REG - Regional REIT Ltd - Final Results
29/03/2022 07:00
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RNS Number : 3062G Regional REIT Limited 29 March 2022
29 March 2022
Regional REIT Limited
("Regional REIT", the "Group" or the "Company")
2021 Full Year Results
Portfolio growth and dividend drives shareholder value
Regional REIT (LSE: RGL), the regional real estate investment specialist
focused on building a geographically diverse portfolio of income producing
regional UK core and core plus office assets, today announces its full year
results for the year ended 31 December 2021.
Financial highlights:
A strong performance and significant increase in both portfolio valuation and
rent roll, providing shareholders with an attractive yield
· Significant portfolio value increase of 23.7% to £906.1m (2020:
£732.4m), following the £236m portfolio acquisition August 2021
· Valuation per share remains resilient: IFRS NAV per share of 97.4p
(2020: 97.5p); EPRA NTA per share of 97.2p (2020: 98.6p)
· EPRA total return of 41.2% since IPO in November 2015; representing
5.8% annualised returns for shareholders
· Total rent collection or within terms for 2021 was 99.2%* of rent
due, improved against the 95.9% of rent collected for the equivalent period in
2020
· Rent roll increased by 12.3% to £72.1m (2020: £64.2m)
· EPRA EPS of 6.6pps (2020: 6.5pps); IFRS EPS 6.3pps (2020: loss
7.2pps)
· Net initial yield was 5.6% (2020: 6.9%)
· 2021 dividend, of 6.50pps (2020: 6.40pps), fully covered by EPRA
earnings
· Group's cost of debt remained the same at 3.3% (2020: 3.3%)
· Net LTV of 42.4% (2020: 40.8%)
· Weighted average debt duration remains robust at 5.5 years (2020: 6.4
years)
*As at 18 March 2022, rent collections to 31 December 2021 amounted to 99.2%;
actual rent collected 97.9%, monthly rents 0.2% and deals agreed of 1.1%.
Operational highlights:
A growing portfolio of geographically diversified assets - generating
attractive income and a substantial yield throughout a challenging year
· Rental income generated from a large spread of tenants and industries
across a growing and geographically diversified portfolio of 168 properties
(2020: 153), 1,511 units (2020: 1,245) and 1,077 occupiers (2020: 898)
· The Asset Manager continued to deliver on exiting all industrial and
retail holdings to focus entirely on the core regional offices which the Asset
Manager believes will provide the best return for shareholders over the coming
years.
· The Group made disposals amounting to £76.9m (net of costs) during
2021. The proceeds from these disposals were promptly recycled into acquiring
higher yielding properties
· A significant acquisition was completed in August 2021, when the
Group acquired a £236.0m (before costs) portfolio comprising of predominately
office assets, in exchange for the issuance of 84,230,000 of the Company's
shares, £76.7m of existing cash resources, and additional borrowings of
£76.2m. The acquired portfolio further de-risked the Company's offering
increasing diversification by geography, occupier and type of income streams
· At the period end, 89.8% (2020: 83.5%) of the portfolio by market
value was offices and 5.1% (2020: 11.1%) was industrial. The balance was made
up of retail 3.7% (2020: 4.1%) and other, 1.4% (2020: 1.3%)
· Portfolio valuation split by region was: England 75.7% (2020: 78.3%),
Scotland 19.0% (2020: 17.3%) and the balance of 5.3% was in Wales (2020:
4.4%). In England, the largest regions were the South East, Midlands and the
North West
· EPRA Occupancy (by ERV) was 81.8% (2020: 89.4%) as expected. EPRA
Occupancy has been impacted by the £236.0m (before costs) portfolio
acquisition made in Q3 2021. Asset management plans are in place to improve
occupancy
· Completed 55 new lettings in 2021, totalling 194,716 sq. ft., which
when fully occupied will provide a gross rental income of c. £2.5m
Post period end
· Post 31 December 2021, the Company has disposed of separately: eight
non-core properties for a total consideration of £33.5m, at a 1.3% premium to
the 31 December 2021 valuation, with a net initial yield of 5.1% (6.3%
excluding vacant properties)
· Good momentum through active asset management, securing £0.7m of
lettings across nine new lease agreements
· On 24 February 2022, the Company declared the Q4 2021 dividend of
1.70pps, which will be paid to shareholders on 8 April 2022
Stephen Inglis, CEO of London and Scottish Property Investment Management, the
Asset Manager, commented:
"We are delighted to report that the Company performed well in 2021, despite
the underlying difficulties in the office sector caused by COVID-19 during the
reporting period. Our track record of distributing a quarterly dividend to
shareholders since IPO remains uninterrupted, achieved through a defensive and
geographically diversified portfolio of assets, which is poised to benefit
from the UK's return to the office in 2022.
2021 was an active year for us, as we undertook substantial transactional
activity in line with our strategy to focus the portfolio exclusively on the
regional office sector and exit all other areas of commercial property.
Additionally, the portfolio's valuation has increased considerably during
2021, owing primarily to the significant acquisition made in August, which
included 31 high quality assets for £236m.
Our performance has been maintained primarily through the strength of our
occupier base and our strong relationships with those tenants, where we have
received 99.2% of rents due for the year, and our intensive asset management
initiatives, helping us realise additional value in the portfolio.
As we look forward, we are confident in the Company's prospects of maximising
shareholder value through the strategic repositioning of the portfolio in high
quality regional office assets, while continuing to deliver a significant
yield."
Forthcoming Events
25 May 2022 May 2022 Trading Update and Outlook Announcement
Q1 2022 Dividend Declaration Announcement
Annual General Meeting
15 September 2022 2022 Interim Results Announcements
10 November 2022 Q3 2022 Trading Update
Note: All dates are provisional and subject to change.
- ENDS -
Enquiries:
Regional REIT Limited
Toscafund Asset Management Tel: +44 (0) 20 7845 6100
Investment Manager to the Group
Adam Dickinson, Investor Relations, Regional REIT Limited
London & Scottish Property Investment Management Tel: +44 (0) 141 248 4155
Asset Manager to the Group
Stephen Inglis
Buchanan Communications Tel: +44 (0) 20 7466 5000
Financial PR regional@buchanan.uk.com
Charles Ryland, Henry Wilson, George Beale
About Regional REIT
Regional REIT Limited ("Regional REIT" or the "Company") and its
subsidiaries (the "Group") is a United Kingdom ("UK") based real estate
investment trust that launched in November 2015. It is managed
by London & Scottish Property Investment Management Limited, the Asset
Manager, and Toscafund Asset Management LLP, the Investment Manager.
Regional REIT's commercial property portfolio is comprised wholly of income
producing UK assets and comprises, predominantly of offices located in the
regional centres outside of the M25 motorway. The portfolio is geographically
diversified, with 168 properties, 1,077 occupiers as at 31 December 2021, with
a valuation of c.£906.1m.
Regional REIT pursues its investment objective by investing in, actively
managing and disposing of regional core and core plus property assets. It aims
to deliver an attractive total return to its Shareholders, targeting greater
than 10% per annum, with a strong focus on income supported by additional
capital growth prospects.
The Company's shares were admitted to the Official List of
the UK's Financial Conduct Authority and to trading on the London Stock
Exchange on 6 November 2015. For more information, please visit the Group's
website at www.regionalreit.com (http://www.regionalreit.com/) .
Cautionary Statement
This document has been prepared solely to provide additional information to
Shareholders to assess the Group's performance in relation to its operations
and growth potential. The document should not be relied upon by any other
party or for any other reason. Any forward looking statements made in this
document are done so by the Directors in good faith based on the information
available to them up to the time of their approval of this document. However,
such statements should be treated with caution due to the inherent
uncertainties, including both economic and business risk factors, underlying
any such forward-looking information.
ESMA Legal Entity Identifier ("LEI"): 549300D8G4NKLRIKBX73
Financial Highlights
Year ending 31 December 2021
Income focused - opportunistic buying and strategic selling, coupled with
intensive asset management, continues to secure long-term income
Portfolio Valuation £906.1m (2020: £732.4m)
IFRS NAV per Share 97.4p (2020: 97.5p)
EPRA* NTA per Share 97.2p (2020: 98.6p)
6.6p (2020: 6.5p)
EPRA earnings per Share
Dividend per Share 6.5p (2020: 6.4p)
Net Loan to Value Ratio** 42.4% (2020: 40.8%)
Weighted Average Cost of Debt** 3.3% (2020: 3.3%)
Weighted Average Debt Duration** 5.5 yrs (2020: 6.4yrs)
* The European Public Real Estate Association (EPRA)
** Alternative Performance Measures. Details are provided in the full Annual
Report.
The European Public Real Estate Association
The EPRA's mission is to promote, develop and represent the European public
real estate sector. As an EPRA member, we fully support the EPRA Best
Practices Recommendations. Specific EPRA metrics can be found in the Company's
financial and operational highlights, with further disclosures and supporting
calculations can be found within the full Annual Report.
Operational Highlights
Year ending 31 December 2021
Deliberately diversified and strengthened portfolio by location and tenant -
regions primed for growth
Properties 168
Units 1,511
Occupiers 1,077
Rent Roll £72.1m
Portfolio by region and sector (by value)
England & Wales 81.0%
Office 89.8%
Property acquisitions (before costs) £236.0m
Number of properties 31
Property disposal proceeds (net of costs) £76.9m
Number of properties 16
EPRA Occupancy by ERV* 81.8%
WAULT to expiry 4.8 yrs
WAULT to first break 3.0 yrs
* Alternative Performance Measures. Details are provided in the full Annual
Report.
Performance Highlights
Year ending 31 December 2021
The high dividend distributions are a major component of the total return
Dividends declared per Share: Pence
2021 6.50
2020 6.40
2019 8.25
2018 8.05
2017 7.85
2016 7.65
2015 1.00
EPRA
EPRA Total Return attributable to Shareholders since Admission^ 41.2%
EPRA Annual Total Return attributable to Shareholders 5.8%
^Admission: 6 November 2015
Member of FTSE All-Share Index since March 2016
Member of FTSE EPRA NAREIT UK Index since June 2016
Total EPRA Return (from IPO)
(EPRA NTA and dividend declared)
Pence per share
IPO Nov 2015 100
Dec 2015 107.8
Dec 2016 113.2
Dec 2017 119.9
Dec 2018 137.5
Dec 2019 142.9
Dec 2020 136.3
Dec 2021 141.2
Chairman's Statement
"The Company is in a strong position to create significant long-term value
with a high dividend distribution."
Kevin McGrath, Chairman
Overview
Our progress this year reflects the growing maturity and strength of Regional
REIT. The transition to being a pure regional office specialist gained
substantial momentum in the year with the acquisition of a £236.0million
(before costs) portfolio of predominately office assets from Squarestone
Growth LLP. Overall, the Company continued to perform well during 2021,
despite the challenging environment.
We continued to execute our successful strategy of having a large number of
occupiers operating across a range of industries in properties located in the
growth regions outside the M25 motorway. Driving this strategy forward has
been in no small part due to our strong working relationships and
understanding of our occupiers' needs and requirements. This has ensured
continued robust rent collections throughout the year. Currently, rent
collection for 2021 amounted to 99.2%* (2020: equivalent period 95.9%). In
addition, our exceptional network of contacts continues to provide a pipeline
of asset acquisition and disposal opportunities to create long-term value.
Whilst 2021 was a challenging year due to the myriad of restrictions and
guidance issued by the respective United Kingdom Government bodies, our strong
rent collection resulted in EPRA diluted earnings of 6.6 pence per share
("pps") (2020: 6.5pps). IFRS diluted earnings per share were 6.3pps (2020:
loss per share of 7.2pps). The dividend was fully covered by EPRA earnings.
During the year, the overall value of the portfolio increased by 23.7% to
£906.1 million from £732.4 million as at 31 December 2020, reflecting the
acquisition of the Squarestone Growth LLP office portfolio, positioning the
REIT for further long term asset growth. The Company made disposals amounting
to £76.9 million (net of costs). As usual the proceeds from these disposals
have been promptly recycled into acquiring higher yielding properties. The
Squarestone Growth LLP acquisition was completed in August, when the Group
acquired a £236.0 million (before costs) portfolio comprising of
predominately office assets, in exchange for the issuance of 84,230,000 of the
Company's shares, £76.7 million of existing cash resources, and additional
borrowings of £76.2 million. The acquired portfolio increased diversification
of the Company's portfolio by geography, occupier and the standard industrial
classification type of income streams, and it aligns well with the expertise,
experience and unique strengths of the Asset Manager. While generating an
attractive yield, it also offers a multitude of longer-term asset management
opportunities.
* As at 18 March 2022, rent collections to 31 December 2021 amounted to 99.2%;
actual rent collected 97.9%, monthly rents 0.2% and deals agreed of 1.1%.
** Alternative Performance Measures. Details are provided in the full Annual
Report.
During the year, our rolling capital expenditure programme amounted to £6.8
million (2020: £8.8 million). Our priorities throughout the year were to
maintain occupancy levels, provide safe and vibrant spaces in which our
occupiers could thrive and grow and provide long-term capital value growth for
our Shareholders.
Financial Resources
The Company continues to be in a financially strong position with an EPRA NTA
of £501.4 million (2020: £425.6 million) and a cash balance of £56.1
million as at 31 December 2021 (2020: £67.4 million), of which £49.9 million
is unrestricted (2020: £55.0 million).
One of the Company's key achievements has been its defensive debt positioning.
The simple and flexible debt profile with strong lender relationships
continued to ensure that the Company was well positioned for any further
economic turbulence. These attributes remain evident going forward with no
requirement to refinance until 2024.
Following the £236.0 million (before costs) portfolio acquisition in August
2021, the net borrowings as at 31 December 2021 amounted to 42.4%. A programme
of asset management initiatives is in train to ensure the net borrowing
reverts to our long-term target of c. 40%. Our debt facilities have sufficient
headroom against their respective covenants, and the Company is in a robust
position to withstand any future economic uncertainty.
Market Environment
Investment in the UK commercial property market reached £57.0 billion in
2021, according to research by Lambert Smith Hampton ("LSH")(1), 6.1% above
the five-year average, 40.1% higher than the volume recorded in 2020, and
15.4% above pre-COVID-19 levels in 2019. Investor sentiment remained positive
in the final quarter of 2021, despite concerns surrounding Omicron, and the
quarterly investment was £17.3 billion, the highest level recorded since Q2
2015.
Savills research highlights that investor sentiment in the regional office
market has improved throughout 2021(2). Regional office investment totalled
£7.2 billion in 2021, 34.8% higher than 2020 figures, and marginally above
the five-year average(3). Investment in office parks in 2021 reached £2.8
billion, the highest level reported since 2017, and 31.6% above the five-year
average. Optimism in the regional office market has been supported by strong
employment growth. The most recent data from the ONS shows that the UK
employment rate rose to 75.5% in the three months to November 2021, up from
74.9% for the same period in 2020(4).
( )
(1 )Lambert Smith Hampton, UKIT Q4 2021
(2) Savills, UK Regional Investment Market Watch - December 2021
(3) Lambert Smith Hampton, UKIT Q4 2021
(4) ONS, Labour Market Overview, UK - January 2022
More details can be found in the Asset Manager's Report in the full Annual
Report.
Strategy Update - Positioned for Growth
As announced on 12 November 2020, the Company has focused its investment on
properties in the office sector in the main regional centres of the UK outside
of the M25 motorway. The Company continued to exit all other commercial
property sector investments. During 2021, non-core disposals amounted to
£76.9 million (net of costs) and regional office acquisitions totalled
£220.2 million.
The Board remains convinced that the supply and demand imbalance of the
regional office sector coupled with the Asset Manager's specialist operating
platform and experience will produce an attractive Total Shareholder Return
over the long term.
Dividends
The dividend is the major component of Total Shareholder Returns. For the year
under review, the Company declared total dividends of 6.50pps for the year
(2020: 6.40pps), comprising three quarterly dividends of 1.60pps each and a
fourth dividend of 1.70pps. This represented a yield of 6.9% at a share price
of 93.90pps at the close of 31 December 2021. Since inception, the Company has
declared dividends amounting to 45.7pps.
Looking ahead, there is a clear aspiration by the Board to maintain its record
of uninterrupted quarterly dividend payments. This is predicated on the
strength of the Company's balance sheet and the strong rent collections
received throughout the year.
Performance
Since listing on 6 November 2015, the Company's EPRA Total Return was 41.2%
and the annualised EPRA Total Return was 5.8%. The Total Shareholder Return
was 47.6%, compared with the FTSE EPRA NAREIT UK Total Return Index, which has
generated a return of 21.9% over the same period.
For the year under review, the Company's Total Shareholder Return was 22.4%,
versus the return of 28.9% for the FTSE EPRA NAREIT UK Total Return Index over
the same period.
Integrating a More Sustainable Approach
The Company has always been cognisant of its environmental impact, transparent
governance structure and its social responsibility. With the Company's
commitment to a more focused and formal approach, the Company joined the Real
Estate Sustainability Benchmark ("GRESB"), achieving a green star for 2021.
The Company has continued with a programme of integrating environmental,
social and governance through its decision making. More details are set out in
the full Annual Report.
Annual General Meeting
The Company plans to hold its 2022 Annual General Meeting ("AGM") in person on
Wednesday, 25 May 2022. The notice for the 2022 AGM will be published on our
website and will be circulated to Shareholders in accordance with the
requirements of the Company's Articles of Incorporation.
In the absence of any reimposition of restrictions, the Board very much looks
forward to meeting with Shareholders at the AGM.
Shareholder and Stakeholder Engagement
Our priority throughout 2021 remained first and foremost to provide vibrant
workspaces where collaborative and collegiate environments can be built by our
occupiers to face market challenges. We have stood ready to support and guide
our occupiers, if required, throughout this challenging period and this
remains the case.
I would like to take this opportunity to thank all the asset management teams,
from property management, research, legal, corporate finance and finance to
credit control, who have continued to support our occupiers through this
unprecedented period.
Board and Governance
I am pleased to announce that in 2021 a Nomination Committee was constituted
by the Board. The Committee's Terms of Reference can be found on the Company's
website. The Committee comprises all of the independent Non-Executive
Directors. More details can be found in the full Annual Report.
Outlook
The outlook for the Company remains positive. With the robust level of rent
collections, the geographical and occupier diversification of the portfolio
and strong finances, the Company is well positioned to continue to grow and
take the opportunities that will inevitably arise in the coming years.
For the remainder of 2022, though we remain mindful of the challenges to be
faced, the Company is confident of maintaining high rent collections and
accelerating the momentum on the asset management initiatives. The Board
believes this will result in the continued de-risking of the portfolio, whilst
continuing to deliver income and long-term total returns for our Shareholders.
Kevin McGrath
Chairman
28 March 2022
Asset and Investment Managers' Report
"We are pleased to report that the Company performed well in 2021, despite the
underlying challenges caused by COVID-19. Since IPO, we have consistently
provided a quarterly dividend to our Shareholders. This has been achieved
through a defensive and geographically diversified portfolio of assets, which
is poised to benefit from the UK's return to the office in 2022.
2021 was an active year for us, as we undertook substantial transactional
activity in line with our strategy to be opportunistic and focus the portfolio
on the regional office sector. We continue to progress with a planned exit for
all other non-core assets.
In addition, the portfolio's valuation increased considerably during 2021,
owing primarily to the significant off-market acquisition made in August, when
the Company acquired a predominately multi-let office portfolio for £236
million. This acquisition, one of the largest regional office acquisitions in
the UK in 2021, was an excellent fit with our existing portfolio given its
complementary spread of quality assets and a differentiated occupier base, and
results in 90% of the portfolio being in the office sector. The portfolio
presents a major opportunity for Regional REIT to implement its proven asset
management strategy to generate additional Shareholder value on a large-scale
portfolio over the coming years.
Our good income performance has been maintained primarily through the strength
of our occupier base and our strong relationships with these occupiers. We
received 99.2% of rents due for the year. We expect to continue to collect the
outstanding amounts over the coming months.
Our consistent quarterly dividends throughout the challenging period of the
pandemic have further strengthened the Company's well-attested credentials as
a reliable source of high income. We believe we are well placed in the
current inflationary environment, given our high level of rent collection,
regular rent reviews, and asset backed valuations.
As we look forward, we are confident in the Company's prospects of maximising
Shareholder value through the strategic repositioning of the portfolio in high
quality regional office assets, whilst continuing to deliver a significant
dividend yield."
Stephen Inglis, CEO of London & Scottish Property Investment Management,
Asset Manager.
Highlights from 2021
· Achieved a high level of rent collection. As at 18 March 2022, rent
collection continued to strengthen, with FY 2021 collections increasing to
99.2%, adjusting for monthly rent and agreed collections plans, which is
similar to the equivalent date in 2020 when 95.9% had been collected.
· Completed 55 new lettings in 2021, totalling 194,716 sq. ft., which
when fully occupied will provide a gross rental income of c. £2.5 million.
· Acquisitions in 2021 totalled £236.0 million (before costs) for 31
assets, reflecting an average net initial yield of 7.8%, and a reversionary
yield of 11.0%.
· Disposals during 2021 totalled £76.9 million (net of costs),
reflecting an average net initial yield of 6.5% (6.6% excluding vacant
properties).
· Average rent by let sq. ft. increased by 22.2% from £10.44 per sq.
ft. in December 2020 to £12.75 per sq. ft. in December 2021.
· Capital value per sq. ft. increased by 21.9% from £102.26 per sq.
ft. in December 2020 to £124.70 per sq. ft.
Investment Activity in the UK Commercial Property Market
Investment in the UK commercial property market reached £57.0 billion in
2021, according to research by Lambert Smith Hampton ("LSH")(5), 6.1% above
the five-year average, 40.0% higher than the volume recorded in 2020, and
15.4% above pre-COVID-19 levels in 2019. Investor sentiment remained positive
in the final quarter of 2021, despite concerns surrounding the Omicron
variant, with a quarterly investment of £17.3 billion - the highest level
recorded since Q2 2015. Investment in Q4 2021 marked an improvement of 23.4%
on Q3 2021 and was 28.7% above the five-year quarterly average. 2021 proved to
be a strong year for investment in portfolio deals, with investment totalling
£15.6 billion, 50.9% above 2020 figures and 20.1% above the pre-pandemic
level recorded in 2019. The commercial property market is well positioned for
a positive 2022. Savills forecast that investment will increase by 10% over
the next 12 months, with growth expected to be underpinned by occupational
factors such as falling unemployment and companies reporting strong employment
intentions(6).
The strength of the UK regional markets was particularly pronounced in 2021,
with annual investment reaching £21.3 billion, 12.0% above the five-year
average and 54.2% higher than 2020 investment volumes. Conversely, London
volumes were down relative to trend with 2021 volumes falling 6.0% below the
five-year average at £20.1 billion. LSH research notes that a rise in
investment levels was reflected across the majority of UK regions, with seven
of the 11 regions recording a volume above the respective five-year averages.
The largest increase in regional investment in 2021 relative to the five-year
average occurred in the East, West Midlands, North West, South East and
Northern Ireland.
Savills research highlights that investor sentiment in the regional office
market improved throughout 2021(7). Regional office investment totalled £7.2
billion in 2021, 34.8% higher than 2020 figures, and marginally above the
five-year average(8). Investment in office parks in 2021 reached £2.8
billion, the highest level reported since 2017, and 31.6% above the five-year
average. Optimism in the regional office market has been supported by strong
employment growth. The most recent data from the ONS shows that the UK
employment rate rose to 75.5% in the three months to November 2021, up from
74.9% for the same period in 2020(9). Moreover, a survey by Deloitte shows
that 74% of CFOs plan to increase employee numbers over the next 12 months.
This is in stark contrast to the same quarter in 2020, in which less than a
quarter of CFOs planned to increase headcount and approximately 50% planned to
reduce staff numbers(10). Strong employment rates and encouraging levels of
recruitment are positive indicators for occupational demand.
The Asset Manager's strong opinion is that the office will continue to play a
vital role in working life regardless of whether hybrid or more traditional
working practices are adopted. It is their opinion that many occupiers will
require more office accommodation in future due to both employment growth and
the improvement in the working environment by employers including
de-densification.
(5) Lambert Smith Hampton, UKIT Q4 2021
(6) Savills, MIM, UK Commercial - January 2022
(7) Savills, UK Regional Investment Market Watch - December 2021
(8) Lambert Smith Hampton, UKIT Q4 2021
(9) ONS, Labour Market Overview, UK - January 2022
(10) Deloitte, CFO Survey, Q4 2021
Quarterly Investment Volumes (£bn)
£bn
2014 Q1 12.04
2014 Q2 12.84
2014 Q3 15.97
2014 Q4 20.50
2015 Q1 19.93
2015 Q2 18.30
2015 Q3 12.74
2015 Q4 16.04
2016 Q1 13.24
2016 Q2 10.90
2016 Q3 9.83
2016 Q4 13.13
2017 Q1 12.98
2017 Q2 14.33
2017 Q3 15.77
2017 Q4 16.90
2018 Q1 14.13
2018 Q2 14.07
2018 Q3 17.04
2018 Q4 16.33
2019 Q1 11.26
2019 Q2 8.78
2019 Q3 13.85
2019 Q4 15.45
2020 Q1 13.89
2020 Q2 4.36
2020 Q3 8.09
2020 Q4 14.32
2021 Q1 11.41
2021 Q2 14.28
2021 Q3 13.98
2021 Q4 17.27
Source: Lambert Smith Hampton Research (February 2022)
Overseas investment in the UK property market accounted for just under half
(49.3%) of total investment in 2021, according to data from LSH. LSH estimates
that total overseas investment for 2021 reached £28.1 billion, 32.0% higher
than 2020, and 6.8% above than the five-year average. Overseas investment in
Q4 2021 reached £7.5 billion, up 14.1% on Q3's level and 13.4% higher than
the five-year quarterly average. North America and the Middle East were net
investors in the final quarter of 2021. Conversely, European investors were
net sellers in Q4 2021, c. 30% below the Q4 average despite strong demand from
German investors.
Research from CBRE(11) indicates that regional offices have outperformed in
comparison to central London offices, delivering superior income returns of
5.7% in 2021 in comparison to central London office returns of 3.6% - a trend
that has been witnessed over the past seven years. With a total return of 7.7%
for regional offices, 2021 marked a significant improvement on 2020
performance, in which a total return of 0.6% was reported.
(11 )CBRE Monthly Index, Q4 2021
Central London & Regional Office Income Returns (12 months to December
2021)
Income Return
2015 2016 2017 2018 2019 2020 2021
Central London Offices 3.2% 3.3% 3.7% 3.8% 3.8% 4.1% 3.6%
Rest of UK Offices 6.4% 6.2% 6.4% 5.9% 5.8% 5.9% 5.7%
Source: CBRE (February 2022)
Occupational Demand in the UK Regional Office Market
Avison Young estimates that take-up of office space across nine regional
office markets(12) totalled 8.1 million sq. ft. in 2021; 41.9% above the level
of take-up recorded in 2020, and 5.0% lower than the 10-year average. Take-up
in the final quarter of 2021 was 21.9% above the five-year average at 2.7
million sq. ft., marking the highest quarterly take-up figure in over three
years. This highlighted a return to 'normal' demand levels in the second half
of 2021 with take-up in H2 totalling 5.0 million sq. ft. Avison Young
highlights that that there is increased demand for greater customer care,
space that encourages collaboration, and a focus on health and well-being.
Occupational demand was driven by the technology, media & telecoms sector,
which accounted for the highest proportion of take-up at 21.9% in 2020.
Following the technology, media & telecoms sector, the public services,
education & health sector and the professional sector accounted for the
second and third largest proportion of take-up in the regional cities,
accounting for 16.9% and 12.7% respectively.
According to Savills, there was a rise in availability for regional office
stock across ten regional UK markets (13), with total availability rising by
11.3% in 2021 to 14.7 million sq. ft. The uptick in availability over the last
two years has pushed supply marginally above the 10-year average by 0.6%. This
marks the second year that supply of office stock has increased over the last
decade, having gradually fallen each year since 2009. The overall vacancy rate
for regional offices ticked upwards from 11.4% in 2020 to 12.6% in 2021 but
remains 2.2% below the 10-year average(14).
Furthermore, it is estimated that approximately 4.0 million sq. ft. of office
space is currently under construction in the Big Nine regional markets, with
Glasgow, Bristol and Leeds accounting for 24.7%, 16.2% and 15.6%,
respectively. Approximately 48.3% of office buildings currently under
construction are already pre-let.
(12) Nine regional office markets mentioned by Avison Young include:
Birmingham, Bristol, Cardiff, Edinburgh, Glasgow, Leeds, Liverpool, Manchester
& Newcastle
(13 )Ten regional office markets mentioned by Savills include: Aberdeen,
Birmingham, Bristol, Cambridge, Cardiff, Edinburgh, Glasgow, Leeds,
Manchester and Oxford
(14) Savills: The Regional Office Market Overview, Q4 2021
Regional Supply: Annual Office Supply
Year Regional Supply (sq, ft.) 10-year Average
2005 13,366,593 14,651,164
2006 13,495,550 14,651,164
2007 15,536,262 14,651,164
2008 17,531,111 14,651,164
2009 20,388,260 14,651,164
2010 19,128,055 14,651,164
2011 18,456,562 14,651,164
2012 18,238,269 14,651,164
2013 16,378,996 14,651,164
2014 16,123,864 14,651,164
2015 15,384,157 14,651,164
2016 14,803,325 14,651,164
2017 14,091,517 14,651,164
2018 12,272,422 14,651,164
2019 11,248,539 14,651,164
2020 13,235,404 14,651,164
2021 14,735,145 14,651,164
Source: Savills (February 2022)
Rental Growth in the UK Regional Office Market
The CBRE Monthly Index shows that rental value growth held up better for the
rest of UK office markets in the 12 months ended December 2021 with growth of
1.4%. Conversely, central London offices experienced modest growth of 0.2%
during 2021. According to MSCI, average rents in the regional office market
(outside of London and the South East) increased by 1.6% in 2021. Demand for
quality office space has put an upward pressure on rents, with growth of 2.3%
recorded across the Big Nine regional markets in 2021, with average headline
rents now sitting at £32.67 per sq. ft., according to research from Avison
Young. Colliers International noted that office park rental growth was
particularly encouraging, with an annual increase of 2.1% as reported by
MSCI(15).
(15) Colliers International, Property Snapshot, December 2021
Regional REIT's Office Assets
EPRA occupancy of the Group's regional offices was 80.8% (2020: 88.6%). A
like-for-like comparison of the Group's regional offices' EPRA occupancy, as
at 31 December 2021 versus 31 December 2020, shows occupancy of 81.4% (2020:
89.4%). WAULT to first break was 2.6 years (2020: 2.6 years); like-for-like
WAULT to first break of 2.8 years (2020: 2.7 years).
Property Portfolio
As at 31 December 2021, the Group's property portfolio was valued at £906.1
million (2020: £732.4 million), with rent roll of £72.1 million (2020:
£64.2 million), and an EPRA occupancy of 81.8% (2020: 89.4%). As expected,
EPRA Occupancy was impacted by the £236.0m (before costs) portfolio
acquisition made in Q3 '2021. Asset management plans are in place to improve
occupancy.
On a like-for-like basis, 31 December 2021 versus 31 December 2020, EPRA
occupancy was 82.4% (2020: 89.5%).
There were 168 properties (2020: 153) in the portfolio, with 1,511 units
(2020: 1,245) and 1,077 tenants (2020: 898). If the portfolio was fully
occupied at Cushman & Wakefield's view of market rents, the rental income
would be £94.6 million per annum as at 31 December 2021 (2020: £76.6
million).
As at 31 December 2021, the net initial yield on the portfolio was 5.6% (2020:
6.9%), the equivalent yield was 8.7% (2020: 8.8%) and the reversionary yield
was 9.4% (2020: 9.4%).
Property Portfolio by Sector
Sector Properties Valuation % by valuation Sq. ft. Occupancy (EPRA) WAULT to first break Gross rental income Average rent ERV Capital rate Yield (%)
(£m) (m) (%) (yrs) (£m) (£psf) (£m) (£psf) Net initial Equivalent Reversionary
Office 138 813.4 89.8 6.0 80.8 2.6 63.9 14.07 86.3 134.77 5.4 8.8 9.6
Industrial 7 46.4 5.1 0.7 90.7 7.2 3.3 5.10 3.6 66.18 6.1 7.5 7.4
Retail 20 33.9 3.7 0.4 92.6 3.6 3.9 9.99 3.8 78.14 9.3 9.7 9.8
Other 3 12.5 1.4 0.1 92.7 13.0 1.0 12.66 0.9 129.27 6.6 8.0 7.5
Total 168 906.1 100.0 7.3 81.8 3.0 72.1 12.75 94.6 124.70 5.6 8.7 9.4
Property Portfolio by Region
Region Properties Valuation % by valuation Sq. ft. Occupancy (EPRA) WAULT to first break Gross rental income Average rent ERV Capital rate Yield (%)
(£m) (m) (%) (yrs) (£m) (£psf) (£m) (£psf) Net initial Equivalent Reversionary
Scotland 44 172.1 19.0 1.7 84.7 3.9 15.5 11.80 19.6 102.62 6.0 9.4 10.2
South East 33 192.9 21.3 1.4 72.9 2.6 12.7 15.08 20.8 140.41 4.2 8.5 9.5
North East 23 121.4 13.4 1.0 83.9 3.0 9.6 11.86 11.8 126.36 6.0 9.2 9.2
Midlands 26 161.8 17.9 1.3 79.1 2.9 13.1 12.60 16.2 124.57 4.9 8.5 9.7
North West 20 125.2 13.8 1.0 80.0 2.7 9.8 12.55 13.3 131.35 6.0 9.2 9.1
South West 15 84.6 9.3 0.5 94.1 2.0 7.0 16.35 8.4 164.45 6.0 8.2 9.1
Wales 7 48.2 5.3 0.5 94.6 4.2 4.4 9.98 4.4 98.57 8.2 8.3 8.5
Total 168 906.1 100.0 7.3 81.8 3.0 72.1 12.75 94.6 124.70 5.6 8.7 9.4
* Table may not sum due to rounding
Top 15 Investments (Market Value) as at 31 December 2021
Property Sector Anchor tenants Market value % of portfolio Lettable area EPRA Occupancy Annualised gross rent % of gross rental income WAULT to first break (years)
(£m) (sq ft) (%) (£m)
300 Bath Street, Glasgow Office University of Glasgow, Glasgow Tay House Centre Ltd, Eaton Ltd 27.2 3.0 156,853 99.8 1.2 1.7 2.9
Buildings 2 & 3, Bear Brook Office Park, Aylesbury Office Utmost Life and Pensions Ltd, Agria Pet Insurance Ltd 22.8 2.5 140,791 90.8 0.9 1.3 3.6
Genesis Business Park, Woking Office Nuvias (UK & Ireland) Ltd, Fernox Ltd, McCarthy & Stone Retirement 22.7 2.5 98,151 81.3 1.4 1.9 2.2
Lifestyles Ltd, Walk The Walk Worldwide
Capitol Park, Leeds Office Hermes European Logistics Ltd, NHS Shared Business Services Ltd 21.5 2.4 98,340 100.0 1.8 2.5 1.7
Eagle Court, Coventry Road, Birmingham Office Virgin Media Ltd, Rexel UK Ltd, Coleshill Retail Ltd 21.4 2.4 132,979 77.8 1.8 2.5 1.4
800 Aztec West, Bristol Office NNB Generation Company (HPC) Ltd, Edvance SAS 19.0 2.1 73,292 100.0 1.5 2.1 1.6
Manchester Green, Manchester Office Chiesi Ltd, Ingredion UK Ltd, Assetz SME Capital Ltd 18.9 2.1 106,133 75.9 1.3 1.8 3.4
Beeston Business Park, Nottingham Office/ Industrial Metropolitan Housing Trust Ltd, SMS Electronics Ltd, Worldwide Clinical Trials 18.9 2.1 215,330 100.0 1.8 2.5 5.4
Ltd, Heart Internet Ltd
Hampshire Corporate Park, Eastleigh Office Aviva Central Services UK Ltd, Utilita Energy Ltd, Digital Wholesale Solutions 18.7 2.1 85,422 99.8 1.3 1.8 2.1
Ltd
Norfolk House, Smallbrook Queensway, Birmingham Office Accenture (UK) Ltd, Secretary of State for Communities & Local Government 18.0 2.0 114,982 49.0 0.8 1.1 2.3
Portland Street, Manchester Office Darwin Loan Solutions Ltd, New College Manchester Ltd, Mott MacDonald Ltd 15.2 1.7 55,787 98.7 0.9 1.3 2.7
One & Two Newstead Court, Nottingham Office E.ON UK Plc 14.5 1.6 146,262 67.8 0.9 1.3 3.3
Templeton On The Green, Glasgow Office The Scottish Ministers, The Scottish Sports Council, Noah Beers Ltd 13.6 1.5 142,512 90.7 1.2 1.7 4.1
Ashby Park, Ashby De La Zouch Office Ceva Logistics Ltd, Hill Rom UK Ltd, Brush Electrical Machines Ltd 13.5 1.5 91,034 92.8 1.1 1.6 3.9
The Lighthouse, Salford Quays, Manchester Office Pearson Education Ltd, Engie Regeneration Ltd, Assemble Technology Ltd 13.3 1.5 64,275 56.7 0.7 1.0 2.7
Total 279.1 30.8 1,722,143 84.3 18.8 26.1 2.9
* Table may not sum due to rounding
Top 15 Tenants (Share of Rental Income) as at 31 December 2021
Tenant Property Sector WAULT to first break (years) Lettable area (sq ft) Annualised gross rent (£m) % of gross rental income
Virgin Media Ltd Eagle Court, Coventry Road, Birmingham Information and communication 1.8 112,147 1.8 2.5
Genesis Business Park, Woking
Southgate Park, Peterborough
NHS Aspect House, Bennerley Road, Nottingham Public sector 1.9 103,240 1.7 2.3
Capitol Park, Leeds
Lightyear - Glasgow Airport, Glasgow
Park House, Bristol
St James Court, Bristol
Wren House, Chelmsford
TUI Northern Europe Ltd Columbus House, Coventry Professional, scientific and technical activities 2.0 53,253 1.4 1.9
Secretary of State for Communities & Local Government 1 Burgage Square, Merchant Square, Wakefield Public sector 2.7 128,335 1.3 1.8
Albert Edward House, Preston
Bennett House, Stoke-On-Trent
Norfolk House, Birmingham
Oakland House, Manchester
Waterside Business Park, Swansea
The Scottish Ministers Calton House, Edinburgh Public sector 1.7 106,511 1.3 1.8
Quadrant House, Dundee
Templeton On The Green, Glasgow
Bank of Scotland Plc Dundas House, Rosyth Banking 0.8 83,060 1.3 1.7
High Street/Bank Street, Dumfries
EDF Energy Ltd Endeavour House, Sunderland Electricity, gas, steam and air conditioning supply 1.7 77,565 1.0 1.4
E.ON UK Plc Two Newstead Court, Nottingham Electricity, gas, steam and air conditioning supply 3.3 99,142 0.9 1.3
John Menzies Plc 2 Lochside Avenue, Edinburgh Professional, scientific and technical activities 1.6 43,780 0.9 1.2
NNB Generation Company (HPC) Ltd 800 Aztec West, Bristol Electricity, gas, steam and air conditioning supply 1.6 41,743 0.9 1.2
James Howden & Company Ltd Howden Site, Renfrew Manufacturing 9.9 204,414 0.8 1.1
SPD Development Co Ltd Clearblue Innovation Centre, Bedford Professional, scientific and technical activities 3.8 58,167 0.8 1.1
Hermes European Logistics Ltd Capitol Park, Leeds Transportation and storage 2.0 37,372 0.8 1.1
Aviva Central Services UK Ltd Hampshire Corporate Park, Eastleigh Other service activities 2.9 42,612 0.8 1.1
Matalan Retail Ltd Loreny Industrial Estate, Kilmarnock Wholesale and retail trade 6.9 75,038 0.8 1.1
Newport Retail Park, Newport
Total 2.7 1,266,379 16.4 22.7
*Table may not sum due to rounding.
Property Portfolio Sector and Region Splits by Valuation and Income
By Valuation
As at 31 December 2021, 89.8% (2020: 83.5%) of the portfolio by market value
was offices and 5.1% (2020: 11.1%) was industrial. The balance was made up of
retail, 3.7% (2020: 4.1%) and other, 1.4% (2020: 1.3%). By UK region, as at 31
December 2021, Scotland represented 19.0% (2020: 17.3%) of the portfolio and
England 75.7% (2020: 78.3%); the balance of 5.3% (2020: 4.4%) was in Wales. In
England, the largest regions were the South East, the Midlands and the North
West.
By Income
As at 31 December 2021, 88.6% (2020: 82.3%) of the portfolio by income was
offices and 4.5% (2020: 10.3%) was industrial. The balance was made up of
retail, 5.4% (2020: 6.0%), and other, 1.4% (2020: 1.3%). By UK region, as at
31 December 2021, Scotland represented 21.6% (2020: 20.4%) of the portfolio
and England 72.4% (2020: 74.6%); the balance of 6.0% was in Wales (2020:
5.0%). In England, the largest regions were the Midlands, the South East and
the North West.
Lease Expiry Profile
The WAULT on the portfolio is 4.8 years (2020: 5.1 years); WAULT to first
break is 3.0 years (2020: 3.2 years). As at 31 December 2021, 11.5% (2020:
14.2%) of income was from leases, which will expire within one year; 13.8%
(2020: 9.1%) between one and two years; 31.9% (2020: 35.8%) between two and
five years; and 42.8% (2020: 40.9%) after five years.
Lease Expiry Income Profile % of rent
0-1 years 11.5%
1-2 years 13.8%
2-5 years 31.9%
5+ years 42.8%
Total 100.0%
Source: LSPIM
Lease Expiry Income Profile by year £m
2022 8,110,328
2023 9,742,865
2024 8,676,128
2025 7,509,207
2026 6,372,007
2027 5,608,480
2028 5,686,320
2029 6,890,525
2030+ 12,013,130
Total 70,608,989
Source: LSPIM
Lease expiry to first break income profile by year £m
2022 14,077,145
2023 16,915,418
2024 14,704,786
2025 8,219,482
2026 6,568,996
2027 2,028,779
2028 1,064,912
2029 1,764,160
2030+ 5,265,312
Total 70,608,989
Source: LSPIM
Tenants by Standard Industrial Classification as at 31 December 2021
As at 31 December 2021, 14.5% of income was from tenants in the professional,
scientific and technical activities sector (2020: 13.5%); 11.4% from the
information and communication sector (2020: 8.3%); 9.6% from the wholesale
& retail trade sector (2020: 7.3%); 9.5% from the administrative and
support service activities sector (2020: 12.9%); 7.9% from the financial and
insurance activities (other) sector (2020: 8.4%); and 7.8% from the public
sector (2020: 8.8%). The remaining exposure is broadly spread.
No tenant represents more than 3% of the Group's rent roll as at 31 December
2021, the largest being 2.5% (2020: 3.5%).
Top 15 Properties
300 Bath Street, Glasgow Market value (£m) 27.2
Sector Office
Annualised gross rent (£m) 1.2
Lettable area (sq. ft.) 156,853
Anchor tenants University of Glasgow, Glasgow Tay House Centre Ltd, Eaton Ltd
EPRA Occupancy (%) 99.8%
WAULT (years) (to first break) 6.0 (2.9)
Buildings 2 & 3, Bear Brook Office Park, Aylesbury Market value (£m) 22.8
Sector Office
Annualised gross rent (£m) 0.9
Lettable area (sq. ft.) 140,791
Anchor tenants Utmost Life and Pensions Ltd, Agria Pet Insurance Ltd
EPRA Occupancy (%) 90.8%
WAULT (years) (to first break) 5.7 (3.6)
Genesis Business Park, Woking Market value (£m) 22.7
Sector Office
Annualised gross rent (£m) 1.4
Lettable area (sq. ft.) 98,151
Anchor tenants Nuvias (UK & Ireland) Ltd, Fernox Ltd, McCarthy & Stone Retirement
Lifestyles Ltd, Walk The Walk Worldwide
EPRA Occupancy (%) 81.3%
WAULT (years) (to first break) 5.4 (2.2)
Capitol Park, Leeds Market value (£m) 21.5
Sector Office
Annualised gross rent (£m) 1.8
Lettable area (sq. ft.) 98,340
Anchor tenants Hermes European Logistics Ltd, NHS Shared Business Services Ltd
EPRA Occupancy (%) 100.0%
WAULT (years) (to first break) 1.7 (1.7)
Eagle Court, Coventry Road, Birmingham Market value (£m) 21.4
Sector Office
Annualised gross rent (£m) 1.8
Lettable area (sq. ft.) 132,979
Anchor tenants Virgin Media Ltd, Rexel UK Ltd, Coleshill Retail Ltd
EPRA Occupancy (%) 77.8%
WAULT (years) (to first break) 2.3 (1.4)
800 Aztec West, Bristol Market value (£m) 19.0
Sector Office
Annualised gross rent (£m) 1.5
Lettable area (sq. ft.) 73,292
Anchor tenants NNB Generation Company (HPC) Ltd, Edvance SAS
EPRA Occupancy (%) 100.0%
WAULT (years) (to first break) 6.8 (1.6)
Manchester Green, Manchester Market value (£m) 18.9
Sector Office
Annualised gross rent (£m) 1.3
Lettable area (sq. ft.) 106,133
Anchor tenants Chiesi Ltd, Ingredion UK Ltd, Assetz SME Capital Ltd
EPRA Occupancy (%) 75.9%
WAULT (years) (to first break) 5.2 (3.4)
Beeston Business Park, Nottingham Market value (£m) 18.9
Sector Office/ Industrial
Annualised gross rent (£m) 1.8
Lettable area (sq. ft.) 215,330
Anchor tenants Metropolitan Housing Trust Ltd, SMS Electronics Ltd, Worldwide Clinical Trials
Ltd, Heart Internet Ltd
EPRA Occupancy (%) 100.0%
WAULT (years) (to first break) 8.2 (5.4)
Hampshire Corporate Park, Eastleigh Market value (£m) 18.7
Sector Office
Annualised gross rent (£m) 1.3
Lettable area (sq. ft.) 85,422
Anchor tenants Aviva Central Services UK Ltd, Utilita Energy Ltd, Digital Wholesale Solutions
Ltd
EPRA Occupancy (%) 99.8%
WAULT (years) (to first break) 6.8 (2.1)
Norfolk House, Smallbrook Queensway, Birmingham Market value (£m) 18.0
Sector Office
Annualised gross rent (£m) 0.8
Lettable area (sq. ft.) 114,982
Anchor tenants Accenture (UK) Ltd, Secretary of State for Communities & Local Government
EPRA Occupancy (%) 49.0%
WAULT (years) (to first break) 2.8 (2.3)
Portland Street, Manchester Market value (£m) 15.2
Sector Office
Annualised gross rent (£m) 0.9
Lettable area (sq. ft.) 55,787
Anchor tenants Darwin Loan Solutions Ltd, New College Manchester Ltd, Mott MacDonald Ltd
EPRA Occupancy (%) 98.7%
WAULT (years) (to first break) 4.5 (2.7)
One & Two Newstead Court, Nottingham Market value (£m) 14.5
Sector Office
Annualised gross rent (£m) 0.9
Lettable area (sq. ft.) 146,262
Anchor tenants E.ON UK Plc
EPRA Occupancy (%) 67.8%
WAULT (years) (to first break) 3.3 (3.3)
Templeton On The Green, Glasgow Market value (£m) 13.6
Sector Office
Annualised gross rent (£m) 1.2
Lettable area (sq. ft.) 142,512
Anchor tenants The Scottish Ministers, The Scottish Sports Council, Noah Beers Ltd
EPRA Occupancy (%) 90.7%
WAULT (years) (to first break) 6.2 (4.1)
Ashby Park, Ashby De La Zouch Market value (£m) 13.5
Sector Office
Annualised gross rent (£m) 1.1
Lettable area (sq. ft.) 91,034
Anchor tenants Ceva Logistics Ltd, Hill Rom UK Ltd, Brush Electrical Machines Ltd
EPRA Occupancy (%) 92.8%
WAULT (years) (to first break) 4.0 (3.9)
The Lighthouse, Salford Quays, Manchester Market value (£m) 13.3
Sector Office
Annualised gross rent (£m) 0.7
Lettable area (sq. ft.) 64,275
Anchor tenants Pearson Education Ltd, Engie Regeneration Ltd, Assemble Technology Ltd
EPRA Occupancy (%) 56.7%
WAULT (years) (to first break) 4.1 (2.7)
Financial Review
Net Asset Value
In the year ended 31 December 2021, the EPRA NTA* of the Group increased to
£501.4 million (IFRS NAV: £502.4 million) from £425.6 million (IFRS NAV:
£420.6 million) as at 31 December 2020, equating to a decrease in the diluted
EPRA NTA of 1.4pps to 97.2pps (IFRS: 97.4pps). This is after the dividends
declared in the year amounting to 6.30pps.
The EPRA NTA increase of £75.8 million since 31 December 2020 was
predominately from the issuance of a tranche of new equity, equivalent to
£83.1 million; offset broadly by an £8.3million decrease in the revaluation
of the property portfolio held as at 31 December 2021, and a £0.7million
realised gain on the disposal of properties.
On 31 August 2021, a £236.0 million portfolio (before costs) comprising: 27
office assets, 2 industrial units, a residential asset and a Tim Horton's
Drive-Thru restaurant was acquired. In consideration of the purchase,
84,230,000 new ordinary shares were issued at 98.6 pence per share (being the
Group's EPRA NTA per share as at 31 December 2020), equivalent to £83.1
million, £76.7 million from existing cash resources, and additional
borrowings of £76.2 million.
The investment property portfolio valuation as at 31 December 2021 amounted to
£906.1 million (2020: £732.4 million). The increase of £173.7 million since
the December 2020 year-end is a reflection of property acquisitions and
subsequent expenditure of £258.2 million and gains on the disposal of
properties of £0.7 million, offset by £76.9 million of net property
disposals and £8.3 million of property revaluation. Overall, on a
like-for-like basis, the portfolio value increased by 1.1% during the year.
The table below sets out the acquisitions, disposals and capital expenditure
for the respective periods:
Year ended Year ended
31 December 31 December
2021 2020
(£m) (£m)
Acquisitions
Net (after costs) 251.4 45.0
Gross (before costs) 236.0 42.4
Disposals
Net (after costs) 76.9 53.4
Gross (before costs) 79.6 56.4
Capital Expenditure
Net (after dilapidations) 6.8 8.8
Gross (before dilapidations) 7.2 13.1
* The Group has determined that EPRA net tangible assets (NTA) is the most
relevant measure. Further detail on the new EPRA performance measures can be
found in the full Annual Report.
EPRA Net Tangible Asset - Bridge
31 December 2021
31 Dec 2020 EPRA NTA 98.6
Equity issuance costs 0.0
EPRA NTA (incl. costs) 98.6
Net rental and property income 10.8
Admin expenses (2.1)
Valuation (excl. net capital expenditure (0.3)
Net capital expenditure (1.3)
Gain on disposal of investment properties 0.1
Net finance expense (2.9)
Dividends (5.8)
31 Dec 2021 EPRA NTA 97.2
The diluted EPRA NTA per share decreased to 97.2pps (2020: 98.6pps). The EPRA
NTA is reconciled in the table below:
£m Pence per Share
Opening EPRA NTA (31 December 2020) 425.6 98.6
Equity issuance (net of expenses)* 82.9 (0.0)
Opening EPRA NAV (Incl. net capital raise) 508.6 98.6
Net rental and property income 55.8 10.8
Administration and other expenses (10.6) (2.1)
Gain on the disposal of investment properties 0.7 0.1
Change in the fair value of investment properties (8.3) (1.6)
Change in value of right of use (0.0) (0.0)
EPRA NTA after operating profit 546.1 105.9
Net finance expense (14.9) (2.9)
Taxation (0.0) (0.0)
EPRA NTA before dividends paid 531.3 103.0
Dividends paid** (29.9) (5.8)
Closing EPRA NTA (31 December 2021) 501.4 97.2
Table may not sum due to rounding
*As at 31 December 2020, there were 431,506,583 Shares in issue. On 1
September 2021, the Company issued 84,230,000 Shares and increased the total
number of Shares in issue to 515,736,583.
** The new issuance of Shares qualified for the Q2 dividend of 1.50 pence per
Share paid on 15 October 2021 and Q3 dividend of 1.50 pence per Share declared
on 11 November 2021.
Income Statement
Operating profit before gains and losses on property assets and other
investments for the year ended 31 December 2021 amounted to £45.2 million
(2020: £42.0 million). Profit after finance and before taxation of £28.8
million (2020: loss £31.2 million). 2021 included the rent roll for
properties held from the 31 December 2020, plus the partial rent roll for
properties disposed or acquired during the year.
Rental and property income amounted to £65.8 million, excluding recoverable
service charge income and other similar items (2020: £62.1 million). The
increase was primarily the result of the increase in the rent roll being held
over the year to 31 December 2021.
Currently more than 80% of the rental income is collected within 30 days of
the due date and bad debts in the year were £0.6million (2020: £1.1
million).
Non-recoverable property costs, excluding recoverable service charge income
and other similar costs, amounted to £9.9 million (2020: £8.8 million), and
the rent roll increased to £72.1 million (2020: £64.2 million).
Realised gain on the disposal of investment properties amounted to £0.7
million (2020: loss £1.1 million). The change in the fair value of investment
properties amounted to a loss of £8.3 million (2020: loss of £54.8 million).
Net capital expenditure amounted to £6.8 million (2020: £8.8 million). The
gain on the disposal of the right of use asset amounted to £0.2 million
(2020: nil). The change in value of right of use asset amounted to a charge of
£0.2 million (2020: charge £0.2 million).
Finance expenses amount to £14.9 million (2020: £14.1 million). The increase
is due to additional borrowings in the period. On 27 August 2021, the Group
drew down £76.2 million from the Royal Bank of Scotland, Bank of Scotland,
and Barclays to finance the enlarged portfolio.
The EPRA* cost ratio, including direct vacancy costs, was 31.2% (2020: 32.4%).
The EPRA cost ratio, excluding direct vacancy costs was 16.8% (2020: 19.6%).
The ongoing charges for the year ending 31 December 2021 were 4.6% (2020:
4.6%).
The EPRA Total Return from Listing to 31 December 2021 was 41.2% (2020:
36.3%), with an annualised rate of 5.8% pa (2020: 6.2% pa).
Dividend
In relation to the year from 1 January 2021 to 31 December 2021, the Company
declared dividends totalling 6.50pps (2020: 6.40pps). Since the end of the
year, the Company has declared a dividend for the fourth quarter of 2021 of
1.70pps. A schedule of dividends can be found in the full Annual Report.
Debt Financing and Gearing
Borrowings comprise third-party bank debt and the retail eligible bond. The
bank debt is secured over properties owned by the Group and repayable over the
next four and a half to eight years. The weighted average maturity of the bank
debt and retail eligible bond is 5.5 years (2020: 6.4 years).
The Group's borrowing facilities are with the Santander UK, Scottish Widows
Limited, Scottish Widows Limited & Aviva Investors Real Estate Finance,
Royal Bank of Scotland, Bank of Scotland and Barclays. The total bank
borrowing facilities at 31 December 2021 amounted to £389.9 million (2020:
£316.2 million) (before unamortised debt issuance costs), with £4.9 million
available to be drawn. In addition to the bank borrowings, the Group has a
£50 million 4.5% retail eligible bond, which is due for repayment in August
2024. In aggregate, the total debt available at 31 December 2021 amounted to
£444 million (2020: £371.9 million).
During the period, the Company increased its borrowings to part fund the
£236.0 million (before costs) portfolio acquisition on 27 August 2021. The
majority of the increase was funded by a new club facility provided by the
Royal Bank of Scotland, Bank of Scotland, and Barclays.
At 31 December 2021, the Group's cash and cash equivalent balances amounted to
£56.1 million (2020: £67.4 million), of which £49.9 million (2020: £55.0
million) was unrestricted cash.
The Group's net loan to value ("LTV") ratio stands at 42.4% (2020: 40.8%)
before unamortised costs. The Board continues to target a net LTV ratio of
40%, with a maximum limit of 50%.
Debt Profile and LTV Ratios as at 31 December 2021
Lender Original facility Outstanding debt* Maturity date Gross loan to value** Annual interest rate
£'000 £'000 % %
Royal Bank of Scotland, Bank of Scotland & Barclays 128,000 127,220 Aug-26 43.4 2.40 over 3mth £ SONIA
Scottish Widows Ltd. & Aviva Investors Real Estate Finance 165,000 165,000 Dec-27 46.4 3.28 Fixed
Scottish Widows Ltd. 36,000 36,000 Dec-28 38.7 3.37 Fixed
Santander UK 65,870 61,717 Jun-29 39.0 2.20 over 3mth £ LIBOR moving to SONIA 1/1/22
394,870 389,937
Retail eligible bond 50,000 50,000 Aug-24 NA 4.50 Fixed
444,870 439,937
* Before unamortised debt issue costs
** Based on Cushman and Wakefield property valuations
Table may not sum due to rounding
The Managers continue to monitor the borrowing requirements of the Group. As
at 31 December 2021, the Group had sufficient headroom against its borrowing
covenants.
The net gearing ratio (net debt to Ordinary Shareholders' equity (diluted)) of
the Group was 76.4% as at 31 December 2021 (2020: 71.0%).
Interest cover, excluding amortised costs, stands at 3.5 times (2020: 3.4
times) and including amortised costs, stands at 3.0 times (2020: 3.0 times).
Hedging
The Group applies an interest hedging strategy that is aligned to the property
management strategy and aims to mitigate interest rate volatility on at least
90% of the debt exposure.
31 December 2021 31 December 2020
% %
101.3 101.6
Borrowings interest rate hedged
Thereof:
Fixed 57.1 68.6
Swap 24.1 16.5
Cap 20.0 16.5
WACD(1) 3.3 3.3
Table may not sum due to rounding
(1) WACD - Weighted Average Effective Interest Rate including the cost of
hedging
The over-hedged position has arisen due to the entire Royal Bank of Scotland,
Bank of Scotland & Barclays and Santander UK facilities, including any
undrawn balances, being hedged by interest rate cap derivatives which have no
ongoing cost to the Group.
Tax
The Group entered the UK REIT regime on 7 November 2015 and all of the Group's
UK property rental operations became exempt from UK corporation tax from that
date. The exemption remains subject to the Group's continuing compliance with
the UK REIT rules.
On 9 January 2018, the Company registered for VAT purposes in England.
During 2021, the Group recognised a tax charge of £0.02 million (2020: tax
credit of £0.2 million), which comprised tax provisions for the year offset
by releases of tax previously provided for in prior years which are now
concluded and not payable.
Principal Risks and Uncertainties
Effective risk management underpins the execution of Regional REIT's strategy,
the positioning of the business for growth and maintaining the regular income
over a long-term sustainable horizon.
Risk Framework and Approach
The overall responsibility for the Company's system of risk management and
internal controls rests with the Board. The Board recognises the importance of
identifying and actively monitoring its risks, which include, but are not
limited to: strategic, valuation, COVID-19, funding, tenant, financial and tax
charges, operational, regulatory, and environmental risks. Over the long term,
the business will face other challenges and emerging threats for which it
remains vigilant.
The Board is supported by the Audit Committee in the management of risk. The
Audit Committee is responsible for determining the principal risks facing the
business and reviewing, at least annually, the effectiveness of the Company's
financial control, risk management and internal control processes.
However, the Board also views the potential risks as opportunities which, when
handled appropriately, can drive performance. Thus, having an effective risk
management process is key to support the delivery of the Group's strategy.
Approach to Managing Risk - Identification, Evaluation and Mitigation
The risk management process is designed to identify, evaluate, manage and
mitigate (rather than eliminate) risks faced. The Company maintains a detailed
and formal matrix of current principal risks, which uses risk scoring to
evaluate risks consistently. This allows the risks to be monitored and
mitigated as part of a risk management process with the Audit Committee
undertaking, at a minimum on a six-monthly basis or more frequently if
required, a robust evaluation of these risks facing the Group.
Risks are identified and weighted according to their potential impact on the
Company and to their likelihood of occurrence. The Audit Committee uses the
risk matrix to prioritise individual risks, allocating scores to each risk for
both the likelihood of its occurrence and the severity of its impact. Those
with the highest gross rating in terms of impact are highlighted as top risks
within the matrix and are defined as principal risks.
While the Board believes that it has a robust framework of internal controls
in place, this can provide only reasonable, and not absolute, assurance
against material financial misstatement or loss and is designed to manage, not
eliminate, risk.
Risk Appetite
Risk appetite is integral to the Board's approach to risk management, business
planning and decision making. The level and type of risk that the Company is
willing to bear will vary over time.
The Board, in conjunction with the Asset Manager and Investment Manager,
regularly reviews the risk appetite of the Company in association with the
latest information available and the Company is able to assess and respond
quickly to new and emerging risks.
Emerging Risks
The Board is cognisant of emerging risks defined as potential trends, sudden
events or changing risks, which are characterised by a high degree of
uncertainty in terms of probability of occurrence and possible effects on the
Company. Once emerging risks become sufficiently clear, they may be classed as
a principal risk and added to the risk matrix.
On 24 February 2022, Russia initiated a military invasion of Ukraine, which
the Board is currently identifying as an emerging risk, as it is likely to
have global economic effects.
Increasing inflation in the UK has also been identified as an emerging risk,
as this will have wide reaching effects to the economy, which will, in turn,
impact the Company. The Board, through the Audit Committee, continue to
monitor inflation levels.
To help manage emerging risks and discuss other wider matters affecting
property, the Board has an annual strategy meeting. The Board considers having
a clear strategy is the key to managing and mitigating emerging risk.
COVID-19
During 2021, the principal risks and uncertainties faced by the Company
continued to be impacted by the respective devolved Government's reactions.
Throughout this period, the Board worked closely with the Asset Manager,
Investment Manager and its third-party suppliers to ensure it was as well
positioned as possible to identify, evaluate, manage and mitigate as required.
The primary aim being to preserve and enhance the Company's net income and
capital values, meeting all regulatory and stakeholder obligations, whilst
looking to the longer term to identify strategic opportunities.
This threat has an ongoing effect on many of our principal risks and the Board
meets regularly with the Asset and Investment Managers to assess these risks
and how they can be managed.
The below list, in no particular order, sets out the current identifiable
principal and emerging risks, including their impact and the actions taken by
the Company to mitigate them. It does not purport to be an exhaustive list of
all the risks faced by the Group.
Principal Risk Summary
Principal Risk Evolution of the
trend during the year
1. Strategic ó
2. Valuation ó
3. COVID-19 ó
4. Economic and political ó
5. Funding ó
6. Tenant ó
7. Financial and tax changes ó
8. Operational ó
9. Accounting, legal and regulatory ö
10. Environmental and energy efficiency standards ö
1. Strategic
POTENTIAL IMPACT MITIGATION MOVEMENT IN THE PERIOD ó
An inappropriate investment strategy, and/or failure to implement the strategy · A clearly defined investment strategy, which is reviewed · The property portfolio remains balanced across a range of
could result in lower income and capital returns to Shareholders. annually. geographical areas and large number of investment properties.
· A defined and rigorous investment appraisal process.
· Acquire portfolios, which offer Shareholders diversification of
investment risk by investing in a range of geographical areas and number of
properties.
· Supply and demand market information is reviewed continuously to
assist in acquisitions and disposals.
· All the above steps are monitored to ensure the strategy is
implemented.
· Predominately, acquiring office properties in the UK and outside · The Group continues to purchase properties in the UK outside the
of the M25 motorway. However, the Group may invest in property portfolios in M25 motorway.
which up to 50% of the properties (by market value) are situated within the
M25 motorway.
· No single property, in the ordinary course of business, is · 300 Bath Street (2020: 300 Bath Street) is the highest valued
expected to exceed 10% of the Group's aggregate Investment Properties property, which equates to 3.0% (2020: 3.8%) of the Group's investment
valuation. However, the Board may, in exceptional circumstances, consider a properties.
property having a value of up to 20% of the Group's investment property value
at the time of investment.
· No more than 20% of the Group's investment property value shall · The Group's largest single tenant exposure is 2.5% (2020: 3.5%)
be exposed to any single tenant or group undertaking of that tenant. of gross rental income, being Virgin Media Ltd (2020: Barclays Execution
Services Ltd.).
· Speculative development (i.e., properties under construction, but · No speculative construction was undertaken during the year under
excluding any refurbishment works, which have not been pre-let) is prohibited. review.
· The value of the properties is protected as far as possible by an · The Asset Manager continues to actively manage the investment
active asset management programme, which is regularly reviewed against the properties in accordance with market conditions and the individual asset
business plan for each property. programme.
2. Valuation
POTENTIAL IMPACT MITIGATION MOVEMENT IN THE PERIOD ó
The valuation of the Group's portfolio affects its profitability and net · The Company's external valuer, Cushman & Wakefield, provide · Cushman & Wakefield independently provides the valuation for
assets. independent valuations for all properties on a six-monthly basis in accordance the entire portfolio, valuing each individual asset.
with the RICS Red Book.
· The Audit Committee has the opportunity to discuss the basis of
the valuations with the external valuer. The Audit Committee membership
includes an experienced chartered surveyor.
· The Asset Manager's experience and extensive knowledge of the
property market. The Asset Manager is able to challenge the external valuers'
findings.
· The Company's Auditor engages an independent third party to
evaluate the Cushman & Wakefield valuation.
3. COVID-19
POTENTIAL IMPACT MITIGATION MOVEMENT IN THE PERIOD ó
The economic disruption resulting from the COVID-19 virus could continue to · The Asset Manager continues to adapt and, as required, to support · The Group has continued to scrutinise all current risk mitigation
impact rental income; the ability of Valuers to discern valuations; the tenants. approaches employed and to work closely with all parties through this
ability to access funding at competitive rates, adherence to banking
disruptive period.
covenants, maintain a progressive dividend policy, and adhere to the HMRC REIT · The Asset Manager continues to adhere to the respective devolved
regime requirements. Government COVID-19 guidelines.
· The property portfolio has been deliberately constituted to
ensure a diverse range of tenants by standard industrial classification
comprised of 47.0% of government designated essential services.
· Close relationships with lenders ensuring continued dialogue
around covenants and ability to access funding as required at competitive
rates.
· Initial vetting of all third-party providers with annual due
diligence reviews, including the review of business continuity capabilities to
minimise when remote working has been necessitated.
4. Economic and Political
POTENTIAL IMPACT MITIGATION MOVEMENT IN THE PERIOD ó
Significant political events could impact the health of the UK economy, · The Group operates with a sole focus on the UK regions, with no · There remains a risk that property valuations and the occupancy
resulting in borrowing constraints, changes in demand by tenants for suitable foreign currency exchange exposure. It remains well positioned with a market may be impacted by change in the political landscape..
properties, the quality of the tenants, and ultimately the property portfolio deliberately diverse standard industry classification of tenants generating
value. 1,077 (2020: 898) income streams which are located in areas of expected
economic growth.
· The Board receives advice on macro-economic risks, including
Brexit, from the Investment Manager and other advisers and acts accordingly.
2. Valuation
POTENTIAL IMPACT MITIGATION MOVEMENT IN THE PERIOD ó
The valuation of the Group's portfolio affects its profitability and net · The Company's external valuer, Cushman & Wakefield, provide · Cushman & Wakefield independently provides the valuation for
assets. independent valuations for all properties on a six-monthly basis in accordance the entire portfolio, valuing each individual asset.
with the RICS Red Book.
· The Audit Committee has the opportunity to discuss the basis of
the valuations with the external valuer. The Audit Committee membership
includes an experienced chartered surveyor.
· The Asset Manager's experience and extensive knowledge of the
property market. The Asset Manager is able to challenge the external valuers'
findings.
· The Company's Auditor engages an independent third party to
evaluate the Cushman & Wakefield valuation.
3. COVID-19
POTENTIAL IMPACT MITIGATION MOVEMENT IN THE PERIOD ó
The economic disruption resulting from the COVID-19 virus could continue to · The Asset Manager continues to adapt and, as required, to support · The Group has continued to scrutinise all current risk mitigation
impact rental income; the ability of Valuers to discern valuations; the tenants. approaches employed and to work closely with all parties through this
ability to access funding at competitive rates, adherence to banking
disruptive period.
covenants, maintain a progressive dividend policy, and adhere to the HMRC REIT · The Asset Manager continues to adhere to the respective devolved
regime requirements. Government COVID-19 guidelines.
· The property portfolio has been deliberately constituted to
ensure a diverse range of tenants by standard industrial classification
comprised of 47.0% of government designated essential services.
· Close relationships with lenders ensuring continued dialogue
around covenants and ability to access funding as required at competitive
rates.
· Initial vetting of all third-party providers with annual due
diligence reviews, including the review of business continuity capabilities to
minimise when remote working has been necessitated.
4. Economic and Political
POTENTIAL IMPACT MITIGATION MOVEMENT IN THE PERIOD ó
Significant political events could impact the health of the UK economy, · The Group operates with a sole focus on the UK regions, with no · There remains a risk that property valuations and the occupancy
resulting in borrowing constraints, changes in demand by tenants for suitable foreign currency exchange exposure. It remains well positioned with a market may be impacted by change in the political landscape..
properties, the quality of the tenants, and ultimately the property portfolio deliberately diverse standard industry classification of tenants generating
value. 1,077 (2020: 898) income streams which are located in areas of expected
economic growth.
· The Board receives advice on macro-economic risks, including
Brexit, from the Investment Manager and other advisers and acts accordingly.
5. Funding
POTENTIAL IMPACT MITIGATION MOVEMENT IN THE PERIOD ó
The Group may not be able to secure further debt or on acceptable terms, which · The Asset Manager has a Corporate Finance team dedicated to · Weighted average debt term decreased to 5.5 years from 6.4 years
may impinge upon investment opportunities and the ability to grow the Group. optimising the Group's funding requirements. in 2020.
· Funding options are constantly reviewed with an emphasis on · Weighted average cost of capital, including hedging costs was
reducing the weighted average cost of capital and lengthening the weighted 3.3% (2020: 3.3%).
average debt to maturity.
· LTV increased to 42.4% from 40.8% as at 31 December 2020.
· Borrowings are currently provided by a range of institutions with
targeted staggered maturities.
· Strong relationships with key long-term lenders.
· Continual monitoring of LTV.
Bank reference interest rates may be set to rise accompanying higher · Policy of hedging at least 90% of variable interest rate · Continued adherence to the hedging policy.
inflation. borrowings.
· Borrowings are currently provided by a range of institutions with
targeted staggered maturities.
Breach of covenants within the Group's funding structure could lead to a · The Asset Manager's Corporate Finance team reviews the applicable · The Group continues to have sufficient headroom against the
cancellation of debt funding if the Company is unable to service the debt. covenants on a regular basis and these are considered in future operational applicable borrowing covenants.
decisions.
· Compliance certificates and requested reports are prepared as
scheduled.
6. Tenant
POTENTIAL IMPACT MITIGATION MOVEMENT IN THE PERIOD ó
Type of tenant and concentration of tenant could result in lower income from · An active asset management programme with a focus on the Asset · This risk remains stable in view of the increasing
reduced lettings or defaults. Manager working with individual tenants to assess any occupational issues and diversification of properties, tenants and geographies in the portfolio.
to manage any potential bad debts.
· The tenant mix and their underlying activity has continued to
· Diversified portfolio of properties let, where possible, to a increasingly diversify, with the number of tenants amounting to 1,077 at the
large number of low-risk tenants across a wide range of standard industrial year-end (2020: 898).
classifications throughout the UK.
· Potential acquisitions are reviewed for tenant overlap and
potential disposals are similarly reviewed for tenant standard industrial
classification concentration.
A high concentration of lease term maturity and/or break options could result · The portfolio lease and maturity concentrations are monitored by · The WAULT to first break as at 31 December 2021 was 3.0 years
in a more volatile contracted rent roll. the experienced Asset Manager to minimise concentration. (2020: 3.2 years)
· There is a focus on securing early renewals and increased lease · The largest tenant is 2.5% (2020: 3.5%) of the gross rental
periods. income, being Virgin Media Limited.
· The requirement for suitable tenants and the quality of the · The Asset Management team remains vigilant to the financial
tenant is managed by the experienced Asset Manager which maintains close well-being of our current tenants and continues to liaise with occupiers and
relationships with current tenants and with letting agents. agents.
6. Tenant
POTENTIAL IMPACT
MITIGATION
MOVEMENT IN THE PERIOD ó
Type of tenant and concentration of tenant could result in lower income from
reduced lettings or defaults.
· An active asset management programme with a focus on the Asset
Manager working with individual tenants to assess any occupational issues and
to manage any potential bad debts.
· Diversified portfolio of properties let, where possible, to a
large number of low-risk tenants across a wide range of standard industrial
classifications throughout the UK.
· Potential acquisitions are reviewed for tenant overlap and
potential disposals are similarly reviewed for tenant standard industrial
classification concentration.
· This risk remains stable in view of the increasing
diversification of properties, tenants and geographies in the portfolio.
· The tenant mix and their underlying activity has continued to
increasingly diversify, with the number of tenants amounting to 1,077 at the
year-end (2020: 898).
A high concentration of lease term maturity and/or break options could result
in a more volatile contracted rent roll.
· The portfolio lease and maturity concentrations are monitored by
the experienced Asset Manager to minimise concentration.
· There is a focus on securing early renewals and increased lease
periods.
· The requirement for suitable tenants and the quality of the
tenant is managed by the experienced Asset Manager which maintains close
relationships with current tenants and with letting agents.
· The WAULT to first break as at 31 December 2021 was 3.0 years
(2020: 3.2 years)
· The largest tenant is 2.5% (2020: 3.5%) of the gross rental
income, being Virgin Media Limited.
· The Asset Management team remains vigilant to the financial
well-being of our current tenants and continues to liaise with occupiers and
agents.
7. Financial and Tax Changes
POTENTIAL IMPACT MITIGATION MOVEMENT IN THE PERIOD ó
Changes to the UK REIT and non-REIT regimes tax and financial legislation. · The Board receives advice on these changes where appropriate and · Advice is received from several corporate advisers, including tax
will act accordingly. adviser Grant Thornton UK LLP and the Group adapts to changes as required.
8. Operational
POTENTIAL IMPACT MITIGATION MOVEMENT IN THE PERIOD ó
Business disruption could impinge on the normal operations of the Group. · The Asset and Investment Managers each have contingency plans in · Both the Asset and Investment Managers annually review their
place to ensure there are no disruptions to the core infrastructure which Disaster and Business Continuity Plans.
would impinge on the normal operations of the Group. These plans have been
implemented in adherence to COVID-19 Government guidelines, with limited
disruption to operations.
· An annual due diligence exercise is carried out on all principal · The annual due diligence visits were curtailed due to government
third-party service providers. restrictions. However, assurances were received as required from third-party
service providers.
· No concerns were identified.
· As an externally managed investment company, there is a continued · Both the Asset and Investment Manager are viable going concerns.
reliance on the Asset and Investment Managers and other third-party service
providers.
· All acquisitions undergo a rigorous due diligence process and all · The Asset Manager continues to monitor changes in Health and
multi-let properties undergo an annual comprehensive fire risk. Safety regulations, including, where required, COVID-19 social distancing
measures.
· The impact of physical damage and destruction to investment
properties is mitigated by ensuring all are covered by a comprehensive · The Asset Manager reviews the adequacy of insurance cover on an
building, loss of rent and service charge plus terrorism insurance with the ongoing basis.
exception of a small number of "self-insure" arrangements covered under
leases.
Information security and cyber threat resulting in data loss, or negative · The Asset and Investment Manager each has a dedicated Information · The Managers review the respective Information Technology polices
regulatory, reputational, operational (including GDPR), or financial impact. Technology team which monitors information security, privacy risk and cyber and the material third party service suppliers on as required basis to ensure
threats ensuring their respective operations are not interrupted. they reflect current and possible future threats.
· As required the building management systems are reviewed for
cyber security risk.
9. Accounting, Legal, and Regulatory
POTENTIAL IMPACT MITIGATION MOVEMENT IN THE PERIOD ö
Changes to accounting, legal and/or regulatory legislation, including · Robust processes are in place to ensure adherence to accounting, · The Group continues to receive advice from its corporate advisers
sanctions could result in changes to current operating processes. legal and regulatory requirements, including sanctions and Listing Rules. and has incorporated changes where required.
· All contracts are reviewed by the Group's legal advisers. · The Administrator and Company Secretary continue to attend all
Board meetings and advise on Listing Rule requirements in conjunction with the
· The Administrator, in its capacity as Group Accountant, and the Corporate Broker and Financial Adviser.
Company Secretary attend all Board meetings in order to be aware of all
announcements that need to be made.
· All compliance issues are raised with the Financial Adviser.
Loss of REIT status · The HMRC REIT regime requirements are monitored by the Asset and · The Group continues to receive advice from external advisers on
Investment Manager, and external advisors including the Company's tax adviser any anticipated future changes to the REIT regime.
Grant Thornton UK LLP and its sub-administrator Link Alternative Fund
Administrators Limited.
10. Environmental and Energy Efficiency Standards
POTENTIAL IMPACT MITIGATION MOVEMENT IN THE PERIOD ö
The Group's cost base could be impacted, and management time diverted, due to · The Board receives regular updates on environmental, social, · Additional attention is currently being devoted to this area to
climate changes and associated legislation. governance and potential legislation changes (e.g. the Government Green ensure the appropriate approach is applied and embedded in Group activities.
Finance Strategy July 2019) from its advisers.
· The Group has engaged an environmental consultancy to assist with
achieving and improving the Global Real Industry Sustainability Benchmark
(GRESB).
Changes to the environment could impact upon the operations of the Group. · Property acquisitions undergo a rigorous due diligence process, · The rigour of the environmental assessments process continues to
including an environmental assessment. be reviewed with the aim of enhancing it.
· The Asset Manager monitors the portfolio for any detrimental
environmental impact, by way of frequent inspections of the properties, and
the annual insurance review process.
An Energy Performance Rating of E and below may impact the Group's ability to · The Group continues to review each property to ensure adherence · The Asset Manager is continually reviewing the feasibility of
sell or lease an asset. with Energy Performance Rating requirements. enhancing Energy Performance Ratings to exceed the minimum requirement.
· The energy efficiency of investment acquisitions is fully
considered as part of the due diligence process for the acquisition of a
property.
Changes to the Principal Risks and Uncertainties
The Board, via the Audit Committee, has agreed the movement during the period
under review to each of the identified principal risks and uncertainties
following review of these risks, having considered the characteristics of
these and the economic and geo-political factors. Any impact of these risks to
the Company's future strategy is considered on an ongoing basis.
Extracts of the Report of the Directors
Share Capital
As at 31 December 2021, the Company's total issued share capital was
515,736,583 Ordinary Shares (2020: 431,506,583).
All of the Company's Ordinary Shares are listed on the premium segment of the
London Stock Exchange and each Ordinary Share carries one vote.
There is only one class of Ordinary Shares in issue for the Company, in
adherence to the REIT requirements. The only other shares the Company may
issue are particular types of non-voting restricted preference shares, of
which none (2020: none) are currently in issue.
Share Issues
On 1 September 2021, the Company allotted and issued 84,230,000 new Ordinary
Shares, which rank pari passu with the Company's existing issued Ordinary
Shares. These new Ordinary Shares were issued for non-cash consideration in
accordance with sections 295 and 296 of the Law as part of the consideration
payable to Squarestone Growth LLP for the acquisition of a regional office
portfolio announced on 31 August 2021.
At the AGM held on 21 September 2021, the Directors were granted authority to
allot Ordinary Shares on a non-pre-emptive basis for cash up to a maximum
number of 43,150,658 Shares (being 5% of the issued Share capital on 9 August
2021). The Directors were also granted the authority to disapply pre-emption
rights in respect of the allotment of Ordinary Shares up to a maximum number
of 21,575,329 Shares (being 5% of the issued Share capital on 9 August 2021)
where the allotment of such Shares is for the sole purpose of financing an
acquisition or other capital investment as defined by the Pre-Emption Group's
Statement of Principles.
No Shares were issued under these authorities during the year under review,
and the authorities will expire at the Company's 2022 AGM where resolutions
for their renewal will be sought, or, if sooner, on 21 December 2022.
Restrictions on Voting Rights
The Company does not have any restrictions on Shareholder voting rights.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report and the Group
Financial Statements in accordance with applicable law and regulations.
Guernsey company law requires the directors to prepare financial statements
for each financial year. The Directors are required under the Listing Rules of
the Financial Conduct Authority to prepare the group financial statements in
accordance with International Financial Reporting Standards ("IFRS") and IFRS
Interpretation Committee ("IFRIC") as contained in UK-adopted International
Accounting Standards.
The financial statements of the Group are required by law to give a true and
fair view of the state of the Group's affairs at the end of the financial
period and of the profit or loss of the Group for that period and are required
by IFRS and IFRIC as contained in UK-adopted International Accounting
Standards to present fairly the financial position and performance of the
Group.
In preparing each of the Group financial statements, the Directors are
required to:
· select suitable accounting policies and then apply them consistently;
· make judgements and accounting estimates that are reasonable and
prudent;
· state whether they have been prepared in accordance with IFRS and
IFRIC as contained in UK-adopted International Accounting Standards;
· prepare the financial statements on the going concern basis unless it
is inappropriate to presume that the Group will continue in business.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Group's transactions; disclose with
reasonable accuracy at any time the financial position of the Group; enable
them to ensure that the financial statements comply with the requirements of
The Companies (Guernsey) Law 2008 and, as regards the Group financial
statements, the IFRS and IFRIC as contained in UK-adopted International
Accounting Standards. They are also responsible for safeguarding the assets of
the Group and hence for taking reasonable steps for the prevention and
detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on Regional REIT's website.
Legislation in Guernsey governing the preparation and dissemination of
financial statements may differ from legislation in other jurisdictions.
RESPONSIBILITY STATEMENT OF THE DIRECTORS IN RESPECT OF THE CONSOLIDATED
ANNUAL REPORT
Each of the Directors, whose names and functions are listed within the full
Annual Report and Accounts, confirms that to the best of each person's
knowledge:
• the financial statements, prepared in accordance with IFRS and
IFRIC as contained in UK-adopted International Accounting Standards, give a
true and fair view of the assets, liabilities, financial position and profit
of the Group and the undertakings included in the consolidation taken as a
whole;
• the Strategic Report, including the Asset and Investment Managers'
Report, includes a fair review of the development and performance of the
business and the position of the Group and the undertakings included in the
consolidation taken as a whole, together with a description of the principal
risks and uncertainties they face; and
· the Annual Report and Accounts, taken as a whole, are fair, balanced
and understandable and provide the information necessary for Shareholders to
assess the Group's position, performance, business model and strategy.
This responsibility statement was approved by the Board of Directors on 28
March 2022 and signed on its behalf by:
Kevin McGrath
Chairman
28 March 2022
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2021
Year ended Year ended
31 December 31 December
2021 2020
Notes £'000 £'000
Continuing Operations
Revenue
Rental and property income 5 79,899 75,941
Property costs 6 (24,075) (22,662)
Net rental and property income 55,824 53,279
Administrative and other expenses 7 (10,583) (11,329)
Operating profit before gains and losses on property assets and other 45,241 41,950
investments
Gain/(loss) on disposal of investment properties 14 679 (1,073)
Change in fair value of investment properties 14 (8,296) (54,793)
Gain on the disposal of right of use assets 26 167 -
Change in fair value of right of use assets 26 (206) (195)
Operating profit/(loss) 37,585 (14,111)
Finance income 9 14 99
Finance expenses 10 (14,872) (14,108)
Impairment of goodwill 16 - (558)
Net movement in fair value of derivative financial instruments
25 6,045 (2,523)
Profit/(loss) before tax 28,772 (31,201)
Taxation 11 (15) 203
Total comprehensive income/(loss) for the year
(attributable to owners of the parent company) 28,757 (30,998)
Total comprehensive income arises from continuing operations.
Earnings/(losses)/ per Share - basic and diluted 12 6.3p (7.2)p
The notes below are an integral part of these consolidated financial
statements.
Consolidated Statement of Financial Position
As at 31 December 2021
31 December 31 December
2021 2020
Notes £'000 £'000
Assets
Non-current assets
Investment properties 14 906,149 732,380
Right of use assets 26 16,482 16,156
Goodwill 16 - -
Non-current receivables on tenant loan 17 819 1,011
Derivative financial instruments 25 1,706 -
925,156 749,547
Current assets
Trade and other receivables 18 29,404 33,690
Cash and cash equivalents 19 56,128 67,373
85,532 101,063
Total assets 1,010,688 850,610
Liabilities
Current liabilities
Trade and other payables 20 (40,966) (33,809)
Deferred income 21 (16,751) (14,584)
Deferred tax liabilities 22 (705) (690)
(58,422) (49,083)
Non-current liabilities
Bank and loan borrowings 23 (383,474) (310,692)
Retail eligible bonds 24 (49,596) (49,441)
Derivative financial instruments 25 - (4,339)
Lease liabilities 26 (16,795) (16,473)
(449,865) (380,945)
Total liabilities (508,287) (430,028)
Net assets 502,401 420,582
Equity
Stated capital 27 513,762 430,819
(Accumulated losses) (11,361) (10,237)
Total equity attributable to owners of the parent company 502,401 420,582
Net asset value per Share - basic and diluted 28 97.4p 97.5p
The notes below are an integral part of these consolidated financial
statements.
These consolidated group financial statements were approved by the Board of
Directors and authorised for issue on 28 March 2022 and signed on its behalf
by:
Kevin McGrath,
Chairman
28 March 2022
Consolidated Statement of Changes in Equity
For the year ended 31 December 2021
Attributable to owners of the parent company
Stated Retained earnings/ (Accumulated losses)
capital £'000 Total
Notes £'000 £'000
Balance at 1 January 2021 430,819 (10,237) 420,582
Total comprehensive income - 28,757 28,757
Shares issued 27 83,051 - 83,051
Share issue costs 27 (108) - (108)
Dividends paid 13 - (29,881) (29,881)
Balance at 31 December 2021 513,762 (11,361) 502,401
For the year ended 31 December 2020
Attributable to owners of the parent company
Stated Retained earnings/ (Accumulated losses)
capital £'000 Total
Notes £'000 £'000
Balance at 1 January 2020 430,819 52,909 483,728
Total comprehensive loss - (30,998) (30,998)
Dividends paid 13 - (32,148) (32,148)
Balance at 31 December 2020 430,819 (10,237) 420,582
The notes below are an integral part of these consolidated financial
statements.
Consolidated Statement of Cash Flows
For the year ended 31 December 2021
Year ended Year ended
31 December 31 December
2021 2020
£'000 £'000
Cash flows from operating activities
Profit/(loss) for the year before taxation 28,772 (31,201)
- Change in fair value of investment properties 8,296 54,793
- Change in fair value of financial derivative instruments (6,045) 2,523
- (Gain)/loss on disposal of investment properties (679) 1,073
- Gain on disposal of right of use assets (167) -
- Change in fair value of right of use assets 206 195
Impairment of goodwill - 558
Finance income (14) (99)
Finance expense 14,872 14,108
Decrease/(increase) in trade and other receivables 4,398 (2,821)
Increase in trade and other payables 5,089 7,595
Increase in deferred income 2,167 1,283
Cash generated from operations 56,895 48,007
Interest paid (13,053) (12,515)
Taxation received - 174
Net cash flow generated from operating activities 43,842 35,666
Investing activities
Purchase of investment properties (175,196) (53,759)
Sale of investment properties 76,940 53,428
Interest received 15 101
Net cash flow used in investing activities (98,241) (230)
Financing activities
Share issue costs (108) -
Dividends paid (27,813) (26,672)
Bank borrowings advanced 77,305 39,200
Bank borrowings repaid (3,539) (17,029)
Bank borrowing costs paid (2,051) (192)
Lease repayments (640) (618)
Net cash flow generated/(used) in financing activities 43,154 (5,311)
Net (decrease)/increase in cash and cash equivalents (11,245) 30,125
Cash and cash equivalents at the start of the year 67,373 37,248
Cash and cash equivalents at the end of the year 56,128 67,373
The notes below are an integral part of these consolidated financial
statements.
Notes to the Consolidated Financial Statements
For the year ended 31 December 2021
1. Corporate information
The Group's consolidated financial statements for the year ended 31 December
2021 comprise the results of the Company and its subsidiaries (together
constituting the "Group") and were approved by the Board and authorised for
issue on 28 March 2022.
The Company is a company limited by Shares incorporated in Guernsey under The
Companies (Guernsey) Law, 2008, as amended (the "Law"). The Company's Ordinary
Shares are admitted to the Official List of the Financial Conduct Authority
("FCA") and traded on the London Stock Exchange ("LSE").
The Company was incorporated on 22 June 2015 and is registered with the
Guernsey Financial Services Commission as a Registered Closed-Ended Collective
Investment Scheme pursuant to The Protection of Investors (Bailiwick of
Guernsey) Law, 1987, as amended, and the Registered Collective Investment
Schemes Rules 2018.
The Company did not begin trading until 6 November 2015 when the Shares were
admitted to trading on the LSE.
The nature of the Group's operations and its principal activities are set out
in the Strategic Report within the full Annual Report.
The address of the registered office is Mont Crevelt House, Bulwer Avenue, St.
Sampson, Guernsey GY2 4LH.
2. Basis of preparation
In accordance with Section 244 of The Companies (Guernsey) Law 2008, the Group
confirms that the financial information for the year ended 31 December 2021
are derived from the Group's audited financial statements and that these are
not statutory accounts and, as such, do not contain all information required
to be disclosed in the financial statements prepared in accordance with
International Financial Reporting Standards ("IFRS").
The statutory accounts for the year ended 31 December 2021 have been audited
and approved, but have not yet been filed.
The Group's audited financial statements for the year ended 31 December 2021
received an unqualified audit opinion and the auditor's report contained no
statement under section 263(2) or 263(3) of The Companies (Guernsey) Law
2008.
The financial information contained within this preliminary statement was
approved and authorised for issue by the Board on 28 March 2022.
2.1 Functional and presentation currency
The financial information is presented in Pounds Sterling, which is also the
functional currency, and all values are rounded to the nearest thousand
(£'000) pound, except where otherwise indicated.
2.2 Going concern
The Directors have carefully considered areas of potential financial risk and
have reviewed cash flow forecasts, evaluating a number of scenarios which
included extreme downside sensitivities in relation to rental cash collection,
no property acquisitions, no elective capital expenditure, REIT regime
compliance, and no dividends. A range of scenarios of up to 12 months of nil
rental cash collection were considered, and taking into account mitigating
management actions, the Company had adequate resources to continue is
operations. Further effects of the COVID-19 outbreak are documented in the
going concern and viability statements within the full Annual Report and
within principal and emerging risks above.
No material uncertainties have been detected which would influence the Group's
ability to continue as a going concern for a period of at least 12 months from
the approval of these financial statements. The Directors have satisfied
themselves that the Group has adequate financial resources to continue in
operational existence for this period.
Accordingly, the Board of Directors continue to adopt the going concern basis
in preparing the financial statements.
2.3 Business combinations
At the time of acquisition, the Group considers whether each acquisition
represents the acquisition of a business or the acquisition of an asset. For
an acquisition of a business where an integrated set of activities are
acquired in addition to the property, the Group accounts for the acquisition
as a business combination under IFRS 3 Business Combinations ("IFRS 3").
Where such acquisitions are not judged to be the acquisition of a business,
they are not treated as business combinations. Rather, the cost to acquire the
corporate entity is allocated between the identifiable assets and liabilities
of the entity based upon their relative fair values at the acquisition date.
Accordingly, no goodwill or additional deferred tax arises.
2.4 New standards, amendments and interpretations
New standards, amendments to standards and interpretations which came into
effect for accounting periods starting on or after 1 January 2021 and which
have had an impact on the financial statements are as follows:
Interest Rate Benchmark Reform-Phase 2:
Amendments to IFRS 9 'Financial Instruments', IAS 39 'Financial Instruments;
Recognition and Measurement', IFRS 7 'Financial Instruments: Disclosures',
IFRS 4 'Insurance Contracts' and IFRS 16 'Leases' (effective for periods
beginning on or after 1 January 2021) These amendments address issues that
might affect financial reporting when an existing interest rate benchmark is
replaced with an alternative benchmark interest rate.
The Group's borrowings with Royal Bank of Scotland, Bank of Scotland &
Barclays and Santander UK are transitioning from the London Interbank Offer
Rate (LIBOR) benchmark to Sterling Overnight Index Average (SONIA) benchmark.
The borrowings with RBS transitioned during the year and the Santander UK
borrowings transition for the first interest payment in 2022. There has been
and is expected to be negligible cost involved in the borrowing facility
transition and the respective hedge instrument amendments. As the Group does
not apply hedge accounting, the accounting standard amendments have not had a
significant impact on the preparation of the financial statements.
Amendments to IFRS 16 'Leases' (effective for periods beginning on or after 1
June 2020) These amendments provide lessees with an exemption from assessing
whether a COVID-19 related rent concession is a lease modification. These
amendments have not had a significant impact on the preparation of the
financial statements.
2.5 New standards, amendments and interpretations effective for future
accounting periods
A number of new standards, amendments to standards and interpretations are
effective for periods beginning on or after 1 January 2022 and have not been
applied in preparing these financial statements. These are:
Amendments to IFRS 3 'Business Combinations' (effective for periods beginning
on or after 1 January 2022) - gives clarification on the recognition of
contingent liabilities at acquisition and clarifies that contingent assets
should not be recognised at the acquisition date. The amendments are not
expected to have a significant impact on the preparation of the financial
statements.
Amendments to IAS 37 'Provisions, Contingent Liabilities and Contingent
Assets' (effective for periods beginning on or after 1 January 2022) - gives
clarification on costs to include in estimating the cost of fulfilling a
contract for the purpose of assessing whether that contract is onerous. The
amendments are not expected to have a significant impact on the preparation of
the financial statements.
Amendments to IFRS 9 'Financial Instruments' (effective for periods beginning
on or after 1 January 2022) - gives clarification on the fees an entity
includes when assessing whether the terms of a new or modified financial
liability are substantially different from the terms of the original
liability. The amendments are not expected to have a significant impact on the
preparation of the financial statements.
Amendments to IAS 1 'Presentation of Financial Statements' (effective for
periods beginning on or after 1 January 2023) - clarifies that liabilities are
classified as either current or non-current, depending on the rights that
exist at the end of the reporting period and not expectations of or actual
events after the reporting date. The amendments also give clarification to the
definition of settlement of a liability. The amendments are not expected to
have a significant impact on the preparation of the financial statements.
Amendments to IAS 1 'Presentation of Financial Statements' (effective for
periods beginning on or after 1 January 2023) - are intended to help entities
in deciding which accounting policies to disclose in their financial
statements. The amendments are not expected to have a significant impact on
the preparation of the financial statements.
Amendments to IAS 8 'Accounting Policies, Changes in Accounting Estimates and
Errors' (effective for periods beginning on or after 1 January 2023) -
introduces the definition of an accounting estimate and includes other
amendments to help entities distinguish changes in accounting estimates from
changes in accounting policies. The amendments are not expected to have a
significant impact on the preparation of the financial statements.
3. Significant accounting judgements, estimates and assumptions
The preparation of the financial statements requires management to make
judgements, estimates and assumptions that affect the reported amounts of
revenues, expenses, assets and liabilities at the reporting date. 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 affected in future periods.
3.1. Critical accounting estimates and assumptions
The principal estimates that may be material to the carrying amount of assets
and liabilities are as follows:
3.1.1 Valuation of investment property
The fair value of investment property, which has a carrying value at the
reporting date of £906,149,000 (31 December 2020: £732,380,000), is
determined by independent 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. Properties have been valued on an individual basis.
The valuation experts use recognised valuation techniques applying the
principles of both IAS 40 and IFRS 13.
The value of the properties has been assessed in accordance with the relevant
parts of the current RICS Red Book. In particular, we have assessed the fair
value as referred to in VPS4 item 7 of the RICS Red Book. Under these
provisions, the term "Fair Value" means the definition adopted by the
International Accounting Standards Board ("IASB") in IFRS 13, namely "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". Factors reflected include current market conditions, annual rentals,
lease lengths and location. The significant methods and assumptions used by
the valuers in estimating the fair value of investment property are set out in
note 14.
There is some uncertainty concerning the impact of COVID-19; however, the
independent valuers note the following in their report.
The outbreak of Novel Coronavirus (COVID-19), which was declared by the World
Health Organisation as a "Global Pandemic" on the 11(th) March 2020, continues
to affect economies and real estate markets globally. Nevertheless, as at the
valuation date, property markets are mostly functioning again, with
transaction volumes and other relevant evidence at levels where enough market
evidence exists upon which to base opinions of value. Accordingly, and for the
avoidance of doubt, our valuation is not reported as being subject to
'material valuation uncertainty' as defined by VPS 3 and VPGA 10 of the RICS
Valuation - Global Standards.
3.1.2 Fair valuation of interest rate derivatives
In accordance with IFRS 13, the Group values its interest rate derivatives at
fair value. The fair values are estimated by the respective counterparties
with revaluation occurring on a quarterly basis. The counterparties will use a
number of assumptions in determining the fair values, including estimations
over future interest rates and therefore future cash flows. The fair value
represents the net present value of the difference between the cash flows
produced by the contracted rate and the valuation rate. The carrying value of
the derivatives at the reporting date was £1,706,000 asset (31 December 2020:
£4,339,000 liability). The significant methods and assumptions used in
estimating the fair value of the interest rate derivatives are set out in note
25.
3.1.3 Leases - the Group as lessee
The Group has a number of leases concerning the long-term lease of land
associated with its long leasehold investment properties. Under IFRS16, the
Group calculates the lease liability at each reporting date and at the
inception of each lease. The liability is calculated using present value of
future lease payments using the Group's incremental borrowing rate as the
discount rate. At 31 December 2021, there were 12 leases with the range of the
period left to run being 45 and 130 years. The Directors have determined that
the discount rate to use in the calculation for each lease is 3.5% being the
Group's weighted average cost of debt at the date of transition.
3.1.4 Dilapidation income
The Group recognises dilapidation income in the Group's Statement of
Comprehensive Income when the right to receive the income arises. In
determining accrued dilapidations, the Group has considered historic recovery
rates, while also factoring in expected costs associated with recovery.
3.2. Critical judgements in applying the Group's accounting policies
In the process of applying the Group's accounting policies, management has
made the following judgements, which have the most significant effect on the
amounts recognised in the financial statements:
3.2.1 Operating lease contracts - the Group as lessor
The Group has acquired investment properties that are subject to commercial
property leases with tenants. The Group has determined, based on an evaluation
of the terms and conditions of the arrangements, particularly the duration of
the lease terms and minimum lease payments, that it retains all of the
significant risks and rewards of ownership of these properties and so accounts
for the leases as operating leases.
3.2.2 Consolidation of entities in which the Group holds less than 50%
Management considered that up until 9 November 2018, the Group had de facto
control of View Castle Limited and its 27 subsidiaries (the "View Castle Sub
Group") by virtue of the amended and restated Call Option Agreement dated 3
November 2015. Following a restructure of the View Castle Sub Group, the
majority of properties held within the View Castle Sub Group now reside in a
new special purpose vehicle ("SPV"). A new call option was entered into dated
9 November 2018 with View Castle Limited and five of its subsidiaries (the
"View Castle Group"). As per the previous amended and restated Call Option
Agreement, under this new option the Group may acquire any of the properties
held by the View Castle Group for a fixed nominal consideration. Despite
having no equity holding, the Group is deemed to have control over the View
Castle Group as the Option Agreement means that the Group is exposed to, and
has rights to, variable returns from its involvement with the View Castle
Group, through its power to control.
3.2.3 Acquisitions of subsidiary companies
For each acquisition, the Directors consider whether the acquisition met the
definition of the acquisition of a business or the acquisition of a group of
assets and liabilities.
A business is defined in IFRS 3 as an integrated set of activities and assets
that is capable of being conducted and managed for the purpose of providing a
return in the form of dividends, lower costs or other economic benefits
directly to investors or other owners, members or participants. Furthermore, a
business consists of inputs and processes applied to those inputs that have
the ability to create outputs.
The companies acquired in the year have comprised portfolios of investment
properties and existing leases with multiple tenants over varying periods,
with little in the way of processes acquired. It has therefore concluded in
each case that the acquisitions did not meet the criteria for the acquisition
of a business as outlined above.
3.2.4 Recognition of income
Service charges and other similar receipts are included in net rental and
property income gross of the related costs as the Directors consider the Group
acts as principal in this respect.
4. Summary of significant accounting policies
The accounting policies adopted in this report are consistent with those
applied in the financial statements for the year ended 31 December 2020 and
have been consistently applied for the year ended 31 December 2021.
4.1. Basis of consolidation
The consolidated financial statements comprise the financial statements of the
Company and its subsidiaries as at the date of the Statement of Financial
Position.
4.2 Subsidiaries
Subsidiaries are all entities (including structured entities) over which the
Group has control. The Group controls an entity when the Group is exposed to,
or has rights to, variable returns from its involvement with the entity and
has the ability to affect those returns through its power over the entity.
Subsidiaries are fully consolidated from the date on which control is
transferred to the Group. They are deconsolidated from the date that control
ceases.
The Group applies the acquisition method to account for business combinations.
The consideration transferred for the acquisition of a subsidiary is the fair
value of the assets transferred, the liabilities incurred to the former owners
of the acquiree and the equity interests issued by the Group. Identifiable
assets and liabilities acquired, and contingent liabilities assumed, in a
business combination are measured initially at their fair values at the
acquisition date. The Group recognises any non-controlling interest in the
acquiree on an acquisition-by-acquisition basis, either at fair value or at
the non-controlling interest's proportionate share of the recognised amounts
of the acquiree's identifiable net assets. Acquisition-related costs are
expensed as incurred.
Any contingent consideration to be transferred by the Group is recognised at
fair value at the acquisition date. Subsequent changes to the fair value of
the contingent consideration are recognised in profit or loss. Contingent
consideration that is classified as equity is not re-measured, and its
subsequent settlement is accounted for within equity.
For acquisitions of subsidiaries not meeting the definition of a business, the
Group allocates the cost between the individual identifiable assets and
liabilities in the Group based on their relative fair values at the date of
acquisition. Such transactions or events do not give rise to goodwill.
Inter-company transactions, balances and unrealised gains and losses on
transactions between Group companies are eliminated in full. When necessary,
amounts reported by subsidiaries have been adjusted to conform to the Group's
accounting policies.
The excess of the consideration transferred, and the amount of any
non-controlling interest in the acquiree over the fair value of the
identifiable net assets acquired, is recognised as goodwill.
4.2.1. Disposal of subsidiaries
When the Group ceases to have control over an entity, any retained interest in
the entity is re-measured to its fair value at the date when control is lost,
with the change in the carrying amount recognised in profit or loss. The fair
value is the initial carrying amount for the purposes of subsequently
accounting for the retained interest as an associate, joint venture or
financial asset. In addition, any amounts previously recognised in other
comprehensive income in respect of that entity are accounted for as if the
Group had directly disposed of the related assets or liabilities. This may
mean that amounts previously recognised in other comprehensive income are
reclassified to profit or loss.
4.3. Segmental information
Operating segments are reported in a manner consistent with the internal
reporting provided to the chief operating decision-maker. The chief operating
decision-maker is the person or group that allocates resources to and assesses
the performance of the operating segments of an entity. The Group has
determined that its chief operating decision-maker is the Board of Directors.
After a review of the information provided for management purposes, it was
determined that the Group has one operating segment and therefore segmental
information is not disclosed in these consolidated financial statements.
4.4. Investment property
Investment property comprises freehold or leasehold properties that are held
to earn rentals or for capital appreciation, or both, rather than for sale in
the ordinary course of business or for use in production or administrative
functions.
Investment property is recognised, usually, on legal completion, when the
risks and rewards of ownership have been transferred, and is measured
initially at cost including transaction costs. Transaction costs include
transfer taxes, professional fees for legal services and other costs incurred
in order to bring the property to the condition necessary for it to be capable
of being utilised in the manner intended. Subsequent to initial recognition,
investment property is stated at fair value. Gains or losses arising from
changes in the fair value are included in the Group's Consolidated Statement
of Comprehensive Income in the period in which they arise under IAS 40,
'Investment Property'.
Additions to investment property include costs of a capital nature only.
Expenditure is classified as capital when it results in identifiable future
economic benefits, which are expected to accrue to the Group. All other
property expenditure is charged in the Group's Consolidated Statement of
Comprehensive Income as incurred.
Investment properties cease to be recognised when they have been disposed of
or withdrawn permanently from use and no future economic benefit is expected.
The difference between the net disposal proceeds and the carrying amount of
the asset (being the fair value at the start of the financial year) would
result in either gains or losses at the retirement or disposal of investment
property. Any gains or losses are recognised in the Group's Consolidated
Statement of Comprehensive Income in the period of retirement or disposal.
4.5. Goodwill
Goodwill arises on the acquisition of subsidiaries and represents the excess
of the consideration transferred over the Group's interest in the fair value
of the net identifiable assets, liabilities and contingent liabilities of the
acquiree plus the amount of the non-controlling interest of the acquiree.
For the purpose of impairment testing, goodwill acquired in a business
combination is allocated to each of the subsidiaries, or groups of
subsidiaries, that is expected to benefit from the synergies of the
combination. Each subsidiary or group of subsidiaries to which the goodwill is
allocated represents the lowest level within the entity at which the goodwill
is monitored for internal management purposes.
Goodwill impairment reviews are undertaken annually, or more frequently if
events or changes in circumstances indicate a potential impairment. The
carrying value of goodwill is compared to the recoverable amount, which is the
higher of the value in use and the fair value less the costs of disposal. Any
impairment is recognised immediately as an expense and is not subsequently
reversed.
4.6. Derivative financial instruments
Derivative financial instruments, comprising interest rate caps and swaps for
hedging purposes, are initially recognised at fair value and are subsequently
measured at fair value, being the estimated amount that the Group would
receive or pay to sell or transfer the agreement at the period end date,
taking into account current interest rate expectations and the current credit
rating of the lender and its counterparties. The gain or loss at each fair
value remeasurement date is recognised in the Group's Consolidated Statement
of Comprehensive Income.
The Group uses valuation techniques that are appropriate in the circumstances
and for which sufficient data is available to measure fair value, maximising
the use of relevant observable inputs and minimising the use of unobservable
inputs significant to the fair value measurement as a whole.
4.7 Financial assets
The Group classifies its financial assets as at fair value through profit or
loss or at amortised cost, depending on the purpose for which the asset was
acquired. Currently the Group does not have any financial assets which it has
classified at fair value through profit or loss.
Assets held at amortised cost arise principally from the provision of goods
and services (e.g. trade and other receivables), but also incorporate other
financial assets where the objective is to hold these assets in order to
collect contractual cash flows which comprise the payment of principal and
interest. They are initially recognised at fair value plus transaction costs
that are directly attributable to their acquisition or issue and are
subsequently carried at amortised cost being the effective interest rate
method, less provision for impairment.
The Group's financial assets comprise 'trade and other receivables', 'tenant
loan' and 'cash and cash equivalents'.
The tenant loan relates to a loan made to a tenant which is subject to
interest. The amount receivable has been recognised at amortised cost using
the effective interest method.
4.8. Trade and other receivables
Trade and other receivables are recognised initially at fair value and
subsequently carried at amortised cost less provision for impairment. Where
the time value of money is material, receivables are carried at amortised cost
using the effective interest method. Impairment provisions are recognised
based on the expected credit loss model detailed within IFRS 9.
The Group recognises a loss allowance for expected credit losses on trade
receivables. The loss allowance is based on lifetime expected credit losses.
The amount of expected credit losses is updated at each reporting date to
reflect changes in credit risk since initial recognition. The expected credit
losses on these financial assets are estimated based on the Group's historical
credit loss experience, adjusted for factors that are specific to the debtors,
general economic conditions and an assessment of both the current as well as
the forecast direction of conditions at the reporting date. Impaired balances
are reported net, however, impairment provisions are recorded within a
separate provision account with the loss being recognised within
administration costs within the Consolidated Statement of Comprehensive
Income. On confirmation that the trade receivable will not be collectable, the
gross carrying value of the asset is written off against the associated
provision.
Lease premiums and other lease incentives provided to tenants are recognised
as an asset and amortised over the period from date of lease commencement to
termination date.
4.9. Cash and cash equivalents
Cash and cash equivalents include cash in hand and deposits held at banks with
original maturities of three months or less. Cash also includes amounts held
in restricted accounts that are unavailable for everyday use.
4.10. Trade and other payables
Trade and other payables are initially recognised at their fair value being at
their invoiced value inclusive of any VAT that may be applicable. Payables are
subsequently measured at amortised cost using the effective interest method.
4.11. Bank and other borrowings
All bank and other borrowings (comprising bank loans and retail eligible
bonds) are initially recognised at cost net of attributable transaction costs.
Any attributable transaction costs relating to the issue of the bank
borrowings are amortised through the Group's Statement of Comprehensive Income
over the life of the debt instrument on a straight-line basis. After initial
recognition, all bank and other borrowings are measured at amortised cost,
using the effective interest method.
Bank and other borrowings are derecognised when the obligation under the
liability is discharged or cancelled or expires. When an existing financial
liability is replaced by another from the same lender on substantially
different terms, or the terms of an existing liability are substantially
modified, such an exchange or modification is treated as the derecognition of
the original liability and the recognition of a new liability. The difference
in the respective carrying amounts is recognised in Group's Consolidated
Statement of Comprehensive Income.
4.12 Dividends payable to Shareholders
Equity dividends are recognised and accrued from the date declared and when
they are no longer at the discretion of the Company.
4.13 Rental and property income
Rental income arising from operating leases on investment property is
accounted for on a straight-line basis over the lease terms and is included in
gross rental and property income in the Group's Consolidated Statement of
Comprehensive Income. Initial direct costs incurred in negotiating and
arranging an operating lease are added to the carrying amount of the lease
asset and are recognised as an expense over the lease term on the same basis
as the lease income.
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.
Tenant lease incentives are recognised as a reduction of rental revenue on a
straight-line basis over the term of the lease. 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.
Surrender premiums received from tenants to terminate leases or surrender
premises are recognised in the Group's Statement of Comprehensive Income when
the right to receive them arises.
Dilapidation income is recognised in the Group's Statement of Comprehensive
Income when the right to receive it arises.
When the Group is acting as an agent, the commission, rather than gross
income, is recorded as revenue.
Income arising from expenses recharged to tenants is recognised in the year in
which the compensation becomes receivable. Service charges and other similar
receipts are included in net rental and property income gross of the related
costs as the Directors consider the Group acts as principal in this respect.
4.14 Property costs
Non-recoverable property costs contain service and management charges related
to empty properties.
Service and management charges are recognised in the accounting period in
which the services are rendered.
Recoverable property costs contain service charges and other similar costs
which are recognised in the accounting period in which the services are
rendered.
4.15. Interest income
Interest income is recognised as interest accrued on cash balances held by the
Group. Interest charged to a tenant on any overdue rental income is also
recognised within interest income.
4.16. Dividend income
Dividend income is recognised when the right to receive payment is
established.
4.17. Finance costs
Interest costs are expensed in the period in which they occur. Arrangement
fees that a Group entity incurs in connection with bank and other borrowings
are amortised over the term of the loan.
4.18. Taxation
As the Company is managed and controlled in the UK, it is considered to be tax
resident in the UK.
The tax currently payable is based on the taxable profit/(loss) for the
period. Taxable profit/(loss) differs from net profit/(loss) as reported in
the Consolidated Statement of Comprehensive Income because it excludes items
of income or expense that are taxable or deductible in other years and it
further excludes items that are never taxable or deductible. The Group's
liability for current and deferred tax is calculated using tax rates that have
been enacted or substantively enacted at the date of the Statement of
Financial Position.
The Group elected to be treated as a UK REIT with effect from 7 November 2015.
The UK REIT rules exempt the profits of the Group's UK property rental
business from UK Corporation Tax. Gains on UK properties are also exempt from
tax, provided that they are not held for trading or sold in the three years
after completion of development. The Group is otherwise subject to UK
Corporation Tax.
There are a small number of entities within the Group which fall outside the
REIT rules and are subject to UK taxes on profits and property gains.
4.19 Deferred tax
Deferred tax is provided in full using the liability method on temporary
differences between the carrying amounts of assets and liabilities in the
financial statements and the corresponding tax bases used in the computation
of taxable profit/(loss). The amount of deferred tax provided is based on the
expected manner of realisation or settlement of the carrying amount of assets
and liabilities, using tax rates that are expected to apply in the period when
the liability is settled or the asset is realised based on tax rates (and tax
laws) enacted or substantively enacted at the date of the Statement of
Financial Position. A deferred tax asset is recognised only to the extent that
it is probable that future profits will be available for offset.
The deferred tax liability in relation to investment properties that are
measured at fair value is determined assuming that the property will be
recovered entirely through sale.
Deferred tax has been recognised on the unrealised property valuation
gains/(losses) of properties owned by Group entities which fall outside of the
REIT tax rules.
The current rate of UK Corporation Tax is 19%.
4.20. Stated capital
Stated capital represents the consideration received by the Company for the
issue of Ordinary Shares. Ordinary Shares are classed as equity.
4.21. Share-based payments
The Group has entered into performance fee arrangements with the Asset Manager
and Investment Manager which depend on the growth in the net asset value of
the Group exceeding a hurdle rate of return over a performance period. The fee
will be partly settled in cash and partly in equity and the equity portion is
therefore a Share-based payment arrangement. The fair value of the obligation
is measured at each reporting period, and the cost recognised as an expense.
The part of the obligation to be settled in Shares is credited to equity
reserves. If circumstances change and the fee is no longer settled by the
issue of Shares, then the amounts previously credited to equity reserves are
reversed. In the year ending 31 December 2021 no cash or equity rewards have
been made.
4.22 Leased assets
The Group has a number of leases concerning the long-term lease of land
associated with its long leasehold investment properties. These leased assets
are capitalised as "right of use assets" by recognising the present value of
the lease payments as an asset and a financial liability representing the
obligation to make future lease payments.
Right of use assets are valued at fair value and the change in fair value is
recognised in the Consolidated Statement of Comprehensive Income.
The associated financial liability is valued at the present value of future
lease payments using the Group's incremental borrowing rate. The value of the
financial liability is revalued at each reporting date. Lease payments reduce
the financial liability and interest on the financial liability is recognised
in finance costs.
5. Rental and property income
Year ended Year ended
31 December 31 December
2021 2020
£'000 £'000
Rental income - freehold property 57,128 55,382
Rental income - long leasehold property 8,626 6,695
Recoverable service charge income and other similar items 14,145 13,864
Total 79,899 75,941
6. Property costs
Year ended Year ended
31 December 2021 31 December
£'000 2020
£'000
Other property expenses and irrecoverable costs 9,930 8,798
Recoverable service charge expenditure and other similar costs 14,145 13,864
Total 24,075 22,662
7. Administrative and other expenses
Year ended Year ended
31 December 31 December
2021 2020
£'000 £'000
Investment management fees 2,326 2,577
Property management fees 2,495 2,266
Asset management fees 2,326 2,579
Directors' remuneration (see note 8) 254 255
Administration fees 647 634
Legal and professional fees 1,680 1,674
Marketing and promotion 72 69
Other administrative costs (including bad debts) 755 1,257
Bank charges 28 18
Total 10,583 11,329
Services provided by the Company's Auditor and its associates
The Group has obtained the following services from the Company's Auditor and
its associates:
Year ended Year ended
31 December 31 December
2021 2020
£'000 £'000
Fees payable to the Company's Auditor for the audit of the Company's annual
accounts*
88 105
Fees payable to the Group's Auditor and its associates for the audit of the
Company's subsidiaries
117 105
Total fees payable for audit services 205 210
Fees payable to the Group's Auditor and its associates for other services:
Audit-related services 27 26
Total fees payable to the Group's Auditor and its associates 232 236
* The prior year charge includes fees of £20,000 in respect of additional
audit work required for the 2019 audit due to the COVID-19 pandemic.
8. Directors' remuneration
Key management comprises the Directors of the Company. A summary of the
Directors' emoluments is set out in the Directors' Remuneration Report.
Year ended Year ended
31 December 31 December
2021 2020
£'000 £'000
Directors' fees 231 231
Employer's National Insurance contributions 23 24
Total 254 255
9. Finance income
Year ended Year ended
31 December 31 December
2021 2020
£'000 £'000
Interest income 14 99
Total 14 99
10. Finance expense
Year ended Year ended
31 December 31 December
2021 2020
£'000 £'000
Interest payable on bank borrowings 10,795 10,257
Amortisation of loan arrangement fees 1,067 857
Bond interest 2,250 2,250
Bond issue costs amortised 155 155
Bond expenses 8 8
Lease interest 597 581
Total 14,872 14,108
11. Taxation
Year ended Year ended
31 December 31 December
2021 2020
£'000 £'000
Corporation tax charge/(credit) - (157)
Increase/(decrease) in deferred tax creditor 15 (46)
Total 15 (203)
The current tax charge is reduced by the UK REIT tax exemptions. The tax
charge for the year can be reconciled to the profit / (loss) in the Statement
of Comprehensive Income as follows:
Year ended Year ended
31 December 31 December
2021 2020
£'000 £'000
Profit/(loss) before taxation 28,772 (31,201)
UK Corporation Tax rate 19% 19%
Theoretical tax at UK Corporation Tax rate 5,467 (5,928)
Effects of:
Revaluation of investment property 1,576 10,410
Permanent differences (207) (363)
Profits from the tax-exempt business (6,836) (4,276)
Deferred tax movement 15 (46)
Total 15 (203)
Permanent differences are the differences between an entity's taxable profits
and its results as stated in the financial statements. These arise because
certain types of income and expenditure are non-taxable or disallowable, or
because certain tax charges or allowances have no corresponding amount in the
financial statements.
The Group elected to be treated as a UK REIT with effect from 7 November 2015.
The UK REIT rules exempt the profits of the Group's UK property rental
business from corporation tax. Gains on UK properties are also exempt from
tax, provided they are not held for trading or sold in the three years after
completion of development. The Group is otherwise subject to UK corporation
tax.
As a REIT, Regional REIT Ltd is required to pay PIDs equal to at least 90% of
the Group's exempted net income. To retain UK REIT status, there are a number
of conditions to be met in respect of the principal company of the Group, the
Group's qualifying activity and its balance of business. The Group continues
to meet these conditions.
UK corporation tax arises on entities which form part of the Group
consolidated accounts but do not form part of the REIT group.
Due to the Group's REIT status and its intention to continue meeting the
conditions required to obtain approval in the foreseeable future, no provision
has been made for deferred tax on any capital gains or losses arising on the
revaluation or disposal of investments held by entities within the REIT group.
No deferred tax asset has been recognised in respect of losses carried forward
due to the unpredictability of future taxable profits.
12. Earnings per Share
Earnings per Share amounts are calculated by dividing profits/(losses) for the
year attributable to ordinary equity holders of the Company by the weighted
average number of Ordinary Shares in issue during the year.
The calculation of basic and diluted earnings per Share is based on the
following:
Year ended Year ended
31 December 31 December
2021 2020
£'000 £'000
Calculation of earnings per Share
Net profit/(loss) attributable to Ordinary Shareholders 28,757 (30,998)
Adjustments to remove:
Changes in value of investment properties 8,296 54,793
Changes in fair value of right of use assets 206 195
(Gain)/loss on disposal of investment property (679) 1,073
Gain on the disposal of right of use assets (167) -
Changes in fair value of interest rate derivatives and financial assets (6,045) 2,523
Impairment of goodwill - 558
Deferred tax charge/(credit) 15 (46)
EPRA net profit attributable to Ordinary Shareholders 30,383 28,098
Weighted average number of Ordinary Shares 459,660,172 431,506,583
Earnings/(loss) per Share - basic and diluted 6.3p (7.2)p
EPRA earnings per Share - basic and diluted 6.6p 6.5p
13. Dividends
Year ended Year ended
31 December 31 December
2021 2020
£'000 £'000
Dividend of 1.50 (2020: 2.55) pence per Ordinary Share
for the period 1 October - 31 December 6,473 11,004
Dividend of 1.60 (2020: 1.90) pence per Ordinary Share
for the period 1 January - 31 March 6,904 8,198
Dividend of 1.60 (2020: 1.50) pence per Ordinary Share
for the period 1 April - 30 June 8,252 6,473
Dividend of 1.60 (2020: 1.50) pence per Ordinary Share
for the period 1 July - 30 September 8,252 6,473
29,881 32,148
On 25 February 2021, the Company announced a dividend of 1.50 pence per Share
in respect of the period 1 October 2020 to 31 December 2020. The dividend
payment was made on 9 April 2021 to Shareholders on the register as at 5 March
2021.
On 19 May 2021, the Company announced a dividend of 1.60 pence per Share in
respect of the period 1 January 2021 to 31 March 2021. The dividend payment
was made on 16 July 2021 to Shareholders on the register as at 28 May 2021.
On 26 August 2021, the Company announced a dividend of 1.60 pence per Share in
respect of the period 1 April 2021 to 30 June 2021. The dividend payment was
made on 15 October 2021 to Shareholders on the register as at 10 September
2021.
On 11 November 2021, the Company announced a dividend of 1.60 pence per Share
in respect of the period 1 July 2021 to 30 September 2021. The dividend
payment was made on 12 January 2022 to Shareholders on the register as at 19
November 2021.
On 24 February 2022, the Company announced a dividend of 1.70 pence per Share
in respect of the period 1 October 2021 to 31 December 2021. The dividend will
be paid on 8 April 2022 to Shareholders on the register as at 4 March 2022.
The financial statements do not reflect this dividend.
The Board intends to pursue a progressive dividend policy and continue to pay
quarterly dividends. The level of future payment of dividends will be
determined by the Board having regard to, amongst other things, the financial
position and performance of the Group at the relevant time, UK REIT
requirements, and the interest of Shareholders.
14. Investment properties
In accordance with International Accounting Standard, IAS 40, 'Investment
Property', investment property has been independently valued at fair value by
Cushman & Wakefield Chartered Surveyors, an accredited independent valuer
with recognised and relevant professional qualifications and with recent
experience in the locations and categories of the investment properties being
valued. The valuations have been prepared in accordance with the Red Book and
incorporate the recommendations of the International Valuation Standards
Committee which are consistent with the principles set out in IFRS 13.
There is some uncertainty concerning the impact of COVID-19; however, the
independent valuers note the following in their report.
The outbreak of Novel Coronavirus (COVID-19), which was declared by the
World Health Organisation as a "Global Pandemic" on the 11(th) March 2020,
continues to affect economies and real estate markets globally. Nevertheless,
as at the valuation date, property markets are mostly functioning again, with
transaction volumes and other relevant evidence at levels where enough market
evidence exists upon which to base opinions of value. Accordingly, and for the
avoidance of doubt, our valuation is not reported as being subject to
'material valuation uncertainty' as defined by VPS 3 and VPGA 10 of the RICS
Valuation - Global Standards.
The valuations are the ultimate responsibility of the Directors. Accordingly,
the critical assumptions used in establishing the independent valuation are
reviewed by the Board.
All corporate acquisitions during the year have been treated as properties
purchased rather than business combinations (see note 3.2.3).
Group Long Leasehold Property
Freehold Property £'000
Movement in investment properties for the year ended 31 December 2021 £'000 Total
£'000
Valuation at 1 January 2021 659,432 72,948 732,380
Property additions - acquisitions 155,806 95,625 251,431
Property additions - subsequent expenditure 3,329 3,487 6,816
Property disposals (60,304) (16,557) (76,861)
Gain/(loss) on the disposal of investment properties (1,256) 1,935 679
Change in fair value during the year (5,567) (2,729) (8,296)
Valuation at 31 December 2021 751,440 154,709 906,149
Movement in investment properties for the year ended 31 December 2020
Valuation at 1 January 2020 697,908 90,007 787,915
Property additions- acquisitions 44,956 - 44,956
Property additions - subsequent expenditure 8,446 357 8,803
Property disposals (47,035) (6,393) (53,428)
Gain/(loss) on the disposal of investment properties (1,128) 55 (1,073)
Change in fair value during the year (43,715) (11,078) (54,793)
Valuation at 31 December 2020 659,432 72,948 732,380
The net book value of properties disposed of during the year amounted to
£76,181,000 (2020: £54,501,000).
The historic cost of the properties is £942,694,000 (31 December 2020:
£759,705,000).
Bank borrowings are secured by charges over investment properties held by
certain asset-holding subsidiaries. The banks also hold charges over the
Shares of certain subsidiaries and any intermediary holding companies of those
subsidiaries. The value of investment properties secured at 31 December 2021
was £896,149,000 (31 December 2020: £705,130,000).
The following table provides the fair value measurement hierarchy for
investment property:
Significant observable inputs Significant unobservable inputs
Quoted active prices (level 2) (level 3)
(level 1) £'000 £'000
Total £'000
Date of valuation: £'000
31 December 2021 906,149 - - 906,149
31 December 2020 732,380 - - 732,380
The hierarchy levels are defined in note 30.
It has been determined that the entire investment properties portfolio should
be classified under the level 3 category. The table below shows the movement
in the year on the level 3 category:
Year ended Year ended
31 December 31 December
2021 2020
£'000 £'000
Balance at the start of the year 732,380 787,915
Additions 258,247 53,759
Disposals (76,861) (53,428)
Gain/(loss) on the disposal of investment properties 679 (1,073)
Change in fair value during the year (8,296) (54,793)
Balance at the end of the year 906,149 732,380
The determination of the fair value of the investment properties held by each
consolidated subsidiary requires the use of estimates such as future cash
flows from investment properties, which take into consideration lettings,
tenants' profiles, future revenue streams, capital values of fixtures and
fittings, any environmental matters and the overall repair and condition of
the property, and discount rates applicable to those assets. Future revenue
streams comprise contracted rent (passing rent) and estimated rental value
after the contract period. In calculating ERV, the potential impact of future
lease incentives to be granted to secure new contracts is taken into
consideration. All these estimates are based on local market conditions
existing at the reporting date.
As at 31 December 2021, the estimated fair value of each property has been
primarily derived using comparable recent market transactions on arm's length
terms and assessed in accordance with the relevant parts of the RICS Valuation
- Global Standards and the RICS Valuation UK National Supplement.
Techniques used for valuing investment properties
The following descriptions and definitions relate to valuation techniques and
key observable inputs made in determining the fair values:
Valuation technique: market comparable method
Under the market comparable method (or market approach), a property fair value
is estimated based on comparable transactions in the market.
Observable input: market rental
The rent at which space could be let in the market conditions prevailing at
the date of valuation range: £9,000 - £3,125,246 per annum (2020: £9,000 -
£3,092,291 per annum).
Observable input: rental growth
The increase in rent is based on contractual agreements: 12.29% (2020: 13.08%)
Observable input: net initial yield
The initial net income from a property at the date of purchase, expressed as a
percentage of the gross purchase price including the costs of purchase range:
0.00% - 60.37% (2020: 0.00% - 25.64%).
Unobservable inputs:
The significant unobservable inputs (level 3) are sensitive to changes in the
estimated future cash flows from investment properties such as increases and
decreases in contracted rents, operating expenses and capital expenses, plus
transactional activity in the real estate market.
As set out within the significant accounting estimates and judgements, the
Group's property portfolio valuation is open to judgement and is inherently
subjective by nature, and actual values can only be determined in a sales
transaction.
15. Investment in subsidiaries
List of subsidiaries which are 100% owned and controlled by the Group
Country of incorporation Ownership
%
Blythswood House LLP (in liquidation) United Kingdom 100%
Beaufort Office Park Management Company Limited United Kingdom 100%
Glasgow Airport Business Park Management Company Limited United Kingdom 100%
Regional Commercial MIDCO Ltd Jersey 100%
RR Aspect Court Ltd Jersey 100%
RR Bristol Ltd Jersey 100%
RR Hounds Gate Ltd Jersey 100%
RR Rainbow (Aylesbury) Ltd Jersey 100%
RR Rainbow (North) Ltd Jersey 100%
RR Rainbow (South) Ltd Jersey 100%
RR Range Ltd Jersey 100%
RR Sea Dundee Ltd United Kingdom 100%
RR Sea Hanover Street Ltd United Kingdom 100%
RR Sea Lamont I Ltd Jersey 100%
RR Sea Lamont II Ltd Jersey 100%
RR Sea Lamont III Ltd Jersey 100%
RR Sea St. Helens Ltd United Kingdom 100%
RR Sea Stafford Ltd United Kingdom 100%
RR Sea Strand Ltd United Kingdom 100%
RR Sea TAPP Ltd Guernsey 100%
RR Sea TOPP Bletchley Ltd Guernsey 100%
RR Sea TOPP I Ltd Guernsey 100%
RR UK (Central) Ltd Jersey 100%
RR UK (Cheshunt) Ltd Jersey 100%
RR UK (South) Ltd Jersey 100%
RR UK (Port Solent) Ltd Jersey 100%
RR Wing Portfolio Ltd Jersey 100%
Smallbrook Queensway Limited Jersey 100%
Quay West Estate Company Limited United Kingdom 100%
Tay Properties Ltd Jersey 100%
TCP Arbos Ltd Jersey 100%
TCP Channel Ltd Jersey 100%
Tosca Chandlers Ford Ltd Jersey 100%
Tosca Glasgow II Ltd United Kingdom 100%
Tosca Midlands Ltd Jersey 100%
Tosca North West Ltd Jersey 100%
Tosca Scotland Ltd Jersey 100%
RR Star Ltd Jersey 100%
Tosca Swansea Ltd Jersey 100%
Tosca UK CP II Ltd Jersey 100%
Tosca UK CP Ltd Jersey 100%
Toscafund Bennett House Ltd Jersey 100%
Toscafund Bishopgate Street Ltd Jersey 100%
Toscafund Blythswood Ltd Jersey 100%
Toscafund Brand Street Ltd Jersey 100%
Toscafund Chancellor Court Ltd Jersey 100%
Toscafund Crompton Way Ltd Jersey 100%
RR Falcon Ltd Jersey 100%
Toscafund Glasgow Ltd Jersey 100%
Toscafund Harvest Ltd Jersey 100%
Toscafund Milburn House Ltd Jersey 100%
Toscafund Minton Place Ltd Jersey 100%
Toscafund Newstead Court Ltd Jersey 100%
Toscafund Portland Street Ltd Jersey 100%
Toscafund St Georges House Ltd Jersey 100%
Toscafund St James Court Ltd Jersey 100%
Toscafund Strathclyde BP Ltd Jersey 100%
Toscafund Wallington Ltd Jersey 100%
Toscafund Westminster House Ltd Jersey 100%
Toscafund Sheldon Court Ltd Jersey 100%
All of the above entities have been included in the Group's consolidated
financial statements.
By virtue of an Amended and Restated Call Option Agreement dated 3 November
2015, the Directors consider that the Group has control of View Castle Limited
and its subsidiaries (the "View Castle Group").
Under this option, the Group has the ability to acquire any of the properties
held by the View Castle Group by issuing an option notice for a nominal
consideration of £1. The recipient of the option notice will be obliged to
convey its title within one month after receipt of the option notice.
Despite having no equity holding, the Group controls the View Castle Group as
the option agreement has the effect that the Group is exposed to, and has
rights to, variable returns from its involvement with the View Castle Group
through its power to control.
The companies which make up the View Castle Group are as follows:
List of subsidiaries that are controlled by the Group:
Country of incorporation Effective
Ownership
%
Castlestream Ltd (in liquidation) United Kingdom 100%
Caststop Ltd (in liquidation) United Kingdom 100%
Credential (Baillieston) Ltd (in liquidation) United Kingdom 100%
Credential (Greenock) Ltd (in liquidation) United Kingdom 100%
Credential (Wardpark North) Ltd United Kingdom 100%
Credential Charing Cross Ltd (in liquidation) United Kingdom 100%
Credential Estates Ltd United Kingdom 100%
Hamiltonhill Estates Ltd (in liquidation) United Kingdom 100%
Old Rutherglen Road Ltd (in liquidation) United Kingdom 100%
Rocket Unit Trust Jersey 100%
Squeeze Newco 2 Ltd United Kingdom 100%
The Legal Services Centre Ltd (in liquidation) United Kingdom 100%
View Castle Ltd United Kingdom 100%
View Castle (Milton Keynes) Ltd United Kingdom 100%
View Castle (Properties) Ltd United Kingdom 100%
All of the above entities have been included in the Group's consolidated
financial statements up to 31 December 2021.
Business Combinations
There have been no new business combinations entered into in the financial
year.
16. Goodwill
31 December 31 December
2021 2020
£'000 £'000
Group
At start of year - 558
Impairment - (558)
At end of year - -
Goodwill arises on the acquisition of subsidiaries and represents the excess
of the consideration transferred, the amount of any non-controlling interest
in the acquiree and the acquisition-date fair value of any previous equity
interest in the acquiree over the fair value of the identifiable net assets
acquired. If the total of consideration transferred, non-controlling interest
recognised and previously held interest measured at fair value is less than
the fair value of the net assets of the subsidiary acquired in the case of a
bargain purchase, the difference is recognised directly in the Group's
Statement of Comprehensive Income.
17. Non-current receivables
Non-current receivables on tenant loans
31 December 31 December
2021 2020
£'000 £'000
At start of year 1,203 1,348
Amounts repaid in the year (192) (145)
At end of year 1,011 1,203
Asset due within 1 year (note 18) 192 192
Asset due after 1 year 819 1,011
1,011 1,203
During 2016, the Group entered into a loan agreement with a tenant for
£1,926,000. The loan is subject to interest of 4% above the base rate of the
Bank of Scotland on late payments and is repayable in instalments over ten
years.
18. Trade and other receivables
31 December 31 December
2021 2020
£'000 £'000
Gross amount receivable from tenants 10,835 11,768
Less provision for impairment (1,615) (1,458)
Net amount receivable from tenants 9,220 10,310
Current receivables - tenant loans (note 17) 192 192
Income tax 52 52
Other receivables 736 1,458
Prepayments 19,204 21,678
29,404 33,690
The maximum exposure to credit risk at the reporting date is the carrying
value of the amounts disclosed above. The Group does not hold any collateral
as security.
The aged analysis of trade receivables that are past due but not impaired was
as follows:
31 December 31 December
2021 2020
£'000 £'000
< 30 days 4,605 6,000
30-60 days 1,160 915
> 60 days 5,070 4,853
10, 835 11,768
Less provision for impairment (1,615) (1,458)
9,220 10,310
The Directors consider the fair value of receivables equals their carrying
amount.
The table above shows the aged analysis of trade receivables included in the
table above which are past due but not impaired. These relate to tenants for
whom there is no recent history of default.
Provision for impairment of trade receivables movement as follows:
31 December 31 December
2021 2020
£'000 £'000
At start of year 1,458 891
Provision for impairment in the year 1,971 1,787
Receivables written off as uncollectable (633) (719)
Unused provision reversed (1,181) (501)
At end of year 1,615 1,458
Other categories within trade and other receivables do not include impaired
assets. Receivables are written off as uncollectable where there is no
reasonable expectation of recovery.
19. Cash and cash equivalents
31 December 31 December
2021 2020
£'000 £'000
Group
Cash held at bank 49,919 54,958
Restricted cash held at bank 6,209 12,415
At end of year 56,128 67,373
Restricted cash balances of the Group comprise:
· £4,149,000 (2020: £10,752,000) of funds held in
blocked bank accounts which are controlled by the Group's lenders and are
released to free cash once certain loan conditions are met. The restricted
funds arose on net proceeds from investment property disposals and were
released after the year end.
· £2,060,000 (2020: £1,663,000) of funds which
represent tenants' rental deposits.
All restricted cash balances will be available before 31 March 2022.
In addition, £10,040,000 (2020: £7,462,000) of cash funds represent service
charge income received from tenants for settlement of future service charge
expenditure. These amounts are not analysed as restricted balances.
20. Trade and other payables
31 December 31 December
2021 2020
£'000 £'000
Withholding tax due on dividends paid 861 572
Dividends announced but not paid 8,252 6,473
Trade payables 3,559 2,262
Other payables 13,245 11,205
Value added tax 1,714 3,662
Accruals 13,335 9,635
At end of year 40,966 33,809
Other payables principally include rent deposits held and service charge
costs.
The Directors consider the fair value of trade and other payables to equal
their carrying amounts.
21. Deferred income
Deferred rental income of £16,751,000 (31 December 2020: £14,584,000)
represents rent received in advance from tenants.
22. Deferred tax liabilities
31 December 31 December
2021 2020
£'000 £'000
Deferred tax 705 690
705 690
The movement on deferred tax liability is shown below:
At start of year 690 736
Deferred tax on the valuation of investment properties 15 (46)
At end of year 705 690
23. Bank and loan borrowings
Bank borrowings are secured by charges over investment properties held by
certain asset-holding subsidiaries. The banks also hold charges over the
Shares of certain subsidiaries and any intermediary holding companies of those
subsidiaries. Any associated fees in arranging the bank borrowings unamortised
as at the year end are offset against amounts drawn on the facilities as shown
in the table below:
31 December 31 December
2021 2020
£'000 £'000
Bank borrowings drawn at start of year 316,171 294,000
Bank borrowings drawn 77,305 39,200
Bank borrowings repaid (3,539) (17,029)
Bank borrowings drawn at end of year 389,937 316,171
Less: unamortised costs at start of year (5,479) (6,144)
Less: loan issue costs incurred in the year (2,051) (192)
Add: loan issue costs amortised in the year 1,067 857
At end of year 383,474 310,692
Maturity of bank borrowings
Repayable within 1 year - -
Repayable between 1 to 2 years - -
Repayable between 2 to 5 years 127,220 52,349
Repayable after more than 5 years 262,717 263,822
Unamortised loan issue costs (6,463) (5,479)
383,474 310,692
As detailed in note 24, the Group has £50,000,000 (31 December 2020:
£50,000,000) retail eligible bonds in issue.
The table below lists the Group's borrowings.
Gross
Lender Original facility Outstanding debt* Maturity loan to value** Annual interest rate Amortisation
date
£'000 £'000
Royal Bank of Scotland, Bank of Scotland and Barclays 128,000 127,220 Aug-26 43.4% 2.40% over 3mth £ SONIA Mandatory prepayment
Scottish Widows Ltd & Aviva Investors Real Estate Finance 165,000 165,000 Dec-27 46.4% 3.28% Fixed None
Scottish Widows Ltd 36,000 36,000 Dec-28 38.7% 3.37% Fixed None
Santander UK 65,870 61,717 Jun-29 39.0% 2.20% over 3mth £ LIBOR Mandatory prepayment
Moving to SONIA 01/01/22
Total bank borrowings 394,870 389,937
50,000 50,000
Retail eligible bond
Total 444,870 439,937
SONIA = Sterling Over Night Indexed Average
LIBOR = London Interbank Offered Rate (Sterling)
* Before unamortised debt issue costs
** Based upon Cushman & Wakefield property valuations
The percentage of loans at variable rates of interest was 42.9% (31 December
2020: 54.9%).
The weighted average term to maturity of the Group's debt at the year end was
5.5 years (31 December 2020: 6.4 years). The weighted average interest rate
payable by the Group on its debt portfolio, excluding hedging costs, as at the
year end was 3.0% (31 December 2020: 3.1%).
The Group weighted average interest rate, including the retail eligible bonds
and hedging costs at the year end, amounted to 3.3% per annum (31 December
2020: 3.3% per annum).
The Group has been in compliance with all of the financial covenants relating
to the above facilities as applicable throughout the year covered by these
consolidated financial statements. Each facility has distinct covenants which
generally include: historic interest cover, projected interest cover, LTV
cover and debt service cover. A breach of agreed covenant levels would
typically result in an event of default of the respective facility, giving the
lender the right, but not the obligation, to declare the loan immediately due
and payable. Where a loan is repaid in these circumstances, early repayment
fees will apply, which are generally based on a percentage of the loan repaid
or calculated with reference to the interest income foregone by the lenders as
a result of the repayment.
As shown in note 25, the Group uses a combination of interest rate swaps and
fixed rate bearing loans to hedge against cash flow interest rate risks. The
Group's exposure to interest rate volatility is minimal.
In line with recent announcements from the Bank of England and the FCA, the
Royal Bank of Scotland and Bank of Scotland & Barclays borrowings and
Santander UK borrowings are transitioning from the London Interbank Offer Rate
(LIBOR) benchmark to Sterling Overnight Index Average (SONIA) benchmark. The
borrowings with RBS transitioned during the year and the Santander UK
borrowings transition for the first interest payment in 2022. There is
expected to be negligible cost involved in the borrowing facility transition
and the respective hedge instrument amendments.
24. Retail Eligible Bonds
The Company has in issue £50,000,000 (31 December 2020: £50,000,000) 4.5%
Retail Eligible Bonds with a maturity date of 6 August 2024. These unsecured
bonds are listed on the London Stock Exchange ORB platform.
31 December 31 December
2021 2020
£'000 £'000
Bond principal at start of year 50,000 50,000
Unamortised issue costs at start of year (559) (714)
Amortisation of issue costs 155 155
At end of year 49,596 49,441
25. Derivative financial instruments
Interest rate caps and swaps are in place to mitigate the interest rate risk
that arises as a result of entering into variable rate borrowings.
31 December 31 December
2021 2020
£'000 £'000
Group
Fair value at start of year (4,339) (1,816)
Revaluation in the year 6,045 (2,523)
(4,339
Fair value at end of year 1,706 (4,339)
The calculation of fair value of interest rate caps and swaps is based on the
following calculation: the notional amount multiplied by the difference
between the swap rate and the current market rate and then multiplied by the
number of years remaining on the contract and discounted.
The table below details the hedging and swap notional amounts and rates
against the details of the Group's loan facilities.
Lender Original facility Outstanding debt Maturity Annual interest rate Notional amount
date Rate
£'000 £'000 £'000
Royal Bank of Scotland, Bank of Scotland and Barclays 128,000 127,220 Aug-26 2.40% over 73,000 0.97%
3 months £ SONIA 55,000 0.97%
Scottish Widows Ltd. & Aviva Investors Real Estate Finance 165,000 165,000 Dec-27 3.28% Fixed n/a n/a
Scottish Widows Ltd 36,000 36,000 Dec-28 3.37% Fixed n/a n/a
Santander UK 65,870 61,717 Jun-29 2.20% over 32,935 1.45%
3 months £ LIBOR 32,935 1.45%
Moving to SONIA 01/01/22
Total 394,870 389,937
SONIA = Sterling Over Night Indexed Average
LIBOR = London Interbank Offered Rate (Sterling)
As at 31 December 2021, the swap notional arrangements were £105.94m (31
December 2020: £60.44m) and the cap notional arrangements amounted to
£87.94m (31 December 2020: £60.44m).
The Group weighted average effective interest rate was 3.3% (31 December 2020:
3.3%) inclusive of hedging costs.
The maximum exposure to credit risk at the reporting date is the fair value of
the derivative liabilities.
It is the Group's target to hedge at least 90% of the total debt portfolio
using interest rate derivatives and fixed-rate facilities. As at the year end,
the total proportion of hedged debt equated to 101.3% (31 December 2020:
101.8%), as shown below. The over-hedged position has arisen as a result of
the full RBS and Santander facilities (including headroom) being hedged but
the excess relates to Interest Rate Caps which have no ongoing cost for the
Group.
31 December 31 December
2021 2020
£'000 £'000
Total bank borrowings 389,937 316,171
Notional value of interest rate caps and swaps 193,870 120,870
Value of fixed rate debts 201,000 201,000
394,870 321,870
Proportion of hedged debt 101.3% 101.8%
The Group has not adopted hedge accounting in either year.
26. Leases
31 December 31 December
2021 2020
Right of use asset £'000 £'000
At start of year 16,156 16,351
Right of use asset acquired 6,438 -
Derecognition of right of use asset (5,906) -
Fair value movement (206) (195)
16,482 16,156
31 December 31 December
2021 2020
Lease liability £'000 £'000
At start of year 16,473 16,510
Finance lease liability acquired 6,438 -
Derecognition of finance lease liability (6,073) -
Lease payments (640) (618)
Interest charges 597 581
16,795 16,473
The derecognition of right of use assets and liabilities during the year gave
rise to a realised gain of £167,000 (2020: £nil).
The Group's lease commitments which are now represented by the right of use
asset and lease liability are spread across 12 separate leases with the two
largest leases at Mountbatten Court Basingstoke and Northern Cross Basingstoke
making up 35% of the balance. Total commitments on leases in respect of land
and buildings are as follows:
31 December 31 December
2021 2020
Group £'000 £'000
Payable within 1 year 648 618
Payable between 1 and 2 years 648 618
Payable between 2 and 5 years 1,943 1,854
Payable after 5 years 47,668 50,346
50,907 53,436
27. Stated capital
Stated capital represents the consideration received by the Company for the
issue of Ordinary Shares.
Group 31 December 31 December
2021 2020
Issued and fully paid Shares of no par value £'000 £'000
At start of the year 430,819 430,819
Shares issued 83,051 -
Share issue costs (108) -
At end of the year 513,762 430,819
Number of Shares in issue
At start of the year 431,506,583 431,506,583
Shares issued 84,230,000 -
At end of the year 515,736,583 431,506,583
During the year 84,230,000 Shares were issued as part of the consideration
package for the purchase of a group of investment properties. The value of
Shares issued was £83,051,000 (98.6p per Share).
28. Net asset value per Share (NAV)
Basic NAV per Share is calculated by dividing the net assets in the Statement
of Financial Position attributable to ordinary equity holders of the parent by
the number of Ordinary Shares outstanding at the end of the year.
In October 2019, EPRA issued new best practice recommendations that replaced
EPRA net asset value (NAV) with three new measures of net asset value. The
Group has determined that EPRA net tangible assets (NTA) is the most relevant
measure, hence this is now reported in place of EPRA NAV. Further detail of
the new EPRA performance measures can be found in the full Annual Report.
Net asset values have been calculated as follows:
Group 31 December 31 December
2021 2020
£'000 £'000
Net asset value per Consolidated Statement of Financial Position 502,401 420,582
Adjustment for calculating EPRA net tangible assets:
Derivative financial instruments (1,706) 4,339
Deferred tax liability 705 690
EPRA Net Tangible Assets 501,400 425,611
Number of Ordinary Shares in issue 515,736,583 431,506,583
Net asset value per Share - basic and diluted 97.4p 97.5p
EPRA Net Tangible Assets per Share - basic and diluted 97.2p 98.6p
29. Notes to the Statement of Cash Flows
29.1 Non-Cash Transactions
During the year, a non-cash transaction took place whereby 84,230,000 Shares
were issued as part of the consideration package for the purchase of a group
of investment properties. The value of Shares issued was £83,051,000.
During the year, three right of use assets and liabilities were recognised at
the value of £6,438,000 being the present value of the lease payments
associated with the Group's long leasehold investment properties. Also during
the year, three right of use assets and liabilities were derecognised
following the sale of long-leasehold investment properties.
29.2 Reconciliation of changes in liabilities to cash flows arising from
financing activities
31 December 2021
Bank loans and borrowings Retail Eligible Bonds Derivative financial instruments
£'000 £'000 £'000 Lease liabilities £'000
Total
£'000
Balance at 1 January 2021 310,692 49,441 4,339 16,473 380,945
Changes from financing cash flows:
Bank and bond borrowings advanced 77,305 - - - 77,305
Bank borrowings repaid (3,539) - - - (3,539)
Bank and bond borrowing costs paid (2,051) - - - (2,051)
Lease payments - - - (640) (640)
Total changes from financing cash flows
71,715 - - (640) 71,075
Amortisation of issue costs 1,067 155 - - 1,222
Unwinding of discount - - - 597 597
Change in fair value - - (6,045) - (6,045)
Finance lease liability acquired - - - 6,438 6,438
Derecognition of finance lease liability - - - (6,073) (6,073)
Total other changes 1,067 155 (6,045) 962 (3,861)
Balance at 31 December 2021 383,474 49,596 (1,706) 16,795 448,159
31 December 2020
Bank loans and borrowings Retail Eligible Bonds Derivative financial instruments
£'000 £'000 £'000 Lease liabilities £'000
Total
£'000
Balance at 1 January 2020 287,856 49,286 1,816 16,510 355,468
Changes from financing cash flows:
Bank and bond borrowings advanced 39,200 - - - 39,200
Bank borrowings repaid (17,029) - - - (17,029)
Bank and bond borrowing costs paid (192) - - - (192)
Lease payments - - - (618) (618)
Total changes from financing cash flows
21,979 - - (618) 21,361
Amortisation of issue costs 857 155 - - 1,012
Unwinding of discount - - - 581 581
Change in fair value - - 2,523 - 2,523
Total other changes 857 155 2,523 581 4,116
Balance at 31 December 2020 310,692 49,441 4,339 16,473 380,945
30. Financial risk management
30.1 Financial instruments
The Group's principal financial assets and liabilities are those that arise
directly from its operations: trade and other receivables, trade and other
payables and cash and cash equivalents. The Group's other principal financial
liabilities are bank and other loan borrowings, amounts due to interest rate
derivatives, the main purpose of which is to finance the acquisition and
development of the Group's investment property portfolio.
Set out below is a comparison by class of the carrying amounts of the Group's
financial instruments that are carried in the financial statements and their
fair value:
Group 31 December 2021 31 December 2020
Carrying value Fair Carrying value Fair
£'000 value £'000 value
£'000 £'000
Financial assets - measured at amortised cost
Trade and other receivables 10,967 10,967 12,971 12,971
Cash and short-term deposits 56,128 56,128 67,373 67,373
Financial assets - measured at fair value through profit or loss
Interest rate derivatives 1,706 1,706 - -
Financial liabilities - measured at amortised cost
Trade and other payables (38,391) (38,391) (29,575) (29,575)
Bank and loan borrowings (383,474) (387,373) (310,692) (327,409)
Retail eligible bonds (49,596) (51,190) (49,441) (49,500)
Lease liability (16,795) (16,795) (16,473) (16,473)
Financial liabilities - measured at fair value through profit or loss
Interest rate derivatives - - (4,339) (4,339)
The following financial liabilities are recorded in the Consolidated Statement
of Financial Position at amortised cost but their fair value is different as
disclosed above. Their fair values are determined as follows:
· The fair value of bank and loan borrowings is determined by
reference to mark-to-market valuations provided by the lenders.
· The fair value of Retail Eligible Bonds is determined by their
published market value.
· The fair value of the lease liability has been determined as the
present value of future cash flows discounted using the Group's incremental
borrowing rate.
The following financial assets and liabilities are recorded in the
Consolidated Statement of Financial Position at fair value which is determined
as follows:
· The fair value of interest rate derivatives is recorded in the
Consolidated Statement of Financial Position and is determined by forming an
expectation that interest rates will exceed strike rates and discounting these
future cash flows at the prevailing market rates as at the year end.
Fair value hierarchy
The following table provides the fair value measurement hierarchy for
financial assets and liabilities measured at fair value through profit or
loss.
Significant observable inputs Significant unobservable inputs
Quoted active prices (level 2) (level 3)
(level 1) £'000 £'000
Total £'000
£'000
31 December 2021
Interest rate derivatives 1,706 - 1,706 -
31 December 2020
Interest rate derivatives (4,339) - (4,339) -
The different levels are defined as follows.
Level 1: Quoted (unadjusted) market prices in active markets for identical
assets or liabilities.
Level 2: Valuation techniques for which the lowest level input that is
significant to the fair value measurement is directly or indirectly
observable.
Level 3: Valuation techniques for which the lowest level input that is
significant to the fair value measurement is unobservable.
For assets and liabilities that are recognised in the consolidated financial
statements on a recurring basis, the Group determines whether transfers have
occurred between levels in the hierarchy by reassessing categorisation at the
end of each reporting period.
There have been no transfers between levels during the year.
30.2 Risk management
The Group is exposed to market risk (including interest rate risk), credit
risk and liquidity risk. The Board of Directors oversees the management of
these risks. The Board of Directors reviews and agrees policies for managing
each of these risks that are summarised below.
30.3 Market risk
Market risk is the risk that the fair values of financial instruments will
fluctuate because of changes in market prices. The financial instruments held
by the Group that are affected by market risk are principally the Group's bank
balances along with a number of interest rate swaps entered into to mitigate
interest rate risk.
The Group's interest rate risk arises from long-term borrowings issued at
variable rates, which expose the Group to cash flow interest rate risk.
Borrowings issued at fixed rates expose the Group to fair value interest rate
risk. The Group manages its cash flow interest rate risk by using floating to
fixed interest rate swaps, interest rate caps and interest rate swaps.
Interest rate swaps have the economic effect of converting borrowings from
floating rates to fixed rates. Interest rate caps limit the exposure to a
known level.
If interest rates were to increase by the following rates, this would increase
the annual interest charge to the Group and thus reduce profits and net assets
as follows:
Interest rate increase Increase to the annual interest charge
31 December 31 December
2021 2020
£'000 £'000
0.00% - -
0.25% 208 137
0.50% 415 274
0.75% 559 411
1.00% 671 547
The Group's borrowings with Royal Bank of Scotland, Bank of Scotland &
Barclays and Santander UK are transitioning from the London Interbank Offer
Rate (LIBOR) benchmark to Sterling Overnight Index Average (SONIA) benchmark.
The borrowings with RBS transitioned during the year and the Santander UK
borrowings transition for the first interest payment in 2022. There is
expected to be negligible cost involved in the borrowing facility transition
and the respective hedge instrument amendments.
30.4 Credit risk
Credit risk is the risk that a counterparty will not meet its obligations
under a financial instrument or customer contract, leading to a financial
loss. The Group is exposed to credit risk from both its leasing activities and
financing activities, including deposits with banks and financial
institutions. Credit risk is mitigated by tenants being required to pay
rentals in advance under their lease obligations. The credit quality of the
tenant is assessed based on an extensive credit rating scorecard at the time
of entering into a lease agreement.
Outstanding trade receivables are regularly monitored. The maximum exposure to
credit risk at the reporting date is the carrying value of each class of
financial asset.
30.5 Credit risk related to trade receivables
Trade receivables, primarily tenant rentals, are presented in the Group's
Statement of Financial Position net of provisions for impairment. Credit risk
is primarily managed by requiring tenants to pay rentals in advance and
performing tests around strength of covenant prior to acquisition.
30.6 Credit risk related to financial instruments and cash deposits
One of the principal credit risks of the Group arises with the banks and
financial institutions. The Board of Directors believes that the credit risk
on short-term deposits and current account cash balances is limited because
the counterparties are banks, who are committed lenders to the Group, with
high credit ratings assigned by international credit-rating agencies.
The list of bankers for the Group, with their latest Fitch credit ratings, was
as follows:
Bankers Fitch Ratings
Barclays A positive
Royal Bank of Scotland A+ Stable
Bank of Scotland plc A+ Stable
Santander UK A+ Stable
Aviva A+ Stable
Scottish Widows A Stable
30.7 Liquidity risk
Liquidity risk arises from the Group's management of working capital and,
going forward, the finance charges and principal repayments on its borrowings.
It is the risk that 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 are therefore not readily realisable. The
Group's objective is to ensure that it has sufficient available funds for its
operations and to fund its capital expenditure. This is achieved by continuous
monitoring of forecast and actual cash flows by management.
The table below summarises the maturity profile of the Group's financial
liabilities based on contractual undiscounted payments:
Group at 31 December 2021 Within Between Between After
1 year 1 and 2 years 2 and 5 years 5 years Total
£'000 £'000 £'000 £'000 £'000
Trade and other payables (38,391) - - - (38,391)
Bank borrowings (11,333) (11,333) (160,167) (274,447) (457,280)
Interest rate derivatives (1,076) (1,076) (3,010) (1,048) (6,210)
Retail eligible bonds (2,250) (2,250) (52,250) - (56,750)
Lease liability (648) (648) (1,943) (47,668) (50,907)
(53,698) (15,307) (217,370) (323,163) (609,538)
Group at 31 December 2020 Within Between Between After
1 year 1 and 2 years £'000 2 and 5 years 5 years Total
£'000 £'000 £'000 £'000
Trade and other payables (29,575) - - - (29,575)
Bank borrowings (9,262) (9,262) (79,509) (283,232) (381,265)
Interest rate derivatives (805) (805) (1,898) (1,611) (5,119)
Retail eligible bonds (2,250) (2,250) (54,500) - (59,000)
Lease liability (618) (618) (1,854) (50,346) (53,436)
(42,510) (12,935) (137,761) (335,189) (528,395)
The maturity dates of all bank borrowings are disclosed in note 23.
The maturity date of the retail eligible bonds is disclosed in note 24.
The range of maturity dates of the lease liability payments is between 4 and
130 years.
31. Capital management
The primary objective of the Group's capital management is to ensure that it
remains a going concern and continues to qualify for UK REIT status.
The Group's capital is represented by reserves and bank borrowings. The Board,
with the assistance of the Investment and Asset Managers, monitors and reviews
the Group's capital so as to promote the long-term success of the business,
facilitate expansion, deliver a quarterly dividend distribution and to
maintain sustainable returns for Shareholders.
The Group's policy on borrowings is as follows: the level of borrowing will be
on a prudent basis for the asset class and will seek to achieve a low cost of
funds, while maintaining flexibility in the underlying security requirements
and the structure of both the portfolio and of Regional REIT.
Based on current market conditions, the Board will target Group net borrowings
of 40% of Investment Property Values at any time. However, the Board may
modify the Group's borrowing policy (including the level of gearing) from time
to time in light of then-current economic conditions, relative costs of debt
and equity capital, fair value of the Company's assets, growth and acquisition
opportunities or other factors the Board deems appropriate. The Group's net
borrowings may not exceed 50% of the Investment Property Values at any time
without the prior approval of Ordinary Shareholders in a General Meeting.
The optimal debt financing structure for the Group will have consideration for
key metrics including: fixed or floating interest rate charged, debt type,
maturity profile, substitution rights, covenant and security requirements,
lender type, diversity and the lender's knowledge and relationship with the
property sector.
32. Operating leases
The future minimum lease payments receivable under non-cancellable operating
leases in respect of the Group's property portfolio are as follows:
31 December 31 December
2021 2020
Group £'000 £'000
Receivable within 1 year 56,503 50,739
Receivable between 1-2 years 43,349 38,103
Receivable between 2-5 years 56,017 57,404
Receivable after 5 years 31,267 40,102
187,136 186,348
The Group has in excess of 1,030 operating leases. The number of years
remaining on these operating leases varies between 1 and 87 years. The
amounts disclosed above represent total rental income receivable up to the
next lease break point on each lease. If a tenant wishes to end a lease prior
to the break point, a surrender premium will be charged to cover the shortfall
in rental income received.
33. Segmental information
After a review of the information provided for management purposes, it was
determined that the Group has one operating segment and therefore segmental
information is not disclosed in these consolidated financial statements.
34. Transactions with related parties
Transactions with the Directors
Directors' remuneration is disclosed within the Remuneration Report in the
full Annual Report and note 8 to the financial statements. Directors'
beneficial interests in the Ordinary Shares of the Company are disclosed
within the Directors' Report.
Transactions with the Asset Manager, London & Scottish Property Investment
Management Limited, and the Property Manager, London & Scottish Property
Asset Management Limited
Stephen Inglis is a non-executive Director of Regional REIT Limited, as well
as being the chief executive officer of London & Scottish Property
Investment Management Limited ("LSPIM") and a director of London &
Scottish Property Asset Management Limited. The former company has been
contracted to act as the Asset Manager of the Group and the latter as the
Property Manager.
In consideration for the provision of services provided, the Asset Manager is
entitled in each financial year (or part thereof) to 50% of an annual
management fee on a scaled rate of 1.1% of the EPRA net asset value, reducing
to 0.9% on net assets over £500,000,000. The fee shall be payable in cash
quarterly in arrears.
In respect of each portfolio property, the Asset Manager has procured and
shall, with the Company in the future, procure that London & Scottish
Property Asset Management Limited is appointed as the Property Manager. A
property management fee of 4% per annum is charged by the Property Manager on
a quarterly basis: 31 March, 30 June, 30 September, and 31 December, based
upon the gross rental yield. Gross rental yield means the rents due under the
property's lease for the peaceful enjoyment of the property, including any
value paid in respect of rental renunciations but excluding any sums paid in
connection with service charges or insurance costs.
The Asset Manager is also entitled to a performance fee. Details of the
performance fee are given below.
The following tables show the fees charged in the year and the amount
outstanding at the end of the year:
Year ended Year ended
31 December 31 December
2021 2020
£'000 £'000
Asset management fees charged* 2,326 2,579
Property management fees charged* 2,495 2,266
Performance fees charged - -
Total 4,821 4,845
31 December 31 December
2021 2020
£'000 £'000
Total fees outstanding 1,350 1,190
* Including irrecoverable VAT charged where appropriate.
Transactions with the Investment Manager, Toscafund Asset Management LLP
Tim Bee is a non-executive Director of the Company, as well as being Chief
Legal Counsel of the Investment Manager.
In consideration for the provision of services provided, the Investment
Manager is entitled in each financial year (or part thereof) to 50% of an
annual management fee on a scaled rate of 1.1% of the EPRA net asset value,
reducing to 0.9% on net assets over £500,000,000. The fee is payable in cash
quarterly in arrears.
The Investment Manager is also entitled to a performance fee. Details of the
performance fee are given below.
The following tables show the fees charged in the year and the amount
outstanding at the end of the year:
Year ended Year ended
31 December 31 December
2021 2020
£'000 £'000
Investment management fees charged 2,326 2,577
Total 2,326 2,577
31 December 31 December
2021 2020
£'000 £'000
Total fees outstanding 593 612
Performance Fee
The Asset Manager and the Investment Manager are each entitled to 50% of a
performance fee. The fee is calculated at a rate of 15% of the total
Shareholder return in excess of the hurdle rate of 8% per annum for the
relevant performance period. Total Shareholder return for any financial year
consists of the sum of any increase or decrease in EPRA NAV per Ordinary Share
and the total dividends per Ordinary Share declared in the financial year. A
performance fee is only payable in respect of a performance period where the
EPRA NAV per Ordinary Share exceeds the high-water mark which is equal to the
greater of the highest year-end EPRA NAV Ordinary Share in any previous
performance period. The performance fee was calculated initially on 31
December 2018 and is assessed annually thereafter.
The performance fees are now payable 34% in cash and 66% in Ordinary Shares,
at the prevailing price per share, with 50% of the Shares locked-in for one
year and 50% of the Shares locked-in for two years.
No performance fee has been earned for the years ending 31 December 2021 or 31
December 2020.
35. Subsequent Events
Post 31 December 2021, the Company has disposed of separately: eight non-core
properties for a total consideration of £33.5m, at a 1.3% premium to the 31
December 2021 valuation, with a net initial yield of 5.1% (6.3% excluding
vacant properties).
On 24 February 2022, the Company declared the Q4 2021 dividend of 1.70pps,
which will be paid to shareholders on 8 April 2022.
Company Information
Directors
Kevin McGrath (Chairman and Independent Non-Executive Director)
William Eason (Senior Independent Non-Executive Director, Nomination Committee
Chairman, Management Engagement and Remuneration Committee Chairman)
Daniel Taylor (Independent Non-Executive Director)
Frances Daley (Independent Non-Executive Director, Audit Committee Chairman)
Stephen Inglis (Non-Executive Director)
Timothy Bee (Non-Executive Director)
Registered office
Regional REIT Limited
Mont Crevelt House
Bulwer Avenue
St. Sampson
Guernsey
GY2 4LH
Regional REIT Limited
ISIN: GG00BYV2ZQ34
SEDOL: BYV2ZQ3
Legal Entity Identifier: 549300D8G4NKLRIKBX73
Company website
www.regionalreit.com (http://www.regionalreit.com)
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