TIDMSIR
RNS Number : 8743R
Secure Income REIT PLC
11 March 2021
11 March 2021
Secure Income REIT Plc
Results for the year ended 31 December 2020
Secure Income REIT Plc (AIM: SIR) (the "Company" or the
"Group"), the specialist long term income UK REIT, today announces
its results for the year ended 31 December 2020.
Aside from the immense tragedy of the loss of life and the
disruption caused to individuals and businesses worldwide, the
Covid-19 pandemic has created significant challenges for our
leisure and hospitality tenants. The combination of the Company's
robust balance sheet, strong liquidity and experienced Management
Team has enabled us to support those of our tenants that suffered
the sudden closure of their businesses, and therefore to aid the
expected resumption of their strong performance track records once
the effects of the pandemic diminish. Ultimately this should
position the Company to regain its own strong growth
trajectory.
Despite the interruption from the exceptional impact of the
pandemic, the Company has continued to pay quarterly dividends
throughout the year, delivering a Total Accounting Return IRR of
15.3% p.a. over the six and a half years since listing and a Total
Shareholder Return IRR of 12.8% p.a. over the same period. This
compares with the equivalent for the FTSE EPRA NAREIT UK Index over
the same period of 2.8% p.a.
The Company has GBP1.95 billion of gross property assets, GBP1.2
billion of net assets, GBP192 million of uncommitted and unfettered
cash, structurally protected non-recourse debt, and very long
leases on Key Operating Assets in defensive sectors and which are
difficult to replicate. The approval and rapid rollout of vaccines
in the UK and elsewhere are cause for cautious optimism that life
will soon start to return to normal and allow our leisure and
hospitality tenants to be able to resume trading. The Management
Team invested a further GBP5.8 million of cash in their interests
in SIR during the year and holds a 12.4% interest in the business.
The team remains energised, committed and aligned with all
shareholders.
Highlights
31 December 30 June 31 December
Balance sheet and portfolio 2020 2020 2019
------------------------------------ ------------- ------------- -------------
Properties at independent valuation GBP1,946.9m GBP1,958.7m GBP2,083.1m
Net assets GBP1,221.5m GBP1,244.1m GBP1,384.5m
EPRA NTA GBP1,229.2m GBP1,252.0m GBP1,391.3m
EPRA NTA per share 379.3p 386.4p 429.4p
Uncommitted cash GBP192.0m GBP219.6m GBP234.2m
Net Loan To Value ratio 36.4% 35.3% 31.9%
Annualised passing rent before
Covid 19 concessions GBP113.3m GBP111.8m GBP110.7m
Topped Up Net Initial Yield 5.42% 5.32% 4.95%
Running Yield by January 2022
(1) 5.58% 5.58% 5.25%
Weighted Average Unexpired Lease
Term 20.2 years 20.8 years 21.0 years
------------------------------------ ------------- ------------- -------------
(1) Using independent external valuers' RPI estimates averaging
2.5% (June 2020: 2.5%; December 2019: 2.6%)
Year to Year to
31 December 31 December
Earnings and returns 2020 2019
---------------------------------------------- -------------- --------------
Adjusted EPRA earnings per share:
Like for like rent net of all costs and
tax, before rent concessions 14.0p 13.6p
Temporary rent concessions on a cash basis (10.5)p -
-------------- --------------
Like for like rents net of all costs and
tax 3.5p 13.6p
Rent net of interest for properties sold
in 2019 - 1.7p
-------------- --------------
Adjusted EPRA EPS 3.5p 15.3p
IFRS Earnings per share:
Like for like rent net of costs and tax,
before revaluations and rent concessions 16.6p 16.3p
IFRS impact of temporary rent concessions,
spread over lease terms (0.3)p -
-------------- --------------
IFRS like for like rent net of costs and
tax, before revaluations 16.3p 16.3p
Rent net of interest and profit on disposal
of Hospitals sold in 2019 - 9.4p
Property revaluations (51.4)p 23.4p
Incentive fee - (1.6)p
-------------- --------------
IFRS EPS (35.1)p 47.5p
-------------- --------------
Dividends per share 15.7p 16.3p
Total Accounting Return - 8.0% 11.7%
Latest dividend per share annualised (%
of EPRA NTA) 3.8% 3.9%
Latest dividend per share annualised (%
of 31 Dec 2020 share price) 4.9% 3.9%
Total Accounting Return over 30 June 2014
EPRA NTA (IRR) 15.3% p.a.
Total Shareholder Return IRR over issue
price at listing 12.8% p.a.
----------------------------------------------- -------------- --------------
All capitalised terms are defined in the glossary at the end of
this report
-- EPRA NTA of GBP1.2 billion; 379.3 pence per share:
- 59.3 pence per share (15.8% of EPRA NTA) in unfettered cash plus 0.5p in other net assets
-- 125.3 pence per share (33.0%) in Healthcare
-- 112.8 pence per share (29.7%) in Leisure
-- 81.4 pence per share (21.5%) in Budget Hotels
-- Overall portfolio valuation down 6.5% to GBP1.95 billion in the year:
-- 91% of the total decline was reflected in the June 2020
valuations , with the balance representing a modest decline of 0.6%
in gross property values in the second half of the year
-- Healthcare asset valuations up by 2.8%
-- Budget Hotel valuations accounted for 69% of the net value
decline, falling by 20.3% following Travelodge's CVA but remaining
stable since 30 June 2020
-- Leisure asset valuations down by 6.9%
-- The Group's 20.2 year Weighted Average Unexpired Lease Term
remains one of the longest in the UK quoted real estate sector
-- Net LTV of 36.4% up from 31.9% at the start of the year and 35.3% at 30 June 2020:
-- debt in six structurally separate non-recourse debt facilities
-- appropriate levels of headroom over financial covenants remain in place
-- Adjusted EPRA EPS of 3.5 pence per share after the full
earnings impact of the temporary rent concessions granted to our
Leisure and Budget Hotels tenants, reflected in this measure on a
cash flow basis
-- Total impact of concessions on Adjusted EPRA Earnings in 2020
of GBP34.0 million (10.5 pence per share)
-- Travelodge rents reduced by a total of GBP23.4 million from 1
April 2020 to 31 December 2021, of which GBP14.5 million relates to
cash flows in the year to 31 December 2020
-- Merlin rents of GBP17.8 million (GBP17.7 million at the year
end exchange rate) for June and September 2020 were deferred for
collection in September 2021; rental cash flows returned to their
previously contracted levels with effect from the December 2020
quarter
-- Stonegate pubs were granted a six month rent free period of
GBP1.1 million from April to September 2020 in exchange for
strengthened lease alienation provisions and lease extensions to a
25.0 year term, up from 19.6 years at that time
-- From January 2021 cash rents receivable amount to 92% of
total contractual rents before concessions and under current
arrangements, will revert to 100% of their originally contracted
levels within ten months
-- The expected impact of concessions on 2021 cash flow and
Adjusted EPRA Earnings is a reduction in Travelodge rents of GBP8.9
million and the expected receipt of GBP17.7 million of deferred
rent from Merlin, resulting in a net positive impact of GBP8.8
million (2.7 pence per share)
-- Rent collections have remained strong with only 0.3% of
passing rents after concessions in arrears at 31 December, all of
which were collected after the year end
-- Dividend payments were maintained throughout 2020 and since the year end
-- Neither the Company nor the Investment Adviser has requested
or utilised any form of Covid-19 Government support
-- The Management Team's shareholding is the largest by value
amongst UK REITs, underpinning very strong alignment with all
shareholders:
-- Management's 12.4% stake is worth GBP152.3 million at 31 December 2020 EPRA NTA
-- Every member of the Management Team has a personally significant investment in the business
-- During the year the Management Team invested a further GBP5.8
million of cash in their interests in the Company
Martin Moore, Non-Executive Chairman of the Company,
commented:
"The Covid-19 pandemic has created significant challenges for
our leisure and hospitality tenants, which has in turn had an
impact on the Company's results, particularly in the first half of
the year. However, the many inherent strengths of the Company,
including its balance sheet, liquidity and management team, as well
as the innately operational nature of our assets, means that the
support we've been able to provide to occupiers should aid the
resumption of their strong performance track record once the
effects of the pandemic diminish. This in turn positions the
Company to regain its own growth trajectory.
"Secure Income REIT was created to provide long term returns
and, since listing, the Company has delivered a Total Accounting
Return IRR of 15.8% p.a. and a Total Shareholder Return IRR of
12.8% p.a. This compares with the equivalent for the FTSE EPRA
NAREIT Index which returned 2.8% p.a. over the same period. While
we recognise the last twelve months have negatively impacted short
term returns for many investors, the performance of the business
over the medium to longer term and its prospects over similar time
scales remains the principal focus of the management team and
board. As economies and businesses hopefully emerge from these
difficult circumstances, we believe that as and when pandemic
restrictions are relaxed the bounce back in economic activity in
the leisure and hospitality sectors will be significant and SIR's
assets and tenants are well positioned to be early beneficiaries of
any recovery. After a challenging period we are excited about
opportunities for the business."
For further information on the Company, please contact:
Secure Income REIT Plc +44 20 7647 7647
Nick Leslau enquiries@SecureIncomeREIT.co.uk
Mike Brown
Sandy Gumm
Stifel Nicolaus Europe Limited +44 20 7710 7600
(Nominated Adviser) StifelSecureIncomeREIT@stifel.com
Mark Young
Stewart Wallace
FTI Consulting LLP +44 20 3727 1000
Dido Laurimore SecureIncomeREIT@FTIconsulting.com
Claire Turvey
Eve Kirmatzis
Results Presentation
Secure Income REIT Plc will be holding a presentation for
analysts and investors today at 10am. If you would like to attend,
please contact FTI Consulting on 020 3727 1000, or email
SecureIncomeREIT@FTIconsulting.com.
The presentation will be on the Company's website
www.SecureIncomeREIT.co.uk and a conference call facility will be
available. The dial-in details are:
Participants, - Local, United Kingdom : +44 (0)330 336 9411
Confirmation code : 8535975
Webcast link :
https://webcasting.brrmedia.co.uk/broadcast/602faf0e1fc46330548fae22
About Secure Income REIT Plc
Secure Income REIT Plc ("SIR") is a specialist UK REIT,
investing in real estate assets that provide long term rental
income with upwards only inflation protection.
The Company owns a GBP1.95 billion portfolio at the 31 December
2020 independent external valuation. With net assets of GBP1.22
billion and some GBP192 million of Uncommitted Cash held at 31
December 2020, the Company has been well positioned to provide
support to its tenants through the Covid-19 pandemic while
maintaining its strong financial discipline and balance sheet
strength.
SIR has a highly experienced board, chaired by Martin Moore, and
is advised by Prestbury Investment Partners Limited. Prestbury is
owned and managed by Nick Leslau, Mike Brown, Tim Evans, Sandy Gumm
and Ben Walford, a team with a long and successful track record of
creating value in real estate investment and asset management and,
with an investment worth over GBP152 million in the Company (at 31
December 2020 EPRA NTA), very close alignment with the interests of
SIR shareholders.
The Company is a UK REIT which floated on the AIM market of the
London Stock Exchange in June 2014.
The Company's LEI is 213800M1VI451RU17H40
Further information on Secure Income REIT is available at
www.SecureIncomeREIT.co.uk.
Forward looking statements
This document includes forward looking statements which are
subject to risks and uncertainties. You are cautioned that forward
looking statements are not guarantees of future performance and
that if risks and uncertainties materialise, or if the assumptions
underlying any of these statements prove incorrect, the actual
results of operations and financial condition of the Group may
differ materially from those made in, or suggested by, the forward
looking statements. Other than in accordance with its legal or
regulatory obligations, the Company undertakes no obligation to
review, update or confirm expectations or estimates or to release
publicly any revisions to any forward looking statements to reflect
events that occur or circumstances that arise after the date of
this document.
Chairman's Statement
Dear Shareholder,
Following a year dominated by a devastating human toll and by
extraordinary stresses on so many businesses around the world
arising from the Covid-19 pandemic, progress with the rollout of
vaccines gives us cause for cautious optimism and more confidence
in assessing the outlook for the Company than when we reported our
interim results six months ago. The pandemic has presented
significant challenges to our leisure and hospitality tenants, but
the Company's robust balance sheet, strong liquidity and
experienced Management Team have enabled us to support those of our
tenants that suffered the sudden closure of their businesses, to
aid the resumption of their strong performance track records once
the effects of the pandemic diminish and, as a result, to position
the Company to regain its own strong growth trajectory.
The Company was established six and a half years ago to deliver
attractive returns over the long term. Even with the interruption
of the exceptional events of 2020, the Company has delivered a
Total Accounting Return IRR of 15.3% p.a. since listing, a Total
Shareholder Return IRR of 12.8% p.a. over the same period and has
maintained its core dividend payments throughout the turbulence of
the pandemic disruption. This compares with the equivalent for the
FTSE EPRA NAREIT Index of 2.8% p.a. over the same period. The
Company has ended 2020 with a robust balance sheet with GBP1.2
billion of net assets, GBP192.0 million of uncommitted and
unfettered cash, structurally protected non-recourse debt and very
long leases which are very difficult to replicate.
Results and financial position
The impact of the pandemic has meant that Group EPRA NTA per
share, disappointingly, declined by 50.1 pence per share ending the
year at 379.3 pence. Dividends paid in the year of 15.7 pence per
share result in the Total Accounting Return of negative 34.4 pence
per share or negative 8.0% in the year.
IFRS Net Assets EPRA NTA
-------------------- --------------------
Pence per Pence per
GBPm share GBPm share
--------------------------------- -------- ---------- -------- ----------
1 January 2020 1,384.5 428.8 1,391.3 429.4
Investment property revaluation (166.6) (51.4) (142.5) (44.0)
Other retained earnings 54.4 15.3 31.2 9.6
Dividends paid (50.8) (15.7) (50.8) (15.7)
--------------------------------- -------- ---------- -------- ----------
31 December 2020 1,221.5 377.0 1,229.2 379.3
--------------------------------- -------- ---------- -------- ----------
Property values decreased over the year by a net 6.5%. Of the
total decline, 91% was reported in the six months ended 30 June
2020, with the fall since then limited to a further 0.6% of gross
property values. 69% of the net fall in valuation over the year was
accounted for by the decline in the value of the Budget Hotels
portfolio at the half year, following Travelodge's Company
Voluntary Arrangement in June 2020.
Contractual passing rent grew by 2.0% across the portfolio at
constant currency and by 2.3% overall, following rent reviews on
77% of total portfolio income. The blended Topped Up Net Initial
Yield on the portfolio was 5.42% at 31 December 2020 compared with
5.32% at 30 June 2020 and 4.95% at the start of the year. The
Investment Adviser reports on the valuation movements and changes
in rental income over the year in detail in its report on the
following pages.
IFRS EPS Adjusted EPRA EPS
------------------------ ------------------------
2020 2019 2020 2019
Pence per Pence per Pence per Pence per
share share share share
------------------------------------ ----------- ----------- ----------- -----------
Like for like net rent after
all costs and tax, before
rent concessions and revaluations 16.6 16.3 14.0 13.6
Rent concessions (0.3) - (10.5) -
------------------------------------ ----------- ----------- ----------- -----------
Like for like net rent after
of all costs and tax, before
revaluations 16.3 16.3 3.5 13.6
Rent net of interest for
hospitals sold in 2019 - 2.1 - 1.7
Profit on sale of hospitals - 7.3 - -
Property revaluations (51.4) 23.4 - -
Incentive fee - (1.6) - -
------------------------------------ ----------- ----------- ----------- -----------
Earnings per share (35.1) 47.5 3.5 15.3
------------------------------------ ----------- ----------- ----------- -----------
The Group's EPS measured on an IFRS basis without the industry
standard EPRA adjustments includes the property revaluations and
also the profit on the sale of the hospitals in 2019, resulting in
a swing from positive to negative earnings compared to last year.
The Group's Adjusted EPRA EPS, which excludes the impact of
property revaluations and profits on property sales, was 3.5 pence
per share for the year, against 15.3 pence per share reported for
2019. In our Adjusted EPRA EPS we eliminate the spreading of the
rent concessions which is required by IFRS, instead reporting to
you our earnings on a basis that reflects the cash flow impact of
these concessions over the limited period over which they apply
which is a 10.5 pence per share reduction in earnings in 2020. On
this adjusted basis, the impact of the rent concessions is at its
greatest in the 2020 financial year. Since the end of 2020,
annualised rent receivable after rent concessions has increased by
GBP5.8 million as a result of the increase in the Travelodge rents
for the 2021 calendar year and the expectation is that 2022 will
see a return in full to the originally contracted rent
profiles.
In our interim results announcement, we reported that at 30 June
2020 the Company's shares stood at a 30% discount to EPRA NTA. At
31 December 2020, with the shares having closed at 300.0 pence per
share the discount was 21%. On 9 March 2021 the discount had
further narrowed to 6.7% at the closing price of 354.0 pence per
share. The Board regularly examines options for managing any
persistent share price discount including the risks and benefits of
buying in the Company's shares with the aim of eliminating the
share price discount while enhancing net asset value per share. To
date, our conclusion has been that any positive impact would be
marginal without allocating a substantial proportion of the
Company's liquidity buffer to a share buy back, and that the
resultant increase in Net LTV and reduction in the options
available to the Company to deploy surplus cash for opportunities
or liability management would outweigh the potential benefits. This
remains under very regular review and re-assessment. However, we
note that during 2020 the Board and Management Team invested GBP0.6
million in shares purchased on the market and the Management Team
invested a further GBP5.3 million of cash in their interests in the
Company through buying out a retiring non-executive director in the
management company. The team remains energised, committed and
aligned with all shareholders.
Outlook
The Government's road map envisions the reopening of outdoor
visitor attractions from mid-April, followed by indoor activity in
most hospitality assets permitted from mid-May, with the caveat
that these dates are not cast in stone. The expectation that the
rollout of vaccinations to the entire UK adult population by the
middle of this year provides much stronger foundations for an
enduring release from the impact of the pandemic. The capital
markets reflect this view, pricing in a strong recovery in both the
publicly traded equity and debt of many companies in the leisure
and hospitality sectors. While many of our leisure and hospitality
assets have been closed for an extended period, 78 of our 123
hotels are already open, serving those unable to work from home.
But we expect clear benefits for our leisure, hotels and pubs
tenants from the easing of restrictions anticipated in May. In the
meantime, our healthcare assets have proved very resilient and
remain in strong demand, further underpinned by an NHS tender
valued at GBP10 billion over four years to the independent hospital
sector to try to clear the backlog of procedures.
The pandemic has created a recession unlike any other with its
economic effects felt very unevenly - devastating for a minority
but leaving a surprising number financially untroubled. Lockdown
restrictions have pushed up household savings ratios to record
levels, creating high levels of enforced savings in the UK which
provide the means to accompany the natural desire to make the most
of leisure and hospitality when it reopens. In tandem, the
unprecedented size and nature of Government financial support has
driven down interest rates to record lows and unleashed a surge of
liquidity seeking a suitable investment home - a home that may soon
require inflation protection. Highly expansionary monetary policy
has seen the Bank of England continue to increase its quantitative
easing programme to a level over four times higher than after the
Great Financial Crisis. With debt levels hitting unprecedented
heights the Government has a strong incentive to manage its cost
and deflate its value by letting inflation run above interest
rates. Unfortunately, the other side of the same coin is the
prospect of a protracted period of negative real interest rates
which would pose a challenge for savers. This is where REITs with
long-dated Inflation linked leases can prove their worth,
delivering healthy dividend yields and inflation protection.
Unfortunately, the pandemic has disrupted the businesses of our
leisure and hospitality tenants but there are increasingly good
grounds to believe that this will prove temporary. Theme parks and
budget hotels typically recover quickly from any economic downturn
and we were encouraged by the speed with which their trade began to
rebuild last summer after the first lockdown. It is still possible
that there will be further bumps along the road, however, and we
consider it prudent to continue to hold high levels of cash as a
shock absorber. The Management Team has a long-established track
record of delivering strong performance in public markets and
rarely have their property vehicles traded at a persistent discount
to net asset value. We remain committed to ensuring that the share
price reflects the prospects of our business and the resumption of
its growth trajectory.
Martin Moore
Chairman
10 March 2021
Investment Adviser's Report
Prestbury Investment Partners Limited, investment adviser to
Secure Income REIT Plc, presents this report on the operations of
the Group for the year ended 31 December 2020. Capitalised terms
within this report are explained in the glossary that follows the
financial information.
Our Management Team together owns 12.4% of the Company, worth
GBP152.3 million at 31 December 2020 EPRA NTA, making ours the
largest management holding by value of any UK REIT. Every member of
the team holds a personally significant investment in Secure Income
REIT. We believe that this aligns our interests very strongly with
those of all shareholders and motivates us to work hard to deliver
attractive risk adjusted returns for all shareholders over the
medium to long term.
Secure Income REIT was created to provide attractive long term
returns. The reporting cycle of half year and annual results
necessarily focuses on those discrete six-monthly periods and we
appreciate the relevance of short term performance for many
investors. However, the performance of the business over the medium
to longer term and its prospects over similar timescales remains
the principal focus of the Management Team and Board, as we
consider that this leads to better decision making and therefore
better outcomes in the long run.
In this report, we aim to explain the fundamentals of the
business, the unique characteristics underlying the property
portfolio including the key terms of the leases and the important
features of the tenant operations that stand behind the lease
obligations and therefore underpin the value of this Company. Our
assessment of the tenant operations this year is focussed in large
part on the impact of the Covid-19 pandemic, but we also look to
their past performance and the medium and longer term prospects for
their businesses and their potential impact upon the Group.
The performance of the Company since the onset of the pandemic
breaks a long track record of strong performance year on year and
in each reporting period. However, as we emerge from the pandemic
the reasons for investing in the Company set out in our explanation
of the business model remain as valid as they have been since it
listed in 2014.
The business model
The Company is a UK REIT specialising in real estate assets that
provide long term rental income with inflation protection. The
business is financed with leverage considered by the Board to be
appropriate to asset specific and wider market risks, with
significant in-built protections intended to enhance returns for
shareholders without taking undue borrowing risk.
The Board exercises strict asset selection and stress testing
criteria for acquisitions with a view to delivering income streams
that are not just long, but also secure and predictable. The Board
seeks to build on the Company's existing, high quality portfolio by
only sourcing assets let on long leases to businesses of
appropriate financial strength or backing by residual asset value,
and with inflation protected rental streams whether by way of fixed
uplifts or inflation linked reviews. Acquisitions should be
accretive to shareholder returns and meet the following
criteria:
i) the properties should be Key Operating Assets: assets that
are essential for the tenant to carry out their business and
generate earnings, and which the tenant is therefore significantly
more motivated to invest in and to retain in order to continue to
generate earnings;
ii) the relevant businesses should be in sectors which are
likely to be more resilient to disruption from technology,
including the internet, to economic downturn or other threats to
their sustainability including climate risk; and
iii) the properties should have high barriers to entry, making
them difficult to replace whether by way of the costs of acquiring
and developing the assets in question (for example, the significant
investment and planning challenges required to create a theme park
or hospital), of building the networks and brand investments that
underpin the operations of a business (for example, the nationwide
coverage of the Budget Hotels portfolio and its 81 year old brand)
or in some cases, such as the Budget Hotels portfolio, where assets
are held by the Company at a significant discount to replacement
cost.
By meeting these tests, the Board considers that tenants should
be more likely to renew or extend their leases and to continue to
invest in the assets, transferring the burden of obsolescence from
the owner to the occupier and thus preserving value for the
Company's shareholders.
While any investment is required to have a Weighted Average
Unexpired Lease Term of 15 years or more at the time of
acquisition, income longevity alone is not enough. When we and the
Board consider how sustainable the rental income is likely to be,
we evaluate various aspects of income security including:
i) protections at site level, such as the profitability of a
given site enhancing its attractiveness to the incumbent and
alternative operators, high residual value and alternative use
value;
ii) protections relating to the tenants, including financial
strength, the sustainability of their business models, the strength
of any restrictions relating to lease assignability and the spread
of tenant operations, whether that is by segment or geography;
and
iii) protections afforded by any lease guarantor in addition to
the direct tenant, including its financial strength and spread of
operations which add to those at site and tenant level.
Financing the assets that meet these criteria with a combination
of equity and appropriately structured debt means that returns to
shareholders can be enhanced in a way that properly reflects risk.
To date all credit facilities have been strictly non-recourse
secured credit facilities where the equity at risk is limited to
the net assets within ring-fenced subgroups. There are currently
six such subgroups which are self-contained, with no cross-default
provisions between them. In all cases, substantial financial
covenant headroom was negotiated into the credit agreements at the
outset together with appropriate cure rights where cash can be
diverted to a security group to maintain covenant compliance if
that becomes necessary. As new investments are acquired or existing
facilities refinanced, or if debt market conditions change, the
appropriateness of the financing structure is kept under review in
order to deliver well priced borrowings while protecting
shareholders' equity. We recognise that the additional protections
can increase the cost of debt and that trade-off is evaluated
relative to the risks in the specific assets and in the debt
structure. Where equity is raised to finance acquisitions, the
Board has undertaken that share issues will be at or above net
asset value in order to protect against dilution of shareholder
returns.
With the Group's debt costs largely fixed and its running costs
predominantly represented by the advisory fee which is a simple
calculation on a reducing scale relative to net asset value
(further explained in note 25 c to the financial information), the
medium to long term prospects for shareholder returns on the basis
of a small number of simple assumptions are largely predictable and
transparent.
The portfolio
The Group held 161 properties at 31 December 2020 with
contracted annual passing rent before Covid related concessions of
GBP113.3 million and a very long Weighted Average Unexpired Lease
Term of 20.2 years without break. Movements in the independent
property valuations and passing rents together with the key terms
of leases are set out in the following sections. First though, we
set out the Covid-related temporary concessions granted, as these
have had a significant impact on the results of the Group for the
year and its financial position at 31 December 2020.
Covid-19 tenant support provided
The Covid-19 pandemic presented a great many businesses globally
with major challenges, most particularly in the hospitality and
leisure sectors, and this Company and its tenants have not gone
unscathed from the impact of the lockdowns in the UK and elsewhere.
The resilience of this Company and that of our tenants has
certainly been tested, but all have thus far proved to be able to
withstand these extraordinary events.
As reported in the 30 June 2020 interim results, the sudden
forced closure of all of the Group's leisure and hospitality assets
and the majority of its Budget Hotels created immediate operational
and liquidity pressures on certain tenants. As a result, the
Company granted rent concessions, tailored in each case to provide
the breathing space needed to assist our tenants with the recovery
of their businesses and in so doing to support the Company's return
to its own growth trajectory. Under current arrangements all rents
are contracted to revert to the levels set out in the original
lease terms by January 2022 at the latest. No rent reductions have
been granted with enduring effect on cash flows after January
2022.
Concessions agreed prior to 30 June 2020 and disclosed in the
June 2020 interim results
-- Merlin Entertainments Limited took prudent action in April
2020 to significantly bolster its liquidity position, and part of
the package of measures was an open and constructive discussion and
then agreement with the Company (and a number of its other
landlords) to reschedule certain rental payments. Deferrals of
quarterly rents due in June 2020 and September 2020 amounting in
total to GBP17.8 million (GBP17.7 million at the year end exchange
rate) were agreed with the Company. The deferred rent is receivable
in September 2021. Rents reverted to their originally contracted
payment schedule from the December quarter and that rent was
received in full when due.
-- In direct response to the pandemic and having had to close
almost all of its over 570-strong hotel network in March 2020,
Travelodge launched a Company Voluntary Arrangement ("CVA") which
was approved by its creditors in June 2020. As a result, rent of
GBP14.5 million was foregone by the Group in the 2020 financial
year (including GBP0.2 million of the rental uplifts that took
effect during the year). The annualised cash rents receivable from
Travelodge increased by GBP5.6 million with effect from January
2021 and will return to their original contractual levels and terms
in January 2022. At that point, the uplifts from the RPI-linked
rent reviews that would have been receivable in the concession
period will also become due. Certain other lease variations were
also agreed as part of the CVA including the payment of the
majority of rents monthly rather than quarterly during the
concession period.
Unusually for a CVA, Travelodge did not use the process to exit
any of its leases, preferring to keep as much of its estate intact
as possible, demonstrating the value of maintaining a national
network with sophisticated yield management systems and perhaps a
reflection of the fact that the business had been performing well
before the pandemic, with a strong five year track record of
profits growth and sector outperformance in its key metric of
revenue per available room.
-- A six month rent free period, reducing rent by GBP1.1
million, was agreed in respect of the Stonegate pubs portfolio from
April 2020 in consideration for extending lease terms from 19.6 to
25.0 years and strengthening the lease alienation clauses. The rent
free period ended in September 2020 and rents have reverted to
their originally contracted level since then.
Concessions agreed subsequent to the 30 June 2020 interim
results announcement
Rent concessions granted since the interim results announcement
relate only to changes in the timing of rental receipts for limited
periods, with the amounts receivable over the relevant lease terms
unchanged. The following changes were agreed between 1 July and 31
December 2020:
-- The Board agreed with Travelodge that any rents that were
still receivable on a quarterly payment schedule following the CVA,
totalling GBP0.8 million for the quarter, would instead be
receivable in monthly instalments between January and March 2021
before reverting to their originally contracted quarterly payment
schedule in April 2021.
-- Quarterly rents of GBP0.8 million receivable in respect of
the Brewery on Chiswell Street in each of September 2020, December
2020 and March 2021 are instead receivable in equal instalments,
monthly in advance.
-- A deferral totalling GBP0.1 million of rent from TeamSport, a
tenant at Manchester Arena, for the period from May to September
2020, was agreed. The amount will instead be receivable in equal
monthly instalments over 18 months commencing in January 2021.
The Company has experienced very low levels of arrears of rent,
as demonstrated by the rent collection statistics presented later
in this report. No further concessions have been granted since 31
December 2020.
Earnings and cash flow impact of concessions
The impact of rent concessions on Adjusted EPRA EPS for the 2020
financial year is a reduction of GBP33.3 million in rent plus costs
of GBP0.7 million, amounting to 10.5 pence per share in total.
Assuming that there are no changes in the composition of the
portfolio or further variations to any of the leases, we are also
able to reliably predict the impact on 2021 earnings, which is
expected to be a positive effect of GBP8.8 million or 2.7 pence per
share. Only the 2020 and 2021 financial years are affected by
concessions granted to date, after which the Adjusted EPRA earnings
and cash flows are expected to revert to their pre pandemic
trajectory.
Year to
Year to 31 December
31 December 2021
2020 contracted
actual *
GBPm GBPm
-------------------------------------------------- ------------ ------------
Annualised contractual rent before concessions
at start of year 110.7 113.3
Fixed rental uplifts 0.7 1.1
RPI uplifts (expected uplifts in 2021 estimated
in line with RPI swap curve) 0.9 0.7
Expiry of Manchester car park lease net of
new operating agreement (1.0) -
Exchange rate movement 0.3 -
Expected rent before temporary concessions 111.6 115.1
-------------------------------------------------- ------------ ------------
Merlin leisure rent deferral (17.8) 17.7
Exchange rate movement on Merlin leisure rent
deferral 0.1 -
Budget Hotels rent reduction (14.3) (8.6)
Reduction in Budget Hotels rental uplifts for
2020 and 2021 (0.2) (0.3)
Rent on Stonegate pubs reduced for two quarters
in exchange for improved lease terms (1.1) -
-------------------------------------------------- ------------ ------------
Rental cash flow impact of temporary concessions (33.3) 8.8
Annualised cash rent receivable 78.3 123.9
-------------------------------------------------- ------------ ------------
Year to
Year to 31 December
31 December 2021
2020 contracted
actual *
GBPm GBPm
------------------------------------------------- ------------ ------------
Rental cash flow impact of concessions (33.3) 8.8
Costs of concessions charged to direct property
costs (0.7) -
Impact on Adjusted EPRA Earnings (GBPm) (34.0) 8.8
------------------------------------------------- ------------ ------------
Impact on Adjusted EPRA EPS (Pence) (10.5)p 2.7p
------------------------------------------------- ------------ ------------
* this is an illustration of rents receivable on their current
contractual terms and is not a profit forecast.
The impact of the rent concessions on IFRS earnings reflects the
spreading of those concessions over the remaining, very long period
to the end of each lease. This has the effect of muting the impact
of the concessions such that they reflect a materially smaller
impact each year for a very long time. In the case of the deferred
Merlin rent, which is reflected in the Adjusted EPRA earnings on a
cash basis, the IFRS results do not change as a result of the
variation in timing of the receipt.
Year to
Year to 31 December
31 December 2021
2020 contracted
actual *
GBPm GBPm
-------------------------------------------------- ------------ ------------
Rent before temporary concessions 111.6 115.1
-------------------------------------------------- ------------ ------------
Budget Hotels rent reduction spread over average
remaining 22 year lease term (0.9) (1.4)
Pubs rent reduction in 2020 spread over average
remaining 25 year lease term - (0.1)
Decrease in revenue from concessions on an
IFRS basis (0.9) (1.5)
-------------------------------------------------- ------------ ------------
110.7 113.6
Other adjustments to cash rents reported in
the income statement:
Rent smoothing adjustments from originally
contracted uplifts 8.9 7.3
Recovery of head rent and other service charge
costs 1.7 1.7
Back rent recognised from 2017 hospitals rent
review 0.4 0.4
-------------------------------------------------- ------------ ------------
IFRS rent receivable in the income statement 121.7 123.0
-------------------------------------------------- ------------ ------------
* this is an illustration of rents receivable on their current
contractual terms and is not a profit forecast.
The IFRS rental income already includes rent smoothing in
respect of the leases where rent concessions were granted,
amounting to GBP0.9 million. Therefore, the incremental increase
from the IFRS basis of measurement to Adjusted EPRA earnings is an
additional GBP32.4 million of rent smoothing, bringing the total to
GBP33.3 million.
The accounting policies for rent concessions and their impact on
earnings are explained in the Financial Review section of this
Investment Adviser's Report and in note 2d to the financial
information.
No Group or Investment Adviser Covid-19 support received
Neither the Group nor the Investment Adviser or any part of the
Investment Adviser's group has taken advantage of any Government
support packages offered to businesses during the pandemic. No
employees of the Investment Adviser or its wider group have been
furloughed or laid off and their salaries have continued to be paid
in full.
Rent collections
Over the 2020 financial year, the Group reported only minimal
rent arrears following each quarterly collection cycle. Collection
rates for each quarter were as follows:
25 March 25 December
to 29 September 2020 to
7 April 24 June to to 7 October 7 January
2020 7 July 2020 2020 2021
GBPm GBPm GBPm GBPm
Originally contracted 27.3 27.5 27.6 27.8
Rent concessions:
Deferred - (8.9) (8.9) -
Reduced (4.8) (4.9) (4.8) (2.2)
Rescheduled to monthly
payment - (1.0) (1.6) (4.0)
------------------------------ ---------- ------------- -------------- ------------
Due in the period 22.5 12.7 12.3 21.6
Collected on or before
the due date (20.2) (12.7) (12.3) (21.3)
Collected after the due
date but before 31 December
2020 (2.3) - - -
------------------------------ ---------- ------------- -------------- ------------
Rent arrears at 31 December
2020 - - - 0.3
Collected subsequently
* - - (0.3)
------------------------------ ---------- ------------- -------------- ------------
Rents demanded prior
to 31 December 2020 in
arrears at the date of
this report - - - -
------------------------------ ---------- ------------- -------------- ------------
Collected within seven
days (%) 89.8% (*) 100.0% 99.9% 98.6%
------------------------------ ---------- ------------- -------------- ------------
* the collection rate for the March and April rent collections
is lower as a result of the delay in receipt of Travelodge rents
while their CVA ran its course. The rents as amended by the CVA
were received after the conclusion of that process.
The portfolio
Portfolio rents and valuation
The portfolio is valued by qualified independent external
valuers every six months.
Leisure Healthcare Budget Hotels Total
------------ ------------ --------------- -------------
Passing rent
before concessions GBPm Change GBPm Change GBPm Change GBPm Change
--------------------- ---- ------ ---- ------ ------ ------- ----- ------
31 December
2019 46.8 35.6 28.3 110.7
--------------------- ---- ------ ---- ------ ------ ------- ----- ------
Uplifts 0.3 0.7% 1.0 2.8% 0.9 2.9% 2.2 2.0%
Exchange rate
movement 0.4 0.9% - - - - 0.4 0.3%
--------------------- ---- ------ ---- ------ ------ ------- ----- ------
Total movement
in rents 0.7 1.6% 1.0 2.8% 0.9 2.9% 2.6 2.3%
--------------------- ---- ------ ---- ------ ------ ------- ----- ------
31 December
2020 47.5 36.6 29.2 113.3
--------------------- ---- ------ ---- ------ ------ ------- ----- ------
Leisure Healthcare Budget Hotels Total
-------------- ------------- --------------- ---------------
Valuation GBPm Change GBPm Change GBPm Change GBPm Change
------------------- ------ ------ ----- ------ ------ ------- ------- ------
31 December
2019 851.9 748.4 482.8 2,083.1
------------------- ------ ------ ----- ------ ------ ------- ------- ------
Revaluation (65.2) (7.6)% 20.7 2.8% (98.0) (20.3)% (142.5) (6.8)%
Exchange rate
movement 6.3 0.7% - - - - 6.3 0.3%
------------------- ------ ------ ----- ------ ------ ------- ------- ------
Total revaluation
movement (58.9) (6.9)% 20.7 2.8% (98.0) (20.3)% (136.2) (6.5%)
------------------- ------ ------ ----- ------ ------ ------- ------- ------
31 December
2020 793.0 769.1 384.8 1,946.9
------------------- ------ ------ ----- ------ ------ ------- ------- ------
Leisure Healthcare (^) Budget Hotels Total
-------------- ---------------- --------------- --------------
31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec
Yields 2020 2019 2020 2019 2020 2019 2020 2019
------------------ ------ ------ ------- ------- ------- ------ ------ ------
Topped Up Net
Initial Yield
* 5.54% 5.07% 4.46% 4.46% 7.10% 5.50% 5.42% 4.95%
Running Yield
by January 2022 5.76% 5.35% 4.58% 4.71% 7.21% 5.83% 5.58% 5.25%
------------------ ------ ------ ------- ------- ------- ------ ------ ------
* Topped up Net Initial Yield ignores the rent concessions, all of which are temporary
^ the healthcare valuation and yields take no account of any
uplift from an outstanding May 2018 open market rent review on the
Ramsay hospitals; the Ramsay rents account for 94% of the
healthcare rents at 31 December 2020
the Leisure and Budget Hotels Running Yields are calculated
using the independent external valuers' estimates of RPI averaging
2.5% per annum (2019: 2.6% per annum)
The independent external valuation of the properties has fallen
by 6.5% in the year. Overall, the blended Topped Up Net Initial
Yield has risen in aggregate by 47 basis points since 31 December
2019 of which 10 basis points represents the movement since 30 June
2020. The 20.3% reduction in the valuation of the Budget Hotels
portfolio, all of which occurred in the first half of the year,
accounts for 72% of the total valuation movement in the year.
The Leisure and Budget Hotels valuations at 31 December 2020
have been reported by the independent external valuers as being
subject to material valuation uncertainty in light of Covid-19,
based on the provisions of the Royal Institution of Chartered
Surveyors' guidelines in force at that time and consistent with the
approach taken for the 30 June 2020 valuations. No material
valuation uncertainty applied to the 31 December 2019 valuations.
The valuation of the healthcare assets, which account for 39.5% of
investment properties at independent valuation, are not subject to
the material valuation uncertainty proviso. Material valuation
uncertainty does not mean that the valuations cannot be relied
upon, but that less certainty can be attached to them than would
otherwise be the case and is further explained in note 11 to the
financial information. Furthermore, this did not impact on the
overall audit opinion, which is unqualified.
Basis of rent reviews
The rents on three of the portfolios have been subject to
deferrals or reductions in the short term and of those, only one,
the Budget Hotels, remains within the period over which rents
demanded are reduced. On the basis of the concessions granted to
date all rental cash flows are contracted to revert to their
originally contracted terms by, at the latest, January 2022. As all
rents are expected to revert to originally contracted terms within
ten months of the date of this report, the income that will arise
on the portfolio still benefits from fixed contractual rental
uplifts which average 2.8 % per annum on 41% of the income and
upwards only RPI-linked rent reviews on 58%, with the remaining 1%
subject to upwards only open market reviews. Two thirds of the rent
is subject to annual review, giving the Group the benefit of
frequent capture of any uplifts.
31 December 31 December
2020 2019
------------------------------- ---------------------------------------------- -----------
Percentage of passing Reviewed three Total Total
rents Reviewed annually or five yearly portfolio portfolio
------------------------------- ----------------- --------------- ---------- -----------
Upwards only RPI:
Uncapped 25% 27% 52% 53%
Collared 4% 2% 6% 6%
------------------------------- ----------------- --------------- ---------- -----------
Total upwards only RPI-linked
reviews 29% 29% 58% 59%
------------------------------- ----------------- --------------- ---------- -----------
Fixed uplifts:
Annual reviews 38% - 38% 38%
Five-yearly reviews - 3% 3% 3%
------------------------------- ----------------- --------------- ---------- -----------
Total fixed uplifts 38% 3% 41% 41%
------------------------------- ----------------- --------------- ---------- -----------
Open market reviews - 1% 1% -
------------------------------- ----------------- --------------- ---------- -----------
Total portfolio 67% 33% 100% 100%
------------------------------- ----------------- --------------- ---------- -----------
The increases in passing rent during the year from both fixed
and RPI-linked uplifts take effect as follows:
Leisure Healthcare Budget Hotels Total
GBPm GBPm GBPm GBPm
-------------------------- ------- ---------- ------------- -----
Paid current (0.3) 1.0 - 0.7
Deferred to:
September 2021 0.6 - - 0.6
January 2022 - 0.9 0.9
-------------------------- ------- ---------- ------------- -----
2020 total at constant
currency 0.3 1.0 0.9 2.2
Exchange rate movement 0.4 - - 0.4
-------------------------- ------- ---------- ------------- -----
Total uplifts in passing
rent 0.7 1.0 0.9 2.6
-------------------------- ------- ---------- ------------- -----
The net uplift on Leisure passing rent includes a GBP0.3 million
fall as a result of the expiry of the car park lease at Manchester
Arena. The GBP0.6 million uplift on the theme parks took effect in
June and July 2020 and the uplift relevant to the deferred rent
receivable in June and September 2020 is therefore deferred to
September 2021. The uplift in subsequent quarters is unaffected by
the rent concession. The terms of the Travelodge rent concessions
are such that the contractual provisions relating to the rent
reviews continue throughout the concession period but with any
rental increases being receivable at the end of that period, in
January 2022, and discounted at the relevant CVA rate.
Consequently, the capture of these rental uplifts is deferred and
becomes receivable within the next nine months. Review provisions
in the Healthcare portfolio are unaffected by the rent
concessions.
Changes in RPI calculation methodology from 2030
In November 2020, the UK Government and UK Statistics Authority
announced changes to its calculation of RPI such that it will align
with the Consumer Prices Index ("CPIH") from February 2030. The
exact impact on the RPI clauses in the Group's leases will depend
on precisely how the UK Statistics Agency implements the change. On
a downside basis, if rents were to follow CPIH which has been on
average 0.8 percentage points lower than RPI over the past ten
years and assuming a differential continues, the rent uplifts from
2030 onwards would be lower than they would otherwise have been.
However, the Group's lease provisions may provide protection so
that there would be no change in some or all cases. In the event
that rental uplifts do change from 2030, any valuation impact in
such circumstances would be expected to be insignificant as the
market tends not to differentiate materially between RPI and CPIH
lease structures, with the other property characteristics carrying
greater weight in establishing pricing.
Lease lengths
The Group's leases are very long with a Weighted Average
Unexpired Lease Term of 20.2 years without break from 31 December
2020.
Leisure * Healthcare Budget Hotels Total
-------------- -------------- --------------- --------------
31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec
2020 2019 2020 2019 2020 2019 2020 2019
------------------ ------ ------ ------ ------ ------- ------ ------ ------
Weighted Average
Unexpired Lease
Term (years) 22.1 22.5 16.8 17.8 21.4 22.4 20.2 21.0
------------------ ------ ------ ------ ------ ------- ------ ------ ------
* The Leisure portfolio WAULT has shortened by less than 12
months as a result of the extension of the leases on the Pubs
portfolio from 19.6 years to 25.0 years in July 2020 and the new
longer term arrangements for the car park at Manchester Arena which
replaced a lease that expired in March 2020
The portfolio Weighted Average Unexpired Lease Term of 20.2
years is significantly longer than that of any other major UK REITs
(defined as those with a market capitalisation in excess of GBP1
billion). 98% of contractual passing rents have an unexpired term
without break of more than 16 years.
No material vacancies or landlord costs
The portfolio is fully let. All occupational leases are on full
repairing and insuring ("FRI") terms, meaning that overall, the
Group's property running costs are low and there is only a very
modest capital expenditure requirement. There is one small income
stream relating to the car park at Manchester Arena that arises
from an operating agreement rather than an FRI lease, which
currently accounts for a negligible percentage of the Group's
income.
Portfolio total rents
The Group's principal lease counterparties, analysed by
contractual passing rent before concessions as at 31 December 2020,
are as follows:
31 December 31 December
2020 2019
Tenant or guarantor GBPm GBPm
--------------------------------------- ------------- -------------
Merlin Entertainments Limited * 35.6 34.5
Ramsay Health Care Limited 34.4 33.5
Travelodge Hotels Limited 29.2 28.3
SMG & SMG Europe Holdings Limited 4.0 4.0
The Brewery on Chiswell Street Limited 3.4 3.4
Orpea SA 2.2 2.1
Stonegate Pub Company Limited 2.2 2.0
Others (each below GBP1.3 million) 2.3 2.9
113.3 110.7
--------------------------------------- ------------- -------------
* GBP7.1 million (2019 GBP6.6 million) of the Merlin rents are Euro denominated
including GBP0.5 million of estimated variable net income for
the car park at Manchester Arena
Further information on the principal portfolio tenants and
guarantors is given within the portfolio analyses that follow.
Leisure assets (41% of portfolio value)
31 December 31 December
2020 2019
Contracted rents before temporary rent concessions GBPm GBPm
--------------------------------------------------- ------------- -------------
UK assets 40.4 40.3
German assets (at constant Euro exchange rate) 7.1 6.9
47.5 47.2
--------------------------------------------------- ------------- -------------
The Company's leisure assets are:
-- four well established large scale visitor attractions with accommodation operated by Merlin Entertainments Limited;
-- Manchester Arena, a city centre 20,000 capacity indoor arena;
-- The Brewery, one of London's largest catered events venues on
Chiswell Street in the City of London; and
-- a portfolio of 18 freehold high street pubs located in England and Scotland.
The Merlin assets include two of the UK's top three resort theme
parks by visitor numbers, Alton Towers and Thorpe Park, as well as
Warwick Castle, and including all the on-site accommodation at the
three attractions. The German assets operated by Merlin are the
Heide Park resort theme park and hotel in Soltau, Saxony, which is
the largest in Northern Germany. These assets are all held freehold
and are let to subsidiaries of Merlin Entertainments Limited, which
owns all of Merlin's operating businesses worldwide and which is
the guarantor of all lease obligations for these assets. Measured
by the number of visitors, Merlin is Europe's largest and the
world's second largest operator of leisure attractions, second only
to Disney.
Merlin is a private business owned by a consortium of
substantial, established, long term investors that took the
business private in 2019 at a price representing an enterprise
value of some GBP6 billion. Merlin's owners are Kirkbi, the
majority owners of the Lego business who have been invested in
Merlin since 2005 and which own 50%, together with Blackstone Core
Equity, a long term fund with Blackstone's latest reported assets
under management over GBP400 billion, and Canada Pension Plan
Investment Board, one of the world's largest pensions investors
with latest reported assets under management of over GBP230
billion. During the pandemic, Merlin has been able to access
capital from public bond markets as part of their liquidity
management strategies. The quoted pricing for Merlin's publicly
traded 5.75% bonds maturing in 2026, which have been in issue since
before the onset of the pandemic, have recovered to within 3% of
their pre pandemic price (taking the quoted price at 1 January
2020) and were trading above par at a yield to maturity on 9 March
2021 of 4.5%. Nick Varney, Merlin Entertainments Limited's Chief
Executive, commented in March 2021 that "after a very challenging
year for the group, our experience in between lockdowns and our
exciting future investment proposals for the UK and German theme
parks allows us to look forward to the future with confidence that
we can continue with our pre Covid-19 growth trajectory."
The average term to expiry of the Merlin leases is 21.5 years
without break from 31 December 2020 and the tenants have two
successive rights to renew for 35 years at the end of each term.
The leases are on full repairing and insuring terms. There are
upwards only uncapped RPI-linked rent reviews on the UK properties
every June throughout the term (based on RPI over the 12 months to
April each year), which in 2020 resulted in a rental increase of
1.5%. The German properties are subject to fixed annual increases
of 3.34% every July throughout the term, as a result of which the
German rents increased from GBP6.9 million to GBP7.1 million on 30
July 2020 (translated at the 31 December 2020 exchange rate).
Manchester Arena is a long leasehold strategic site of eight
acres which is located on top of Manchester Victoria Railway and
Metrolink station. It comprises the UK's largest indoor arena by
capacity, some additional 160,000 sq ft of office and leisure
space, a multi-storey car park with approximately 1,000 spaces, and
other income sources.
The Arena is let to SMG and SMG Europe Holdings Limited, part of
ASM Global, with 24.5 years unexpired without break from 31
December 2020. The annual rent is GBP4.0 million (before headrent)
and is reviewed annually every June in line with RPI, collared
between 2% and 5%, which in 2020 resulted in a rental increase of
2.0%.
ASM Global was created by a merger of AEG Facilities and SMG in
October 2019 and is the world's largest venue management company,
operating over 300 venues in 21 countries and with pro forma
annualised 2019 revenues of $500 million estimated at the time of
the merger. The ASM management team has been in regular dialogue
with us. The arena has been closed throughout the pandemic period
and the Government's roadmap for easing lockdown restrictions
permits it to reopen from 21 June 2021, with the expectation that
it is likely to be fully operational from September 2021. All Arena
rents have been paid when due. The offices and ancillary leisure
space at Manchester Arena is let to tenants including Serco,
Unison, JCDecaux and go-karting operator TeamSport. The leases on
the Manchester site as a whole have an average term to expiry of
17.1 years from 31 December 2020 and produce net passing rent of
GBP5.7 million per annum at that date.
The Brewery on Chiswell Street is a predominantly freehold
investment let to an established specialist venue operator on a
full repairing and insuring lease. It provides the largest catered
event spaces in the City of London and is located within five
minutes' walk of the Moorgate entrance to the new Crossrail Station
at Liverpool Street. As with Manchester Arena, the Brewery has been
closed throughout the pandemic period but is permitted to reopen
from 21 June 2021 and is likely to be fully operational from
September 2021.
The lease term to expiry is 35.5 years without break from 31
December 2020 and the lease provides for five-yearly fixed uplifts
of 2.5% per annum compounded. The passing rent is GBP3.4 million
per annum as at 31 December 2020 and the next rental uplift to
GBP3.8 million will take effect in July 2021.
The portfolio of 18 high street pubs produces passing rent of
GBP2.2 million per annum as at 31 December 2020 and the leases have
an average term to expiry of 24.5 years without break. The pubs are
currently closed but will be able to open for indoor trading from
17 May 2021.
The pubs are let on individual leases either to, or guaranteed
by, Stonegate Pub Company Limited, the largest pub company in the
UK, with over 4,500 pubs following its March 2020 acquisition of Ei
Group for GBP1.27 billion. Stonegate has been able to access public
debt markets during the pandemic period in support of the group's
liquidity needs. Stonegate's Sterling bonds maturing 2025, issued
in July 2020, were trading above par at a yield to maturity of 7.0%
at close on 9 March 2021.
Rents are subject to five-yearly RPI-linked increases collared
between 1% and 4% per annum compounded. The rent reviews in
February 2020 resulted in an increase in passing rent of GBP0.2
million per annum (13.2% or 2.5% per annum compounded).
Healthcare assets (39% of portfolio value)
31 December 31 December
2020 2019
Passing rents GBPm GBPm
---------------------------- ------------- -------------
Ramsay hospitals 34.4 33.5
London psychiatric hospital 2.2 2.1
36.6 35.6
---------------------------- ------------- -------------
The Group's healthcare assets, 11 freehold private acute
hospitals and a central London freehold psychiatric hospital, have
continued to trade throughout the year and since the year end, with
no rent concessions required. The private hospitals are located
throughout England and are let to a subsidiary of Ramsay Health
Care Limited, the ASX50 listed Australian healthcare company. The
psychiatric hospital, the only private facility of its kind in
Central London, is let to Groupe Sinoué, a very substantial French
company specialising in mental health care.
The Ramsay hospitals are let on full repairing and insuring
leases with a term to expiry at 31 December 2020 of 16.3 years
without break. The rents increase in May each year by a fixed
minimum of 2.75% per annum throughout the lease term. Following the
May 2020 fixed uplifts, the rents on the Ramsay portfolio increased
from GBP33.5 million to GBP34.4 million per annum. In addition,
there is an upwards only open market rent review within each lease
as at 3 May 2018 and then in May 2022 and every five years
thereafter. The May 2018 open market review remains outstanding. It
is subject to a formal arbitration process which was put on hold by
agreement between the parties during 2020, to allow Ramsay
management to fully focus on its pandemic response and because the
arbitrator would have been unable to inspect the hospitals during
the lockdowns. Given the uncertainty over the time taken to resolve
the arbitration and the nature of that process, there are currently
no indications of the likely review outcome and t his financial
information takes no account of any potential increase in rental
income that may arise from it.
The leases on the Ramsay hospitals are all guaranteed by Ramsay
Health Care Limited, the listed parent company of one of the top
five private hospital operators in the world and the largest
operator of private hospitals in Australia, France and Scandinavia.
Ramsay is a constituent of the ASX 50 index of Australia's largest
companies, with a market capitalisation at 9 March 2021 (and using
the exchange rate on that date) of GBP8.1 billion (GBP6.5 billion
at 10 March 2020).
The Ramsay hospitals have continued to trade without pause
throughout the pandemic and, through their contracts with the NHS,
have provided guaranteed capacity to the NHS to tackle the Covid
crisis at cost (including the cost of their rents) since late March
2020. Ramsay reported in February 2021 that they had treated more
than 500,000 NHS patients over this period, more than any other
provider in the independent sector. They also noted that private
patient volumes showed some recovery between lockdowns. Ramsay UK
is currently operating under a new volume-based agreement with NHS
England from 1 January to 31 March 2021 under which the NHS may
trigger a peak surge period on seven days' notice should Ramsay's
capacity be required to enable the NHS to respond to Covid cases.
Importantly, Ramsay is able to continue providing private patient
services under the new agreement. They have provided similar
support in the other jurisdictions in which they operate. Control
of their hospital capacity worldwide is being gradually regained,
allowing Ramsay both to return to their more profitable core
private healthcare business and to participate in the very
significant backlogs of NHS and private patient treatment in the UK
and elsewhere. This is expected to include their participation in
the NHS's GBP10 billion tender process for independent providers
which is currently underway in England.
The London psychiatric hospital is let on a full repairing and
insuring lease with a term to expiry at 31 December 2020 of 23.6
years without break. The rent increases in May each year by a fixed
3.0% per annum throughout the lease term and as a result increased
from GBP2.1 million to GBP2.2 million on 3 May 2020. The lease is
guaranteed by Orpea SA, a leading European operator of nursing
homes, post-acute care and psychiatric care, listed on Euronext
Paris with a market capitalisation at 9 March 2021 (and using the
exchange rate on that date) of GBP5.7 billion (GBP5.8 billion at 10
March 2020).
Budget Hotel assets (20% of portfolio value)
31 December 31 December
2020 2019
GBPm GBPm
--------------------------------------------------- ------------- -------------
Contracted rents before temporary rent concessions 29.2 28.3
--------------------------------------------------- ------------- -------------
At 31 December 2020 the Group owned 123 (2019: 123) Travelodge
hotels in England, Wales and Scotland, let to Travelodge Hotels
Limited which is the main operating company within the Travelodge
group trading in the UK, Ireland and Spain. Travelodge is the UK's
second largest budget hotel brand, with 586 hotels and over 44,500
rooms as at 31 December 2020.
As a response to liquidity issues created by the forced closure
of nearly all of their more than 570 hotels, Travelodge concluded a
Company Voluntary Arrangement (CVA) in June 2020. As a consequence
of the CVA, GBP14.5 million of rent (including GBP0.2 million of
RPI uplifts) was foregone by the Group in the 2020 financial year
and rent for the 2021 financial year will be GBP8.9 million
(including GBP0.3 million of RPI uplifts) lower than the originally
expected rental cash flows. Rents are due to return to the levels
originally contracted from January 2022. Travelodge rents are
currently receivable monthly in advance and all rent demanded under
the terms of the CVA has been received when due.
A feature of Travelodge's CVA was a landlord option to break
leases at no cost, which applied to 119 of the Group's 123 leases
and which was exercisable on the majority of those prior to 20
November 2020. Against the background of a still challenging
environment, the Management Team and Board conducted extensive
analyses as to whether the prospects of the Group would be better
served by retaining the current lease arrangements, seeking to
lease to alternative operators or selling part or all of the Budget
Hotels portfolio. Ultimately the conclusion reached was that the
current lease arrangements provided the best value opportunity for
the Company's shareholders and the properties were retained. We
note that the vast majority of landlords remained with Travelodge
which, immediately after the lease break option period, operated
578 hotels compared with 588 hotels at 31 December 2019.
Travelodge is a major, established brand with very high levels
of brand recognition and a strong pre-pandemic five year
performance track record. In addition to the rent reductions
secured by Travelodge through their CVA, the company received a
GBP40 million equity investment from its shareholder group and
completed a GBP65 million private debt placement in December 2020
to further support liquidity. Travelodge's publicly traded bonds
that have been in issue throughout the pandemic period are trading
at 8% lower than at the start of 2020, recovering from a decline of
38% in April 2020, and are trading at a yield to maturity of 7.6%
at close of business on 9 March 2021.
One of the attractions of investment specifically in budget
hotels rather than the wider hotel markets is their relative
resilience in recessionary times. While we cannot examine the
performance of the budget hotels sector following previous
pandemics, we can look at periods of recessions and post recession
recovery where it can be observed that budget hotels recover more
quickly than the rest of the hotels sector. We understand that,
consistent with the rest of the budget hotel sector, demand for
bookings between lockdowns where hotels have been able to open has
been relatively strong, particularly in leisure destinations.
Travelodge reported on 12 February 2021 that, they have contained
costs to below the lower end of their expected range in lockdown
while revenues remain in line with those experienced in the
November 2020 lockdown which, together with their decisive action
to increase their liquidity through their private placement in
December 2020, resulted in a better than expected GBP117 million
cash balance at 3 February 2021. Travelodge management consider
that their business is well positioned to benefit from any
improvement in trading conditions, with its strong brand, direct
distribution model, low-cost proposition and "class-leading"
operating margins.
The average term to expiry of the Travelodge leases is 21.4
years from 31 December 2020 with no break clauses. The leases are
on full repairing and insuring terms and Travelodge is also
responsible for the cost of any headlease payments and other
amounts owing to the freeholders of the 52 leasehold properties.
There are upwards only uncapped RPI-linked rent reviews every five
years throughout the term of each lease, with reviews falling due
over a staggered pattern across the portfolio. Reviews arising
during the CVA concession period, which runs to January 2022,
continue to be calculated and documented but are reduced in line
with the terms of the CVA and any remaining uplifts become
receivable at the end of the concession period. Reviews on 39
budget hotels (22% of the portfolio by rental value) were agreed
during 2020, with passing rent on those assets increasing by 13.3%
from GBP6.3 million to GBP7.1 million, equivalent to an average
uplift of 2.5% per annum. 24% of the passing rent will be reviewed
in 2021, 39% in 2022, 11% in 2023 and 4% in 2024.
Financing
The Group's operations are financed by a combination of cash
resources and non-recourse debt finance, where the equity at risk
is limited to the net assets within six ring-fenced subgroups. Each
subgroup is self-contained, with no cross-default provisions or
cross collateralisation between the six of them. In all cases,
substantial financial covenant headroom was negotiated into loan
terms at their inception, together with appropriate rights to
remedy certain breaches, where cash can be temporarily injected
into a security group in order to maintain covenant compliance if
and when that is considered the best course of action for the
Company. The objective of this structure is to provide a reasonable
level of ongoing protection for the Group against unexpected
valuation movements or changes in income.
Where rent concessions have been agreed this has, in each case,
been done with the consent of the relevant lenders. In certain
cases this has also included covenant waivers during the concession
period. Save for the waivers, the terms of the various loan
agreements remain unchanged and we appreciate the open and
constructive communications with our lenders through the pandemic
period.
The Group's total gross debt decreased by GBP2.4 million in the
year. Scheduled loan repayments of GBP4.4 million and GBP1.5
million repaid out of the net proceeds of non-core hotels sold in
2019 but completed in 2020 were offset by a GBP3.5 million increase
from foreign currency translation movements on the Group's Euro
denominated debt. Net debt has increased by GBP45.0 million,
largely reflecting the impact of GBP34.6million of dividends paid
in the year out of the Group's cash resources rather than from
earnings and GBP11.8 million deployed in interest payments not
covered by rent while the Merlin rents were temporarily
deferred.
The Group's Net Loan To Value ratio increased from 31.9% to
36.4% over the financial year. The majority of this increase was
reported in the six months to 30 June 2020 when the Net LTV was
35.3%, largely as a result of the valuation movements in the year
being heavily weighted in the first half.
Group
Secured amounts Unsecured amounts total
GBPm GBPm GBPm
-------------------- --------------- ----------------- ---------
Gross debt 928.3 928.3
Secured cash (23.1) (23.1)
Free cash * (2.4) (194.2) (196.6)
-------------------- --------------- ----------------- ---------
Net debt 902.8 (194.2) 708.6
-------------------- --------------- ----------------- ---------
Property valuation 1,946.9
-------------------- --------------- ----------------- ---------
Net LTV 36.4%
-------------------- --------------- ----------------- ---------
* free cash within secured facilities is released to Company
free cash after each quarterly interest payment date as long as all
loan covenants are complied with.
Key terms of the facilitie s, ranked by maturity date
Number of Maximum
properties annual
Principal securing interest Interest Annual cash Final repayment
GBPm loan rate rate protection amortisation date
----------------- --------- ----------- --------- ---------------- ------------- ---------------
Merlin leisure 380.4* 6 5.7% Fixed GBP3.8m Oct 2022
80% fixed
Budget Hotels 2 65.4 70 3.3% 20% capped None Apr 2023
Leisure: Arena, 83% fixed
Brewery, Pubs 60.0 20 3.2% 17% capped None Jun 2023
Budget Hotels 1 59.0 53 2.7% Fixed None Oct 2023
Healthcare 1 63.8 2 4.3% Fixed GBP0.3m Set 2025
Healthcare 2 299.7 10 5.3% Fixed GBP3.2m Oct 2025
Total 928.3 161 4.9%
----------------- --------- ----------- --------- ---------------- ------------- ---------------
* GBP316.0 million of senior and mezzanine Sterling loans and
EUR71.6 million of senior and mezzanine Euro denominated loans
translated at the year end exchange rate of EUR1:GBP0.90. All loan
tranches within the total GBP380.4 million are
cross-collateralised.
amortisation in each of the years ending October 2021 and
October 2022 comprises GBP3.2 million of the Sterling facility and
EUR0.7 million of the Euro facility.
Interest rate risk is managed by either fixing or capping rates
over the term of each loan. 97.5% of the Group's borrowings at 31
December 2020 are subject to fixed rates.
The weighted average interest cost in the year was 4.9% per
annum, consistent with the prior year. Interest cover, measured for
these purposes as annualised current passing rent after concessions
divided by annualised interest cost, was 2.3 times at 31 December
2020. This is a modest decrease compared to the 2.4 times cover
reported for the 2019 financial year, as a result of the cash flow
low point of the rent concessions being historic at the point of
testing. As the Budget Hotels rent reduction for 2021 amounts to
less than 8% of total passing rent the impact on overall interest
cover is relatively small.
There have been no defaults or potential defaults in any
facility during the year or since the balance sheet date. The
extent of headroom on financial covenants at the balance sheet date
is analysed in the financial review on the following pages.
Financial review
EPRA measures
Together with the IFRS results reported in the financial
information, we include in this report financial measures
recommended by the European Public Real Estate Association ("EPRA")
to facilitate comparison with other real estate investment
companies. The calculation of the EPRA measures and their
reconciliation to the financial information prepared under IFRS is
presented in the Unaudited Supplementary Information which follows
the financial information. In addition, the calculation of EPRA EPS
is presented in note 10 to the financial information and EPRA Net
Tangible Assets in note 23 .
New EPRA guidelines became effective on 1 January 2020 and
comparative figures have been provided on a consistent basis. The
new EPRA guidelines set out three measures of Net Asset Value, each
of which is disclosed and reconciled to the financial information
in note 23 and in the Unaudited Supplementary Information. In this
report we highlight EPRA Net Tangible Assets ("EPRA NTA") as the
most meaningful measure of long term performance for the Company
and the measure which is being adopted by the majority of UK REITs,
establishing it as the industry standard benchmark. The Unaudited
Supplementary Information also includes a calculation of EPRA NAV
on the basis reported in prior years and a reconciliation of that
measure to EPRA NTA, both for the purposes of comparison and
because EPRA NAV continues to be used in the calculation of certain
fees payable to the Investment Adviser, as explained in note 25 b
to the financial information.
Key performance indicators (KPIs)
The Board monitors the following key performance indicators and
comments on performance against these KPIs in this report.
Year to 31
Year to 31 December
December 2020 2019
--------------------------------------------------- ---------------- ------------
Financial measures:
Total Accounting Return - 8.0% 11.7%
Total Shareholder Return - 27.3% 19.4%
Adjusted EPRA EPS 3.5p 15.3p
Net LTV ratio 36.4% 31.9%
Uncommitted Cash GBP192.0m GBP234.2m
Other measures:
Headroom on debt default covenants before any
preventative cash cure or other remedial action:
Valuation headroom before tightest LTV default
test would be triggered 32% 38%
Rent headroom before tightest projected interest
cover default test would be triggered 29% 33%
--------------------------------------------------- ---------------- ------------
Impact of rent concessions on KPIs and IFRS financial
information
Recognising the Group's long term relationships with its tenants
and the benefits to the Company of supporting their businesses
through the impact of the Covid-19 pandemic and subsequent
lockdowns, the Company provided support where it was needed. The
forms of support provided are summarised at the start of this
report, where we also highlight the altered cash flow profile of
the Group's rental income during the year and the expected gradual
restoration of the Group's contractual rental cash flows by January
2022.
In simple terms, the IFRS accounting standards applicable to the
Group require that we calculate the rental income to be earned over
the whole term of a lease (broadly the income that is contractually
certain over the entire remaining term), and then recognise it in
the income statement evenly over the term. Consequently, the
Group's leases with fixed or fixed minimum uplifts (47% of the
Group's total contracted pre-concession passing rent) require a
'smoothing' adjustment to reflect the mismatch between the rents
actually receivable and those recognised in the income statement.
The remaining 53% of the Group's rental income which is subject to
RPI-linked or open market reviews is not subject to a smoothing
adjustment. The revenue recognition accounting policy set out in
note 2d to the financial information is consistent with these
principles and the smoothing effect is explained in more detail in
the Unaudited Supplementary Information which follows the financial
information.
Applying these accounting policies and principles following the
agreement of the rent concessions has affected the Group's IFRS
income.
-- The reduction in rent receivable from Travelodge reduces the
Group's cash flows over the period from 1 April 2020 to 7 January
2022, with the original contractual rents receivable (and any
accrued RPI uplifts arising in the concession period) due to be
restored from January 2022. While the cash flow impact is
temporary, it reduces the total rents receivable over the life of
the leases, so while the cash impact is limited to the period from
April 2020 to January 2022, it must be spread through the income
statement over the whole remaining lease term from 1 April 2020,
which on a weighted average basis was 22.2 years. The effect of
spreading a total GBP22.9 million reduction in rents over the very
long unexpired term results in rental income reported in the income
statement being higher than cash rents receivable during the
concession period until 7 January 2022 and lower than cash rents
receivable thereafter. Travelodge rent reported in the IFRS income
statement for the year ended 31 December 2020 is GBP13.7 million
higher than the rent receivable on a cash basis and is expected to
be GBP7.4 million higher in the year ended 31 December 2021. From
the start of 2022 this mismatch will unwind, with cash rent higher
than the income reported under IFRS by an expected GBP1.1 million
per annum for approximately the following 20 years through to the
end of the term of the leases.
-- The six month rent free period granted to Stonegate on the
pubs portfolio in consideration for extending lease terms to 25
years and strengthening the lease alienation provisions is treated
in a similar way to the Travelodge rent reduction. Rent reported
from Stonegate in the IFRS income statement for the year ended 31
December 2020 is GBP1.1 million higher than the rent receivable on
a cash basis. From the start of 2021 this mismatch has begun to
unwind, with cash rent higher than the income reported under IFRS
by GBP47,000 per annum through to the end of the term of the
leases.
The deferral of Merlin rent does not change the total lease
income over the life of the lease, merely changing the timing of
receipt, therefore there is no change to the IFRS income that would
otherwise have been reported in the year. The rent deferred is held
as an asset on the balance sheet, separate from and not valued as
part of the investment properties by the external valuer. The
carrying value of the rent receivable is evaluated at each balance
sheet date and it is held at 31 December 2020 at its face value of
GBP17.7 million as it is considered reasonable to conclude that it
will be recoverable in full.
From the time of its listing six and a half years ago, the Group
has had the benefit of a high proportion of income with fixed
rental increases over very long lease terms therefore the
requirement to spread rents over the whole of any lease has always
created a mismatch between cash rents receivable and rental income
reported under IFRS. That mismatch was a major contributing factor
to the adoption by the company of its Adjusted EPRA earnings
measure. This measure is further explained under the "Adjusted EPRA
earnings per share" heading later in this report, in note 10 to the
financial information and in the Unaudited Supplementary
Information which follows the financial information. In order to
calculate Adjusted EPRA earnings on a basis consistent with the
Group's definition of the measure and prior reporting periods, the
cash and income mismatches arising as a result of the rent
concessions are taken into account in Adjusted EPRA earnings in
order to calculate dividend cover on a basis that more closely
reflects the Group's actual cash flows. The composition of Adjusted
EPRA Earnings is explained later in this report but the impact of
the rent concessions in isolation is as follows:
Year to 31 December Year to 31 December
2020 2019
------------------------- -------------------------
Pence per Pence per
GBPm share GBPm share
---------------------------------- --------- -------------- --------- --------------
EPRA earnings 52.9 16.3 54.7 16.9
Rent Smoothing Adjustments:
on pre-concession rental
income (8.9) (2.7) (10.6) (3.3)
from Travelodge rent reductions (13.7) (4.3) -
from Stonegate rent free
period (1.1) (0.3) -
Merlin theme parks rent deferral (17.7) (5.5) - -
Incentive fee adjustment - - 5.3 1.7
Adjusted EPRA earnings 11.5 3.5 49.4 15.3
---------------------------------- --------- -------------- --------- --------------
Impact of rent concessions on dividend cover and dividend
policy
The effects of the pandemic on the Group's net income and cash
flows and the heightened uncertainty during this period prompted a
review by the Board of the prudent and appropriate dividend policy
to apply in the circumstances. The materially higher than usual
liquidity buffer held in Uncommitted Cash by the Company following
the sale of the private hospital portfolio in 2019 affords
significant flexibility, not only in supporting the Group's tenants
but also in providing appropriate returns to shareholders without
putting at risk the strength and flexibility of the balance
sheet.
With the Company's liquidity buffer directed in part to
supporting tenants and ensuring that the balance sheet remains
robust during such uncertain times, the Board concluded that it
would be appropriate to discontinue the element of the dividend
that had been deployed since July 2019 in topping up the dividend
in the amount of the foregone income on the hospitals sold in 2019.
The basis of the dividend payment has therefore reverted to the
'core' dividend as guided with the 2019 annual results
announcement, without the top slice of the hospitals net income
top-up. This equates to a quarterly dividend of 3.65 pence per
share which has been paid in each of the last two quarters of 2020
and the first quarter of 2021 and which, all things being equal, is
expected to be the amount for the second quarter of 2021 to be
announced in April 2021. Subject to there being no material change
in circumstances the dividend rate is expected to increase to 3.95
pence per share in the third quarter of 2021.
The analysis of the core and top-up dividends paid to date is as
follows:
Quarter
Year to Year to Year to Year to Year to 1 dividend
GBPm paid in the 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec paid March
period 2016 2017 2018 2019 2020 2021
------------------- -------- -------- -------- -------- -------- -----------
Core dividend GBP12.0m GBP16.1m GBP41.4m GBP49.0m GBP46.4m GBP11.8m
Hospitals top-up - -
dividend - GBP3.5m GBP4.4m -
Total dividend GBP12.0m GBP16.1m
paid GBP41.4m GBP52.5m GBP50.8m GBP11.8m
------------------- -------- -------- -------- -------- -------- -----------
Pence per share
paid
Core dividend 5.9p 13.6p 13.9p 15.2p 14.4p 3.65p
Hospitals top-up
dividend - - - 1.1p 1.3p -
Total dividend
paid 5.9p 13.6p 13.9p 16.3p 15.7p 3.65p
------------------- -------- -------- -------- -------- -------- -----------
The use of some of the Company's surplus liquidity to fund the
GBP34.6 million of dividends in excess of the Group's Adjusted EPRA
Earnings in the year was considered appropriate in recognition of
the fact that the rent concessions granted to date do not have any
impact on contracted rental income beyond January 2022. The
dividend policy will be kept under regular review as conditions
develop while the pandemic runs its course. The importance of the
dividend to many investors is acknowledged and is carefully
considered in any evaluation of the appropriateness of declaring a
dividend in the context of the conditions prevailing at that
time.
Key performance indicator - Total Accounting Return
In measuring progress towards the Board's objective to deliver
attractive and sustainable shareholder returns, both Total
Accounting Return (the movement in EPRA NTA per share plus
dividends) and Total Shareholder Return (the share price movement
plus dividends) are monitored. The principal focus for the Board is
on Total Accounting Return as the Total Shareholder Return, while
important, is also subject to wider market fluctuations not
necessarily related to the Group itself.
The movements in net asset value reported under IFRS in the
consolidated balance sheet and the calculation of Total Accounting
Return on that basis are as follows:
Year to 31 December Year to 31 December
2020 2019
----------------------------- -----------------------------
Pence per Pence per
GBPm share GBPm share
-------------------------------------- ---------- ----------------- ---------- -----------------
NAV at the start of the
year 1,384.5 428.8 1,281.6 398.5
Investment property revaluation
* (166.6) (51.4) 75.7 23.4
Rental income * less administrative
expenses, finance costs
and tax 52.9 16.3 58.9 18.3
Dividends paid (50.8) (15.7) (52.5) (16.3)
Currency translation and
derivative revaluation
movements 1.5 0.5 (3.0) (0.9)
Dilution from shares issued
in settlement of previous
year's incentive fee - (1.5) - (1.5)
Net profit on disposal
of investment properties - - 23.8 7.3
NAV at the end of the
year 1,221.5 377.0 1,384.5 428.8
-------------------------------------- ---------- ----------------- ---------- -----------------
Change in NAV (163.0) (51.8) 102.9 30.3
Dividends paid 50.8 15.7 52.5 16.3
-------------------------------------- ---------- ----------------- ---------- -----------------
IFRS Total Accounting Return (112.2) (36.1) 155.4 46.6
-------------------------------------- ---------- ----------------- ---------- -----------------
IFRS Total Accounting Return:
percentage (8.4)% 11.7%
-------------------------------------- ---------- ----------------- ---------- -----------------
* including GBP23.7 million or 7.3 pence (2019: GBP10.5 million
or 3.2 pence) of Rent Smoothing Adjustments
The industry standard EPRA NTA measure takes IFRS net asset
value and excludes items that are considered to have no relevance
to the assessment of long term performance. Consistent with the
EPRA Guidance, the Group's reported IFRS NAV is adjusted to exclude
50% of deferred tax on investment property revaluations (in this
case relating to the German assets) and fair value movements on
derivatives. EPRA NTA and EPRA NTA per share is reconciled to net
asset value measured in accordance with IFRS in note 23 to the
financial information.
The Group's EPRA NTA per share at 31 December 2020 was 379.3
pence, down 11.7% over the year. The 50.1 pence per share fall in
EPRA NTA, together with dividends of 15.7 pence per share, results
in a Total Accounting Return over the year of negative 8.0%.
Year to 31 December Year to 31 December
2020 2019
------------------------- -------------------------
Pence per Pence per
GBPm share GBPm share
------------------------------------- --------- -------------- --------- --------------
EPRA NTA at the start of
the year 1,391.3 429.4 1,292.9 400.5
Investment property revaluation
* (142.5) (44.0) 86.3 26.7
Rental income * less administrative
expenses, finance costs
and current tax 28.8 8.9 49.3 15.4
Dividends paid (50.8) (15.7) (52.5) (16.3)
Currency translation movements 2.4 0.7 (2.6) (0.8)
Net contribution from sold
properties - - 23.8 7.3
Incentive fee dilution
from shares to be issued - - (0.3) (1.7)
EPRA NTA at the end of
the year 1,229.2 379.3 1,396.9 431.1
------------------------------------- --------- -------------- --------- --------------
Movement in EPRA NTA (162.1) (50.1) 104.0 30.6
Dividends paid 50.8 15.7 52.5 16.3
------------------------------------- --------- -------------- --------- --------------
Total Accounting Return (111.3) (34.4) 156.5 46.9
------------------------------------- --------- -------------- --------- --------------
Total Accounting Return
- percentage (8.0)% 11.7%
------------------------------------- --------- -------------- --------- --------------
* adjusted by GBP23.7 million or 7.3 pence (2019: GBP10.5
million or 3.2 pence) of Rent Smoothing Adjustments
Total Shareholder Return is calculated as:
Year to Year to
31 December 31 December
2020 2019
Pence per Pence per
share share
-------------------------- ----- --------------- --------------
Share price at the end
of the year 300.0 434.0
Share price at the start
of the year (434.0) (377.0)
Movement in the year (134.0) 57.0
Dividends paid 15.7 16.3
---------------------------------- --------------- --------------
Total Shareholder Return (118.3) 73.3
---------------------------------- --------------- --------------
Total Shareholder Return
- percentage (27.3)% 19.4%
---------------------------------- --------------- --------------
Key performance indicator - Adjusted EPRA earnings per share
Year to 31 December Year to 31 December
2020 2019
------------------------- ------------------------
Basic and diluted EPS (IFRS Pence per Pence per
basis) GBPm share GBPm share
---------------------------------- --------- -------------- -------- --------------
Rental income net of property
outgoings 120.2 37.0 131.4 40.7
Investment property revaluation (166.6) (51.4) 75.7 23.4
Net finance costs (49.9) (15.4) (54.2) (16.7)
Administrative expenses (17.0) (5.2) (16.9) (5.2)
Tax charge (0.3) (0.1) (1.1) (0.4)
Profit on disposal of investment
properties net of costs
of early repayment of debt - - 23.8 7.3
Incentive fee (including
irrecoverable VAT) - - (5.3) (1.6)
Basic earnings (113.6) (35.1) 153.4 47.5
---------------------------------- --------- -------------- -------- --------------
Diluted earnings per share (35.1) 47.3
---------------------------------- --------- -------------- -------- --------------
The IFRS earnings measure includes unrealised property
revaluations, gains or losses on property disposals and certain
other factors which are considered to distort an assessment of
underlying long term performance of real estate companies and which
are therefore required to be excluded from EPRA earnings.
A further element of the IFRS calculations considered to have a
distorting effect on the Company's Dividend Cover is the impact of
the weighting of share issues where they relate to incentive fee
payments. The Group's basic and diluted EPS in accordance with IFRS
must be calculated on the hypothetical assumption that any shares
issued in settlement of an incentive fee are treated as having been
issued on the first day of the year, regardless of when they are
actually issued. As a result, basic EPS for 2019, for example, was
calculated on the basis that the 1.3 million shares issued in March
2019 in settlement of the 2018 incentive fee were in issue for the
whole year. This assumption results in a reduction in EPS which
does not reflect the actual impact of the share issue. The
calculation of diluted EPS for 2019 under the IFRS rules also
included the 1.2 million shares not yet issued at 31 December 2019
in settlement of the 2019 incentive fee as if they had been issued,
creating a further artificial reduction.
There are also certain items within the calculated EPRA earnings
which create a material disconnect between EPRA earnings and the
Group's funds from operations available for the payment of
dividends: principally the Rent Smoothing Adjustments, including
those arising as a result of the Covid-19 related rent concessions,
and incentive fees which are payable in shares. The Board considers
that including these items results in both IFRS earnings and EPRA
earnings being an unreliable basis for calculating the Company's
Dividend Cover and long term performance. A further measure,
Adjusted EPRA EPS, is therefore presented, both for comparison of
the performance of the Group from year to year and with its peer
group, and to avoid distortions in the per share figures which in
turn would result in unreliable measures of Dividend Cover.
Adjusted EPRA EPS is derived from EPRA EPS by:
-- removing the Rent Smoothing Adjustments, including those
arising from the Covid related rent concessions, from rental
income;
-- excluding any significant non-recurring costs or income
(there have been no non-recurring income or costs since 2016);
-- excluding the charge for the incentive fee, on the basis that
it is a non-cash payment and considered to be linked to revaluation
movements, and therefore best treated consistently with
revaluations which are excluded from EPRA EPS; and
-- calculating the weighted average number of shares so as to
reflect the actual dates on which shares were issued.
Year to 31 December Year to 31 December
2020 2019
------------------------ ------------------------
Pence per Pence per
GBPm share GBPm share
---------------------------------- -------- -------------- -------- --------------
Rental income net of property
outgoings 118.2 36.5 129.7 40.1
Net finance costs (48.0) (14.9) (52.5) (16.3)
Administrative expenses (17.0) (5.2) (16.9) (5.2)
Tax charge (0.3) (0.1) (0.4) (0.1)
Incentive fee (including
irrecoverable VAT) - - (5.3) (1.6)
EPRA earnings 52.9 16.3 54.6 16.9
Rent Smoothing Adjustments:
Before any Covid related
rent concessions (8.9) (2.7) (10.5) (3.2)
Impact of Covid related
rent concessions - difference
between IFRS and Adjusted
EPRA EPS smoothing methodology (32.5) (10.1) - -
Incentive fee - - 5.3 1.6
Adjusted EPRA earnings 11.5 3.5 49.4 15.3
---------------------------------- -------- -------------- -------- --------------
Adjusted EPRA EPS is reconciled to basic EPS in note 10 to the
financial information and the component parts of the Adjusted EPRA
earnings are analysed below.
Year to 31 December Year to 31 December
2020 2019
------------------------ ------------------------
Pence per Pence per
GBPm share GBPm share
----------------------------------- -------- -------------- -------- --------------
Like for like earnings:
Rental income net of outgoings
before concessions 110.8 34.2 109.4 33.9
Finance costs (48.4) (15.0) (49.0) (15.2)
Finance income 0.4 0.1 0.7 0.2
Administrative expenses (17.0) (5.2) (16.9) (5.2)
Tax charge (0.3) (0.1) (0.4) (0.1)
----------------------------------- -------- -------------- -------- --------------
Like for like, before concessions
and excluding sold hospitals 45.5 14.0 43.8 13.6
Rent concessions (34.0) (10.5) - -
----------------------------------- -------- -------------- -------- --------------
11.5 3.5 43.8 13.6
Impact of hospitals sale:
Rental income net of outgoings - - 9.8 3.0
Finance costs - - (4.2) (1.3)
----------------------------------- -------- -------------- -------- --------------
Adjusted EPRA earnings 11.5 3.5 49.4 15.3
----------------------------------- -------- -------------- -------- --------------
The key components of the Group's earnings are its rental
income, finance costs and administrative expenses. An analysis of
the Group's rental income is included in the portfolio review
earlier in this report and the other components of earnings are
described in the following sections.
Adjusted EPRA EPS - property outgoings
Property outgoings under the IFRS, EPRA and Adjusted EPRA
earnings measures are set out below.
Year to 31 December Year to 31 December
2020 2019
----------------------- -----------------------
Pence per Pence per
GBPm share GBPm share
----------------------------------- ------- -------------- ------- --------------
Costs of negotiating and
documenting rent concessions 0.6 0.2 - -
Headrents on leasehold properties 0.5 0.1 0.4 0.1
Irrecoverable property costs 0.3 0.1 0.1 -
Managing agents and other
net property outgoings 0.2 0.1 0.2 0.1
Rent review costs - - 0.4 0.1
Feasibility costs of prospective
capital projects - - 0.2 0.1
Property outgoings in the
IFRS income statement and
EPRA earnings 1.5 0.5 1.3 0.4
Financing element of headrent
costs reclassified from
finance costs 1.7 0.6 1.7 0.6
Costs of negotiating and
documenting rent concessions
reclassified from finance
costs 0.1 - - -
Recovery of headrent and
other costs reclassified
from revenue (1.6) (0.6) (1.6) (0.6)
Property outgoings in Adjusted
EPRA earnings 1.7 0.5 1.4 0.4
----------------------------------- ------- -------------- ------- --------------
On an Adjusted EPRA earnings basis, various items are
reclassified within the income statement to more accurately reflect
the net cost of the Group's property outgoings, which is used in
the calculation of the EPRA cost ratios. This includes the recovery
of certain headrent and other costs from the occupational
tenants.
While the costs of the rent concessions are not a recurring cost
they have not been excluded from Adjusted EPRA EPS as they relate
to the ongoing management of the portfolio and are in any case not
material to the Group.
Adjusted EPRA EPS: administrative expenses
The Group's administrative expenses for the year and prior year
are the same under the IFRS and the EPRA measure, while Adjusted
EPRA EPS excludes any incentive fees which are payable in
shares.
Year to 31 December Year to 31 December
2020 2019
---------------------- ----------------------
Pence per Pence per
GBPm share GBPm share
------------------------------- ------ -------------- ------ --------------
Advisory fees 13.7 4.2 14.7 4.6
Other administrative expenses 2.8 0.8 1.6 0.4
Corporate costs 0.5 0.2 0.6 0.2
------------------------------- ------ -------------- ------ --------------
17.0 5.2 16.9 5.2
Incentive fee payable
in shares - - 4.9 1.5
VAT on incentive fee,
payable in cash - - 0.4 0.1
Total administrative expenses 17.0 5.2 22.2 6.8
------------------------------- ------ -------------- ------ --------------
Because VAT cannot be applied to the rents on the Healthcare
assets, there is an element of irrecoverable VAT incurred on the
Group's running costs which is included within each relevant line
item in the table above. The proportion of disallowed VAT on
administrative expenses averaged 30% during the year (2019: 26%)
and was 39% as at 31 December 2020 (31 December 2019: 30%).
As an externally managed business, the majority of the Group's
overheads are covered by the advisory fees paid to the Investment
Adviser, which meets office running costs, administrative expenses
and remuneration for the whole management and support team out of
those fees. The advisory fee for the year amounted to GBP12.8
million plus irrecoverable VAT of GBP0.9 million (2019: GBP13.8
million plus irrecoverable VAT of GBP0.9 million). If there were no
change in EPRA NAV in the 2021 financial year and assuming that
surplus cash at 31 December 2020 is not deployed, the advisory fee
for 2021 would be GBP12.0 million plus VAT (GBP12.9 million of cost
including irrecoverable VAT).
The basis of calculating the advisory fees is explained in note
25 b to the financial information. In summary, the fees are
calculated on a reducing scale based on the Group's EPRA NAV (as
defined under the EPRA recommendations in place at the time of
inception of the management contract), at:
-- 1.25% per annum on EPRA NAV up to GBP500 million; plus
-- 1.0% on EPRA NAV from GBP500 million to GBP1 billion; plus
-- 0.75% on EPRA NAV from GBP1 billion to GBP1.5 billion: plus
-- 0.5% thereafter.
In this way, the Investment Adviser is directly exposed to the
reduction in the Group's EPRA NAV by way of a reduction in its fee
income with the annualised reduction at 31 December 2020 amounting
to GBP0.9 million per annum.
In February 2020 the Independent Directors approved a proposal
made by the Investment Adviser to exclude the surplus cash on the
hospitals portfolio disposal in 2019 from the advisory fee
calculation. With effect from 1 April 2020, for the purposes of
calculating the advisory fee only, EPRA NAV excludes the balance of
that surplus cash to the extent that those funds have not been:
-- deployed in topping up dividends or otherwise returned to shareholders;
-- invested in acquisitions; or
-- used for liability management.
The saving for the 2020 financial year as a result of this
amendment is GBP0.8 million. The surplus cash realised on the
disposal was GBP164.0 million. Prior to the balance sheet date,
GBP50.1 million (2019: GBP3.5 million) had been applied in dividend
top ups and liability management, resulting in a balance of the
surplus at 31 December 2020 of GBP113.9 million (2019: GBP160.5
million).
The management contract between the Company and the Investment
Adviser has a term expiring in December 2025 and will be subject to
its next review by the Remuneration Committee in December 2022.
There are no renewal rights or payments at the time of expiry. Any
payments on termination of the contract triggered by a change of
control of the Company are limited to four times the most recent
quarterly fee prior to any such change occurring, which is the
maximum amount payable on any form of termination of the
contract.
The other recurring administrative expenses are principally
professional fees, including the costs of independent external
property valuations, external trustee and administration costs, tax
compliance fees and the fees of the external auditor, which are
largely billed directly to subsidiary undertakings. Fees paid to
the auditor are disclosed in note 7 to the financial
information.
Corporate costs are those costs necessarily incurred as a result
of the Company being listed and comprise:
-- fees payable to the four Independent Directors amounting to
GBP0.2 million in the year (2019: GBP0.2 million), with the other
three Directors being shareholders in the Investment Adviser who
receive no directors' fees from the Company; and
-- other costs of being listed, such as the fees of the
nominated adviser required under the AIM Rules, registrars' fees
and AIM fees, whi ch together totalled GBP0.3 million (2019: GBP0.4
million) in the year .
If the Total Accounting Return to investors over a financial
year, as set out in the audited accounts, exceeds a compound growth
rate of 10% per annum above the EPRA NAV per share the last time
any incentive fee was paid, the Investment Adviser earns an
incentive fee amounting to 20% of any surplus above that priority
return to shareholders, subject to a cap of 5% of EPRA NAV (other
than in the event of a sale of the business, where an incentive
fee, if earned, would not be capped). Any such fee is payable in
shares which are not permitted to be sold, save in certain limited
circumstances, for a period of between 18 and 42 months following
the end of the year for which they were earned. The 2019 fee
payment was satisfied by the issue of 1.2 million shares in March
2020 .
Having adjusted for dividends paid in the year, the benchmark
EPRA NAV per share for the year ended 31 December 2020 was 459.6
pence. Shareholder returns for the year fell short of the benchmark
so no fee has been earned in respect of the 2020 year (2019: GBP4.9
million plus VAT).
The benchmark return to be achieved before any incentive fee is
earned in respect of the 2021 financial year must exceed 10% per
annum from 31 December 2019 (the most recent year in respect of
which a fee was earned) therefore the Group's EPRA NAV growth plus
dividends paid in the year must exceed 124.4 pence per share before
any fee is earned for 2021, which is estimated to be equivalent to
EPRA NTA of 503.6 pence per share before dividends.
Adjusted EPRA EPS: net finance costs
Year to 31 December Year to 31 December
2020 2019
----------------------- -----------------------
Pence per Pence per
GBPm share GBPm share
----------------------------------- ------- -------------- ------- --------------
Interest on secured debt
facilities:
----------------------------------- ------- -------------- ------- --------------
Outstanding throughout
the year 45.9 14.2 46.2 14.3
Repaid in August 2019 - - 4.1 1.3
45.9 14.2 50.3 15.6
Amortisation of costs of
arranging facilities (non-cash):
----------------------------------- ------- -------------- ------- --------------
Routine amortisation over
loan term 2.3 0.7 2.4 0.7
Accelerated amortisation
on prepayment from property
sales in 2019 - - 1.4 0.5
----------------------------------- ------- -------------- ------- --------------
2.3 0.7 3.8 1.2
Interest charge on headlease
liabilities 1.7 0.5 1.7 0.4
Loan agency fees and other
lenders' costs 0.3 0.1 0.5 0.2
Fair value movements on
derivatives 0.1 - - -
Interest income on cash
and cash equivalents (0.4) (0.1) (0.7) (0.2)
Net finance costs for the
year
(IFRS basis) 49.9 15.4 55.6 17.2
Accelerated amortisation
on prepayment from property
sales in 2019 - - (1.4) (0.5)
----------------------------------- ------- -------------- ------- --------------
Net finance costs for the
year
(EPRA basis) 49.9 15.4 54.2 16.7
Financing element of headrent
costs reclassified to property
outgoings (1.7) (0.5) (1.7) (0.4)
Costs of negotiating and
documenting rent concessions
reclassified to property
outgoings (0.1) - - -
Net finance costs for the
year (Adjusted EPRA basis) 48.1 14.9 52.5 16.3
----------------------------------- ------- -------------- ------- --------------
The nature and principal terms of the Group's loan facilities
are explained in the Financing section earlier in this report.
Adjusted EPRA EPS: Tax
The Group is a UK Group REIT, so its rental operations, which
make up the majority of the Group's earnings, are exempt from UK
corporation tax, subject to the Group's continuing compliance with
the UK REIT rules. The Group is otherwise subject to UK corporation
tax on any net income not arising from its rental operations.
Tax is payable on the Group's German rental operations at an
effective tax rate in the year of 15% (2019: 15%), resulting in a
tax charge of GBP0.4 million (2019: GBP0.3 million). The balance
sheet includes a deferred tax liability of GBP11.9 million (2019:
GBP11.3 million) relating to unrealised German capital gains tax on
the German properties, which would only be crystallised on a sale
of those assets. There are no plans at present to sell these
assets, so the deferred tax is not currently expected to be
crystallised.
On an IFRS basis, the current tax charge and the movement in
deferred tax result in a net tax charge of GBP0.3 million (2019:
GBP1.1 million). Deferred tax is excluded from EPRA EPS and
Adjusted EPRA EPS as shown in note 10 to the financial
information.
In the EPRA NTA calculation, in accordance with the EPRA
Guidance, half of the deferred tax is excluded. This is on the
basis that the Company has neither (i) decided never to sell the
German assets, as the Board manages its assets in an opportunistic
way and would sell the assets if that presented the best option for
shareholders; nor (ii) identified a consistent track record of
disposal of assets and related capital gains within the strict
criteria set out within the EPRA guidance.
Adjusted EPRA EPS: Currency translation
94% (2019: 95%) by value of the Group's property assets are
located in the UK and the financial information is therefore
presented in Sterling. 3.9% (2019: 3.1%) of the Group's EPRA NTA
comprises assets and liabilities relating to properties located in
Germany, valued in and generating net earnings in Euros. Exposure
to currency fluctuations is partially hedged through assets,
liabilities, rental income and interest costs being Euro
denominated. The Group remains exposed to currency translation
differences on the net results and net assets of these unhedged
operations. Foreign currency movements are recognised in the
statement of other comprehensive income.
The German properties are valued at EUR128.2 million as at 31
December 2020 (2019: EUR129.7 million), with the Euro denominated
secured debt amounting to EUR71.6 million (2019: EUR71.8 million).
The Euro strengthened against Sterling over the year by c. 6%
(2019: weakened by 5%) and as a result there was a net currency
translation gain of GBP2.1 million (2019: loss of GBP2.0 million)
on an IFRS basis. Half of the deferred tax liability is excluded
from EPRA NTA and as a result a currency translation loss of GBP0.3
million (2019: gain of GBP0.3 million) arises in the movement in
EPRA NTA in relation to the German operations.
Key performance indicator - Net LTV ratio
The Board structures debt facilities with a view to maintaining
a capital structure that will enhance shareholder returns while
withstanding a range of market conditions.
During the year, the Group's Net LTV rose from 31.9% to 36.4%
which reflects the impact of GBP136.2 million of decreased property
values (2019: GBP80.7 million of property valuation uplifts) along
with the deployment of GBP34.6 million of cash in topping up
dividends which have been maintained in the year and GBP11.8
million of liability management by way of meeting debt service
costs temporarily uncovered during a rent deferral period.
While the Net LTV ratio is one indicator of borrowing risk it
does not present a complete picture of risk facing the Company. The
Board always considers Net LTV in conjunction with a wider
assessment of headroom on financial covenants within debt
facilities and, as part of that assessment, the security of
portfolio rental income in order to evaluate risks that the Company
and the Group may be facing.
Key performance indicator - headroom on debt covenants
The Board's approach to managing the Group's capital structure
includes assessing the risk of any breach of covenants within
secured debt facilities and considering the extent to which these
risks can be managed. Covenant calculations are regularly and
carefully monitored on various scenarios within a realistic range
of outcomes, including stress tested and reverse stress test
scenarios. At the inception of new loans, facilities are structured
to ring-fence the extent to which the Group's assets are at risk,
ensuring that levels of headroom over financial covenants are
appropriate. Subsequently, the Board considers the Group's
liquidity needs regularly and aims to maintain a level of
Uncommitted Cash which could be applied in avoiding or curing debt
defaults in the event that it is needed.
When evaluating the appropriateness of the level of secured
debt, the Board has regard to the unusual nature of the Group's
income streams, specifically that all of the occupational leases
are significantly longer than conventional UK real estate leases
and that the Group's rental income can be expected to increase
annually as a result of the annual minimum fixed rental uplifts on
38% of portfolio income, with a further 3% subject to three or five
yearly uplifts and the additional prospect of increases from the
upwards only RPI-linked reviews on the rest of the portfolio.
Overall, two thirds of the portfolio rents before any Covid related
rent concessions are subject to annual review with the remainder
subject to three or five yearly reviews. This structure gives rise
to predictable improvements in interest cover across the Group in
aggregate on the basis of contractual income flows and a naturally
deleveraging debt profile on the assumption of constant valuation
yields. The Board also has regard to other factors including
specific tenant credit risks.
The Board reviews the headroom on all financial covenants at
least quarterly, including stress tested and reverse stress test
scenarios. The headroom on key financial covenants at the first
test date following 31 December 2020 (which in all cases fell
before the end of January 2021) is summarised below, including the
fall in valuation (and related Net Initial Yield) or the fall in
rent that would trigger a breach of the relevant covenant at the
first test date after the balance sheet date, before any
preventative or remedial actions are taken. Defensive actions could
include utilising any of the Group's significant Uncommitted Cash
of GBP192.0 million as at 31 December 2020 and which is further
explained under the heading 'Key performance indicator -
Uncommitted Cash'.
Scenarios before any remedial
action
--------
Rent
Valuation fall before
Net Initial fall before interest
At 31 Yield triggering LTV test cover test
Dec 2020 Covenant LTV test triggered triggered
---------------------------------- --------- -------- ----------------- ------------ ------------
Merlin facility
Property security at independent
valuation (GBPm) 616.2
Gross loan outstanding (GBPm) (380.4)
Other subgroup net assets
(GBPm) 10.2
---------
Ring fenced equity (GBPm) 246.0
---------
Ring fenced equity (pence
per share) 75.9p
---------
LTV default test n/a none n/a n/a
Cash trap LTV test: 1% per
annum loan amortisation 62% <80% 7.0% 23%
Cash trap LTV test: full cash
sweep 62% <85% 7.4% 27%
Rental fall before interest
covered 1:1 29%
While the valuation fall to trigger the LTV cash sweeps has tightened
since 31 December 2019 (from 28% for 1% amortisation and 32% for
the full cash sweep) as a result of the fall in valuation in the
year, the yield required to trigger a cash sweep has increased slightly
as a result of both the 1.5% RPI increases in rental income on the
UK properties and 3.3% fixed increases on the German properties,
and the reduction in finance costs by way of GBP1.0 million of scheduled
loan amortisation. The net initial yield required to trigger a 1%
per annum additional amortisation has increased from 6.9% to 7.0%
and the full cash sweep trigger point has increased from 7.3% to
7.4%.
During the year, the lenders consented to the rent deferral but
the credit agreements are otherwise unchanged.
Scenarios before any remedial
action
--------
Rent
Valuation fall before
Net Initial fall before interest
At 31 Yield triggering LTV test cover test
Dec 2020 Covenant LTV test triggered triggered
---------------------------------- --------- -------- ----------------- ------------ ------------
Healthcare facility 1
Property security at independent
valuation (GBPm) 623.0
Gross loan outstanding (GBPm) (299.7)
Other subgroup net assets
(GBPm) 0.1
---------
Ring fenced equity (GBPm) 323.4
---------
Ring fenced equity (pence
per share) 99.8p
---------
Cash trap LTV test: full cash
sweep 48% <74% 6.8% 35%
LTV test 48% <80% 7.3% 39%
Cash trap projected interest
cover: full cash sweep 192% >140% 27%
Projected interest cover test 192% >120% 38%
Headroom on the LTV tests has increased over the 31 December 2019
levels which were a 33% fall in valuation to a 6.6% valuation yield
for the LTV cash sweep trigger and a 38% fall to a 7.1% valuation
yield for the LTV default test. Headroom on the interest cover test
has improved from 35% to 38% as a result of a combination of the
fixed 2.77% weighted average rental increase in the year and the
reduction in finance costs because of GBP3.2 million of scheduled
loan amortisation.
Scenarios before any remedial
action
--------
Rent
Valuation fall before
Net Initial fall before interest
At 31 Yield triggering LTV test cover test
Dec 2020 Covenant LTV test triggered triggered
---------------------------------- --------- -------- ----------------- ------------ ------------
Healthcare facility 2
Property security at independent
valuation (GBPm) 146.1
Gross loan outstanding (GBPm) (63.8)
Other subgroup net assets
(GBPm) 0.3
---------
Ring fenced equity (GBPm) 82.6
---------
Ring fenced equity (pence
per share) 25.5p
---------
LTV test 44% <80% 8.2% 45%
Cash trap projected debt service
cover test (full cash sweep
if triggered) 225% >150% 33%
Projected debt service cover
test 225% >125% 44%
Headroom on the LTV test has increased over the 31 December 2019
levels which was a 44% fall in valuation to an 8.0% valuation yield.
Headroom on the interest cover test has improved from 31% to 33%
for the cash sweep test and from 42% to 44% on the default test
as a result of a combination of the fixed 2.75% rental increase
in the year and the reduction in finance costs because of GBP0.3
million of scheduled loan amortisation.
Scenarios before any remedial
action
--------
Rent
Valuation fall before
Net Initial fall before interest
At 31 Yield triggering LTV test cover test
Dec 2020 Covenant LTV test triggered triggered
---------------------------------- --------- -------- ----------------- ------------ ------------
Budget Hotels facility 2
Property security at independent
valuation (GBPm) 195.9
Gross loan outstanding (GBPm) (65.4)
Other subgroup net assets
(GBPm) 0.5
---------
Ring fenced equity (GBPm) 131.0
---------
Ring fenced equity (pence
per share) 40.6p
---------
Partial cash trap LTV test
(50% of surplus cash swept
to lender if triggered) 33% <40% 8.5% 16%
Cash trap LTV test (full cash
sweep if triggered) 33% <45% 9.6% 26%
LTV test 33% <50% 10.6% 33%
Cash trap projected interest
cover test (full cash sweep
if triggered) 610% >300% 51%
Projected interest cover test 610% >250% 59%
Budget Hotels facility 1
Property security at independent
valuation (GBPm) 188.9
Gross loan outstanding (GBPm) (59.0)
Other subgroup net assets
(GBPm) 2.3
---------
Ring fenced equity (GBPm) 132.2
---------
Ring fenced equity (pence
per share) 40.8p
---------
Partial cash trap LTV test
(50% of surplus cash swept
to lender if triggered) 31% <40% 9.1% 22%
Cash trap LTV test (full cash
sweep if triggered) 31% <45% 10.2% 31%
LTV test 31% <50% 11.4% 38%
Cash trap projected interest
cover test (full cash sweep
if triggered) 792% >300% 62%
Projected interest cover test 792% >250% 68%
The two hotels facilities are ring fenced from one another as while
they have the same arranger, they each have a different lender group.
However, the comments below relate to both facilities as they are
structured in much the same way and the factors affecting the covenants
in the year were the same for each facility.
Income and LTV covenants have both tightened as a consequence of
the Travelodge CVA measures implemented in June 2020. The Budget
Hotels facilities were both negotiated at low levels of LTV and
with very significant income cover, designed to reflect the Board's
assessment of risk in the tenant. This high income cover and relatively
lower leverage has acted, as designed, as a 'shock absorber' and
to a significant extent dealt with the impact of the CVA. As the
maximum rent reductions are historic as at the January 2021 covenant
test date, income covenant headroom is already approaching pre pandemic
levels. Assuming that the rents continue to be paid on the terms
agreed in the CVA, the headroom on interest cover and LTV tests
should continue to improve.
Lenders consented in the year to the lease amendments arising from
the tenant CVA and amended certain income covenants to accommodate
the revised rental profile over the concession period. The credit
agreements are otherwise unchanged.
Scenarios before any remedial
action
--------
Rent
Topped Up Valuation fall before
Net Initial fall before interest
At 31 Yield triggering LTV test cover test
Dec 2020 Covenant LTV test triggered triggered
---------------------------------- --------- -------- ----------------- ------------ ------------
Leisure facility: Arena, Brewery,
Pubs
Property security at independent
valuation (GBPm) 176.8
Gross loan outstanding (GBPm) (60.0)
Other subgroup net assets
(GBPm) 2.9
---------
Ring fenced equity (GBPm) 119.7
---------
Ring fenced equity (pence
per share) 36.9p
---------
Partial cash trap LTV cash
(50% cash sweep) 34% <40% 7.1% 15%
Cash trap LTV test (full cash
sweep if triggered) 34% <45% 7.9% 25%
LTV test 34% <50% 8.8% 32%
Projected interest cover test 350% >150% 57%
The LTV on this facility has increased in the year from 30% to 34%
resulting in lower headroom over the financial covenants. However,
the yield movement required to trigger the LTV tests has tightened
by only 0.2 percentage points given the relatively low leverage
on the facility. The headroom on the income test has tightened from
71% to 57% as we have excluded from the income forecast at the test
date any rents in arrears on that date. Those rents were collected
very shortly after the test date and cover was therefore further
restored. The low leverage and ample day one headroom on covenants
has accommodated the valuation movements, rent concessions and a
delay in collecting one of the amounts due in this portfolio meaning
that headroom levels, while reduced, remain reasonably comfortable.
The lender has consented to the rent concessions granted in the
year. The credit agreement is otherwise unchanged.
Key performance indicator - Uncommitted Cash
The ability to prevent or mitigate debt covenant breaches is an
important part of the Board's leverage strategy. Headroom
considered appropriate to the business has been negotiated on all
financial covenants together with certain contractual cure rights,
including the ability to inject cash (subject to some limitations
as to the frequency and duration of cash cures) into ring-fenced
financing structures in the event of actual or prospective breaches
of financial covenants. The Board regularly monitors the Group's
levels of Uncommitted Cash, which are the cash balances outside
ring-fenced structures secured to lenders, net of any creditors or
other cash commitments at the balance sheet date.
The Group's Uncommitted Cash was GBP192.0 million as at 31
December 2020, which represents free cash of GBP196.6 million net
of GBP4.6 million of current liabilities. Uncommitted Cash is down
from GBP234.2 million as at 31 December 2019 largely as a result of
the GBP34.6 million of cash directed to supporting the dividend and
the GBP11.8 million used for loan repayments during the period of
temporary rent concessions. The balance of Uncommitted Cash held at
31 December 2020 exceeds the principal outstanding of each of four
of the Group's six credit facilities.
As demonstrated in the table of covenant headroom, there remains
a substantial 'cushion' over covenant levels in each facility but
the option to manage future stresses on covenants remains an
important part of the Company's leverage management strategy while
general risk in the economy and for the certain of the Group's
tenants remains at an elevated level.
Cash flow
The business is structured to provide an efficient flow through
of net income to the payment of dividends. Rents in the ordinary
course are predictable, financing costs are in the main fixed and
the majority of operating costs are represented by the advisory
fees which are transparently calculated relative to the Group's net
assets.
The rent concessions granted in the period have reduced the cash
flow from operating activities by GBP34.0 million in rent
reductions and related costs. GBP17.7 million in deferral of rents
due from Merlin are expected to be received in September 2021 and
the temporary variation for some tenants to pay monthly in advance
rather than quarterly has reduced operating cash inflows by a
further GBP0.8 million. Both of these effects are expected to
reverse in the 2021 financial year. Assuming that no further
material tenant concessions are required, the effect of the
pandemic concessions in 2021 is expected to be a positive GBP8.8
million in additional rents plus the reversal of the Merlin
deferral and temporary changes in payment terms, so GBP27.3 million
of additional cash inflow in the year compared with 2020. Rent
collections have been very strong in the year with only GBP0.3
million in rent arrears at the year end, all of which has been
since collected.
The structure of the Company's external manager's fees is such
that the advisory fee, which covers the majority of Group
overheads, has reduced by GBP1.0 million year on year and the
reduction in debt from assets sales in 2019 together with scheduled
loan amortisation means that net interest costs are GBP5.5 million
lower in 2020 than in 2019. The continuation of dividend payments
in the year through the period of temporary concessions is the main
contributor to the GBP47.5 million cash outflow in the year.
Year to 31 December Year to 31 December
2020 2019
----------------------------- -----------------------------
Pence per Pence per
GBPm share GBPm share
Cash from operating activities 54.7 16.9 100.7 31.2
Net interest and finance
costs paid (47.4) (14.5) (52.9) (16.4)
Tax paid (0.4) (0.1) (0.2) (0.1)
6.9 2.3 47.6 14.7
Dividends paid (50.8) (15.7) (52.5) (16.3)
-------------------------------- ----------- ---------------- ----------- ----------------
(43.9) (13.4) (4.9) (1.6)
Scheduled repayment of
secured debt (4.4) (1.4) (4.0) (1.2)
Property disposals net
of debt repayment 1.1 0.3 174.7 54.1
Acquisition of tangible
fixed assets (0.3) (0.1) - -
Acquisition of investment
properties - - (0.3) (0.1)
Cash flow in the year (47.5) (14.6) 165.5 51.2
Cash at the start of the
year 267.1 82.7 101.7 31.6
Currency translation movements 0.1 - (0.1) -
Dilution from incentive
fee share issues - (0.3) - (0.1)
Cash at the end of the
year 219.7 67.8 267.1 82.7
-------------------------------- ----------- ---------------- ----------- ----------------
The Group's investment properties are let on full repairing and
insuring terms, with each tenant obliged to keep their premises in
good and substantial repair and condition, including rebuilding,
reinstating, renewing or replacing premises where necessary.
Consequently, no material unrecovered capital expenditure, property
maintenance or insurance costs have been incurred in the year and
it is not currently expected that material costs of that nature
will be incurred on the portfolio as it stands at 31 December 2020.
Risks to future cash flows are summarised in the Principal Risks
and Uncertainties section of the Strategic Review.
Management Team and Investment Advisory Agreement
As explained at the start of this report, the Company is
externally managed by an experienced team, appointed under the
terms of a contract known as the Investment Advisory Agreement. The
terms of that agreement have not changed since the amendment
proposed by the Management Team and approved by the Board in March
2020 to reduce the advisory fee to reflect the larger than usual
cash balance held by the Group, details of which appear in note 25
b to the financial information.
The team providing services to the Company has remained
unchanged during the year and since the balance sheet date. In
December 2020, a director and shareholder in the Investment Adviser
retired. He had not been involved in the day to day delivery of
services to the Company. The other members of the Management Team
acquired his interests in the Investment Adviser and related
entities and as a result increased their personal investment in the
Company by some 10% each, investing a further GBP5.3 million in
cash between them in their interests in the Company's shares
through their increased shareholdings in those management entities,
in addition to a further GBP0.5 million invested by the team in the
purchase of the Company's shares on the market during 2020.
As a team, we are the second largest shareholder in the Company
with 12.4% of the shares, worth over GBP152 million at 31 December
2020 EPRA NTA. Every member of the Management Team has a personally
significant investment in Secure Income REIT Plc. That interest,
together with the fee arrangements which are directly related to
the value of the business and to growth in shareholder returns,
provides exceptionally strong alignment of our interests with those
of all shareholders.
Our team at Prestbury has continued to perform in their usual
diligent way despite the many challenges and personal stresses of
the pandemic and we are grateful to them for their commitment. This
has been, without question, a challenging year but the team remains
highly energised and motivated to deliver the very best for the
Company and all of its stakeholders.
Nick Leslau
Chairman, Prestbury Investment Partners Limited
10 March 2021
Strategic Review
Strategy and investment policy
Strategy
One of the key reasons for creating the Company as a specialist
long lease REIT in 2014 was that investors had a requirement for a
tax efficient investment in well secured, long term, inflation
protected income from industries with sustainable prospects against
a background of a marked reduction in the average term to the first
tenant break or lease expiry in the UK property market. The 'lower
for longer' interest rate environment which has persisted for some
time now creates conditions where we believe that demand for these
types of assets should continue to remain strong. The prospect of
inflationary conditions fuelled by Government responses to the
pandemic only reinforces this thesis.
The Board's intention is for the Group to continue to hold a
diversified portfolio of long term, secure income streams from real
estate investments across a range of property sectors, enhancing
prospects for attractive total returns both from the existing
portfolio and, when appropriate, through earnings accretive
acquisitions. In this way, the Board believes that the Company is
well placed to continue to offer attractive geared returns from
high quality real estate, with tenants operating with well
established brands in industry sectors with strong defensive
characteristics. An important characteristic of the portfolio is
that assets acquired are Key Operating Assets, meaning they are
business critical from the tenant's perspective. In that way,
rental security is more certain as the assets in question forms an
essential part of the value of the tenants' own businesses,
therefore the tenants are strongly motivated to continue to invest
in the assets and to retain their leases.
Through the implementation of the investment policy, set out
below, the Board believes that it will be able to deliver
returns-enhancing deals in the interests of all shareholders and,
when investment and equity market conditions are right, the Board
aims to add to the Group's existing portfolio of Key Operating
Assets to further build a substantial diversified portfolio
providing secure, growing income and capital returns for
shareholders. This could include further acquisition opportunities
from a range of sources including operating businesses, non-REITs
with latent capital gains fettering sale prospects and
opportunities where the Company's shares may be used as currency to
unlock value. Acquisitions should be accretive to shareholder
returns and will be financed with modest leverage and non-dilutive
equity issues.
The Company is managed by a team with an exceptionally large
12.4% interest in the Company, worth over GBP152 million at the 31
December 2020 EPRA NTA, making them as a team the second largest
shareholder in the Company. The Management Team has continued to
invest in their holdings in the Company during the year, with on
market purchases amounting to GBP0.5 million and a further buyout
of a retiring non-executive Management Team member amounting to a
GBP5.3 million cash investment in December 2020. Consequently, the
motivation for the Management Team to deliver on strategy is very
strong, with their interests closely aligned with those of all
shareholders.
Investment policy
The Company invests in long term, secure income streams from
real estate investments. A long term income stream is considered to
be one with (or a portfolio with) a Weighted Average Unexpired
Lease Term in excess of 15 years at the time of acquisition.
Security of income is assessed with reference to the extent of rent
cover from underlying earnings, the credit strength of tenants and
(where relevant) guarantors, and the reversionary potential of the
assets.
The portfolio is considered by the Board to offer attractive
geared returns from high quality real estate, with tenants which
have well established brands in industry sectors with strong
defensive characteristics. The Board proposes to build on this
strong foundation by seeking to:
-- diversify sources of income and enhance prospects for
attractive shareholder returns through acquisitions; and
-- manage the Company's capital structure in order to enhance
income returns for investors whilst maintaining discipline over net
debt levels and terms.
The Group's business model is explained in the Investment
Adviser's Report.
Potential future changes to strategy and the business model
The Board aims to keep future risks to the business under review
with the objective of amending the Company's strategy or business
model on a timely basis if necessary. No-one has perfect foresight,
but currently the principal areas being considered in this context
are climate risk and the risks of an extended Covid pandemic or of
a new pandemic.
The way that climate change is manifesting itself is prompting a
range of responses from governments and businesses around the
world. These responses in turn feed back into climate change itself
and will have an impact on businesses, individuals and economies.
Predicting the way that climate change and the responses to it will
interact and impact on this business and that of our tenants
remains difficult to assess accurately. However, we know that our
principal tenants are very much alive to the risks and to their
responsibilities and we report on their approaches and progress
later in this report. Furthermore, we consider that climate change
may well present opportunities as well as challenges. Widespread
decarbonisation to meet global emissions goals may well increase
costs for our tenants in the short term, albeit potentially for
medium to longer term benefits in both social and economic terms.
We will remain close to our tenants to understand their
considerable efforts to reduce emissions and meet their climate
commitments, and work with them where we can to our mutual benefit.
We will continue to report on those efforts in the Corporate
Responsibility section of our annual reports and on our
website.
The scale and suddenness of the onset of the Covid-19 pandemic
prompted an early and considered reaction from the Board and
management of the Company, both in terms of support provided for
the Group's tenants and the change in our working practices. The
business and our tenants' businesses have to date weathered the
storm due to the robustness of their business operations and brand
strength. The Board considers that the Company is well positioned
to provide further support to tenants if that is needed and to
benefit from any recovery as and when it ultimately comes. This has
not prompted any changes to the Company's strategy or business
model at this stage save as to the consideration of further
diversification of income when appropriate, but not at any cost.
While sustainability in its widest sense and the longevity of the
businesses operating the assets that the Company owns have always
been key considerations, it is fair to say that the pandemic has
heightened our awareness of previously unanticipated external
threats to those businesses, reminding us of the importance of this
particular plank of the Company's strategy.
Key performance indicators
In order to oversee the successful delivery of the investment
strategy, the Board regularly monitors the following key
performance indicators, which are reported on in the Investment
Adviser's quarterly reports to the Board and more frequently when
appropriate:
-- Total Accounting Return and Total Shareholder Return
-- Adjusted EPRA EPS
-- Net LTV Ratio
-- Headroom on debt covenants
-- Uncommitted cash
Each of these is reported on in the Investment Adviser's
Report.
Corporate responsibility and ESG
The Board is mindful of its responsibilities to all of its
stakeholders, including the wider community, when it makes
decisions in setting and implementing the Company's strategy.
Alongside its fiduciary, regulatory and legal responsibilities,
these responsibilities include those which can be broadly
classified under the headings environmental responsibility, social
responsibility and governance, widely referred to as "ESG".
While we do not run any trading operations on site at any of the
assets owned by the Group, we take into account the impact of our
assets on people and the environment so we monitor our tenants'
compliance with the terms of their leases and with good estate
management practice, including in the areas of health and safety
and sustainability, recognising that the assets that the Group owns
are places where buildings connect with peoples' lives.
During the current financial year, we have commissioned a review
of our ESG policies from independent experts. We therefore expect
to further develop our reporting on this area with effect from the
2021 financial reports.
We comment below on the Company's own ESG policies and follow
this with a brief summary of the key ESG policies and strategies of
our major tenants' businesses in the specific areas of ESG where
they intersect most closely with our portfolio.
Environmental responsibility
In considering environmental responsibility, the Board has
regard to climate, nature and sustainability. In our reporting, the
Board makes reference to the Real Estate Sustainability Accounting
Standard, published in October 2019 by the Sustainability
Accounting Standards Board ("SASB"). That standard sets out certain
metrics that are considered relevant for REITs, and has categorised
certain 'activity metrics' against which the Group reports as
follows:
Leisure Hospitals Budget Hotels Total
--------------------------------- ---------- ------------ -------------- --------
Number of assets 26 12 123 161
Lettable floor area The nature of the great majority of
the Group's assets is such that lettable
area measured in square feet is not
a relevant measure. As the assets are
operational assets, lettable floor area
is not monitored by the Board and so
is not provided.
Percentage by ERV of indirectly
managed assets (where tenants
have operational control) 98.9% 100% 100% 99.5%
Average occupancy rate by
ERV 99.9% 100% 100% 100%
--------------------------------- ---------- ------------ -------------- --------
For the overwhelming majority of the Group's assets, operational
control of the asset rests with the tenant. Consequently, the
energy management and water management data outlined in the
standard is not provided in this report, nor is it currently
monitored by the Board as in most cases the information is not at
this stage able to be obtained from the tenants under the terms of
the leases. We comment further on the policies of our major tenants
and our engagement with them under the heading "ESG policies and
strategies of our major tenants". We are, however, working closely
with our tenants to obtain relevant information to better support
their and our own objectives.
The SASB standard suggests disclosure of the approach to
"management of tenant sustainability impacts", described as the
manner in which agreements, contracts and relationships with
tenants are structured to be instrumental in effectively managing
the sustainability impacts of those tenants. This can include
aligning sustainability outcomes, creating systems for measuring
and communicating resource consumption information, and/or
mandating minimum sustainability performance criteria. All
investment property assets owned during the year with the exception
of the small income stream from the Manchester car park operating
agreement entered into during 2020 had their leases already in
place at the time of acquisition and the Group has no ability to
unilaterally change their terms, including insofar as
sustainability is concerned. Aside from the requirement for tenants
to abide by all laws and regulations, including environmental law,
none of the Group's leases have provisions which are relevant to
management of tenant sustainability in a specific way. This is in
large part because the majority were granted at least five years
ago and in most cases over 13 years ago, when it was very uncommon
for sustainability criteria or reporting to be included in leases.
The Group has only negligible amounts of vacant space and therefore
has extremely limited opportunity to make a meaningful difference
by introducing tenant sustainability management measures on new
lettings. Where space becomes available for letting or lease
renewal, compliance with environmental standards and promotion of
good environmental practices form part of the assessment of
appropriate lease terms. A recent example is the requirement for
Citipark, the new operator of the 1,000 space car park at
Manchester Arena, to offer a discounted tariff to all Euro 6
compliant vehicles, which was negotiated when the operating
agreement was entered into during the year. However, 98% of the
Group's leases by rental value have terms to expiry (with no
breaks) of greater than 16 years therefore it is not anticipated
that the pace of change in lease terms will accelerate materially
in the near term.
Finally, the SASB standard suggests reporting on "climate change
adaptation" which is an assessment of the approach to managing
climate change risk. The Board considers that the structures of the
Group's leases, where the risks of continuing to operate each asset
rest with the tenants and guarantors (where relevant), together
with the insurance of assets in accordance with the principles of
good estate management, mean that this risk is managed to the
extent that is proportionate for a company with the vast majority
of its assets being subject to very long leases on full repairing
and insuring terms where the tenants bear the majority of these
risks.
The Board has also considered the recommendations of the Task
Force on Climate-related Financial Disclosures ("TCFD") and, while
not yet in a position to fully comply, has specifically aimed to
address all four 'pillars' of TCFD's recommendations:
-- Governance, where the Board retains responsibility for
assessing environmental risks, opportunities and responsibilities,
as set out in the Board Leadership and Company Purpose section of
the Corporate Governance Report in the annual report;
-- Risk management, where climate risk is included in the report
of Principal Risks and Uncertainties;
-- Strategy, where the impacts of climate change and
environmental issues are addressed in the summary of the business
model, strategy and future strategy; and
-- Metrics and targets, where we explain in this section of the
report our approach to working closely with our tenants and the
continuing development of our own policies in this area.
Social responsibility
Social responsibility encompasses a wide range of issues,
including in particular:
-- Equality, diversity and inclusion
The Board is committed to fairness and to encouraging diversity
on the Board and in its operations, including prevention of any
forms of discrimination including under the terms of the Equality
Act 2010. The terms of reference of the Nominations Committee
include a requirement for it to regularly review the structure,
size and composition of the Board including the skills, knowledge,
experience and diversity of the Directors. The Committee's report
includes commentary on its work in this respect. The Corporate
Governance Report in the annual report includes details of the
composition of the Board, including a description of the balance of
skills, experience and gender on the Board. The gender balance of
the Board is two female and five male directors.
As an externally managed business, no Group company has any
employees, therefore the Group is not required to report in this
annual report on gender balance or the gender pay gap, nor on
recruitment policies or procedures for employees. The Board has,
however, satisfied itself with the appropriateness of the
Investment Adviser's approach to fairness and equality in its
operations. The Investment Adviser has confirmed that it complies
with all relevant laws and regulations in that respect. The gender
split of the wider external management team and staff is 50/50 with
eight males and eight females.
-- Human rights and supply chain integrity
Both the Company and the Investment Adviser have complied with
their responsibilities under the Modern Slavery Act 2015 and the
relevant confirmations are regularly updated and included on their
respective websites.
-- Data protection and protection of privacy
The Company and the Investment Adviser seek to comply at all
times with relevant data protection legislation and to protect the
privacy of counterparties where appropriate. There have been no
breaches of policy or regulation in this regard in the reporting
period.
-- Health, safety and wellbeing
While the Company does not have any employees, the health,
safety and wellbeing of the Board, the Investment Adviser's
employees and those of its affiliated service provider, and the
Group's suppliers and other counterparties is taken into account in
the Board's decision making. This has been particularly relevant
since the onset of the Covid-19 pandemic, where remote working
practices were implemented at an early stage, ahead of the UK's
national lockdown in March 2020. The Board and the board of the
Investment Adviser have sought to support the physical and mental
health of the workforce, including remaining in regular contact
with all team members wherever they are based. The members of the
Prestbury workforce have access to private health cover and also an
externally run confidential helpline to support their physical and
mental wellbeing.
Governance
Aspects of governance cover a broad range of matters
including:
-- the overall purpose and strategy of the Company;
-- the structure and constitution of the Board and management of the business;
-- engagement with the Company's stakeholders;
-- the management of risks and opportunities;
-- the creation of appropriate incentive and remuneration arrangements; and
-- regulatory aspects such as the prevention of money laundering
and corporate crime, anti-bribery and corruption policies and the
establishment and monitoring of an appropriate, transparent tax
policy for the Company.
These and other aspects of governance are set out in the report
on Corporate Governance in the annual report.
ESG policies and strategies of our major tenants
One of the important features of the leases underpinning the
value of the Group's real estate assets is that they are granted on
Full Repairing and Insuring ("FRI") terms, where the tenant is
responsible for the upkeep of the properties and compliance with
laws and regulations relevant to them. In terms both of the
enduring value of the Group's assets and of the Company's
responsibilities to stakeholders in a wide sense, understanding how
our tenants fulfil these responsibilities is important to us.
While we do not in every case have reporting from our tenants on
an asset by asset basis, we have engaged with their own Heads of
Sustainability or other senior individuals responsible for ESG and
we have summarised below key points from their publicly available
corporate statements. We note that these are current as at the date
of this report.
Contractual
rent per
annum
GBPm
Merlin Entertainments 35.6 Merlin Entertainments Limited has a "Responsible
Limited Business" section on its website, www.MerlinEntertainments.Biz.
That includes reports on a range of ESG issues
covering health, safety & security, people
& communities, animal care & conservation,
the environment and corporate governance.
The most directly relevant of these to the
Company's business is the Environmental Policy
which includes among other things a commitment
to comply with and, where appropriate and
practicable, to exceed all relevant environmental
legislation, and a commitment to measure,
monitor and make public their annual carbon
emissions with a carbon reduction target of
at least 2% year on year.
---------------------- ------------ -----------------------------------------------------------------
Ramsay Health 34.4 Ramsay Health Care Limited has published a
Care Limited Corporate Governance Statement on the "Investors"
section of its website, www.RamsayHealth.com.
This covers in some detail their various governance
policies and includes, on page 14 of that
statement, their sustainability policy. That
report includes details of their Global Sustainability
Committee and refers to the appointment during
the financial year ended 30 June 2020 of a
Group Sustainability Officer, responsible,
among other things, for driving their sustainability
programme.
Ramsay has been included in the FTSE4Good
Global Index every year since 2011. That index
identifies companies demonstrating strong
ESG practices, measured against globally recognised
standards. Every year since 2017, Ramsay received
an MSCI* ESG rating of AA. Ramsay also publishes
a Sustainability Impact Report, available
on its website, covering the various aspects
of ESG including, in their 2020 report, specific
commentary on their actions during the Covid-19
pandemic.
---------------------- ------------ -----------------------------------------------------------------
Travelodge 28.3 Travelodge Hotels Limited's latest public
Hotels Limited statements on ESG matters are made in its
annual report for the year ended 31 December
2019, which is available on the Investors
section of its website www.Travelodge.co.uk/investors.
This includes, on pages 23 to 27, their sustainability
reporting and social impact statement. It
also discloses that their gross greenhouse
gas emissions in 2019 represented a 7.9% reduction
on those in 2018 and a 12.2% reduction was
achieved in that period for the measure of
emissions intensity relative to turnover.
Travelodge reports that its 'Energy Governance
Group' is continuing to drive positive change
in this area.
---------------------- ------------ -----------------------------------------------------------------
ASM Global 4.0 ASM Group's Corporate Responsibility Statement
(parent entity is available on the "Our Story" section of
of SMG) its website, www.ASMGlobal.com. This includes
an overview of their environmental policy,
stating their intention to be industry leaders
in this area and confirming that they undertake
the measurement of greenhouse gas emissions,
water consumption and waste reduction.
---------------------- ------------ -----------------------------------------------------------------
The Brewery 3.4 The Brewery's Corporate Social Responsibility
on Chiswell statement is available within a dedicated
Street Limited section of its website www.TheBrewery.co.uk.
The tenant and venue have achieved ISO20121
certification for sustainability in event
management, incorporating socially and environmentally
responsible decision making.
---------------------- ------------ -----------------------------------------------------------------
Major tenants 105.7 93% of Group contractual rent
---------------------- ------------ -----------------------------------------------------------------
* the reference to MSCI ESG Research LLC or its affiliates
("MSCI"), and the use of MSCI logos, trademarks, service marks or
index names herein, does not constitute a sponsorship, endorsement,
recommendation or promotion by MSCI. MSCI services and data are the
property of MSCI or its information providers, and provided "as is"
and without warranty. MSCI names and logos are trademarks or
service marks of MSCI.
Statement on stakeholder relationships made under Section 172(1)
of the Companies Act
The Directors consider that, in conducting the business of the
Company over the course of the year ended 31 December 2020, they
have complied with Section 172(1) of the Companies Act 2006 ("the
Act").
The business is externally managed and the Group has no
employees. The Board is of the opinion that its conduct and that of
its external Management Team culminated from decisions made in good
faith to promote the success of the Company for the benefit of all
of its members, having regard to the impact of decisions on the
following matters specified in Section 172 of the Act:
-- the interests of the workforce, for whom the Chairman of the
Remuneration Committee has special responsibility and who are also
represented on the Board by the three Prestbury directors;
-- business relationships with suppliers, customers and other
counterparties, where engagement is managed in the main by the
Investment Adviser;
-- the community and the environment, where the Board takes overall responsibility;
-- the reputation of the Company for high standards of business
conduct, monitored by the Board with input from advisers including
the Company's broker;
-- fair treatment as between all members of the Company where
the Investment Adviser engages routinely and where the Chairman of
the Company and other Independent Directors make themselves
available for meetings as appropriate; and
-- the likely long term consequences of decisions made by the Board.
The strategy of the Company was initially laid out in the AIM
Admission document issued in May 2014 and was approved by the Board
at that time. In running the business, any deviation from or
amendment of that strategy is subject to Board and, if necessary,
shareholder approval.
At least annually, the Board considers a business plan and
budget for the delivery of its strategic objectives. Through
regular engagement with its stakeholder groups, the Board aims to
gain a rounded and balanced understanding of the impact of its
decisions. In the main, that information is gathered in the first
instance by the Investment Adviser and communicated to the Board in
its regular quarterly meetings and otherwise as required.
The key strategic decisions for the Board are those relating to
asset acquisitions, lease variations, financing, disposals and
distributions, and where these types of transaction, or any other
material transaction or decision, is considered, the Board has
regard to its wider obligations under Section 172 of the Act.
Specifically, during the 2020 financial year the principal
non-routine decisions made by the Board related to the support
extended to certain of the Group's tenants as a result of the
pressures on them from the Covid-19 pandemic. These were in the
vast majority of cases constructive, collaborative bilateral
discussions between the Company and those tenants, where the
various outcomes were considered to represent a good result both
for the tenant businesses, including their employees and other
stakeholders, and the Company and its stakeholders, including
specifically its shareholders and lenders. In the case of the
Budget Hotels portfolio where the tenant implemented a Company
Voluntary Arrangement ("CVA"), the process was more combative
largely as a consequence of the way CVAs generally work, including
the limits on information that can be provided and the lack of
flexibility that is possible in accommodating suggestions or
requirements from landlords either individually or in groups.
However, despite these challenges the decisions taken by the Board
as to how to approach the assessment of the CVA proposals and the
consequences of it were taken with the best interests of the
Company and its stakeholders in the foreground, but also in
weighing up the best outcome for the tenant and its stakeholders
including its customers, its many employees and its suppliers. The
Board's commitment to taking into account the long term
consequences of its decisions underlies its focus on risk,
including risks to the long term viability and success of the
business. These assessments led the Board to conclude that the
actions taken in granting rent concessions would benefit the
Company as well as its tenants.
While the Group has no employees, the Board has regard to the
interests of the individuals who are responsible for delivery of
the management and advisory services to the Company. Three of the
seven Directors are representatives of the Investment Adviser and,
in their capacity as directors and majority owners of the
Investment Adviser, have direct responsibility for the employees of
the companies providing services to the business. In addition, the
Chairman of the Remuneration Committee has responsibility for
workforce engagement so that there is a direct line of
communication from the workforce to the Independent Directors.
There have been no strategic initiatives or transactions in the
year that were considered to have a direct bearing on the employees
of the external management business.
The Board has been kept informed of relevant developments in the
workforce. The Investment Adviser has confirmed that none of the
workforce has been furloughed or made redundant, that all members
of the workforce have continued to be paid their salaries in full,
and that the Investment Adviser and its associated companies have
not drawn on the Government's Job Retention Scheme or any other
Covid related support. Steps have been taken to protect the
physical and mental wellbeing of the workforce, as far as possible.
This includes access to a confidential helpline for physical and
mental health issues which is provided by the Investment Adviser's
private medical insurer. The whole team has been required to work
from home during the Government mandated lockdowns and at times
during the various other 'tiered' restrictions. Where office based
work has been possible, teams were split and worked in rotation in
and out of the office, to minimise the number of people in the
office at any one time, to keep the workforce safe. The workforce
below director level also participated in a special Covid related
charitable giving scheme funded by the Investment Adviser,
additional to the charitable donations made in the ordinary course
of its business, where each employee selected a number of charities
which resulted in donations totalling GBP27,000 made to 32 good
causes.
In the Board's annual review of the internal control environment
operating in the business, the appropriateness of staffing levels
and staff qualifications are kept under review, but it is noted
that the Board does not have direct responsibility for any
employees.
In the main, the Company's suppliers, customers and
counterparties are professional firms such as lenders, property
agents, accounting and law firms, tenants with which we have
longstanding relationships, and transaction counterparties which
are generally large and sophisticated businesses or institutions.
Where material counterparties are new to the business, checks,
including anti money laundering checks, are conducted prior to
transacting any business to ensure that no reputational or legal
issues would arise from engaging with that counterparty. The
Company also reviews the compliance of all material counterparties
with relevant laws and regulations such as the Modern Slavery Act
2015. All Group entities have a policy of paying suppliers in
accordance with agreed terms as reported in the Supplier Payment
Policies below and our approach to our suppliers and to payments
has been unchanged throughout the pandemic.
The interaction of Group entities with the wider community and
their impact on the environment is relatively limited as a result
of the Group's business operations being entirely related to
investment in properties let on very long leases, where the
operation of the properties, their upkeep and environmental impact
is the responsibility of the occupational tenants. The Board and
the Investment Adviser have committed to limiting the Company's own
impact of the business on the environment where possible, including
engagement with our tenants in understanding and where possible
supporting their climate related targets.
The Board is mindful that the ability of the Company to continue
to conduct its investment business and to finance its activities
depends in part on the reputation of the Board and Management Team.
The risk of falling short of the high standards expected and
thereby risking the reputation of the Company is included in the
Board's review of the Company's risk register, which is conducted
at least annually.
The investor relations programme is designed to promote formal
engagement with major investors, generally defined as those holding
more than approximately 1% of the shares in the Company. Major
investors are offered meetings after each results announcement and
the Management Team is also available to other investors who may
request meetings. The Board and Management Team also engage with
investors and potential investors who request meetings on an ad hoc
basis throughout the year. The impact of the pandemic on markets
generally and specifically on the Company's share price meant that
ad hoc engagement with shareholders has been significantly more
frequent than usual in 2020.
Recognising the great importance of engaging with the Company's
shareholders, the Board oversees the Management Team's investor
relations programme which is supported by the Company's brokers and
financial PR advisers. The Board and Management Team aim to be open
with shareholders and available to them, subject at all times to
compliance with relevant securities laws.
Feedback from our shareholders is an important part of the
Board's decision making process. We receive such feedback both
directly and through intermediaries such as brokers and analysts.
The feedback received is a natural part of the open dialogue we aim
to have with our investors and, when appropriate and within the
rules on sharing company information, the opinions of shareholders
are sought in advance of decisions being made. During the financial
year these discussions have included our response to the pandemic
and also our approach to the discount between the share price and
the Group's net asset value, where in the main shareholders
confirmed their support for the Board's decisions.
All Company announcements and formal shareholder presentations
are made available on the Company's website.
Until 2020, the whole Board has always attended the Company's
Annual General Meeting. However, the restrictions imposed on people
gathering together that were in force at the time of the 2020 AGM
meant that only one director was able to attend the meeting, with
one other shareholder present at an appropriate distance and with
all Covid-19 related precautions having been taken. The Board's
intention is to return to attendance in person at the AGM in future
but, where that is not possible, will continue to keep lines of
communication with shareholders open including the facility for
shareholders to submit questions by email or post ahead of the
AGM.
The Company has a single class of shares in issue with all
members of the Company having equal rights therefore balancing the
interests of shareholders among themselves is not an issue for the
Company.
The investment strategy of the Group is focussed on medium to
long term returns and as such the long term is firmly within the
sights of the Board when all material decisions are made.
Supplier payment policies
Neither the Company nor any of its subsidiary undertakings
exceeds the thresholds for reporting payment practices and
performance. The following voluntary disclosures relate to the
Group:
-- the Group does not have standard or maximum payment terms,
but seeks to settle supplier invoices in accordance with pre-agreed
terms;
-- invoices may be submitted electronically but as the volume of
payments is relatively low, the Group does not operate electronic
tracking for suppliers;
-- the Group does not offer supply chain finance;
-- there are no arrangements for participation on supplier lists
and no charges for being on such a list;
-- the Group is not a member of a payment code of conduct; and
-- the average number of days taken to make payments in the year
was 30 days (2019: 23 days). The lengthening of the average in 2020
is due in large part to both of our accounts assistants
unfortunately suffering from Covid-19 at the same time, but payment
terms are reverting to normal levels since their recovery.
Principal Risks and Uncertainties
The Board's responsibilities for risk management include
assessing the principal risks faced by the Group and how they may
be mitigated, including considering matters that may threaten the
performance of the Group, its business model or its viability.
Material changes to the Group risk register
The Audit Committee and the Board review the Group's risk
register at least annually and more often as necessary. Given the
elevated risks following the onset of the Covid-19 pandemic, the
risk register, which was most recently reviewed in connection with
the publication of the interim report in September 2020, has been
reviewed again in conjunction with the approval of this annual
report.
Pandemic disruption was added to the overarching risks (which
comprised Brexit risk and Climate risk) at the first review after
the pandemic was declared, and the risk rating of each of the
principal risks was increased at that time because all are impacted
by the consequences of the pandemic and the response of governments
and public health bodies to it. This remains the case in the
current schedule of risks.
The rollout of vaccines in the UK and elsewhere is a positive
development which has eased the Covid-19 pandemic risk, although
this has been to some extent offset by the spread of more
contagious strains of the virus leaving the risk, overall,
unchanged albeit with a brighter medium term outlook.
Towards the end of 2020 a trade deal was agreed with the EU,
just prior to the end of the Brexit transition period, reducing the
Brexit risk by way of the removal of the risk of a disorderly exit
on World Trade Organisation terms. As a result, Brexit risk has now
been removed from the overarching risk list. However, as the change
in trading conditions is recent and as terms of trade in various
areas continue to evolve, the Board will continue to monitor Brexit
risk to ensure that assessment remains appropriate, particularly as
it may impact on our tenants despite its having been assessed as
lower risk.
The risk assessments are otherwise unchanged since those
presented in the 2020 Interim Report.
Overarching risks
There are overarching risks which the Board considers to be
relevant to most of the individual risk areas identified. These are
not classified as separate risks in their own right, but as general
risks affecting many of the specific risk factors faced by the
Group and which are also kept under review and are:
-- the risks of extensive economic and social disruption, including from a pandemic; and
-- climate risk, including the risks and costs of decarbonisation.
Global economic and social disruption including pandemic
risk
The Board and Management Team of the Company and those of the
Group's major tenants have operated through a number of cycles of
economic boom and bust, through varying degrees of political
stability, and have dealt with deep recessions and periods of great
disruption. However, the global reach, sudden onset and extensive
impact of the spread of Covid-19 is in a class of its own in its
scale and unpredictability. While the full force of the lockdowns
and other pandemic related restrictions has been felt by our
tenants in the Leisure and Budget Hotels sectors, this has been
mitigated, from the Company's perspective, through its significant
weighting in healthcare assets which account for 32% of the Group's
passing rents before Covid-related concessions. The Company's
Uncommitted Cash balance remains available to deal with further
threats arising. While the path of the virus, of consumer behaviour
in the face of it and of any resulting recession cannot be known,
the experience of the Board and Management Team members is being
brought to bear on every aspect of the risks faced by the Company
as a result of the pandemic.
Climate risk
As the Company has very limited direct impact on the
environment, this risk is not one where the Company can take steps
to make a material impact on its own behalf. The Company is
externally managed and has no offices and so has no directly
produced emissions to report. However, in assessing the strength of
the credit quality of our tenants and of potential tenants, we take
climate risk into account. Climate risk assessments also form an
integral part of the way that we consider how any assets being
considered for acquisition meet the criteria set out in the
Company's business model. We report on our own policies and those
of our major tenants in the ESG section of the Strategic
Review.
The Board considers that the principal risks and uncertainties
facing the Group over the medium to long term are as follows:
Risk and change in
assessment since prior
year Impact on the Group Mitigation
---------------------------- ------------------------------- -------------------------------------
Tenant risk
During the year and A default of lease 32% (31 December 2019: 32%)
prior year, the Group obligations by a of passing rent before concessions
derived its income material tenant and at the balance sheet date
from ten tenant groups, its guarantor (if is contractually backed
two of which have any) would have an by large listed companies
the benefit of guarantees impact on the Group's and a further 35% (31 December
from or joint tenancies revenue, earnings 2019: 31%) by global businesses
with substantial listed and cash flows and with multi billion pound
parent companies. could have an impact valuations, all with capital
The three largest on debt covenant structures considered by
tenant groups account compliance. The specialised the Board to have been strong
for 88% of passing use of the properties and with impressive long
rent before concessions may mean that, in term earnings growth and
as at the balance the event of an unexpected (where relevant) share price
sheet date (31 December vacancy, re-letting track records up until the
2019: 87%). takes time. start of the pandemic. The
balance of the income is
Although the Board Investment property payable by substantial businesses
considers the tenant valuations reflect also considered by the Board
and guarantor groups an independent external to be sufficiently financially
to be financially valuer's assessment strong in the context of
strong in ordinary of the future security their lease obligations.
circumstances, certain of income. A loss
tenants experienced of income would therefore The properties are Key Operating
liquidity stresses impact net asset Assets, which should have
during the pandemic value as well as the effect of enhancing
and there can be no earnings. It could rental income security.
guarantee that they also lead to a breach
will remain able to of interest cover The Board reviews the financial
comply with their or debt service cover position of the tenants
obligations throughout covenants, resulting and guarantors at least
the term of the relevant in increased interest every quarter and more often
leases. rate margins payable when relevant, based on
to lenders, restricted publicly available financial
The severe impact cash flows out of information and any other
of Covid-19 on the secured debt groups trading information which
Group's Leisure and or ultimately default may be obtained either under
Budget Hotels tenants, under secured debt the terms of the leases
which suffered an agreements. The availability or informally. The Group's
abrupt and almost of distributable key performance indicators
complete closure of reserves could also include the levels of covenant
their operations as be restricted. headroom and of Uncommitted
a result of the pandemic, Cash, both of which are
creates heightened relevant to monitoring and
tenant risk. The reopening if necessary mitigating
of their businesses this risk.
in the UK over the
summer of 2020 brought The Board reserves unsecured
some easing of risk and Uncommitted Cash outside
but subsequent local ring-fenced debt structures
restrictions and later which would be available
national lockdowns to be used to cure certain
continue to create covenant defaults to the
pressures for them, extent of the cash available.
although we note that
many of the leisure
and hotels operations
are now in their quieter
seasons and some are
generally closed for
the winter in any
case.
---------------------------- ------------------------------- -------------------------------------
Risk and change
in assessment since
prior year Impact on the Group Mitigation
-------------------------- ------------------------------ ---------------------------------------
Property valuation
movements Investment properties The Group uses experienced
The Group invests make up the majority independent external valuers
in commercial property of the Group's assets, whose work is reviewed by
which is held on so material changes suitably qualified members
the balance sheet in their value will of the Management Team and,
at its fair value have a significant separately, the Audit Committee
at each balance impact on measures before being considered by
sheet date. The of net asset value the Board in the context of
Company is therefore including EPRA NTA, the financial information
exposed to movements with any effect of as a whole.
in property valuations, the valuation changes
which are subjective on net assets magnified The Board seeks to structure
and may vary as by the impact of the Group's capital such that
a result of a number borrowings. the level of borrowing and
of factors, many the protections available
of which are outside Falls in the value to cure a covenant default
the control of the of investment properties are appropriate having regard
Board. could lead to a breach to market conditions and financial
of financial covenants covenant levels.
As a result of the in secured debt facilities,
pandemic, this risk resulting in increased The Group's key performance
has increased since interest margins indicators include the levels
the start of 2020 payable to lenders, of covenant headroom and Uncommitted
because of the relative restricted cash flows Cash, both of which are relevant
lack of liquidity out of secured debt to monitoring and if necessary
in the Leisure and groups, restrictions mitigating this risk.
Budget Hotel sectors of distributable
(61% of property reserves available The Board reserves Uncommitted
assets by value), for dividend payments Cash outside ring-fenced debt
which is reflected or default under structures which would be
in a 'material valuation secured debt agreements. available to cure certain
uncertainty' in covenant breaches.
the independent
external valuations.
The risk relating
to the healthcare
assets is not considered
to be similarly
affected by the
pandemic and no
such 'material valuation
uncertainty' applies
to those valuations.
-------------------------- ------------------------------ ---------------------------------------
Risk and change
in assessment since
prior year Impact on the Group Mitigation
------------------------------ ----------------------------- -------------------------------------
Borrowing
Certain Group companies In the event of a The Group's borrowing arrangements
have granted security breach of a debt comprise six ring-fenced subgroups
to lenders in the covenant, the Group with no cross-guarantees between
form of mortgages may be required to them and no recourse to other
over each of the pay higher interest assets outside each secured
Group's investment costs or increase subgroup. A financial covenant
properties and fixed debt amortisation, issue in one portfolio should
and floating charges affecting Group earnings therefore be limited to that
over other assets. and cash flows. If portfolio, save for tenant
a financial covenant related events (such as a
Following the sale breach is the result tenant insolvency) where the
of eight hospitals of the financial two healthcare subgroups would
in August 2019, weakness of a tenant both be affected by any issue
the Group holds or a guarantor, the relating to Ramsay and the
an Uncommitted Cash property valuations two budget hotel facilities
balance that is and therefore net would be affected by any issue
substantially higher asset value may also relating to Travelodge.
than the level of be adversely affected.
c. GBP60 million In certain circumstances Five of the facilities have
it has held historically. the Company's ability LTV default covenants (the
For such time as to make cash distributions Merlin Leisure facility has
significant surplus to shareholders may no LTV default covenant) and
cash is retained, be reduced. all facilities have interest
the borrowing risk cover or debt service cover
can be considered Where a loan repayment covenants. The Board reviews
to be lower than cannot be made the compliance with all financial
prior to 2019 as Group may be forced covenants at least every quarter,
the ability to cure to sell assets to including forward-looking
breaches of financial repay part or all tests for at least twelve
covenants, should of the Group's debt. months, and considers whether
they occur, is significantly It may be necessary there is sufficient headroom
greater. to sell assets at on relevant loan covenants
below book value, to withstand stress test and
While to date the which would adversely reverse stress test scenarios.
Group has had the impact net assets
support of its lenders and future earnings. The Board seeks to structure
in agreeing any Early debt repayments the Group's capital such that
consents or waivers would in most cases gearing is appropriate having
required to accommodate crystallise repayment regard to market conditions
the support provided penalties, which and financial covenant levels,
to its tenants throughout would also adversely with appropriate cure rights
the pandemic, for impact cash balances within debt facilities.
as long as tenant and net assets and
risk is elevated, reduce distributable The Group's key performance
borrowing risk is reserves. indicators include the levels
also considered of Net Loan to Value, covenant
to be elevated. headroom and of Uncommitted
Cash, all of which are relevant
to monitoring and if necessary
mitigating this risk.
The Board reserves Uncommitted
Cash outside ring-fenced debt
structures which would be
available to cure certain
covenant breaches.
------------------------------ ----------------------------- -------------------------------------
Risk and change
in assessment since
prior year Impact on the Group Mitigation
--------------------------- ------------------------------- --------------------------------------
Tax risk
As a UK REIT, a If subject to UK The REIT conditions which,
failure to comply corporation tax, if breached, could result
with certain UK the Group's current in automatic expulsion from
REIT conditions tax charge would the REIT regime are those
resulting in the increase, impacting relating to the Company's
loss of this status cash flows, net asset share (and any loan capital
could result in value and earnings, should the Company have any
property income and reducing cash in future), and are therefore
being subject to and reserves available (with the exception of a successful
UK corporation for distributions. hostile takeover of the Company
tax. Further, any asset by a non-REIT) within the
sales would also control of the Group.
This risk has increased be subject to corporation
as a result of tax, reducing the The Board reviews compliance
the pandemic. The net amounts receivable with the UK REIT rules at
pressures on the on sale and requiring least every quarter.
UK Treasury of deferred tax to be
providing financial provided on inherent
support throughout capital gains.
the pandemic is
considered to have
increased the risk
of changes in the
tax regime.
--------------------------- ------------------------------- --------------------------------------
Liquidity risk
Working capital A breach of a lending Unless there is a tenant default
must be managed covenant, or the (the risk of which is explained
to ensure that insolvency of either under Tenant risk) the Group's
both the Group the Group as a whole cash flows are generally highly
as a whole and or an individual predictable. The cash position
all individual entity within a secured is reported to the Board at
entities are able subgroup could result least quarterly, projections
to meet their liabilities in a loss of net at least two years ahead are
as they fall due, assets, impacting included in the Group budget
though with highly net asset value and and are updated for review
predictable income earnings, and reducing when the interim and annual
and costs there cash and reserves reports are approved, and
is limited scope available for distributions. projections for a five year
for unexpected period are reviewed for the
liquidity pressures As a result, there viability statement in the
outside those risks could be insufficient annual report.
described under cash and/or distributable
Tenant risk. reserves to meet The Group's key performance
the Property Income indicators include the levels
The Group holds Distribution ("PID") of Uncommitted Cash available
a material Uncommitted requirement under to the Group.
Cash balance providing the UK REIT rules,
the benefit of which could result The Group has Uncommitted
a very substantial in UK corporation Cash reserves out of which
liquidity buffer. tax becoming payable any tax liabilities or increases
For as long as on the Group's property in required PIDs above the
the risks of further rental business. cash flow generated from operations
economic disruption This would in turn could be met in the short
arising from the reduce free cash to medium term. A scrip dividend
pandemic remain flows. alternative could be offered
elevated, the potential to meet the PID requirement.
for the liquidity
buffer to be called
on to provide support
to tenants and/or
to deploy in debt
management is also
elevated.
--------------------------- ------------------------------- --------------------------------------
Going concern and viability
The Board regularly monitors the Company's and the Group's
ability to continue as a going concern and its longer term
viability. This is supported by the Audit Committee's work in this
area. Summaries of the Company's and the Group's liquidity
position, compliance with loan covenants and the financial strength
of its tenants and their guarantors are considered at the scheduled
quarterly Board meetings and more often as required. This includes
updating of the stress tests and reverse stress tests described in
the mitigation sections of the tenant and borrowing risks within
the Principal Risks and Uncertainties section. These include
expanded and stress tested assessments consistent in approach with,
but more detailed than, those presented in the Investment Adviser's
summary of the 'headroom on debt covenants' key performance
indicator. The modelling includes (but is not limited to):
-- the identification of uncertainties facing the Group,
including the risks of tenant defaults and investment property
valuation movements (as outlined in the principal risks and
uncertainties section), the resulting impact on Group debt
covenants and the remedial action that may be taken, including the
extent of the resources available to the Company to cure covenant
breaches; and
-- stress tests, presented both on the basis of estimated
reasonable ranges of outcomes (such as variations in investment
property valuation yields, rental cash flows and exposure to any
unexpected cash outflows) and reverse stress tests, where scenarios
are presented to demonstrate the key inputs (principally rental
cash flows and property valuation yields) that would be required to
exhaust the Company's liquidity buffer in curing financial covenant
breaches.
The detailed scenarios are calculated by the Investment Adviser
and presented to the Audit Committee for its review, subject to
challenge and debate. The projections and scenarios considered
throughout 2020 and in connection with the approval of this
financial information had particular regard to issues arising from
the Covid-19 pandemic, specifically the impact on the Group's
tenants. The ability of each tenant to navigate its way through the
challenges of the pandemic to date, the Group's significant
liquidity levels to deal with any further issues arising and the
brighter medium term outlook as a result of the vaccine rollouts,
are considered relevant in the context of the going concern and
viability assessments for the Group.
The Board has weighed up the risks to going concern set out
above together with the ability of the Company to take mitigating
action in response to those risks. The Board considers that the
combination of their assessments as to the tenants' prospects, the
headroom available on debt covenants and the liquidity available to
the Group to deal with reasonable stressed scenarios on income and
valuation outlook leads to a conclusion that the Company and the
Group are each able to continue in business for the foreseeable
future. They therefore consider it appropriate to adopt the going
concern basis in the preparation of this financial information.
Viability statement
The Board has assessed the prospects of the Group over the five
years from the balance sheet date to 31 December 2025, which is the
period covered by the Group's longer term financial projections.
The Board considers the resilience of projected liquidity, as well
as compliance with debt covenants and UK REIT rules, under a range
of RPI and property valuation assumptions. These scenarios include
stress tests and reverse stress tests consistent with those
described in the paragraph preceding the going concern statement
and include a consideration of mitigating actions that may be taken
to avert or mitigate potential threats to viability.
The principal risks and the key assumptions that were relevant
to this assessment are as follows:
Risk Assumptions
------------ ----------------------------------------------------------------
Tenant risk
* Tenants and their guarantors (where relevant)
continue to comply with their rental obligations and
do not suffer any insolvency events or otherwise
cease rental payments over the term of the review.
Borrowing
risk * The Group continues to comply with all loan
covenants.
* The Group is able to negotiate acceptable terms to
refinance GBP374.7 million of debt in the Merlin
Leisure facility falling due in October 2022 and
GBP184.4 million in two hotel facilities and one
leisure facility falling due between April and
October 2023.
Liquidity
risk * The Group continues to generate sufficient cash to
cover its costs while retaining the ability to make
distributions, which includes the Group's continuing
compliance with loan covenants.
------------ ----------------------------------------------------------------
Based on the work performed, the Board has a reasonable
expectation that the Group will be able to continue in business
over the five year period of its assessment.
The Strategic Report, which comprises the Chairman's Statement,
Investment Adviser's Report and Strategic Review, was signed on
behalf of the Board on 10 March 2021.
Martin Moore Sandy Gumm
Chairman Director
Group Income Statement
Year to Year to
31 December 31 December
2020 2019
Notes GBP000 GBP000
-------------------------------------------- ----- ------------- -------------
Revenue 3 , 4 121,664 132,677
Property outgoings 5 (1,525) (1,327)
-------------------------------------------- ----- ------------- -------------
Gross profit 120,139 131,350
Administrative expenses 6 (17,001) (22,128)
Profit on disposal of investment properties 32 53,074
Investment property revaluation 11 (166,622) 75,708
Operating (loss) / profit 7 (63,452) 238,004
Finance income 8 374 730
Finance costs 8 (50,264) (84,234)
-------------------------------------------- ----- ------------- -------------
(Loss) / profit before tax (113,342) 154,500
Tax charge 9 (299) (1,141)
-------------------------------------------- ----- ------------- -------------
(Loss) / profit for the year (113,641) 153,359
-------------------------------------------- ----- ------------- -------------
Pence per Pence per
Earnings per share share share
-------------------------------------------- ----- ------------- -------------
Basic 10 (35.1) 47.5
Diluted 10 (35.1) 47.3
-------------------------------------------- ----- ------------- -------------
All amounts relate to continuing activities.
The notes form part of this financial information.
Group Statement of Other Comprehensive Income
Year to Year to
31 December 31 December
2020 2019
Notes GBP000 GBP000
-------------------------------------------- ----- ------------- -------------
(Loss) / profit for the year (113,641) 153,359
Items that may subsequently be reclassified
to profit or loss:
Currency translation differences 21 2,101 (2,000)
13 ,
Fair value movements in derivatives 21 (637) (851)
Other comprehensive income / (loss) 1,464 (2,851)
-------------------------------------------- ----- ------------- -------------
Total comprehensive (loss) / income for
the year (112,177) 150,508
-------------------------------------------- ----- ------------- -------------
The notes form part of this financial information.
Group Statement of Changes in Equity
Share premium Retained
Share capital reserve Other reserves earnings Total
Year to 31 December 2020 GBP000 GBP000 GBP000 GBP000 GBP000
--------------------------- --------------- --------------- ---------------- ----------- ---------
At 1 January 2020 32,285 518,415 7,164 826,678 1,384,542
---------------------------- --------------- --------------- ---------------- ----------- ---------
Loss for the year - - - (113,641) (113,641)
Other comprehensive income - - 1,464 - 1,464
---------------------------- --------------- --------------- ---------------- ----------- ---------
Total comprehensive income
/ (loss) - - 1,464 (113,641) (112,177)
Issue of shares 119 4,791 (4,910) - -
Interim dividends of 15.7
pence per share - - - (50,824) (50,824)
At 31 December 2020 32,404 523,206 3,718 662,213 1,221,541
---------------------------- --------------- --------------- ---------------- ----------- ---------
Share premium Retained
Share capital reserve Other reserves earnings Total
Year to 31 December 2019 GBP000 GBP000 GBP000 GBP000 GBP000
--------------------------- --------------- --------------- ---------------- ----------- ---------
At 1 January 2019 32,156 513,675 9,977 725,780 1,281,588
---------------------------- --------------- --------------- ---------------- ----------- ---------
Profit for the year - - - 153,359 153,359
Other comprehensive loss - - (2,851) - (2,851)
---------------------------- --------------- --------------- ---------------- ----------- ---------
Total comprehensive income - - (2,851) 153,359 150,508
Issue of shares 129 4,740 (4,869) - -
Shares to be issued - - 4,907 - 4,907
Interim dividends of 16.3
pence per share - - - (52,461) (52,461)
At 31 December 2019 32,285 518,415 7,164 826,678 1,384,542
---------------------------- --------------- --------------- ---------------- ----------- ---------
The notes form part of this financial information.
Group Balance Sheet
31 December 31 December
2020 2019
Notes GBP000 GBP000
------------------------------------------- ------ ------------ -------------
Non-current assets
Investment properties 3 , 11 1,975,600 2,111,297
Headlease rent deposits 2,740 2,742
Tangible fixed assets 228 -
Interest rate derivatives 13 7 43
1,978,575 2,114,082
Current assets
Cash and cash equivalents 14 219,730 267,119
Trade and other receivables 15 20,009 3,798
239,739 270,917
Total assets 2,218,314 2,384,999
------------------------------------------- ------ ------------ -------------
Current liabilities
Trade and other payables 16 (32,889) (38,290)
Secured debt 17 (4,984) (1,170)
Interest rate derivatives 13 (557) (246)
Current tax liability (56) (129)
(38,486) (39,835)
------------------------------------------- ------ ------------ -------------
Non-current liabilities
Secured debt 17 (916,596) (920,408)
Head rent obligations under finance leases 18 (28,662) (28,190)
Deferred tax liability 19 (11,899) (11,267)
Interest rate derivatives 13 (1,130) (757)
------------------------------------------- ------ ------------ -------------
(958,287) (960,622)
Total liabilities (996,773) (1,000,457)
------------------------------------------- ------ ------------ -------------
Net assets 1,221,541 1,384,542
------------------------------------------- ------ ------------ -------------
Equity
Share capital 20 32,404 32,285
Share premium reserve 21 523,206 518,415
Other reserves 21 3,718 7,164
Retained earnings 21 662,213 826,678
Total equity 1,221,541 1,384,542
------------------------------------------- ------ ------------ -------------
Pence Pence
per share per share
------------------------------------------- ------ ------------ -------------
Basic NAV per share 23 377.0 428.8
Diluted NAV per share 23 377.0 427.3
EPRA NTA per share 23 379.3 429.4
------------------------------------------- ------ ------------ -------------
The notes form part of this financial information.
Group Cash Flow Statement
Year to Year to
31 December 31 December
2020 2019
Notes GBP000 GBP000
-------------------------------------------- ------ ------------- -------------
Operating activities
(Loss) / profit before tax (113,342) 154,500
Adjustments for non-cash items:
Investment property revaluation 11 142,516 (86,727)
Depreciation 18 -
Administrative expenses payable in shares 25 - 4,907
Profit on disposal of investment properties (32) (53,074)
Finance income 8 (374) (730)
Finance costs 8 50,264 84,234
-------------------------------------------- ------ ------------- -------------
Cash flows from operating activities
before changes in working capital 79,050 103,110
Changes in working capital:
Trade and other receivables (18,811) (265)
Trade and other payables (5,504) (2,144)
Headlease rent deposits 2 24
Cash generated from operations 54,737 100,725
Tax paid (401) (233)
-------------------------------------------- ------ ------------- -------------
Cash flows from operating activities 54,336 100,492
-------------------------------------------- ------ ------------- -------------
Investing activities
Net proceeds on disposal of investment
properties 2,597 357,744
Interest received 409 695
Acquisition of tangible fixed assets (246) -
Acquisition of investment properties - (307)
Cash flows from investing activities 2,760 358,132
-------------------------------------------- ------ ------------- -------------
Financing activities
Dividends paid (50,824) (52,461)
Interest and finance costs paid 24 (47,844) (53,638)
Scheduled repayment of secured debt 24 (4,434) (3,988)
Repayment of secured debt from proceeds
of property disposals 24 (1,494) (154,519)
Fees on accelerated prepayment of secured
debt 8 , 24 - (27,868)
Loan arrangement costs paid 24 - (670)
Cash flows from financing activities (104,596) (293,144)
-------------------------------------------- ------ ------------- -------------
(Decrease) / increase in cash and cash
equivalents (47,500) 165,480
Cash and cash equivalents at the beginning
of the year 267,119 101,745
Currency translation movements 111 (106)
-------------------------------------------- ------ ------------- -------------
Cash and cash equivalents at the end
of the year 14 219,730 267,119
-------------------------------------------- ------ ------------- -------------
The notes form part of this financial information.
Notes to the Group Financial Information
1. General information about the Group
The financial information set out in this report covers the year
to 31 December 2020 with comparative figures relating to the year
to 31 December 2019. It includes the results and net assets of the
Company and its subsidiaries, together referred to as the
Group.
The Company is incorporated in England and Wales. The address of
the registered office and principal place of business is Cavendish
House, 18 Cavendish Square, London W1G 0PJ. The nature and scope of
the Group's operations and principal activities are described in
the Strategic Report. The Company is listed on the AIM market of
the London Stock Exchange.
Further information about the Group can be found on its website,
www.SecureIncomeREIT.co.uk.
2. Basis of preparation and accounting policies
a) Statement of compliance
The consolidated financial information has been prepared in
accordance with international accounting standards in conformity
with the requirements of the Companies Act 2006.
The financial information contained in this announcement has
been prepared on the basis of the accounting policies set out in
the financial statements for the year ended 31 December 2020.
Whilst the financial information included in this announcement has
been computed in accordance with international accounting standards
in conformity with the requirements of the Companies Act 2006, this
announcement does not itself contain sufficient information to
comply with those standards. The financial information does not
constitute the Group's financial statements for the years ended 31
December 2020 or 31 December 2019, but is derived from those
financial statements. Those financial statements give a true and
fair view of the assets, liabilities, financial position and
results of the Group. Financial statements for the year ended 31
December 2019 have been delivered to the Registrar of Companies and
those for the year ended 31 December 2020 will be delivered
following the Company's AGM. The auditors' reports on both the 31
December 2020 and 31 December 2019 financial statements were
unqualified; did not draw attention to any matters by way of
emphasis; and did not contain statements under section 498 (2) or
(3) of the Companies Act 2006.
b) Basis of preparation
The Group financial information is presented in Sterling as this
is the currency of the primary economic environment in which the
Group operates. Amounts are rounded to the nearest thousand pounds
unless otherwise stated.
Euro denominated results for the German operations have been
converted to Sterling at the average exchange rate for the year of
EUR1:GBP0.89 (2019: EUR1:GBP0.88), which is not considered to
produce materially different results from using the actual rates at
the date of the transactions. Year end balances have been converted
to Sterling at the 31 December 2020 exchange rate of EUR1:GBP0.90
(2019: EUR1:GBP0.85).
The financial information has been prepared on the historical
cost basis, except for investment properties and derivatives which
are stated at fair value. The accounting policies have been applied
consistently in all material respects.
Going concern
The Directors have, at the time of approving the financial
information, a reasonable expectation that the Company and the
Group have adequate resources to continue in operational existence
for the foreseeable future and therefore continue to adopt the
going concern basis of accounting in preparing the financial
information. Further details are given in the Strategic Review.
Judgements in applying accounting policies and key sources of
estimation uncertainty
The preparation of financial information requires the Directors
to make judgements, estimates and assumptions that may affect the
application of accounting policies and reported amounts of assets
and liabilities as at each balance sheet date and the reported
amounts of revenue and expenses during any financial year. Any
estimates and assumptions are based on experience and any other
factors that are believed to be relevant under the circumstances
and which the Board considers reasonable. Actual outcomes may
differ from these estimates.
The principal area of estimation uncertainty is the investment
property valuation where, as described in note 11 , the opinion of
independent external valuers has been obtained at each reporting
date using recognised valuation techniques and the principles of
IFRS 13 "Fair Value Measurement".
2. Basis of preparation and accounting policies (continued)
b) Basis of preparation (continued)
The principal areas of judgement relate to revenue recognition.
Consistent with the prior year, one area of judgement is the
recognition of any additional revenue in the year as a result of an
outstanding May 2018 open market rent review on the Ramsay
hospitals. The review is under arbitration and the nature of the
assets mean that there is little comparative information on which
to base an assessment. The Directors consider that it is not
possible at present to make a reasonably certain estimate of any
uplift that might result, and the financial information therefore
does not reflect any additional revenue arising as a result of this
rent review. This position has not changed from that disclosed in
the 2019 financial statements. A further consideration in the year
is the treatment of the Covid-19 rent concessions, where the extent
of any lease modifications and the methodology for spreading income
over lease terms has been assessed in the context of accounting
standards and the Company's accounting policies.
The Group's accounting policies for property valuation and
revenue recognition are set out in paragraph 2d. Other policies
material to the Group are set out in paragraphs 2c and 2e to
2k.
Adoption of new and revised standards
During the year, the Group adopted the amendments to IFRS 16
that were introduced as a result of the Covid-19 pandemic. As these
largely apply to lessees rather than lessors, there was no material
change to the Group's accounting policies and disclosures.
During year, the Group also adopted the "Interest Rate Benchmark
Reform" amendments to IFRS 9, IAS 39 and IFRS 7. As well as certain
additional disclosures, the amendments provide relief in applying
the requirements of IFRS 9 to certain hedges, including allowing
the Group to assume that LIBOR will not be altered as a result of
interest rate benchmark reform. Consequently, hedging relationships
that may otherwise have been impacted by interest rate benchmark
reform have remained in place and no additional ineffective portion
of the hedges has been recognised. LIBOR linked exposures amount to
only 8% of Group borrowings and 4% of the Group's interest charge
on secured debt for the year ended 31 December 2020, therefore any
effects are not considered to be material.
None of the other new or amended standards or interpretations
issued by the International Accounting Standards Board ("IASB") or
the IFRS Interpretations Committee ("IFRIC") have led to any
material changes in the Group's accounting policies or disclosures
during the year.
Standards and interpretations in issue not yet adopted
The IASB and IFRIC have issued or revised IFRS 1, IFRS 3, IFRS
4, IFRS 7, IFRS 9, IFRS 17, IAS 1, IAS 8, IAS 16, IAS 28, IAS 37,
IAS 39 and IAS 41 but these are not expected to have a material
effect on the operations of the Group.
c) Basis of consolidation
Subsidiaries are those entities controlled directly or
indirectly by the Company. The Company has control within the
meaning of this policy when it has power over an entity, is exposed
to or has rights to variable returns from its involvement with the
entity and has the ability to use its power over the entity to
affect those returns.
The consolidated financial information includes the financial
information of the Company's subsidiaries prepared to 31 December
under the same accounting policies as the Group as a whole, using
the acquisition method. All intra-group balances and transactions
are eliminated on consolidation.
All Group entities were wholly owned throughout the current year
and the prior year.
d) Property portfolio
Investment properties
Investment properties are properties ultimately owned by the
Company, directly or indirectly, which are held for capital
appreciation, rental income or both. They are initially recorded at
cost and subsequently valued at each balance sheet date at fair
value as determined by professionally qualified independent
external valuers.
Valuations are calculated, in accordance with "RICS Valuation -
Global Standards 2020" by applying market capitalisation rates to
future rental cash flows with reference to data from comparable
market transactions, together with an assessment of the security of
income. Gains or losses arising from changes in the fair value of
investment properties are recognised in the income statement in the
period in which they arise. Depreciation is not charged in respect
of investment properties.
Acquisitions of investment properties are recognised on
unconditional exchange of contracts where it is reasonable to
assume at the balance sheet date that completion of the acquisition
will occur. Disposals of investment properties are recognised when
the buyer obtains control of the property, taking into account the
points at which the Group has a right to payment and the buyer has
obtained legal title or possession of the property, or has taken on
the significant risks and rewards of ownership.
2. Basis of preparation and accounting policies (continued)
d) Property portfolio (continued)
Gains or losses on disposal are determined as the difference
between the net disposal proceeds and the carrying value of the
asset in the previous balance sheet, adjusted for any subsequent
capital expenditure or capital receipts.
Occupational leases
The Directors exercise judgement in considering the potential
transfer of the risks and rewards of ownership in accordance with
IFRS 16 "Leases" for all occupational leases and headleases to
determine whether or not such leases are operating leases. A lease
is classified as a finance lease if substantially all of the risks
and rewards of ownership transfer to the lessee. In the case of
properties where the Group has a leasehold interest, this
assessment is made by reference to the Group's right of use asset
arising under the headlease rather than by reference to the
underlying asset. If the Group substantially retains those risks, a
lease is classified as an operating lease. All occupational leases
reflected in this financial ionformation are classified as
operating leases.
Headleases
Where an investment property is held under a leasehold interest,
the headlease is initially recognised as an asset at cost plus the
present value of minimum ground rent payments. The corresponding
rental liability to the head leaseholder is included in the balance
sheet as a finance lease obligation. Cash flows arising under
headleases are classified under operating activities before changes
in working capital in the cash flow statement. Cash deposits held
by head leaseholders as guarantees of headlease obligations are
held on the balance sheet as non-current assets and any movements
in deposits are disclosed as changes in working capital within cash
generated from operations in the cash flow statement.
Rental income
Revenue comprises rental income exclusive of VAT, recognised in
the income statement on an accruals basis. Future anticipated
rental income is spread over the term of a lease on a straight line
basis, giving rise to a Rent Smoothing Adjustment in cases where
future rental variations can be determined with sufficient
certainty. Where income has been cumulatively recognised in advance
of the contractual right to receive that income, such as from
leases with fixed rent uplifts, an adjustment is made to ensure
that the carrying value of the relevant investment property
including accrued rent does not exceed the fair value of the
property as assessed by the independent external valuers. Income
arising from contractual rights that are subject to external
factors, such as RPI-linked or open market rent reviews, is
recognised in the income statement in the period in which it is
determinable and reasonably certain.
Where there has been a change in the scope of a lease or the
consideration for a lease that was not part of the original terms
and conditions of that lease, this is accounted for as a lease
modification. This treatment applies to cases where rent reductions
have been agreed, as has been the case in the Covid-19 related rent
concessions described in the Strategic Report. Such modifications
are accounted for as new leases from the effective date of the
modification, which is the date at which both parties agree to the
terms of the modification. Any prepaid or accrued lease payments
relating to the original lease at the date of modification are
treated as part of the lease payments for the new lease. Future
anticipated rental income is spread over the term of the lease on a
straight line basis, giving rise to a Rent Smoothing Adjustment in
the event that rent is reduced for a period.
Rent Smoothing Adjustments are not considered to be financial
assets as the amounts are not yet contractually due. As such, the
requirements of IFRS 9 (including the expected credit loss model)
are not applied to those balances, although credit risk is
considered in the determination of the fair value of the related
property.
Cash flows from rental income are included in the cash flow
statement within cash flows from operating activities.
e) Financial assets and liabilities
Financial assets and liabilities are initially recognised at
their fair value when a Group entity becomes a party to the
unconditional contractual terms of an instrument. Unless otherwise
indicated, the carrying amounts of financial assets and liabilities
are considered by the Directors to be reasonable estimates of their
fair values.
Trade and other receivables
Trade and other receivables are measured at amortised cost using
the effective interest method, less any impairment. Impairment is
calculated using an expected credit loss model.
Cash and cash equivalents
Cash and cash equivalents comprise cash in hand and deposits
with maturities of three months or less held with banks or
financial institutions. Returns on cash and cash equivalents are
included in the cash flow statement under investing activities.
Trade and other payables
Trade and other payables are measured at amortised cost using
the effective interest method.
2. Basis of preparation and accounting policies (continued)
e) Financial assets and liabilities (continued)
Borrowings and finance costs
Secured debt is initially recognised at its fair value, net of
any arrangement fees and other transaction costs directly
attributable to its issue. Subsequently, secured debt is carried at
amortised cost. Transaction costs are amortised over the life of
the loan and charged to the income statement as part of the Group's
finance costs. Cash flows relating to borrowings and finance costs
are included in the cash flow statement within financing
activities.
Derecognition of financial liabilities
The Group derecognises financial liabilities when its
obligations are discharged, cancelled or expire. The difference
between the carrying amount of those financial liabilities and the
consideration paid, including any non-cash assets transferred and
any new liabilities assumed, is recognised in profit or loss on
derecognition.
Interest rate derivatives
The Group has used interest rate derivatives to hedge its
exposure to cash flow interest rate risk. Derivatives are initially
recognised at fair value on the date on which the derivative
contract is entered into and are subsequently measured at fair
value.
Derivatives are classified either as derivatives in effective
hedges or derivatives held for trading. It is anticipated that any
hedging arrangements will generally be "highly effective" within
the meaning of IFRS 9 "Financial Instruments" and that the criteria
necessary for applying hedge accounting will therefore be met.
Hedges are assessed upon inception and on an ongoing basis to
identify whether they continue to be effective. The gain or loss on
the revaluation of the portion of an instrument that qualifies as
an effective hedge of cash flow interest rate risk is recognised
directly in other comprehensive income. Amounts accumulated in
equity will be reclassified to the income statement in the period
when the hedged items affect the income statement. The gain or loss
on the revaluation of any derivative that is not an effective hedge
is recognised directly in the income statement.
The Group ceases to use hedge accounting if a forecast
transaction being hedged against is no longer expected to occur. In
such circumstances, the cumulative amounts in other comprehensive
income are then reclassified from equity to profit or loss.
f) Tax
Tax is included in the income statement except to the extent
that it relates to income or expense items recognised through
reserves, in which case the related tax is recognised either in
other comprehensive income or directly in reserves.
Current tax is the expected tax payable on taxable income for a
reporting period at the blended tax rate for the period, using tax
rates enacted or substantively enacted at the balance sheet date,
together with any adjustment in respect of previous periods.
Deferred tax is provided using the balance sheet liability method,
providing for temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the
amounts used for tax purposes.
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 enacted or substantively
enacted at the balance sheet date. A deferred tax asset is
recognised only to the extent that it is probable that future
taxable profits will be available against which the asset can be
utilised.
Tax paid is classified under cash flows from operating
activities in the cash flow statement.
g) Foreign currency translation
The results of Group undertakings with a functional currency
other than Sterling are translated into Sterling at the actual
exchange rates prevailing at the time of the transaction, unless
the average rate for the reporting period is not materially
different from the actual rate, in which case that average rate is
used.
The gains or losses arising on the end of year translation of
the net assets of such Group undertakings at closing rates and the
difference between translating the results at average rates
compared to the closing rates are taken to other reserves. Monetary
assets and liabilities denominated in foreign currencies are
translated into Sterling at the rates of exchange ruling at the
balance sheet date with any gains or losses arising on translation
recognised in the income statement.
2. Basis of preparation and accounting policies (continued)
h) Equity instruments
Equity instruments issued by the Company are recorded at the
proceeds received, net of directly attributable issue costs. Costs
not directly attributable to the issue are included within
administrative expenses in the income statement and financing
activities within the cash flow statement. Dividends paid are also
classified under financing activities in the cash flow
statement.
i) Share based payments
The fair value of payments to non-employees that are to be
settled by the issue of shares is determined on the basis of an
estimate of the value of the services provided over the relevant
accounting period. The estimated number of shares to be issued in
satisfaction of the services provided is calculated using the
average daily closing share price of the Company for that
period.
j) Fair value measurements
Fair value is the price that would be received on the sale of an
asset, or paid to transfer a liability, in an orderly transaction
between market participants at the measurement date. The fair value
measurement is based on the presumption that the transaction takes
place either in the principal market for the asset or liability or,
in the absence of a principal market, in the most advantageous
market. It is based on the assumptions that market participants
would use when pricing the asset or liability, assuming they act in
their economic best interest. A fair value measurement of a
non-financial asset takes into account the best and highest value
use for that asset.
k) Tangible fixed assets
Tangible fixed assets, which comprise car park equipment at
Manchester Arena, are depreciated to their residual values,
assessed for these purposes as zero, on a straight line basis over
their estimated useful life of ten years.
3. Operating segments
IFRS 8 "Operating Segments" requires operating segments to be
identified on a basis consistent with internal reports about
components of the Group that are reviewed by the chief operating
decision maker to make decisions about resources to be allocated
between segments and assess their performance. The Company's chief
operating decision maker is its Board.
The Group owned 161 properties at 31 December 2020 and 31
December 2019, originally acquired in five separate portfolios.
Although certain information about these portfolios is described on
a portfolio basis within the Investment Adviser's Report or grouped
by property type (Healthcare, Leisure and Budget Hotels), when
considering resource allocation and performance the Board reviews
quarterly management accounts prepared on a basis which aggregates
the performance of the portfolios and focuses on the Group's Total
Accounting Return. The Board has therefore concluded that the Group
has operated in, and was managed as, one reportable segment of
property investment in both the current and prior year.
The geographical split of revenue and applicable non-current
assets was:
Year to Year to
31 December 31 December
2020 2019
GBP000 GBP000
----------------------- ----------- -----------
Revenue
UK 113,218 124,348
Germany 8,446 8,329
----------------------- ----------- -----------
121,664 132,677
----------------------- ----------- -----------
Investment properties
UK 1,860,300 2,001,047
Germany 115,300 110,250
----------------------- ----------- -----------
1,975,600 2,111,297
----------------------- ----------- -----------
3. Operating segments (continued)
Revenue by tenant comprises:
Year to Year to
31 December 31 December
2020 2019
Revenue including Rent Smoothing Adjustments GBP000 GBP000
----------------------------------------------------- ----------- -----------
Ramsay Healthcare UK Operations Limited, guaranteed
by Ramsay Health Care Limited:
Properties owned throughout the period 37,180 37,165
Properties sold in August 2019 - 10,907
Travelodge Hotels Limited 29,373 30,400
Merlin Attractions Operations Limited, guaranteed
by Merlin Entertainments Limited 28,286 27,654
Other tenants (each less than 10% of revenue) 26,825 26,551
Reported revenue 121,664 132,677
----------------------------------------------------- ----------- -----------
Year to Year to
31 December 31 December
2020 2019
Revenue excluding Rent Smoothing Adjustments GBP000 GBP000
----------------------------------------------------- ----------- -----------
Ramsay Healthcare UK Operations Limited, guaranteed
by Ramsay Health Care Limited
Properties owned throughout the period 34,121 33,195
Properties sold in August 2019 - 9,752
Travelodge Hotels Limited 14,072 28,820
Merlin Attractions Operations Limited, guaranteed
by Merlin Entertainments Limited 14,043 27,654
Other tenants (each less than 10% of revenue) 16,044 20,742
Revenue on Adjusted EPRA Earnings basis 78,280 120,163
----------------------------------------------------- ----------- -----------
4. Revenue
Year to Year to
31 December 31 December
2020 2019
GBP000 GBP000
------------------------------------------------ ----------- -----------
Rent receivable 96,360 120,533
Rent Smoothing Adjustments:
Smoothing of original contractual uplifts 8,901 10,564
Smoothing of Covid-19 rent concessions 14,760 -
Recovery of head rent and service charge costs
from occupational tenants (note 5 ) 1,643 1,580
121,664 132,677
------------------------------------------------ ----------- -----------
The Rent Smoothing Adjustments arise from the Group's accounting
policy in respect of leases, which requires the recognition of
rental income on a straight line basis over the lease term,
including rent uplifts throughout the term in certain
circumstances. Uplifts that must be smoothed over the lease term
are those for the 41% of passing rent as at 31 December 2020 (2019:
38%) that increases by a fixed percentage at each review date and
the 6% of passing rent at 31 December 2020 (2019: 6%) that is
subject to minimum RPI-linked uplifts.
A new feature of this calculation in the 2020 financial year is
the impact of the temporary rent reductions agreed to assist
tenants as a result of the Covid-19 pandemic, which in the short
term result in rental income being recognised in the income
statement ahead of cash flows but which, after the end of each
relevant concession period, reverse so that rental income
recognised in the income statement will be lower than cash rents
received on those leases. These are further described in the
Strategic Report, in note 11 and in the Unaudited Supplementary
Information following this financial information. In addition,
GBP17.7 million (2019: GBPnil) of rent on the Leisure portfolio,
receipt of which has been deferred from 2020 to 2021, has also been
excluded from revenue on an Adjusted EPRA earnings in the current
year because although it has been recognised in the income
statement it has not yet been received in cash.
4. Revenue (continued)
Revenue on an Adjusted EPRA earnings basis also excludes the
back rent received during a prior year from a May 2017 rent review
on the healthcare portfolio, which is being recognised in revenue
over the remaining lease term despite the cash having been received
in 2017, and the amounts recovered from occupational tenants for
head rent and service charge costs, which are reclassified against
the equivalent costs in property outgoings. As a result of these
adjustments, revenue reconciles between the IFRS basis and Adjusted
EPRA Earnings basis as follows:
Year to Year to
31 December 31 December
2020 2019
GBP000 GBP000
------------------------------------------------ ----------- -----------
IFRS revenue 121,664 132,677
Rent Smoothing Adjustments:
relating to original contractual uplifts (8,901) (10,564)
relating to Covid-19 rent concessions (14,760) -
Leisure rent deferral (17,727) -
Recovery of head rent and service charge costs
reclassified to property outgoings (1,643) (1,580)
Adjustment for back rent (353) (370)
Adjusted EPRA Earnings revenue 78,280 120,163
------------------------------------------------ ----------- -----------
The Group's accounting policy for revenue recognition is
disclosed in note 2d.
5. Property outgoings
Year to Year to
31 December 31 December
2020 2019
GBP000 GBP000
-------------------------------------------------- ----------- -----------
Property outgoings in the income statement 1,525 1,327
Finance element of head rent included in finance
costs (note 8 ) 1,680 1,702
Movement in headlease liabilities included
in property revaluations (note 11 ) 106 100
-------------------------------------------------- ----------- -----------
Property outgoings 3,311 3,129
Recovery of head rents and service charge
costs from occupational tenants, included
in revenue (note 4 ) (1,643) (1,580)
Net property outgoings 1,668 1,549
-------------------------------------------------- ----------- -----------
Year to Year to
31 December 31 December
2020 2019
Property outgoings in the income statement GBP000 GBP000
---------------------------------------------- ----------- -----------
Cost of negotiating and documenting Covid-19
rent concessions 568 -
Head rents 461 441
Irrecoverable property costs 293 121
Managing agent costs and other net property
outgoings 190 134
Rent review costs 13 416
Costs of prospective capital projects - 215
1,525 1,327
---------------------------------------------- ----------- -----------
Amounts shown above include any irrecoverable VAT. The costs of
prospective capital projects in the prior year related largely to
feasibility studies and may be capitalised in future if those
projects proceed.
The Group's accounting policy for headleases is disclosed in
note 2d.
6. Administrative expenses
Year to Year to
31 December 31 December
2020 2019
GBP000 GBP000
------------------------------- ----------- -----------
Advisory fees (note 25 b) 13,661 14,732
Other administrative expenses 2,794 1,546
Corporate costs 546 594
Incentive fee (note 25 d) - 5,256
17,001 22,128
------------------------------- ----------- -----------
Amounts shown above include any irrecoverable VAT. The incentive
fee in the prior year comprised GBP4.9 million satisfied by way of
the issue of shares and GBP0.4 million of VAT payable in cash.
The Group's accounting policy for share based payments is
disclosed in note 2i.
7. Operating profit
Audit fees, which are included within administrative expenses,
relate to:
Year to Year to
31 December 31 December
2020 2019
GBP000 GBP000
---------------------------------------------------- ----------- -----------
Audit of the Company's consolidated and individual
financial statements 48 47
Audit of subsidiaries, pursuant to legislation 236 182
---------------------------------------------------- ----------- -----------
Total audit services 284 229
Audit related services: review of interim
report 35 33
Audit related services: regulatory reporting - 3
---------------------------------------------------- ----------- -----------
Total audit and audit related services 319 265
Other non-audit services - 3
---------------------------------------------------- ----------- -----------
Total fees 319 268
---------------------------------------------------- ----------- -----------
Amounts shown above include any irrecoverable VAT. The fees as
received by the auditor, excluding VAT, in the year were GBP286,000
(2019: GBP259,000), of which GBP35,000 (2019: GBP39,000) related to
non-audit work.
The Group had no employees in either the current or prior year.
The key management personnel of the Company are the Directors, who
are appointed under letters of appointment for services. Directors'
remuneration, all of which represents fees for services provided
and is included within administrative expenses, was as follows:
Year to Year to
31 December 31 December
2020 2019
GBP000 GBP000
--------------------------------------------- ----------- -----------
Martin Moore (Chairman) 75 75
Leslie Ferrar (Chairman of Audit Committee) 45 45
Jonathan Lane 40 40
Ian Marcus 40 40
--------------------------------------------- ----------- -----------
200 200
--------------------------------------------- ----------- -----------
Mike Brown, Sandy Gumm and Nick Leslau received no Directors'
remuneration from the Group in either the current or prior
year.
8. Finance income and costs
Year to Year to
31 December 31 December
2020 2019
GBP000 GBP000
----------------------------------------------------- ----------- -----------
Finance income
Interest on cash deposits 374 730
----------------------------------------------------- ----------- -----------
Finance costs
Cash costs:
Interest on secured debt (45,561) (49,920)
Interest charge on headlease liabilities (note
5 ) (1,680) (1,702)
Loan agency fees and other lender costs (300) (546)
Fees on accelerated prepayment of secured
debt following property disposals - (27,868)
Non-cash movements:
Amortisation of loan arrangement costs (2,280) (2,382)
Amortisation of interest rate derivatives,
transferred from other reserves (339) (269)
Fair value adjustment of interest rate derivatives
(note 13 ) (83) (104)
Amortisation of loan arrangement costs on
accelerated debt prepayment (21) (1,443)
Total finance costs (50,264) (84,234)
----------------------------------------------------- ----------- -----------
Net finance costs recognised in the income
statement (49,890) (83,504)
----------------------------------------------------- ----------- -----------
Fair value adjustment of interest rate derivatives (976) (1,120)
Amortisation of interest rate derivatives,
transferred to the income statement 339 269
----------------------------------------------------- ----------- -----------
Net finance costs recognised in other comprehensive
income / (loss) (note 13 ) (637) (851)
----------------------------------------------------- ----------- -----------
Net finance costs analysed by the categories of financial asset
and liability shown in note 17 b are as follows:
Year to Year to
31 December 31 December
2020 2019
GBP000 GBP000
-------------------------------------------- ----------- -----------
Financial assets at amortised cost 374 730
Financial liabilities at amortised cost (50,181) (84,130)
Derivatives in effective hedges (83) (104)
Net finance costs recognised in the income
statement (49,890) (83,504)
-------------------------------------------- ----------- -----------
The Group's sensitivity to changes in interest rates, on the
basis of a ten basis point change in LIBOR, was as follows:
Year to Year to
31 December 31 December
2020 2019
GBP000 GBP000
----------------------------------------------- ----------- -----------
Effect on (loss) / profit for the year 198 242
Effect on other comprehensive income / (loss)
and equity 124 181
----------------------------------------------- ----------- -----------
The Group receives interest on its cash and cash equivalents so
an increase in interest rates would increase finance income. An
increase in LIBOR up to the maximum capped rate of 1.65% would also
increase finance costs relating to the GBP23.3 million (2019:
GBP24.8 million) of the secured debt that is hedged by interest
rate caps. A further GBP50.0 million (2019: GBP50.0 million) of the
secured debt is hedged with interest rate swaps, and movements in
LIBOR would only have an impact on the fair value of those interest
rate swaps, which would be reflected in other comprehensive income.
There would be no effect from a change of LIBOR on the remaining
GBP855.0 million (2019: GBP855.9 million) of the secured debt which
is at fixed rates. The Group's sensitivity to interest rates has
not changed significantly in the year.
The Group's accounting policy for finance costs is disclosed in
note 2e.
9. Tax
Year to Year to
31 December 31 December
2020 2019
GBP000 GBP000
------------------------------------------- ----------- -----------
Current tax - Germany
Corporation tax charge 360 341
Adjustments in respect of prior years (39) 41
Deferred tax - Germany
Deferred tax (credit) / charge (note 19 ) (22) 759
------------------------------------------- ----------- -----------
299 1,141
------------------------------------------- ----------- -----------
The tax assessed for the year varies from the standard rate of
corporation tax in the UK applied to the (loss) / profit before
tax. The differences are explained below:
Year to Year to
31 December 31 December
2020 2019
GBP000 GBP000
--------------------------------------------------- ----------- -----------
(Loss) / profit before tax (113,342) 154,500
--------------------------------------------------- ----------- -----------
Tax (credit) / charge at the standard rate
of corporation tax in the UK for the financial
year of 19% (2019: 19%) (21,535) 29,355
Effects of:
Investment property revaluation not allowable
/ (taxable) 29,924 (15,652)
Qualifying property rental business not taxable
under UK REIT rules (8,935) (4,001)
Unutilised tax losses carried forward 273 721
Finance costs disallowed under corporate interest
restriction rules 257 420
German current tax charge for the year 360 341
Adjustments in respect of prior years (39) 41
Profit on disposal of investment properties
not taxable under UK REIT rules (6) (10,084)
Tax charge for the year 299 1,141
--------------------------------------------------- ----------- -----------
The Company and its subsidiaries operate as a UK Group REIT.
Subject to continuing compliance with certain rules, the UK REIT
rules exempt the profits of the Group's UK and German property
rental business from UK corporation tax. Capital gains on the
Group's UK and German properties are also generally exempt from UK
corporation tax, provided they are not held for trading or in
certain circumstances sold in the three years after completion of a
development. None of the Group's properties were developed in the
last three years.
To remain a UK REIT, a number of conditions must be met in
respect of the Company, the Group's qualifying activity and the
Group's balance of business. Since entering the UK REIT regime the
Group has met all applicable conditions.
The Group is subject to German corporation tax on its German
property rental business at an effective rate of 15% (2019: 15%),
resulting in a tax charge of GBP0.3 million (2019: GBP0.3 million).
A deferred tax liability of GBP11.9 million (2019: GBP11.3 million)
is recognised for the German capital gains tax that would
potentially be payable on the sale of the relevant investment
properties.
Certain non-resident unit trust Group entities entered into
transparency elections during the year, such that any future
disposals of UK investment properties by those entities will be
deemed to arise in their parent companies and can therefore benefit
from the REIT exemption.
The Group's accounting policy for tax is disclosed in note
2f.
10. Earnings per share
Basic EPS
Earnings per share ("EPS") is calculated as the profit
attributable to ordinary shareholders of the Company for each year
divided by the weighted average number of ordinary shares in issue
throughout the relevant year. In calculating the weighted average
number of shares in issue for basic EPS:
-- where shares have been issued during the year in settlement
of an incentive fee relating to the results of the prior year, they
are treated as having been issued on the first day of the year
rather than their actual date of issue, which is typically in
March; and
-- shares still to be issued at the balance sheet date in
settlement of an incentive fee relating to the results of that year
are not taken into account.
Diluted EPS
The weighted average number of shares used in the calculation of
diluted EPS is required to include any shares to be issued in
respect of an incentive fee, as if those shares had been in issue
throughout the whole of the year over which the fee was earned,
although in fact they will not be issued until the following
year.
Year to Year to
31 December 31 December
2020 2019
GBP000 GBP000
------------------------------ ----------- -----------
(Loss) / profit for the year (113,641) 153,359
------------------------------ ----------- -----------
Weighted average number of shares in issue Number Number
-------------------------------------------------- ----------- -----------
Basic EPS calculation 324,035,146 322,850,595
Shares to be issued in satisfaction of incentive
fee (note 25 d) - 1,184,551
-------------------------------------------------- ----------- -----------
Diluted EPS calculation 324,035,146 324,035,146
-------------------------------------------------- ----------- -----------
Pence per Pence per
share share
------------- --------- ---------
Basic EPS (35.1) 47.5
Diluted EPS (35.1) 47.3
------------- --------- ---------
EPRA EPS
The European Public Real Estate Association ("EPRA") publishes
guidelines for calculating adjusted earnings designed to represent
core operational activities. EPRA EPS is calculated in accordance
with the EPRA Guidance currently in force.
An Adjusted EPRA earnings calculation has also been presented.
This adjusted measure was designed to reflect the fact that, as a
Group with unusually long leases and a high proportion of fixed or
minimum rental increases to spread over the lease terms, the
Company's Dividend Cover would be artificially high if calculated
on the basis of EPRA EPS. Adjusted EPRA EPS removes the effect of
the Rent Smoothing Adjustments, including in the current year the
impact of Covid-19 rent concessions. It also excludes any
non-recurring costs or income which do not relate to the Group's
routine operations, such as costs incurred for share placings. The
adjusted measure also excludes any incentive fees which are paid in
shares, as they are considered to be linked to revaluation
movements and are therefore best treated consistently with
revaluations which are excluded from EPRA EPS.
In calculating Adjusted EPRA EPS, the weighted average number of
shares is calculated using the actual date on which any shares are
issued during the year so as not to create a mismatch between the
basis of calculation of Adjusted EPRA EPS and the dividends per
share paid in the year. In this way the Group's measure of dividend
cover is considered to be more precisely calculated.
The weighted average number of shares applied in calculating
Adjusted EPRA EPS has been calculated as follows:
Year to Year to
31 December 31 December
2020 2019
Number Number
------------------------------------------- ----------- -----------
Shares in issue throughout the period 322,850,595 321,563,353
Adjustment for:
Shares issued in March 2020 in settlement
of 2019 incentive fee 925,633 -
Shares issued in March 2019 in settlement
of 2018 incentive fee - 976,893
323,776,228 322,540,246
------------------------------------------- ----------- -----------
EPRA and Adjusted EPRA earnings are calculated as:
Year to Year to
31 December 31 December
2020 2019
GBP000 GBP000
------------------------------------------------------- ----------- -----------
(Loss) / profit for the year (113,641) 153,359
EPRA adjustments:
Investment property revaluation (note 11 ) 166,516 (75,708)
Profit on disposal of investment properties (32) (53,074)
Deferred tax on German investment property
revaluations (note 9 ) (22) 759
Amortisation of loan arrangement costs on accelerated
debt prepayment (note 8 ) 21 1,443
Fair value adjustment of interest rate derivatives 13 36
Fees on accelerated debt repayments on property
disposals (note 8 ) - 27,868
EPRA earnings 52,855 54,683
Other adjustments :
Rent Smoothing Adjustments (note 4 ) (23,661) (10,564)
Rent deferral (17,727) _
Incentive fee (note 6 ) - 5,256
Adjusted EPRA earnings 11,467 49,375
------------------------------------------------------- ----------- -----------
As a result of those adjustments, the EPRA EPS and Adjusted EPRA
EPS figures are as follows:
Pence per Pence per
share share
------------------- ----------- ---------
EPRA EPS 16.3 16.9
Adjusted EPRA EPS 3.5 15.3
------------------- ----------- ---------
11. Investment properties
Year to Year to
31 December 31 December
2020 2019
Freehold investment properties GBP000 GBP000
----------------------------------------------- ----------- -----------
At the start of the year 1,802,390 2,018,115
Revaluation movement (102,938) 88,901
Currency translation movement 6,341 (5,986)
Disposals - (301,535)
Reclassification on acquisition of freehold
interest in leasehold property - 2,595
Acquisition of freehold interest in leasehold
property - 262
Additions - 38
At the end of the year 1,705,793 1,802,390
----------------------------------------------- ----------- -----------
Year to Year to
31 December 31 December
2020 2019
Leasehold investment properties GBP000 GBP000
------------------------------------------------ ----------- -----------
At the start of the year 308,907 317,105
Revaluation movement (39,578) (2,174)
Increase / (decrease) in headlease liabilities 578 (221)
Revaluation movement in headlease liabilities (106) (100)
Additions 6 7
Disposals - (3,115)
Reclassification on acquisition of freehold
interest in leasehold property - (2,595)
At the end of the year 269,807 308,907
------------------------------------------------ ----------- -----------
Year to Year to
31 December 31 December
2020 2019
Total investment properties GBP000 GBP000
------------------------------------------------ ----------- -----------
At the start of the year 2,111,297 2,335,220
Revaluation movement (142,516) 86,727
Currency translation movement 6,341 (5,986)
Increase / (decrease) in headlease liabilities 578 (221)
Revaluation movement in headlease liabilities (106) (100)
Additions 6 45
Net cost of acquisition of freehold interest
in leasehold property - 262
Disposals - (304,650)
At the end of the year 1,975,600 2,111,297
------------------------------------------------ ----------- -----------
As at 31 December 2020 the properties were valued at GBP1,946.9
million (2019: GBP2,083.1 million) by CBRE Limited or Christie
& Co in their capacity as independent external valuers. Of the
total fair value, GBP115.3 million (2019: GBP110.3 million) relates
to the Group's German investment properties, the valuations of
which are translated into Sterling at the year end exchange
rate.
The valuations were prepared on a fixed fee basis, independent
of the portfolio value, and were undertaken in accordance with RICS
Valuation - Global Standards 2020 on the basis of fair value,
supported by reference to market evidence of transaction prices for
similar properties where available.
The Royal Institution of Chartered Surveyors mandated that
valuations in certain sectors should be subject to "material
valuation uncertainty" as at 31 December 2020. Healthcare asset
valuations did not carry such a proviso as at 31 December 2020 or
any prior period, and none of the 31 December 2019 valuations in
any sector were subject to material valuation uncertainty.
The valuation report on Healthcare assets, which comprise 39.5%
of the Group's investment property valuations as at 31 December
2020, included this wording:
"In the healthcare sector, as at the Valuation Date, transaction
volumes provided enough up-to-date comparable market evidence upon
which to base opinions of value for the Hospital assets and
therefore there is no material uncertainty associated with these
properties. We do however recommend that you keep the Valuations of
all the assets contained in this report under frequent review."
The reports from each valuer included the following statement
about material valuation uncertainty in respect of the Leisure and
Budget Hotel properties, which together comprise 60.5% of the
Group's investment property valuations as at 31 December 2020:
"The outbreak of the Novel Coronavirus (Covid-19), declared by
the World Health Organisation as a 'Global Pandemic' on 11 March
2020, continues to impact many aspects of daily life and the global
economy - with some real estate markets having experienced lower
levels of transactional activity and liquidity. Travel, movement
and operational restrictions have been implemented by many
countries. In some cases, 'lockdowns' have been applied - in
varying degrees - to reflect further 'waves' of Covid-19. While
these may imply a new stage of the crisis, they are not
unprecedented in the same way as the initial impact.
The pandemic and the measures taken to tackle Covid-19 continue
to affect economies and real estate markets globally. In the case
of the properties set out within this report, as at the valuation
date, we continue to be faced with an unprecedented set of
circumstances caused by Covid-19 and a reduction in market evidence
on which to base our judgements. Our valuation is therefore
reported as being subject to 'material valuation uncertainty', as
set out in VPS 3 and VPGA 10 of the RICS Valuation - Global
Standards. Consequently, in respect of these valuations less
certainty - and a higher degree of caution - should be attached to
our valuation than would normally be the case.
For the avoidance of doubt, this explanatory note - including
the 'material valuation uncertainty' declaration - does not mean
that the valuation cannot be relied upon. Rather, it has been
included to ensure transparency and to provide further insight as
to the market context under which the valuation opinion was
prepared. In recognition of the potential for market conditions to
move rapidly in response to changes in the control or future spread
of Covid-19, we highlight the importance of the valuation
date."
Under the Group's accounting policy, in line with IFRS, the
carrying value of leasehold properties is grossed up by the present
value of minimum headlease payments. The corresponding liability to
the head leaseholder is included in the balance sheet as a finance
lease obligation. The reconciliation between the carrying value of
the investment properties and their independent external valuation
is as follows:
31 December 31 December
2020 2019
GBP000 GBP000
-------------------------------------------- ----------- -----------
Carrying value 1,975,600 2,111,297
Gross-up of headlease liabilities (note 18
) (28,662) (28,190)
-------------------------------------------- ----------- -----------
Independent external valuation 1,946,938 2,083,107
-------------------------------------------- ----------- -----------
Included within the carrying value of investment properties at
31 December 2020 is GBP181.4 million (2019: GBP155.7 million) in
respect of Rent Smoothing Adjustments (described in note 4 and in
the unaudited supplementary information following this financial
information), representing the amount of the net mismatch between
rent included in the income statement and cash rents actually
receivable. This net receivable increases over broadly the first
half of each lease term, in the case of fixed or minimum uplifts,
or the period of the temporary rent reductions agreed with tenants
in light of Covid-19. The balance then unwinds, reducing to zero by
the end of the lease term. The difference between rents on a
straight line basis and rents actually receivable is included
within, but does not increase over fair value, the carrying value
of investment properties.
Also included in the revaluation movement for the year is the
impact of back rent received during a prior year from a May 2017
rent review on the healthcare portfolio, which is being recognised
in revenue over the remaining lease term despite the cash having
been received in 2017, together with movements on the headlease
liabilities.
Year to Year to
31 December 31 December
2020 2019
GBP000 GBP000
---------------------------------------------- ----------- -----------
Investment property revaluation (142,516) 86,727
Rent Smoothing Adjustments (note 4 ) (23,661) (10,564)
Adjustment for back rent received (339) (355)
Movement in headlease liabilities (note 5
) (106) (100)
Revaluation movement in the income statement (166,622) 75,708
---------------------------------------------- ----------- -----------
The historic cost of the Group's investment properties,
translated at historic foreign exchange rates, as at 31 December
2020 was GBP1,479.6 million (2019: GBP1,479.6 million).
All of the investment properties are held within six (2019: six)
ring-fenced security pools as security under fixed charges in
respect of separate secured debt facilities.
All of the Group's revenue reflected in the income statement is
derived either from rental income or the recovery of head rent and
other leasehold costs on investment properties. As shown in note 5
, property outgoings arising on investment properties, all of which
generated rental income in each year, were GBP3.3 million (2019:
GBP3.1 million) of which GBP1.7 million (2019: GBP1.5 million) was
not recoverable from occupational tenants.
Other than the future minimum headlease payments disclosed in
note 18 , the majority of which are recoverable from tenants, the
Group did not have any contractual investment property obligations
at either balance sheet date. All responsibility for property
liabilities including repairs and maintenance resides directly with
the tenants, except at Manchester Arena where such costs relating
to the structure and common areas are liabilities of the Group in
the first instance. However, since the majority of these costs are
currently recoverable from tenants the net cost to the Group in the
year was GBP0.3 million (2019: GBP0.1 million). In addition, the
car park at Manchester Arena is run under an operating agreement
which means the Group is responsible for the costs of running the
car park to the extent that they are not covered by the revenue it
generates. During the year, this resulted in a net cost to the
Group of GBP0.1 million (2019: GBPnil), as the car park has been
largely closed as a result of Covid related restrictions.
The Board determines the Group's valuation policies and
procedures and is responsible for overseeing the valuations.
Valuations performed by the Group's independent external valuers
are based on information extracted from the Group's financial and
property reporting systems, such as current rents and the terms and
conditions of lease agreements, together with assumptions used by
the valuers (based on market observation and their professional
judgement) in their valuation models.
At each reporting date, certain directors of the Investment
Adviser, who have recognised professional qualifications and are
experienced in valuing the types of property owned by the Group,
initially analyse the independent external valuers' assessments of
movements in the property valuations from the prior reporting date
or, if later, the date of acquisition. Positive or negative fair
value changes over a certain materiality threshold are considered
and are also compared to external sources, such as the MSCI indices
and other relevant benchmarks, for reasonableness. Once the
Investment Adviser has considered the valuations, the results are
discussed with the independent external valuers, focusing on
properties with unexpected fair value changes or any with unusual
characteristics. The Audit Committee considers the valuation
process, including meetings with the independent external valuers
and assessing their expertise and independence, and reports on its
assessment of the procedures to the Board.
The fair value of the investment property portfolio has been
determined using an income capitalisation technique whereby
contracted and market rental values are capitalised with a market
capitalisation rate. This technique is consistent with the
principles in IFRS 13 and uses significant unobservable inputs,
such that the fair value measurement of each property within the
portfolio has been classified as level 3 in the fair value
hierarchy as defined in IFRS 13. There have been no transfers to or
from other levels of the fair value hierarchy during the year.
The key inputs for the level 3 valuations were as follows:
Fair value Inputs
----------------------------
Portfolio GBP000 Key unobservable input Range Blended yield
------------------- ----------- -------------------------- ------------- -------------
At 31 December
2020:
Healthcare 769,095 Net Initial Yield 3.9% - 4.5% 4.5%
Running Yield by January
2022 4.0% - 4.6% 4.6%
Leisure - UK 687,721 Net Initial Yield 4.8% - 7.3% 5.5%
Running Yield by January
2022 4.8% - 7.4% 5.7%
RPI assumption per annum 2.5%
Topped Up Net Initial
Budget Hotels 403,484 Yield 5.3% - 13.9% 7.1%
Running Yield by January
2022 5.8% - 15.5% 7.2%
RPI assumption per annum 2.5%
Leisure - Germany 115,300 Net Initial Yield 5.8% 5.8%
Running Yield by January
2022 5.9% 5.9%
1,975,600
------------------- ----------- -------------------------- ------------- -------------
At 31 December
2019:
Healthcare 748,385 Net Initial Yield 3.9% - 4.5% 4.5%
Running Yield by December
2020 4.0% - 4.6% 4.6%
Leisure - UK 751,008 Net Initial Yield 3.7% - 6.2% 5.0%
Running Yield by December
2020 4.2% - 6.9% 5.1%
RPI assumption per annum 2.5% - 3.1%
Budget Hotels 501,654 Net Initial Yield 4.3% - 10.5% 5.5%
Running Yield by December
2020 4.5% - 10.5% 5.7%
RPI assumption per annum 2.5%
Leisure - Germany 110,250 Net Initial Yield 5.5% 5.5%
Running Yield by December
2020 5.7% 5.7%
2,111,297
------------------- ----------- -------------------------- ------------- -------------
The principal sensitivity of measurement to variations in the
significant unobservable outputs is that decreases in Net Initial
Yield, decreases in Running Yield and increases in RPI will
increase the fair value (and vice versa).
The Group's accounting policy for investment properties is
disclosed in note 2d.
12. Subsidiaries
The companies listed below are the subsidiary undertakings of
the Company at 31 December 2020, all of which are wholly owned.
Save where indicated all subsidiary undertakings are incorporated
in England with their registered office at Cavendish House, 18
Cavendish Square, London W1G 0PJ.
Nature of business
------------------------- --------------------------------------------------
SIR Theme Park Subholdco Intermediate parent company and borrower under
Limited * mezzanine secured debt facility
Charcoal Midco 2 Limited Intermediate parent company
SIR Theme Parks Limited Intermediate parent company and borrower under
senior secured debt facility
SIR ATH Limited Property investment - leisure
SIR ATP Limited Property investment - leisure
SIR HP Limited Property investment - leisure and borrower under
senior secured debt facility (incorporated in
England, operating in Germany)
SIR TP Limited Property investment - leisure
SIR WC Limited Property investment - leisure
SIR Hospital Holdings Intermediate parent company
Limited *
SIR Umbrella Limited Intermediate parent company
SIR Hospitals Propco Intermediate parent company and borrower under
Limited secured debt facility
SIR Duchy Limited Property investment - healthcare
SIR Springfield Limited Property investment - healthcare
SIR Healthcare 1 Limited Intermediate parent company
SIR Healthcare 2 Limited Intermediate parent company and borrower under
secured debt facility
SIR Fitzwilliam Limited Property investment - healthcare
SIR Fulwood Limited Property investment - healthcare
SIR Lisson Limited Property investment - healthcare
SIR Midlands Limited Property investment - healthcare
SIR Oaklands Limited Property investment - healthcare
SIR Oaks Limited Property investment - healthcare
SIR Pinehill Limited Property investment - healthcare
SIR Rivers Limited Property investment - healthcare
SIR Woodland Limited Property investment - healthcare
SIR Yorkshire Limited Property investment - healthcare
Thomas Rivers Limited Property investment - healthcare
SIR Hotels 1 Limited Intermediate parent company
*
SIR Hotels Jersey Intermediate parent company
Limited
SIR Unitholder 1 Limited Intermediate parent company
SIR Unitholder 2 Limited Intermediate parent company
Grove Property Unit Property investment - budget hotels and borrower
Trust 6 under secured debt facility
Grove Property Unit Property investment - budget hotels and borrower
Trust 7 under secured debt facility
Grove Property Unit Property investment - budget hotels and borrower
Trust 9 under secured debt facility
Grove Property Unit Property investment - budget hotels and borrower
Trust 11 under secured debt facility
Grove Property Unit Property investment - budget hotels and borrower
Trust 12 under secured debt facility
Grove Property Unit Property investment - budget hotels and borrower
Trust 16 under secured debt facility
SIR Hotels 2 Limited Intermediate parent company
*
SIR Hotels Jersey Intermediate parent company
2 Limited
SIR Unitholder 3 Limited Intermediate parent company
SIR Unitholder 4 Limited Intermediate parent company
Grove Property Unit Property investment - budget hotels and borrower
Trust 2 under secured debt facility
Grove Property Unit Property investment - budget hotels and borrower
Trust 5 under secured debt facility
Grove Property Unit Property investment - budget hotels and borrower
Trust 13 under secured debt facility
------------------------- --------------------------------------------------
* directly owned by the Company; all other entities are
indirectly owned
incorporated in Jersey with their registered office at 26 New
Street, St Helier, Jersey JE2 3RA
Nature of business
------------------------- --------------------------------------------------
Grove Property Unit Property investment - budget hotels and borrower
Trust 14 under secured debt facility
Grove Property Unit Property investment - budget hotels and borrower
Trust 15 under secured debt facility
SIR Maple 4 Limited Property investment - budget hotels and borrower
under secured debt facility
SIR Maple Holdco Limited Intermediate parent company
*
SIR Maple 1 Limited Intermediate parent company
SIR Unitholder 5 Limited Intermediate parent company
MIF I Unit Trust (x) Property investment - leisure and borrower under
secured debt facility
SIR Maple 2 Limited Property investment - leisure and borrower under
secured debt facility
SIR Maple 3 Limited Property investment - leisure and borrower under
secured debt facility
SIR New Hall Limited Dormant
*
SIR MTL Limited * Dormant
Charcoal Bidco Limited Dormant
*
SIR Hotels 2 Holdco Dormant
Limited
SIR Hotels 2 GP Limited Dormant
SIR Hotels 2 Nominee Dormant
Limited
SIR Hotels 2 LP Dormant
SIR Newco Limited Dormant
*
SIR Newco 2 Limited Dormant
*
------------------------- --------------------------------------------------
* directly owned by the Company; all other entities are
indirectly owned
incorporated in Jersey with the registered office at 26 New
Street, St Helier, Jersey JE2 3RA
(X) incorporated in Jersey with the registered office at 44
Esplanade, St Helier, Jersey JE4 9WG
The terms of the secured debt facilities may, in the event of a
covenant breach, restrict the ability of certain subsidiaries to
transfer distributable reserves or assets including cash to the
Company, which is itself outside all security groups.
13. Interest rate derivatives
The notional amounts of the Group's interest rate derivatives
comprise:
31 December 31 December
2020 2019
GBP000 GBP000
-------------------------------------------- ----------- -----------
Interest rate swaps (weighted average rate
1.3%) 50,000 50,000
Interest rate caps (weighted average rate
1.5%)
In effective hedges 23,272 24,766
Classified as held for trading 3,256 1,762
76,528 76,528
-------------------------------------------- ----------- -----------
The fair value of those interest rate derivatives and the
movement in fair value during the year was as follows:
31 December 31 December
2020 2019
GBP000 GBP000
--------------------------- ----------- -----------
Interest rate swaps:
Falling due within one
year (557) (246)
Falling due in more than
one year (1,130) (757)
----------------------------- ----------- -----------
(1,687) (1,003)
Interest rate caps:
Falling due in more than
one year 7 43
(1,680) (960)
--------------------------- ----------- -----------
Year to Year to
31 December 31 December
2020 2019
GBP000 GBP000
-------------------------------------------- ----------- -----------
At the start of the year (960) (5)
Charge to the income statement (note 8 ) (83) (104)
Charge to other comprehensive income (note
8 ) (637) (851)
At the end of the year (1,680) (960)
-------------------------------------------- ----------- -----------
The Group utilises interest rate derivatives in risk management
as cash flow hedges to protect against movements in future interest
costs on secured loans which bear interest at variable rates. The
derivatives have been valued in accordance with IFRS 13 by
reference to interbank bid market rates as at the close of business
on the last working day prior to each balance sheet date by Chatham
Financial Europe Limited. The fair values are calculated using
present values of future cash flows based on market forecasts of
interest rates and adjusted for the credit risk of the
counterparties. The amounts and timing of future cash flows are
projected on the basis of the contractual terms of the derivatives.
All interest rate derivatives are classified as level 2 in the fair
value hierarchy as defined in IFRS 13 and there were no transfers
to or from other levels of the fair value hierarchy during the
year.
The entire GBP50.0 million notional amount of the interest rate
swaps and GBP10.0 million of the notional amount of the interest
rate caps are used to hedge cash flow interest rate risk on GBP60.0
million of the floating rate loans shown in note 17 a. The notional
amounts of the interest rate derivatives equal the loan principal
balance, and their maturity dates also match. GBP3.3 million of the
notional amount of the interest rate caps was not designated for
hedge accounting to allow for any future loan prepayments and as a
result, although the entire cash flow interest rate is hedged, the
hedges as measured for the purposes of IFRS 9 were expected on
inception to be 94.5% effective throughout their lives.
The remaining GBP16.5 million notional amount of the interest
rate caps is used to hedge cash flow interest rate risk on the
remaining GBP13.3 million (2019: GBP14.8 million) of the floating
rate loans shown in note 17 a. Following a rebalancing of the
hedging arrangements on GBP3.2 million (2019: GBP1.7 million) of
the notional amount of the interest rate caps, matching the loan
principal that has been repaid from the proceeds of investment
property sales, the notional amounts of the interest rate caps
designated for hedge accounting equal the loan principal balance
and their maturity dates also match. As a result, the interest rate
cap hedges, which have a fair value of GBP6,000 (2019: GBP40,000),
are expected to be 100% effective throughout their terms. The
remaining interest rate caps, which have a fair value of GBP1,000
(2019: GBP3,000), have been classified as held for trading.
The floating rate loans and interest rate derivatives are
contractually linked to LIBOR, a market rate which is expected to
become unavailable from the end of 2021. The Investment Adviser is
working with the Group's lenders and derivative counterparties to
transition to an alternative benchmark rate, currently expected to
be Sterling Overnight Index Average ("SONIA"). The transition is
not expected to have a material impact on the results or financial
position of the Group.
The Group's accounting policy for interest rate derivatives is
disclosed in note 2e.
14. Cash and cash equivalents
31 December 31 December
2020 2019
GBP000 GBP000
-------------------------------- ----------- -----------
Free cash and cash equivalents 196,628 240,254
Secured cash 23,102 26,261
Regulatory capital - 604
219,730 267,119
-------------------------------- ----------- -----------
Secured cash is held in accounts over which the providers of
secured debt have fixed and floating security. The Group is unable
to access this cash unless and until it is released to free cash
each quarter, which takes place after quarterly interest and any
loan repayments have been made for each facility, as long as the
terms of those facilities are complied with.
In the prior year and until March 2020 the Company was
classified as an Alternative Investment Fund and was required by
the Financial Conduct Authority to hold a balance of regulatory
capital in liquid funds, which was maintained in cash. This
classification ceased to apply to the Company during the year so
the Company is no longer required to hold regulatory capital.
The Group's accounting policy for cash and cash equivalents is
disclosed in note 2e.
15. Trade and other receivables
31 December 31 December
2020 2019
GBP000 GBP000
-------------------------------------------------- ----------- -----------
Trade receivables 605 359
Accrued income 18,425 35
Prepayments 614 599
Other receivables 365 240
Investment property disposal proceeds receivable - 2,565
20,009 3,798
-------------------------------------------------- ----------- -----------
Having been reviewed for expected credit losses, no impairment
was considered necessary for trade receivables and accrued
income.
The Group's accounting policy for trade and other receivables is
disclosed in note 2e.
16. Trade and other payables
31 December 31 December
2020 2019
GBP000 GBP000
--------------------------------------------- ----------- -----------
Trade payables 968 1,172
Rent received in advance and other deferred
income 19,566 24,402
Interest payable 7,979 8,019
Tax and social security 2,305 3,192
Accruals and other payables 2,071 1,505
32,889 38,290
--------------------------------------------- ----------- -----------
The Group's accounting policy for trade and other payables is
disclosed in note 2e.
17. Financial assets and liabilities
a) Borrowings
31 December 31 December
2020 2019
GBP000 GBP000
------------------------------------------- ----------- -----------
Amounts falling due within one year
Fixed rate secured debt 7,284 3,480
Unamortised finance costs (2,300) (2,310)
------------------------------------------- ----------- -----------
4,984 1,170
------------------------------------------- ----------- -----------
Amounts falling due in more than one year
Fixed rate secured debt 847,719 852,411
Floating rate secured debt 73,272 74,766
Unamortised finance costs (4,395) (6,769)
------------------------------------------- ----------- -----------
916,596 920,408
------------------------------------------- ----------- -----------
The Group had no undrawn, committed borrowing facilities at
either balance sheet date.
The debt is secured by charges, within six ring-fenced security
groups, over the Group's investment properties and by fixed and
floating charges over the other assets of certain Group companies,
not including the Company itself save for a limited share charge
over the parent company of one of the ring-fenced subgroups.
During the year, certain financial covenants were amended or
waived to accommodate the temporary Covid-19 rent concessions on
the Leisure and Budget Hotels portfolios described in the Strategic
Report. There were no defaults or breaches of any loan covenants
during the current or any prior year.
The analysis of borrowings by currency is as follows:
31 December 31 December
2020 2019
GBP000 GBP000
--------------------------- ----------- -----------
Sterling denominated
Secured debt 863,877 869,645
Unamortised finance costs (6,421) (8,677)
857,456 860,968
--------------------------- ----------- -----------
Euro denominated
Secured debt 64,398 61,012
Unamortised finance costs (274) (402)
--------------------------- ----------- -----------
64,124 60,610
--------------------------- ----------- -----------
The Group's accounting policy for borrowings is disclosed in
note 2e.
b) Categories of financial instruments
31 December 31 December
2020 2019
GBP000 GBP000
---------------------------------------------- ----------- -----------
Financial assets
Financial assets at amortised cost:
Cash and cash equivalents (note 14 ) 219,730 267,119
Accrued income (note 15 ) 18,425 35
Headlease deposits 2,740 2,742
Trade receivables (note 15 ) 605 359
Other receivables 155 19
Amounts receivable from investment property
disposals - 2,565
Derivatives in effective hedges:
Interest rate caps (note 13 ) 6 40
Derivatives classified as held for trading:
Interest rate caps (note 13 ) 1 3
241,662 272,882
---------------------------------------------- ----------- -----------
Financial liabilities
Financial liabilities at amortised cost:
Secured debt (921,580) (921,578)
Headlease liabilities (note 18 ) (28,662) (28,190)
Interest payable (note 16 ) (7,979) (8,019)
Accruals and other payables (note 16 ) (2,071) (1,505)
Trade payables (note 16 ) (968) (1,172)
Derivatives in effective hedges:
Interest rate swaps (note 13 ) (1,687) (1,003)
(962,947) (961,467)
---------------------------------------------- ----------- -----------
At each balance sheet date, all financial assets and liabilities
other than derivatives in effective hedges and derivatives
classified as held for trading were measured at amortised cost.
As at 31 December 2020 the fair value of the Group's secured
debt was GBP969.2 million (2019: GBP961.0 million) and the fair
value of the other financial liabilities was equal to their book
value. Fair value is not the same as a liquidation valuation, the
amount required to prepay the loans at the balance sheet date, and
therefore does not represent an estimate of the cost to the Group
of prepaying the debt before the scheduled maturity date, which
would be materially higher.
The secured debt was valued in accordance with IFRS 13 by
reference to interbank bid market rates as at the close of business
on the balance sheet date by Chatham Financial Europe Limited. All
secured debt was classified as level 2 in the fair value hierarchy
as defined in IFRS 13 and its fair value was calculated using the
present values of future cash flows, based on market benchmark
rates (interest rate swaps) and the estimated credit risk of the
Group for similar financings. There were no transfers to or from
other levels of the fair value hierarchy during the current or
prior year.
The Group's accounting policy for financial assets and
liabilities is disclosed in note 2e.
c) Financial risk management
Through the Group's operations and use of debt financing it is
exposed to certain risks. The Group's financial risk management
objective is to manage the effect of these risks, for example by
using fixed rate debt and interest rate derivatives to manage
exposure to fluctuations in interest rates.
The exposure to each financial risk considered potentially
material to the Group, how it would arise and the policy for
managing it is summarised below.
Market risk
Market risk in financial assets and liabilities is the risk that
the fair value or future cash flows of a financial instrument will
fluctuate because of changes in market prices. The Group's market
risk arises from open positions in interest bearing assets,
liabilities and foreign currencies, to the extent that these are
exposed to general and specific market movements.
(a) Market risk - interest rate risk
The Group's interest bearing assets comprise only cash and cash
equivalents. Changes in market interest rates therefore affect the
Group's finance income. The Group's interest bearing liabilities
comprise only secured debt. Changes in market interest rates
therefore affect the Group's finance costs.
The Group's policy is to mitigate interest rate risk on its
financial liabilities by entering into interest rate derivatives,
which at the balance sheet date included interest rate swaps on
GBP50.0 million (2019: GBP50.0 million) of floating rate debt and
interest rate caps on the remaining GBP23.3 million (2019: GBP24.8
million) of floating rate debt. Under the interest rate swaps, the
Group agrees to exchange with an institutional counterparty, at
specified intervals, the difference between fixed and variable rate
interest amounts calculated by reference to an agreed schedule of
notional principal amounts. The Group's fixed rate debt and debt
where the interest rate risk is hedged by way of interest rate
swaps, together totalling GBP905.0 million (2019: GBP905.9
million), are therefore not subject to interest rate risk. Under
the interest rate caps, the Group agrees a similar exchange if the
variable interest rate exceeds the contractual strike rate of the
derivative. The Group is therefore exposed to limited cash flow
interest rate risk on the GBP23.3 million (2019: GBP24.8 million)
of floating rate debt where this risk is hedged by way of interest
rate caps. Interest on those loans is payable at variable rates up
to the maximum established by the cap strike rate, which averaged
1.5% (2019: 1.5%) in the year.
The Group's sensitivity to changes in interest rates is
disclosed in note 8 .
Trade and other payables are interest free as long as they are
paid in accordance with their terms, and have payment terms of less
than one year, so there is considered to be no material interest
rate risk associated with these financial liabilities.
(b) Market risk - foreign currency exchange risk
The Group prepares its financial information in Sterling. On an
IFRS basis, 3.5% (2019: 2.7%) by value of the Group's net assets
are Euro denominated and as a result the Group is subject to
foreign currency exchange risk. On an EPRA NTA basis, the Euro
exposure is 3.9% (2019: 3.1%). This risk is partially hedged
because within the Group's German operations, rental income,
interest costs and the majority of both assets and liabilities are
Euro denominated. An unhedged currency risk remains on the value of
the Group's net investment in, and net returns from, its German
operations.
The Group's sensitivity to changes in foreign currency exchange
rates, calculated on the basis of a 10% increase in average and
closing Sterling rates against the Euro, was as follows, with a 10%
decrease having the opposite effect:
Year to Year to
31 December 31 December
2020 2019
GBP000 GBP000
------------------------------------------------- ----------- -----------
Investment property revaluation net of deferred
tax (131) 290
Other income statement movements 257 227
------------------------------------------------- ----------- -----------
Effect on (loss) / profit for the year 126 517
Effect on other comprehensive income and equity 4,108 3,805
------------------------------------------------- ----------- -----------
Credit risk
Credit risk is the risk of financial loss to the Group if a
counterparty fails to meet its contractual obligations as a result
of financial stress. The principal counterparties are the Group's
tenants (in respect of trade receivables and accrued income arising
under operating leases), banks and financial institutions (as
holders of the Group's cash deposits and hedging counterparties)
and the counterparties to the Group's investment property
disposals.
The credit risk of trade receivables is considered low because
the counterparties to the operating leases are believed by the
Board to be capable of discharging their lease obligations and any
lease guarantors are also of appropriate financial strength. On the
71% of the portfolio (at 31 December 2020 valuations) that has been
owned by Group entities since 2007, over the last 13 years the rent
has always been paid by the due date. Rent collection statistics
are benchmarked in internal reports to identify any problems at any
early stage, and if necessary and where possible (in the absence,
for example, of a Government imposed moratorium on the enforcement
of rent collection) rigorous credit control procedures are applied
to facilitate the recovery of trade receivables.
As at 31 December 2020, the Group held financial assets with a
carrying value of GBP0.4 million (2019: GBPnil) which were past
due, all of which were trade receivables and all but GBP40,000 of
which (a cost recovery from a tenant, not rent) have been received
since the balance sheet date. The Group did not hold any financial
assets that were impaired at either balance sheet date.
The credit risk on cash deposits is considered to be limited
because the counterparties are banks and financial institutions
with credit ratings which are acceptable to the Board and which are
kept under review at least each quarter and more often if
required.
Inflation risk
Inflation risk arises from the impact of inflation on the
Group's income and expenditure. 58% (2019: 59%) of the Group's
contractual passing rent before concessions at 31 December 2020 is
subject to RPI-linked rent reviews, though those rents are subject
to nil or upwards review, never downwards. 41% (2019: 41%) of
contractual passing rent before concessions is subject to fixed
rental uplifts and is not exposed to fluctuations in the inflation
rate, with 1% (2019: nil) subject to upwards only open market rent
reviews. As a result, the Group is not exposed to any fall in rent
in deflationary conditions.
In November 2020, the UK Government and UK Statistics Authority
announced changes to RPI such that it will align with the Consumer
Prices Index ("CPIH") from February 2030. The exact impact on the
RPI clauses in the Group's leases will depend on precisely how the
UK Statistics Agency implements the change. On a downside basis, if
rents were to follow CPIH which has been on average 0.8 percentage
points lower than RPI over the past ten years and assuming a
differential continues, the rent uplifts from 2030 onwards would be
lower than they would otherwise have been. However, the Group's
lease provisions may provide protection so that there would be no
change in some or all cases. In the event that rental uplifts do
change from 2030, any valuation impact in such circumstances would
be expected to be insignificant as the market tends not to
differentiate materially between RPI and CPIH lease structures,
with the other property characteristics carrying greater weight in
establishing pricing.
The Group is exposed to inflation risk on its running costs,
which (with the exception of any advisory and incentive fees, the
calculation of which is based on EPRA NAV as described in note 25
b) could increase in inflationary conditions. These costs totalled
GBP3.3 million (2019: GBP2.4 million) in the current year (20%
(2019: 11%) of total administrative expenses) and therefore the
impact of any significant percentage increase in inflation on the
financial results or position of the Group would be relatively
limited.
Liquidity risk
Liquidity risk arises from the Group's management of working
capital and its ability to meet the finance costs and principal
repayments on its secured debt. It is the risk that the Group will
not be able to meet its financial obligations as they fall due.
The Board seeks to manage liquidity risk by ensuring that
sufficient cash is available to meet the Group's foreseeable needs.
The Group's more material financial obligations are the payment of
financing costs and any scheduled amortisation or repayments of its
secured debt. Financing costs and scheduled amortisation have been
met, with only limited exceptions during a rent concession period
for one tenant, out of rental income which, in all cases, provides
headroom over the relevant amounts payable. Before entering into
any financing arrangements, the Board assesses the resources that
are expected to be available to the Group to meet its liabilities
when they fall due including repayments at loan maturity. These
assessments are made on the basis of both base case and stress
tested scenarios.
Other liquidity needs are relatively modest and are managed
principally through the deduction of much of the direct operating
costs from rental receipts before any surplus is applied in payment
of interest and loan amortisation as required by the facility
agreements relating to the Group's secured debt.
Budgets and working capital forecasts are reviewed by the Board
at least quarterly to assess liquidity requirements and compliance
with loan covenants. The Board also keeps under review the maturity
profile of the Group's cash deposits in order to have reasonable
assurance that cash will be available for the settlement of
liabilities or to deploy in investment opportunities when they fall
due.
The following maturity analysis has been drawn up based on the
undiscounted cash flows of financial liabilities, including future
interest payments, with reference to the earliest date on which the
Group can be required to pay. During the year, 73% (2019: 69%) of
the Group's headlease liabilities were recoverable from tenants and
are not included in this analysis to the extent that they are
recoverable.
Effective
interest Less than One to two Two to five More than
rate one year years years five years Total
31 December 2020 GBP000 GBP000 GBP000 GBP000 GBP000
--------------------------- --------- --------- ---------- ----------- ----------- -----------
Financial assets
Cash and cash equivalents 0.2% 219,730 - - - 219,730
Accrued income 18,425 - - - 18,425
Headlease deposits - - - 2,740 2,740
Trade and other
receivables 730 30 - - 760
Interest rate derivatives - 2 5 - 7
--------------------------- --------- --------- ---------- ----------- ----------- -----------
238,885 32 5 2,740 241,662
--------------------------- --------- --------- ---------- ----------- ----------- -----------
Financial liabilities
Fixed rate secured
debt 5.1% (50,775) (425,351) (524,259) - (1,000,385)
Floating rate secured
debt 2.4% (1,757) (1,675) (74,505) - (77,937)
Headlease liabilities (533) (533) (1,600) (7,295) (9,961)
Accrued interest (7,979) - - - (7,979)
Trade payables and
accruals and other
payables (3,039) - - - (3,039)
Interest rate derivatives 1.3% (558) (686) (443) - (1,687)
(64,641) (428,245) (600,807) (7,295) (1,100,988)
--------------------------- --------- --------- ---------- ----------- ----------- -----------
Effective
interest Less than One to two Two to five More than
rate one year years years five years Total
31 December 2019 GBP000 GBP000 GBP000 GBP000 GBP000
--------------------------- --------- --------- ---------- ----------- ----------- -----------
Financial assets
Cash and cash equivalents 0.6% 267,119 - - - 267,119
Trade and other
receivables 2,924 - - - 2,924
Headlease deposits - - - 2,742 2,742
Interest rate derivatives - 3 40 - 43
Accrued income 35 35
270,078 3 40 2,742 272,863
--------------------------- --------- --------- ---------- ----------- ----------- -----------
Financial liabilities
Fixed rate secured
debt 5.1% (47,968) (50,442) (576,096) (363,559) (1,038,065)
Floating rate secured
debt 2.9% (2,134) (2,083) (77,922) - (82,139)
Headlease liabilities (502) (502) (1,507) (6,871) (9,382)
Accrued interest (8,019) - - - (8,019)
Trade payables and
accruals and other
payables (2,677) - - - (2,677)
Interest rate derivatives 1.3% (246) (316) (441) - (1,003)
(61,546) (53,343) (655,966) (370,430) (1,141,285)
--------------------------- --------- --------- ---------- ----------- ----------- -----------
d) Capital risk management in respect of the financial year
The Board's primary risk management objective when monitoring
capital is to preserve the Group's ability to continue as a going
concern, while ensuring it remains within its secured debt
covenants to safeguard shareholders' equity and avoid financial
penalties. Borrowings are secured on each of six (2019: six)
property portfolios by way of fixed charges over property assets,
over the shares in the parent company of each ring-fenced borrower
subgroup, and also by floating charges on the assets of the
relevant subsidiary companies within each distinct subgroup. The
suitability of the extent of asset cover in the secured facilities
forms a key part of debt negotiations and ongoing monitoring.
At 31 December 2020 and 31 December 2019, the capital structure
of the Group consisted of debt (note 17 a), cash and cash
equivalents (note 14 ), and equity attributable to the shareholders
of the Company (comprising share capital, retained earnings and the
other reserves described in notes 20 and 21 ).
In managing the Group's capital structure, the Board considers
the Group's cost of capital. In order to maintain or adjust the
capital structure, the Board keeps under review the amount of any
dividends or other returns to shareholders and monitors the extent
to which the issue of new shares, repurchases of share capital or
the realisation of assets may be advisable or required.
Details of significant accounting policies are disclosed in the
accounting policies in note 2 . This includes the criteria for
recognition, the basis of measurement and the basis on which income
and expenses are recognised, in respect of each class of financial
asset, financial liability and equity instrument.
Until March 2020, the Group was subject to externally imposed
capital requirements under AIFMD as disclosed in note 14 . Those
capital requirements were complied with at all relevant times
during the current and prior year.
18. Headlease liabilities
Headlease obligations in respect of amounts payable on leasehold
properties are as follows:
31 December 31 December
2020 2019
Minimum headlease payments GBP000 GBP000
Within one year 1,817 1,786
Between one and five years 7,297 7,166
More than five years 157,922 154,489
167,036 163,441
Less future finance charges (138,374) (135,251)
----------------------------- ----------- -----------
28,662 28,190
----------------------------- ----------- -----------
The earliest expiry date of all the headlease obligations is in
more than five years. All but GBP0.5 million (2019: GBP0.5 million)
of the minimum headlease payments due within one year are
recoverable from the occupational tenants.
The Group's accounting policy for headleases is disclosed in
note 2 d.
19. Deferred tax liability
The deferred tax liability relates to unrealised gains on the
Group's German investment properties.
Year to Year to
31 December 31 December
2020 2019
GBP000 GBP000
------------------------------------------------- ----------- -----------
At the start of the year 11,267 11,110
(Credit) / charge to the income statement
(note 9 ) (22) 759
Charge / (credit) to other comprehensive income 654 (602)
At the end of the year 11,899 11,267
------------------------------------------------- ----------- -----------
The Group's accounting policy for deferred tax is disclosed in
note 2f.
20. Share capital
Share capital represents the aggregate nominal value of shares
issued. The movement in the number of fully paid ordinary shares of
10 pence each in issue was as follows:
Year to Year to
31 December 31 December
2020 2019
Number Number
-------------------------------------- ----------- -----------
At the start of the year 322,850,595 321,563,353
Issue of ordinary shares:
in settlement of 2019 incentive fee 1,184,551 -
in settlement of 2018 incentive fee - 1,287,242
At the end of the year 324,035,146 322,850,595
-------------------------------------- ----------- -----------
21. Reserves
The share premium reserve represents the surplus of the gross
proceeds of share issues over the nominal value of the shares, net
of the direct costs of those equity issues.
Retained earnings represent the cumulative profits and losses
recognised in the income statement, together with any amounts
transferred or reclassified from the Group's share premium reserve
and other reserves, less dividends paid.
Other reserves represent:
-- the cumulative exchange gains and losses on foreign currency translation;
-- the cumulative gains or losses, net of tax, on effective cash flow hedging instruments; and
-- the impact on equity of any shares to be issued after the
balance sheet date, as described in note 25 d, under the terms of
the incentive fee arrangements.
Movements in other reserves comprise:
Currency Cash flow
Shares to
translation be hedging
differences issued instruments Total
Year to 31 December 2020 GBP000 GBP000 GBP000 GBP000
---------------------------- ----------- --------- ----------- -------
At the start of the year 3,305 4,910 (1,051) 7,164
Currency translation
movements 2,101 - - 2,101
Fair value of derivatives
(note 13 ) - - (637) (637)
---------------------------- ----------- --------- ----------- -------
Other comprehensive income
/ (loss) 2,101 - (637) 1,464
Shares issued in the
year - (4,910) - (4,910)
At the end of the year 5,406 - (1,688) 3,718
---------------------------- ----------- --------- ----------- -------
Year to 31 December 2019
--------------------------- ------- ------- ------- -------
At the start of the year 5,305 4,872 (200) 9,977
Currency translation
movements (2,000) - - (2,000)
Fair value of derivatives
(note 13 ) - - (851) (851)
Other comprehensive loss (2,000) - (851) (2,851)
Shares issued in the
year - (4,869) - (4,869)
Shares to be issued - 4,907 - 4,907
At the end of the year 3,305 4,910 (1,051) 7,164
--------------------------- ------- ------- ------- -------
22. Operating leases
The majority of the Group's assets are investment properties
leased to third parties under non-cancellable operating leases. The
weighted average remaining lease term at 31 December 2020 is 20.2
years (2019: 21.0 years) and there are no tenant break options. The
leases contain either fixed uplifts or upwards only RPI-linked
uplifts, alongside periodic upwards only open market reviews on 1%
(2019: nil) of the Group's contractual passing rent before
concessions.
RPI-linked uplifts on 37% (2019: 41%) of the Group's passing
rent as at 31 December 2020 resulted in the settlement of GBP0.9
million (2019: GBP0.9 million) of contingent rental income that was
recognised in the income statement in the year.
Future minimum rents receivable are as follows:
31 December 31 December
2020 2019
GBP000 GBP000
------------------------------ ----------- -----------
Within one year 104,903 110,697
Between one and two years 115,515 111,932
Between two and three years 116,875 113,534
Between three and four years 118,456 114,944
Between four and five years 118,504 116,373
More than five years 2,045,222 2,129,296
------------------------------ ----------- -----------
2,619,475 2,696,776
------------------------------ ----------- -----------
The Group's accounting policy for operating leases is disclosed
in note 2d.
23. Net asset value per share
Net asset value ("NAV") per share is calculated as the net
assets of the Group attributable to shareholders divided by the
number of shares in issue at the end of each year, which as at 31
December 2020 was 324,035,146 shares (2019: 322,850,595
shares).
Diluted NAV per share includes within the denominator any shares
that will be issued in future, such as those in settlement of any
incentive fee that may become payable as explained in note 25 d,
which at 31 December 2020 resulted in a total of 324,035,146 shares
(2019: 321,035,146 shares).
The European Public Real Estate Association ("EPRA") publishes
guidelines for the calculation of three measures of NAV to enable
consistent comparisons between property companies, which were
updated in the prior year and took effect from 1 January 2020. The
Group uses EPRA Net Tangible Assets ("EPRA NTA") as the most
meaningful measure of long term performance and the measure which
is being adopted by the majority of UK REITs, establishing it as
the industry standard benchmark. It excludes items that are
considered to have no impact in the long term, such as the fair
value of derivatives and a portion of the deferred tax on
investment properties held for long term benefit, and uses as its
denominator the same number of shares in issue for calculating
diluted NAV per share, which reflects any shares to be issued in
settlement of an incentive fee as described in note 25 d.
The Group's basic NAV, diluted NAV and EPRA NTA are as
follows:
31 December 2020 31 December 2019
----------------------------- -------------------- --------------------
Pence per Pence per
GBP000 share GBP000 share
----------------------------- --------- --------- --------- ---------
Basic NAV 1,221,541 377.0 1,384,542 428.8
EPRA adjustments :
Dilution from shares
to be issued for 2019
incentive fee - - - (1.5)
----------------------------- --------- --------- --------- ---------
Diluted NAV 1,221,541 377.0 1,384,542 427.3
50% of deferred tax on
German investment property
revaluations 5,950 1.8 5,634 1.8
Fair value of interest
rate derivatives 1,734 0.5 1,084 0.3
EPRA NTA 1,229,225 379.3 1,391,260 429.4
----------------------------- --------- --------- --------- ---------
24. Reconciliation of changes in financial liabilities arising
from financing activities
Secured
Secured debt
debt due due in more
within than one Headlease Interest
one year year liabilities payable Derivatives
(note 17 (note 17 (note 18 (note 16 (note 13
Year to a) a) ) ) ) Total
31 December 2020 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
--------------------------- --------- ------------ ------------ --------- ----------- --------
At the start of
the year 2,124 919,454 28,190 8,019 960 958,747
Cash flows:
Interest and finance
costs paid - - (1,680) (45,768) (396) (47,844)
Scheduled repayment
of secured debt (4,434) - - - - (4,434)
Repayment of secured
debt from property
sales - (1,494) - - - (1,494)
Non-cash movements:
Finance costs
in the income
statement 2,310 97 1,680 45,716 461 50,264
Finance costs
in other comprehensive
income - - - - 637 637
Increase in headlease
liabilities - - 578 - - 578
Revaluation movement
in headlease liabilities - - (106) - - (106)
Currency translation
movements (15) 3,538 - 30 - 3,553
Reclassifications 4,999 (4,999) - (18) 18 -
At the end of
the year 4,984 916,596 28,662 7,979 1,680 959,901
--------------------------- --------- ------------ ------------ --------- ----------- --------
Year to
31 December 2019
--------------------------- ------- --------- ------- -------- ----- ---------
At the start of
the year 1,771 1,078,495 28,511 9,248 5 1,118,030
Cash flows:
Repayment of secured
debt from property
sales - (154,519) - - - (154,519)
Interest and finance
costs paid - - (1,702) (51,833) (103) (53,638)
Loan break costs - (27,868) - - - (27,868)
Scheduled repayment
of secured debt (3,988) - - - - (3,988)
Loan arrangement
costs paid - (670) - - - (670)
Non-cash movements:
Finance costs
in the income
statement 2,385 29,308 1,702 50,586 253 84,234
Finance costs
in other comprehensive
loss - - - - 851 851
Decrease in headlease
liabilities - - (221) - - (221)
Revaluation movement
in headlease liabilities - - (100) - - (100)
Currency translation
movements 8 (3,344) - (28) - (3,364)
Reclassifications 1,948 (1,948) - 46 (46) -
At the end of
the year 2,124 919,454 28,190 8,019 960 958,747
--------------------------- ------- --------- ------- -------- ----- ---------
25. Related party transactions and balances
a) Relationship between Company and Investment Adviser
The Investment Advisory Agreement sets out the terms of the
relationship between the Company and the Investment Adviser,
including services to be provided and the calculation of the
advisory fee and any incentive fee. The agreement has a termination
date in December 2025 and neither party to the agreement has any
contractual renewal right. The agreement may be terminated in
certain circumstances which are summarised on page 59 of the March
2016 Secondary Placing Disclosure Document which is available in
the Investor Centre of the Company's website. It includes a right
for the Company to terminate the agreement without compensation in
the event of an unremedied breach by the Investment Adviser and a
right for the Investment Adviser to terminate the agreement in the
event of a change of control of the Company. The maximum
termination fee is four times the previous quarter's advisory fee,
with any such termination payment designed to cover the cost of
redundancies and wind down costs that may be required following the
Investment Adviser's loss of the management of the Group.
During the year, the Investment Adviser was Prestbury Investment
Partners Limited ("PIP"). Nick Leslau, Mike Brown and Sandy Gumm,
who are Directors of the Company, are also directors and
shareholders in PIP together with Tim Evans and Ben Walford. Until
10 December 2019, the Investment Adviser was Prestbury Investments
LLP ("PILLP"), at which date the Investment Advisory Agreement was
novated from PILLP to PIP with the terms of the agreement remaining
unchanged. The ownership of PILLP and PIP was identical at the date
of transfer and PIP had the same resources available to it to
perform the services required as PILLP had available to it. Nick
Leslau, Mike Brown and Sandy Gumm hold partnership interests in
PILLP.
b) Basis of calculation of fees
EPRA introduced new methods of calculation of EPRA net asset
value which apply with effect from 1 January 2020. In considering
that change, the Remuneration Committee concluded that, in order
for the calculation of the advisory and incentive fees to remain
consistent with the way that those fees had been calculated since
the Company's listing and as set out in the Investment Advisory
Agreement, the fees would continue to be calculated on the basis of
the EPRA NAV methodology in place at the time of the agreement.
That basis is set out in the EPRA Guidance previously issued in
2016, referred to in this financial information as "2016 basis EPRA
NAV".
In addition, following a proposal made by the Investment
Adviser, with effect from 1 April 2020 the advisory fee is reduced
to the extent that the net assets include surplus cash realised on
the disposal of a portfolio of hospitals in August 2019 to the
extent that surplus cash remains available for deployment. The
balance of the surplus cash at 1 April 2020 was GBP158.3 million
and as at 31 December 2020 was GBP113.9 million. The 2016 basis
EPRA NAV used for the fee calculations reconciles to EPRA NTA as
follows:
31 December 2020 31 December 2019
------------------------------ -------------------- --------------------
Pence per Pence per
GBP000 share GBP000 share
------------------------------ --------- --------- --------- ---------
EPRA NTA 1,229,225 379.3 1,391,260 429.4
Add back 50% of deferred
tax on German investment
property revaluations 5,950 1.9 5,633 1.7
2016 basis EPRA NAV for
purposes of incentive
fee calculation 1,235,175 381.2 1,396,893 431.1
Adjustment for surplus
cash (113,945) (35.2) - -
------------------------------ --------- --------- --------- ---------
NAV for purposes of advisory
fee calculations 1,121,230 346.0 1,396,893 431.1
------------------------------ --------- --------- --------- ---------
c) Advisory fees payable
Advisory fees payable to the Investment Adviser are calculated
on a reducing scale based on the Group's 2016 basis EPRA NAV
adjusted for surplus cash:
-- 1.25% per annum on 2016 basis EPRA NAV up to GBP500 million, plus
-- 1.0% per annum on 2016 basis EPRA NAV between GBP500 million and GBP1 billion, plus
-- 0.75% per annum on 2016 basis EPRA NAV between GBP1 billion and GBP1.5 billion, plus
-- 0.5% per annum on 2016 basis EPRA NAV over GBP1.5 billion.
During the year, advisory fees of GBP12.8 million (2019: GBP0.8
million) plus VAT were payable to PIP, of which GBP10,000 was
receivable (as a routine adjustment to the calculation of the fee
for the fourth quarter) as at the balance sheet date and included
in trade and other receivables (note 15 ) (2019: GBP0.8 million
payable and included in trade and other payables (note 16 )).
During the year, advisory fees of GBPnil (2019: GBP12.9 million)
plus VAT were payable in cash to PILLP, of which GBPnil (2019:
GBPnil) was outstanding as at the balance sheet date. The impact of
adopting 2016 basis EPRA NAV is that fees payable in the current
year were c. GBP44,000 higher than they would have been under EPRA
NTA.
d) Incentive fee
The Investment Adviser may become entitled to an incentive fee
intended to reward growth in Total Accounting Return ("TAR") above
an agreed benchmark and to maintain strong alignment of the
Investment Adviser's interests with those of shareholders. TAR is
measured as growth in 2016 basis EPRA NAV per share plus dividends
paid in the year.
The fee entitlement is calculated annually on the basis of the
Group's audited financial statements, with any fee payable settled
in shares in the Company (subject to certain limited exceptions
none of which have yet applied). Sales of these shares are
restricted (save for certain limited exceptions), with the
restriction lifted on a phased basis over a period from 18 to 42
months from the date of issue. Shares may be released from the sale
restriction in the event that shares need to be sold to settle the
tax liability on the receipt of those shares, but this exemption
has never been requested.
The incentive fee is calculated by reference to growth in TAR:
if that growth exceeds a hurdle rate of 10% over a given financial
year, an incentive fee equal to 20% of this excess is payable in
shares to the Investment Adviser. In the event of an incentive fee
being payable, a high water mark is established, represented by the
2016 basis EPRA NAV per share at the end of the relevant financial
year, after the impact of the incentive fee, which is then the
starting point for the cumulative hurdle calculations for future
periods. The hurdle is set at the higher of the 2016 basis EPRA NAV
at the start of the year plus 10% or the high water mark 2016 basis
EPRA NAV plus 10% per annum. In this way, the incentive fee is
never rebased as a result of a year of low or negative growth,
maintaining strong alignment of management and shareholder
interests. Dividends or other distributions paid in any period are
treated as payments on account against achievement of the hurdle
rate of return. The incentive fee payable in any year is subject to
a cap of 5% of 2016 basis EPRA NAV, save for a fee payable in the
event of a change of control of the Company which is uncapped.
A high water mark EPRA NAV per share of 431.1 pence per share
was established at 31 December 2019 when a fee was last earned,
therefore TAR had to exceed 43.1 pence per share for the year to 31
December 2020 for a fee to be earned . Since dividends of 15.7
pence per share were paid in the year, this equated to a 2016 basis
EPRA NAV per share of 459.6 pence per share at 31 December 2020.
Since 2016 basis EPRA NAV is below this level, no incentive fee
arises for the current year.
Assuming no changes in the Company's capital structure, 2016
basis EPRA NAV per share growth together with dividends paid will
have to exceed 124.4 pence per share for the year ending 31
December 2021 before an incentive fee is earned for that year.
In the prior year, an incentive fee of GBP5.3 million was
payable: GBP4.9 million that was satisfied by way of the issue of
1,184,551 shares to PIP in March 2020, plus GBP0.4 million of
irrecoverable VAT which arises on any element of the Group's costs,
including incentive fees, that relate to the healthcare
portfolio.
e) Dividends paid to related parties and key management personnel
Year to Year to
31 December 31 December
2020 2019
GBP000 GBP000
--------------------------------------- ----------- -----------
Prestbury Incentives Limited 3,007 3,049
Nick Leslau * 2,880 3,668
Mike Brown 186 193
Prestbury Investment Partners Limited 136 -
Sandy Gumm 30 31
Martin Moore 19 19
Ian Marcus 14 14
Jonathan Lane 9 9
Leslie Ferrar 4 4
6,285 6,987
--------------------------------------- ----------- -----------
Nick Leslau, Mike Brown and Sandy Gumm are shareholders and
directors of both Prestbury Investment Partners Limited and the
parent undertaking of Prestbury Incentives Limited, together with
other key management personnel, Tim Evans and Ben Walford. Other
senior members of the Prestbury team also have equity interests in
those companies.
* comprising dividends from 16,850,300 ordinary shares held by
an entity in which Nick Leslau has a 95% indirect interest and
1,491,709 shares held by a company which he wholly owns.
26. Events after the balance sheet date
On 5 March 2021, the Company paid an interim dividend of 3.65
pence per share amounting to GBP11.7 million.
Unaudited Supplementary Information
Shareholder returns
Total Shareholder Return
Shareholder return is one of the Group's key performance
indicators. Total Shareholder Return ("TSR") is measured as the
movement in the Company's share price over a period, plus dividends
paid in the period. Total Accounting Return ("TAR") is a
shareholder return measure calculated as the movement in EPRA NTA
per share plus dividends per share paid over the period.
Comparative figures below have been restated to be consistent with
the new measure of EPRA NTA that was introduced by EPRA with effect
from 1 January 2020.
TAR - EPRA NTA performance
Year to Year to
31 December 31 December
2020 2019
Pence Pence
per share per share
---------------------------------------------- ------------- ------------
EPRA NTA per share:
at the start of the year 429.4 398.8
at the end of the year 379.3 429.4
----------------------------------------------- ------------- ------------
Movement in EPRA NTA per share (50.1) 30.6
Dividends per share 15.7 16.3
----------------------------------------------- ------------- ------------
Movement in EPRA NTA per share plus dividends
per share (34.4) 46.9
----------------------------------------------- ------------- ------------
TAR (8.0)% 11.8%
----------------------------------------------- ------------- ------------
TSR - share price performance
Year to Year to
31 December 31 December
2020 2019
Pence Pence
per share per share
--------------------------------------- ------------- -------------
Mid market closing share price:
at the start of the year 434.0 377.0
at the end of the year 300.0 434.0
---------------------------------------- ------------- -------------
Movement in share price (134.0) 57.0
Dividends per share 15.7 16.3
---------------------------------------- ------------- -------------
Movement in share price plus dividends
per share (118.3) 73.3
---------------------------------------- ------------- -------------
TSR (27.3)% 19.4%
---------------------------------------- ------------- -------------
Unaudited Supplementary Information
EPRA measures
31 December 31 December
2020 2019
EPRA Net Tangible Assets (EPRA NTA) per
share 379.3p 429.4p
EPRA Net Reinstatement Value per share 421.7p 474.6p
EPRA Net Disposal Value per share 364.3p 417.9p
EPRA Net Initial Yield 4.44% 4.94%
EPRA Topped Up Net Initial Yield 5.40% 4.94%
EPRA Vacancy Rate 0% 0%
----------------------------------------- ----------- -----------
Year to Year to
31 December 31 December
2020 2019
EPRA EPS 16.3p 16.9p
Adjusted EPRA EPS * 3.5p 15.3p
EPRA Capital Expenditure GBP0.5m GBP0.3m
EPRA Cost Ratio excluding direct vacancy
costs 14.8% 17.5%
EPRA Cost Ratio including direct vacancy
costs 15.1% 17.6%
Adjusted EPRA Cost Ratio excluding direct
vacancy costs 18.4% 14.9%
Adjusted EPRA Cost Ratio including direct
vacancy costs 18.7% 15.0%
-------------------------------------------- ----------- -----------
* not an EPRA measure: calculation explained in note 10 to the financial information
not an EPRA measure
EPRA Net Tangible Assets
31 December 2020 31 December 2019
----------------------------------- -------------------- --------------------
Pence per Pence per
GBP000 share GBP000 share
----------------------------------- --------- --------- --------- ---------
Basic NAV (note 23 ) 1,221,541 377.0 1,384,542 428.8
EPRA adjustments :
Dilution from shares to
be issued for 2019 incentive
fee - - - (1.5)
----------------------------------- --------- --------- --------- ---------
Diluted NAV 1,221,541 377.0 1,384,542 427.3
Deferred tax on German
investment property revaluations
* 5,950 1.8 5,634 1.8
Fair value of derivatives 1,734 0.5 1,084 0.3
EPRA NTA 1,229,225 379.3 1,391,260 429.4
----------------------------------- --------- --------- --------- ---------
* in accordance with the EPRA Guidance, half of the deferred tax
is adjusted for in the EPRA NTA calculation
The number of shares in issue at each balance sheet date for the
EPRA net assets calculations is as follows:
31 December 31 December
2020 2019
Number Number
-------------------------------------------------- ----------- -----------
Basic NAV 324,035,146 322,850,595
Shares to be issued in satisfaction of incentive
fee (note 25 d) - 1,184,551
-------------------------------------------------- ----------- -----------
Diluted NAV and EPRA measures 324,035,146 324,035,146
-------------------------------------------------- ----------- -----------
EPRA Net Reinstatement Value
The EPRA Net Reinstatement Value assumes that the Group never
sells assets and is intended to represent the value that would be
required to rebuild the portfolio, calculated as follows:
31 December 2020 31 December 2019
---------------------- ----------------------
Pence per Pence per
GBP000 share GBP000 share
----------- --------- ----------- ---------
Basic NAV 1,221,541 377.0 1,384,542 428.8
EPRA adjustments:
Dilution from shares to
be issued for 2019 incentive
fee - - - (1.5)
------------------------------- ----------- --------- ----------- ---------
Diluted NAV 1,221,541 377.0 1,384,542 427.3
Adjustment for real estate
transfer taxes 131,418 40.5 140,826 43.5
Deferred tax on investment
property revaluations 11,899 3.7 11,267 3.5
Fair value of interest
rate derivatives 1,734 0.5 1,084 0.3
EPRA Net Reinstatement
Value 1,336,592 421.7 1,537,719 474.6
------------------------------- ----------- --------- ----------- ---------
EPRA Net Disposal Value
The EPRA Net Disposal Value Represents the Group's value under a
disposal scenario, with deferred tax and financial instruments
(including fixed rate debt) shown to the full extent of their
liability, calculated as follows:
31 December 2020 31 December 2019
---------------------- ----------------------
Pence per Pence per
GBP000 share GBP000 share
----------- --------- ----------- ---------
Basic NAV 1,221,541 377.0 1,384,542 428.8
EPRA adjustments:
Dilution from shares to
be issued for 2019 incentive
fee - - - (1.5)
------------------------------- ----------- --------- ----------- ---------
Diluted NAV 1,221,541 377.0 1,384,542 427.3
Fair value of fixed rate
debt (40,966) (12.7) (30,343) (9.4)
EPRA Net Disposal Value 1,180,575 364.3 1,354,199 417.9
------------------------------- ----------- --------- ----------- ---------
The fair value of the fixed rate debt is defined by EPRA as a
mark to market adjustment measured in accordance with
IFRS 9 in respect of all debt not held at fair value in the
balance sheet, as disclosed in note 17 b to the financial
information. The fair value of debt is not the same as a
liquidation valuation, so the fair value adjustment above does not
reflect the liability that would crystallise if the debt was
prepaid on the balance sheet date, which would be materially
higher.
EPRA Net Initial Yield and EPRA Topped Up Net Initial Yield
31 December 31 December
2020 2019
GBP000 GBP000
------------------------------------------------------ ----------- -----------
Investment property, all of which is completed
and wholly owned, at independent external valuation
(note 11 ) 1,946,938 2,083,107
Allowance for estimated purchasers' costs 131,418 140,826
------------------------------------------------------ ----------- -----------
Grossed up completed property portfolio valuation 2,078,356 2,223,933
------------------------------------------------------ ----------- -----------
Annualised cash passing rental income 98,297 110,726
Annualised non-recoverable property outgoings (1,020) (866)
------------------------------------------------------ ----------- -----------
Annualised net rents 97,277 109,860
Notional rent increase on expiry of rent free
periods and other lease incentives 15,032 48
------------------------------------------------------ ----------- -----------
112,309 109,908
------------------------------------------------------ ----------- -----------
EPRA Net Initial Yield 4.68% 4.94%
EPRA Topped Up Net Initial Yield 5.40% 4.94%
------------------------------------------------------ ----------- -----------
The EPRA Net Initial Yield at 31 December 2020 reflects the
temporary rent concessions on the budget hotels arising as a result
of the Covid-19 pandemic.
EPRA Vacancy Rate
31 December 31 December
2020 2019
GBP000 GBP000
ERV of vacant space 40 40
ERV of portfolio 111,536 110,766
EPRA Vacancy Rate 0.04% 0.04%
--------------------- ----------- -----------
EPRA EPS
Year to Year to
31 December 31 December
2020 2019
GBP000 GBP000
---------------------------------------------------- ----------- -----------
(Loss) / profit for the year (113,641) 153,359
EPRA adjustments:
Investment property revaluation (note 11 ) 166,516 (75,708)
Profit on disposal of investment properties (32) (53,074)
Deferred tax on German investment property
revaluations (note 9 ) (22) 759
Other early debt repayment costs (note 8 ) 21 1,443
Fair value adjustment of interest rate derivatives 13 36
Cost of early repayment of debt on disposal
of investment properties (note 8 ) - 27,868
EPRA earnings 52,855 54,683
Other adjustments :
Rent Smoothing Adjustments (note 4 ) (23,661) (10,564)
Rent deferral (17,727) -
Incentive fee (note 6 ) - 5,256
Adjusted EPRA earnings 11,467 49,375
---------------------------------------------------- ----------- -----------
Weighted average number of shares in issue Number Number
-------------------------------------------------- ----------- -----------
Adjusted EPRA EPS 323,776,228 322,540,246
Adjustment for weighting of shares issued in
the year * 258,918 310,349
EPRA EPS 324,035,146 322,850,595
Shares to be issued in satisfaction of incentive
fee (note 25 d) - 1,184,551
-------------------------------------------------- ----------- -----------
Diluted EPRA EPS 324,035,146 324,035,146
-------------------------------------------------- ----------- -----------
* Adjusted EPRA EPS is calculated using the weighted average
number of shares reflecting the actual date on which shares are
issued in settlement of any incentive fee. EPRA EPS and diluted
EPRA EPS are calculated on the assumption that those shares were in
issue throughout the year.
Pence per Pence per
share share
------------------- ----------- ---------
EPRA EPS 16.3 16.9
Diluted EPRA EPS 16.3 16.8
Adjusted EPRA EPS 3.5 15.3
------------------- ----------- ---------
EPRA Capital Expenditure
Year to Year to
31 December 31 December
2020 2019
Wholly owned property GBP000 GBP000
---------------------------------------------- ----------- -----------
Acquisitions - 307
Development - -
Expenditure on completed investment property
held throughout the year:
Creation of additional lettable area - -
Enhancing existing space - -
Other 456 -
EPRA Capital Expenditure 456 307
---------------------------------------------- ----------- -----------
The Group does not have any joint ventures or other partial
interests in investment property so any EPRA capital expenditure
relates to wholly owned properties. The Group does not capitalise
any overheads or interest into its property portfolio and it does
not develop properties.
The EPRA Capital Expenditure in the current period relates to
Manchester Arena: GBP0.3 million for the acquisition of car park
equipment and GBP0.2 million for capital works within the service
charge that is not recoverable from the tenants. The expenditure on
acquisitions in the prior year represents the purchase of the
freehold of an existing leasehold property.
The Group's properties are let on full repairing and insuring
leases, so the Group incurs no routine ongoing capital expenditure
on its property portfolio except at Manchester Arena, where such
costs relating to the structure and common areas are liabilities of
the Group in the first instance. However, since the majority of
these costs are currently recoverable from tenants, the net cost to
the Group in the year was GBP0.3 million (2019: GBP0.1
million).
EPRA Cost Ratio
Year to Year to
31 December 31 December
2020 2019
GBP000 GBP000
-------------------------------------------------- ----------- -----------
Revenue (note 4 ) 121,664 132,677
Tenant contributions to property outgoings
(note 4 ) (1,643) (1,580)
-------------------------------------------------- ----------- -----------
EPRA gross rental income 120,021 131,097
Non-recoverable property operating expenses
(note 5 ) * 1,668 1,549
Less headlease costs included in non-recoverable
property operating expenses (604) (662)
Administrative expenses (note 6 ) 17,001 22,128
EPRA costs including direct vacancy costs 18,065 23,015
Direct vacancy costs (293) (95)
EPRA costs excluding direct vacancy costs 17,772 22,920
-------------------------------------------------- ----------- -----------
EPRA Cost Ratio including direct vacancy costs 15.1% 17.6%
EPRA Cost Ratio excluding direct vacancy costs 14.8% 17.5%
-------------------------------------------------- ----------- -----------
* included within the GBP3.3 million (2019: GBP3.1 million) of
property costs payable by the Group are GBP1.7 million (2019:
GBP1.5 million) of headlease and other costs that are recoverable
from the tenants.
The Group capitalises the initial direct costs incurred in
obtaining a lease, which are then charged to the income statement
over the term of the relevant lease. During the year, costs of
GBP54,000 (2019: GBP10,000) were capitalised, and GBP4,000 (2019:
GBP19,000) was released from capitalised costs and charged to the
income statement. Costs of GBP568,000 (2019: GBPnil) for
negotiating and documenting Covid-19 rent concessions, and rent
review and other letting costs of GBP35,000 (2019: GBP416,000) are
included in non-recoverable property operating expenses. A further
GBP106,000 (2019: GBPnil) relating to the amendment of loan
facilities as a result the Covid-19 rent concessions is included in
finance costs.
The Group has no capitalised overheads or other operating
expenses and does not capitalise interest.
Adjusted EPRA Cost Ratio excluding non-cash items
The Group also calculates an Adjusted EPRA Cost Ratio excluding
the following non-cash items to present what the Board considers to
be a measure of cost efficiency more directly relevant to its
business model:
-- revenue recognised ahead of cash receipt as a result of Rent
Smoothing Adjustments (note 4 ); and
-- any incentive fee, included in administrative expenses, which
is settled in shares (note 25 d).
Year to Year to
31 December 31 December
2020 2019
GBP000 GBP000
---------------------------------------------- ----------- -----------
EPRA gross rental income 120,021 131,097
Rent Smoothing Adjustments (note 4 ) (23,661) (10,564)
---------------------------------------------- ----------- -----------
Adjusted EPRA gross rental income excluding
non-cash items 96,360 120,533
EPRA costs 18,065 23,015
Incentive fee settled in shares (note 25 d) - (4,907)
Adjusted EPRA costs including direct vacancy
costs 18,065 18,108
Direct vacancy costs (293) (95)
---------------------------------------------- ----------- -----------
Adjusted EPRA costs excluding direct vacancy
costs 17,772 18,013
---------------------------------------------- ----------- -----------
Adjusted EPRA Cost Ratio including direct
vacancy costs 18.7% 15.0%
Adjusted EPRA Cost Ratio excluding direct
vacancy costs 18.4% 14.9%
---------------------------------------------- ----------- -----------
Like for like rental growth by portfolio
Leisure Healthcare Budget Hotel Total
portfolio portfolio portfolio portfolio
Passing rent GBP000 GBP000 GBP000 GBP000
---------- ---------- ------------ -----------
At 1 January 2020 46,785 35,607 28,334 110,726
Movement in Euro exchange
rate 377 - - 377
----------------------------- ---------- ---------- ------------ -----------
Like for like passing
rent 47,162 35,607 28,334 111,103
Rental uplifts 360 984 834 2,178
At 31 December 2020 47,522 36,591 29,168 113,281
----------------------------- ---------- ---------- ------------ -----------
Increase in like for like
passing rent 0.8% 2.8% 2.9% 2.0%
Portfolio valuation at
31 December 2020 793,060 769,095 384,783 1,946,938
----------------------------- ---------- ---------- ------------ -----------
Leisure Healthcare Budget Hotel Total
portfolio portfolio portfolio portfolio
Passing rent GBP000 GBP000 GBP000 GBP000
---------- ---------- ------------ -----------
At 1 January 2019 45,723 50,217 29,049 124,989
Disposals - (15,569) (874) (16,443)
Movement in Euro exchange
rate (346) - - (346)
----------------------------- ---------- ---------- ------------ -----------
Like for like passing
rent 45,377 34,648 28,175 108,200
Rental uplifts 1,408 959 159 2,526
At 31 December 2019 46,785 35,607 28,334 110,726
----------------------------- ---------- ---------- ------------ -----------
Increase in like for like
passing rent 3.1% 2.8% 0.6% 2.3%
Portfolio valuation at
31 December 2019 851,875 748,385 482,847 2,083,107
----------------------------- ---------- ---------- ------------ -----------
Like for like figures exclude foreign currency translation
movements and any properties not held throughout the period.
Like for like rental growth by country
Total
UK Germany portfolio
Passing rent GBP000 GBP000 GBP000
----------- --------- -----------
At 1 January 2020 104,239 6,487 110,726
Movement in Euro exchange
rate - 377 377
------------------------------ ----------- --------- -----------
Like for like passing
rent 104,239 6,864 111,103
Rental uplifts 1,949 229 2,178
At 31 December 2020 106,188 7,093 113,281
------------------------------ ----------- --------- -----------
Increase in like for like
passing rent 1.9% 3.3% 2.0%
Portfolio valuation at
31 December 2020 1,831,638 115,300 1,946,938
------------------------------ ----------- --------- -----------
Total
UK Germany portfolio
Passing rent GBP000 GBP000 GBP000
----------- --------- -----------
At 1 January 2019 118,365 6,624 124,989
Disposals (16,443) - (16,443)
Movement in Euro exchange
rate - (346) (346)
------------------------------ ----------- --------- -----------
Like for like passing
rent 101,922 6,278 108,200
Rental uplifts 2,317 209 2,526
At 31 December 2019 104,239 6,487 110,726
------------------------------ ----------- --------- -----------
Increase in like for like
passing rent 2.3% 3.3% 2.3%
Portfolio valuation at
31 December 2019 1,972,857 110,250 2,083,107
------------------------------ ----------- --------- -----------
Unaudited Supplementary Information
Rent Smoothing Adjustments
The Group's revenue recognition accounting policy set out in
note 2d, in line with IFRS, requires the impact of any fixed or
minimum rental uplifts to be spread evenly over the term of a lease
and as a result there is a material mismatch between the rental
cash flows and rental revenues shown in the income statement. The
adjustments historically related to the 41% of portfolio rents
(before rent concessions) that are subject to fixed uplifts and the
6% of portfolio rents with minimum uplifts on RPI-linked reviews.
From the current year onwards, the Rent Smoothing Adjustments also
include the effect of the temporary Covid-19 rent concessions
agreed with the tenants of the Budget Hotels and Pubs portfolios.
The reductions represent lease modifications under IFRS 16, so
their effect is spread over the remaining lease term from the
effective date of the modification, which is the date at which both
parties agreed to the modification.
A receivable is included in the book value of investment
property for the amount of rent included in the income statement
ahead of actual cash receipts. A receivable relating to fixed and
minimum uplifts increases over broadly the first half of the later
of the lease commencement or the date of acquisition, then unwinds
to zero over the remainder of each lease term. If a lease is
extended, the receivable at the date of modification is not
adjusted but the smoothing is recalculated over the new term from
that date. A receivable relating to rent concessions increases over
the period during which the rent is reduced, then unwinds to zero
over the remainder of each lease term.
So as not to overstate the portfolio value, any movement in the
receivable is offset against property revaluation movements. Since
this adjustment initially increases rental income and reduces
property revaluation gains (and vice versa in the second half of
each lease term or once the rent concession has expired) it does
not change the Group's retained earnings or net assets. Income
recognised in this way in excess of cash flow is also taken out of
Adjusted EPRA EPS so as not to artificially flatter the Group's
dividend cover.
The impact of the Rent Smoothing Adjustments on the Group's
balance sheet as at 31 December 2020 is as follows:
Receivable
at
31 December Maximum Date of maximum
2020 receivable receivable
GBPm GBPm
------------------------------------ ----------- ------------ ---------------
Fixed/minimum uplifts recognised
ahead of cash receipt:
Healthcare - Ramsay hospitals 109.1 111.8 March 2023
Leisure - German theme parks * 37.8 42.2 June 2026
Healthcare - Lisson Grove hospital 12.3 20.6 March 2035
The Brewery 3.9 23.5 June 2041
Manchester Arena 2.9 8.9 June 2032
Pubs 0.6 2.0 March 2030
------------------------------------ ----------- ------------ ---------------
166.6 209.0
Covid-19 related rent concessions:
Budget Hotels 13.7 21.1 Dec 2021
Pubs 1.1 1.1 Sept 2020
------------------------------------ ----------- ------------ ---------------
181.4 231.2
------------------------------------ ----------- ------------ ---------------
* at the year end exchange rate of EUR1:GBP0.90.
The future impact of this adjustment would change if there were
acquisitions, disposals, lease variations of properties with fixed
or minimum RPI-linked rental uplifts or further rent concessions.
Assuming no change in the portfolio, the change in rental income
that was recognised on the portfolio during the current year and is
expected for each of the next three financial years (with the
German adjustment translated at the 2020 average Euro conversion
rate of EUR1:GBP0.89) is as follows:
Fixed/minimum Covid-19 rent
uplifts concessions Total
GBPm GBPm GBPm
------ --------------- --------------- ----------
2020 8.9 14.8 23.7
2021 7.3 7.3 14.6
2022 5.7 (1.2) 4.5
2023 4.3 (1.2) 3.1
------- --------------- --------------- ----------
Unaudited Supplementary Information
Glossary
Adjusted EPRA EPS EPRA EPS adjusted to exclude non-cash and non-recurring
costs, calculated on the basis of the time-weighted
number of shares in issue
AGM Annual General Meeting
CVA Company Voluntary Arrangement, a process under
UK insolvency law which allows a company to reschedule
its debts with the consent of a specified majority
of its creditors
Dividend Cover Adjusted EPRA EPS divided by dividends per share
EPRA European Public Real Estate Association
EPRA EPS A measure of EPS designed by EPRA to present
underlying earnings from core operating activities
EPRA Guidance The EPRA Best Practices Recommendations Guidelines
October 2019
EPRA NTA A measure of NAV designed by EPRA to present
the fair value of a company on a long term basis.
For these purposes, the Group uses EPRA Net Tangible
Assets as defined in the EPRA Guidance
EPS Earnings per share, calculated as the profit
or loss for the period after tax attributable
to shareholders of the Company divided by the
weighted average number of shares in issue in
the period
ERV Estimated Rental Value: the independent valuers'
opinion of the open market rent which, on the
date of valuation, could reasonably be expected
to be obtained on a new letting or rent review
of a property
IFRS International Financial Reporting Standards
Investment Adviser Prestbury Investment Partners Limited or, as
the context requires, its predecessor Prestbury
Investments LLP
Investment Advisory The agreement between the Company (and its subsidiaries)
Agreement and the Investment Adviser, key terms of which
are set out on pages 204 to 221 of the Secondary
Placing Disclosure Document as modified by the
amendments to the basis of fee calculation set
out in note 25 b to the financial information
Key Operating Asset An asset where the operations conducted from
the property are integral to the tenant's business
LTV Loan to value: the outstanding amount of a loan
as a percentage of property value
Management Team Nick Leslau, Mike Brown, Tim Evans, Sandy Gumm
and Ben Walford, who are directors of the Investment
Adviser
NAV Net asset value
Net Initial Yield Annualised net rents on an investment property
as a percentage of the investment property valuation,
less purchaser's costs
Net Loan To Value LTV calculated on the gross loan amount less
or Net LTV cash balances
REIT Real Estate Investment Trust
Rent Smoothing Adjustments The adjustments required to recognise any mismatch
between rent received in the income statement
and cash rent received
Running Yield The anticipated Net Initial Yield at a future
date, taking account of any rent reviews or other
changes in rent in the intervening period
Secondary Placing The Secondary Placing Disclosure Document dated
Disclosure Document 14 March 2016 which is available in the Investor
Centre of the Company's website under "Circulars
to Shareholders/2016"
Total Accounting The movement in EPRA NTA over a period plus dividends
Return paid in the period, expressed as a percentage
of the EPRA NTA at the start of the period
Total Shareholder The movement in share price over a period plus
Return dividends paid in the period, expressed as a
percentage of the share price at the start of
the period
Uncommitted Cash Cash balances not subject to fixed charges in
favour of lenders, net of any creditors or other
cash commitments at the balance sheet date
Weighted Average The term to the first tenant break or expiry
Unexpired Lease Term of the leases in the portfolio, weighted by rental
value before rent concessions, also referred
to as WAULT
Unaudited Supplementary Information
Company Information
Registered office Cavendish House, 18 Cavendish Square, London W1G
0PJ
Directors Martin Moore, Non-Executive Chairman
Mike Brown
Leslie Ferrar, Chairman of the Audit Committee
Sandy Gumm
Jonathan Lane, Chairman of the Nominations Committee
Nick Leslau
Ian Marcus, Senior Independent Director and Chairman
of the Remuneration Committee
Company Secretary Sandy Gumm
Investment Adviser Prestbury Investment Partners Limited
Cavendish House, 18 Cavendish Square, London W1G
0PJ
Nominated Adviser Stifel Nicolaus Europe Limited
and Broker 150 Cheapside, London EC2V 6ET
Auditor BDO LLP
55 Baker Street, London W1U 7EU
Property valuers CBRE Limited
St Martin's Court, 10 Paternoster Row, London
EC4M 7HP
Christie & Co
Whitefriars House, 6 Carmelite Street, London
EC4Y 0BS
Derivative valuers Chatham Financial Europe Limited
12 St James's Square, London SW1Y 4LB
Financial PR advisers FTI Consulting LLP
200 Aldersgate, Aldersgate Street, London EC1A
4HD
Email: SecureIncomeREIT@FTIconsulting.com
Registrar Link Group
10(th) Floor, Central Square, 29 Wellington Street,
Leeds LS1 4DL
Registrar's helpline: 0371 664 0300
Calls are charged at the standard geographic rate
and will vary by provider. Calls outside the United
Kingdom will be charged at the applicable international
rate. The helpline is open 9.00am - 5.30pm, Monday
to Friday excluding public holidays in England
and Wales
Registrar's email: ShareholderEnquiries@LinkGroup.co.uk
Website www.SecureIncomeREIT.co.uk
Email Enquiries@SecureIncomeREIT.co.uk
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END
FR URUARAAUOAUR
(END) Dow Jones Newswires
March 11, 2021 02:00 ET (07:00 GMT)
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