REG - Local Shopping REIT - Final Results <Origin Href="QuoteRef">LSR.L</Origin> - Part 2
12/12/2016 07:06
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practicable, subject to regulatory constraints. The Board is
provided with feedback on these meetings, as well as regular commentary from investors and the Company's bankers and
advisers. The Board provides reports and other announcements via the regulatory news service in accordance with regulatory
requirements. Regulatory announcements and key publications can also be accessed via the Company's website. The Company's
Annual General Meeting provides a further forum for investors to discuss the Company's progress and the Board encourages
shareholders to attend. The Company complies with relevant regulatory requirements, and also the UK Corporate Governance
Code, in relation to convening the meeting, its conduct and the announcement of voting on resolutions. The Annual Report
and Notice of the Annual General Meeting are sent to shareholders at least 20 working days prior to the meeting and are
available on the Company's website. The results of resolutions considered at the Annual General Meeting are announced to
the Stock Exchange and are also published on the website and lodged with the National Storage Mechanism. Investors may
elect to receive communications from the Company in electronic form and be advised by email that communications may be
accessed via the Company's website.
Acquisitions and Disposals
The Group made no material acquisitions during the year.
During the year, the Company continued to sell properties in accordance with its investment policy, details of which are
given on page 5.
Group Companies
The subsidiary undertakings of the Company are set out in note 19 to the financial statements.
Group Result and Dividend
The profit for the Group attributable to shareholders for the year was £0.63 million (2015: profit £0.02m). The recurring
operating profit for the year was 1.9p per share (2015: 0.3p). The definition of recurring operating profit is set out in
the glossary of terms at the end of the Report. In accordance with the revised investment policy, no interim dividend has
been or will be distributed in respect of the financial year. The directors will keep the dividend distribution policy
under review.
Use of financial instruments
The Company's use of financial instruments to reduce its exposure to risks arising from interest rate fluctuations is
described in notes 14 and 15 to the financial statements.
Share Capital
Details of the Company's issued share capital are set out in note 11 to the financial statements. All of the Company's
issued shares are listed on the London Stock Exchange. The Company's share capital comprises one class of Ordinary Shares
of 20p each. All issued shares are fully paid up and rank equally. Shares acquired through the Company's employee share
schemes rank pari passu with shares in issue and no shares carry special rights regarding control of the Company. The
Company's Articles impose requirements on shareholders in relation to distributions and the size of individual holdings, in
order to ensure that the Company continues to conform to the UK REIT regime. Subject to this, there are no restrictions on
the transfer of shares or the size of holdings. The directors are not aware of any agreements between shareholders in
relation to the Company's shares. The Company's issued share capital did not alter during the year.
Transactions in the Company's shares
The Company's previous authority to purchase its own shares was extended at the Annual General Meeting in March 2016, which
authorised purchases of up to 14.99% of the Company's issued Ordinary Share capital (excluding shares held in treasury).
This authority will expire at the 2017 Annual General Meeting, at which a resolution will be proposed for its renewal. The
directors exercise their authority to purchase the Company's shares only when they consider it in the Company's best
interests to do so. No share purchases were made during the year.
The directors are also authorised to offer shareholders the alternative of receiving fully paid Ordinary Shares in lieu of
dividends. This authority was not used during the year.
Substantial Interests
As at 1 December 2016, the last practicable reporting date before the production of this document, the Company had been
notified of the following major interests (of 3% or more) in its issued share capital:
Shareholder Ordinary Shares %
Thalassa Holdings Ltd 19,168,376 23.23
Damille Investments II Limited 18,300,000 22.18
Hargreaves Lansdown Asset Management 5,323,358 6.45
EFG Harris Allday 4,300,973 5.21
Thames River Capital LLP 3,204,324 3.88
Equiniti Financial Services Limited 2,907,594 3.52
N J Vetch 2,873,563 3.48
Value Investments Limited 2,793,500 3.39
Alliance Trust Savings Limited 2,500,479 3.03
Effect of change of control on significant contracts
Funding agreements entered into by certain Group companies require the written approval of the relevant bank before any
change can be made to the nature, constitution, management or ownership of the business. The employment contracts of
directors do not contain any provisions specifically relating to a change of control. The Company's employee share schemes
contain change of control provisions that are considered to be standard for such schemes.
Key Contracts
The Company has in place an agreement with INTERNOS Global Investors Limited ("INTERNOS") to execute the Group's new
investment policy and to take responsibility for the management and performance of the Company's investment property
portfolio. Details of the investment advisory agreement with INTERNOS, including remuneration arrangements, are contained
in note 20 to the financial statements. Details of the Group's continuing loan and banking facility agreements with HSBC
Bank plc are set out in the Banking Facilities section of the Finance Review.
Carbon Reporting
Scope
The directors believe that the Company's outsourced business model, which focusses on the employment of agents, advisers
and contractors who are local to our property assets, is inherently environmentally friendly. However, the collection of
consumption data from such businesses is not practicable. It is also not possible for our national agents and advisers to
separately identify such data in relation to the proportion of their work devoted to the Company's activities and it is not
possible to measure the energy consumed by the Company's tenants (nor is this consumption within the Company's control).
The consumption of water, waste output and greenhouse gases other than CO2 within the Company's control is negligible.
Accordingly, the scope of the Company's environmental reporting focuses on energy consumed by the Company and its wholly
owned subsidiaries through:
· the activities of INTERNOS in relation to the Company's business;
· shared facilities provided by the Company within its property portfolio;
· activities within vacant properties.
Carbon Emissions Data
In relation to the Scope 1 figures it is not possible to separately identify the gas consumed on our activities within the
INTERNOS office and the only meaningful data that can be supplied relates entirely to fuel consumed on journeys between our
property sites. As we do not have a company car fleet, all such journeys are made in employees' private vehicles or on
public transport. We have assessed vehicles used against the categories given on the DEFRA website. The use of hire cars
and air flights has been minimal.
The Scope 2 figures incorporate an estimate (on a per desk basis) of the energy consumed in relation to our activities
within the London office of INTERNOS, together with consumption in our vacant properties for which we are responsible. This
includes any electricity used in relation to development work in the conversion or remodelling of premises, as well as
standing charges for electricity connections. Given the granularity of the Company's property portfolio it is not been
practicable to separate this element from the amount of electricity actually consumed.
Comparisons of the Scope 1 and Scope 2 figures between 2014-15 and 2015-16 are likely to be affected by the disposal of
properties immediately prior to and during the year.
Our direct usage and emissions of water is minimal, being largely confined to hygiene and refreshment purposes within the
INTERNOS office. Again, it is not practicable to apportion this for the Company's activities. A small element of utility
supply within vacant premises will relate to water and to gas. However, this largely relates to standing charges and
consumption is negligible.
The data has been compiled using the software tools available on the DEFRA website.
2016Kg Co2e Kg Co2e per £1m t/o 2015Kg Co2e Kg Co2e per £1m t/o
Scope 1 (gas and fuel) 1,508 197 2,183 285
Scope 2 (electricity) 9,450 1,233 9.437 1,231
Total gross emissions 10,958 11,620
Employee Share Schemes
During the year the Company operated The Local Shopping REIT plc Employee & Former Employee Incentive Scheme 2015, details
of which are set out in the Remuneration Report
The Company's Employee Benefit Trust operates to supply shares as appropriate to meet obligations arising from employee
share schemes. The voting rights of shares held by the Employee Benefit Trust are identical to the remainder of the
Company's issued share capital.
REIT Regime
The Company is subject to the regulatory regime for UK Real Estate Investment Trusts.
Political Donations
During the year the Company made no donations for political purposes (2015: nil).
Amendment of Articles
The Company has no rules in place in relation to the amendment of its Articles in addition to statutory provisions.
Auditors
The current KPMG audit engagement partner will rotate off the Local Shopping REIT's audit account at the conclusion of the
2016 audit, having completed his permitted tenure of five years. It was decided by the Committee that, mindful of the
regulatory changes and the longevity of the KPMG audit tenure, it would be appropriate to put the external audit out to
tender aligned to the partner rotation.
During the year KPMG LLP supplied the Company with tax advice. However, following the year-end and in compliance with the
regulatory changes for auditors, KPMG LLP has resigned its appointment as the Company's tax advisor.
Viability Statement
In accordance with the UK Corporate Governance Code 2014, the directors have assessed the Company's viability over the
coming three financial years to 30 September 2019, taking account of:
· likely progress with the execution of the Company's investment strategy;
· the continuation of the Company's current loan finance facilities to 31 December 2019;
· the potential impact of the principal risks and mitigation factors described in the Principal Risks section above.
The directors consider that the period to 30 September 2019 is appropriate for assessing the Company's viability, bearing
in mind the Company's investment policy of liquidating the property portfolio, paying down debt and returning surplus finds
to shareholders. The directors are pursuing a number of approaches for selling down the property portfolio and note that
this may take several years to achieve, depending on market conditions. The directors review progress with the investment
strategy on a regular basis. The directors note that a number of alternative strategies remain available to the Company,
such as selling the Company as a going concern or continuing to trade as a going concern. They will continue to evaluate
these, and will make recommendations to shareholders on alternative strategies if appropriate.
The directors' review noted the diversity of the Company's tenant base across retail sectors and its geographical spread
around the country, reducing reliance on a few significant tenants or a single region. The directors also note that the
Company has conformed to all covenants throughout the year and that the Company's overall loan to value ratio has
progressively diminished since the revised investment strategy was adopted in July 2013. The directors have prepared
profit and cashflow forecasts for the period to 30 September 2019 which include assumptions on the timing and manner of the
liquidation of the property portfolio (whilst recognising the inherent uncertainty regarding these assumptions). These
forecasts project the Company's funding needs will be comfortably met by its existing banking facilities agreements without
any breach of related covenants over the remaining life of the facilities to 31 December 2019. Based on this assessment,
the directors have a reasonable expectation that the Company will be able to remain in operation and meet its liabilities
as they fall due over the three financial years to 30 September 2019. In providing this opinion the directors recognise the
possibility that selling down the property portfolio and returning cash to shareholders may be achieved prior to that date.
Accordingly, the directors consider it appropriate that the financial statements have been prepared on the going concern
basis.
Responsibilities Statement
The directors confirm that to the best of their knowledge:
· the report of the directors includes a fair review of the development and performance of the business and the
position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description of
the principal risks and uncertainties that they face; and
· 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 or loss of the Company and the undertakings included in
the consolidation taken as a whole.
Remuneration Report
Remuneration Committee Chairman's Statement
During the year the Committee operated in accordance with formal terms of reference set by the Board, within which it has
been responsible for:
· determining the broad policy for the remuneration and benefits of the Company's executive directors and senior
managers;
· approving the design and performance targets for share-related performance plans for the Company; and
· determining the individual remuneration packages of each director, giving due regard to the provisions and
recommendations of the Code and the Listing Rules.
The Committee comprises the Company's independent non-executive directors, Stephen East and Nick Vetch. The Committee was
chaired by Stephen East. Biographical details of the members of the Committee are set out on page 13. The Committee met
twice during the year.
Other than the Company Secretary, who serves as secretary to the Committee, other directors or executives attend meetings
of the Committee only by invitation. The Committee has access to independent remuneration consultants.
Remuneration Policy
This report should be considered bearing in mind that the Company had no employee directors during the year. However,
should the Company make relevant appointments in the future, the Company will apply a remuneration policy based on the
principles set out below:
· within a competitive market, enabling the recruitment and retention of individuals whose talent matches the
entrepreneurial and leadership needs of the business, enabling the Company to fulfil its investment objectives for its
shareholders; and
· placing emphasis on performance-related rewards and focusing on incentive targets that are closely aligned with the
interests of shareholders.
The Remuneration Committee ("the Committee") is responsible for the operation of the Company's long-term share-related
performance plans (the Long Term Incentive Plan and the Company Share Option Plan) during the year. However, neither of
these plans were operated during the year, the participatory rights under each of them having lapsed during prior years.
The independent non-executive directors engage with INTERNOS with the aim of ensuring that those working on the Company's
portfolio, including the Company's former employees, are appropriately incentivised. During the year the Company had in
place a share-based retention and incentive plan ("The Local Shopping REIT plc Employee & Former Employee Incentive Scheme
2015"), related to the execution of the investment strategy, which applied to members of the asset management team eligible
to participate in such arrangements under the terms of the Employee Benefit Trust. This was a short-term arrangement
linked to the achievement of property disposals under the Company's investment strategy, which expired on 30 September
2016. Option awards vested over 305,447 shares during the year. The Company has put in place a similar arrangement for
2016-17.
In the event that the directors consider it to be in shareholders' interests for the Company to directly engage members of
staff, including executive directors, the remuneration policy set out in this report will be applied. In applying the
remuneration policy, the Committee will use its discretion, within the terms of schemes previously adopted by the Company,
to provide a tailored mix of benefits that encourages individuals to maximise their efforts in the best interests of
shareholders. In particular, the remuneration policy would be subject to any special considerations that may arise in
relation to the execution of the Company's revised investment policy.
Director Appointments
Under the Company's Articles one-third of the directors are subject to retirement at each Annual General Meeting. However,
recognising the best practice provisions of the UK Corporate Governance Code, the Board has implemented a policy for
directors to be subject to re-election at each Annual General Meeting. Additionally, the Articles require that director
appointments made by the Board directors are ratified at the subsequent General Meeting of the Company.
For non-executive directors, the Company's policy is for initial appointments to be for a term of 12 months, subject to
extension by periods of 12 months thereafter and also subject at any time to termination on notice by the Company or the
director. This policy is reflected in the terms of the formal appointment document which is in place for each non-executive
director, which also sets out the expected time commitment of the non-executive directors to the Company's affairs.
For executive directors, the Company's policy is for service contracts not to be capable of termination by the Company at
not more than one year's notice.
See Table 2 on page 27.
Non-Executive Pay
The Company's policy is for reviews of non-executive remuneration to be conducted by independent consultants commissioned
by the Company Secretary and for such reviews to take place every three years. However, given the Company's changed
circumstances, the Board has not considered it appropriate to review non-executive pay and the level of non-executive pay
has not changed since the Company's flotation in May 2007. Further consideration will be given to carrying out a review
during 2016-17.
Payments on Loss of Office
The Company's policy on payments to directors on loss of office, in the absence of a breach of contract or other misconduct
by the director, is to seek agreement to a termination settlement based on the value of base salary and contractual
entitlements that would have applied to the director during his or her contractual notice period. The Remuneration
Committee will determine the extent to which it is in the Company's best interests for the director work during his or her
notice period, or (to the extent permissible under his or her contract) to be required not to undertake duties or attend at
the Company's premises or receive a payment in lieu of notice. The Committee may seek to require mitigation where it
appears to it that it is reasonable in all the circumstances to do so.
Should it appear to the Company that the director may pursue a claim against the Company in respect of a breach of
employment rights in addition to his or her contractual entitlement, the Committee may authorise settlement terms with the
director that it considers to be reasonable in all the circumstances and in the best interests of the Company.
Shareholder Approval
A resolution concerning shareholder approval of the implementation of the Company's remuneration policy, as described in
the Remuneration Implementation Report, below, will be put to the Company's Annual General Meeting in March 2017.
Remuneration Implementation Report
This section sets out the ways in which the Company applied its remuneration policy during 2015-16.
As no director of the Company was engaged as an employee during the year (Steve Faber being an employee of INTERNOS), this
report does not refer to executive pay and benefits.
The level of fees paid to non-executive directors was set at the time of the Company's admission to the Official List of
the London Stock Exchange having regard to market levels at that time. The level of remuneration for non-executive
directors, which is set out in the table below, did not change during the year.
At the Company's 2016 Annual General Meeting shareholders passed a resolution approving the Remuneration Implementation
Report for 2014-15, with no votes against at the meeting and proxy votes for each resolution showing a majority of 99.99%
of votes cast.
Directors' Contracts and Terms of Appointment
Nick Vetch has an appointment document dated 30 March 2007, subject to annual extensions. Stephen East has an appointment
document dated 9 September 2009, subject to annual extensions. During his appointment as a director of the Company, Steve
Faber was an employee of INTERNOS Global Investors Limited.
Copies of the directors' service agreements are kept at the Company's registered office, where they are available for
inspection by shareholders during usual business hours on weekdays.
Investor Commentary
During the year the Company did not receive any communications from shareholders specifically regarding directors' pay.
Save as indicated below, the remainder of this report has been audited.
Table 1: Directors' Total Remuneration 2015-16
Director Salary Short termincentives Long termincentives Pensioncontributions Benefitsin kind Total
Non-executive directors
Stephen East 30,000 - - - - 30,000
Nick Vetch 30,000 - - - - 30,000
Executive directors
Steve Faber* - - - - - -
Total 60,000 - - - - 60,000
The figures in the above table were unchanged from 2014-15.
Table 2: Directors' Service Contracts
Non-executive directors Date of initial appointment Date of current appointment letter Expiry of term
Stephen East 10 September 2009 10 September 2016 9 September 2017
Nick Vetch 30 March 2007 30 March 2016 29 March 2017
Executive directors
Steve Faber* Not applicable Not applicable Not applicable
Table 3: Directors' Interests in the Company's Shares
Ordinary 20p Shares
Director 2016
2015
Stephen East 75,000 75,000
Steve Faber* 3,574 3,574
Nicholas Vetch 2,873,563 2,873,563
*Resigned 11 April 2016
Stephen East
Remuneration Committee Chairman
Audit Committee Report
The Committee met four times during the year and each member's attendance record is set out in the table on page 16. During
the year, the Committee paid particular attention to the significant areas set out below, which were discussed in detail
with the Auditors.
Valuation of Investment Properties
Key areas of focus for the Committee were the methodology adopted and valuations provided by Allsop LLP ("Allsop"). During
the year, we reviewed the valuations for 30 September 2015 and 31 March 2016.
Going Concern Assumption
Consideration was given to technical implications for the Going Concern assumption in connection with the sales during the
year in furtherance of the investment policy, and ongoing initiatives for its execution. In concluding that it was
appropriate for the Going Concern assumption to apply, the Committee noted the inherent uncertainty regarding the timing
and manner of the execution of the investment policy, as well as alternative strategic options available to the Company.
The Committee also took note of management forecasts that the Company should continue to operate comfortably within its
banking facilities during the lifetime of the facilities.
The Committee also covered the following items:
· ensuring that the format of the financial statements and the information supplied meets the standards set by the
International Accounting Standards Board;
· reviewing the accounting treatment of receivables and ensuring effective co-ordination between the Company's records
and those of its managing agents;
· ensuring that the audit scope properly reflected the risk profile of the business;
· ensuring that the Committee's terms of reference continued to accord with the Code.
In accordance with the Code, as part of the Company's year-end process we also assessed the effectiveness of the external
audit process during the year (including the full-year audit and the Auditors' half-year review). In doing so, the
Committee again noted that KPMG have been the Company's Auditors since its stock market listing in 2007. Having carefully
considered the outcome of this exercise and bearing in mind the Company's investment policy, the Committee decided that it
would tender the audit following the publication of the annual report in order to comply with applicable statutory and
regulatory requirements in audit rotation and tender process.
KPMG LLP and its related entities provide non-audit services to the Company, in particular tax advice in connection with
the Company's REIT status. In order to safeguard the objectivity of the Auditors, strict procedures are in place for the
engagement of KPMG entities in non-audit work. All work undertaken by KPMG is notified to the Chairman of the Audit
Committee and careful consideration is given to whether such work might give rise to a conflict of interest. The Chairman
of the Audit Committee must separately authorise any item of work that could result in fees being paid in excess of 50% of
the audit fee in any year. Following the year end KPMG LLP resigned as the Company's tax adviser, in order to comply with
recently promulgated best practice standards.
Nicholas Vetch
Audit Committee Chairman
9 December 2016
Directors' Report
The directors of The Local Shopping REIT plc ("the Company") present their report and the audited financial statements of
the Company together with its subsidiary and associated undertakings ("the Group") for the year ended 30 September 2016.
The Directors' Report also includes the information set out on pages 13 to 28, together with the description of the
Company's investment policy and business model set out on page 5.
The Company is a public limited company incorporated in England under registered number 05304743, with its registered
office at 65 Grosvenor Street, London, W1K 3JH.
Statement of Directors' Responsibilities in Respect of the Annual Report and the Financial Statements
The directors are responsible for preparing their annual report and the Group and parent Company financial statements in
accordance with applicable law and regulations. Company law requires that the directors prepare Group and parent Company
financial statements for each financial year. Under that law they are required to prepare the Group financial statements in
accordance with IFRSs as adopted by the European Union and applicable law and have elected to prepare the parent Company
financial statements in accordance with UK Accounting Standards (UK Generally Accepted Accounting Practice). 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 Group and the parent Company and of their profit or loss for the relevant period.
In preparing each of the Group and parent Company financial statements, the directors are required to:
· select suitable accounting policies and apply them consistently;
· make judgements and estimates that are reasonable and prudent;
· for the Group financial statements, state whether they have been prepared in accordance with IFRSs as adopted by the
EU;
· for the parent Company financial statements, state whether applicable UK Accounting Standards have been followed,
subject to any material departures disclosed and explained in the parent Company financial statements; and
· prepare the financial statements on the going concern basis, unless it is inappropriate to presume that the Group
and the parent Company will continue in business.
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent
Company's transactions and disclose with reasonable accuracy at any time the financial position of the parent Company and
enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility
for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud
and other irregularities.
Under applicable law and regulations, the directors are also responsible for preparing a directors' report, a directors'
remuneration report and a corporate governance statement, each of which conforms to the relevant law and 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. The directors consider that the annual report and accounts, taken as a whole, is fair, balanced and
understandable in accordance with the UK Corporate Governance Code 2014, and provides the information necessary for
shareholders to assess the Company's performance, business model and strategy.
The Independent Auditor's Report can be found on pages 32. So far as the directors are aware, there is no information
relevant to the Auditors' preparation of their report that has not been disclosed to the Company's Auditors. Each director
has taken all steps required of a director to ensure that he is aware of any information relevant to the audit and to
establish that all such information has been disclosed to the Auditors. The directors consider that the sections headed
Performance Review, Finance Review, Corporate Governance and the Remuneration Report together fulfil the requirement for an
enhanced Business Review under section 417 of the Companies Act 2006. The Strategic Report and the Directors' Report
together comprise the management report as required by the Disclosure and Transparency Rule 4.1.8R.
The Corporate Governance section is a statement for the purposes of the Disclosure and Transparency Rule 7.2.1.
The foregoing reports were approved by the directors on 9 December 2016.
William A Heaney
Company Secretary
INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OFTHE LOCAL SHOPPING REIT PLC ONLY
Opinions and conclusions arising from our audit
1 Our opinion on the financial statements is unmodified
We have audited the financial statements of the Local Shopping REIT plc for the year ended 30 September 2016 which comprise
the Group Income Statement, the Group and Parent Company Balance Sheets, the Group Cash Flow Statement, the Group Statement
of Changes in Equity, and the related notes. In our opinion:
· the financial statements give a true and fair view of the state of the group's and of the parent company's affairs as
at 30 September 2016 and of the group's profit for the year then ended;
· the group financial statements have been properly prepared in accordance with International Financial Reporting
Standards as adopted by the European Union;
· the parent company financial statements have been properly prepared in accordance with UK Accounting Standards,
including FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland; and
· the financial statements have been prepared in accordance with the requirements of the Companies Act 2006; and, as
regards the group financial statements, Article 4 of the IAS Regulation.
2 Our assessment of risks of material misstatement
In arriving at our audit opinion above on the financial statements the risks of material misstatement that had the greatest
effect on our audit, in decreasing order of audit significance, were as follows:
· Valuation of investment property portfolio £74.2m (2015:£79.4m) - Risk vs 2015: ◄►
Refer to Audit Committee Report, accounting policy and financial disclosures.
The risk - Investment property is the group's single largest asset category. Its valuation requires significant judgments
and estimates, from both Directors and external valuers, particularly in relation to sensitivity of the valuation to
assumptions regarding yield rates, void levels and comparable market transactions.
Our response - In this area our audit procedures included using our own specialist real estate valuers to assist us in
evaluating the assumptions used by the group. We have also reviewed the competence, capability and objectivity of the
external valuers used by the Group. We compared the group's assumptions to externally derived data as well as our own
assessments in relation to yield rates on a geographic as well as a property type basis. Further, we compared the sales
price achieved on disposals during the year and after the balance sheet date to the carrying amounts of the disposed
properties in the accounting records; and assessed the portfolio valuation as a whole for 'outliers' such as yields in
excess of, and significantly below, the average for the portfolio and those properties resulting in the most significant
valuation uplift or decrease, which we then investigated with the Directors and the external valuers by assessing specific
qualitative factors relevant to each outlier. We also assessed the adequacy of the group's disclosures concerning related
estimates and judgments.
· Going concern - Risk vs 2015: ◄►
Refer to Audit Committee Report, basis of preparation and financial disclosures
The risk - During the current year the Group continued its operational strategy which was announced in July 2013, and
disposed of a number of properties. The directors note that a number of alternative strategies remain available to the
Company, such as selling the Company as a going concern or continuing to trade as a going concern. As such, assessing
whether the going concern basis of preparation remains appropriate requires significant judgment and it is important that
the disclosure of the directors' judgments in this regard are appropriate.
Our response - Our procedures in this area involved discussing with the directors the availability of other strategies that
remain open to the Group such as continuing to trade as a going concern or the disposal of the Group as a going concern and
assessed the viability of such strategies. With regards the group continuing to trade as a going concern we assessed
whether the group's property portfolio was being actively marketed for sale as at the yearend (which would question the
viability of the group continuing to trade). We also critically assessed the Group's cash flow forecasts, prepared by the
directors, and the forecast level of cash and forecast headroom on debt covenants over the remaining life of the facilities
to December 2019. We challenged the directors' assumptions included in the forecasts particularly around property
disposals valuations, yield and void rates and tenant default rates using sensitivity analysis over these assumptions and
evaluated the accuracy of the Directors' previous valuations by reference to property disposal values. We also considered
the adequacy of the group's disclosures in respect of the going concern assumption.
3 Our application of materiality and an overview of the scope of our audit
The materiality for the Group financial statements as a whole was set at £820,000 (2015: £900,000) determined with
reference to a benchmark of total group assets of which it represents 0.9% (2015: 0.9%).
We report to the Audit Committee any corrected and uncorrected identified misstatements exceeding £41,000, in addition to
other identified misstatements that warranted reporting on qualitative grounds.
The Group team performed the audit of the Group as if it was a single aggregated set of financial information. The audit
was performed using the materiality level specified above and covered 100% of total Group revenue, Group profit before tax
and Group total assets.
4 Our opinion on other matters prescribed by the Companies Act 2006 is unmodified
In our opinion:
· the part of the Directors' Remuneration Report to be audited has been properly prepared in accordance with the
Companies Act 2006;
· the information given in the Strategic Report and the Directors' Report for the financial year for which the
financial statements are prepared is consistent with the financial statements; and
the information given in the Corporate Governance Statement set out on Corporate Governance Report with respect to internal
control and risk management systems in relation to financial reporting processes and about share capital structures is
consistent with the financial statements.
5 We have nothing to report on the disclosures of principal risks
Based on the knowledge we acquired during our audit, we have nothing material to add or draw attention to in relation to:
· the directors' statement of Viability and Going Concern on Principal Risks section, concerning the principal risks,
their management, and, based on that, the directors' assessment and expectations of the group's continuing in operation
over the next three years to 2019; or
· the disclosures in note 1 of the financial statements concerning the use of the going concern basis of accounting.
6 We have nothing to report in respect of the matters on which we are required to report by exception
Under ISAs (UK and Ireland) we are required to report to you if, based on the knowledge we acquired during our audit, we
have identified other information in the annual report that contains a material inconsistency with either that knowledge or
the financial statements, a material misstatement of fact, or that is otherwise misleading.
In particular, we are required to report to you if:
· we have identified material inconsistencies between the knowledge we acquired during our audit and the directors'
statement that they consider that the annual report and financial statements taken as a whole is fair, balanced and
understandable and provides the information necessary for shareholders to assess the group's position and performance,
business model and strategy; or
· the Audit Committee Report does not appropriately address matters communicated by us to the audit committee.
Under the Companies Act 2006 we are required to report to you if, in our opinion:
· adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been
received from branches not visited by us; or
· the parent company financial statements and the part of the Directors' Remuneration Report to be audited are not in
agreement with the accounting records and returns; or
· certain disclosures of directors' remuneration specified by law are not made; or
· we have not received all the information and explanations we require for our audit; or
· a Corporate Governance Statement has not been prepared by the company.
Under the Listing Rules we are required to review:
· the directors' statements in relation to going concern and longer-term viability; and
· the part of the Corporate Governance Statement on Corporate Governance Report relating to the company's compliance
with the eleven provisions of the 2014 UK Corporate Governance Code specified for our review.
We have nothing to report in respect of the above responsibilities.
Scope and responsibilities
As explained more fully in the Directors' Responsibilities Statement, the directors are responsible for the preparation of
the financial statements and for being satisfied that they give a true and fair view. A description of the scope of an
audit of financial statements is provided on the Financial Reporting Council's website at
www.frc.org.uk/auditscopeukprivate. This report is made solely to the company's members as a body and is subject to
important explanations and disclaimers regarding our responsibilities, published on our website at
www.kpmg.com/uk/auditscopeukco2014a, which are incorporated into this report as if set out in full and should be read to
provide an understanding of the purpose of this report, the work we have undertaken and the basis of our opinions.
John Leech (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
One Snowhill
Snow Hill Queensway
Birmingham
B4 6GH
Date: 9 December 2016
Financial Statements
Consolidated Income Statement
for the year ended 30 September 2016
Note 2016 2015
£000s £000s
Gross rental income 6,989 7,664
Property operating expenses (1,862) (1,960)
Net rental income 5,127 5,704
Loss on disposal of investment properties (199) (7)
Loss from change in fair value of investment properties 5 (1,073) (1,638)
Administrative expenses including non-recurring items 2 (1,710) (1,699)
Operating profit before net financing costs 2,145 2,360
Financing income* 3 25 18
Financing expenses* 3 (3,833) (4,086)
Movement in fair value of financial derivatives 3 2,294 1,728
Profit before tax 631 20
Taxation 4 - -
Profit the year from continuing operations 631 20
Profit for the financial year attributable to equity holders of the Company 631 20
Basic and diluted profit per share on profit for the year 13 0.76p 0.02p
Basic and diluted profit per share on continuing operations for the year 13 0.76p 0.02p
* Excluding movement in the fair value of financial derivatives.
Consolidated Statement of Comprehensive Income
for the year ended 30 September 2016
2016 2015
£000s £000s
Profit for the financial year 631 20
Share based transactions 66 -
Total comprehensive income for the year 697 20
Attributable to:
Equity holders of the parent Company 697 20
Consolidated Balance Sheet
as at 30 September 2016
Note 2016 2015
£000s £000s
Non-current assets
Investment properties 5 74,285 79,468
74,285 79,468
Current assets
Trade and other receivables 6 2,094 2,028
Investment properties held for sale 5 1,590 2,387
Cash 7 11,000 12,740
14,684 17,155
Total assets 88,969 96,623
Non-current liabilities
Interest bearing loans and borrowings 8 (49,635) (54,688)
Finance lease liabilities 10 (567) (659)
(50,202) (55,347)
Current liabilities
Interest bearing loans and borrowings 8 (907) (1,001)
Trade and other payables 9 (2,311) (3,129)
Derivative financial instruments 14 - (2,294)
(3,218) (6,424)
Total liabilities (53,420) (61,771)
Net assets 35,549 34,852
Equity
Issued capital 11 18,334 18,334
Reserves 11 3,773 3,773
Capital redemption reserve 11 1,764 1,764
Retained earnings 11,678 10,981
Total attributable to equity holders of the Company 35,549 34,852
Consolidated Statement of Cash Flows
for the year ended 30 September 2016
2016 2015
Note £000s £000s
Operating activities
Profit for the year 631 20
Adjustments for:
Loss from change in fair value of investment properties 5 1,073 1,638
Net financing costs 3 1,514 2,340
Loss on disposal of investment properties 199 7
Employee benefit trust share vesting 2 66 -
3,483 4,005
(Decrease)/increase in trade and other receivables (66) 1,419
Decrease in trade and other payables (423) (147)
2,994 5,277
Interest paid (2,353) (4,129)
Loan arrangement fees paid (5) (79)
Interest received 25 18
Net cash from operating activities 661 1,087
Investing activities
Net proceeds from sale of investment properties 4,919 5,143
Acquisition and improvements to investment properties 5 (210) (407)
Repayment of investment in jointly controlled entities - 292
Cash flows from investing activities 4,709 5,028
Net cash flows from operating activities and investing activities 5,370 6,115
Financing activities
Repayment of borrowings (5,352) (9,037)
Payments to close swaps (1,758) -
Cash flows from financing activities (7,110) (9,037)
Net decrease in cash (1,740) (2,922)
Cash at beginning of year 12,740 15,662
Cash at end of year 7 11,000 12,740
Consolidated Statement of Changes in Equity
for the year ended 30 September 2016
Capital
redemption Retained
Share capital Reserves reserve earnings Total
£000 £000 £000 £000 £000
Balance at 1 October 2014 18,334 3,773 1,764 10,961 34,832
Total comprehensive income for the year
Profit for the year - - - 20 20
Share based payments - - - - -
Balance at 30 September 2015 18,334 3,773 1,764 10,981 34,852
Total comprehensive income for the year
Profit for the year - - - 631 631
Share based payments 66 66
Balance at 30 September 2016 18,334 3,773 1,764 11,678 35,549
Notes to the Financial Statements
for the year ended 30 September 2016
1. Accounting Policies
Basis of Preparation
The Local Shopping REIT plc ("the Company") is a company incorporated and domiciled in the UK. The Group's financial
statements have been prepared in accordance with International Financial Reporting Standards as adopted by the EU (adopted
"IFRS") and in accordance with the provisions of the Companies Act 2006.
The financial statements are prepared in pounds sterling, rounded to the nearest thousand. They have been prepared under
the historical cost convention except for the following assets which are measured on the basis of fair value: investment
properties, derivative financial instruments, other investments and investment properties held for sale.
The directors have considered whether it is appropriate to prepare the financial statements on a going concern basis. The
directors are pursuing a number of approaches for selling down the property portfolio and note that this may take several
years to achieve, depending on market conditions. The directors review progress with the investment strategy on a regular
basis. The directors note that a number of alternative strategies remain available to the Company, such as selling the
Company as a going concern or continuing to trade as a going concern. They will continue to evaluate these, and will make
recommendations to shareholders on alternative strategies if appropriate.
The directors have prepared profit and cash flow forecasts for the two year period to 30 September 2018 which include
assumptions relating to the sale of properties under the current investment strategy which the directors consider to be
reasonable. These forecasts project that the Group's and Company's funding needs will be comfortably met by the revised
banking facility agreements entered into in November 2016 (see note 8) without any breach of related covenants .
On the basis of these projections the directors consider that the Group will continue to be compliant with its banking
covenants and sufficient resources will be available to enable it to continue as a going concern for at least the next 12
months. The financial statements do not include the adjustments that would result from the going concern basis of
preparation being inappropriate.
The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in
these financial statements.
Basis of Consolidation
The consolidated financial statements include the financial statements of the Company and all its subsidiary undertakings
up to 30 September 2016. Subsidiaries are consolidated from the date on which the Group obtains control, being the power to
govern the financial and operating policies of the entity so as to obtain benefit from its activities. They continue to be
consolidated until the date that such control ceases. The financial statements of subsidiaries are prepared using
consistent accounting policies. Inter-company transactions and balances are eliminated.
Investment Property
Investment properties are those properties owned by the Group that are held to earn rental income or for capital
appreciation or both and are not occupied by the Company or any of its subsidiaries.
For the Group as a whole Allsop LLP, a firm of independent chartered surveyors valued the Group's property portfolio at 30
September 2016, 31 March 2016, 30 September 2015 and 31 March 2015. On each of these dates Allsop LLP performed a full
valuation of 25% of the Group's properties (including site inspections) and a desktop valuation of the remainder, such that
all properties owned by the Group have been inspected and valued over the two-year period. The valuations were undertaken
in accordance with the Royal Institute of Chartered Surveyors Appraisal and Valuation Standards on the basis of market
value. Market value is defined as the estimated amount for which a property should exchange on the date of valuation
between a willing buyer and a willing seller in an arm's length transaction, after proper marketing wherein the parties had
each acted knowledgeably, prudently and without compulsion.
Investment properties are treated as acquired at the point the Group assumes the significant risks and returns of
ownership. Subsequent expenditure is charged to the asset's carrying value only when it is probable that future economic
benefits associated with the expenditure will flow to the Group and the cost of each item can be reliably measured. All
other repairs and maintenance costs are charged to the Income Statement during the period in which they are incurred.
Disposals of investment properties are recognised on completion; profits and losses arising are recognised through the
Income Statement, the profit is determined as the difference between the sales proceeds and the carrying amount of the
asset at the last valuation date plus any additional expenditure incurred since that date.
Interest on loans associated with acquiring investment properties is expensed on an effective interest rate basis.
Rental income from investment properties is accounted for as described below.
Investment Properties Held for Sale
Investment properties held for sale are included in the Balance Sheet at their fair value. In determining whether assets no
longer meet the investment criteria of the Group, consideration has been given to the conditions required under IFRS 5.
An investment property shall classify a non-current asset as held for sale if its carrying amount will be recovered
principally through a sale transaction rather than through continuing use.
The asset must be available for immediate sale in its present condition subject only to terms that are usual and customary
for sales of such assets and its sale must be highly probable as at the year end.
Head Leases
Where a property is held under a head lease and is classified as an investment property, it is initially recognised as an
asset based on the sum of the premium paid on acquisition and if the remaining life of the lease at the date of acquisition
is considered to be material, the net present value of the minimum ground rent payments. The corresponding rent liability
to the leaseholder is included in the Balance Sheet as a finance obligation in current and non-current liabilities.
The payment of head rent reduces the gross liability and the interest element of the finance lease is charged to the Income
Statement. Head leases considered not to have a material life remaining at the date of acquisition are accounted for as
operating leases with the head rent paid
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