REG - Alternative Inc REIT - Results for the year ended 30 June 2022
29/09/2022 08:30
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RNS Number : 0817B Alternative Income REIT PLC 29 September 2022
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29 September 2022
ALTERNATIVE INCOME REIT PLC
(the "Company" or the "Group")
Annual Report and Financial Statements for the year ended 30 June 2022
The Board of Directors of Alternative Income REIT plc (ticker: AIRE), the
owner of a diversified portfolio of UK commercial property assets
predominantly let on long leases, is pleased to announce its annual report and
financial statements for the year ended 30 June 2022.
Financial Highlights
As at 30 June
2022 2021 Change
Net Asset Value ('NAV') £77.6 million £68.9 million +12.6%
NAV per share 96.4p 85.6p +12.6%
Share price 82.1p 71.0p +15.6%
Loan to gross asset value ('GAV') (A) 33.7% 36.3% -
Loan Facility £41 million £41 million -
For the year ended 30 June
2022 2021 Change
EPRA earnings per share (A) 6.27p 5.55p +13.0%
Adjusted earnings per share (A) 5.57p 5.07p +9.9%
Dividend cover (A) 101.27% 98.6% +2.7%
Total dividends per share 5.5p 5.14p +7.0%
Dividend yield (A) 6.7% 7.2% -0.5%
Operating profit (including gain on sale of investment property) £6.6 million £6.3 million +4.8%
Profit before tax £13.2 million £5.6 million +135.7%
Earnings per share ('EPS') 16.36p 6.92p +136.4%
Share price total return (A) 24.3% 43.5% -
NAV total return (A) 22.5% 8.3% -
Investment property fair value (based on external valuation) £117.9 million £109.2 million +8.0%
Annualised passing rent £7.2 million £7.0 million +2.9%
Ongoing charges (A) (annualised) 1.42% 1.27% +15bps
(A) Alternative Performance Measure; full calculations are set out following
the financial statements.
Highlight Notes
· The majority of the NAV increase to 96.4 pence per share (pps) is due
to the £8.7 million (8%) valuation uplift in investment properties, which
primarily came from improved market conditions, following the last year's
COVID-19 negative impact on valuations.
· A healthy dividend yield of 6.7%; the 0.5% decrease from the prior
year being a result of the Company's rising share price.
· Dividends in respect of the year total 5.5pps: a substantial 7.0%
increase from the previous year and in line with the Board's target annual
dividend.
· Profit before tax increased 135.7% to £13.2 million and earnings per
share to 16.36pps for the year. The majority of this increase is due to the
£8.7 million valuation uplift in investment properties.
· Loan to GAV ratio of 33.7% with significant headroom on the lender's
loan to value covenant of 60% and interest cover covenant of 250%. The loan
matures in 2025 and is fixed at a weighted average interest cost of 3.19%.
Operational Overview
At the Group's Year End of 30 June 2022:
· The Group's property portfolio had a fair value of £117.9 million
across 19 properties (2021: £109.2 million across 19 properties).
· On a like-for-like basis, excluding the newly acquired and disposed
asset, the 18 properties held throughout the year were valued at £112.8
million at 30 June 2022 (2021: £103.9 million), a valuation increase of £8.9
million or 8.6%.
· The EPRA Net Initial Yield (A) ('NIY') was 5.7% (2021: 5.9%).
· The portfolio had Annualised Gross Passing Rental Income (A) of £7.2
million across 19 properties (2021: £7.0 million across 19 properties).
· 96% of the Group's income is inflation linked to Retail Price Index
('RPI') or Consumer Price Index ('CPI').
· The assets were fully let at both the current and previous year end.
· The weighted average unexpired lease term ('WAULT') was:
- 17.5 years to the earlier of break and expiry (2021: 17.8 years)
- 19.4 years to expiry (2021: 19.8 years).
Income and Expense During the Year
· Rent recognised was £7.5 million (2021: £7.2 million), of which, £0.5
million was accrued debtors for the combination of minimum uplifts and
rent-free period (2021: accrued debtors of £0.5 million).
· Ongoing charges increased from 1.27% to 1.42%. The Board has continued in
its effort to carefully control costs, and a significant part (0.13%) of the
0.15% increase was as a result of the Investment Adviser's waiver of fees in
the prior year.
Property Transactions During the Year
· On 1 December 2021, the Group completed the disposal of the freehold
interest in the Audi car showroom in Huddersfield to the occupier for £5.50
million, representing a 3.80% premium on the book value at 30 June 2021 and a
net exit yield of 6.75%.
· On 28 January 2022, the Company completed the acquisition of the
Volvo car showroom in a prime location on the A4 Bath Road, Slough for £5.0
million with a materially longer WAULT of 15 years. This acquisition
redeployed the net proceeds from the Group's disposal of its Audi car showroom
in Huddersfield.
Operational highlights after the year end
· On 2 August 2022 the Board declared an interim dividend of 1.60pps in
respect of the quarter ended 30 June 2022. This was paid on 26 August 2022 to
shareholders on the register at 12 August 2022. The ex-dividend date was 11
August 2022.
· By 22 September 2022, the Group had collected 100% of rent for the 4
rental quarters of the financial year being reported. All rent deferred due to
COVID-19 has been paid.
Outlook
· The Group is continuing to deal with a backdrop of global and recent
UK-centred economic headwinds impacting the UK commercial property sector.
· The Company's resilient portfolio of 19 investment properties continues
to provide investors with long-dated higher yielding income, of which 96% is
linked to inflationary growth, and with a weighted average unexpired lease
term to break of 17.5 years. The portfolio also provides investors with
exposure to a diverse range of alternative investment sectors and its existing
Canada Life senior debt facility eliminates the Group's exposure to increasing
debt costs.
· Over the next 12-month financial period, 66% of the Group's incomes
will be reviewed (44% annual index-linked rent reviews and 21% periodic
index-linked rent reviews (5 years since the previous reviews)), helping to
support our focus on delivering an increasing dividend that is fully covered.
Alan Sippetts, Non-Executive Chairman of Alternative Income REIT plc,
comments:
"Against a backdrop of global and recent UK-centred economic headwinds
impacting the UK commercial property sector, the Board remains convinced by
the fundamentals of the Group's resilient diversified portfolio of long-dated
higher yielding income, which is 100% let and benefits from 100% rent
collection. We are committed to further enhancement of both income and capital
growth supported by 96% of the Group's income having inflation linked upwards
only rent reviews, active asset management opportunities and opportunistic
transactions.
We have met our 5.5pps fully covered dividend target and achieved an NAV
increase of 12.6%, which equates to an NAV total return of 22.5% and a share
price return of 24.3% in the period. Our focus is on generating an increasing
dividend which is fully covered, and our recent dividend increase is testament
to the Board's confidence in the long-term value we expect to deliver to our
shareholders."
ENQUIRIES
Alternative Income REIT PLC
Alan Sippetts - Chairman via H/Advisors Maitland below
M7 Real Estate Ltd +44 (0)20 3657 5500
Richard Croft
Panmure Gordon (UK) Limited +44 (0)20 7886 2500
Alex Collins
Tom Scrivens
Chloe Ponsonby
H/Advisors Maitland (Communications Adviser) +44(0) 7747 113 930
James Benjamin aire-maitland@maitland.co.uk
The Company's LEI is 213800MPBIJS12Q88F71.
Further information on Alternative Income REIT plc is available at
www.alternativeincomereit.com (about%3Ablank) (1).
NOTES
Alternative Income REIT PLC aims to generate a sustainable, secure and
attractive income return for shareholders from a diversified portfolio of UK
property investments, predominately in alternative and specialist sectors. The
majority of the assets in the Group's portfolio are let on long leases which
contain index linked rent review provisions.
The Company's investment adviser is M7 Real Estate Limited ("M7"). M7 is a
leading specialist in the pan-European, regional, multi-tenanted real estate
market. It has over 220 employees in 15 countries across Europe. The team
manages over 570 properties with a value of circa €4.9 billion.
1 Neither the content of the Company's website, nor the content on any
website accessible from hyperlinks on its website or any other website, is
incorporated into, or forms part of, this announcement nor, unless previously
published on a Regulatory Information Service, should any such content be
relied upon in reaching a decision as to whether or not to acquire, continue
to hold, or dispose of, securities in the Company.
CHAIRMAN'S STATEMENT
Overview
I am pleased to present the annual audited results of Alternative Income REIT
plc (the 'Company') together with its subsidiaries (the 'Group') for the
financial year ended 30 June 2022.
Following the successful vaccination programme which allowed the government to
ease COVID-19 restrictions, the Russia-Ukraine war has had wide-ranging
macroeconomic effects, increasing inflationary pressures and supply chain
disruption to many industries, which have been recently exacerbated in the UK.
Throughout these challenges, our 100% let portfolio has demonstrated its
resilience, and the Directors are pleased that we have been able to pay an
increased dividend of 5.5pps (2021: 5.14pps), meeting the target of a 5.5pps
fully covered dividend for the year ended 30 June 2022. Furthermore, through
increases in the portfolio valuation and income earned during the year, the
Net Asset Value ('NAV') per share has increased by 12.6% to 96.40pps.
We are very pleased to report a share price total return of 24.3% and a NAV
total return of 22.5% to shareholders for the year, demonstrating that the
Company continues to provide our shareholders with attractive, secure, long
dated income and capital growth.
As announced in our results for the half year ended 31 December 2021, on 1
December 2021 we completed the disposal of the freehold interest in the Audi
car showroom in Huddersfield to the occupier for £5.5 million, representing a
3.8% premium on the book value as at 30 June 2021 and a net exit yield of
6.75%. On 28 January 2022, we were also delighted to announce that we had
swiftly redeployed these proceeds through the acquisition of a
state-of-the-art car showroom let to Volvo for £5.0 million (net of
acquisition costs to the Company) with a materially longer WAULT of 15 years.
Furthermore, a total of 12 rent reviews took place during the year with a
combined uplift of £259,000 representing a 3.9% increase in contracted rent
across the portfolio, further enhancing income.
Portfolio Performance
The near full deployment of the Group's funds for the whole year resulted in
headline rent of £7.5 million during the year, of which, £0.5 million was
accrued debtors for the combination of minimum contracted uplifts and
rent-free periods (2021: £7.2 million; accrued debtors of £0.5 million).
At 30 June 2022, the Group's property portfolio had a fair value of £117.9
million (2021: £109.2 million). The portfolio had a net initial yield of 5.7%
(2021: 5.9%), and a WAULT to the first break of 17.5 years, 19.4 years to
expiry (2021: 17.8 years to first break, 19.8 years to expiry).
Financing
The Group has fully utilised its £41 million loan facility with Canada Life
Investments throughout the year. The weighted average interest cost of the
facility is 3.19% and it is repayable on 20 October 2025. If repayment is
made prior to this date, and the corresponding Gilt rate is lower than the
contracted rate of interest, then the loan terms provide for a prepayment fee,
which at 30 June 2022 was £486,088.
Dividends and Earnings
The Company declared three interim dividends of 1.30pps each and a fourth
interim dividend of 1.60pps in respect of the financial year, totalling 5.5pps
(2021: four dividends totalling 5.14pps), representing an increase of 7.0% and
meeting our target dividend ahead of schedule. This underlines the Company's
strong rent collection and cash flows.
As set out in Note 8 to the Consolidated Financial Statements, these dividends
were covered by both EPRA Earnings (A) of 6.27pps (2021: 5.55pps), and the
Group's Adjusted EPS (representing cash) of 5.57pps (2021: 5.07pps).
It is the Board's intention to continue to pay four equally spaced dividends
each year, with payments in November, February, May and August. In order to do
this, all must be paid as interim dividends which prevents shareholders having
the opportunity to vote on a final dividend. Recognising this, and though not
required, the Board have added a dividend policy setting out the above
dividend payment schedule and, by resolution 9 of the AGM notice, have given
shareholders the opportunity to vote on this policy.
Discount
The discount of the share price to NAV at the year end had narrowed slightly
to 14.8% from 17.0% at the previous year end. The Board monitors the discount
level throughout the year and has the authority to both issue and buy back
shares. Although these powers have not been used to date, the Board believe
these authorities are important powers for it to have available if required,
and therefore recommend that shareholders vote in favour of their continuance.
Board Composition
As a board of only three directors, there has been considerable change in the
year with the resignation of Jim Prower and the appointment on the same day of
Stephanie Eastment as an independent non-executive director and Audit
Committee Chair. Jim takes with us our thanks for his hard work throughout
the life of the Company which included the change of the Investment Adviser -
no mean undertaking - and his wealth of commercial expertise. Stephanie
joined us on 1 October 2021 so has been on the Board for the majority of the
financial year being reported. Her experience and knowledge has been very
welcome, and her biography can be found in the Board of Directors section.
After serving on the Board for over five years and having guided the Company
through a period of stabilisation, cost control and having provided continuity
of historical knowledge following director changes over the last two years, I
intend to step down as a Director and Chair of the Company. A formal
recruitment process for my replacement will be carried out, and I will remain
as Director and Chair until this process has been completed. A further
announcement will be made in due course.
Continuation Resolution
At our upcoming Annual General Meeting (AGM) on 10 November 2022, we will be
presenting a resolution for shareholders to consider whether the Company
should continue its business as presently constituted, as required under the
Company's Articles of Association.
The Board's focus for the last two years has been to maximise rent collection,
income distribution and returns to shareholders, whilst maintaining a low
operating cost base and taking initiatives within the Group's current
portfolio of assets. This year has demonstrated that the Company has an
attractive, well-managed and resilient portfolio which continues to increase
in value with growing contracted rents, 96% of which are linked to inflation
and with 100% rent collection. The Board believes that the Company can
continue to deliver strong returns. Consequently, and following detailed
consideration by the Board which took into account the advice of the Company's
broker and views of major shareholders, the Board considers that the Company
should continue in its current form and therefore recommend shareholders vote
in favour of the resolution. The Directors have confirmed their intention to
vote their shareholdings in favour of continuation.
The Board will continue to canvas the views of shareholders, including in the
lead up to the maturity of the current debt facility in October 2025, to
ensure that the strategy adopted by the Board for your Company continues to be
in the best interests of shareholders.
AGM
The Company will hold its AGM at 10am on 10 November 2022 at The Monument
Building, 11 Monument Street, London EC3R 8AF. The AGM will be in its
traditional format, though this is subject to there being no re-introduction
of any Government restrictions preventing this. The Investment Adviser will
give a presentation on the Company and the investment outlook before the AGM.
I always welcome engagement by shareholders at the AGM. Shareholders may also
submit questions to myself, my fellow directors and the Investment Adviser by
emailing cosec@hanwayadvisory.com (mailto:cosec@hanwayadvisory.com) or by
writing to Alternative Income REIT plc, 1 King William Street, London EC4N
7AF.
Outlook
The Board remains convinced by the fundamentals of the Group's resilient
portfolio and is committed to further enhancement of both income and capital
growth through the inflation linked upwards only rent reviews, active asset
management opportunities and opportunistic transactions. Having achieved the
major milestone set out in the Company's prospectus of the dividend target of
5.5p, our focus is on generating an increasing dividend which is fully covered
by the Group's fully invested portfolio. Our recent dividend increase is
testament to the Board's confidence in the long-term value we can deliver to
our shareholders.
We remain cognisant of the discount in the Company's share price to NAV and
continue to explore initiatives and opportunities to narrow this discount and
increase liquidity. The Company's share price has increased in the year by
15.6% to 82.10p as at 30 June 2022. We continue to believe there is a
significant market opportunity for certain property sectors in the UK and are
confident that delivering on our outlined strategy will continue to support
our share price and improve liquidity, which in turn should narrow the
discount.
I would like to thank my fellow shareholders, Directors, the Investment
Adviser and our other advisers and
service providers who have provided professional support and services to the
Group.
Alan Sippetts
Chairman
28 September 2022
Business Model and Strategy
Introduction
Alternative Income REIT plc is a real estate investment trust listed on the
premium segment of the Official List of the Financial Conduct Authority
('FCA') and traded on the Main Market of the London Stock Exchange. As part of
its business model and strategy, the Group has maintained and intends to
maintain its UK REIT status.
Investment Objective
The investment objective of the Group is to generate a secure and predictable
income return, sustainable in real terms, whilst at least maintaining capital
values, in real terms, through investment in a diversified portfolio of UK
properties, in alternative and specialist sectors.
Investment Policy
In order to achieve the investment objective, the Group invests in freehold
and long leasehold properties across the whole spectrum of the UK property
sector, but with a focus on alternative and specialist real estate sectors.
Examples of alternative and specialist real estate sectors include, but are
not limited to, leisure, hotels, healthcare, education, logistics, automotive,
supported living and student accommodation.
In the event of a breach of the investment policy or the investment
restrictions set out below, the Alternative Investment Fund Manager ('AIFM'),
as advised by the Investment Adviser, shall inform the Board upon becoming
aware of the same and, if the Board considers the breach to be material,
notification will be made to a Regulatory Information Service and the AIFM, as
advised by the Investment Adviser, will look to resolve the breach.
Any material change to the investment policy or investment restrictions of the
Group may only be made with the prior approval of shareholders.
Investment Strategy
The Group focuses on properties which can deliver a secure income and preserve
capital value, with an attractive entry yield. The Group has an emphasis on
alternative and specialist property sectors to access the attractive value and
capital preservation qualities which such sectors currently offer.
The Group will supplement this core strategy with active asset management
initiatives for certain properties.
Subject at all times to the AIFM's (as advised by the Investment Adviser)
assessment of their appeal and specific asset investment opportunities,
permitted sectors include, but are not limited to the following: Healthcare;
Leisure; Hotels and serviced apartments; Education; Automotive; Car parks;
Residential; Supported living; Student accommodation; Logistics; Storage;
Communications; Supermarkets; and, subject to the limitations on traditional
sector exposures below, Offices; Shopping centres; Retail and retail
warehouses; and Industrial.
The Group is not permitted to invest in land assets, including development
land which does not have a development agreement attached, agriculture or
timber.
The focus will be to invest in properties to construct a portfolio with the
following minimum targets:
· a WAULT, at the time of investment, in excess of 18 years;
· at least 85% of the gross passing rent will have leases with rent
reviews linked to inflation (RPI or CPI) at the time of investment;
· investment in properties which typically have a value, at the time
of investment, of between £2 million and £30 million;
· at least 70% of the properties will be in non-traditional
sectors;
· less than 30% of the properties will be in the traditional
sectors of Retail, Industrial and Offices; and
· over 90% of properties will be freehold or very long leasehold
(over 100 years).
Once GAV is £250 million or greater, future investments will be made to
target a portfolio with at least 80% of the properties in non-traditional
sectors and less than 20% of the properties in traditional sectors.
Whilst each acquisition will be made on a case-by-case basis, it is expected
that properties will typically offer the following characteristics:
· existing tenants with strong business fundamentals and profitable
operations in those locations;
· depth of tenant/operator demand;
· alternative use value;
· current passing rent close to or below rental value; and
· long-term demand drivers, including demographics, use of
technology or built-for-purpose real estate.
The Group may invest in commercial properties or portfolios of commercial
property assets which, in addition, include ancillary or secondary
utilisations.
The Group does not intend to spend any more than 5% of the NAV in any rolling
12-month period on (a) the refurbishment of previously occupied space within
the existing Portfolio, or (b) the refurbishment of new properties acquired
with vacant units.
The Group may invest in corporate and other entities that hold property and
the Group may also invest in conjunction with third party investors.
Investment Restrictions
GAV of less than £250 million GAV of £250 million or greater
Investment in a single property limited to 15% of GAV (measured at the time of Investment in a single property limited to 10% of GAV (measured at the time of
investment). investment).
The value of assets in any sub-sector in one geographical region, at the time Investments will be made with a view to reducing the maximum exposure to any
of investment, shall not exceed 15% of GAV. sub-sector in one geographical region to 10% of GAV.
The value of assets in any one sector and sub-sector, at the time of
investment, shall not exceed 50% of GAV and 25% of GAV respectively.
Exposure to a single tenant covenant will be limited to 15% of GAV.
The Group may commit up to a maximum of 10% of its GAV (measured at the
commencement of the project) in development activities.
Investment in unoccupied and non-income producing assets will, at the time of
investment, not exceed 5% of Estimated Rental Value ('ERV').
The Group will not invest in other closed-ended investment companies.
If the Group 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, 20% of GAV.
The Group will invest and manage its assets with the objective of spreading
risk through the above investment restrictions.
When the measure of GAV is used to calculate the restrictions relating to (i)
the value of a single property and (ii) the value of assets in any sub-sector
in one geographical region, it will reflect an assumption that the Group has
drawdown borrowings such that these borrowings are equal to 30% of GAV.
Borrowings
The Group has utilised borrowings to enhance returns over the medium term.
Borrowings have been utilised on a limited recourse basis for each investment
on all or part of the total Portfolio and will not exceed 40% of GAV (measured
at drawdown) of each relevant investment or of the portfolio.
Dividend Policy
It is the Directors' intention to pay dividends in line with the Company's
investment objective with interim dividends payable by four instalments
quarterly in November, February, May and August in respect of each financial
year to June. Additionally, the dividend policy allows for the payment of
further interim dividends should compliance with the REIT rules require.
Key Performance Indicators
KPI AND DEFINITION RELEVANCE TO STRATEGY PERFORMANCE
Net Initial Yield ('NIY')(A) 5.70%
Annualised rental income based on the cash rents passing at the balance sheet The NIY is an indicator of the ability of the Group to meet its target At 30 June 2022
date, less non-recoverable property operating expenses, divided by the market dividend after adjusting for the impacts of leverage and deducting operating
value of the property, increased with purchasers' costs estimated by the costs. (2021: 5.94%)
Group's External Valuers.
Weighted Average Unexpired Lease Term ('WAULT') to break and expiry 17.5 years to break and 19.4 years to expiry
The average lease term remaining to expiry across the portfolio, weighted by The WAULT is a key measure of the quality of the portfolio. Long leases At 30 June 2022
contracted rent. underpin the security of our future income.
(2021: 17.8 years to break and 19.8 years to expiry)
Net Asset Value ('NAV') per share £77.60 million /96.40pps
NAV is the value of an entity's assets minus the value of its liabilities. Provides stakeholders with the most relevant information on the fair value of At 30 June 2022
the assets and liabilities of the Group.
(2021: £68.89 million, 85.58pps)
Dividend per share 5.50pps
Dividends declared in relation to the period are in line with the stated The Group seeks to deliver a sustainable income stream from its portfolio, For the year ended 30 June 2022
dividend target as set out in the Prospectus at IPO. Having achieved the which it distributes as dividends.
target dividend of 5.5 pence per Ordinary Share per annum, the aim now is to (2021: 5.14pps)
ensure an increasing dividend in line with the Company's Investment Objective.
Adjusted EPS(A) 5.57pps
Adjusted EPS from core operational activities, as adjusted for non-cash items. This reflects the Group's ability to generate earnings from the portfolio For the year ended 30 June 2022
A key measure of a company's underlying operating results from its property which underpins dividends.
rental business and an indication of the extent to which current dividend (2021: 5.07pps)
payments are supported by earnings. See Note 8 to the Consolidated Financial
Statements.
Leverage (Loan-to-GAV)(A) 33.69%
The proportion of the Group's assets that is funded by borrowings. The Group utilises borrowings to enhance returns over the medium term. At 30 June 2022
Borrowings will not exceed 40% of GAV (measured at drawdown).
(2021: 36.34%)
(A) is considered by the Directors to be an Alternative Performance Measure
(APM). The NIY calculation is the same calculation as that for EPRA NIY, which
is set out in the EPRA Performance Measure Calculation following the financial
statements. Adjusted EPS and Loan-to-GAV are also considered by the Directors
to be APMs. Their calculations are set out in note 8 of the consolidated
financial statements and following the financial statements respectively.
EPRA Performance Measures
Detailed below is a summary table showing the EPRA performance measures (which
are all alternative performance measures) in the Group.
MEASURE AND DEFINITION PURPOSE PERFORMANCE
EPRA NIY(1) - unaudited 5.70%
Annualised rental income based on the cash rents passing at the balance sheet A comparable measure for portfolio valuations. This measure should make it At 30 June 2022
date, less non-recoverable property operating expenses, divided by the market easier for investors to judge themselves, how the valuation of two portfolios
value of the property, increased with (estimated) purchasers' costs. compare. (2021: 5.94%)
EPRA 'Topped-up' NIY(1) - unaudited 6.41%
This measure incorporates an adjustment to the EPRA NIY in respect of the A comparable measure for portfolio valuations. This measure should make it At 30 June 2022
expiration of rent-free periods (or other unexpired lease incentives such as easier for investors to judge themselves, how the valuation of two portfolios
discounted rent periods and step rents). compare. (2021: 6.95%)
EPRA NAV(2) £77.60 million/96.40pps
Net asset value adjusted to include properties and other investment interests Makes adjustments to IFRS NAV to provide stakeholders with the most relevant At 30 June 2022
at fair value and to exclude certain items not expected to crystallise in a information on the fair value of the assets and liabilities within a real
long-term investment property business. estate investment company with a long-term investment strategy. (2021: £68.89 million/85.58pps)
EPRA Net Reinstatement Value2 £84.77 million/105.31pps
The EPRA NRV adds back the purchasers' costs deducted from the EPRA NAV and A measure that highlights the value of net assets on a long-term basis. At 30 June 2022
deducts the break cost of bank borrowings.
(2021: £72.53 million/90.09pps)
EPRA Net Tangible Assets2 £77.11 million/95.79pps
The EPRA NTA deducts the break cost of bank borrowings from the EPRA NAV and A measure that assumes entities buy and sell assets, thereby crystallising At 30 June 2022
any unavoidable deferred tax. certain levels of avoidable deferred tax liability. The Group has UK REIT
status and as such no deferred tax is required to be recognised in the (2021: £65.43 million/81.27pps)
accounts.
EPRA Net Disposal Value2 £77.11 million/95.79pps
The EPRA NDV deducts the break cost of bank borrowings from the EPRA NAV. Represents shareholders' value under a disposal scenario, where deferred tax, At the year ended 30 June 2022
financial instruments and certain other adjustments are calculated to the full
extent of their liability, net of any resulting tax. (2021: £65.43 million/81.27pps)
EPRA Earnings/EPS2 £5.05 million/6.27pps
Earnings from operational activities. A key measure of a company's underlying operating results and an indication of For the year ended 30 June 2022
the extent to which current dividend payments are supported by earnings.
(2021: £4.47 million/ 5.55pps)
EPRA Vacancy1 - unaudited 0.00%
Estimated Rental Value ('ERV') of vacant space divided by ERV of the whole A 'pure' percentage measure of investment property space that is vacant, based At 30 June 2022
portfolio. on ERV.
(2021: 0.00%)
EPRA Cost Ratio1 - unaudited 13.79%
Administrative and operating costs (including and excluding costs of direct A key measure to enable meaningful measurement of the changes in a company's For the year ended 30 June 2022
vacancy) divided by gross rental income. operating costs.
(2021: 18.36%)
1 The reconciliation of this APM is set out in the EPRA Performance Measures
Calculations section following the Notes to the Consolidated Financial
Statements.
2 The reconciliation of this APM is set out in Note 8 of the Notes to the
Consolidated Financial Statements.
EPRA NNNAV is equal to EPRA NAV as there are no adjusting items. As such this
measure has not been presented.
Investment Adviser's Report
Introduction
Whilst the 2021 Investment Adviser's Report spoke in detail about primarily
COVID-19, H2'2021 and H1'2022 presented the Group with a new set of obstacles
to deal with, including soaring inflation, increasing debt costs and
decreasing consumer confidence, all of which have an impact on real estate
investment and its performance.
The Company's 19 investment properties continue to provide investors with
long-dated higher yielding income, with an average unexpired lease term to
break of 17.5 years, of which 96% is linked to inflationary growth, adding
3.9% to the income profile this year. The portfolio also provides investors
with exposure to a diverse range of alternative investment sectors and its
existing Canada Life senior debt facility eliminates the Group's exposure to
increasing debt costs.
The portfolio has shown resilience to the headwinds being experienced
throughout the UK commercial real estate market. At 30 June 2022, 16% of the
tenants are contractually invoiced monthly, whilst the remaining 84% are
invoiced quarterly and 100% of rents due have been collected for the four
quarter days of H2'2021 and H1'2022.
During the year the Group completed the disposal of Audi, Huddersfield to the
occupier for £5.5 million, a 3.8% premium on the book value at 30 June 2021.
The proceeds from the sale were used to acquire Volvo, Slough, at a net
initial yield of 5% in an off market transaction.
Following the portfolio's resilience over the past year, it's continued
performance improvement with a strong and improving dividend, M7 remains
optimistic despite the risks surrounding the UK economy and real estate
market.
Market Outlook
UK Economic Outlook
Just as the UK economy returned to its pre-pandemic size, new shocks hit the
global economy. The invasion of Ukraine and renewed lockdowns in China put
upward pressure on commodity prices while keeping supply chains under strain.
There are growing concerns that a combination of policy actions to combat
inflation and any further fallouts as a result of geopolitical tensions will
bring about another recession.
The half year report for December 2021 commented on headline UK GDP growth in
2022 of between 4.5% and 5.1%. However, updated analysis by KPMG expects GDP
growth to decrease to 3.2% for 2022 before slowing further to 0.7% in 2023.
This is primarily driven by the cost-of-living crisis and rising tax burden
negatively impacting consumer confidence, which will adversely affect
spending.
One of the key economic changes impacting real estate investment in 2022 is
the increasing cost of debt. There has already been a series of interest rate
increases by the Bank of England in 2022, and some, including KPMG, expect
there to be two further increases before the end of the year in order to
combat rising inflation. The current increase in inflation will positively
impact the income profile of the Company with 96% of tenants having index
linked rent reviews, though the likely reaching of caps on some future rent
reviews will for the first time limit increases but also prevent overburden on
tenants.
The risks to most UK economic outlooks are skewed to the downside. A sharper
deterioration in the external environment causing a recession in some of the
UK's major trading partners, coupled with rising debt costs, rising inflation
and a stronger fall in consumer spending in the UK, could see the UK economy
enter a mild recession next year, with manufacturing and financial services
likely to be among the worst affected sectors.
UK Real Estate Outlook
Whilst the 2021 half year report for December 2021 spoke of a renewed sense of
optimism within the UK real estate sector, with the UK showing an improving
economy and the labour market holding stable following the removal of the
furlough scheme, it is now becoming clear that the UK commercial real estate
market is facing headwinds.
With debt costs having increased throughout H1'2022, Savills reported that for
the third month in a row, the average prime yield remained static showing only
a four basis point fall during this period. Commercial real estate, as with
most asset classes, is looking at the combined issues of inflation and
recession.
Looking at the above in more granular detail, June 2022 saw the flattening of
yields in five of the sub sectors, which previously trended downwards:
Southeast Offices, Retail Warehousing, Food Stores, Industrial Logistics and
Industrial Multi-let. Yields for the High Street and Shopping Centre retail
sectors continued to trend downwards reflecting improved sentiment to the
sectors but are still much higher than pre-pandemic levels by 75 and 100 basis
points respectively. The diversified nature of the AIRE portfolio combined
with June 2022 valuation gains, provides evidence of the portfolios ability to
mitigate the impacts of a market downturn.
Reports from Lambert Smith Hampton confirmed in Q1'2022 that, amid concerns
over the cost-of-living crisis and the war in Ukraine, the UK investment
market demonstrated clear resilience. £16.7bn of property assets changed
hands during Q1 2022, just 3% shy of Q4 2021's six-year high of £17.3
billion. Notably, despite the outbreak of the war in late February, activity
was consistent throughout Q1, with volumes in March comparable with each of
the previous months. With that being said, the current rising inflation
combined with increasing debt costs, has caused a slowdown in property asset
transactions, with many investors taking some downtime whilst they assess
where both variables are heading.
2021 saw an emphasis placed on the importance of ESG related credentials and
2022 has seen that continue. Normally associated with sustainability, and
gaining in prominence, ESG has quickly been established as an ethical priority
for businesses, both large and small. It has become a central aspect of how
businesses define themselves. This is having significant impact on the
occupational market with perspective tenants taking ESG values into account
when considering their next premises move and making ESG related credentials a
key selling point. Furthermore, investors are seeing their equity come with
ESG related caveats, ensuring it takes a key role in investment decisions and
the deployment of capital.
Portfolio Activity During the Year
The following asset management initiatives were undertaken during the year:
· Rent Reviews: A total of 12 rent reviews took place during the
year with a combined uplift of £259,000 representing a 3.9% increase in
contracted rent across the portfolio.
· Audi, Huddersfield was sold for £5.5 million on 1 December 2021
to the occupier.
· Volvo, Slough was acquired for £5.0 million on 28 January 2022,
with the rent review settled on 17 March 2022 at £281,124 per annum.
· Pocket Nook Estate, St Helens: BGEN Limited have extended their
lease for Unit 2 until 2027 with a break in 2025, at an increased rent of
£145,000 p.a. with 4 months' rent-free spread over 12 months. In addition,
they have taken a further co-terminus lease at £50,000 p.a. rising to
£63,750 p.a. of 0.75 acres of adjacent land. Ayrshire Metals, having closed
their operation in St Helens, have assigned their lease to Kingscrown Land
& Commercial Limited with a sub-letting to Prospect Engineering (MIA)
Limited.
· Hoddesdon Energy have placed their advanced thermal treatment plant
in Hoddesdon on standby whilst they look for a buyer for their business.
· Travelodge, Swindon: Travelodge Hotels Limited are now paying 100%
of contracted rent (increased at review in June 2021 to £403,148 p.a.),
following company voluntary agreement ('CVA') proceedings in 2020. As
previously reported, following works to replace the combustible cladding
elements uncovered on part of the property, with non-combustible replacements
and to remediate the fire/smoke stopping completed in December 2020, both the
architect and cladding sub-contractor involved are being pursued for
reimbursement of the costs of £1,056,000.
NAV Movements
For the year ended 30 June 2022 2022 2021
Pence per £ million Pence per £ million
share share
NAV at beginning of year 85.58 68.89 83.58 67.29
Change in fair value of investment property 9.97 8.02 0.85 0.68
Income earned for the year 9.81 7.90 9.20 7.41
Gain on sale of property 0.12 0.10 0.53 0.42
Finance costs for the year (1.77) (1.42) (1.77) (1.42)
Other expenses for the year (1.77) (1.43) (1.89) (1.52)
Dividends paid during the year (5.54) (4.46) (4.92) (3.97)
NAV at the end of the year 96.40 77.60 85.58 68.89
Valuation
At the year end the Group owned 19 assets. The fair value of these 19 assets
had increased from £109.2 million at 30 June 2021 to £117.9 million at the
year end, an increase of £8.7 million or 8.0%.
The Group has experienced valuation increases across the majority of the
Group's assets. The best performances came in the industrial and retail
warehouse sectors, showing annual increases of 15-25%. Slower to react,
following the pandemic have been the hotel, student accommodation &
automotive sectors which have seen uplifts during 2022.
Summary by Sector at 30 June 2022
Gross
Market Occupancy WAULT to Passing Rental
Number of Valuation Value by ERV break Income ERV ERV
Sector Properties (£m) (%) (%) (years) (£m) (£m) (%)
Industrial 4 26.4 22.3 100.0 25.8 1.55 1.56 22.3
Hotel 3 22.3 19.0 100.0 13.9 1.60 1.45 20.7
Automotive & Petroleum 3 18.6 15.8 100.0 26.5 1.14 1.10 15.7
Healthcare 3 17.5 14.8 100.0 14.0 1.02 0.99 14.1
Student Accommodation 1 13.5 11.5 100.0 19.1 0.67 0.67 9.6
Leisure 2 5.8 4.9 100.0 7.3 0.37 0.38 5.6
Retail 1 5.2 4.4 100.0 9.7 0.33 0.33 4.8
Power Station 1 6.4 5.4 100.0 5.0 0.40 0.38 5.3
Education 1 2.2 1.9 100.0 21.6 0.13 0.13 1.9
Total/Average 19 117.9 100.0 100.0 17.5 7.21 6.99 100.0
Summary by Geographical Area at 30 June 2022
Gross
Market Occupancy WAULT to Passing Rental
Geographical Number of Valuation Value by ERV break Income ERV ERV
Area Properties (£m) (%) (%) (years) (£m) (£m) (%)
West Midlands 4 29.9 25.4 100.0 12.3 1.90 1.85 26.4
North West & Merseyside 2 24.3 20.6 100.0 35.9 1.24 1.23 17.7
South East excluding London 5 25.7 21.8 100.0 11.4 1.40 1.34 19.2
South West 2 13.4 11.4 100.0 22.6 0.86 0.81 11.6
Yorkshire and the Humber 2 6.6 5.6 100.0 19.6 0.43 0.42 6.0
Scotland 1 7.0 5.9 100.0 14.2 0.68 0.61 8.7
London 2 5.8 4.9 100.0 7.3 0.37 0.40 5.6
Eastern 1 5.2 4.4 100.0 9.7 0.33 0.33 4.8
Total/Average 19 117.9 100.0 100.0 17.5 7.21 6.99 100.0
The table below illustrates the weighting of the Group's contracted rental
income, based on the type of rent review associated with each lease.
Income Allocation by Type
Inflation linked - RPI 69.6% (2021: 65.0%)
Expiry or Open Market Value Reviews 4.1% (2021: 13.0%)
Inflation linked - CPI 26.3% (2021: 22.0%)
Property Portfolio
Property Portfolio at 30 June 2022
Property Sector Region Market
Value
(£m)
1. Bramall Court, Salford Student Accommodation North West & Merseyside 13.5
2. Pocket Nook Industrial Estate, St Helens Industrial North West & Merseyside 10.8
3. Premier Inn, Camberley Hotel South East excluding London 9.1
4. Grazebrook Industrial Estate, Dudley Industrial West Midlands 8.5
5. Motorpoint, Birmingham Automotive & Petroleum West Midlands 8.1
6. Silver Trees, Bristol Healthcare South West 7.1
7. Prime Life Care Home, Solihull Healthcare West Midlands 7.0
8. Mercure City Hotel, Glasgow Hotel Scotland 7.0
9. Droitwich Spa Retail Park, Droitwich Retail West Midlands 6.3
10. Travelodge, Duke House, Swindon Hotel South West 6.3
11. Volvo Slough, Slough Automotive & Petroleum South East excluding London 5.2
12. Hoddesdon Energy, Hoddesdon Power Station Eastern 5.2
13. Unit 2, Dolphin Park, Sittingbourne Industrial South East excluding London 5.0
14. Prime Life Care Home, Brough Healthcare Yorkshire and the Humber 4.5
15. Applegreen Petrol Station, Crawley Automotive & Petroleum South East excluding London 4.2
16. Pure Gym, London Leisure London 3.9
17. YMCA Nursery, Southampton Education South East excluding London 2.2
18. Unit 14, Provincial Park, Sheffield Industrial Yorkshire and the Humber 2.1
19. Snap Fitness, London Leisure London 1.9
Top Ten Tenants at 30 June 2022
% of
Annual Portfolio
Contracted Total
Rental Passing
Income Rental WAULT
(£ '000) Income (Years)
Tenant Property
Meridian Steel Ltd Grazebrook Industrial Estate, Dudley and Provincial Park, Sheffield 716 9.9 4.9
Prime Life Ltd Lyndon Croft Care Centre, Solihull and Westerlands Care Village, Brough 704 9.8 26.4
Jupiter Hotels Ltd Mercure City Hotel, Glasgow 680 9.4 14.2
Mears Group Plc Bramall Court, Salford 671 9.3 19.1
Premier Inn Hotels Ltd Premier Inn, Camberley 504 7.0 9.7
Motorpoint Ltd Motorpoint, Birmingham 500 6.9 15.0
Handsale Ltd Silver Trees, Bristol 438 6.1 26.6
Travelodge Hotels Ltd Duke House, Swindon 403 5.6 18.9
Hoddesdon Energy Ltd Hoddesdon Energy, Hoddesdon 333 4.6 9.7
Volvo Car UK Ltd Volvo Slough, Slough 281 3.9 14.7
Tenancy Schedule
Annual
Contracted
Rental
Income
Tenant Property (£ '000) Break Date Expiry Date
Mears Group Plc Bramall Court, Salford 671 16/08/2041
Jupiter Hotels Ltd Mercure City Hotel, Glasgow 660 23/08/2036
Premier Inn Hotels Ltd Premier Inn, Camberley 504 25/03/2032 24/03/2037
Motorpoint Ltd Motorpoint, Birmingham 500 24/06/2037
Handsale Ltd Silver Trees, Bristol 438 14/01/2049
Prime Life Ltd Prime Life Care Home, Solihull 412 21/11/2048
Travelodge Hotels Ltd Duke House, Swindon 403 31/05/2041
Meridian Steel Ltd Grazebrook Industrial Estate, Works 1 & 2, Dudley 347 21/05/2027
Hoddesdon Energy Ltd Hoddesdon Energy, Hoddesdon 332 27/02/2032 26/02/2050
Prime Life Ltd Prime Life Care Home, Brough 292 21/11/2048
Volvo Car UK Ltd Volvo Slough, Slough 281 16/03/2037
B&M Bargains Droitwich Spa Retail Park, Droitwich 272 31/08/2029
Dore Metal Services Southern Ltd Unit 2, Dolphin Park, Sittingbourne 262 13/09/2028 12/09/2033
Pure Gym Ltd Pure Gym, London 236 11/12/2027 10/12/2032
Petrogas Group UK Ltd Applegreen Petrol Station, Crawley 234 16/07/2033
Meridian Steel Ltd Grazebrook Industrial Estate, Works 1 & 2, Dudley 232 21/05/2027
Biffa Waste Services Ltd Pocket Nook Industrial Estate, St Helens 156 24/02/2133
Sec. of State for Communities & Local Gov'mt Pocket Nook Industrial Estate, St Helens 154 29/01/2048
BGEN Ltd Pocket Nook Industrial Estate, St Helens 97** 05/04/2025 04/04/2027
Meridian Steel Ltd Unit 14, Provincial Park, Sheffield 136 21/05/2027
Pets at Home Droitwich Spa Retail Park, Droitwich 131 13/01/2023
MSG Life Realty Ltd Snap Fitness, London 130 28/03/2033
YMCA Fairthorne Group YMCA Nursery, Southampton 130 17/02/2044
Biffa Waste Services Ltd Pocket Nook Industrial Estate, St Helens 111 31/03/2134
BGEN Ltd Pocket Nook Industrial Estate, St Helens 50*** 05/04/2024 04/04/2025
The Salvation Army Trustee Company Duke House, Swindon 22 17/07/2032
Jupiter Hotels Ltd Mercure City Hotel, Glasgow 20 31/08/2036
Ayrshire Metal Products Ltd Pocket Nook Industrial Estate, St Helens * 28/09/2045
Ayrshire Metal Products Ltd Pocket Nook Industrial Estate, St Helens * 28/09/2045
Ayrshire Metal Products Ltd Pocket Nook Industrial Estate, St Helens * 28/09/2045
Ayrshire Metal Products Ltd Pocket Nook Industrial Estate, St Helens * 28/09/2045
Camberley Properties Ltd Premier Inn, Camberley * 23/06/3010
Westlea Housing Association Ltd Duke House, Swindon * 17/09/3006
Southern Electric Parcel Distribution Plc Premier Inn, Camberley * 20/02/2111
* Ground rents less than £150 per annum.
** Increasing to £145,000 per annum on 25 April 2023
*** Increasing to £63,750 per annum on 5 April 2023
Environmental, Social and Governance
The Group recognises that Environmental, Social and Governance ("ESG") matters
are of utmost importance to sustainable investment and a focus for the
business and investor community. The Group is committed to understanding how
best to consider ESG factors in all facets of its business, from business
strategy to investment decisions and company operations.
In order to meet investors' expectations relating to ESG matters the Group and
its advisers adopt both financial and non-financial strategies to drive
long-term value with an innovative yet disciplined and conscientious approach
to ESG in respect of the property portfolio management including but not
limited to:
Environmental
· A proactive approach to procurement of Energy Performance
Certificate ("EPC") reassessments ahead of Minimum Energy Efficiency Standards
2023, maintaining quarterly reviews of EPC schedules, identification of
opportunities to improve energy efficiency, reduce greenhouse gas ("GHG")
emissions and working closely with tenants who occupy under full repairing and
insuring leases.
· Ongoing environmental reviews and audits as part of regular due
diligence, including regular asset inspections to avoid any breach in
environmental legislation.
· Responsible refurbishment in respect of all works to assets with
consideration to the best approach to improving the EPC rating against
potential spend, liaison with tenants in respect of any fit-out or alterations
to carry out sustainable development and reuse of existing materials where
feasible to reduce waste.
· 'Green lease' terms are incorporated in leases where feasible.
· Assets are operated in a manner to reduce overall energy and water
consumptions as well as waste production, while maintaining tenant comfort and
needs.
· Leverage technology for data management is used to monitor and drive
improvement across environmental and social metrics.
Social
· Commitment to occupier engagement.
· Incorporation of social improvements to each asset such as installing
defibrillators & electrical charging points.
· Provision of regular training and awareness to all managers on social
issues, such as wellbeing and mental health
Governance
· Client checks are completed on all tenants as well as new
suppliers and contractors.
· Regular tenant engagement and inspections to ensure assets are
used as agreed within leases.
· Effective tracking of legislative requirements to assess and
monitor risks and opportunities.
Diversity
As an externally managed business, the Company does not have any employees or
office space. As such, the Group does not operate a diversity policy with
regards to any administrative, management and supervisory functions. A
description of the Board's policy on Director diversity can be found in the
Corporate Governance Report of the Annual Report.
Employees
The Group has no employees and accordingly no requirement to report separately
in this area as the management of the portfolio has been delegated to the AIFM
and Investment Adviser.
The AIFM and Investment Adviser are equal opportunities employers who respect
and seek to empower each individual and the diverse cultures, perspectives,
skills and experiences within their workforce.
Human Rights
The Group 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.
Business Relationships
As well as the critical day-to-day portfolio management, the Group has a set
of service providers that ensure the smooth running of the Group's activities.
The Group's key service providers are listed in the Annual Report, and the
Management Engagement Committee annually review the effectiveness and
performance of these service providers, taking into account any feedback
received.
The Group, AIFM and Investment Adviser and other third-party service providers
maintain high standards of business conduct by acting in a collaborative and
responsible manner with all its business partners that protects the reputation
of the Group as a whole.
Greenhouse Gas Emissions
As an investment company, the Group's own direct environmental impact is
minimal and greenhouse gas ('GHG') emissions are negligible, and as such the
Company has not introduced measures to achieve energy efficiency. Information
on the GHG emissions in relation to the Group's property portfolio are shown
in the following section.
The Group has followed UK Government environmental reporting guidelines and
used the UK Government 2020 greenhouse gas reporting conversion factors for
company reporting to identify and report relevant GHG emissions over which it
has operational control for the 12-month period to 30 June 2022.
An independent consultancy specialising in the application of sustainability
in commercial real estate was appointed to calculate the GHG statement and
provide verification on the approach used.
Scopes
GHG emissions have been reported against the following 'Scopes', as defined by
the GHG Protocol and where relevant:
Scope 1 (not relevant to AIRE): Direct emissions from owned vehicles,
controlled boilers and fugitive emissions from air conditioning systems under
landlord control.
Scope 2: Indirect emissions from electricity purchased by the Company and
consumed within real estate assets owned by the Company.
Scope 3: Indirect emissions from electricity and gas purchased/consumed within
AIRE assets, by tenants, where the tenant is counterparty to the energy
supply.
Statement of GHG emissions
The table below sets out the emissions per sector and for the Group overall in
the year ended 30 June 2022. The approach taken follows guidance provided by
the GHG Reporting Guidelines (BEIS, 2019) and EPRA Best Practice
Recommendations of Sustainability Reporting 2017. The Group has little or no
control over energy purchased over the majority of its assets. However, there
are two properties where there is some form of control being Droitwich Spa
Retail Park (retail park), and Pocket Nook Industrial Estate (industrial
warehouse), and their scope 2 and 3 emissions respectively are set out below.
The retail park was purchased in December 2020 and the data is incomplete for
the period prior to this. Like-for-like comparison can therefore not be
provided between 2020/21 and 2021/22.
Sector Scope Absolute tonnes of carbon dioxide equivalent (tCO(2)e) Like-for-like comparison of carbon dioxide equivalent (tCO(2)e)
2020/21 2021/22 Difference (tCO(2)e) % Change
Retail park Scope 2 0.59 1.44 N/A N/A
Industrial warehouse Scope 3 - Electricity 104.11 82.21 -21.9 -21%
Total Scope 2 & 3 104.7 83.65 -21.9 -21%
Statement of Energy Usage
The table below sets out the energy use per sector and for the Group overall.
The approach follows guidance provided by the GHG Reporting Guidelines (BEIS,
2019) and the EPRA Best Practice Recommendations on Sustainability Reporting
2017.
Sector Energy Source Absolute energy usage (kWh) Like-for-like energy usage (kWh)
2020/21 2021/22 Difference 2020/21 (kWh) % Change 2021/22
Retail park Electricity 446,568 425,106 -21,462 -5%
Industrial warehouse Electricity 2,555 7,454 N/A N/A
Total Electricity 449,123 432,560 -21,462 -5%
Intensity Ratios
In addition to reporting relevant absolute GHG emissions (per scope and per
sector), the Group has chosen to report intensity ratios, where appropriate.
An intensity measure is reported for assets within the like for like
portfolio, where:
- No major renovation or refurbishment has taken place i.e. affecting
more than 50% of the building by area or number of occupants
- Occupancy is at least 75%
- At least 24 months data is available
Whilst no landlord meters reflect the above criteria for an intensity metric,
the Group has applied an intensity figure for one asset, Pocket Nook of 0.013
tCO(2)e/m(2) for the year ended 30 June 2022, where the landlord procures the
energy and directly recharges this to the tenant. An intensity metric has not
been produced for Droitwich Spa retail park on the basis that the
landlord-controlled meter does not reflect the above criteria (less than 12
months data available from the previous reporting year).
No normalisation factors have been considered for this annual report.
Assurance statement
The Group's GHG emissions have been calculated and verified by an independent
third-party in accordance with the principles of ISO 14064. A full copy of the
methodology used, including scope, source or data and conversion factors, is
available on request.
Section 172(1) statement
The following disclosure describes how the directors have had regard to the
matters set out in section 172(1)(a) to (f) of the Companies Act 2006, in
promoting the success of the Company for the benefit of members as a whole.
This section describes how the Board has regard to the likely consequences of
any decision in the long term, the need to foster the Company's business
relationships with suppliers, customers and others, the desirability of the
Company maintaining a reputation for high standards of business conduct, and
the need to act fairly as between members of the Company. The Company does not
have any employees and therefore s172(1)(b) is not applicable to the Company.
The impact of the Company's operations on the community and the environment is
set out more fully in the Environmental, Social and Governance section.
Stakeholder Issues of importance Engagement Effect of engagement on key decisions
Shareholders · Attractive and sustainable level of income, earnings and dividends. · Shareholder engagement is set out above. The effect of shareholder engagement has fed into each aspect of the Board's
decision-making. The total aggregate dividends for the year have increased
The Group's investment objective is to deliver an attractive total return to · Long-term income stream linked to inflationary growth. · As a publicly listed Company, the Company is subject to Listing compared to the prior year and the Board has also worked to keep expenses
shareholders. Shareholders are directly impacted by changes to the Company's
Rules and other regulatory disclosure requirements which the Board abides by under control. This, alongside, asset management initiatives to enhance the
NAV and thus the share price and dividends. · Robust corporate governance structure and well-performing service with the assistance of the Company Secretary and Corporate Broker. income stream, have resulted in a strong total shareholder return.
providers.
· Strategic direction of the Company.
· Execution of investment objective.
· Value for money - low ongoing charges.
Service Providers · Reputation of the Company, and maintaining high standards of · Effective and consistent engagement both through formal Board meetings Clear and effective strategic oversight and culture by the Board has been
business conduct. and regularly outside the meetings. crucial to enhancing the effectiveness of the Company's key service providers.
As an externally managed REIT, the Company conducts all its business through
The Board has worked closely with its service providers to maintain and
its service providers, the key ones being the Investment Adviser, Property · Productive working relationships with the Company. continually improve processes and to ensure that the Company's values are
Manager, Company Secretary, AIFM, Depositary and Corporate Broker.
aligned with them.
· Fair and transparent service agreements. · Annual evaluation of key service providers.
· Collaboration.
· Culture set by the Board and communicated to all providers.
Tenants · Positive working relationship with the Board, Investment Advisor and · To ensure the Investment Adviser and Property Manager generate and Following the removal of national lockdown restrictions in response to
Property Manager. foster good relationships with our tenants. COVID-19, all outstanding arrears/deferrals have been repaid.
Tenants with strong business fundamentals and profitable operations are one of
the key components to ensure a consistent income stream and ability to pay · Rent reviews · Focus on asset management initiatives to assist our tenants where All rent reviews due in the year have been successfully negotiated and
dividends to the Company's shareholders.
applicable. extension to leases have been agreed for Pocket Nook, as set out in the
· Fair lease terms Investment Adviser's Report.
· Long-term strategy and alignment with the tenant's business
operations.
· Financial stability of tenants.
Debt provider · Compliance with loan covenants. · Ongoing engagement by the Investment Adviser throughout the year Board strategic and detailed oversight by the Board has ensured enhanced
and by the Board if required. application of covenants and improved process.
The Group maintains a positive working relationship with its debt provider, · Responsible portfolio management.
Canada Life.
Society and the environment · Responsible investing together with sustainability. · Starting regular engagement with tenants in respect of EPC The Company is in the process of putting in place an ESG policy. The Board has
requirements. encouraged both the Investment Adviser and Property Manager to consider ESG on
As an investor in real estate, the Company's assets have an impact on the · Long-term strategy to take account of ESG considerations without
investment and on an ongoing basis.
built environment. Environmental, Social and Governance ('ESG') factors negatively impacting financial returns. · Ensuring shareholder engagement covers ESG.
increasingly apply alongside of financial returns.
Principal Decisions
Principal decisions are those that have a material impact to the Group and its
key stakeholders. In taking these decisions, the Directors considered their
duties under section 172 of the Act.
Directorate Changes
During the year, the Board welcomed Stephanie Eastment to the board as an
independent non-executive Director and Audit Chair effective 1 October 2021,
and at the same time, Jim Prower resigned as Director and Audit Chair as part
of a planned succession process. The Board undertook steps to ensure that it
replaced its Audit Chair with an individual with the appropriate skills and
experience to undertake the role, including appointing an external consultant
to support the process. In taking this decision, the Board considered that the
appointment would maintain the Company's robust corporate governance structure
and, alongside the other Directors, Stephanie Eastment's skills and experience
would complement the Board to deliver the Company's strategy.
Property Transactions during the Year
As set out in the Chairman's Statement and Investment Adviser's Report, Audi,
Huddersfield was sold and the proceeds re-invested swiftly into Volvo, Slough.
Dividend Policy and Dividend
In the year the Board formally adopted a dividend policy, as set out above, to
pay four evenly spaced interim dividends a year. Previously a resolution had
been put to shareholders and the policy is in keeping with those earlier
resolutions.
The Board set a dividend target of 5.5 pps for the year ended 30 June 2022.
This provided clarity to shareholders on what could be expected from the
Company.
Principal Risks and Uncertainties
The Group's assets consist 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 AIFM
and, where appropriate, the Investment Adviser. The Group's ongoing risk
management process is designed to identify, evaluate and mitigate the risks
the Group 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 AIFM's, and
where appropriate the Investment Adviser's, risk management and internal
control systems.
The Board has carried out a robust assessment of the principal and emerging
risks facing the Group, including those that would threaten its business
model, future performance, solvency or liquidity.
An analysis of the principal risks and uncertainties is set out in the table
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. Tenant default
Failure by tenants to comply with their rental obligations could affect the Our investment policy limits our exposure to any one tenant to 15% of Gross Probability: Moderate to high
income that the properties earn and the ability of the Group to pay dividends Asset Value. Our maximum exposure to any one tenant (calculated by GAV) is
to its shareholders. 11.47% at 30 June 2022. The Group benefits from a balanced portfolio with a
diversified tenant base and is therefore not reliant on a single tenant or
sector. Impact: High
Macroeconomic trends discussion through the report, including rising interest
rates, higher inflation and the possibility of recession have the ability to
materially impact on a tenant's business. This could result in tenants being In the due diligence process prior to acquiring a property, covenant checks Movement: No change to the overall risk rating. However, the impact of
unable to comply with their rental obligations. are carried out on tenants which are repeated on a regular basis. different factors considered by Directors have changed with the COVID-19
pressure on tenants reducing offset by costs (energy particularly) and
inflation/ interest rate pressures on tenants increasing.
The Investment Adviser and Property Manager conduct ongoing monitoring and
liaison with tenants to manage potential bad debt risk.
2. Portfolio concentration
Any downturn in the UK and its economy or regulatory changes in the UK could The Group has investment restrictions in place to invest and manage its assets Probability: Low to moderate
have a material adverse effect on the Group's operations or financial with the objective of spreading and mitigating risk.
condition. Greater concentration of investments in any sector or exposure to
the creditworthiness of any one tenant or tenants may lead to greater
volatility in the value of the Group's investments, NAV and the Company's
Impact: Low to moderate
share price. Having a diversified portfolio in respect of both sector and tenants provides
reduced potential volatility in the portfolio and the impact rating for this
risk is accordingly set at low to moderate.
Movement: No change
3. Property defects
Due diligence may not identify all the risks and liabilities in respect of an The Group's due diligence relies on the work (such as legal reports on title, Probability: Moderate
acquisition (including any environmental, structural or operational defects) property valuations, environmental, building surveys) outsourced to third
that may lead to a material adverse effect on the Group's profitability, the parties that have appropriate Professional Indemnity cover in place.
NAV and the Company's share price.
Impact: Moderate
Movement: No change
4. Rate of inflation
Rent review provisions may have contractual limits to the increases that may The inflation linked (RPI/CPI) leases in the portfolio have contractual rent Probability: Moderate
be made as a result of the rate of inflation. If inflation is in excess of review collars, with the lowest floor being 0%, and caps that range from 3% to
such contractual limits, the Group may not be able to deliver targeted returns no cap. The majority of caps are in excess of RPI and CPI forecasts during the
to shareholders. next five-year rent review cycle and therefore based on forecasts.
Impact: Moderate
The risk of inflation is somewhat mitigated by the leases that have no cap. In
addition, a total of eight leases undergo reviews annually which will allow Movement: Increased
inflation changes to be reflected expeditiously.
The rate of inflation has increased significantly in the past year so that
caps may for the first time limit the level of rent increases. The probability
and risk have both been increased from low to moderate to reflect this.
5. Property market
Any recession or future deterioration in the property market could, inter The Group has investment restrictions in place to invest and manage its assets Probability: Moderate to high
alia, (i) lead to an increase in tenant defaults, (ii) make it difficult to with the objective of spreading and mitigating risk.
attract new tenants for its properties, (iii) lead to a lack of finance
available to the Group, (iv) cause the Group to realise its investments at
lower valuations; and (v) delay the timings of the Group's realisations.
Impact: Moderate to high
Most of the leases provide a relatively long unexpired term and contain upward
only rent reviews which are linked to either RPI or CPI. Because of these
factors, the Group expects that the assets will show less volatile valuation
Any of these factors could have a material adverse effect on the ability of movement over the long term. Movement: No change
the Group to achieve its investment objective.
6. Property valuation
Property is inherently difficult to value due to the individual nature of each The Group uses an independent valuer (Knight Frank LLP) to value the Probability: Low to moderate
property. properties on a quarterly basis at fair value in accordance with accepted RICS
appraisal and valuation standards.
Impact: Moderate to high
There may be an adverse effect on the Group's profitability, the NAV and the
Company's share price in cases where properties are sold whose valuations have The Knight Frank valuation is reviewed by the AIFM, Investment Adviser and
previously been materially overstated. auditor.
Movement: No change.
7. Investments are illiquid
The Group invests in commercial properties. Such investments are illiquid; The Group aims to hold the properties for long-term income. Probability: Moderate
they may be difficult for the Group to sell and the price achieved on any
realisation may be at a discount to the prevailing valuation of the relevant
property.
Impact: Moderate
Movement: No change
8. Environment
The Group is subject to environmental regulations. In addition to regulatory The current regulations require annual mandatory Green House Gas (GHG) Probability: Moderate
risk, there is a growing importance being placed on ESG credentials by reporting, which will be carried out as part of the annual report and will
tenants, which could lead to difficulty in letting vacant space. result in minimal expenditure for the Group.
Impact: Moderate
Properties could be impacted by extreme environment events such as flooding. Furthermore, the Investment Adviser has prepared an ESG strategy to ensure it
Climate change could accelerate more quickly leading to adverse physical meets legal requirements and remains attractive to current and future
impacts as well as regulatory change. tenants. Please see the 'Environmental, Social and Governance' section for Movement: N/A (new risk)
further information.
Failure by the Group to meet current or future environmental targets could
result in penalties, increased costs, a reduction in asset values and have an In depth research is undertaken on each property at acquisition. The
adverse effect on the Company's reputation, leading to loss of good quality Investment Adviser has adopted an environmental policy which it is in the
tenants. process of applying to all properties with the portfolio.
Borrowing Risks
9. Breach of borrowing covenants
The Group has entered into a term loan facility. The Group monitors the use of borrowings on an ongoing basis through regular Probability: Low
cash flow forecasting and quarterly risk monitoring to monitor financial
covenants.
Material adverse changes in valuations and net income may lead to breaches in Impact: High
the LTV and interest cover ratio covenants.
The Group's gearing at 30 June 2022 was 33.7%, below our maximum gearing (on a
GAV basis on drawdown) of 40% and materially below the loan's default covenant
of 60%. Borrowing is carefully monitored by the Group, and action will be Movement: No change
If the Group is unable to operate within its debt covenants, this would lead taken to conserve cash where necessary to ensure that this risk is mitigated.
to default and the loan facility being recalled. This could result in the
Group being forced to sell properties to repay the loan facility, possibly
resulting in a substantial fall in the NAV.
There is significant headroom in the LTV and interest cover covenants in the
loan agreement.
Diversification of both the portfolio and tenants limit the risk to the Group
of any one geographic or sector property event and any one tenant default.
CORPORATE RISKS
10. Failure of service providers
The Group has no employees and is reliant upon the performance of third-party The performance of service providers in conjunction with their service level Probability: Low to moderate
service providers. agreements is monitored regularly and the use of Key Performance Indicators,
where relevant.
Impact: Moderate to high
Failure by any service provider to carry out its obligations to the Group in
accordance with the terms of its appointment could have a materially The Management Engagement Committee reviews the performance and continuing
detrimental impact on the operation of the Group. appointment of key service providers on an annual basis.
Movement: Decrease in probability from moderate to low to moderate. The Board
has lowered this risk due to the continued strong performance of the Group's
current service providers
Should the Group pursue litigation against service providers, there is a risk
that the Company may incur costs that are irrecoverable if litigation is
unsuccessful.
11. Dependence on the Investment Adviser
The future ability of the Group to successfully pursue its investment The Board meets regularly with, and monitors, all of its service providers, Probability: Moderate
objective and investment policy may, among other things, depend on the ability including the Investment Adviser, to ensure close positive working
of the service providers to retain its existing staff and/or to recruit relationships are maintained.
individuals of similar experience and calibre, and effectively carry out its
services. Impact: Moderate
The dependence on the Investment Adviser is managed through segregating the
roles of AIFM and Investment Adviser.
The Group relies on the Investment Adviser to manage the assets and
Movement: No change
termination of the Investment Adviser agreement could severely affect the
Group's ability to effectively manage its operations.
Directors engage with the Investment Adviser not only in Board meetings but
also by email, telephone and ad hoc meetings, This helps to maintain a good
working relationship.
12. Ability to meet objectives
The Group may not meet its investment objective to deliver an attractive total The Group has an investment policy to achieve a balanced portfolio with a Probability: Low to moderate
return to shareholders from investing predominantly in a portfolio of smaller diversified tenant base. This is reviewed by the Board at each scheduled Board
commercial properties in the UK. meeting.
Impact: High
Poor relative total return performance may lead to an adverse reputational The Group's property portfolio has a WAULT to break of 17.5 years and a WAULT
impact that affects the Group's ability to raise new capital and new funds. to expiry of 19.4 years. Further, over 96% of leases have inflation linked
upwards only rent reviews, representing a secure income stream on which to Movement: No change
deliver attractive total returns to shareholders.
TAXATION RISK
13. Group REIT status
The Group has UK REIT status that provides a tax-efficient corporate The Company monitors REIT compliance through the Investment Adviser and Probability: Low
structure. Administrator on acquisitions and disposals and distribution levels; the
Registrar and Broker on shareholdings; and third-party tax advisors to monitor
REIT compliance requirements.
Impact: High
If the Group fails to remain a REIT for UK tax purposes, its profits and gains
will be subject to UK corporation tax.
Processes are in place to ensure ongoing compliance with REIT regulations.
Movement: No change
POLITICAL/ ECONOMIC RISK
14.Political and macroeconomic events. The Group only invests in UK properties with strong alternative use values and Probability: high
long leases so the portfolio is well positioned to withstand an economic
downturn. Tenant default risk arising from political and macroeconomic events
is managed as described above.
Such events present risks to the real estate and financial markets that affect
Impact: high
the Group and the business of our tenants.
The Investment Adviser monitors COVID-19 second-order effects and the current
deterioration in the global economy for their possible effects on the Group. Movement: Increase probability and impact from moderate to high to high due to
The economic disruption arising from the COVID-19 pandemic, the deterioration the impact of the deterioration of the global, including UK, economy.
of the global economy arising from changes such as higher interest rates, and
ongoing long-term effects of the Ukraine-Russia war could impact the
portfolio, tenants and the ability of the Group to raise capital.
REGULATORY RISK
15. Disclosure Risk Service providers including AIFM, Investment Adviser, Company Secretary, Probability: Low to moderate
auditor, and corporate broker monitor disclosure obligations and liaise with
Failure to properly disclose information to investors or regulators in the Board to ensure requirements are met.
accordance with various disclosure rules and regulations. Examples include
AIFMD investor disclosures, annual reporting requirements, marketing/promotion Impact: Moderate
disclaimers, data protection regulations etc.
Movement: N/A (new risk)
16. Regulatory Change The Board receives regular updates on relevant regulatory changes (and Probability: Low
prospective changes) from its professional advisers.
New regulations or changes to existing regulations (particularly in relation
to climate change) could result in sub-optimal performance of the Group or, in
worst case, inability to continue as a viable business.
Impact: High
The Investment Adviser monitors the impact of emerging legislation across all
aspects of property investment and ESG has a particularly high profile at this
time. The Investment Adviser uses an ESG pre-acquisition checklist to review
purchases but also work to ensure that the current portfolio is monitored and Movement: N/A (new risk)
works are carried out as appropriate, with tenant's agreement, to prevent
asset depreciation.
Emerging Risks
The Board takes account of and considers emerging risks as part of its risk
management assessment.
EXTRACTS FROM DIRECTORS' REPORT
Going Concern
The Group has considered its cash flows, financial position, liquidity
position and borrowing facilities. As discussed in the Chairman's Statement,
in accordance with the Company's Articles of Association there is a
continuation vote being put to shareholders at the upcoming AGM. Having
taken account of the views of the Company's broker and major shareholders, the
Directors have no reason to believe that the continuation vote will not pass.
If the Continuation Resolution is not passed, the Directors will formulate
proposals to be put to Shareholders to reorganise, restructure or wind-up the
Company and to present such proposals to Shareholders within six months of the
date of the AGM.
The Group's unrestricted cash balance at the year end was £2.5 million. The
Group borrowings totalled £41 million under a facility repayable on 20
October 2025. The Group had headroom against its borrowing covenants. The
Group is permitted to utilise up to 40% of GAV measured at drawdown with a
Loan to GAV of 33.69% at 30 June 2022.
A 'severe but plausible downside' scenario has also been projected. While rent
collections have been strong, this scenario anticipates rent deferrals and
write-offs for tenants with difficulty paying rents from operational cash
flows. In this scenario the Group still has adequate headroom against the
interest cover covenant and positive cash balances. Further detail of the
assumptions made in assessing the adaption of Group's going concern basis can
be found in Note 2.
The Group 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 Group is well placed to manage its financing and other
business risks.
The Directors are satisfied that the Group and the Company has adequate
resources to continue in operational existence for the foreseeable future,
being a period of at least 12 months from the date of the approval of these
financial statements. The Board is, therefore, of the opinion that the going
concern basis adopted in the preparation of the financial statements is
appropriate.
Viability Statement
In accordance with provision 30 of the UK Code, the Directors have assessed
the prospects of the Group over a period longer than the 12 months required by
the 'Going Concern' provisions. For the reasons given in the Going Concern
statement, the viability statement has been prepared assuming that the
continuation vote in 2022 will be passed.
The Board has considered the nature of the Group's assets and liabilities and
associated cash flows and has determined that three years, up to 30 June 2025,
is a realistic timescale over which the performance of the Group can be
forecast with a degree of accuracy and so is an appropriate period over which
to consider the Group's viability.
Considerations in support of the Group's viability over this three-year period
include:
1. The current unexpired term under the Group's debt facilities stands at
3.3 years.
2. The Group's property portfolio had a WAULT to break of 17.5 years and a
WAULT to expiry of 19.4 years at 30 June 2022, representing a secure income
stream for the period under consideration.
3. A major proportion of the leases contain annual, three or five year
rent review patterns and therefore three years allow for the forecasts to
include the reversion arising from most rent reviews.
The three-year review considers the Group's cash flows, dividend cover, REIT
compliance and other key financial ratios over the period. In assessing the
Group's viability, the Board has carried out a thorough review of the Group's
business model, including future performance, liquidity and banking covenant
tests for a three-year period. The Board has assessed the extent of any
operational disruption; potential curtailment of rental receipts; potential
liquidity and working capital shortfalls; and diminished demand for Group's
assets going forward, in adopting a going concern preparation basis and in
assessing the Group's longer-term viability.
These assessments are subject to sensitivity analysis, which involves flexing
a number of key
assumptions and judgements included in the financial projections:
· Tenant default;
· Dividend payments; and
· Property portfolio valuation movements.
Based on the prudent assumptions within the Group's forecasts regarding rent
deferrals, tenant default, void rates and property valuation movements, the
Directors expect that over the three year period of their assessment:
· LTV covenants will not be breached - at 30 June 2022, the asset
valuations and rental income of the properties secured to Canada Life would
need to fall by 24.9% and 43.3% respectively before breaching the Loan to
Value loan and Income Cover Cash Trap covenants;
· REIT tests are complied with; and
· That the Group and Company will be able to continue in operation
and meet its liabilities as they fall due over the three year period of their
assessment.
Board Approval of the Strategic Report
The Strategic Report has been approved and signed on behalf of the Board by:
Alan Sippetts
Chairman
28 September 2022
Statement of Directors' Responsibilities in respect of the Annual Report and
the Consolidated Financial Statements
The Directors are responsible for preparing the Annual Report and the Group
and parent Company Financial Statements in accordance with applicable law and
regulations.
Company law requires the Directors to 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 international
accounting standards in conformity with the requirements of the Companies Act
2006 and in accordance with the UK adopted international accounting standards.
The Directors have elected to prepare the parent Company financial statements
in accordance with UK accounting standards, including FRS 101 Reduced
Disclosure Framework 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 Group and parent Company and of their profit or loss for that
period. In preparing each of the Group and parent Company financial
statements, the Directors are required to:
· select suitable accounting policies and then apply them
consistently;
· make judgements and estimates that are reasonable, relevant,
reliable and prudent;
· for the Group financial statements, state whether they have been
prepared in accordance with Companies Act 2006 and in accordance with UK
adopted international accounting standards;
· 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;
· assess the Group and parent 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 Group or the parent 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 Group's and the parent Company's
transactions and disclose with reasonable accuracy at any time the financial
position of the Group and the parent 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 Group and the parent 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 complies 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.
Responsibility statement of the Directors in respect of the Annual Report and
the Consolidated Financial Statements
We confirm that to the best of our knowledge:
· the Consolidated 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; and
· the Strategic Report and Directors' Report include 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.
· that the Annual Report and the Consolidated Financial Statements,
taken as a whole, are fair, balanced and understandable and provide the
information necessary for shareholders to assess the Group's position and
performance, business model and strategy.
On behalf of the Board
Alan Sippetts
Chairman
28 September 2022
Consolidated Statement of Comprehensive Income
For the year ended 30 June 2022
2022 2021
Notes £'000 £'000
Income
Rental and other income 3 7,901 7,409
Property operating expense 4 (330) (647)
Net rental and other income 7,571 6,762
Other operating expenses 4 (1,101) (876)
Operating profit before fair value changes 6,470 5,886
and gain on sale
Change in fair value of investment properties 10 8,023 682
Gain on disposal of investment property 10 96 425
Operating profit 14,589 6,993
Finance expense 6 (1,423) (1,421)
Profit before tax 13,166 5,572
Taxation 7 - -
Profit and total comprehensive income attributable to shareholders 13,166 5,572
Earnings per share (basic and diluted) 8 16.36p 6.92p
EPRA EPS (basic and diluted) 8 6.27p 5.55p
Adjusted EPS (basic and diluted) 8 5.57p 5.07p
All items in the above statement are derived from continuing operations.
The accompanying notes form part of these Consolidated Financial Statements.
Consolidated Statement of Financial Position
As at 30 June 2022
2022 2021
Notes £'000 £'000
Assets
Non-current Assets
Investment properties 10 115,124 107,026
115,124 107,026
Current Assets
Receivables and prepayments 11 4,034 3,682
Cash and cash equivalents 2,542 2,115
6,576 5,797
Total Assets 121,700 112,823
Non-current Liabilities
Interest bearing loans and borrowings 13 (40,620) (40,516)
Lease obligations 14 (299) (335)
(40,919) (40,851)
Current Liabilities
Payables and accrued expenses 12 (3,146) (3,041)
Lease obligations 14 (36) (38)
(3,182) (3,079)
Total Liabilities (44,101) (43,930)
Net Assets 77,599 68,893
Equity
Share capital 17 805 805
Capital reserve 75,417 75,417
Retained earnings 1,377 (7,329)
Total equity 77,599 68,893
Net Asset Value per share (basic and diluted) 8 96.40p 85.58p
The accompanying notes form part of these Consolidated Financial Statements.
The Consolidated Financial Statements were approved by the Board of Directors
on 28 September 2022 and were signed on its behalf by:
Alan Sippetts
Chairman
Company number: 10727886
Consolidated Statement of Changes in Equity
For the year ended 30 June 2022
Share Capital Retained Total
capital Reserve* Earnings* Equity
Notes £'000 £'000 £'000 £'000
For the year ended 30 June 2022
Balance as at 30 June 2021 805 75,417 (7,329) 68,893
Total comprehensive income - - 13,166 13,166
Dividends paid 9 - - (4,460) (4,460)
Balance as at 30 June 2022 805 75,417 1,377 77,599
For the year ended 30 June 2021
Balance as at 30 June 2020 805 75,417 (8,936) 67,286
Total comprehensive income - - 5,572 5,572
Dividends paid 9 - - (3,965) (3,965)
Balance as at 30 June 2021 805 75,417 (7,329) 68,893
* Capital reserve and retained earnings were presented combined in prior
years.
The accompanying notes form part of these Consolidated Financial Statements.
Consolidated Statement of Cash Flows
For the year ended 30 June 2022
Notes 2022 2021
£ '000 £ '000
Cash flows from operating activities
Profit before tax 13,166 5,572
Adjustment for:
Finance expenses 6 1,423 1,421
Gain on disposal of investment property 10 (96) (425)
Change in fair value of investment properties 10 (8,023) (682)
Operating results before working capital changes 6,470 5,886
Change in working capital
(Increase) / decrease in receivables and prepayments (352) 1,735
Increase in payables and accrued expenses 100 429
Net cash flow generated from operating activities 6,218 8,050
Cash flows from investing activities
Purchase of investment property 10 (5,375) (6,070)
Net proceeds from disposal of investment property 10 5,396 3,159
Net cash generated from / (used in) investing activities 21 (2,911)
Cash flows from financing activities
Finance costs paid (1,319) (1,322)
Dividends paid 9 (4,455) (3,949)
Payment of lease obligation (38) (41)
Net cash used in financing activities (5,812) (5,312)
Net increase / (decrease) in cash and cash equivalents 427 (173)
Cash and cash equivalents at beginning of year 2,115 2,288
Cash and cash equivalents at end of year 2,542 2,115
The accompanying notes form part of these Consolidated Financial Statements.
Notes to the Consolidated Financial Statements
For the year ended 30 June 2022
1. Corporate Information
Alternative Income REIT plc (the "Company") is a public limited company and a
closed ended Real Estate Investment Trust ('REIT') incorporated on 18 April
2017 and domiciled in the UK and registered in England and Wales. The
registered office of the Company is 1 King William Street, London, United
Kingdom, EC4N 7AF.
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 6 June
2017.
The nature of the Group's operations and its principal activities are set out
in the Strategic Report.
2. Accounting policies
2.1 Basis of preparation
These Consolidated financial statements (the "financial statements") are
prepared and approved by the Directors in accordance with international
accounting standards in conformity with the requirements of the Companies Act
2006 and in accordance with UK-adopted international accounting standards.
These financial statements have been prepared under the historical-cost
convention, except for investment properties that have been measured at fair
value.
These financial statements are presented in Sterling and all values are
rounded to the nearest thousand pounds (£'000), except where otherwise
indicated.
Basis of consolidation
The financial statements incorporate the financial statements of the Company
and its subsidiaries (the 'Group').
Subsidiaries are the entities controlled by the Company, being Alternative
Income Limited and Alternative Income REIT Holdco Limited.
New standards, amendments and interpretations, and forthcoming requirements
Standards effective from 1 July 2021
New standards impacting the Group that have been adopted for the first time in
this set of Consolidated Financial Statements are:
• Interest Rate Benchmark Reform - IBOR 'phase 2' (Amendments to IFRS 9,
IAS 39, IFRS 7, IFRS 4 and IFRS 16)
The amendments provide relief to the Group in respect of certain loans whose
contractual terms are affected by interest benchmark reform (effective from 1
January 2021). Applying the practical expedient introduced by the amendments,
when the benchmarks are replaced the adjustments to the contractual cash flows
will be reflected as an adjustment to the effective interest rate. Therefore,
the replacement of the benchmark interest rate does not result in an immediate
gain or loss recorded in profit or loss.
Forthcoming requirements
The following are new standards, interpretations and amendments, which are not
yet effective, and have not been early adopted in this financial information,
that will or may have an effect on the Group's future financial statements:
• Amendments to IAS 1 which clarifies the criteria used to determine
whether liabilities are classified as current or non-current (effective 1
January 2023). These amendments clarify that current or non-current
classification is based on whether an entity has a right at the end of the
reporting period to defer settlement of the liability for at least 12 months
after the reporting period. The amendment is not expected to have an impact on
the presentation or classification of the liabilities in the Group based on
rights that are in existence at the end of the reporting period.
The Group has also applied the following amendments for the first time for
their annual reporting period
commencing 1 July 2021:
o Onerous contracts - Cost of Fulfilling a Contract (Amendments to IAS 37)
(effective 1 January 2022);
o Annual Improvements to IFRS Standards 2018-2020 (effective 1 January
2022);
o Property, Plant and Equipment: Proceeds before intended use (Amendments to
IAS 16) (effective 1 January 2022);
o Reference to the Conceptual Framework (Amendments to IFRS 3) (effective 1
January 2022).
The amendments listed above did not have any impact on the amounts recognised
in prior periods and are not expected to significantly affect the current or
future periods.
Certain new accounting standards and interpretations have been published that
are not mandatory for annual periods beginning after 1 July 2021 and early
application is permitted; however the Group has not early adopted the new or
amended standards in preparing these Consolidated Financial Statements:
o Deferred Tax related to Assets and Liabilities arising from a Single
Transaction (Amendments to IAS 12) (effective 1 January 2023);
o Classification of Liabilities as Current or Non-current (Amendments to
IAS 1) (effective 1 January 2023);
o IFRS 17 Insurance Contracts and amendments to IFRS 17 Insurance
Contracts (effective 1 January 2023);
o Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS Practice
Statement 2) (effective 1 January 2023);
o Definition of Accounting Estimates (Amendments to IAS 8) (effective 1
January 2023);
o Sale or Contribution of Assets between an Investor and its Associate or
Joint Venture (Amendments to IFRS 10 and IAS 28) (effective date deferred
indefinitely).
2.2 Significant accounting judgements and estimates
In the application of the Group's accounting policies the Directors are
required to make judgements, estimates and assumptions that affect the
reported amounts recognised in the Consolidated 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. The estimates and associated assumptions that have a
significant risk of causing a material adjustment to the carrying amounts of
assets and liabilities within the next financial year are outlined below:
Valuation of investment properties
The fair value of investment properties are determined by external property
valuation experts to be the estimated amount for which a property should
exchange on the date of the valuation in an arm's length transaction. The
Group's properties have been valued on an individual basis. The valuation
experts use recognised valuation techniques, applying the principles of both
IAS 40 and IFRS13.
The valuations have been prepared in accordance with the Royal Institution of
Chartered Surveyors ('RICS') Valuation. Factors include current market
conditions, annual rentals, the contractual terms of the leases and their
lengths and location. The significant methods and assumptions used by valuers
in estimating the fair value of investment property are set out in note 10.
Provision for expected credit losses ('ECL') of trade receivables
Rent collection rates since the start of the Fund are in the region of 100%.
As a result, the Group does not have the data to establish historical loss
rates for the expected credit loss analysis.
In determining the provision on a tenant by tenant basis, the Group considers
both recent payment history and future expectations of the tenant's ability to
pay or possible default in order to recognise an expected credit loss
allowance. The Group also considers the risk factors associated by sector in
which the tenant operates and the nature of the debt. Based on sector and
rent receivable type a provision is provided in addition to full provision for
maximum risk tenants or known issues.
Principal versus agent considerations - services to tenants
The Group arranges for certain services to be provided to tenants. These
arrangements are included in the contract the Group enters into as a lessor.
The Group has determined that it controls the services before they are
transferred to tenants, because it has the ability to direct the use of these
services and obtain the benefits from them. The Group has determined that it
is primarily responsible for fulfilling these services as it directly deals
with tenants' complaints and is primarily responsible for the quality or
sustainability of the services. In addition, the Group has discretion in
establishing the price that it charges to the tenants for the specified
services.
Therefore, the Group has concluded that it is the principal in these
contracts. In addition, the Group has concluded that it transfers control of
these services over time, as services are rendered by the third-party service
providers, because this is when tenants receive and, at the same time, consume
the benefits from these services.
REIT status
The Group is a Real Estate Investment Trust (REIT) and does not pay tax on its
property income or gains on property sales, provided that at least 90% of the
Group's property income is distributed as a dividend to shareholders, which
becomes taxable in their hands. In addition, the Group has to meet certain
conditions such as ensuring the property rental business represents more than
75% of total profits and assets. Any potential or proposed changes to the REIT
legislation are monitored and discussed with HMRC. It is the Board's intention
that the Group will continue as a REIT for the foreseeable future.
Classification of lease arrangements - the Group as lessor (Note 14)
The Group has acquired investment properties that are leased to tenants. In
considering the classification of lease arrangements, at inception of each
lease the Group considers the economic life of the asset compared with the
lease term and the present value of the minimum lease payments and any
residual value compared with the fair value and associated costs of acquiring
the asset as well as qualitative factors as indicators that may assert to the
risks and rewards of ownership having been substantially retained or
transferred. The Group has determined that it retains all the significant
risks and rewards of ownership of its investment property and accounts for the
lease arrangements as operating leases.
2.3 Segmental information
Each property held by the Group is reported to the chief operating decision
maker. In the case of the Group, the chief operating decision maker is
considered to be the Board of Directors. The review process for segmental
information includes the monitoring of key performance indicators applicable
across all properties. These key performance indicators include Net Asset
Value, Earnings per Share and valuation of properties. All asset cost and
rental allocations are also reported by property. The internal financial
reports received by the Directors cover the Group and all its properties and
do not differ from amounts reported in the financial statements. The Directors
have considered that each property has similar economic characteristics and
have therefore aggregated the portfolio into one reportable segment under the
provisions of IFRS 8.
2.4 Going concern
The Consolidated Financial Statements have been prepared on a going concern
basis.
The Group's business activities, together with the factors likely to affect
its future development, performance and position are set out in the Strategic
Report. The robust financial position of the Group, its cash flows, liquidity
position and borrowing facilities are described in the financial statements
and the accompanying notes. The financial statements also include the Group's
objectives, policies and processes for managing its capital; its financial
risk management objective; and its exposures to market price risk, real estate
risk, credit risk and liquidity risk.
The Investment Adviser on behalf of the Board has projected the Group's cash
flows for the period up to 30 September 2023, challenging and sensitising
inputs and assumptions to ensure that the cash forecast reflects a realistic
outcome given the uncertainties associated with the current economic
environment. The scenarios applied were designed to be severe but plausible,
and to take account of the availability of mitigating actions that could be
taken to avoid or reduce the impact or probability of the underlying risks.
The Group's debt of £41m does not mature until 2025 and the Group has
reported full compliance with its loan covenants to date. Based on cash flow
projections, the Directors expect the Group to continue to remain compliant.
The headroom of the loan to value covenant is significant and any reduction in
property values that would cause a breach would be significantly more than any
reduction currently envisaged.
Based on the above, the Board believes that the Group has the ability and
adequate resources to continue in operational existence for the foreseeable
future, being at least 12 months from the date of approval of the financial
statements.
At the Company's upcoming AGM on 10 November 2022, a resolution will be put to
shareholders in accordance with its Articles of Association, to consider
whether it should continue its business as presently constituted
("Continuation Resolution"). In the event that the Continuation Resolution did
not pass, the Company would be required to formulate proposals to reorganise,
restructure or wind up. The Company has provided justifications to
shareholders for why it should continue in operation as presently constituted
and the Board has recommended that shareholders vote in favour of this
resolution. Having taking account of the views of the Company's broker and
major shareholders, the Board has no reason to believe that the continuation
vote will not pass.
2.5 Summary of significant accounting policies
The principal accounting policies applied in the preparation of these
Consolidated Financial Statements are set out below.
a) Functional and presentation currency
These Consolidated Financial Statements are presented in Sterling, which is
the functional and presentational currency of the Group and its subsidiary
undertakings. The functional currency of the Group and its subsidiaries is
principally determined by the primary economic environment in which it
operates. The Group did not enter into any transactions in foreign currencies
during the period.
b) Revenue recognition
i) Rental income
Rental income 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. For leases, which contain fixed or minimum uplifts,
the rental income arising from such uplifts is recognised on a straight-line
basis over the lease term.
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.
Lease modifications, such as lease extensions and rent reductions, are
accounted for either as a separate lease or not a separate lease.
Amodification will only be treated as a separate lease if it involves the
addition of one or more underlying assets at a price that is commensurate with
the standalone price of the increase in scope. All other modifications are not
treated as a separate lease.
If a modification is a separate lease, a lessee applies the requirements of
IFRS 16 to the newly added asset, due as a result of the modification,
independently of the original lease. The accounting for the original lease
continues unchanged.
If a modification is not a separate lease, the accounting reflects that there
is a linkage between the original lease and the modified lease. The existing
lease liability is remeasured with a corresponding adjustment to the
right-of-use asset on the effective date of the modification.
ii) Service charges and direct recharges
Revenue from service charges is recognised in the accounting period in which
the service is rendered. For certain service contracts, revenue is recognised
based on the actual service provided to the end of the reporting period as a
proportion of the total services to be provided because the customer receives
and uses the benefits simultaneously.
iii) Deferred income
Deferred income is rental income received in respect of future accounting
periods.
(iv) Dilapidation and lease surrender premium
Amounts received from tenants to terminate leases or to compensate for
dilapidations are recognised in the Consolidated Statement of Comprehensive
income when the right to receive them arises.
c) 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 which is
significantly the same as the contracted interest.
d) 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 replacement of that part will prolong or improve the life of
the asset.
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 external valuer. Any valuation of
investment properties by the external 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 yield applicable to those cash flows.
For the purposes of these Consolidated 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 profit
or loss in the year of retirement or disposal.
e) Cash and cash equivalents
Cash and short-term deposits in the Consolidated Statement of Financial
Position comprise cash at bank and short-term deposits with an original
maturity of three months or less.
f) Receivables and prepayments
Rent and other receivables are initially recognised at fair value and
subsequently at amortised cost. Impairment provisions are recognised based on
the processed as described in note 2.2. Any adjustment is recognised in profit
or loss as an impairment gain or loss.
g) Other payables and accrued expenses
Other payables and accrued expenses are initially recognised at fair value and
subsequently held at amortised cost.
h) 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.
i) Provisions
Aprovision is recognised in the Consolidated Statement of Financial Position
when the Group 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.
j) Dividend payable to shareholders
Equity dividends are recognised when they become legally payable.
k) 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.
l) Lease obligations
Lease obligations relate to the head rent of investment property and are
capitalised at the lease commencement, at the lower of fair value of the
property and present value of the minimum lease payments and held as a
liability within the Consolidated Statement of Financial Position. The lease
payments are discounted using the interest rate implicit in the lease. Where
the Group is exposed to potential future increases in variable lease payments
based on an index or rate, these are not included in the lease liability until
they take effect. Lease payments are allocated between principal and finance
cost. The finance cost is charged to profit or loss over the lease period so
as to produce a constant periodic rate of interest on the remaining balance of
the liability for each period.
m) Taxes
Corporation tax is recognised in profit or loss except to the extent that it
relates to items recognised directly in equity, in which case it is recognised
in equity.
As a REIT, the Group 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 year, using tax rates
applicable in the year.
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.
n) Non-current assets held for sale
Non-current assets are classified as assets held for sale when their
carrying amount is to be recovered principally through a sale transaction and
asale is considered highly probable. Investment properties classified as such
are measured at fair value.
o) European Public Real Estate Association
The Group has adopted the 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 ended 30 June 2022, audited EPS and NAV calculations
under EPRA's methodology are included in note 8 and further unaudited measures
are uded following the financial statements.
p) Capital and reserves
Share capital
Share capital is the nominal amount of the Company's ordinary shares in issue,
and is non-distributable.
Capital reserve
The capital reserve is a distributable reserve and represents the cancelled
share premium less dividends paid from this reserve.
Retained earnings
Retained earnings represent the profits of the Group less dividends paid from
revenue profits to date.
2.6 Fair value measurement
The Group measures financial and non-financial assets such as investment
properties at fair value at each reporting date.
A number of the Group's accounting policies and disclosures require the
determination of fair value, for both financial and non-financial assets and
liabilities. Fair value is defined in IFRS 13 Fair Value Measurement as the
price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date.
Fair values have been determined for measurement and/or disclosure purposes
based on methods described below. Where applicable, further information about
the assumptions made in determining fair values is disclosed in the notes
specific to that asset or liability.
The Group uses valuation techniques that are appropriate in the circumstances
and for which sufficient data are available to measure fair value, maximising
the use of relevant observable inputs and minimising the use of unobservable
inputs significant to fair value measurement as a whole:
Fair value hierarchy:
Level 1: Quoted prices (unadjusted) in active markets for identical assets
or liabilities.
Level 2: Inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly (i.e. as prices) or
indirectly (i.e. derived from prices).
Level 3: Inputs for the asset or liability that are not based on observable
market data (unobservable inputs).
For assets and liabilities that are recognised in the financial statements at
fair value on a recurring basis, the Group determines whether transfers have
occurred between levels in the hierarchy by re-assessing categorisation (based
on the lowest level input that is significant to the fair value measurement as
a whole) at the end of each reporting period.
There were no transfers between any of the levels during the year.
Investment property
The valuation of investment property by valuers engaged by the Group who are
independently appointed and have the relevant professional qualifications and
with recent experience in the location and category of the investment property
being valued. Further information in relation to the valuers is provided in
note 10.
Property valuations are inherently subjective as they are made on the basis of
assumptions made by the valuer which may not prove to be accurate. For these
reasons, and consistent with EPRA's guidance, we have classified the
valuations of our property portfolio as Level 3 as defined by IFRS 13. The
inputs to the valuations are defined as 'unobservable' by IFRS 13 and these
are analysed in note 10.
REIT status
The Group is a Real Estate Investment Trust (REIT) and does not pay tax on its
property income or gains on property sales, provided that at least 90% of the
Group's property income is distributed as a dividend to shareholders, which
becomes taxable in their hands. In addition, the Group has to meet certain
conditions such as ensuring the property rental business represents more than
75% of total profits and assets. Any potential or proposed changes to the REIT
legislation are monitored and discussed with HMRC. It is the Board's intention
that the Group will continue as a REIT for the foreseeable future.
Classification of lease arrangements - the Group as lessor (Note 14)
The Group has acquired investment properties that are leased to tenants. In
considering the classification of lease arrangements, at inception of each
lease the Group considers the economic life of the asset compared with the
lease term and the present value of the minimum lease payments and any
residual value compared with the fair value and associated costs of acquiring
the asset as well as qualitative factors as indicators that may assert to the
risks and rewards of ownership having been substantially retained or
transferred. The Group has determined that it retains all the significant
risks and rewards of ownership of its investment property and accounts for the
lease arrangements as operating leases.
2.3 Segmental information
Each property held by the Group is reported to the chief operating decision
maker. In the case of the Group, the chief operating decision maker is
considered to be the Board of Directors. The review process for segmental
information includes the monitoring of key performance indicators applicable
across all properties. These key performance indicators include Net Asset
Value, Earnings per Share and valuation of properties. All asset cost and
rental allocations are also reported by property. The internal financial
reports received by the Directors cover the Group and all its properties and
do not differ from amounts reported in the financial statements. The Directors
have considered that each property has similar economic characteristics and
have therefore aggregated the portfolio into one reportable segment under the
provisions of IFRS 8.
2.4 Going concern
The Consolidated Financial Statements have been prepared on a going concern
basis.
The Group's business activities, together with the factors likely to affect
its future development, performance and position are set out in the Strategic
Report. The robust financial position of the Group, its cash flows, liquidity
position and borrowing facilities are described in the financial statements
and the accompanying notes. The financial statements also include the Group's
objectives, policies and processes for managing its capital; its financial
risk management objective; and its exposures to market price risk, real estate
risk, credit risk and liquidity risk.
The Investment Adviser on behalf of the Board has projected the Group's cash
flows for the period up to 30 September 2023, challenging and sensitising
inputs and assumptions to ensure that the cash forecast reflects a realistic
outcome given the uncertainties associated with the current economic
environment. The scenarios applied were designed to be severe but plausible,
and to take account of the availability of mitigating actions that could be
taken to avoid or reduce the impact or probability of the underlying risks.
The Group's debt of £41m does not mature until 2025 and the Group has
reported full compliance with its loan covenants to date. Based on cash flow
projections, the Directors expect the Group to continue to remain compliant.
The headroom of the loan to value covenant is significant and any reduction in
property values that would cause a breach would be significantly more than any
reduction currently envisaged.
Based on the above, the Board believes that the Group has the ability and
adequate resources to continue in operational existence for the foreseeable
future, being at least 12 months from the date of approval of the financial
statements.
At the Company's upcoming AGM on 10 November 2022, a resolution will be put to
shareholders in accordance with its Articles of Association, to consider
whether it should continue its business as presently constituted
("Continuation Resolution"). In the event that the Continuation Resolution did
not pass, the Company would be required to formulate proposals to reorganise,
restructure or wind up. The Company has provided justifications to
shareholders for why it should continue in operation as presently constituted
and the Board has recommended that shareholders vote in favour of this
resolution. Having taking account of the views of the Company's broker and
major shareholders, the Board has no reason to believe that the continuation
vote will not pass.
2.5 Summary of significant accounting policies
The principal accounting policies applied in the preparation of these
Consolidated Financial Statements are set out below.
a) Functional and presentation currency
These Consolidated Financial Statements are presented in Sterling, which is
the functional and presentational currency of the Group and its subsidiary
undertakings. The functional currency of the Group and its subsidiaries is
principally determined by the primary economic environment in which it
operates. The Group did not enter into any transactions in foreign currencies
during the period.
b) Revenue recognition
i) Rental income
Rental income 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. For leases, which contain fixed or minimum uplifts,
the rental income arising from such uplifts is recognised on a straight-line
basis over the lease term.
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.
Lease modifications, such as lease extensions and rent reductions, are
accounted for either as a separate lease or not a separate lease.
A modification will only be treated as a separate lease if it involves the
addition of one or more underlying assets at a price that is commensurate with
the standalone price of the increase in scope. All other modifications are not
treated as a separate lease.
If a modification is a separate lease, a lessee applies the requirements of
IFRS 16 to the newly added asset, due as a result of the modification,
independently of the original lease. The accounting for the original lease
continues unchanged.
If a modification is not a separate lease, the accounting reflects that there
is a linkage between the original lease and the modified lease. The existing
lease liability is remeasured with a corresponding adjustment to the
right-of-use asset on the effective date of the modification.
ii) Service charges and direct recharges
Revenue from service charges is recognised in the accounting period in which
the service is rendered. For certain service contracts, revenue is recognised
based on the actual service provided to the end of the reporting period as a
proportion of the total services to be provided because the customer receives
and uses the benefits simultaneously.
iii) Deferred income
Deferred income is rental income received in respect of future accounting
periods.
(iv) Dilapidation and lease surrender premium
Amounts received from tenants to terminate leases or to compensate for
dilapidations are recognised in the Consolidated Statement of Comprehensive
income when the right to receive them arises.
c) 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 which is
significantly the same as the contracted interest.
d) 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 replacement of that part will prolong or improve the life of
the asset.
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 external valuer. Any valuation of
investment properties by the external 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 yield applicable to those cash flows.
For the purposes of these Consolidated 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 profit
or loss in the year of retirement or disposal.
e) Cash and cash equivalents
Cash and short-term deposits in the Consolidated Statement of Financial
Position comprise cash at bank and short-term deposits with an original
maturity of three months or less.
f) Receivables and prepayments
Rent and other receivables are initially recognised at fair value and
subsequently at amortised cost. Impairment provisions are recognised based on
the processed as described in note 2.2. Any adjustment is recognised in profit
or loss as an impairment gain or loss.
g) Other payables and accrued expenses
Other payables and accrued expenses are initially recognised at fair value and
subsequently held at amortised cost.
h) 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.
i) Provisions
A provision is recognised in the Consolidated Statement of Financial Position
when the Group 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.
j) Dividend payable to shareholders
Equity dividends are recognised when they become legally payable.
k) 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.
l) Lease obligations
Lease obligations relate to the head rent of investment property and are
capitalised at the lease commencement, at the lower of fair value of the
property and present value of the minimum lease payments and held as a
liability within the Consolidated Statement of Financial Position. The lease
payments are discounted using the interest rate implicit in the lease. Where
the Group is exposed to potential future increases in variable lease payments
based on an index or rate, these are not included in the lease liability until
they take effect. Lease payments are allocated between principal and finance
cost. The finance cost is charged to profit or loss over the lease period so
as to produce a constant periodic rate of interest on the remaining balance of
the liability for each period.
m) Taxes
Corporation tax is recognised in profit or loss except to the extent that it
relates to items recognised directly in equity, in which case it is recognised
in equity.
As a REIT, the Group 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 year, using tax rates
applicable in the year.
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.
n) Non-current assets held for sale
Non-current assets are classified as assets held for sale when their
carrying amount is to be recovered principally through a sale transaction and
a sale is considered highly probable. Investment properties classified as such
are measured at fair value.
o) European Public Real Estate Association
The Group has adopted the 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 ended 30 June 2022, audited EPS and NAV calculations
under EPRA's methodology are included in note 8 and further unaudited measures
are uded following the financial statements.
p) Capital and reserves
Share capital
Share capital is the nominal amount of the Company's ordinary shares in issue,
and is non-distributable.
Capital reserve
The capital reserve is a distributable reserve and represents the cancelled
share premium less dividends paid from this reserve.
Retained earnings
Retained earnings represent the profits of the Group less dividends paid from
revenue profits to date.
2.6 Fair value measurement
The Group measures financial and non-financial assets such as investment
properties at fair value at each reporting date.
A number of the Group's accounting policies and disclosures require the
determination of fair value, for both financial and non-financial assets and
liabilities. Fair value is defined in IFRS 13 Fair Value Measurement as the
price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date.
Fair values have been determined for measurement and/or disclosure purposes
based on methods described below. Where applicable, further information about
the assumptions made in determining fair values is disclosed in the notes
specific to that asset or liability.
The Group uses valuation techniques that are appropriate in the circumstances
and for which sufficient data are available to measure fair value, maximising
the use of relevant observable inputs and minimising the use of unobservable
inputs significant to fair value measurement as a whole:
Fair value hierarchy:
Level 1: Quoted prices (unadjusted) in active markets for identical assets
or liabilities.
Level 2: Inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly (i.e. as prices) or
indirectly (i.e. derived from prices).
Level 3: Inputs for the asset or liability that are not based on observable
market data (unobservable inputs).
For assets and liabilities that are recognised in the financial statements at
fair value on a recurring basis, the Group determines whether transfers have
occurred between levels in the hierarchy by re-assessing categorisation (based
on the lowest level input that is significant to the fair value measurement as
a whole) at the end of each reporting period.
There were no transfers between any of the levels during the year.
Investment property
The valuation of investment property by valuers engaged by the Group who are
independently appointed and have the relevant professional qualifications and
with recent experience in the location and category of the investment property
being valued. Further information in relation to the valuers is provided in
note 10.
Property valuations are inherently subjective as they are made on the basis of
assumptions made by the valuer which may not prove to be accurate. For these
reasons, and consistent with EPRA's guidance, we have classified the
valuations of our property portfolio as Level 3 as defined by IFRS 13. The
inputs to the valuations are defined as 'unobservable' by IFRS 13 and these
are analysed in note 10.
3. Rental and other income
2022 2021
£'000 £'000
Gross rental income 7,036 6,724
Spreading of minimum contracted future rent-indexation 541 571
Spreading of tenant incentives - rent free periods (73) (85)
Other property income 1 -
Gross rental income (adjusted) 7,505 7,210
Service charges and direct recharges (see note 4) 396 199
Total rental and other income 7,901 7,409
All rental, service charges, direct recharges and other income are derived
from the United Kingdom.
4. Operating Expenses
2022 2021
£'000 £'000
Property operating expenses 136 448
Service charges and direct recharges (see note 3) 396 199
Reversal of provision for impairment of trade receivables (202) -
Property operating expenses 330 647
Investment adviser fee 368 269
Auditor's remuneration 63 77
Operating costs * 588 442
Directors' remuneration (note 5) 82 88
Other operating expenses 1,101 876
Total operating expenses 1,431 1,523
Total operating expenses (excluding service charges and direct recharges) 1,035 1,324
* Included in the Operating cost is £1,250 of fees paid to Stephanie Eastment
incurred in advance of her appointment as a Director, for due diligence
activities.
2022 2021
£'000 £'000
Audit
Statutory audit of Annual Report and Accounts 53 67
Statutory audit of Subsidiary Accounts 10 10
Total fees due to auditor 63 77
Moore Kingston Smith LLP has not provided any non-audit services to the Group.
5. Directors' remuneration
2022 2021
£'000 £'000
Directors' fees 75 78
Tax and social security 7 10
Total fees 82 88
A summary of the Director's remuneration is set out in the Directors'
Remuneration Report.
The Group had no employees during the year.
6. Finance expenses
2022 2021
£'000 £'000
Interest payable on loan 1,307 1,307
Amortisation of finance costs (note 13) 104 99
Other finance costs 12 15
Total 1,423 1,421
7. Taxation
2022 2021
£'000 £'000
Tax charge comprises:
Analysis of tax charge in the year
Profit before tax 13,166 5,572
Theoretical tax charge at UK corporation tax standard rate of 19.00% 2,502 1,059
(2021: 19.00%)
Effects of tax-exempt items under the REIT regime (2,502) (1,059)
Total - -
The Group maintained its REIT status and as such, no deferred tax asset or
liability has been recognised in the current year.
Factors that may affect future tax charges
Due to the Group's status as a REIT and the intention to continue meeting the
conditions required to retain approval as a REIT in the foreseeable future,
the Group has not provided deferred tax on any capital gains or losses arising
on the revaluation or disposal of investments
8. Earnings per share (EPS) and Net Asset Value (NAV) per share
2022 2021
Earnings per share:
Total comprehensive income (£'000) 13,166 5,572
Weighted average number of shares (number) 80,500,000 80,500,000
Earnings per share (basic and diluted) 16.36p 6.92p
EPRA EPS (£'000):
Total comprehensive income 13,166 5,572
Adjustment to total comprehensive income:
Change in fair value of investment properties (8,023) (682)
Gain on disposal of investment property (96) (425)
EPRA earnings (basic and diluted) (£'000) 5,047 4,465
EPRA EPS (basic and diluted) 6.27p 5.55p
Adjusted EPS:
EPRA earnings (basic and diluted) (£'000) - as above 5,047 4,465
Adjustments (£'000):
Rental income recognised in respect of guaranteed fixed rental uplifts - (541) (571)
Note 3
Rental income recognised in respect of rent free periods - Note 3 73 85
Amortisation of loan arrangement fee - Note 6 104 99
Write-off of rent 4 -
Reversal of provision for impairment of trade receivables (202) -
Adjusted earnings (basic and diluted) (£'000) 4,485 4,078
Adjusted EPS (basic and diluted) * 5.57p 5.07p
* Adjusted EPS is a measure used by the Board to assess the level of the
Group's dividend payments. This metric adjusts EPRA earnings for non-cash
items in arriving at an adjusted EPS as supported by cash flows.
Earnings per share are calculated by dividing profit/(loss) for the year
attributable to ordinary equity holders of the Company by the weighted average
number of Ordinary Shares in issue during the year.
2022 2021
NAV per share:
Net assets (£'000) 77,599 68,893
Ordinary Shares (Number) 80,500,000 80,500,000
NAV per share 96.40p 85.58p
EPRA Net Reinvestment Value (NRV), EPRA Net Tangible Assets (NTA) and EPRA Net
Disposal Value (NDV)
EPRA NRV EPRA NTA and EPRA NDV
£'000 £'000
At 30 June 2022
Net assets value (£'000) 77,599 77,599
Purchasers' cost (£'000) 7,664 -
Break cost on bank borrowings (£'000) (486) (486)
84,777 77,113
Ordinary Shares (Number) 80,500,000 80,500,000
Per share measure 105.31p 95.79p
At 30 June 2021
Net assets value (£'000) 68,893 68,893
Purchasers' cost (£'000) 7,100 -
Break cost on bank borrowings (£'000) (3,467) (3,467)
72,526 65,426
Ordinary Shares (Number) 80,500,000 80,500,000
Per share measure 90.09p 81.27p
9. Dividends paid
Quarter Rate 2022 2021
Ended
£'000 £'000
Dividends in respect of year ended 30 June 2020
4th dividend 30-Jun-20 1.425p - 1,147
Dividends in respect of year ended 30 June 2021
1st dividend 30-Sep-20 1.250p - 1,006
2nd dividend 31-Dec-20 1.000p - 805
3rd dividend 31-Mar-21 1.250p - 1,007
4th dividend 30-Jun-21 1.640p 1,320 -
Dividends in respect of year ended 30 June 2022
1st dividend 30-Sep-21 1.300p 1,047 -
2nd dividend 31-Dec-21 1.300p 1,046 -
3rd dividend 31-Mar-22 1.300p 1,047 -
Total dividends paid 4,460 3,965
4th dividend 30-Jun-20 1.425p - (1,147)
4th dividend 30-Jun-21 1.640p (1,320) 1,320
4th dividend 30-Jun-22 1.600p 1,288 -
Total dividends payable in respect of the year 4,428 4,138
Total dividends payable in respect of the year 5.50p 5.14p
* Dividends declared after the year end are not included in the financial
statements as a liability.
** Dividends paid per Consolidated Statement of Cash Flows amount to
£4,455,000 (2021: 3,949,000), the difference between the amount disclosed
above is due to withholding tax.
10. Investment properties
2022 2021
Freehold Leasehold Total Total
Investment
Investment
properties
properties
£'000 £'000 £'000 £'000
At the beginning of the year 75,772 33,458 109,230 101,910
Acquisition during the year 5,375 - 5,375 6,070
Disposal during the year (5,300) - (5,300) -
Change in value of investment properties 5,133 3,467 8,600 1,250
Valuation provided by Knight Frank LLP 80,980 36,925 117,905 109,230
Adjustment to fair value for minimum rent indexation of lease income (note 11) (3,177) (2,709)
Adjustment for lease obligations 396 505
Total investment properties 115,124 107,026
Change in fair value of investment properties
Change in fair value before adjustments for lease 8,600 1,250
incentives and lease obligations
Movement in lease obligations (109) 34
Adjustment to spreading of contracted future rent (468) (602)
indexation and tenant incentives
8,023 682
During the year, the Group acquired the property known as Volva, Slough (2021:
Droitwich Spa Retail Park) and disposed of the investment property known as
Audi, Huddersfield (2021: Wet n Wild, Royal Quays, North Shields).
The table below shows a reconciliation of the gain recognised on disposal
through the Consolidated Statement of Comprehensive Income and the realised
gain on disposal in the year which includes changes in fair value of the
investment property and minimum rent indexation spreading recognised in
previous periods.
2022 2021
£'000 £'000
Gross proceeds on disposal 5,500 3,204
Selling costs (104) (45)
Net proceeds on disposal 5,396 3,159
Carrying value (5,300) (2,734)
Gain on disposal of investment property 96 425
Valuation of investment properties
Valuation of investment properties 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 Group's investment
properties 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 properties 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 yield applicable to those cash flows.
Sensitivity analysis to significant changes in unobservable inputs within
Level 3 of the fair value hierarchy
The significant unobservable inputs used in the fair value measurement
categorised within Level 3 of the fair value hierarchy of the Group's
portfolios of investment properties are:
1) Estimated Rental Value ('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 yield in isolation would result in a lower/(higher) fair value
measurement.
The significant unobservable inputs used in the fair value measurement,
categorised within Level 3 of the fair value hierarchy of the portfolio of
investment property and investments are:
Class Fair value Valuation technique Significant unobservable inputs Range
£'000
30 June 2022
Investment Properties* 117,905 Income capitalisation ERV £4.00 - £21.96
Equivalent yield
4.87% - 8.70%**
30 June 2021
Investment Properties* 109,230 Income capitalisation ERV £3.86 - £21.96
Equivalent yield
5.17% - 8.46%**
* Valuation per Knight Frank LLP
**Hotels, nurseries, petrol stations, student accommodation & healthcare
are excluded from this range
The estimated fair value would increase if the equivalent yield decreases to
lower end of the range, see sensitivity analysis below.
2022
Change in ERV Change in equivalent yield
£'000 £'000 £'000 £'000
Sensitivity Analysis +10% -10% +10% -10%
Resulting fair value of investment properties 121,583 114,850 111,837 126,023
2021
Change in ERV Change in equivalent yield
£'000 £'000 £'000 £'000
Sensitivity Analysis +10% -10% +10% -10%
Resulting fair value of investment properties 112,222 107,104 103,375 116,769
12. Payables and accrued expenses
2022 2021
£'000 £'000
Deferred income 1,501 1,445
Trade creditors 51 59
Accruals 576 603
Tenant deposit liability (note 11) 118 -
Bank interest payable 258 258
Other creditors 642 676
3,146 3,041
13. Interest bearing loans and borrowings
2022 2021
£'000 £'000
Facility drawn 41,000 41,000
Unamortised finance costs brought forward (484) (583)
Amortisation of finance costs 104 99
At end of year 40,620
40,516
Repayable between 1 and 2 years - -
Repayable between 2 and 5 years 41,000 41,000
Repayable in over 5 years - -
Total at end of the year
41,000 41,000
At 30 June 2022, the Group had utilised all of its £41 million fixed interest
loan facility with Canada Life Investments and was geared at a loan to Gross
Asset Value ('GAV') of 33.7% (2021: 36.3%). The weighted average interest cost
of the Group's facility is 3.19% and the facility is repayable on 20 October
2025.
2022 2021
£'000 £'000
Reconciliation to cash flows from financing activities
At beginning of the year 40,516 40,417
Non-cash changes
Amortisation of loan issue costs 104 99
Total at end of the year 40,620 40,516
14. Lease obligations
At the commencement date, the lease liability is measured at the present value
of the lease payments that are not paid on that date.
The following table analyses the minimum lease payments due under
non-cancellable leases:
2022 2021
£'000 £'000
Within one year 50 50
After one year but not more than five years 150 150
More than five years 513 563
Total undiscounted lease liabilities 713 763
Less: Future finance charge on lease obligations (378) (390)
Present value of lease liabilities 335 373
Lease liabilities included in the Consolidated Statement of Financial Position
Current 36 38
Non-current 299 335
335 373
15. Commitments
15.1. Operating lease commitments - as lessor
The Group has 19 commercial properties with 33 units on its investment
property portfolio. These non-cancellable leases have a remaining term of
between 7 months and 112 years (2021: 6 months to 113 years), excluding ground
leases.
Future minimum rentals receivable under non-cancellable operating leases as at
30 June 2022 are as follows:
2022 2021
£'000 £'000
Within one year 7,071 6,957
After one year, but not more than two years 7,015 7,135
After two years, but not more than three years 6,754 7,094
After three years, but not more than four years 7,011 7,191
After four years, but not more than five years 7,045 7,002
After five years, but not more than ten years 29,896 29,898
After ten years, but not more than fifteen years 25,935 27,201
More than fifteen years 55,472 58,889
146,199 151,367
During the year ended 30 June 2022 there were no material contingent rents
recognised as income (2021: £nil).
15.2. Capital commitments
There were no capital commitments at 30 June 2022 (2021: nil).
15.3. Financial commitments
In the 2021 annual report, it was disclosed that the Company is involved in
litigation against two parties to recover £1,056,000 of costs. The costs were
incurred for work in the period September to December 2020 to replace
defective cladding elements uncovered in the external walls of the top floors
and rear lift core of the Travelodge Hotel, Swindon. The defective cladding
was installed when the property was extended in 2007 and the Company's claims
are against the architect and cladding sub-contractor involved. Subsequent to
the year end, the Board engaged in mediation with both parties and agreed a
full and final settlement. (See also note 21b.) Settlement is due to be
received after the signing of this annual report. Consequent to that
settlement being received, the Group will have no financial commitments other
than those arising from its normal business operations.
There are no other commitments other than those shown above at the year-end
(2021: same).
16. Investments in subsidiaries
The Company has two wholly owned subsidiaries as disclosed below:
Name and company number Country of registration and incorporation Date of incorporation Principal activity Ordinary Shares held
Alternative Income REIT Holdco Limited (Company number 11052186) England and 7 Nov 2017 Real Estate Company 73,158,502*
Wales
Alternative Income Limited (Company number 10754641) England and 4 May 2017 Real Estate Company 73,158,501*
Wales
* Ordinary shares of £1.00 each.
Alternative Income REIT Plc as at 30 June 2022 owns 100% of Alternative Income
REIT Holdco Limited.
Alternative Income REIT Holdco Limited holds 100% of Alternative Income
Limited.
Both Alternative Income REIT Holdco Limited and Alternative Income Limited are
registered at 1 King William Street, London, United Kingdom, EC4N 7AF.
17. Issued share capital
2022 2021
Number of Number of
Ordinary Shares
Ordinary Shares
£'000 £'000
Ordinary Shares of £0.01 each issued
And fully paid
At the beginning and end of the year 805 80,500,000 805 80,500,000
18. Financial risk management and policies
The Group's activities expose it to a variety of financial risks: market risk,
credit risk, liquidity risk and further risks inherent to investing in
investment property. The Group's objective in managing risk is the creation
and protection of shareholder value. Risk is inherent in the Group'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 Group in the management of its portfolio follows.
18.1 Market price risk
Market price risk is the risk that future values of investments in property
will fluctuate due to changes in market prices. To manage market price risk,
the Group diversifies its portfolio geographically in the UK 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 Board of Directors and the Investment Adviser meet regularly as
required and are responsible for recommending investment purchases or sales to
the AIFM which makes the ultimate decision. In order to monitor property
valuation fluctuations, the Investment Adviser 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.
18.2 Real estate risk
Property investments are illiquid asset 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.
There can be no certainty regarding the future performance of any of the
properties acquired for the Group. The value of any property can go down as
well as up.
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 Group.
These aspects, and their effect on the Group from a going concern perspective
are discussed in more detail in the Going Concern policy note.
18.3 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 Group by failing to
meet a commitment it has entered into with the Group.
It is the Group's policy to enter into financial instruments with reputable
counterparties. All cash deposits are placed with an approved counterparty,
Barclays International.
In respect of property investments, in the event of a default by a tenant, the
Group will suffer a rental shortfall and additional costs concerning
re-letting the property. The Investment Adviser monitors tenant arrears in
order to anticipate and minimise the impact of defaults by occupational
tenants.
The table below shows the Group's exposure to credit risk:
2022 2021
£'000 £'000
Debtors 528 909
Cash and cash equivalents 2,542 2,115
Total 3,070 3,024
18.4 Liquidity risk
Liquidity risk arises from the Group's management of working capital and the
finance charges and principal repayments on its borrowings. It is the risk the
Group will encounter difficulty in meeting its financial obligations as they
fall due as the majority of the Group's assets are investment properties and
therefore not readily realisable. The Group's objective is to ensure it has
sufficient available funds for its operations and to fund its capital
expenditure. This is achieved by quarterly review/ monitoring of forecast and
actual cash flows by the Investment Adviser and Board of Directors.
The below table summarises the maturity profile of the Group's financial
liabilities based on contractual undiscounted payments.
2022 On demand £'000 < 3 months £'000 3-12 months £'000 1-5 years £'000 > 5 years £'000 Total £'000
Interest bearing loans and borrowings - - - 41,000 - 41,000
Interest payable - 327 980 3,266 - 4,573
Payables and accrued expenses 134 863 - - - 997
Lease obligations - 13 38 200 463 714
Total 134 1,203 1,018 44,466 463 47,284
2021 On demand £'000 < 3 months £'000 3-12 months £'000 1-5 years £'000 > 5 years £'000 Total £'000
Interest bearing loans and borrowings - - - 41,000 - 41,000
Interest payable - 327 980 4,573 - 5,880
Payables and accrued expenses 138 884 123 - - 1,145
Lease obligations - 13 37 200 513 763
Total 138 1,224 1,140 45,773 513 48,788
18.5 Fair value of financial instruments
There is no material difference between the carrying amount and fair value of
the Group's financial instruments.
18.6 Interest rate risk
Interest rate risk is the risk that future cash flows of a financial
instrument will fluctuate because of changes in market interest rates. The
Group's exposure to the risk of changes in market interest rates is minimal
because the Group's loan is at a fixed rate of 3.19% (note 13).
19. Capital management
The Group's objectives when managing capital are to safeguard the Group's
ability to continue as a going concern in order to provide returns for
shareholders and to maintain an optimal capital structure to reduce the cost
of capital.
To enhance returns over the medium term, the Group utilises borrowings on a
limited recourse basis for each investment or all or part of the total
portfolio. The Group's policy is to borrow up to a maximum of 40% loan to GAV
(measured at drawdown). Alongside the Group's borrowing policy, the Directors
intend, at all times, to conduct the affairs of the Group so as to enable the
Group to qualify as a REIT for the purposes of Part 12 of the Corporation Tax
Act 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 Group remained
compliant in both this and the prior year.
The monitoring of the Group's level of borrowing is performed primarily using
a Loan to GAV ratio. The Loan to GAV ratio is an alternative performance
measure and its calculation is shown in the notes to the company accounts. The
Group Loan to GAV ratio at the year end was 33.7% (2021: 36.3%).
Breaches in meeting the financial covenants would permit the lender to
immediately call loans and borrowings. During the period, the Group did not
breach any of its loan covenants, nor did it default on any other of its
obligations under its loan agreements.
20. Transactions with related parties
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.
Directors
Directors of the Group are related party. Directors' remuneration is disclosed
in note 5.
Investment Adviser
M7 Real Estate Limited
M7 Real Estate Ltd was appointed as Investment Adviser on 14 May 2020. The
Interim Investment Advisory agreement (amended with Deed of Variation dated 21
February 2021) specifies that there were fees payable up to 30 September 2020.
From 1 October 2020, the annual management fee is calculated at a rate
equivalent of 0.50% per annum of NAV (subject to a minimum fee of £90,000 per
quarter), payable quarterly in advance. During the year ended 30 June 2022,
the Group incurred £367,920 (2021: £269,327) in respect of investment
advisory fees, of which £97,920 was outstanding at 30 June 2022 (2021:
£nil).
21. Events after reporting date
21a. Dividend
On 1 August 2022, the Board approved the interim dividend for the quarter
ended 30 June 2022 of 1.6p, in line with the Group's previously announced
target of 5.5 p.
21b. Swindon Travelodge remediation
As previously reported, work was completed in December 2020 to the Swindon
Travelodge to replace the combustible cladding elements
uncovered on part of the property with non-combustible
replacements and to remediate the fire/smoke stopping. Both
the architect and cladding sub-contractor involved were
being pursued for reimbursement of the costs of
£1,056,000. Subsequent to the year end, the Board engaged in mediation with
both parties and agreed a full and final settlement of £825,000.
As at 30 June 2022
Notes 2022 2021
£'000 £'000
Assets
Non-current Assets
Investments in subsidiary companies 2 73,158 73,158
Investment property 2 2,153 2,067
75,311 75,225
Current Assets
Receivables and prepayments 3 159 208
Cash and cash equivalents 66 535
225 743
Total Assets 75,536 75,968
Current Liabilities
Payables and accrued expenses 4 (13,035) (17,148)
,(13,035) (17,148)
Net Assets 62,501 58,820
Equity
Share capital 6 805 805
Capital reserve 75,417 75,417
Retained earnings (13,721) (17,402)
Total capital and reserves attributable to equity holders of the Company 62,501 58,820
Net Asset Value per share (pence per share) 77.64p 73.07p
As permitted by s408 Companies Act 2006, the Company's profit and loss account
has not been presented in these financial statements.
The Company's profit for the year was £8,140,836 (2021: loss of £596,947).
The financial statements were approved by the Board of Directors on 28
September 2022 and were signed on its behalf by:
Alan Sippetts
Chairman
Company number: 10727886
Company Statement of Changes in Equity
For the year ended 30 June 2022
Share Capital Retained Total
capital reserve* earnings* equity
Notes £'000 £'000 £'000 £'000
For the year ended 30 June 2022
Balance as at 30 June 2021 805 75,417 (17,402) 58,820
Total comprehensive income - - 8,141 8,141
Dividends paid - - (4,460) (4,460)
Balance as at 30 June 2022 805 75,417 (13,721) 62,501
For the year ended 30 June 2021
Balance as at 30 June 2020 805 75,417 (12,840) 63,382
Total comprehensive income - - (597) (597)
Dividends paid - - (3,965) (3,965)
Balance as at 30 June 2021 805 75,417 (17,402) 58,820
* Capital reserve and retained earnings were presented combined in prior
years.
The accompanying notes form an integral part of these financial statements.
Notes to the Company Accounts
for the year ended 30 June 2022
1. Accounting policies
Basis of preparation
These financial statements are prepared and approved by the Directors in
accordance with Financial Reporting Standard 101 Reduced Disclosure Framework
(FRS 101) and in accordance with applicable accounting standards.
As permitted by FRS 101, the Company has taken advantage of the following
disclosures exemptions which are permissible under FRS 101 as the equivalent
disclosures are contained within the Group's consolidated financial
statements.
- a cash flow statement and related notes;
- disclosures in respect of capital management;
- the effects of new but not yet effective IFRSs;
- the disclosures of the remuneration of key management personnel;
- disclosure of related party transactions with other wholly owned members of
the Ultimate Parent;
- the disclosure of financial instruments and other fair value measurements.
The financial statements are presented in Sterling and all values are rounded
to the nearest thousand pounds (£'000), except when otherwise indicated. They
have been prepared on the historical cost basis.
The principal accounting policies adopted in the preparation of the Company's
financial statements are consistent with the Group which are described in note
2.5 of the Consolidated Financial Statements but makes amendments where
necessary in order to comply with the Companies Act 2006 and taking advantage
of the FRS 101 exemptions mentioned above.
New standards effective for the current accounting period do not have a
material impact on the financial statements of the Company.
The accounting policies used are otherwise consistent with those contained in
the Company financial statements for the year ended 30 June 2021.
Going concern
The financial statements have been prepared on a going concern basis.
For an assessment of going concern refer to the accounting policy 2.4 of the
Consolidated Financial Statements.
Investments in subsidiary companies
Investments in subsidiary companies which are all 100% owned by the Company
are included in the statement of financial position at cost less provision for
impairment.
Impairment of non-financial assets
The carrying amounts of the Company's investment in subsidiaries are reviewed
at each reporting date to determine whether there is any indication of
impairment. If any such indication exists, then the asset's recoverable amount
is estimated. The recoverable amount of an asset is the greater of its value
in use and its fair value less costs to sell.
An impairment loss is recognised if the carrying amount of an asset exceeds
its estimated recoverable amount. Impairment losses are recognised in profit
or loss.
Impairment losses recognised in prior periods are assessed at each reporting
date for any indications that the loss has decreased or no longer exists. An
impairment loss is reversed if there has been a change in the estimates used
to determine the recoverable amount. An impairment loss is reversed only to
the extent that the asset's carrying amount does not exceed the carrying
amount that would have been determined, net of depreciation or amortisation,
if no impairment loss had been recognised.
Deferred income
Deferred income is rental income received in respect of future accounting
periods.
2. Investments
2a. Investments in Subsidiary Companies
2022 2021
£'000 £'000
At the beginning and end of the year 73,158 73,158
A list of subsidiary undertakings at 30 June 2022 is included on note 16 of
the Consolidated Financial Statements.
The Directors have considered the recoverability of the investment in
subsidiary company by comparing the carrying value of the investment to the
net asset value of the subsidiary. The directors consider the net asset value
of the subsidiary to be a reliable proxy to the recoverable amount as the
properties held by the Company are carried at fair value. The net asset value
of the subsidiary company exceed the carrying amount of the investment in
subsidiary and the Directors have concluded that no impairment is necessary.
2b. Investment property
2022 2021
£'000 £'000
At the beginning of the year 2,067 2,011
Revaluation of investment property 100 70
Adjustment to fair value for minimum rent indexation of lease income (14) (14)
2,153 2,067
3. Receivables and prepayments
2022 2021
£'000 £'000
Receivables
Rent debtor 32 4
Spreading of contracted future - rent indexation 40 33
VAT receivable 59 57
131 94
Prepayments
Other prepayments 28 114
159 208
4. Payables and accrued expenses
2022 2021
£'000 £'000
Due to subsidiaries 12,427 16,759
Deferred income 30 30
Trade creditors 35 26
Accruals 459 254
Other creditors 84 79
13,035 17,148
Amounts due to subsidiaries are unsecured, interest free and repayable on
demand.
5. Dividends paid and payable
Details of dividends paid and payable in respect of the year are set out in
note 9 of the Consolidated Financial Statements.
6. Issued share capital
2022 2021
Number of Number of
Ordinary Shares
Ordinary Shares
£'000 £'000
Ordinary Shares of £0.01 each
issued and fully paid
At the beginning and end of the year 805 80,500,000 805 80,500,000
7. Contingent liabilities, capital commitments and related party transactions
As at 30 June 2022 the Company had £nil contingent liabilities or capital
commitments (2021: £nil).
Related party transactions are the same for the Company as for the Group. For
details refer to note 20 of the Consolidated Financial Statements.
8. Events after reporting date
Events after the reporting date are the same as those disclosed in note 21 of
the Consolidated Financial Statements.
EPRA Yield calculations 2022 2021
£'000 £'000
Investment properties wholly owned:
- by Company 2,200 2,100
- by Alternative Income Limited 115,705 107,130
Total - note 10 117,905 109,230
Allowance for estimated purchasers' costs 7,665 7,100
Gross up completed property portfolio valuation b 125,570 116,330
Annualised cash passing rental income 7,217 6,965
Annualised property outgoings (55) (55)
Annualised net rents a 7,162 6,910
Add: notional rent expiration of rent-free periods or other lease incentives 893 1,171
Topped-up net annualised rent c 8,055 8,081
EPRA NIY* a/b 5.70% 5.94%
EPRA "topped-up" NIY c/b 6.41% 6.95%
* The NIY calculation is the same calculation as that for EPRA NIY.
EPRA Cost Ratios 2022 2021
£'000 £'000
Include:
EPRA Costs (including direct vacancy costs) - note 4 a 1,035 1,324
Direct vacancy costs - -
EPRA Costs (excluding direct vacancy costs) b 1,035 1,324
Gross rental income (adjusted) - note 3 c 7,505 7,210
EPRA Cost Ratio (including direct vacancy costs) a/c 13.79% 18.36%
EPRA Cost Ratio (excluding direct vacancy costs) b/c 13.79% 18.36%
EPRA Vacancy rate 2022 2021
£'000 £'000
Annualised potential rental value of vacant premises a - -
Annualised potential rental value for the completed property portfolio b 6,987 6,927
EPRA Vacancy rate a/b 0.00% 0.00%
Glossary
Alternative Investment Fund Manager or AIFM or Investment Manager Langham Hall Fund Management LLP.
Company Alternative Income REIT plc.
Contracted rent The annualised rent adjusting for the inclusion of rent subject to rent-free
periods.
Earnings Per Share ('EPS') Profit for the period attributable to equity shareholders divided by the
weighted average number of Ordinary Shares in issue during the period.
EPRA European Public Real Estate Association, the industry body representing listed
companies in the real estate sector.
Equivalent Yield The internal rate of return of the cash flow from the property, assuming a
rise to Estimated Rental Value at the next review or lease expiry. No future
growth is allowed for.
Estimated Rental Value ('ERV') The external valuer's opinion as to the open market rent which, on the date of
the valuation, could reasonably be expected to be obtained on a new letting or
rent review of a property.
External Valuer An independent external valuer of a property. The Group's External Valuer is
Knight Frank LLP.
Fair value The estimated amount for which a property should exchange on the valuation
date between a willing buyer and a willing seller in an arm's length
transaction after proper marketing and where parties had each acted
knowledgeably, prudently and without compulsion.
Fair value movement An accounting adjustment to change the book value of an asset or liability to
its fair value.
FCA The Financial Conduct Authority.
Gross Asset Value ('GAV') The aggregate value of the total assets of the Group as determined in
accordance with IFRS.
IASB International Accounting Standards Board.
IFRS International financial reporting standards. On 31 December 2020 EU-adopted
IFRS was brought into UK law and became UK-adopted international accounting
standards, with future changes to IFRS being subject to endorsement by the UK
Endorsement Board.
Investment Adviser M7 Real Estate Limited.
IPO The admission to trading on the London Stock Exchange's Main Market of the
share capital of the Company and admission of Ordinary Shares to the premium
listing segment of the Official List on 6 June 2017.
Lease incentives Incentives offered to occupiers to enter into a lease. Typically, this will be
an initial rent-free period, or a cash contribution to fit-out. Under
accounting rules, the value of the lease incentive is amortised through the
Consolidated Statement of Comprehensive Income on a straight-line basis until
the lease expiry.
Loan to Value ('LTV') The value of loans and borrowings utilised (excluding amounts held as
restricted cash and before adjustments for issue costs) expressed as a
percentage of the combined valuation of the property portfolio (as provided by
the valuer) and the fair value of other investments.
Net Asset Value ('NAV') Net Asset Value is the equity attributable to shareholders calculated under
IFRS.
Net Asset Value per share Equity shareholders' funds divided by the number of Ordinary Shares in issue.
Net equivalent yield Calculated by the Group's External Valuers, net equivalent yield is the
internal rate of return from an investment property, based on the gross
outlays for the purchase of a property (including purchase costs), reflecting
reversions to current market rent and items as voids and non-recoverable
expenditure but ignoring future changes in capital value. The calculation
assumes rent is received annually in arrears.
Net Initial Yield ('NIY') The initial net rental income from a property at the date of purchase,
expressed as a percentage of the gross purchase price including the costs of
purchase.
Net rental income Rental income receivable in the period after payment of ground rents and net
property outgoings.
Ordinary Shares The main type of equity capital issued by conventional Investment Companies.
Shareholders are entitled to their share of both income, in the form of
dividends paid by the Company, and any capital growth.
Passing rent The gross rent, less any ground rent payable under head leases.
REIT A Real Estate Investment Trust. A company which complies with Part 12 of the
Corporation Tax Act 2010. Subject to the continuing relevant UK REIT criteria
being met, the profits from the property business of a REIT, arising from both
income and capital gains, are exempt from corporation tax.
Reversion Increase in rent estimated by the Company's External Valuers, where the
passing rent is below the ERV.
Share price The value of a share at a point in time as quoted on a stock exchange. The
Company's Ordinary Shares are quoted on the Main Market of the London Stock
Exchange.
Weighted Average Unexpired Lease Term ('WAULT') The average lease term remaining for first break, or expiry, across the
portfolio weighted by contracted rental income (including rent-frees).
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 0370 707 1874 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 80,500,000
SEDOL Number BDVK708
ISIN Number GB00BDVK7088
Ticker/TIDM AIRE
Share Prices
The Company's Ordinary Shares are traded on the Main Market of the London
Stock Exchange.
Frequency of NAV publication
The Group's NAV is released to the London Stock Exchange on a quarterly basis
and is published on the Company's website www.alternativeincomereit.com
(http://www.alternativeincomereit.com) .
Annual and Interim Reports
Copies of the Annual and Half-Yearly Reports are available from the Group's
website.
Financial Calendar 2022
30 June 2022 Year end
September 2022 Announcement of annual results
November 2022 Annual General Meeting
31 December 2022 Half year end
March 2023 Announcement of interim results
Shareholder Information
Directors
Alan Sippetts (Independent non-executive Chairman)
Stephanie Eastment (Independent non-executive Director)
Adam C Smith (Non-executive Director)
Company Website
https://www.alternativeincomereit.com/ (http://www.aewukllreit.com)
Registered Office
1 King William Street
London
EC4N 7AF
Company Secretary
Hanway Advisory Limited
1 King William Street
London
EC4N 7AF
AIFM
Langham Hall Fund Management LLP
1 Fleet Place
8(th) Floor
London
EC4M 7RA
Depositary
Langham Hall UK Depositary LLP
8th Floor
1 Fleet Place
London
EC4M 7RA
Legal Adviser to the Company
Travers Smith LLP
10 Snow Hill
London
EC1A 2AL
Investment Adviser and Administrator
M7 Real Estate Limited
3(rd) Floor
The Monument Building
11 Monument Street
London
EC3R 8AF
Property Manager
Mason Owen and Partners Limited
7(th) Floor
20 Chapel Street
Liverpool
L3 9AG
Valuer
Knight Frank LLP
55 Baker Street
London
W1U 8AN
Consultant Portfolio Manager
King Capital Consulting Limited
140a Tachbrook Street
London
SW1V 2NE
Registrar
Computershare Investor Services PLC
The Pavilions
Bridgwater Road
Bristol
BS13 8AE
Auditor
Moore Kingston Smith LLP
9 Appold Street
London
EC2A 2AP
Corporate Broker
Panmure Gordon (UK) Limited
One New Change
London
EC4M 9AF
Communications Adviser
H/Advisors Maitland
3 Pancras Square
London
N1C 4AG
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