REG-AEW UK REIT plc AEW UK REIT plc: Annual Financial Report
24/06/2019 07:05
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AEW UK REIT plc (AEWU)
AEW UK REIT plc: Annual Financial Report
24-Jun-2019 / 07:00 GMT/BST
Dissemination of a Regulatory Announcement, transmitted by EQS Group.
The issuer is solely responsible for the content of this announcement.
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AEW UK REIT PLC
Announcement of Full Year Results for the year ended 31 March 2019
AEW UK REIT PLC (the 'Company') which holds a diversified portfolio of 35
commercial investment properties throughout the UK, is pleased to publish
its full year results for the year ended 31 March 2019.
Mark Burton, Chairman of AEW UK REIT, commented: "A key feature of the
financial year has been achieving the target income returns of 8.00 pence
per share ('pps') from the Company's established portfolio of assets. Such
returns demonstrate the success of both the Company's investment strategy
and the stock selection process of the Investment Manager when deploying
the proceeds of the most recent capital raise, as well as our active asset
management. The Board expects this level of return to continue, with
further value expected to be gained through asset management initiatives
in the short term. Additionally, we continue to see attractive
opportunities across our target sectors. The portfolio is defensively
positioned for any Brexit outcome, with no exposure to London offices and
broad diversification by sector and region. We look forward to raising
additional capital to pursue identified opportunities as and when market
conditions allow."
Enquiries
AEW UK
Alex Short 1 Alex.Short@eu.aew.com
2 Nicki.Gladstone-ext@eu.aew.com
Nicki Gladstone
+44(0) 771 140 1021
Liberum Capital
Gillian.Martin@liberum.com
Gillian Martin
+44 (0)20 3100 2217
TB Cardew
3 AEW@tbcardew.com
Ed Orlebar
+44(0) 7738 724 630
Lucas Bramwell
+44(0) 7939 694 437
Financial Highlights
• Net Asset Value ('NAV')* of £149.46 million and of 98.61 pps as at 31
March 2019 (31 March 2018: £146.03 million and 96.36 pps).
• Operating profit before fair value changes of £13.52 million for the
year (11 months ended 31 March 2018: £9.60 million).
• Unadjusted profit before tax ('PBT')* of £15.54 million and earnings
of 10.26 pps for the year (11 months ended 31 March 2018: £9.82
million and of 7.17 pps).
• EPRA Earnings Per Share ('EPRA EPS')* for the year of 8.07 pence (11
months ended 31 March 2018: 6.56 pence).
• Total dividends of 8.00 pps have been declared for the year (11 months
ended 31 March 2018: 7.33 pps, equating to an annualised dividend of
8.00 pps).
• Shareholder Total Return* for the year of 5.44% (11 months ended 31
March 2018: 3.65%).
• The price of the Company's Ordinary Shares on the Main Market of the
London Stock Exchange was 92.80 pps as at 31 March 2019 (31 March
2018: 95.60 pps).
• As at 31 March 2019, the Company had drawn £50.00 million (31 March
2018: £50.00 million) of a £60.00 million (31 March 2018: £60.00
million) term credit facility with the Royal Bank of Scotland
International Limited ('RBSi') and was geared to 25.30% of the Gross
Asset Value ('GAV')* (31 March 2018: 26.00%) (see note 21 below for
further details).
• The Company held cash balances totalling £2.13 million as at 31 March
2019 (31 March 2018: £4.71 million). Under the terms of its loan
facility, the Company can draw a further £2.31 million (31 March 2018:
£1.11 million) to the maximum 35% loan to NAV at drawdown.
• On 1 March 2019, the Company published its Prospectus in relation to a
Share Issuance Programme of up to 250 million new Ordinary shares and
up to 250 million convertible redeemable preference shares ("C
shares"). No shares have been issued, to date, under the programme.
Property Highlights
• The Company acquired one property during the year for a purchase price
of £6.93 million, excluding acquisition costs (11 months ended 31
March 2018: 10 properties for £60.11 million). The Company made two
full disposals and two part disposals during the year for gross sales
proceeds of £6.80 million (11 month period ended 31 March 2018: one
disposal for gross sales proceeds of £11.05 million).
• As at 31 March 2019, the Company's property portfolio had a fair value
of £197.61 million across 35 properties (31 March 2018: £192.34
million across 36 properties) and a historical cost of £196.86 million
(31 March 2018: £196.64 million).
• The majority of assets that have been acquired are fully let and the
portfolio had an EPRA Vacancy Rate** of 2.99% as at 31 March 2019 (31
March 2018: 7.10%).
• Rental income generated in the year under review was £17.18 million
(11 months ended 31 March 2018: £12.33 million). The number of tenants
as at 31 March 2019 was 95 (31 March 2018: 104).
• EPRA Net Initial Yield ('NIY')** of 7.62% as at 31 March 2019 (31
March 2018: 7.73%).
• Weighted Average Unexpired Lease Term ('WAULT')* of 4.87 years to
break (31 March 2018: 5.08 years) and 6.10 years to expiry (31 March
2018: 6.16 years).
* See KPIs below for definition of alternative performance measures.
** See Glossary in the full Annual Report for definition of alternative
performance measures.
The current period being reported is for the 12 months from 1 April 2018
to 31 March 2019. The prior period ended 31 March 2018 was an 11-month
period from 1 May 2017 to 31 March 2018 and so cannot be used as a direct
comparator.
Chairman's Statement
Overview
I am pleased to present the audited annual results of the Company for the
year ended 31 March 2019. As at 31 March 2019, the Company had a
diversified portfolio of 35 commercial investment properties throughout
the UK with a value of £197.61 million. On a like-for-like* basis, the
portfolio valuation increased by 2.80% over the year.
A key feature of the financial year has been achieving the target income
returns of 8.00 pps from the Company's established portfolio of assets.
Dividends of 8.00 pps have been declared in relation to the year, equating
to a dividend yield of 8.62% based on the share price as at 31 March 2019.
Dividends were fully covered by EPRA EPS of 8.07 pps, reflecting the high
yielding nature of the portfolio. Over the year, the portfolio achieved
total returns of 10.5%, an outperformance of 4.7% relative to the
Benchmark (MSCI/AREF UK PFI Balanced Funds Quarterly Property Index) ('the
Benmark'). This performance was driven by income returns of 8.1% and the
portfolio also achieved capital growth of 2.3%.
Such returns demonstrate the success of both the Company's investment
strategy and the stock selection process of the Investment Manager when
deploying the proceeds of the most recent capital raise, which occurred in
October 2017. From the date of the share issue and up to 31 March 2018,
the Company made seven acquisitions totalling £49.72 million, which fully
utilised the capital raised, as well as an additional £17.50 million of
debt. These acquisitions have played a major part in the Company achieving
EPRA EPS ahead of its dividend target for the current year, with the seven
assets having a combined NIY equating to 9.10% on the purchase price.
An active approach to asset management has also played a role in
maximising returns from the portfolio. The vacancy rate has fallen from
7.10% as at 31 March 2018 to 2.99% as at 31 March 2019, largely as a
result of new lettings in the office sector during the year. The most
notable of these were the letting of Orion House in Oxford at a contracted
rent of £179,410 per annum and the letting of Third Floor East, 255 Bath
Street, Glasgow at a contracted rent of £88,608 per annum. Lease renewals
have also been completed at 40 Queen Square, Bristol, increasing
contracted rent on that accommodation from £66,623 to £94,500 per annum
and at Cedar House, Gloucester, increasing contracted rent from £300,000
to £321,000 per annum and securing a 10-year term.
Another contributor to the fall in the vacancy rate has been the Company's
divestment of largely vacant premises. The Company disposed of Floors 1-9,
Pearl House, Nottingham in April 2018, retaining the fully let ground
floor accommodation. 18-36, Chapel Walk, Sheffield was sold in August 2018
with the fully let adjoining units, 11-15 Fargate being retained. These
disposals for combined gross proceeds of £4.55 million eliminated over a
quarter of the Company's vacant Estimated Rental Value ('ERV')* *as at 31
March 2018.
Further to these disposals, in December 2018, the Company divested
Stoneferry Retail Park, Hull, for gross proceeds of £1.80 million. The
asset had c.£165,000 of income due to expire in May 2019. Waggon Road,
Mossley, was sold at auction, completing in March 2019, for gross proceeds
of £450,000. This price was £100,000 ahead of the asset's most recent
valuation in December 2018.
The Company reinvested the proceeds from its disposals into an industrial
asset, Lockwood Court, Parkside Industrial Estate, Leeds, which was
acquired for £6.93 million, net of purchase costs, in February 2019.
The Company's share price was 92.80 pps as at 31 March 2019 (31 March
2018: 95.60 pps), representing a 5.89% discount to NAV. The share price
has been trading at a discount to NAV since June 2018. The fall in the
share price over the year was offset by total dividend payments of 8.00
pps, generating a Shareholder Total Return of 5.44%, compared with a NAV
Total Return of 10.64%. Since the year end, the share price has increased
and as at 31 May 2019 was 96.00 pps, representing a 2.65% discount to NAV.
On 1 March 2019, the Company published its prospectus (the "Prospectus")
in relation to a share issuance programme (the "Share Issuance Programme")
of up to 250 million new Ordinary Shares and up to 250 million convertible
redeemable preference shares ("C Shares"). The Share Issuance Programme
will close on 28 February 2020 (or on any earlier date on which it is
fully subscribed). We continue to see attractive opportunities across our
target sectors and look forward to raising additional capital to pursue
those opportunities as and when market conditions allow.
Financial Results
Period from
Year ended 1 May 2017 to
31 March 2019 31 March 2018
Operating profit before fair value changes 13,524 9,601
(£'000)
Operating profit (£'000) 17,226 10,472
Profit after tax (£'000) 15,544 9,820
EPS (basic and diluted) (pence) 10.26 7.17
EPRA EPS (basic and diluted) (pence) 8.07 6.56
Ongoing Charges (%) 1.40 1.24
NAV per share (pence) 98.61 96.36
EPRA NAV per share (pence) 98.51 96.34
Financing
There were no drawdowns or repayments of the loan facility during the year
and the Company's loan balance remained at £50.00 million as at 31 March
2019 (31 March 2018: £50.00 million), producing gearing of 25.30% of
property valuation (31 March 2018: 26.00%). The amount available under the
facility was £60.00 million as at 31 March 2019 (31 March 2018: £60.00
million).
On 22 October 2018, the Company extended the term of the facility by three
years up to 22 October 2023, to mitigate the financing risk associated
with Brexit. The margin remains unchanged, with the loan incurring
interest at three month LIBOR +1.4%, which equated to an all-in rate of
2.32% as at 31 March 2019 (31 March 2018: 2.11%). The Company is protected
from a significant rise in interest rates as it has interest rate caps
(£26.51 million at 2.50% and £10.00 million at 2.00%) with a combined
notional value of £36.51 million (31 March 2018: £36.51 million),
resulting in the loan being 73.00% hedged (31 March 2018: 73.00%). These
interest rate caps are effective until 19 October 2020. The Company has
entered into additional interest rate caps on a notional value of £46.51
million at 2.00% covering the extension period of the loan from 20 October
2020 to 19 October 2023.
Under the Prospectus the long-term gearing target remains 25.00% or less,
however, the Company can borrow up to 35.00% of GAV in advance of an
expected capital raise or asset disposal. Under the terms of the current
loan facility, borrowing is restricted to 35.00% of NAV at drawdown. The
Board and Investment Manager will continue to monitor the level of gearing
and may adjust the target gearing according to the Company's circumstances
and perceived risk levels.
Dividends
The Company has continued to deliver on its target of paying dividends of
8.00 pps per annum. During the year, the Company declared and paid four
quarterly dividends of 2.00 pence per Ordinary Share, in line with its
target.
On 26 April 2019, the Board declared an interim dividend of 2.00 pence per
Ordinary Share in respect of the period from 1 January 2019 to 31 March
2019. This interim dividend was paid on 31 May 2019 to shareholders on the
register as at 9 May 2019.
The Directors will declare dividends taking into account the current level
of the Company's earnings and the Directors' view on the outlook for
sustainable recurring earnings. As such, the level of dividends paid may
increase or decrease from the current annual dividend of 8.00 pps. Based
on the current profile of the portfolio, the Company expects to pay an
annualised dividend of 8.00 pps in respect of the year ending 31 March
2020, subject to market conditions.
Outlook
The Board and the Investment Manager are pleased with the strong income
returns delivered to shareholders to date. Based on annualised dividend
payments of 8.00 pps, the Company delivered a dividend yield of 8.62%
based on the year-end share price of 92.80 pence.
The Company was fully invested at the start of the year and achieved
returns during the year which fully covered its dividend payments. The
Board expects this level of returns to continue, based on the projected
income from the portfolio which had an EPRA NIY of 7.62% and a
Reversionary Yield of 7.75% as at 31 March 2019.
Whilst the EPRA Vacancy Rate has been reduced significantly during the
year to 2.99% as at 31 March 2019, there is still further value to be
gained through asset management initiatives in the short term. The
portfolio has a WAULT of 4.9 years to break and 6.1 years to expiry and
those lease events arising in the near future will provide the opportunity
to increase and extend income streams from certain assets.
In the wider economic environment, it had been hoped that there would be
more political certainty by the end of this financial year, however with
the Brexit deadline being extended further to 31 October 2019, we expect
investors to remain cautious. We consider the portfolio to be defensively
positioned in any outcome, with no exposure to London offices - the sector
most likely to be impacted - and broad diversification by sector and
region.
Looking forward, our focus remains on continuing to grow the Company with
share issues as part of the 12-month Share Issuance Programme, as set out
in the Company's Prospectus, subject to market conditions. Subject to
future fund raising, the Investment Manager will focus on finding further
acquisitions which will deliver an attractive return as part of a
well-diversified portfolio.
Annual General Meeting
The Company's Annual General Meeting ('AGM') will be held on Thursday, 12
September 2019 at 12 noon at The Cavendish Hotel, 81 Jermyn Street, St
James', London SW1Y 6JF. You will find enclosed with the Annual Report and
Notice of AGM a letter asking if you would prefer to receive future annual
and half-yearly reports and other communication from the Company in
electronic form rather than in printed form. Further details regarding
this are set out in the Notice of AGM.
Board Composition
James Hyslop will retire from the Board at the forthcoming AGM. The Board
would very much like to express its appreciation for his contribution to
the Company which has been greatly valued since the Company was formed.
Mark Burton
Chairman
21 June 2019
* See, Glossary in the full Annual Report for definition of alternative
performance measures.
** See KPIs below for definition of alternative performance measures.
Business Model and Strategy
Introduction
The Company is a real estate investment company listed on the premium
segment of the Official List of the FCA and traded on the London Stock
Exchange's Main Market. As part of its business model and strategy, the
Company has, and intends to maintain, UK REIT status. HM Revenue and
Customs has acknowledged that the Company has met, and intends to continue
to meet, the necessary qualifying conditions to conduct its affairs as a
UK REIT.
Investment Objective
The investment objective of the Company is to deliver an attractive total
return to shareholders from investing predominantly in a portfolio of
smaller commercial properties in the United Kingdom.
Investment Policy
In order to achieve its investment objective, the Company invests in
freehold and leasehold properties across the whole spectrum of the
commercial property sector (office properties, industrial/warehouse
properties, retail warehouses and high street retail) to achieve a
balanced portfolio with a diversified tenant base.
Within the scope of restrictions set out below (under the heading
'Investment Restrictions') the Company may invest up to 10.00% of its NAV
(at the time of investment) in the AEW UK Core Property Fund (the 'Core
Fund') and up to 10.00% of its NAV (measured at the commencement of the
project) in development opportunities, with the intention of holding any
completed development as an investment.
Investment Restrictions
The Company invests and manages its assets with the objective of spreading
risk through the following investment restrictions:
• the value of no single property, at the time of investment, will
represent more than 15.00% of GAV;
• the Company may commit up to a maximum of 10.00% of its NAV (measured
at the commencement of the project) to development activities;
• the value of properties, measured at the time of each investment, in
any one of the following sectors: office properties, retail
warehouses, high street retail and industrial/warehouse properties
will not exceed 50.00% of GAV. The 50.00% sector limit may be
increased to 60.00% as part of the Investment Manager's efficient
portfolio management whereby the Investment Manager determines it
appropriate to pursue an attractive investment opportunity which could
cause the 50.00% sector limit to be exceeded on a short-term basis
pending a repositioning of the portfolio through a sale of assets or
other means;
• investment in unoccupied and non-income producing assets will, at the
time of investment, not exceed 20.00% of NAV;
• the Company may commit up to a maximum of 10.00% of the NAV (at the
time of investment) in the Core Fund. The Company disposed of its last
remaining units in the Core Fund in May 2017 and it is not the current
intention of the Directors to invest in the Core Fund;
• the Company will not invest in other closed-ended investment
companies; and
• if the Company invests in derivatives for the purposes of efficient
portfolio and cash management, the total notional value of the
derivatives at the time of investment will not exceed, in aggregate,
35.00% of GAV.
The Directors currently intend, at all times, to conduct the affairs of
the Company so as to enable the Group to qualify as a REIT for the
purposes of Part 12 of the Corporation Tax Act 2010 ('CTA') (and the
regulations made thereunder).
The Company will at all times invest and manage its assets in a way that
is consistent with its objective of spreading investment risk and in
accordance with its published investment policy and will not, at any time,
conduct any trading activity which is significant in the context of the
business of the Company as a whole.
In the event of a breach of the investment policy and investment
restrictions set out above, the Directors upon becoming aware of such
breach will consider whether the breach is material, and if it is,
notification will be made to a Regulatory Information Service.
Any material change to the investment policy or investment restrictions of
the Company may only be made with the prior approval of shareholders.
Our Strategy
The Company exploits what it believes to be the compelling relative value
opportunities currently offered by pricing inefficiencies in smaller
commercial properties let on shorter occupational leases. The Company
supplements this core strategy with asset management initiatives to
upgrade buildings and thereby improve the quality of income streams. In
the current market environment, the focus is to invest in properties
which:
• typically have a value, on investment, of between £2.50 million and
£15.00 million;
• have initial net yields, on investment, of typically between 7.5-10%;
• achieve across the whole portfolio an average weighted lease term of
between three to six years remaining;
• achieve, across the whole portfolio, a diverse and broad spread of
tenants; and
• have potential for asset management initiatives to include
refurbishment and re-lettings.
The Company's strategy is focused on delivering enhanced returns from the
smaller end (up to £15.00 million) of the UK commercial property market.
The Company believes that there are currently pricing inefficiencies in
smaller commercial properties relative to the long-term pricing resulting
in a significant yield advantage, which the Company aims to exploit.
How we add value
An Experienced Team
The investment management team averages 20 years working together,
reflecting stability and continuity.
Value Investing
The Investment Manager's investment philosophy is based on the principle
of value investing. The Investment Manager looks to acquire assets with an
income profile coupled with underlying characteristics that underpin
long-term capital preservation. As value managers, the Investment Manager
looks for assets where today's pricing may not correspond to long-term
fundamentals.
Active Asset Management
The Investment Manager has an in-house team of dedicated asset managers
with a strong focus on active asset management to enhance income and add
value to commercial properties.
Strategy in Action
Acquiring a stable income stream in a location with strong rental growth
Lockwood Court, Leeds
• Acquired February 2019
• Location close to motorway network which is the focus of regional
demand and has seen declining availability
• A NIY of 7.7% and WAULT of 10 years to expiry
• Low passing rent of £3.21 per sq ft
Active asset management driving value
Eastpoint Business Park, Oxford
• Orion House let in August 2018 at a rent of £179,410 per annum
• 25-year term with five-yearly rent reviews linked to the Retail Price
Index
• 27.5% increase in valuation of the property (as provided by the
valuers) over the year
Extending existing income streams to maximise value
Mangham Road, Rotherham
• Lease renewal completed in October 2018 at the c.80,000 sq ft unit
• 10-year term at a rent of £275,000 per annum, representing an increase
of 20% in passing rent
• 30.4% increase in valuation of the property (as provided by the
valuer) over the year
Minimising risk through divestment opportunities
Stoneferry Retail Park, Hull
• Sold in December 2018 for gross proceeds of £1.80 million
• Over 70% of the passing income due to expire in May 2019
• Helped reduce exposure to the retail sector to 15.3% as at 31 March
2019
Key Performance Indicators
KPI AND DEFINITION RELEVANCE TO STRATEGY PERFORMANCE
1. Net Initial Yield
A representation to the The NIY is in line with the 7.63%
investor of what their Company's target dividend
initial net yield would yield meaning that, after at 31 March 2019
be at a predetermined costs, the Company should
purchase price after have the ability to meet (31 March 2018:
taking account of all its target dividend through 7.74%)
associated costs, e.g. property income.
void costs and rent-free
periods.
2. True Equivalent Yield A True Equivalent Yield
profile in line with the 7.94%
The average weighted Company's target dividend
return a property will yield shows that, after at 31 March 2019
produce according to the costs, the Company should
present income and ERV have the ability to meet (31 March 2018:
assumptions, assuming its proposed dividend 8.20%)
the income is received through property income.
quarterly in advance.
A Reversionary Yield
profile that is in line 7.75%
3. Reversionary Yield with an Initial Yield
profile shows a potentially at 31 March 2019
The expected return the sustainable income stream
property will provide that can be used to meet (31 March 2018:
once rack-rented. dividends past the expiry 8.03%)
of a property's current
leasing arrangements.
The Investment Manager
believes that current
market conditions present
an opportunity whereby
4. WAULT to expiry assets with a shorter
unexpired lease term are 6.10 years
The average lease term often mispriced. It is also
remaining to expiry the Investment Manager's at 31 March 2019
across the portfolio, view that a shorter WAULT
weighted by contracted is useful for active asset (31 March 2018:
rent. management as it allows the 6.16 years)
Investment Manager to
engage in direct
negotiation with tenants
rather than via rent review
mechanisms.
The Investment Manager
believes that current
market conditions present
an opportunity whereby
assets with a shorter
unexpired lease term are
often mispriced. As such,
5. WAULT to break it is in line with the
Investment Manager's 4.87 years
The average lease term strategy to acquire
remaining to break, properties with a WAULT at 31 March 2019
across the portfolio that is generally shorter
weighted by contracted than the benchmark. It is (31 March 2018:
rent. also the Investment 5.08 years)
Manager's view that a
shorter WAULT is useful for
active asset management as
it allows the Investment
Manager to engage in direct
negotiation with tenants
rather than via rent review
mechanisms.
6. NAV Provides stakeholders with £149.46 million
the most relevant
NAV is the value of an information on the fair at 31 March 2019
entity's assets minus value of the assets and
the value of its liabilities of the Company. (31 March 2018:
liabilities. £146.03 million)
The Company utilises
7. Leverage (Loan to borrowings to enhance 25.30%
GAV) returns over the medium
term. Borrowings will not at 31 March 2019
The proportion of our exceed 35% of GAV (measured
property portfolio that at drawdown) with a (31 March 2018:
is funded by borrowings. long-term target of 25% or 26.00%)
less of GAV.
The Company's aim is to
8. Vacant ERV minimise vacancy of the 2.99%
properties. A low level of
The space in the structural vacancy provides at 31 March 2019
property portfolio which an opportunity for the
is currently unlet, as a Company to capture rental (31 March 2018:
percentage of the total uplifts and manage the mix 7.10%)
ERV of the portfolio. of tenants within a
property.
8.00 pps
9. Dividend The dividend reflects the
Company's ability to for the year
Dividends declared in deliver a sustainable ended 31 March
relation to the year. income stream from its 2019 (11 months
The Company targets a portfolio. ended to 31 March
dividend of 8.00 pence 2018: 7.33 pps,
per Ordinary Share per equating to an
annum. annualised
dividend of 8.00
pps)
The Ongoing Charges ratio
provides a measure of total
10. Ongoing Charges costs associated with 1.40%
managing and operating the
The ratio of total Company, which includes the for the year
administration and management fees due to the ended 31 March
operating costs Investment Manager. The 2019 (11 months
expressed as a Investment Manager presents ended 31 March
percentage of average this measure to provide 2018:
NAV throughout the investors with a clear
period. picture of operational 1.24%)
costs involved in running
the Company.
11. Profit before tax £15.54 million
('PBT')
The PBT is an indication of for the year
PBT is a profitability the Company's financial ended 31 March
measure which considers performance for the year in 2019 (11 months
the Company's profit which its strategy is ended 31 March
before the payment of exercised. 2018:
income tax.
£9.82 million)
12. Shareholder Total 5.44%
Return
This reflects the return for the year
The percentage change in seen by shareholders on ended 31 March
the share price assuming their shareholdings through 2019 (11 months
dividends are reinvested share price movements and ended 31 March
to purchase additional dividends received. 2018:
Ordinary Shares.
3.65%)
13. EPRA EPS
Earnings from core
operational activities. 8.07 pps
A key measure of a
company's underlying This reflects the Company's for the year
operating results from ability to generate ended 31 March
its property rental earnings from the portfolio 2019 (11 months
business and an which underpins dividends. ended 31 March
indication of the extent 2018:
to which current
dividend payments are 6.56 pps)
supported by earnings.
See note 8 of the
Financial Statements.
Investment Manager's Report
Market Outlook
UK Economic Outlook
The UK's economy strengthened in the first quarter of 2019, achieving
growth of 0.5%. This was due in part to stockpiling by UK manufacturers
fearing the impact of a no-deal Brexit. This was an improvement on the Q4
2018 results, which had seen a sharp decline in growth to 0.2% due to
Brexit uncertainty. The extension of Article 50 to 31 October 2019,
coupled with the arrival of a new Prime Minister in July 2019, will now
prolong this uncertainty and could continue to hamper investment. Although
investment has remained subdued, private consumption growth has been
steady, supported by strong employment figures and real wage growth over
the last two quarters.
The Bank of England ("BoE") raised its forecast for GDP growth in 2019
from 1.2% to 1.5% based on a higher level of global GDP growth than had
been expected at the start of the year. Despite this improved outlook from
the BoE, monetary policy will depend on a number of factors and it is
expected that any rises in interest rates will be slow and steady over the
next few years.
UK Real Estate Outlook
With Brexit dominating the economic outlook, this is taking its toll on
the macro-economic picture, including financial and property markets.
Given the market uncertainty, rental growth is expected to be fairly
subdued during the remainder of 2019. There could be a period of
volatility in values ahead as the uncertainty surrounding Brexit
intensifies, although property is still expected to deliver a stable
income return.
Property appears fairly priced at the current low levels of interest
rates, which are expected to rise over time, but in small stages. The
scope for further yield compression appears to be limited and a general
upward pressure on property yields could occur, depending on the nature of
the Brexit transition.
Sector Outlook
Industrial
Standard industrials and distribution are expected to be a major driver of
the occupier market with the growth of e-commerce, although it is thought
that rental growth in 2019 will not be to the extent seen in 2018, as some
rents are reaching a ceiling. Annual transaction activity in the
industrial sector reached £7.8 billion in 2018, which is the
second-highest figure on record.
The industrial sector represents the largest proportion of our portfolio
with 48% of the valuation at 31 March 2019. We generally focus on assets
with low capital value in locations with good accessibility from the
national motorway network.
Our industrial assets achieved a total return of 16.2% for the year, the
highest sector return in the portfolio, outperforming the Benchmark by
1.1%.
Office
We expect office rents outside London to remain stable for the coming
years as development in most cities has already peaked. Some rental growth
was seen in regional markets in 2018 and rental rates are expected to
remain unchanged for the remainder of 2019.
Offices make up the second largest sector holding in the portfolio,
representing 22.0% of the portfolio valuation as at 31 March 2019. Our
office holding achieved the greatest performance relative to the Benchmark
for the year in terms of total return, outperforming the Benchmark Total
Return by 8.4%.
This performance was driven by strong capital growth of 8.6% for the year,
which was achieved through significant lettings and lease renewals, as
noted in the Asset Management section of the Investments Manger's Report.
Retail
Growth in household consumption slowed in 2018, despite seeing real wage
growth towards the end of the year, as consumers remained cautious with
regards to their spending decisions. As such, there is increasing concern
around the weakness in the retail market, which is expected to persist
during 2019, and headline rents are predicted to continue to fall across
all segments except Central London unit shops. In terms of investment, the
total number of retail deals in 2018 was at its lowest since 2012.
Retail represented the portfolio's smallest sector holding, with only
15.3% of the valuation as at 31 March 2019, which somewhat mitigates the
risk associated with the sector at a portfolio level. Our assets performed
poorly in terms of capital return relative to the Benchmark, with a
negative 15.4% capital return. However, our income streams have remained
largely intact, despite the myriad of company voluntary arrangements
('CVA's) and company failures in the retail market, and delivered income
returns of 9.5% for the year.
Alternatives
We think that the Alternatives sector will continue to grow in importance
and could begin to outperform other sectors in terms of total returns.
This is a sector in which we have significant expertise and continue to
see compelling opportunities. Our alternatives assets, which include
leisure and car parking, represent 15.2% of the valuation as at 31 March
2019 and delivered the highest sector income return over the year of 9.3%.
Financial Results
Net rental income for the year was £15.72 million (11 months ended 31
March 2018: £11.22 million), contributing to an operating profit before
fair value changes and disposals of £13.52 million (11 months ended 31
March 2018: £9.60 million).
The portfolio saw a gain of £4.18 million on revaluation of investment
property over the year (11 months ended 31 March 2018: £1.01 million).
This performance was largely driven by valuation gains in the portfolio's
office assets resulting from several new lettings and lease renewals
during the year. The Company's industrial assets also performed strongly,
delivering like-for-like valuation growth. There was a small like-for-like
increase in the valuation of the Company's alternative assets and only the
Company's retail assets suffered a decrease in valuation, which is in
common with the overall market performance of the sector.
The Company reported a loss on disposal of investment properties of £0.48
million (11 months ended 31 March 2018: £0.22 million), having made two
part disposals (Floors 1-9, Pearl House, Nottingham and 18-36, Chapel
Walk, Sheffield) and two full disposals (Stoneferry Retail Park, Hull and
Waggon Road, Mossley) during the year.
Administrative expenses, which include the Investment Manager's fee and
other costs attributable to the running of the Company, were £2.20 million
(11 months ended 31 March 2018: £1.62 million). Ongoing Charges for the
period were 1.40% (11 months ended 31 March 2018: 1.24%) and have
increased largely as a result of one-off costs during the year relating to
the publication of the Company's Prospectus.
The Company incurred finance costs of £1.68 million (11 months ended 31
March 2018: £0.65 million). This increase compared with the prior period
comes as a result of having a higher balance of the loan drawn over the
course of the year. The Company also entered into additional interest rate
caps on a notional value of £46.51 million during the year, becoming
effective in October 2020, which saw a fair value loss of £0.37 million.
The total profit before tax for the year of £15.54 million (11 months
ended 31 March 2018: £9.82 million) equates to a basic EPS of 10.26 pence
(11 months ended 31 March 2018: 7.17 pence).
EPRA EPS for the year was 8.07 pps which, based on dividends paid of 8.00
pps, reflects a dividend cover of 101% (11 months ended 31 March 2018:
EPRA Earnings of 6.56 pps, dividends paid of 7.33 pps and dividend cover
of 89.50%
The Company's NAV as at 31 March 2019 was £149.46 million or 98.61 pps (31
March 2018: £146.03 million or 96.36 pps). This is an increase of 2.25 pps
or 2.33%, with the underlying movement in NAV set out in the table below:
Pence per share £ million
NAV as at 1 April 2018 96.36 146.03
Change in fair value of investment property 2.76 4.18
Change in fair value of derivatives (0.26) (0.39)
Loss on disposal of investment property (0.32) (0.48)
Income earned for the period 11.33 17.18
Expenses and net finance costs for the (3.24) (4.94)
period
Dividends paid (8.00) (12.12)
NAV as at 31 March 2019 98.61 149.46
Financing
As at 31 March 2019, the Company had utilised £50.00 million (31 March
2018: £50.00 million) of an available £60.00 million (31 March 2018:
£60.00 million) credit facility with RBSi, resulting in gearing of 25.30%
loan to property valuation. In October 2018, the Company extended the term
of the loan facility by three years to October 2023 to mitigate the
financing risk associated with Brexit. The loan incurs interest at
three-month LIBOR + 1.4% (2018: LIBOR + 1.4%).
To mitigate the interest rate risk that arises from entering into a
variable rate linked loan, as at 31 March 2019, the Company held interest
rate caps with a combined notional value of £36.51 million, at strike
rates of 2.5% on £26.51 million and 2.0% on £10.00 million (31 March 2018:
2.5% on £26.51 million and 2.0% on £10 million), meaning that the loan is
73% hedged (31 March 2018: 73%). In October 2018, the Company entered into
interest rate caps on a national value of £46.51 million, effective from
20 October 2020 to 19 October 2023, capping the interest rate at 2.0% per
annum; meaning that the current loan drawn down of £50.00 million will
become 93% hedged.
Share Issuance Programme
On 1 March 2019, the Company published its Prospectus in relation to a
Share Issuance Programme of up to 250 million new Ordinary shares and up
to 250 million C shares. No shares have been issued, to date, under the
programme.
Portfolio Activity
The Company's objective is to build a diversified portfolio of commercial
properties throughout the UK. New acquisitions are selected to provide a
sustainable income return and the potential for growth, whilst also
limiting downside risk. The majority of the Company's assets are fully let
and as at 31 March 2019, the Company had a vacancy rate of 2.99% (31 March
2018: 7.10%). The following significant investment transactions were made
during the year:
- In February 2019, the Company acquired Lockwood Court, Parkside
Industrial Estate, Leeds, for a gross purchase price of £6.93 million. The
187,626 sq ft industrial warehouse is fully let to LWS Yorkshire Limited,
a logistics and storage provider for Harrogate Spring Water, on a 10-year
lease from October 2018. The lease provides a low passing rent of £3.21
per sq ft which, together with tight supply, forms a strong base for
future potential rental growth. Located two miles south of Leeds City
Centre and close to J25 of the M62 and J40 of the M1, Parkside Industrial
Estate is a well-established industrial and commercial area with a history
of attracting regional and national occupiers.
- On 14 March 2019, the Company completed the sale of its industrial asset
at Waggon Road, Mossley. The asset was sold at auction for £450,000, ahead
of its most recent valuation £350,000.
- In December 2018, the Company completed the sale of Stoneferry Retail
Park, Hull, for gross proceeds of £1.80 million, reducing the Company's
exposure to the retail sector.
- On 6 August 2018, the Company completed the sale of 18-36 Chapel Walk,
Sheffield, for gross proceeds of £0.90 million. The units sold were 47.10%
vacant by floor area. The Company has retained the fully let adjacent
units, 11-15 Fargate, totalling 5,495 sq ft.
- On 5 April 2018, the Company completed the sale of its office
accommodation at Pearl House, Nottingham, for gross proceeds of £3.65
million. The sale comprised the first to ninth floors, a ground floor
reception and car parking spaces, providing a total area of 41,262 sq ft.
The Company retained the ground floor accommodation in the busy city
centre location, totalling 28,432 sq ft, let to national retail operators
including Costa Coffee, Poundland and Lakeland.
Acquisition during the year
Lockwood Court, Leeds
Purchase Price (£m): 6.93
Sector: Industrial
Area (sq ft): 187,626
NIY at acquisition (%): 7.7
WAULT to break as at 31 March 2019 (years): 9.5
Occupancy by ERV (%): 100
Constructed: 1970s
Property Portfolio
Summary by Sector as at 31 March 2019
Gross
Passing
Area Occupancy WAULT Rental
by ERV to Income
Number of Valuation ('000 break (£m)
Properties sq ft) (%) ERV
(£m) (years) (£m)
Sector
Industrial 20 94.1 2,335 99.4 4.9 7.3 8.3
Offices 6 43.2 287 88.9 3.7 3.2 4.2
Alternatives 3 30.0 165 100.0 6.1 2.8 2.3
Standard 5 23.6 169 99.9 3.6 2.7 2.1
Retail
Retail 1 6.7 51 100.0 5.0 0.6 0.6
Warehouse
Portfolio 35 197.6 3,007 97.0 4.9 16.6 17.5
Summary by Geographical Area as at 31 March 2019
Gross
Passing
Area Occupancy WAULT Rental
by ERV to Income
Geographical Number of Valuation ('000 break (£m) ERV
Area Properties sq ft) (%) (£m)
(£m) (years)
Yorkshire and 8 35.2 1,028 98.5 3.6 2.8 3.4
Humberside
South East 5 29.8 195 97.0 4.1 2.5 2.5
Eastern 5 22.9 345 100.0 3.8 1.7 2.0
South West 3 22.7 125 100.0 3.8 1.7 1.7
West Midlands 4 17.9 397 100.0 3.7 1.7 1.8
East Midlands 2 17.9 81 100.0 3.0 1.9 1.4
North West 4 15.8 302 98.8 4.2 1.4 1.3
Wales 2 14.8 376 100.0 10.0 1.2 1.3
Greater 1 12.0 72 100.0 12.6 1.0 0.9
London
Scotland 1 8.6 86 65.8 2.3 0.7 1.2
Portfolio 35 197.6 3,007 97.0 4.9 16.6 17.5
Please refer to Appendix 5 'Properties by Market Value', accessible
through the link at the end of this announcement.
Market
Property Sector Region Value
Range (£m)
Top ten:
1. 2 Geddington Road, Corby Other (Car East Midlands 10.0 - 15.0
parking)
2. 40 Queen Square, Bristol Offices South West 10.0 - 15.0
3. London East Leisure Park, Other (Leisure) Greater London 10.0 - 15.0
Dagenham
4. Eastpoint Business Park, Offices South East 10.0 - 15.0
Oxford
5. Gresford Industrial Industrial Wales 7.5 - 10.0
Estate, Wrexham
6. 225 Bath Street, Glasgow Offices Scotland 7.5 - 10.0
7. Lockwood Court, Leeds Industrial Yorkshire and 5.0 - 7.5
Humberside
8. Above Bar Street, Standard Retail South East 5.0 - 7.5
Southampton
Langthwaite Grange Yorkshire and
9. Industrial Estate, South Industrial Humberside 5.0 - 7.5
Kirkby
10. Barnstaple Retail Park Retail Warehouse South West 5.0 - 7.5
The Company's top 10 properties listed above comprise 47.7% of the total
value of the portfolio.
Market
Property Sector Region Value
Range (£m)
11. Storeys Bar Road, Industrial Eastern 5.0 - 7.5
Peterborough
12. Sarus Court Industrial Industrial North West 5.0 - 7.5
Estate, Runcorn
13. Apollo Business Park, Industrial Eastern 5.0 - 7.5
Basildon
14. Commercial Road, Portsmouth Standard Retail South East 5.0 - 7.5
15. Euroway Trading Estate, Industrial Yorkshire and 5.0 - 7.5
Bradford Humberside
16. Oak Park, Droitwich Industrial West Midlands 5.0 - 7.5
17. Odeon Cinema, Southend Other (Leisure) Eastern 5.0 - 7.5
18. Brockhurst Crescent, Walsall Industrial West Midlands 5.0 - 7.5
19. Pearl Assurance House, Standard Retail East Midlands 5.0 - 7.5
Nottingham
20. Sandford House, Solihull Offices West Midlands < 5.0
21. Excel 95, Deeside Industrial Wales < 5.0
22. Diamond Business Park, Industrial Yorkshire and < 5.0
Wakefield Humberside
23. Bank Hey Street, Blackpool Standard Retail North West < 5.0
24. Walkers Lane, St. Helens Industrial North West < 5.0
25. Brightside Lane, Sheffield Industrial Yorkshire and <5.0
Humberside
26. Cedar House, Gloucester Offices South West < 5.0
27. Wella Warehouse, Basingstoke Industrial South East < 5.0
28. Magham Road, Rotherham Industrial Yorkshire and < 5.0
Humberside
29. Pipps Hill Industrial Estate, Industrial Eastern < 5.0
Basildon
30. Eagle Road, Redditch Industrial West Midlands < 5.0
31. Vantage Point, Hemel Offices Eastern < 5.0
Hempstead
32. Clarke Road, Milton Keynes Industrial South East < 5.0
33. Knowles Lane, Bradford Industrial Yorkshire and < 5.0
Humberside
34. Fargate, Sheffield Standard Retail Yorkshire and < 5.0
Humberside
35. Moorside Road, Salford Industrial North West < 5.0
Top 10 Tenants
% of
Portfolio
Passing Total
Rental Passing
Income Rental
Tenant Sector Property (£'000) Income
1. GEFCO UK Limited Logistics 2 Geddington Road, 1,320 7.9
Corby
2. Plastipak UK Manufacturing Gresford Industrial 883 5.3
Limited Estate, Wrexham
The Secretary of Government Sandford House,
3. State Solihull and Cedar 832 5.0
body House, Gloucester
Ardagh Glass Langthwaite Grange
4. Limited Manufacturing Industrial Estate, 676 4.0
South Kirkby
5. Mecca Bingo Leisure London East Leisure 625 3.7
Limited Park, Dagenham
6. Egbert H Taylor & Manufacturing Oak Park, Droitwich 620 3.7
Company Limited
7. Odeon Cinemas Leisure Odeon Cinema, 535 3.2
Southend
Barnstaple Retail
Park and Bank Hey
8. Sports Direct Retail Street, 525 3.1
Blackpool
Wyndeham
9. Peterborough Manufacturing Storeys Bar Road, 525 3.1
Peterborough
Limited
Advanced Supply Euroway Trading
10. Chain (BFD) Logistics Estate, Bradford 428 2.6
Limited
The Company's top 10 tenants, listed above, represent 41.6% of the total
passing rental income of the portfolio.
Asset Management
We undertake asset management to achieve rental growth, let vacant space
and enhance value through initiatives such as refurbishments. During the
year, key asset management initiatives included:
- Orion House, Oxford - In August 2018, the Company completed the letting
of Orion House, Oxford, to Genesis Cancer Care UK Limited. The lease is
for a term of 25 years, at a rent of £179,410 per annum. There are
five-yearly, upward-only rent reviews linked to the Retail Price Index
("RPI") measure of inflation and the tenant benefits from a 12-month rent
free period, followed by six years at half rent. The valuation of the
property increased by 27.8% over the year, thanks largely to this
transaction.
- 225 Bath Street, Glasgow - In July 2018, the Company completed the
letting of Third Floor East, 225 Bath Street, Glasgow, to International
Correspondence Schools Limited. The lease is for a term of five years,
with a tenant break option at the end of the third year, at a rent of
£88,608 per annum. The tenant benefits from a 10-month rent free period.
- Cedar House, Gloucester - In June 2018, the Company completed a lease
renewal to the Secretary of State for Communities and Local Government at
its Cedar House office building in Gloucester. The property was acquired
in December 2017 with the expectation of achieving a new three-year lease
at the passing rent of £300,000 per annum and this was significantly
exceeded with a 10-year lease at a rent of £321,000 per annum. No rent
free incentive was offered to the tenant.
- 40 Queen Square, Bristol - In June 2018, the Company completed a
reversionary lease renewal at 40 Queen Square, Bristol, with tenant
Ramboll Whitbybird Ltd. A 10-year lease commenced in November 2018 and the
tenant has the option to break at the end of the fifth year. The letting
at a rent of £94,500 per annum proved a new high rental tone for
unrefurbished space within the building at £23.00 per sq ft, as compared
to a passing rent of £16.84 per sq ft.
- Diamond Business Park, Wakefield - During June 2018, a new letting was
completed at Diamond Business Park, Wakefield which was acquired by the
Company in February 2018. Unit 7, totalling c. 13,700 sq ft, was let to
Wow Interiors Yorkshire Ltd for a six year term with tenant break options
in years two and four. Stepped rental increases have been agreed so that,
if the tenant remains in occupation for the full term, the average rent
received equates to £3.30 per sq ft as compared to an ERV of £3.00 per sq
ft.
- Sarus Court, Runcorn - In April 2018, the Company documented two rent
reviews with CJ Services, its largest tenant at Sarus Court, Runcorn. The
rent reviews at Units 1 and 2 date back to January 2017 and result in a
combined rate of £5.25 per sq ft net effective. This supports a headline
rent of c.£5.75 per sq ft which was £0.25 per sq ft ahead of the
property's ERV at the time of the letting.
- Commercial Road, Portsmouth - the Company has completed a 10-year lease
renewal with Greggs plc at its retail property located on Commercial Road,
Portsmouth. The new rent of £20,500 per annum exceeded the unit's ERV at
the time of letting by 11%. Greggs have been in occupation of the unit for
10 years and have the option to break the lease after five years.
Alternative Investment Fund Manager ('AIFM')
AEW UK Investment Management LLP is authorised and regulated by the FCA as
a full-scope AIFM and provides its services to the Company.
The Company has appointed Langham Hall UK Depositary LLP ('Langham Hall')
to act as the depositary to the Company, responsible for cash monitoring,
asset verification and oversight of the Company.
Information Disclosures under the AIFM Directive
Under the AIFM Directive, the Company is required to make disclosures in
relation to its leverage under the prescribed methodology of the
Directive.
Leverage
The AIFM Directive prescribes two methods for evaluating leverage, namely
the 'Gross Method' and the 'Commitment Method'. The Company's maximum and
actual leverage levels are as per below:
31 March 2019 31 March 2018
Commitment
Leverage Exposure Gross Method Commitment Method Gross Method
Method
Maximum Limit 140% 140% 140% 140%
Actual 132% 134% 131% 134%
In accordance with the AIFM Directive, leverage is expressed as a
percentage of the Company's exposure to its NAV and adjusted in line with
the prescribed 'Gross' and 'Commitment' methods. The Gross method is
representative of the sum of the Company's positions after deducting cash
balances and without taking into account any hedging and netting
arrangements. The Commitment method is representative of the sum of the
Company's positions without deducting cash balances and taking into
account any hedging and netting arrangements. For the purposes of
evaluating the methods above, the Company's positions primarily reflect
its current borrowings and NAV.
Remuneration
The AIFM has adopted a Remuneration Policy which accords with the
principles established by the AIFMD Directive.
AIFMD Remuneration Code Staff includes the members of the AIFM's
Management Committee, those performing control functions, department
heads, risk takers and other members of staff that exert material
influence on the AIFM's risk profile or the AIFs it manages.
Staff are remunerated in accordance with the key principles of the AIFM's
remuneration policy, which include: (1) promoting sound risk management;
(2) supporting sustainable business plans; (3) remuneration being linked
to non-financial criteria for control function staff; (4) incentiving
staff performance over longer periods of time; (5) awarding guaranteed
variable remuneration only in exceptional circumstances; and (6) having an
appropriate balance between fixed and variable remuneration.
As required under section 'Fund 3.3.5.R(5)' of the Investment Fund
Sourcebook, the following information is provided in respect of
remuneration paid by the AIFM to its staff. The information provided below
is provided for the year from 1 January 2018 to 31 December 2018, which is
in line with the most recent financial reporting period of the AIFM, and
relates to the total remuneration of the entire staff of the AIFM.
Year ended
31 December 2018
Total remuneration paid to employees during financial
year:
a) remuneration, including, where relevant, any carried £2,665,423
interest paid by the AIFM
b) the number of beneficiaries 24
The aggregate amount of remuneration, broken down by:
a) senior management £809,561
b) other staff £1,855,862
Fixed Variable Total
remuneration remuneration remuneration
Senior management £759,561 £50,000 £809,561
Other staff £1,419,441 £436,421 £1,855,862
Total £2,179,002 £486,421 £2,665,423
AEW UK Investment Management LLP
21 June 2019
Principal Risks and Uncertainties
The Company's assets consist primarily of UK commercial property. Its
principal risks are therefore related to the commercial property market in
general, but also to the particular circumstances of the individual
properties and the tenants within the properties.
The Board has overall responsibility for reviewing the effectiveness of
the system of risk management and internal control which is operated by
the Investment Manager. The Company's ongoing risk management process is
designed to identify, evaluate and mitigate the significant risks the
Company faces.
Twice each year, the Board undertakes a risk review with the assistance of
the Audit Committee, to assess the adequacy and effectiveness of the
Investment Manager and other service providers' risk management and
internal control processes.
The Board has carried out a robust assessment of the principal risks
facing the Company, including those that would threaten its business
model, future performance, solvency or liquidity.
An analysis of the principal risks and uncertainties is set out below.
This does not purport to be exhaustive as some risks are not yet known and
some risks are currently not deemed material but could turn out to be
material in the future.
Principal risks and their How risk is managed Risk assessment
potential impact
REAL ESTATE RISKS
1. Property market
Any property market recession or
future deterioration in the
property market could, inter Probability:
alia, (i) cause the Company to The Company has Moderate
realise its investments at lower investment restrictions
valuations; and (ii) delay the in place to invest and Impact: Moderate
timings of the Company's manage its assets with to High
realisations. These risks could the objective of
have a material adverse effect on spreading and Movement:
the ability of the Company to mitigating risk. Increase
achieve its investment objective.
2. Property valuation
Property and property-related
assets are inherently difficult
to value due to the individual
nature of each property. The Company uses an
independent external Probability:
valuer (Knight Frank Moderate
LLP) to value the
There may be an adverse effect on properties at fair Impact: Low to
the Company's profitability, the value in accordance Moderate
NAV and the price of Ordinary with accepted RICS
Shares in cases where properties appraisal and valuation Movement: No
are sold whose valuations have standards. change
previously been materially
overstated.
Comprehensive due
diligence is undertaken
on all new tenants.
Tenant covenant checks
3. Tenant default are carried out on all
new tenants where a Probability:
Failure by tenants to fulfil default would have a Moderate
their rental obligations could significant impact.
affect the income that the Impact: Low to
properties earn and the ability Moderate
of the Company to pay dividends
to its shareholders. Asset management team Movement:
conducts ongoing Increase
monitoring and liaison
with tenants to manage
potential bad debt
risk.
4. Asset management initiatives
Asset management initiatives, Costs incurred on asset
such as refurbishment works, may management initiatives
prove to be more extensive, are closely monitored Probability: Low
expensive and take longer than against budgets and
anticipated. Cost overruns may reviewed in regular Impact: Low
have a material adverse effect on presentations to the
the Company's profitability, the Investment Management Movement: No
NAV and the share price. Committee of the change
Investment Manager.
5. Due diligence
The Company's due
Due diligence may not identify diligence relies on
all the risks and liabilities in work (such as legal
respect of an acquisition reports on title,
(including any environmental, property valuations, Probability: Low
structural or operational environmental and
defects) that may lead to a building surveys) Impact: Moderate
material adverse affect on the outsourced to third
Company's profitability, the NAV parties who have Movement: No
and the price of the Company's expertise in their change
Ordinary Shares. areas. Such third
parties have
professional indemnity
cover in place.
The Company builds a
6. Fall in rental rates diversified property
and tenant base with
Rental rates may be adversely subsequent monitoring
affected by general UK economic of concentration to
conditions and other factors that individual occupiers
depress rental rates, including (top 10 tenants) and
local factors relating to sectors (geographical
particular properties/locations and sector exposure).
(such as increased competition). Probability: Low
to Moderate
The Investment Manager Impact: Moderate
Any fall in the rental rates for holds quarterly
the Company's properties may have meetings with its Movement:
a material adverse affect on the Investment Strategy Increase
Company's profitability, the NAV, Committee and regularly
the price of the Ordinary Shares meets the Board of
and the Company's ability to meet Directors to assess
interest and capital repayments whether any changes in
on any debt facilities. the market present
risks that should be
addressed in the
Company's strategy.
FINANCIAL RISKS
7. Breach of borrowing covenants
The Company has entered into a
term credit facility. The Company monitors
the use of borrowings Probability: Low
on an ongoing basis to Moderate
through weekly cash
Material adverse changes in flow forecasting and Impact: High
valuations and net income may quarterly risk
lead to breaches in the LTV and monitoring to monitor Movement:
interest cover ratio covenants. financial covenants. Increase
The Company uses
interest caps on a
8. Interest rate rises significant notional
value of the loan to
The Company's borrowings through mitigate the adverse
a term credit facility are impact of possible
subject to interest rate risk interest rate rises. Probability:
through changing LIBOR rates. Any High
increases in LIBOR rates may have
an adverse effect on the Impact: Low
Company's ability to pay The Investment Manager
dividends. and Board of Directors Movement: No
monitor the level of change
hedging and interest
rate movements to
ensure that the risk is
managed appropriately.
9. Availability and cost of debt
The term credit facility expires The Company maintains a
in October 2020. In the event good relationship with
that RBSi does not renew the the bank providing the
facility, the Company may need to term credit facility. Probability: Low
sell assets to repay the
outstanding loan. Any increase in Impact: High
the financing costs of the
facility on renewal would The Company monitors Movement: No
adversely impact on the Company's the projected usage and change
profitability. covenants of the credit
facility on a quarterly
basis.
CORPORATE RISKS
10. Use of service providers
The Company has no employees and
is reliant upon the performance
of third party service providers. The performance of
service providers in
conjunction with their Probability: Low
service level to Moderate
Failure by any service provider agreements is monitored
to carry out its obligations to via regular calls and Impact: Moderate
the Company in accordance with face-to-face meetings
the terms of its appointment and the use of key Movement: No
could have a materially performance indicators, change
detrimental impact on the where relevant.
operation of the Company.
11. Dependence on the Investment
Manager
The Investment Manager is
responsible for providing
investment management services to
the Company.
The Investment Manager Probability: Low
has endeavoured to to moderate
The future ability of the Company ensure that the
to successfully pursue its principal members of Impact: Moderate
investment objective and its management team are
investment policy may, among suitably incentivised. Movement:
other things, depend on the Decrease
ability of the Investment Manager
to retain its existing staff
and/or to recruit individuals of
similar experience and calibre.
12. Ability to meet objectives
The Company may not meet its
investment objective to deliver The Company has an
an attractive total return to investment policy to
shareholders from investing achieve a balanced
predominantly in a portfolio of portfolio with a
smaller commercial properties in diversified asset and Probability:
the United Kingdom. tenant base. The Moderate
Company also has
investment restrictions Impact: High
in place to limit
Poor relative total return exposure to potential Movement:
performance may lead to an Increase
adverse reputational impact that risk factors. These
affects the Company's ability to factors mitigate the
raise new capital. risk of fluctuations in
returns.
TAXATION RISKS
13. Company REIT status
The Company has a UK REIT status
that provides a tax-efficient
corporate structure.
The Company monitors
REIT compliance through
If the Company fails to remain a the Investment Manager
REIT for UK tax purposes, its on acquisitions; the Probability: Low
profits and gains will be subject Administrator on asset
to UK corporation tax. and distribution Impact: High
levels; the Registrar
and Broker on Movement: No
shareholdings and the change
Any change to the tax status or use of third-party tax
UK tax legislation could impact advisers to monitor
on the Company's ability to REIT compliance
achieve its investment objectives requirements.
and provide attractive returns to
shareholders.
14. POLITICAL/ECONOMIC RISKS
Political and macroeconomic
events present risks to the real Probability:
estate and financial markets that The Board considers the Moderate to High
affect the Company and the impact of political and
business of its tenants. The macroeconomic events Impact: Moderate
level of uncertainty that such when reviewing to High
events bring has been highlighted strategy.
in recent times, most pertinently Movement:
following the EU referendum vote Increase
(Brexit) in June 2016.
Approval
The Strategic Report has been approved and signed on behalf of the Board
by:
Mark Burton
Chairman
21 June 2019
Extract from the Directors Report
Directors
Mark Burton, non-executive Chairman
James Hyslop, non-executive non-independent Director
Bimaljit ("Bim") Sandhu, non-executive Director
Katrina Hart, non-executive Director
Going Concern
The Company has considered its cash flows, financial position, liquidity
position and borrowing facilities. The Company's cash balance as at 31
March 2019 was £2.13 million. The Company can draw a further £2.31 million
(31 March 2018: £1.11 million) of its debt facility up to the maximum 35%
loan to NAV at drawdown.
As at 31 March 2019, the Company had sufficient headroom against its
borrowing covenants. The Company has the ability to utilise up to 35% of
NAV measured at drawdown under the current borrowing facility limits with
a Company loan to NAV of 33.5% as at 31 March 2019.
The Company benefits from a secure, diversified income stream from leases
which are not overly reliant on any one tenant or sector.
As a result, the Directors believe that the Company is well placed to
manage its financing and other business risks. There are currently no
material uncertainties in relation to the Company's ability to continue
for a period of at least 12 months from the date of approval of these
financial statements. The Board is, therefore, of the opinion that the
going concern basis adopted in the preparation of the Annual Report is
appropriate.
Viability Statement
In accordance with the principle 21 of the AIC Code, the Directors have
assessed the prospects of the Company over a period longer than the 12
months required by the 'Going Concern' provisions. The Board has
considered the nature of the Company's assets, liabilities and associated
cash flows, and has determined that five years, up to 31 March 2024, is
the maximum timescale over which the performance of the Company can be
forecast with a material degree of accuracy and so is an appropriate
period over which to consider the Company's viability.
Considerations in support of the Company's viability over this five-year
period include:
• The current unexpired term under the Company's debt facilities stands
at 4.56 years;
• The Company's property portfolio has a WAULT of 6.10 years to expiry,
representing a secure income stream for the period under
consideration;
• The Company's portfolio reflects a diversified strategy that has
invested across a broad spectrum of real estate sectors returning a
diversified income stream, which should spread the risk of any
default; and
• Most leases contain a five-year rent review pattern and, therefore,
five years allow for the forecasts to include the reversion arising
from those reviews. The five-year review considers the Company's cash
flows, dividend cover, REIT compliance and other key financial ratios
over the period.
In assessing the Company's viability, the Board has carried out a thorough
review of the Company's business model, including future performance,
liquidity, dividend cover and banking covenant tests for a five-year
period.
The business model is subject to annual sensitivity analysis, which
involves flexing a number of key assumptions underlying the forecasts both
individually and in aggregate for normal and stressed conditions. The five
year review also considers whether financing facilities will be renewed as
required.
The following scenarios were tested, both individually and combined, in an
effort to represent a severe but plausible scenario, which might
reasonably be expected to arise as a result of a 'No Deal' Brexit outcome,
amongst other factors:
• An increase in financing costs;
• Default of the three highest risk tenants within the Company's top 20
tenants (as rated by Coface); and
• A fall in portfolio valuation.
Based on the results of this analysis, the Directors have a reasonable
expectation that the Company will be able to continue in operation and
meet its liabilities as they fall due over the five-year period of their
assessment.
Subsidiary Company
Details of the Company's subsidiary, AEW UK REIT 2015 Limited, can be
found in Note 17 to the Financial Statements.
Management Arrangements
AEW UK Investment Management LLP is the Company's Investment Manager and
has been appointed as the AIFM. Under the terms of the Investment
Management Agreement, the Investment Manager is responsible for the
day-to-day discretionary management of the Company's investments subject
to the investment objective and policy of the Company and the overall
supervision of the Directors. The Investment Manager is entitled to
receive a quarterly management fee in respect of its services calculated
at the rate of one-quarter of 0.9% of the prevailing NAV (excluding
uninvested proceeds from fundraisings). There is no performance fee. Any
investment by the Company into the Core Fund is not subject to management
fees or performance fees otherwise charged to investors in the Core Fund
by the Investment Manager. The Investment Management Agreement may be
terminated by the Company or the Investment Manager giving 12 months'
notice.
Financial Risk Management
The financial risk management objectives and policies can be found in Note
20 to the Financial Statements.
Social, Community and Employee Responsibility
The Company has no direct social, community or employee responsibilities.
It has no employees and, accordingly, no requirement to separately report
in this area as the management of the portfolio has been delegated to the
Investment Manager and other service providers.
The Investment Manager is an equal opportunities employer who respects and
seeks to empower each individual and the diverse cultures, perspectives,
skills and experiences within its workforce.
The Company is not within the scope of the Modern Slavery Act 2015 because
it has not exceeded the turnover threshold and therefore, no further
disclosure is required in this regard.
Environmental Policy
The Investment Manager acquires and manages properties on behalf of the
Company. It is recognised that these activities have both direct and
indirect environmental impacts. The Investment Manager has a Sustainable
and Responsible Investment ('SRI') policy. This can be found on the
Investment Manager's website 4 www.aewuk.co.uk.
The Investment Manager believes environmentally responsible fund
management means being active. As part of this process, the Investment
Manager submits disclosures to GRESB, the Global Real Estate
Sustainability Benchmark. GRESB is an industry driven organisation
committed to assessing the sustainability of real estate portfolios
(public, private and direct) around the globe. The Investment Manager is
in the process of submitting the Company's GRESB assessment for the year
from 1 April 2018 to 31 March 2019 and will receive the results of this
assessment in September 2019 when it will be made available on the
Company's website.
As an investment company, the Company's own direct environmental impact is
minimal and greenhouse gas ('GHG') emissions are therefore negligible.
Information on the GHG emissions in relation to the Company's property
portfolio are disclosed in the Directors' Report above.
Share Capital
Share Issues
At the AGM held on 12 September 2018, the Company was granted the
authority to allot Ordinary Shares up to an aggregate nominal amount of
£151,558 on a non pre-emptive basis. No Ordinary Shares have been allotted
under this authority and the authority will expire at the conclusion of
the 2019 AGM.
At a general meeting held on 12 September 2018, the Company was granted
authority to allot up to (i) 250 million Ordinary Shares of £0.01 each in
the capital of the Company and/or (ii) 250 million convertible redeemable
preference shares ('C' shares) of £0.01 each in the capital of the Company
pursuant to a potential Share Issuance Programme. The Company published
its Prospectus in relation to the Share Issuance Programme on 1 March
2019. No Ordinary Shares have been allotted under this authority which
will expire, at the earlier of the close of the Share Issuance Programme
and 30 June 2020.
As at 31 March 2019, the Company had 151,558,251 Ordinary Shares in issue
Purchase of Own Shares
At the Company's AGM on 12 September 2018, the Company was granted
authority to purchase up to 14.99% of the Company's Ordinary Shares in
issue. No shares have been bought back under this authority during the
year, which expires at the conclusion of the Company's 2019 AGM. A
resolution to renew the Company's authority to purchase (either for
cancellation or for placing into Treasury) up to 22,718,581 Ordinary
Shares (being 14.99% of the issued Ordinary Share capital as at the date
of this report), will be put to shareholders at the 2019 AGM. Any purchase
will be made in the market and prices will be in accordance with the terms
laid out in the Notice of AGM (enclosed separately and available on the
Company's website). The authority will be used where the Directors
consider it to be in the best interests of shareholders.
Income Entitlement
The profits of the Company (including accumulated revenue reserves)
available for distribution and resolved to be distributed shall be
distributed in proportion to the amount paid upper share by way of interim
and, where applicable special or final dividends among the holders of
Ordinary Shares.
Capital Entitlement
After meeting the liabilities of the Company on a winding-up, the surplus
assets shall be paid to the holders of different classes of members and
distributed among such holders rateably according to the amounts paid up
or credited as paid up on their shares.
Voting Entitlement
Each Ordinary shareholder is entitled to one vote on a show of hands and,
on a poll, to one vote for every Ordinary Share held. The Notice of AGM
and Form of Proxy stipulate the deadlines for the valid exercise of voting
rights and, other than with regard to Directors not being permitted to
vote their Ordinary Shares on matters in which they have an interest,
there are no restrictions on the voting rights of Ordinary Shares.
There are no restrictions concerning the transfer of securities in the
Company or on voting rights; no special rights with regard to control
attached to securities; no agreements between holders of securities
regarding restrictions on the transfer of securities or voting rights
known to the Company; and no agreements which the Company is party to that
might affect its control following a successful takeover bid.
Requirements of the Listing Rules
Listing Rule 9.8.4 requires the Company to include specified information
in a single identifiable section of the annual report or a cross reference
table indicating where the information is set out. The Directors confirm
that there are no disclosures required in relation to Listing Rule 9.8.4.
Related Party Transactions
Related party transactions during the year ended 31 March 2019 can be
found in Note 22 to the Financial Statements.
Post Year-End Events
Post balance sheet events can be found in Note 24 to the Financial
Statements.
The Directors' Report has been approved by the Board of Directors and
signed on its behalf by:
Mark Burton
Chairman
21 June 2019
Statement of Directors' Responsibilities in respect of the Annual Report
and Financial Statements
The Directors are responsible for preparing the Annual Report and
Financial Statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for
each financial year. Under that law, they are required to prepare the
financial statements in accordance with International Financial Reporting
Standards as adopted by the European Union (IFRS as adopted by the EU) and
applicable law.
Under company law, the Directors must not approve the financial statements
unless they are satisfied that they give a true and fair view of the state
of affairs of the Company and of its profit or loss for that period. In
preparing these financial statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgements and estimates that are reasonable, relevant and
reliable;
• state whether they have been prepared in accordance with IFRS as
adopted by the EU;
• assess the Company's ability to continue as a going concern,
disclosing, as applicable, matters related to going concern; and
• use the going concern basis of accounting unless they either intend to
liquidate the Company or to cease operations, or have no realistic
alternative but to do so.
The Directors are responsible for keeping adequate accounting records that
are sufficient to show and explain the Company's transactions and disclose
with reasonable accuracy at any time the financial position of the Company
and enable them to ensure that its financial statements comply with the
Companies Act 2006. They are responsible for such internal control as they
determine is necessary to enable the preparation of financial statements
that are free from material misstatement, whether due to fraud or error,
and have general responsibility for taking such steps as are reasonably
open to them to safeguard the assets of the Company and to prevent and
detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible
for preparing a Strategic Report, Directors' Report, Directors'
Remuneration Report and Corporate Governance Statement that comply with
that law and those regulations.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Company's website.
Legislation in the UK governing the preparation and dissemination of
financial statements may differ from legislation in other jurisdictions.
We confirm that to the best of our knowledge:
• the Financial Statements, prepared in accordance with the applicable
set of accounting standards, give a true and fair view of the assets,
liabilities, financial position and profit of the Company; and
• the Strategic Report includes a fair review of the development and
performance of the business and the position of the Company, together
with a description of the principal risks and uncertainties that it
faces.
We consider the Annual Report and the Financial Statements, taken as a
whole, is fair, balanced and understandable and provides the information
necessary for shareholders to assess the Company's position and
performance, business model and strategy.
On behalf of the Board
Mark Burton
Chairman
21 June 2019
Non-statutory Accounts
The financial information set out below does not constitute the Company's
statutory accounts for the year ended 31 March 2019 but is derived from
those accounts. Statutory accounts for the year ended 31 March 2019 will
be delivered to the Registrar of Companies in due course. The Independent
Auditor has reported on those accounts; its report was (i) unqualified,
(ii) did not include a reference to any matters to which the Independent
Auditor drew attention by way of emphasis without qualifying its report
and (iii) did not contain a statement under Section 498 (2) or (3) of the
Companies Act 2006. The text of the Independent Auditor's Report can be
found in the Company's full Annual Report and Financial Statements on the
Company's website.
Financial Statements
Statement of Comprehensive Income
for the year ended 31 March 2019
Year ended For the period
31 March 1 May 2017 to
Notes
2019 31 March 2018
£'000 £'000
Income
Rental and other income 3 17,183 12,330
Property operating expenses 4 (1,462) (1,106)
Net rental and other income 15,721 11,224
Other operating expenses 4 (2,075) (1,539)
Directors' remuneration 5 (122) (84)
Operating profit before fair value 13,524 9,601
changes
Change in fair value of investment 10 4,184 1,014
properties
Realised loss on disposal of investment 10 (482) (216)
properties
Realised gains on disposal of - 73
investments
Operating profit 17,226 10,472
Finance expense 6 (1,682) (652)
Profit before tax 15,544 9,820
Taxation 7 - -
Profit after tax 15,544 9,820
Other comprehensive income - -
Total comprehensive income for the year 15,544 9,820
Earnings per share (pps) (basic and 8 10.26 7.17
diluted)
The notes below form an integral part of these financial statements.
Statement of Changes in Equity
for the year ended 31 March 2019
Total capital
Capital
Share and reserves
reserve and
For the year ended Share premium attributable
Notes capital retained to
31 March 2019 account
£'000 earnings owners of the
£'000
£'000 Company
£'000
Balance at 1 April 1,515 49,768 94,751 146,034
2018
Total comprehensive - - 15,544 15,544
income
Share issue costs 19 - 2 - 2
Dividends paid 9 - - (12,124) (12,124)
Balance at 31 March 1,515 49,770 98,171 149,456
2019
Total capital
Capital
Share and reserves
reserve and
Share premium attributable
For the period 1 May Notes capital retained to
2017 to 31 March 2018 account
£'000 earnings owners of the
£'000
£'000 Company
£'000
Balance at 1 May 2017 1,236 22,514 94,924 118,674
Total comprehensive - - 9,820 9,820
income
Ordinary Shares issued 18/19 279 27,771 - 28,050
Share issue costs 19 - (517) - (517)
Dividends paid 9 - - (9,993) (9,993)
Balance at 31 March 1,515 49,768 94,751 146,034
2018
The notes below form an integral part of these financial statements.
Statement of Financial Position
as at 31 March 2019
31 March 2019 31 March 2018
Notes
£'000 £'000
Assets
Non-Current Assets
Investment property 10 196,129 187,751
196,129 187,751
Current Assets
Investment property held for sale 10 - 3,650
Receivables and prepayments 11 4,469 2,938
Other financial assets held at fair 12 162 26
value
Cash and cash equivalents 2,131 4,711
6,762 11,325
Total Assets 202,891 199,076
Non-Current Liabilities
Interest bearing loans and borrowings 13 (49,476) (49,643)
Finance lease obligations 15 (636) (573)
(50,112) (50,216)
Current Liabilities
Payables and accrued expenses 14 (3,275) (2,779)
Finance lease obligations 15 (48) (47)
(3,323) (2,826)
Total Liabilities (53,435) (53,042)
Net Assets 149,456 146,034
Equity
Share capital 18 1,515 1,515
Share premium account 19 49,770 49,768
Capital reserve and retained earnings 98,171 94,751
Total capital and reserves
attributable to equity holders of the 149,456 146,034
Company
Net Asset Value per share (pps) 8 98.61 pps 96.36 pps
The financial statements were approved by the Board on 21 June 2019 and
signed on its behalf by:
Mark Burton
Chairman
AEW UK REIT plc (Company number: 09522515)
The notes below form an integral part of these financial statements.
Statement of Cash Flows
for the year ended 31 March 2019
For the period
Year ended
1 May 2017 to
31 March 2019
31 March 2018
£'000
£'000
Cash flows from operating activities
Profit before tax 15,544 9,820
Adjustment for non-cash items:
Finance expense 1,682 652
Gain from change in fair value of (4,184) (1,014)
investment property
Realised loss on disposal of investment 482 216
properties
Realised gain on disposal of investments - (73)
Increase in other receivables and (1,318) (701)
prepayments
Increase/(decrease) in other payables and 587 (409)
accrued expenses
Net cash flow generated from operating 12,793 8,491
activities
Cash flows from investing activities
Purchase of investment properties (7,945) (63,896)
Disposal of investment properties 6,629 10,856
Disposal of investments - 7,667
Net cash used in investing activities (1,316) (45,373)
Cash flows from financing activities
Proceeds from issue of ordinary share - 28,050
capital
Share issue costs (32) (483)
Loan draw down - 20,990
Arrangement loan facility fee paid (294) (166)
Premiums for interest rate caps (531) (19)
Finance costs (1,076) (439)
Dividends paid (12,124) (9,993)
Net cash (used in)/ generated from (14,057) 37,940
financing activities
Net (decrease)/increase in cash and cash (2,580) 1,058
equivalents
Cash and cash equivalents at start of the 4,711 3,653
year/period
Cash and cash equivalents at end of the 2,131 4,711
year/period
Notes to the Financial Statements
for the year ended 31 March 2019
1. Corporate information
AEW UK REIT plc (the 'Company') is a closed ended Real Estate Investment
Trust ('REIT') incorporated on 1 April 2015 and domiciled in the UK. The
registered office of the Company is 6th Floor, 65 Gresham Street, London,
EC2V 7NQ.
The Company's Ordinary Shares were listed on the Official List of the FCA
and admitted to trading on the Main Market of the London Stock Exchange on
12 May 2015.
The nature of the Company's operations and its principal activities are
set out in the Strategic Report above.
2. Accounting policies
2.1 Basis of preparation
These financial statements are prepared and approved by the Directors in
accordance with IFRS and interpretations issued by the International
Accounting Standards Board ('IASB') as adopted by the European Union ('EU
IFRS').
The current period is for a period of 12 months from 1 April 2018 to 31
March 2019. The comparative
period is for a period of 11 months from 1 May 2017 to 31 March 2018.
These financial statements have been prepared under the historical cost
convention, except for
investment property and interest rate derivatives that have been measured
at fair value.
The financial statements are presented in Sterling and all values are
rounded to the nearest thousand
pounds (£'000), except when otherwise indicated.
The Company is exempt by virtue of Section 402 of the Companies Act 2006
from the requirement to
prepare group financial statements. These financial statements present
information solely about the
Company as an individual undertaking.
New standards, amendments and interpretations
The following new standards and amendments to existing standards have been
published and approved by the EU. The Company has applied the following
standards from 1 April 2018, with the year ended 31 March 2019 being the
first year end reported under the standards:
• IFRS 9 Financial Instruments (effective for annual periods beginning
on or after 1 January 2018). The IFRS 9 requirements represent a
change from the existing requirements in IAS 39 in respect of
financial assets. The standard contains two primary measurement
categories for financial assets: amortised cost and fair value. A
financial asset is measured at amortised cost if it is held within a
business model whose objective is to hold assets in order to collect
contractual cash flows, and the asset's contractual terms give rise on
specified dates to cash flows that are solely payments of principal
and interest on the principal outstanding. All other financial assets
are measured at fair value. The standard eliminates the existing IAS
39 categories of held-to-maturity, available-for-sale and loans and
receivables.
Interest rate derivatives
IFRS 9 requires that all derivative financial instruments are recognised
at fair value in the statement of financial position. Changes in fair
value are recognised in profit or loss unless the contract is designated
in an effective hedging relationship.
Trade and other receivables
Under IFRS 9 there is no change to the classification and measurement of
trade and other receivables, however there is a requirement to carry out
an ongoing assessment of expected credit losses using a general approach.
The Company has made an assessment of expected credit losses at each
period end, using the simplified approach where a lifetime expected loss
allowance is always recognised over the expected life of the financial
instrument. Any adjustment is recognised in profit or loss as an
impairment gain or loss. Following the adoption of IFRS 9, there is no
material impact on the Company financial statements.
• IFRS 15 Revenue from contracts with customers. IFRS 15 establishes a
new framework for revenue recognition and replaces all existing
standards and interpretations. IFRS 15 does not apply to lease
contracts within the scope of IAS 17 Leases or, from its date of
application, IFRS 16 Leases. This standard does not have a material
impact on the Company's financial statements as presented for the
current year as the majority of the Company's revenue consists of
rental income from the Company's investment properties, which is
outside the scope of IFRS 15.
• IFRS 7 Financial Instruments: Disclosures - amendments regarding
additional hedge accounting disclosures (applies when IFRS 9 is
applied). The changes did not have a material impact on the financial
statements of the Company as hedge accounting is not applied.
The following new standards and amendments to existing standards have been
published and approved by the EU, and are mandatory for the Company's
accounting periods beginning after 1 April 2019 or later periods.
• IFRS 16 Leases. In January 2016, the IASB published the final version
of IFRS 16 Leases. IFRS 16 specifies how an IFRS reporter will
recognise, measure, present and disclose leasing arrangements. The
Company has decided against early adoption of IFRS 16 Leases.
The Company does not expect the adoption of new accounting standards
issued but not yet effective to have a significant impact on its financial
statements. The right of use finance lease asset relating to head leases
will be required to be measured at the present value of future cash flows,
however, the difference from the IAS 17 carrying value is expected to be
insignificant in the context of the Company's financial statements.
2.2 Significant accounting judgements and estimates
The preparation of financial statements in accordance with EU IFRS
requires the Directors of the Company to make judgements, estimates and
assumptions that affect the reported amounts recognised in the financial
statements. However, uncertainty about these assumptions and estimates
could result in outcomes that require a material adjustment to the
carrying amount of the asset or liability in the future.
There are not considered to be any judgements which have a significant
effect on the amounts recognised in the financial statements.
i) Valuation of investment property
The Company's investment property is held at fair value as determined by
the independent valuer on
the basis of fair value in accordance with the internationally accepted
RICS Appraisal and Valuation Standards.
2.3 Segmental information
In accordance with IFRS 8, the Company is organised into one main
operating segment being investment in property in the UK.
2.4 Going concern
The Directors have made an assessment of the Company's ability to continue
as a going concern and are satisfied that the Company has the resources to
continue in business for at least 12 months from the date of approval of
these financial statements. Furthermore, the Directors are not aware of
any material uncertainties that may cast significant doubt upon the
Company's ability to continue as a going concern. Therefore, the financial
statements have been prepared on the going concern basis.
2.5 Summary of significant accounting policies
The principal accounting policies applied in the preparation of these
financial statements are set out below.
a) Presentation currency
These financial statements are presented in Sterling, which is the
functional and presentational currency of the Company. The functional
currency of the Company is principally determined by the primary economic
environment in which it operates. The Company did not enter into any
transactions in foreign currencies during the year.
b) Revenue recognition
i) Rental income
Rental income receivable under operating leases is recognised on a
straight-line basis over the term of the lease, except for contingent
rental income, which is recognised when it arises.
Incentives for lessees to enter into lease agreements are spread evenly
over the lease term, even if the payments are not made on such a basis.
The lease term is the non-cancellable period of the lease together with
any further term for which the tenant has the option to continue the
lease, where, at the inception of the lease, the Directors are reasonably
certain that the tenant will exercise that option.
ii) Deferred income
Deferred income is rental income received in advance during the accounting
period.
c) Dividend income
Dividend income is recognised in profit or loss on the date the entity's
right to receive a dividend is established.
d) Financing income and expenses
Financing income comprises interest receivable on funds invested.
Financing expenses comprise interest and other costs incurred in
connection with the borrowing of funds. Interest income and interest
payable are recognised in profit or loss as they accrue, using the
effective interest method.
e) Investment property
Property is classified as investment property when it is held to earn
rentals or for capital appreciation or both. Investment property is
measured initially at cost including transaction costs. Transaction costs
include transfer taxes and professional fees to bring the property to the
condition necessary for it to be capable of operating. The carrying amount
also includes the cost of replacing part of an existing investment
property at the time that cost is incurred if the recognition criteria are
met.
Subsequent to initial recognition, investment property is stated at fair
value. Gains or losses arising from changes in the fair values are
included in profit or loss.
Investment properties are valued by the independent valuer on the basis of
a full valuation with physical inspection at least once a year. Any
valuation of an immovable by the independent valuer must be undertaken in
accordance with the current issue of RICS Valuation - Professional
Standards (the 'Red Book').
The determination of the fair value of investment property requires the
use of estimates such as future cash flows from assets (such as lettings,
tenants' profiles, future revenue streams, capital values of fixtures and
fittings, plant and machinery, any environmental matters and the overall
repair and condition of the property) and discount rates applicable to
those cash flows.
For the purposes of these financial statements, the assessed fair value
is:
• reduced by the carrying amount of any accrued income resulting from
the spreading of lease incentives; and
• increased by the carrying amount of leasehold obligations.
Investment property is derecognised when it has been disposed of or
permanently withdrawn from use and no future economic benefit is expected
after its disposal or withdrawal.
The profit on disposal is determined as the difference between the net
sales proceeds and the carrying amount of the asset at the commencement of
the accounting period plus capital expenditure in the period.
Any gains or losses on the retirement or disposal of investment property
are recognised in the profit or loss in the year of retirement or
disposal.
f) Investments in subsidiaries
AEW UK REIT 2015 Limited is the subsidiary of the Company. The subsidiary
was dormant during the reporting period. The investment in the subsidiary
is stated at cost less impairment and shown in note 17.
As permitted by Section 405 of the Companies Act 2006, the subsidiary is
not consolidated as its inclusion is not material for the purposes of
giving a true and fair view.
g) Investment property held for sale
Investment property is classified as held for sale when it is being
actively marketed at year end and it is highly probable that the carrying
amount will be recovered principally through a sale transaction within 12
months.
Investment property classified as held for sale is included within current
assets within the Statement of Financial Position and measured at fair
value.
h) Derivative financial instruments
Derivative financial instruments, comprising interest rate caps for
hedging purposes, are initially recognised at fair value and are
subsequently measured at fair value, being the estimated amount that the
Company would receive or pay to terminate the agreement at the period end
date, taking into account current interest rate expectations and the
current credit rating of the Company and its counterparties. Premiums
payable under such arrangements are initially capitalised into the
Statement of Financial Position.
The Company uses valuation techniques that are appropriate in the
circumstances and for which sufficient data is available to measure fair
value, maximising the use of relevant observable inputs and minimising the
use of unobservable inputs significant to the fair value measurement as a
whole. Changes in fair value of interest rate derivatives are recognised
within finance expenses in profit or loss in the period in which they
occur.
i) Cash and cash equivalents
Cash and short-term deposits in the Statement of Financial Position
comprise cash at bank and short-term deposits with an original maturity of
three months or less.
j) Receivables
Rent and other receivables are initially recognised at fair value and
subsequently at amortised cost. Impairment provisions are recognised based
upon an expected credit loss model. The Company has made an assessment of
expected credit losses at each period end, using the simplified approach
where a lifetime expected loss allowance is always recognised over the
expected life of the financial instrument. Any adjustment is recognised in
profit or loss as an impairment gain or loss.
k) Capital prepayments
Capital prepayments are made for the purpose of acquiring future property
assets and held as receivables within the Statement of Financial Position.
When the asset is acquired, the prepayments are capitalised as a cost of
purchase. Where a purchase is not successful, these costs are expensed
within profit or loss as abortive costs in the period.
l) Other payables and accrued expenses
Other payables and accrued expenses are initially recognised at fair value
and subsequently held at amortised cost.
m) Rent deposits
Rent deposits represent cash received from tenants at inception of a lease
and are subsequently transferred to the rent agent to hold on behalf of
the Company.
n) Interest bearing loans and borrowings
All loans and borrowings are initially recognised at fair value less
directly attributable transaction costs. After initial recognition,
interest bearing loans and borrowings are subsequently measured at
amortised cost using the effective interest method. Borrowing costs are
amortised over the lifetime of the facilities through profit or loss.
When the lifetime of a floating rate facility is extended, and this is
considered to be a non-substantial modification, the effective interest
rate is revised to reflect changes in market rates of interest.
o) Provisions
A provision is recognised in the Statement of Financial Position when the
Company has a present legal or constructive obligation as a result of a
past event, that can be reliably measured and is probable that an outflow
of economic benefits will be required to settle the obligation. Provisions
are determined by discounting the expected future cash flows at a pre-tax
rate that reflects risks specific to the liability.
p) Dividend payable to shareholders
Equity dividends are recognised when they become legally payable.
q) Share issue costs
The costs of issuing or reacquiring equity instruments (other than in a
business combination) are accounted for as a deduction from equity.
r) Finance leases
Finance leases are capitalised at the lease commencement, at present value
of the minimum lease payments, and held as a liability within the
Statement of Financial Position.
s) Taxes
Corporation tax is recognised in profit or loss except to the extent that
it relates to items recognized directly in equity, in which case, it is
recognised in equity.
As a REIT, the Company is exempt from corporation tax on the profits and
gains from its investments, provided it continues to meet certain
conditions as per REIT regulations.
Taxation on the profit or loss for the period not exempt under UK REIT
regulations comprises current and deferred tax. Current tax is expected
tax payable on any non-REIT taxable income for the period, using tax rates
applicable in the period.
Deferred tax is provided on temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for taxation purposes. The amount of deferred tax that is
provided is based on the expected manner of realisation or settlement of
the carrying amount of assets and liabilities, using tax rates enacted or
substantially enacted at the period end date.
t) European Public Real Estate Association
The Company has adopted European Public Real Estate Association ('EPRA')
best practice recommendations, which it expects to broaden the range of
potential institutional investors able to invest in the Company's Ordinary
Shares. For the year to 31 March 2019, audited EPS and NAV calculations
under EPRA's methodology are included in note 8 and further unaudited
measures are included below.
3. Revenue
For the period
Year ended
1 May 2017 to
31 March 2019
31 March 2018
£'000
£'000
Gross rental income received 17,179 12,330
Other property income 4 -
Total revenue 17,183 12,330
Rent receivable under the terms of the leases is adjusted for the effect
of any incentives agreed.
4. Expenses
For the period
Year ended
1 May 2017 to
31 March 2019
31 March 2018
£'000
£'000
Property operating expenses 1,462 1,106
Other operating expenses
Investment management fee 1,302 989
Auditor remuneration 98 88
Costs associated with the drafting of a 181 -
Prospectus*
Other operating costs 494 462
Total other operating expenses 2,075 1,539
Total operating expenses 3,537 2,645
* During the year, costs were incurred in order to update the Prospectus
of the Company. As no shares were issued in the year, these costs have
been expensed in the year.
Year ended For the period
31 March 2019 1 May 2017 to
£'000 31 March 2018
Audit
Statutory audit of Annual Report and 79 65
Financial Statements
Over accrual 2018 (4) -
75 65
Non-audit
Review of Interim Report 23 23
Renewal of Company's Prospectus 2017* - 30
Renewal of Company's Prospectus 2019* 31 -
54 53
Total fees paid to KPMG LLP 129 118
Percentage of total fees attributed to 42% 45%
non-audit services
* Charged to share premium account in 11 months ended 31 March 2018.
Charged to Statement of Comprehensive Income in year ended 31 March 2019.
5. Directors' remuneration
For the period
Year ended
1 May 2017 to
31 March 2019
31 March 2018
£'000
£'000
Directors' fees 114 80
Tax and social security 8 4
Total remuneration 122 84
A summary of the Directors' remuneration is set out in the Directors'
Remuneration Report in the full Annual Report and Financial Statements.
The Company had no employees in either period.
6. Finance expenses
For the period
Year ended
1 May 2017 to
31 March 2019
31 March 2018
£'000
£'000
Interest payable on loan borrowings 1,103 540
Amortisation of loan arrangement fee 127 79
Agency fee payable on loan borrowings 3 (11)
Commitment fees payable on loan borrowings 54 20
1,287 628
Charge in fair value of interest rate 395 24
derivatives
Total 1,682 652
7. Taxation
For the period
Year ended
1 May 2017 to
31 March 2019
31 March 2018
£'000
£'000
Total tax comprises
Analysis of tax charge in the year/period
Profit before tax 15,544 9,820
Theoretical tax at UK corporation tax 2,953 1,866
standard rate of 19% (2018: 19.00%)1
Adjusted for:
Exempt REIT income (2,249) (1,700)
Non taxable investment profit (704) (166)
Total tax charge - -
1Standard rate of corporation tax was 19% to 31 March 2019. The
corporation tax rate is to reduce to 17% with effect from 1 April 2020.
Factors that may affect future tax charges
At 31 March 2019, the Company had unrelieved management expenses of £8,405
(31 March 2018: £8,056). It is unlikely that the Company will generate
sufficient taxable income in the future to use these expenses to reduce
future tax charges and therefore no deferred tax asset has been
recognised.
Due to the Company's status as a REIT and the intention to continue
meeting the conditions required to obtain approval as a REIT in the
foreseeable future, the Company has not provided deferred tax on any
capital gains and losses arising on the revaluation or disposal of
investments.
8. Earnings per share and NAV per share
For the period
Year ended
1 May 2017 to
31 March 2019
31 March 2018
Earnings per share:
Total comprehensive income (£'000) 15,544 9,820
Weighted average number of shares 151,558,251 136,894,561
Earnings per share (basic and diluted) 10.26 7.17
(pence)
EPRA earnings per share:
Total comprehensive income (£'000) 15,544 9,820
Adjustment to total comprehensive income:
Change in fair value of investment (4,184) (1,014)
properties (£'000)
Realised loss on disposal of investment 482 216
properties (£'000)
Realised gain on disposal of investments - (73)
(£'000)
Change in fair value of interest rate 395 24
derivatives (£'000)
Total EPRA Earnings (£'000) 12,237 8,973
EPRA earnings per share (basic and diluted) 8.07 6.56
(pence)
NAV per share:
Net assets (£'000) 149,456 146,034
Ordinary Shares 151,558,251 151,558,251
NAV per share (pence) 98.61 96.36
EPRA NAV per share:
Net assets (£'000) 149,456 146,034
Adjustments to net assets:
Other financial assets held at fair value (162) (26)
(£'000)
EPRA NAV (£'000) 149,294 146,008
EPRA NAV per share (pence) 98.51 96.34
Earnings per share (EPS) amounts are calculated by dividing profit for the
period attributable to ordinary equity holders of the Company by the
weighted average number of Ordinary Shares in issue during the period. As
at 31 March 2019, EPRA NNNAV was equal to IFRS NAV and, as such, a
reconciliation between the two measures has not been presented.
9. Dividends paid
For the period
Year ended
1 May 2017 to
31 March 2019
31 March 2018
£'000
£'000
Fourth interim dividend paid in respect of
the period 1 January 2018 to 31 March 2018 3,031 -
at 2.00p per Ordinary Share
First interim dividend paid in respect of
the period 1 April 2018 to 30 June 2018 at 3,031 -
2.00p per Ordinary Share
Second interim dividend paid in respect of
the period 1 July 2018 to 30 September 2018 3,031 -
at 2.00p per Ordinary Share
Third interim dividend paid in respect of
the period 1 October 2018 to 31 December 3,031 -
2018 at 2.00p per Ordinary Share
Fourth interim dividend paid in respect of
the period 1 February 2017 to 30 April 2017 - 2,473
at 2.00p per Ordinary Share
First interim dividend paid in respect of
the period 1 May 2017 to 31 July 2017 at - 2,473
2.00p per Ordinary Share
Second interim dividend paid in respect of
the period 1 August 2017 to 31 October 2017 - 3,031
at 2.00p per Ordinary Share
Third interim dividend paid in respect of
the period 1 November 2017 to 31 December - 2,016
2017 at 1.33p per Ordinary Share
Total dividends paid during the year/period 12,124 9,993
Fourth interim dividend declared in respect
of the period 1 January 2019 to 31 March 3,031 -
2019 at 2.00p per Ordinary Share*
Fourth interim dividend declared in respect
of the period 1 January 2018 to 31 March (3,031) -
2018 at 2.00p per Ordinary Share
Fourth interim dividend declared in respect
of the period 1 January 2018 to 31 March - 3,031
2018 at 2.00p per Ordinary Share**
Fourth interim dividend declared in respect
of the period 1 February 2017 to 30 April - (2,473)
2017 at 2.00p per Ordinary Share
Total dividends in respect of the 12,124 10,551
year/period
* The fourth interim dividend declared is not included in the accounts as
a liability as at year ended 31 March 2019.
** The fourth interim dividend declared is not included in the accounts as
a liability as at period ended 31 March 2018.
10. Investments
10.a) Investment property
31 March 2019
Investment Investment 31 March
property property Total 2018
freehold leasehold £'000 Total
£'000 £'000 £'000
UK investment property
As at beginning of the 155,517 36,825 192,342 137,820
year/period
Purchases in the year/period 7,590 - 7,590 64,186
Disposals in the year/period (7,053) - (7,053) (11,050)
Revaluation of investment 3,026 1,700 4,726 1,386
properties
Valuation provided by Knight 159,080 38,525 197,605 192,342
Frank
Adjustment to fair value for (2,160) (1,561)
lease incentive debtor
Adjustment for finance lease 684 620
obligations*
Total investment property 196,129 191,401
Classified as:
Investment properties 196,129 187,751
Investment properties held for - 3,650
sale
196,129 191,401
Loss on disposal of the
investment property
Net proceeds from disposals of
investment property during the 6,629 10,856
year/period
Carrying value at date of sale (7,053) (11,050)
Lease incentives amortised in (58) (22)
current year/period
Loss realised on disposal of (482) (216)
investment property
Change in fair value of
investment property
Change in fair value before
adjustments for lease 4,726 1,386
incentives
Adjustment for movement in the
year/period:
in value of lease incentive (542) (452)
debtor
in value of rent guarantee - 80
debtor
4,184 1,014
* Adjustment in respect of minimum payment under head leases separately
included as a liability within the Statement of Financial Position
Valuation of investment property
Valuation of investment property is performed by Knight Frank LLP, an
accredited external valuer with recognised and relevant professional
qualifications and recent experience of the location and category of the
investment property being valued.
The valuation of the Company's investment property at fair value is
determined by the external valuer on the basis of market value in
accordance with the internationally accepted RICS Valuation - Professional
Standards (incorporating the International Valuation Standards).
The determination of the fair value of investment property requires the
use of estimates, such as future cash flows from assets (based on
lettings, tenants' profiles, future revenue streams, capital values of
fixtures and fittings, plant and machinery, any environmental matters and
the overall repair and condition of the property) and discount rates
applicable to those flows.
Valuation of investment property
10.b) Investment
For the period
Year ended
1 May 2017 to
31 March 2019
31 March 2018
£'000
£'000
Investment in AEW UK Core Property Fund
As at beginning of the year/period - 7,594
Disposals in the year/period - (7,594)
Total investment in AEW UK Core Property - -
Fund
Profit on disposal of the investment in AEW
UK Core Property Fund
Proceeds from disposals of investments - 7,667
during the year/period
Cost of disposal - (7,594)
Profit on disposal of investment - 73
Valuation of investment
Investments in collective investment schemes were stated at NAV with any
resulting gain or loss recognised in profit or loss. Fair value is
assessed by the Directors based on the best available information.
As at 31 March 2019, the Company had no investment in the AEW UK Core
Property Fund (31 March 2018: Nil).
10.c) Fair value measurement hierarchy
The following table provides the fair value measurement hierarchy for
investments:
31 March 2019
Significant Significant
Quoted prices observable unobservable
in
inputs inputs
active markets
(Level 2) (Level 3) Total
(Level 1)
£'000 £'000 £'000
£'000
Assets measured at fair
value
Investment property - - 196,129 196,129
- - 196,129 196,129
31 March 2018
Significant Significant
Quoted prices observable unobservable
in
inputs inputs
active markets
(Level 2) (Level 3) Total
(Level 1)
£'000 £'000 £'000
£'000
Assets measured at fair
value
Investment property - - 191,401 191,401
191,401 191,401
Explanation of the fair value hierarchy:
Level 1 - Quoted prices for an identical instrument in active markets;
Level 2 - Prices of recent transactions for identical instruments and
valuation techniques using observable market data; and
Level 3 - Valuation techniques using non-observable data.
There have been no transfers between Level 1 and Level 2 during either
period, nor have there been any transfers in or out of Level 3.
Sensitivity analysis to significant changes in unobservable inputs within
Level 3 of the hierarchy
The significant unobservable inputs used in the fair value measurement
categorised within Level 3 of the fair value hierarchy of the entity's
portfolio of investment property are:
1) ERV
2) Equivalent yield
Increases/(decreases) in the ERV (per sq ft per annum) in isolation would
result in a higher/(lower) fair value measurement. Increases/(decreases)
in the discount rate/yield in isolation would result in a lower/(higher)
fair value measurement.
The significant unobservable input used in the fair value measurement
categorised within Level 3 of the fair value hierarchy of the portfolio
investment property are as follows:
Fair Value Valuation Significant
Class Range
£'000 Technique Unobservable
Inputs
31 March 2019
£1.00 -
Investment Income ERV £127.00
property* 197,605 capitalisation
Equivalent yield 5.87% -
10.25%
31 March 2018
£1.00 -
Investment Income ERV £145.00
property* 192,342 capitalisation
Equivalent yield 3.14% -
10.72%
*Valuation per Knight Frank LLP.
Where possible, sensitivity of the fair values of Level 3 assets are
tested to changes in unobservable inputs against reasonable alternatives.
Gains and losses recorded in profit or loss for recurring fair value
measurements categorised within Level 3 of the fair value hierarchy are
attributable to changes in unrealised gains or losses relating to
investment property held at the end of the reporting period.
With regards to investment property, gains and losses for recurring fair
value measurements categorised within Level 3 of the fair value hierarchy,
prior to adjustment for rent free debtor and rent guarantee debtor where
applicable, are recorded in profit and loss.
The carrying amount of the assets and liabilities, detailed within the
Statement of Financial Position, is considered to be the same as their
fair value.
31 March 2019
Change in ERV Change in equivalent yield
£'000 £'000 £'000 £'000
Sensitivity analysis
+5% -5% +5% -5%
Resulting fair value of 205,803 189,720 187,352 208,707
investment property
31 March 2018
Change in ERV Change in equivalent yield
£'000 £'000 £'000 £'000
Sensitivity analysis
+5% -5% +5% -5%
Resulting fair value of
203,903 188,297 185,985 206,943
investment property
11. Receivables and prepayments
31 March 2019 31 March 2018
£'000 £'000
Receivables
Rent debtor 1,438 1,074
Allowance for expected credit losses (39) -
Rent agent float account 92 81
Other receivables 420 179
1,911 1,334
Lease incentive debtor 2,160 1,561
4,071 2,895
Prepayments
Property related prepayments 4 13
Listing fees - 16
Other prepayments 394 14
398 43
Total 4,469 2,938
The aged debtor analysis of receivables is as follows:
31 March 2019 31 March 2018
£'000 £'000
Less than three months 1,911 1,334
Between three and six months - -
Between six and twelve months - -
Total 1,911 1,334
12. Interest rate derivatives
31 March 2019 31 March 2018
£'000 £'000
At the beginning of the year/period 26 31
Interest rate cap premium paid 531 19
Changes in fair value of interest rate (395) (24)
derivatives
At the end of the year/period 162 26
The Company is protected from a significant rise in interest rates as it
has interest rate caps with a combined notional value of £36.51 million
(31 March 2018: £36.51 million), resulting in the loan being 73% hedged
(31 March 2018: 73%). These interest rate caps are effective until 19
October 2020. The Company has entered into additional interest rate caps
on a notional value of £46.51 million at 2.00% covering the extension
period of the loan from 20 October 2020 to 19 October 2023.
Fair value hierarchy
The following table provides the fair value measurement hierarchy for
interest rate derivatives:
Significant
Quoted prices in Significant
unobservable
active markets observable input Total
inputs
(Level 1) (Level 2) £'000
(Level 3)
£'000 £'000
Valuation £'000
31 March 2019 - 162 - 162
31 March 2018 - 26 - 26
The fair value of these contracts are recorded in the Statement of
Financial Position as at the year end.
There have been no transfers between level 1 and level 2 during the
period, nor have there been any transfers between level 2 and level 3
during the year.
The carrying amount of all assets and liabilities, detailed within the
Statement of Financial Position, is
considered to be the same as their fair value.
13. Interest bearing loans and borrowings
Bank borrowings
31 March 2019 31 March 2018
£'000 £'000
At the beginning of the year/period 50,000 29,010
Bank borrowings drawn in the year/period - 20,990
Interest bearing loans and borrowings 50,000 50,000
Unamortised loan arrangement fees 524 357
At the end of the year/period 49,476 49,643
Repayable between 2 and 5 years 50,000 50,000
Undrawn facility at the year/period end 10,000 10,000
Total facility 60,000 60,000
The Company has a £60.00 million (31 March 2018: £60.00 million) credit
facility with RBSi of which £50.00 million (31 March 2018: £50.00 million)
has been utilised as at 31 March 2019.
Under the terms of the Prospectus, the Company has a target gearing of 25%
Loan to GAV, but can borrow up to 35% Loan to GAV in advance of a capital
raise or asset disposal. As at 31 March 2019, the Company's gearing was
25.30% Loan to GAV (31 March 2018: 26.00%).
Under the terms of the loan facility, the Company can draw up to 35% Loan
to NAV at drawdown. As at 31 March 2019, the Company could draw a further
£2.31 million up to the maximum 35% (31 March 2018: £1.11 million).
Borrowing costs associated with the credit facility are shown as finance
costs in note 6 to these financial statements.
On 22 October 2018, the Company extended the term of the facility by three
years up to 22 October 2023, to mitigate the financing risk associated
with Brexit. The margin remains unchanged, with the loan incurring
interest at three month LIBOR +1.4%, which equated to an all-in rate of
2.32% as at 31 March 2019 (31 March 2018: 2.11%).
Reconciliation to cash flows from financing activities
Bank borrowings
31 March 2019 31 March 2018
£'000 £'000
Balance at the beginning of the year/period 49,643 28,740
Changes from financing cash flows
Loan drawdown - 20,990
Loan arrangement fees (294) (166)
Total changes from financing cash flows (294) 20,824
Other changes
Amortisation of loan arrangement fees 127 79
Total other changes 127 79
Balance at the end of the year/period 49,476 49,643
14. Payables and accrued expenses
31 March 2019 31 March 2018
£'000 £'000
Deferred income 1,137 993
Accruals 1,189 831
Other creditors 949 955
Total 3,275 2,779
15. Finance lease obligations
Finance leases are capitalised at the lease's commencement at the lower of
the fair value of the property and the present value of the minimum lease
payments. The present value of the corresponding rental obligations are
included as liabilities.
The following table analyses the minimum lease payments under
non-cancellable finance leases:
31 March 2019 31 March 2018
£'000 £'000
Within one year 48 47
After one year but not more than five years 160 152
More than five years 476 421
636 573
Total 684 620
16. Guarantees and commitments
As at 31 March 2019, there were capital commitments of £210,588 relating
to works in Apollo Business Park, Basildon (31 March 2018: £nil).
Operating lease commitments - as lessor
The Company has entered into commercial property leases on its investment
property portfolio. These non-cancellable leases have a remaining term of
between zero and 24 years.
Future minimum rentals receivable under non-cancellable operating leases
as at 31 March 2019 are as follows:
31 March 2019 31 March 2018
£'000 £'000
Within one year 16,387 16,932
After one year but not more than five years 41,304 47,858
More than five years 29,513 37,574
Total 87,204 102,364
During the year ended 31 March 2019 there were contingent rents totalling
£67,591 (11 month period to 31 March 2018: £149,192) recognised as income.
17. Investment in subsidiary
The Company has a wholly-owned subsidiary, AEW UK REIT 2015 Limited:
Country of
Name and company registration Principal Ordinary Shares
number activity held
and incorporation
AEW UK REIT 2015
Limited
England and Wales Dormant 100%
(Company number
09524699)
AEW UK REIT 2015 Limited is a subsidiary of the Company incorporated in
the UK on 2 April 2015. At 31 March 2019, the Company held one share,
being 100% of the issued share capital. AEW UK REIT 2015 Limited is
dormant and the cost of the subsidiary is £0.01 (31 March 2018: £0.01).
The registered office of AEW UK REIT 2015 Limited is 6th Floor, 65 Gresham
Street, London, EC2V 7NQ.
18. Issued share capital
31 March 2019 31 March 2018
£'000 Number of Ordinary £'000 Number of
Shares Ordinary Shares
Ordinary Shares (nominal
value £0.01 per share)
authorised, issued and
fully paid
At the beginning of the 1,515 151,558,251 1,236 123,647,250
year/period
Issued on admission to
trading on the London Stock - - 279 27,911,001
Exchange on 24 October 2017
At the end of the 1,515 151,558,251 1,515 151,558,251
year/period
On 24 October 2017, the Company issued 27,911,001 Ordinary Shares at a
price of 100.5 pps, pursuant to the Initial Placing, Initial Offer for
Subscription and Intermediaries Offer of the Share Issuance Programme, as
described in the prospectus published by the Company on 28 September 2017.
19. Share premium account
31 March 31 March
2019 2018
£'000 £'000
The share premium relates to amounts subscribed for
share capital in excess of nominal value:
Balance at the beginning of the year/period 49,768 22,514
Issued on admission to trading on the London Stock
Exchange on - 27,771
24 October 2017
Share issue cost (paid and accrued) 2 (517)
Balance at the end of the period/year 49,770 49,768
20. Financial risk management objectives and policies
20.1 Financial assets and liabilities
The Company's principal financial assets and liabilities are those derived
from its operations: receivables and prepayments, cash and cash
equivalents and payables and accrued expenses. The Company's other
principal financial liabilities are interest bearing loans and borrowings,
the main purpose of which is to finance the acquisition and development of
the Company's property portfolio.
Set out below is a comparison by class of the carrying amounts and fair
value of the Company's financial instruments that are carried in the
financial statements.
31 March 2019 31 March 2018
Book Value Fair Value Fair Value Fair Value
£'000 £'000 £'000 £'000
Financial assets
Receivables1 1,911 1,911 1,334 1,334
Cash and cash equivalents 2,131 2,131 4,711 4,711
Other financial assets held at 162 162 26 26
fair value
Financial liabilities
Interest bearing loans and 49,476 50,000 49,643 50,000
borrowings
Payables and accrued expenses2 1,923 1,923 1,638 1,638
Financial lease obligations 684 684 620 620
1 Excludes lease incentive debtor & prepayments
2 Excludes tax, VAT liabilities and deferred income
Interest rate derivatives are the only financial instruments classified as
fair value through profit and loss. All other financial assets and
financial liabilities are measured at amortised cost. All financial
instruments were designated in their current categories upon initial
recognition.
Fair value measurement hierarchy has not been applied to those classes of
asset and liability stated above which are not measured at fair value in
the financial statements. The difference between the fair value and book
value of these items is not considered to be material.
20.2 Financing management
The Company's activities expose it to a variety of financial risks: market
risk, real estate risk, credit risk and liquidity risk.
The Company's objective in managing risk is the creation and protection of
shareholder value. Risk is inherent in the Company's activities but it is
managed through a process of ongoing identification, measurement and
monitoring, subject to risk limits and other controls.
The principal risks facing the Company in the management of its portfolio
are as follows:
Market price risk
Market price risk is the risk that future values of investments in direct
property and related property investments will fluctuate due to changes in
market prices. To manage market price risk, the Company diversifies its
portfolio geographically in the United Kingdom and across property
sectors.
The disciplined approach to the purchase, sale and asset management
ensures that the value is maintained to its maximum potential. Prior to
any property acquisition or sale, detailed research is undertaken to
assess expected future cash flow. The Investment Management Committee of
the Investment Manager meets twice monthly and reserves the ultimate
decision with regards to investment purchases or sales. In order to
monitor property valuation fluctuations, the Investment Manager meets with
the independent external valuer on a regular basis. The valuer provides a
property portfolio valuation quarterly, so any movements in the value can
be accounted for in a timely manner and reflected in the NAV every
quarter.
Real estate risk
The Company is exposed to the following risks specific to its investment
property:
Property investments are illiquid assets and can be difficult to sell,
especially if local market conditions are poor. Illiquidity may also
result from the absence of an established market for investments, as well
as legal or contractual restrictions on resale of such investments. In
addition, property valuation is inherently subjective due to the
individual characteristics of each property, and thus, coupled with
illiquidity in the markets, makes the valuation in the investment property
difficult and inexact.
No assurances can be given that the valuations of properties will be
reflected in the actual sale prices even where such sales occur shortly
after the relevant valuation date.
There can be no certainty regarding the future performance of any of the
properties acquired for the Company. The value of any property can go down
as well as up. Property and property-related assets are inherently
subjective as regards value due to the individual nature of each property.
As a result, valuations are subject to uncertainty.
Real property investments are subject to varying degrees of risk. The
yields available from investments in real estate depend on the amount of
income generated and expenses incurred from such investments.
There are additional risks in vacant, part vacant, redevelopment and
refurbishment situations although these are not prospective investments
for the Company.
Credit risk
Credit risk is the risk that the counterparty (to a financial instrument)
or tenant (of a property) will cause a financial loss to the Company by
failing to meet a commitment it has entered into with the Company.
It is the Company's policy to enter into financial instruments with
reputable counterparties. All cash deposits are placed with an approved
counterparty, The Royal Bank of Scotland International Limited.
In respect of property investments, in the event of a default by a tenant,
the Company will suffer a rental shortfall and additional costs concerning
re-letting the property. The Investment Manager monitors tenant arrears in
order to anticipate and minimise the impact of defaults by occupational
tenants.
The table below shows the Company's exposure to credit risk:
As at As at
31 Match 2019 31 March 2018
£'000 £'000
Debtors (excluding incentives and prepayments) 1,911 1,334
Cash and cash equivalents 2,131 4,711
Total 4,042 6,045
Liquidity risk
Liquidity risk arises from the Company's management of working capital,
the finance charges and principal repayments on its borrowings. It is the
risk that the Company will encounter difficulty in meeting its financial
obligations as they fall due, as the majority of the Company's assets are
investment properties and therefore not readily realisable. The Company's
objective is to ensure it has sufficient available funds for its
operations and to fund its capital expenditure. This is achieved by
continuous monitoring of forecast and actual cash flows by management.
The table below summarises the maturity profile of the Company's financial
liabilities based on contractual undiscounted payments:
On < 3 3-12 1-5 > 5
Total
31 March 2019 demand months months years years
£'000
£'000 £'000 £'000 £'000 £'000
Interest bearing loans and - 290 877 54,145 - 55,312
borrowings
Payables and accrued expenses - 1,923 - - - 1,923
Finance lease obligation - - 51 205 4,307 4,563
- 2,213 928 54,350 4,307 61,798
On <3 3-12 1-5 > 5
Total
31 March 2018 demand months months years years
£'000
£'000 £'000 £'000 £'000 £'000
Interest bearing loans and - 228 678 51,422 - 52,328
borrowings
Payables and accrued expenses - 1,638 - - - 1,638
Finance lease obligation - - 51 205 3,128 3,384
- 1,866 729 51,627 3,128 57,350
21. Capital management
The primary objectives of the Company's capital management are to ensure
that it continues to qualify for UK REIT status and complies with its
banking covenants.
To enhance returns over the medium term, the Company utilises borrowings
on a limited recourse basis for each investment or all or part of the
total portfolio. The Company's policy is to target a borrowing level of
25% loan to GAV and can borrow up to a maximum of 35% loan to GAV in
advance of a capital raise or asset disposal. It is currently anticipated
that the level of total borrowings will typically be at the level of 25%
of GAV (measured at drawdown).
Alongside the Company's borrowing policy, the Directors intend, at all
times, to conduct the affairs of the Company so as to enable the Company
to qualify as a REIT for the purposes of Part 12 of the CTA 2010 (and the
regulations made thereunder). The REIT status compliance requirements
include: 90% distribution test, interest cover ratio, 75% assets test and
the substantial shareholder rule, all of which the Company remained
compliant with in this reporting year.
The monitoring of the Company's level of borrowing is performed primarily
using a Loan to GAV ratio, which is calculated as the amount of
outstanding debt divided by the total valuation of investment property.
The Company Loan to GAV ratio at the year end was 25.30% (31 March 2018:
26.00%).
Breaches in meeting the financial covenants would permit the bank to
immediately call loans and borrowings. During the year under review, the
Company did not breach any of its loan covenants, nor did it default on
any other of its obligations under its loan agreements.
22. Transactions with related parties
As defined by IAS 24 Related Parties Disclosures, parties are considered
to be related if one party has the ability to control the other party or
exercise significant influence over the other party in making financial or
operational decisions.
For the year ended 31 March 2019, the Directors of the Company are
considered to be the key management personnel. Details of amounts paid to
Directors for their services can be found within note 5, Directors'
remuneration.
AEW UK Investment Management LLP is the Company's Investment Manager and
has been appointed as AIFM. Under the terms of the Investment Management
Agreement, the Investment Manager is responsible for the day-to-day
discretionary management of the Company's investments subject to the
investment objective and investment policy of the Company and the overall
supervision of the Directors.
The Investment Manager is entitled to receive a quarterly management fee
in respect of its services calculated at the rate of one-quarter of 0.9%
of the prevailing NAV (excluding uninvested proceeds from fundraisings).
During the year, the Company incurred £1,302,153 (31 March 2018: £988,612)
in respect of investment management fees and expenses, of which £328,323
(31 March 2018: £469,239) was outstanding as at 31 March 2019.
23. Segmental information
Management has considered the requirements of IFRS 8 'operating segments'.
The source of the Company's diversified revenue is from the ownership of
investment properties across the UK. Financial information on a portfolio
basis is provided to senior management of the Investment Manager and the
Directors, which collectively comprise the chief operating decision maker.
The properties are managed on a portfolio basis and the chief operating
decision maker assesses performance and makes resource allocation
decisions at the portfolio level (being the total investment property
portfolio held by the company). Therefore, the Company is considered to be
engaged in a single segment of business, being property investment and in
one geographical area, United Kingdom.
24. Events after reporting date
Dividend
On 26 April 2019, the Board declared its fourth interim dividend of 2.00
pps, in respect of the period from 1 January 2019 to 31 March 2019. This
was paid on 31 May 2019, to shareholders on the register as at 10 May
2019. The ex-dividend date was 9 May 2019.
EPRA Unaudited Performance Measures
Detailed below is a summary table showing the EPRA performance measures of
the Company
All EPRA performance measures have been calculated in line with EPRA Best
Practices Recommendations Guidelines which can be found at
5 www.epra.com.
MEASURE AND DEFINITION PURPOSE PERFORMANCE
A key measure of a £12.24 million/8.07
company's underlying pps
1. EPRA Earnings operating results and an
indication of the extent EPRA earnings for
Earnings from operational to which current year to
activities. dividend payments are
supported by earnings. 31 March 2019 (11
month period to 31
March 2018: £8.97
million/6.56 pps)
2. EPRA NAV Makes adjustments to
IFRS NAV to provide £149.29
Net asset value adjusted to stakeholders with the million/98.51 pps
include properties and other most relevant
investment interests at fair information on the fair EPRA NAV as at 31
value and to exclude certain value of the assets and March
items not expected to liabilities within a
crystallise in a long-term true real estate 2019 (31 March 2018:
investment property investment company with
business. a long-term investment £146.01
strategy. million/96.34 pps)
3. EPRA NNNAV
Makes adjustments to £149.46
EPRA NAV adjusted to include EPRA NAV to provide million/98.61 pps
the fair values of: stakeholders with the
most relevant EPRA NNNAV as at 31
(i) financial instruments; information on the March
current fair value of
(ii) debt; and all the assets and 2019 (31 March 2018:
liabilities within a
(iii) deferred taxes. real estate company. £146.03
million/96.36 pps)
4.1 EPRA NIY
Annualised rental income
based on the cash rents A comparable measure for
passing at the balance sheet portfolio valuations.
date, less non-recoverable This measure should make 7.62%
property operating expenses, it easier for investors
divided by the market value to judge themselves, how EPRA NIY as at 31
of the property, increased the valuation of March 2019 (31 March
with (estimated) purchasers' portfolio X compares 2018: 7.73%)
costs. with portfolio Y.
4.2 EPRA 'Topped-Up' NIY
A comparable measure for
This measure incorporates an portfolio valuations. 8.58%
adjustment to the EPRA NIY This measure should make
in respect of the expiration it easier for investors EPRA 'Topped-Up' NIY
of rent-free periods (or to judge themselves, how
other unexpired lease the valuation of as at 31 March 2019
incentives such as portfolio X compares (31 March
discounted rent periods and with portfolio Y.
step rents). 2018: 8.52%)
5. EPRA Vacancy
A 'pure' (%) measure of 2.99%
ERV of vacant space divided investment property
by ERV of the whole space that is vacant, EPRA ERV as at 31
portfolio. based on ERV. March 2019 (31 March
2018: 7.10%)
21.04%
EPRA Cost Ratio
6. EPRA Cost Ratio (including direct
vacancy costs) as at
Administrative and operating A key measure to enable 31 March 2019 (31
costs (including and meaningful measurement March 2018: 21.89%)
excluding costs of direct of the changes in a
vacancy) divided by gross company's operating 15.81%
rental income. costs.
EPRA Cost Ratio
(excluding direct
vacancy costs) as at
31 March 2019 (31
March 2018: 14.89%)
Calculation of EPRA Net Initial Yield and 'topped-up' Net Initial Yield
Year ended For the period
31 March 1 May 2017 to
2019 31 March 2018
£'000 £'000
Investment property - wholly-owned 197,605 192,342
Allowance for estimated purchasers' costs 13,437 13,079
Grossed-up completed property portfolio 211,042 205,421
valuation
Annualised cash passing rental income 16,725 17,046
Property outgoings (651) (1,174)
Annualised net rents 16,074 15,872
Rent from expiry of rent-free periods and fixed 2,023 1,626
uplifts
'Topped-up' net annualised rent 18,097 17,498
EPRA NIY 7.62% 7.73%
EPRA 'topped-up' NIY 8.58% 8.52%
EPRA NIY basis of calculation
EPRA NIY is calculated as the annualised net rent, divided by the gross
value of the completed property portfolio.
The valuation of grossed-up completed property portfolio is determined by
the Company's external valuers as at 31 March 2019, plus an allowance for
estimated purchaser's costs. Estimated purchaser's costs are determined by
the relevant stamp duty liability, plus an estimate by our valuers of
agent and legal fees on notional acquisition. The net rent deduction
allowed for property outgoings is based on the Company's valuers'
assumptions on future recurring non-recoverable revenue expenditure.
In calculating the EPRA 'topped-up' NIY, the annualised net rent is
increased by the total contracted rent from expiry of rent-free periods
and future contracted rental uplifts.
Calculation of EPRA Vacancy Rate
For the period
Year ended
1 May 2017 to
31 March 2019
31 March 2018
£'000
£'000
Annualised potential rental value of vacant 522 1,254
premises
Annualised potential rental value for the 17,484 17,677
complete property portfolio
EPRA Vacancy Rate 2.99% 7.10%
Calculation of EPRA Cost Ratios
For the period
Year ended
1 May 2017 to
31 March 2019
31 March 2018
£'000
£'000
Administrative/operating expense per IFRS 3,660 2,729
income statement
Less: ground rent costs (58) (38)
EPRA costs (including direct vacancy costs) 3,602 2,691
Direct vacancy costs (see Glossary in full (895) (861)
Annual Report for further details)
EPRA costs (excluding direct vacancy costs) 2,707 1,830
Gross rental income less ground rent costs 17,121 12,292
EPRA Cost Ratio (including direct vacancy 21.04% 21.89%
costs)
EPRA Cost Ratio (excluding direct vacancy 15.81% 14.89%
costs)
Company Information
Share Register Enquiries
The register for the Ordinary Shares is maintained by Computershare
Investor Services PLC. In the event of queries regarding your holding,
please contact the Registrar on +44 (0)370 707 1341 or email:
web.queries@computershare.co.uk.
Changes of name and/or address must be notified in writing to the
Registrar, at the address shown below. You can check your shareholding and
find practical help on transferring shares or updating your details at
www.investorcentre.co.uk. Shareholders eligible to receive dividend
payments gross of tax may also download declaration forms from that
website.
Share Information
Ordinary £0.01 Shares 151,558,251
SEDOL Number BWD2415
ISIN Number GB00BWD24154
Ticker/TIDM AEWU
Share Prices
The Company's Ordinary Shares are traded on the premium segment of the
Main Market of the London Stock Exchange.
Frequency of NAV publication:
The Company's NAV is released to the London Stock Exchange on a quarterly
basis and is published on the Company's website.
Annual and Half-Yearly Reports
Copies of the Annual and Half-Yearly Reports are available from the
Company's website.
Financial Calendar
12 September 2019 Annual General Meeting
30 September 2019 Half-year end
November/December 2019 Announcement of half-yearly results
31 March 2020 Year end
June 2020 Announcement of annual results
Dividends
The following table summarises the amounts distributed to equity
shareholders in respect of the period:
£
Interim dividend for the period 1 April 2018 to 30 June 2018
3,031,165
(payment made on 31 August 2018)
Interim dividend for the period 1 July 2018 to 30 September 3,031,165
2018 (payment made on 30 November 2018)
Interim dividend for the period 1 October 2018 to 31 December
2018 3,031,165
(payment made on 28 February 2019)
Interim dividend for the period 1 January 2019 to 31 March 2019
3,031,165
(payment made on 31 May 2019)
Total 12,124,660
Directors
Mark Burton* (Non-executive Chairman)
Katrina Hart* (Non-executive Director)
James Hyslop (Non-executive Director)
Bimaljit (''Bim'') Sandhu* (Non-executive Director)
* independent of the Investment Manager
Registered Office
6th Floor
65 Gresham Street
London
EC2V 7NQ
Investment Manager and AIFM
AEW UK Investment Management LLP
33 Jermyn Street
London
SW1Y 6DN
Tel: 020 7016 4880
Website: www.aewuk.co.uk
Property Manager
MJ Mapp
180 Great Portland Street
London
W1W 5QZ
Corporate Broker
Liberum
Ropemaker Place
25 Ropemaker Street
London
EC2Y 9LY
Legal Adviser
Gowling WLG (UK) LLP
4 More London Riverside
London
SE1 2AU
Depositary
Langham Hall UK LLP
8th Floor
1 Fleet Place
London
EC4M 7RA
Administrator
Link Alternative Fund Administrators Limited
Beaufort House
51 New North Road
Exeter
EX4 4EP
Company Secretary
Link Company Matters Limited
6th Floor
65 Gresham Street
London
EC2V 7NQ
Registrar
Computershare Investor Services PLC
The Pavilions
Bridgwater Road
Bristol
BS13 8AE
Auditor
KPMG LLP
15 Canada Square
Canary Wharf
London
E14 5GL
Valuer
Knight Frank LLP
55 Baker Street
London
W1U 8AN
Copies of the Annual Report and Financial Statements and the Notice of AGM
Printed copies of the Annual Report and Notice of the 2019 Annual General
Meeting will be sent to shareholders shortly and will be available on the
Company's website.
National Storage Mechanism
A copy of the Annual Report and Financial Statements will be submitted
shortly to the National Storage Mechanism ('NSM') and will be available
for inspection at www.morningstar.co.uk/uk/NSM.
Annual General Meeting
The AGM will be held on 12 September 2019 at 12 noon at The Cavendish
Hotel, 81 Jermyn Street, St. James', London SW1Y 6JF.
END
══════════════════════════════════════════════════════════════════════════
ISIN: GB00BWD24154
Category Code: ACS
TIDM: AEWU
LEI Code: 21380073LDXHV2LP5K50
OAM Categories: 1.1. Annual financial and audit reports
Sequence No.: 11011
EQS News ID: 828939
End of Announcement EQS News Service
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