Annual Report • Apr 30, 2016
Annual Report
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Annual Report and Revised Accounts for the period 1 April 2015 to 30 April 2016
| Strategic Report | |
|---|---|
| Financial Highlights | 1 |
| Property Highlights | 1 |
| Chairman's Statement | 2 |
| Business Model and Strategy | 4 |
| Key Performance Indicators | 12 |
| Investment Manager's Report | 15 |
| Principal Risks and Uncertainties | 21 |
| Our Portfolio | 24 |
| Diversity, Social and Environmental Matters | 37 |
| Governance | |
| Board of Directors | 38 |
| Corporate Governance Statement | 39 |
| Report of the Audit Committee | 43 |
| Directors' Remuneration Report | 45 |
| Directors' Report | 51 |
| Directors' Responsibilities Statement | 56 |
| Independent Auditor's Report | 57 |
| Revised Financial Statements | |
| Statements of Comprehensive Income | 61 |
| Statements of Changes in Equity | 62 |
| Statements of Financial Position | 63 |
| Statements of Cash Flows | 64 |
| Notes to the Financial Statements | 65 |
| EPRA Unaudited Performance Measures | 89 |
| Company Information | 92 |
| Glossary | 94 |
I am pleased to present the first annual audited results of AEW UK REIT plc (the 'Company') forthe period from 1 April 2015 to 30 April 2016. Thiswas a very active period forthe Company inwhichwe have implemented ourinvestment policy and met ourinvestment objective to deliver an attractive total return to shareholdersfrom investing predominately in a portfolio ofsmaller commercial propertiesin the UK.
In May 2015, the Company'sIPO raised gross proceeds of £100.5 million,with the Company's Ordinary Shares admitted to listing on the premium listing segment ofthe Official List ofthe UK Listing Authority and to trading on the Main Market ofthe London Stock Exchange.
OurInvestment Manager, AEW UK Investment Management LLP (the 'Investment Manager'), immediately began to invest the net proceedsfrom the IPO and establish a portfolio of commercial investment propertiesthroughout the UK, togetherwith the acquisition of a £9.63 million holding in the AEW UKCore Property Fund. The Company raised a further £17.18 million during a share issue in December 2015with the issuance of 17,010,000 newOrdinary Shares at an issue price of 101 pence pershare.
As at 30 April 2016, the Company has established a diversified portfolio of 25 commercial investment propertiesthroughout the UK with aweighted average total equivalent yield of 8.36%.
Our financial resultsreflect the establishment ofthe property portfolio forthe period aswe have implemented ourinvestment policy.
UnderInternational Financial Reporting Standards('IFRS') as adopted by the European Union, our operating profit forthe period ofthe IPO on 12 May 2015 to 30 April 2016was £4.86 million,with total comprehensive income of £4.64 million. Basic earnings pershare ('EPS') forthe periodwere 4.83 pence. Thisincludes net valuation losses of £1.94 million on the revaluation ofinvestment properties acrossthe portfolio (being £5.64 million oftransaction costs associatedwith asset purchases offset by £3.70 million of unrealised valuation gains) and a valuation gain on the investment in the AEW UKCore Property Fund of £0.48 million. Adjusting forthese valuation losses and finance costs of £0.23 million, adjusted earnings pershare forthe periodwere 6.34 pence.
Under European Public Real Estate Association ('EPRA') methodology, EPS forthe periodwas 6.33 pence and the NAV pershare at 30 April 2016was 98.97 pence. A full list of EPRA performance figures can be found on pages 88 to 90.
The audited NAV pershare as at 30 April 2016was 99.03 pence, priorto adjusting forthe fourth interim dividend forthe period of 2.00 pence pershare. This compareswith the Net Asset Value pershare of 98.03 pence immediately following the IPO.
The Company has Ongoing Charges of 1.14% forthe period underreview.
The Company's property portfolio has been independently valued by Knight Frank in accordancewith the RICS Valuation – Professional Standards(the 'Red Book'). As at 30 April 2016, the Company's Portfolio had a FairValue of £114.34 million as comparedwith the combined purchase price ofthe Portfolio of £110.64 million (excluding purchase costs), an increase of £3.70 million or 3.35%.
On 20 October 2015, the Company entered into a 5 year £40 million term loan facilitywith The Royal Bank of Scotland International Limited. The Company used £14.25 million ofthisfacility to continue to invest in properties once the initial net IPO proceeds had been fully invested. As at 30 April 2016, the unexpired term ofthe facilitywas 4.5 years and the gearingwas 12.5% (as calculated on the loan to market value ofthe property portfolio).
The loan attractsinterest at LIBOR +1.4%. The Company is protected from a potentialsignificant rise in interest rates asit has entered into an interest rate CAPwith a notional value of £14.25 million and a strike rate of 2.5% for 5 years.
On 18 May 2016 the Company amended the terms ofitsloan facilitywith The Royal Bank of Scotland International Limited to increase the facility limit from 20% to 30% ofNAV measured at drawdown. This amendmentwill enable the Company to utilise the facility up to an amount calculated asthe equivalent of 25% ofthe GAV (measured at drawdown)which isthe maximum gearing limit asset out in the Company's Prospectus.
We have developed our portfolio to provide an income stream to deliver ourtarget of declaring fully covered dividends of 2.00 pence per Ordinary Share per quarter.
During the period from the IPO to 30 April 2016,we have paid three interim dividends. The first,whichwe paid on 31 December 2015was 1.50 pence perOrdinary Share and related to the period from the IPO to 31 October 2015. The second interim dividend was 0.75 pence perOrdinary Share and related to the period from 1 November 2015 to 14 December 2015whenwe held oursecond Ordinary Share placement. The third interim dividendwas 1.25 pence perOrdinary Share and related to the period from 15 December 2015 to 31 January 2016. The second and third interim dividendstotalling 2.00 pence perOrdinary Sharewere paid on 31 March 2016.
On 31 May 2016, the Board declared a fourth interim dividend of 2.00 pence perOrdinary Share, in respect ofthe period from 1 February 2016 to 30 April 2016. Thisfourth interim dividendwas paid on 30 June 2016.
The Board and the Investment Manager are confident of delivering strong relative returnsfor ourshareholdersthrough the diversified and high income yielding property portfolio that has been established. Active asset management initiativesshould also provide opportunitiesforfurther capital value enhancement.
In the period since the Statement of Financial Position date at 30 April 2016, the Company has acquired a further 2 properties totalling £13.20 million (net of acquisition costs) and generating a further £1.41 million per annum in passing rent. Following these 2 acquisitions, the Company has nowfully invested the equity raised at the IPO and the Decemberfundraising and is geared to 20% of Gross Asset Value. The portfolio should provide the Companywith the ability to meet itstarget dividend of 8% per annum based on the IPO issue price of 100 pence perOrdinary Sharewith fully covered income.
On 20 May 2016 the Company held a General Meeting atwhich resolutionsto allot up to 11,740,000 Ordinary Shares and to allot up to 250,000,000 Ordinary Sharesin connectionwith a share issuance programmewere passed.
At the time ofwriting ourAnnual Report, the UK hasrecently voted in the EU referendum with the Leave campaign securing 51.9% of the vote. In the immediate aftermathwe have seen a period of volatility in the financial markets andwe enter a period of economic and political uncertainty forthe future ofthe UK.
The Company is keeping a close eye on the situation and ourinvestments but at the current time sees no need to take any immediate action.
The Company's objective isto growand raise more capital and the Company intendsthatstrategywill be implemented as market conditions allow.
Mark Burton Chairman 7 July 2016
AEW UK REIT plc (the 'Company') is a real estate investment company that was incorporated on 1 April 2015. The Company was admitted to the premium listing segment of the Official List of the UK Listing Authority and to trading on the London Stock Exchange's Main Market on 12 May 2015 following an Initial Public Offering ('IPO'). As part of its business model and strategy, the Company intends to carry on business with a group UK REIT status. With effect from 5 June 2015, HM Revenue and Customs has acknowledged the Company's intention to meet the necessary qualifying conditions to conduct its affairs as a group UK REIT.
The investment objective of the Company is to deliver an attractive total return to Shareholders from investing predominantly in a portfolio ofsmaller commercial properties in the United Kingdom.
In order to achieve its investment objective the Company invests in freehold and leasehold properties across the whole spectrum of the commercial property sector (office properties, retail warehouses, high street retail and industrial/warehouse properties) to achieve a balanced portfolio with a diversified tenant base.
Within the scope of restrictions set out below (under the heading "Investment Restrictions") the Company may invest up to 10 per cent. of its Net Assets (at the time of investment) in the AEW UK Core Property Fund and up to 10 per cent. of its net assets for investment (measured at the commencement of the project) in development opportunities, with the intention of holding any completed development as an investment.
On 1 June 2015, the Company made a £9.63 million investment in the AEW UK Core Property Fund, representing 9.7% of its Net Assets at the time of investment. The AEW UK Core Property Fund is a property authorised investment fund ('PAIF') managed by AEW UK Investment Management UK LLP which has a similar investment policy to that of the Company. The investment by the Company into the AEW UK Core Property Fund is not subject to management fees or performance fees otherwise charged to investors in the AEW UK Core Property Fund by the Investment Manager.
The Companywill at all times invest and manage its assets in a way that is consistent with its objective ofspreading investment risk and in accordance with its published investment policy. The Companywill not, at any time, conduct any trading activitywhich is significant in the context of the business of the Company as a whole.
In the event of a breach of the investment policy set out above or the investment restrictions set out below, the Investment Manager shall inform the Board upon becoming aware of the same and if the Board considers the breach to be material, notification will be made to a Regulatory Information Service and the Investment Managerwill look to resolve the breach.
Any material change to the investment policy of the Company may only be made with the prior approval of Shareholders.
The Companywill invest and manage its assets with the objective ofspreading risk through the following investment restrictions:
The Directors currently intend, at all times, to conduct the affairs of the Company so as to enable the Group to qualify as a REIT for the purposes of Part 12 of the CTA 2010 (and the regulations made thereunder).
The Company currently intends to exploit what it believes to be the compelling relative value opportunities offered by pricing inefficiencies in smaller commercial properties let on shorter occupational leases. The Company intends to supplement this core strategywith asset management initiatives to upgrade buildings and thereby improve the quality of income streams.
In the current market environment the focus will be to invest in properties which:
The Company may also invest up to a maximum of 10 per cent. of its Net Asset Value in the AEW UK Core Property Fund. The AEW UK Core Property Fund has an investment policy that is similar to that of the Company although generally it may invest in smaller value properties than those to be purchased by the Company. The Investment Manager has a stock allocation process that determines how property investments are allocated to the Company, AEW UK Core Property Fund and any other funds managed by the Investment Manager.
The Directors, rather than the Investment Manager, will determine when to divest of the Company's holding in the AEW UK Core Property Fund.
* As at 30 April 2016, the Company has an average property lot size of £4.6 million.
The Company's strategy is focused on delivering enhanced returns from the smaller end (up to £15 million) of the UK property market. The Company believes that there are currently pricing inefficiencies in smaller commercial properties relative to the long term pricing resulting in a significant yield advantage which the Company hopes to exploit. This is demonstrated in the graphs below;
Note: Equivalent yield is a weighted average of the initial yield and reversionary yield, and represents the yield which the property will produce based on timing of the income received.
Source: IPD, 04 May 2016
Alongside an experienced Board, the investment management team has an average of 17 years working together reflecting stability and continuity, which translates to confidence for ourshareholders.
The Investment Manager's investment philosophy is based on the principle of value investing. The Investment Manager looks to acquire assets with an intrinsically sustainable income profile coupled with underlying residual characteristics that underpin long term capital preservation. As value managers, the Investment Manager looks for assets where today's pricing may not correspond to long term fundamentals.
The Investment Manager has an in-house team of dedicated asset managers with a strong focus on active asset management to enhance income and add value to commercial properties.
Valley Retail Park, Belfast
Triple Net Initial Yield is a representation to the investorwhat their initial net yield would be at a predetermined purchase price after taking account of all associated costs. E.g. void costs and rent free periods.
The average weighted return a propertywill produce according to the present income and estimated rental value assumptions, assuming the income is received quarterly in advance.
The expected return the propertywill provide once rack rented.
Weighted average unexpired lease term to expiry is the average lease term remaining to expiry, across the portfolio weighted by contracted rent. The Triple Net Initial Yield isin linewith the
Company'starget dividend yield meaning that, after costs, the Company should have the ability to meet itstarget dividend through property income.
An Equivalent Yield profile in linewith the Company'starget dividend yield showsthat, after costs, the Company should have the ability to meet itstarget dividend through property income.
A Reversionary Yield profile that isin linewith an initial yield profile shows a potentially sustainable income stream that can be used to meet dividends past the expiry of a property's current leasing arrangements.
The Investment Manager believesthat current market conditions present an opportunity whereby assetswith a shorter unexpired lease term are often mispriced. It is also the Investment Manager's viewthat a shorterWAULT is useful for active asset management asit allows the Investment Managerto engage in direct negotiationwith tenantsratherthan via rent review mechanisms.
8.38% at 30 April 2016.
8.36% at 30 April 2016.
at 30 April 2016.
6.08 years
at 30 April 2016.
the portfolio.
| KPI AND DEFINITION | RELEVANCE TO STRATEGY | PERFORMANCE |
|---|---|---|
| 5. Weighted Average Unexpired Lease Term to break Weighted average unexpired lease term to break is the average lease term remaining to break, across the portfolio weighted by contracted rent. |
The Investment Manager believes that current market conditions present an opportunity whereby assets with a shorter unexpired lease term are often mispriced. It is also the Investment Manager's view that a shorter WAULT is useful for active asset management as it allows the Investment Manager to engage in direct negotiation with tenants rather than via rent review mechanisms. |
4.94 years at 30 April 2016. |
| 6. NAV Net asset value (NAV) is the value of an entity's assets minus the value of its liabilities. |
The NAV reflects the success of the Company's strategy. |
£116.38 million at 30 April 2016. |
| 7. Leverage (Loan to Gross Asset Value) The proportion of our property portfolio that is funded by borrowings. |
The Company intends to utilise borrowings to enhance returns over the medium term. Borrowings will not exceed 25 per cent. of Gross Asset Value (measured at drawdown). It is currently anticipated that the level of total borrowings will typically be at the level of 20 per cent. of Gross Asset Value (measured at drawdown). |
10.5% at 30 April 2016. |
| 8. Vacant ERV The Vacant ERV of the space in the property portfolio which is currently let, as a percentage of the total ERV of |
The Company's aim is to minimise vacancy of the properties. A low level ofstructural vacancy provides an opportunity for the Company to |
3.16% at 30 April 2016. |
capture rental uplifts and manage the mix of
tenants within a property.
The exposure to real estate development or property development encompassing activities that range from the purchase of land for development to material refurbishments.
Dividends declared in relation to the year. The Company targets a dividend yield of between 8 to 9% per annum on the IPO issue price, when fully invested.
The ratio of total administration and property operating costs expressed as a percentage of average net asset value throughout the period.
Profit before tax is a profitability measurewhich considersthe Company's profit before the payment of corporate income tax.
By nature of its high yielding strategy, the Companywill limit its exposure to property developments which will lead to a temporary reduction in income. It will consider limited or infill development to the extent that this will not detract from a property's income.
The dividend reflects the Company's ability to deliver a sustainable income stream from its portfolio.
TheOngoing Chargesratio provides a measure oftotal costs associatedwith managing and operating the Company,which includesthe managementfees due to the Investment Manager. The Investment Managerpresentsthis measure to provide investorswith a clearpicture of operational costsinvolved in running the Company.
The PBT is an indication ofthe Company's financial performance forthe period inwhich its strategy is exercised.
0% at 30 April 2016.
for the quarter to 30 April 2016. This supports an annualised target of 8.0 pence pershare.
for the period from inception to 30 April 2016.
at 30 April 2016.
for the period from inception to 30 April 2016.
Alex Short – Portfolio Manager
Operating profit before investment property and investment revaluationswas £6.31 million forthe period ofthe IPO on 12 May 2015 to 30 April 2016. The Company has built a diversified portfolio of propertiessince the IPO and as at 30 April 2016 holds 25 investment properties.
Net rental income earned from this portfolio during the period underreviewamountsto £6.88 million. Net asset value as at 30 April 2016was £116.38 million.
The Company received dividends during the period totalling £0.65 million from its investment in the AEW UKCore Property Fund (the 'AEW Core Fund'). In the period to 31 October 2015, a dividend of £0.27 millionwasreceived in relation to the Company's investment in the AEW Core Fund. A further dividend of £0.38 millionwasreceived from the AEW Core Fund in relation to the period 1 October 2015 to 31 March 2016 representing a gross dividend of 4.72 pence per share. In addition, the valuation ofthe investment ofthe AEW Core Fund hasincreased from £9.63 million on acquisition to £10.11 million at 30 April 2016, a rise of 5.01%.
A loss of £1.94 million has arisen on the revaluation ofinvestment properties acrossthe portfolio, mainly driven by £5.64 million of transaction costs associatedwith asset purchases, although thisis partially offset by £3.70 million of unrealised gains acrossthe portfolio.
Administration expenses,which include the Investment Manager'sfee and other costs attributable to the running ofthe Company for the period,were £1.22 million. The Company's Ongoing Chargesforthe period is 1.14%. The Company hasincurred finance costs of £0.23 million during the period underreview.
The total profit before tax forthe period of £4.64 million, equatesto basic earnings pershare of 4.83 pence.
The Company's property portfolio has been independently valued by Knight Frank in accordancewith the RICS Valuation – Professional Standards Global January 2014, including the InternationalValuations Standards, and RICS Professional Standards UKJanuary 2014 (revised April 2015). Referencesto "the Red Book"referto either or both ofthese documents, as applicable. The properties have been valued on the basis of FairValue in accordancewith the RICS Valuation – Professional Standards VVPS4 (1.5) FairValue and VPGA1 Valuationsfor Inclusion in Financial Statements,which adopt the definition of FairValue used by the International Accounting Standards Board.
As at 30 April 2016, the Company's Portfolio had a FairValue of £114.34 million.
Our objective isto build a diversified portfolio ofinvestment propertiesthroughout the UK to support a target dividend of 8-9 pence perOrdinary Share. Newacquisitions have been selected to provide an income return to meet ourtarget. We undertake active asset management to seek opportunitiesto achieve rental growth, let vacantspace and enhance value through initiativessuch as refurbishments.
The majority of assetsthat have been acquired are fully let and the portfolio has a vacancy rate (as a % of Estimated Rental Value ('ERV')) of 3.16% as at 30 April 2016. During the reporting period, key asset management initiatives have included:
On 20 October 2015, the Company entered into a 5 year £40 million term credit facilitywith The Royal Bank of Scotland International Limited ('RBSi').
As at 30 April 2016, the Company had utilised £14.25 million ofits £40 million facilitywith RBSi. Gearing as at 30 April 2016was 12.5% (Loan to market value ofthe property portfolio). The loan attractsinterest at LIBOR + 1.4%. To mitigate the interest rate risk that arises as a result of entering into a variable rate linked loan, the Company entered into an interest rate cap on £14.25 million ofthe loan at a strike rate of 2.5% on 4 March 2016 for 5 years.
On 18 May 2016, the Company completed an amendment to the terms ofitsfacilitywith RBSi. The terms ofthe facility limit have increased from 20% to 30% ofNAV measured at drawdown. Thiswill enable the Company to utilise the facility up to an amount calculated asthe equivalent of 25% ofthe Gross Asset Value (measured at drawdown), the maximum gearing limit asset out in the Company's Prospectus.
On 27 May 2016, the Company acquired two mixed use assetsin Nottingham and Blackpool for a total of £13.20 million, net of acquisition costs. With these two acquisitions, the Company has nowfully invested its equity capital and is geared to 20% Gross Asset Value, in linewith itsinvestmentstrategy.
Nottingham, acquired for £8.15 million, islocated on WheelerGatewith frontage to Old Market Squarewithin the retailing core ofthe City Centre. The property provides a total of 71,260 sq ft and islet to 9 office tenants and 6 retail tenantsincluding Poundland, Costa and Lakeland providing a WAULT of approximately 4.5 yearsto break and 5.2 yearsto expiry. The acquisition shows an initial yield of 9.0%, a reversionary yield of 9.9% and a capital value of £114 persq ft.
Blackpool, acquired for £5.05 million, is prominently located directly adjacent to the famous Blackpool Tower. The property extends to 100,079 sq ft and provides 3 retail units at ground floor and basement level let to Poundland, Sports Direct and J D Wetherspoons providing a WAULT of approximately 7.5 yearsto break and 10 yearsto expiry. The upper floors ofthe property are currently vacant and have been de-listed forrating purposes but provide strong potential for alternative useswhich the Company is currently investigating. The acquisition shows an initial yield of 9.5%, a reversionary yield of 8.4% and a capital value of £50 persq ft.
On 23 June 2016, the UK held the EU in/out referendum ("Brexit"). On the morning of 24 June 2016 afterthe votes had been counted, the Leave campaign had ultimately prevailed having gained 51.9% ofthe vote. The Prime Minister, David Cameron announced his resignation and the financial markets opened to high levels of volatilitywith Sterling and the FTSE taking big falls, bond yieldsfalling and gold pricesrising. In the immediate aftermath, 5 yearswap rates have fallen 50bps asthe markets anticipate an interest rate cut in the nearfuture toward offrecessionary pressure.
As anticipated in the event of a leave vote, the quoted real estate sector experienced an immediate fall in share prices, especially those with the greatest exposure to London. However, the impact on the smaller, externally managed REITswith limited exposure to London such asthe Company, has been less pronounced.
The uncertainty aroundwhat happens nextwith the UK's negotiation to exit its EU membership islikely to prolong caution from investors and tenants alike. A newprime ministeristo be appointed at the Conservative Party Conference in October and it is unclear at presentwhen Article 50will be served to begin the formal proceedings oftaking the UK out ofthe EU. Thiswill trigger a 2 year deadline to negotiate an exit from the EU. Trade deals between the UK and the rest oftheworldwill need to be negotiated and thisislikely to take considerable time and create prolonged uncertainty.
It remainsto be seen if Scotlandwill hold a second independence referendum that could lead to Scotland leaving the UK and joining the EU.
Despite recent economic turbulence, the outlook forUK commercial property returnsremains positive forthe foreseeable future. The real estate sectorremains attractive from an economic fundamental viewasthe yield gap to government bondsremainssignificant and the supply of available propertiesremains constricted.
Looking forward to 2016/2017,we expect rental growth to spread beyond Central London and to the rest ofthe South East and larger regional cities. As a result, income islikely to be the main component ofreturns as opposed to recent yearswhen total returns have largely been driven by capital growthwhichwe expect to slowdown through 2016/2017.
While the property market continuesto exhibit positive rental value growth, albeit atslowerratesto 2020, the capital growth is predicted to decline, particularly in the prime property sector assuggested by the IPFUKConsensus Forecast. The Company iswell positioned to take advantage ofincreasesin rental valuesthroughout the UKgiven the diversified spread ofincome producing properties within the portfolio.
The Company aimsto deliver an attractive total return to shareholdersfrom investing predominantly in a portfolio ofsmaller commercial propertiesin strong commercial locations acrossthe UK. It istherefore not assusceptible to capital value erosion aswill be experienced by holders of prime asset portfolios. The yield differential between prime and secondary property continuesto narrowwhichwill also be beneficial forshareholderslooking for an attractive returnwith the Company's portfolio.
In terms ofsectorfocus,we foresee the best total returnsto be in the industrial/logisticssector. Thisis driven by online retailers' requirementsfor distribution hubs around big citiesto enable them to deliver goodsin an expedient fashion to shoppers' homes. Forecast total returnsforindustrial property for 2016 are 11.7% (Source: Capital Economics, UKCommercial Property Analyst Q1 2016).
AEW UK Investment Management LLP is authorised and regulated by the Financial Conduct Authority as a full-scope AIFM and provides itsservicesto the Company.
The Company has appointed Langham Hall UKDepositary LLP ('Langham Hall') to act asthe depositary to the Company, responsible for cash monitoring, asset verification and oversight ofthe Company.
Underthe AIFM Directive, the Group isrequired to make disclosuresin relation to itsleverage underthe prescribed methodology of the Directive.
The AIFM Directive prescribestwo methodologiesfor evaluating leverage, namely the "Gross Method" and the "Commitment Method". The Group's maximum and actual leverage levels at 30 April 2016 are as per below:
| Leverage Exposure | Gross Method | Commitment Method |
|---|---|---|
| Maximum Limit | 140% | 140% |
| Actual | 105% | 112% |
In accordancewith the AIFM Directive, leverage is expressed as a percentage ofthe Group's exposure to its net asset value and adjusted in linewith the prescribed gross and commitment method. The gross method isrepresentative ofthe sum ofthe Group's positions after deducting cash balances andwithout taking into account any hedging and netting arrangements. The commitment method is representative ofthe sum ofthe Group's positionswithout deducting cash balances and taking into account any hedging and netting arrangements. Forthe purposes of evaluating the methods above, the Group's positions primarily reflect its current borrowings and net asset value.
As at 30 April 2016, the Company's portfolio hasthe following geographical and sector allocations(split by valuation).
The Group'stop ten properties as at 30 April 2016 asset out belowcomprise 67.98% ofthe portfolio value:
| Top Ten Properties | ||
|---|---|---|
| Property Name | Market Value Range (£) |
Sector |
| 225 Bath Street, Glasgow | 10-15m | Office |
| Valley Retail Park, Belfast | 10-15m | Retail Warehouse |
| 69-75 Above Bar Street, Southampton | 7.5-10m | Standard Retail |
| Eastpoint Business Park, Oxford | 7.5-10m | Office |
| 40 Queen Square, Bristol | 7.5-10m | Office |
| Barnstaple Retail Park, Barnstaple | 0-7.5m | Retail Warehouse |
| Langthwaite Grange Industrial Estate, South Kirkby | 0-7.5m | Industrial |
| Odeon Cinema, Southend On Sea | 0-7.5m | Other |
| 11/15 Fargate & 18/36 Chapel Walk, Sheffield | 0-7.5m | Standard Retail |
| Oak Park Rylands Lane, Droitwich | 0-7.5m | Industrial |
The table belowsets out the Group'stop ten tenants as at 30 April 2016 that represent 43.04% ofthe passing rent ofthe property portfolio:
| Tenant Group | Passing Rent (£'000) |
As % of Total Passing Rent |
|---|---|---|
| Ardagh Glass Limited | 676 | 6.53 |
| The Secretary of State for Communities and Local Government | 625 | 6.04 |
| Egbert H. Taylor & Company Limited | 620 | 5.99 |
| Odeon Cinemas Limited | 505 | 4.88 |
| Wella (UK) Holdings Limited | 410 | 3.96 |
| Barclays Bank plc | 375 | 3.62 |
| ROM Group Limited | 350 | 3.38 |
| B&Q plc | 348 | 3.36 |
| Waterstones Booksellers Limited | 280 | 2.71 |
| Aecom Limited | 266 | 2.57 |
The table above showsthe lease expiry profile ofthe portfolio tenants and the percentage oftenants expiring at variousintervals.
AEW UK Investment Management LLP July 2016
The Group's assets consist primarily ofUK commercial property. Its principal risks are therefore related to the commercial property market in general, but also to the particular circumstances ofthe individual properties and the tenantswithin the properties.
The Board has carried out a robust assessment ofthe principal risksfacing the Group, including those thatwould threaten its business model, future performance,solvency orliquidity. The Board's assessment identified a number ofspecific risksthat are reviewed by the Board on a quarterly basis. The Group has a limited operating history and therefore some risks are not yet known and some that are currently not deemed material, could turn out to be material in the future. An analysis ofthe principal risks and uncertaintiesisset out below:
Failure by tenantsto complywith theirrental obligations could affect the income that the properties earn and the ability ofthe Group to pay dividendsto its Shareholders.
Tenant covenant checks are carried out on newtenantswhere there are concerns asto their creditworthiness.
Asset management conduct ongoing monitoring and liaison with tenantsto manage potential bad debt risk.
Asset management initiativessuch asrefurbishmentworks may prove to be more extensive, expensive and take longerthan anticipated. Cost overruns may have a material adverse effect on the Group's profitability, the Net Asset Value and the share price.
Due diligence may not identify all the risks and liabilitiesin respect of an acquisition (including any environmental,structural or operational defects) that may lead to a material adverse effect on the Group's profitability, the Net Asset Value and the price of Shares.
Rental rates may be adversely affected by general UK economic conditions and otherfactorsthat depressrental rates, including local factorsrelating to particular properties/locations(such as increased competition).
Any fall in the rental ratesforthe Group's properties may have a material adverse effect on the Group's profitability, the Net Asset Value, the price ofthe Shares and the Group's ability to meet interest and capital repayments on any debt facilities.
Costsincurred on asset management initiatives are closely monitored against budgets and reviewed in regular presentationsto the Investment Management Committee of the Investment Manager.
The Group's due diligence relies on thework (such aslegal reports on title, property valuations, environmental, building surveys) outsourced to third partieswhich have Professional Indemnity coverin place.
The Group mitigatesthisrisk through building a diversified property and tenant basewith subsequent monitoring of concentration to individual occupiers(top 10 tenants) and sectors(geographical and sector exposure).
Quarterly meetings are heldwith the Investment Strategy Committee ofthe Investment Manager and Board ofDirectors to assesswhether any changeswith the market present risks thatshould be considered in our strategy.
| Principal risks and their potential impact | How risk is managed | ||
|---|---|---|---|
| REAL ESTATE RISKS (continued) | |||
| Property market | |||
| Any property market recession orfuture deterioration in the property market could, inter alia, (i) cause the Group to realise itsinvestments at lower valuations; (ii) delay the timings of the Group'srealisations. These risks could have a material adverse effect on the ability ofthe Group to achieve its investment objective. |
The Group hasinvestment restrictionsin place to invest and manage its assetswith the objective ofspreading and mitigating risk. |
||
| Property valuation | |||
| Property and property related assets are inherently difficult to value due to the individual nature of each property. |
The Group uses an independent valuer(Knight Frank) to value the properties at FairValue in accordancewith accepted RICS appraisal and valuation standards. |
||
| There may be an adverse effect on the Group's profitability, the Net Asset Value and the price ofOrdinary Sharesin cases where properties are soldwhose valuations have previously been materially overstated. |
|||
| FINANCIAL RISKS | |||
| Breach of borrowing covenants | |||
| The Group has entered into a term credit facility. | The Group monitorsthe use of borrowings on an ongoing | ||
| Material adverse changesin valuations and net income may lead to breachesin the LTV and interest coverratio covenants. |
basisthroughweekly cash flowforecasting and quarterly risk monitoring to monitor financial covenants. |
||
| Interest rate rises | |||
| The Group's borrowingsthrough a term credit facility issubject to interest rate risk due to changing LIBOR rates. Any increasesin LIBOR rates may have an adverse effect on the Group's ability to |
An interest rate cap of 2.5% isin place to mitigate the adverse impact of possible interest rate rises. |
pay dividends.
| Principal risks and their potential impact | How risk is managed | ||
|---|---|---|---|
| CORPORATE RISKS | |||
| Use of service providers | |||
| The Group has no employees and isreliant upon the performance ofthird party service providers. |
The performance ofservice providersin conjunctionwith their service level agreementsis monitored via regular calls and face |
||
| Failure by any service providerto carry out its obligationsto the Group in accordancewith the terms ofits appointment could have a materially detrimental impact on the operation ofthe Group. |
to face meetings and the use of Key Performance Indicators where relevant. |
||
| Dependence on the Investment Manager | |||
| The Investment Managerisresponsible for providing investment managementservicesto the Group. |
The Investment Manager has endeavoured to ensure that the principal members ofits management team are |
||
| The future ability ofthe Group to successfully pursue its investment objective and investment policy may, among other things, depend on the ability ofthe Investment Managerto retain its existing staffand/orto recruit individuals ofsimilar experience and calibre. |
suitably incentivised. | ||
| Ability to meet objectives | |||
| The Group may not meet itsinvestment objective to deliver an attractive total return to shareholdersfrom investing predominantly in a portfolio ofsmaller commercial propertiesin the United Kingdom. |
The Group has an investment policy to achieve a balanced portfoliowith a diversified tenant base. The Group also has investment restrictionsin place to limit exposure to potential risk factors. These factors mitigate the risk of fluctuationsin |
||
| Poorrelative total return performance may lead to an adverse reputational impact that affectsthewiderGroup's ability to raise newcapital and newfunds. |
returns. | ||
| TAXATION RISKS | |||
| Group REIT status | |||
| The Group has a UK REIT statusthat provides a tax-efficient | The Group monitors REIT compliance through the Investment |
corporate structure.
Ifthe Group failsto remain a REIT forUK tax purposes, its profits and gainswill be subject to UK corporation tax.
Any change to the tax status orin UK tax legislation could impact on the Group's ability to achieve it'sinvestment objectives and provide attractive returnsto Shareholders.
The Group monitors REIT compliance through the Investment Manager on acquisitions; the Administrator on asset and distribution levels; the Registrar and Broker on shareholdings and the use ofthird-party tax advisorsto monitor REIT compliance requirements.
Attractive yield, improving industrial location
| Property characteristics | Adding value | |
|---|---|---|
| Property type | Industrial | |
| Area | 56,123 sq ft | |
| Purchase price | £3.37m | M56 to M62. |
| Purchase yield | 8.00% | |
| Vendor | Property Company | |
| Lease |
| Tenants | Multi-let to two tenants providing a WAULT of 3.2 yearsto break and 4.6 yearsto expiry. |
|
|---|---|---|
| Rent | Average passing rent of £5.08 psf. |
Attractive yield, improving industrial location
| Property characteristics | Adding value | |
|---|---|---|
| Property type | Industrial | |
| Area | 16,154 sq ft | |
| Purchase price | £0.91m | M56 to M62. |
| Purchase yield | 7.92% | |
| Constructed | 1990's | |
| Vendor | Private | |
| Lease |
| Tenants | Single letwith an unexpired term of 5 years, 2 yearsto break. |
|---|---|
| Rent | Passing rent of £4.71 psf. |
High yielding industrial investment
| Property characteristics | Adding value | |
|---|---|---|
| Property type | Industrial | |
| Area | 43,421 sq ft | |
| Purchase price | £2.00m | |
| Purchase yield | 11.34% | |
| Vendor | Standard Life | to planning. |
| Lease | ||
| Tenants | Equinox International Ltd. | |
| £240,000 pa. WAULT of 0.4 year to break and 5.4 yearsto expiry. |
Rent Passing rent of £5.54 psf.
High yielding industrial units
| Property characteristics | Adding value | |
|---|---|---|
| Property type | Industrial | |
| Area | 230,850 sq ft | |
| Purchase price | £5.80m | |
| Purchase yield | 11.00% | |
| Vendor | Onward Holdings | |
| Lease | ||
| Tenants | Both units(16 and 16a) let to Ardagh Glass Ltd. Total £682,029 pa. WAULT of |
|
| 1.54 yearsto expiry | ||
| Rent | Average passing rent of £2.95 psf. |
Industrial complex let to a strong covenant
| Property characteristics | Adding value | |
|---|---|---|
| Property type | Industrial | |
| Area | 188,555 sq ft | |
| Purchase price | £6.62m | |
| Purchase yield | 10.40% | |
| Vendor | Receivership sale | |
| Lease | ||
| Tenants | Single let to Taylor Bins(trading | |
| name) providing a WAULT of 6.5 yearsto expiry. |
||
| Rent | Average passing rent of £3.29 psf. |
Prominentsouth east town centre location,strong underlying trade
| Property characteristics | Adding value | |
|---|---|---|
| Property type | Leisure | |
| Area | 40,635 sq ft | |
| Purchase price | £5.70m | |
| Purchase yield | 8.40% | |
| Vendor | Institution | indexation. |
| Lease | ||
| Tenants | Fully let to Odeon Cinemas Ltd | |
| providing a WAULT of 6.4 years to expiry. |
||
| Rent | Average passing rent of | |
| £12.42 psf. ERV of £13.00 psf. |
Three fully industrial units,strategically located nearthe M6
| Property characteristics | Adding value | |
|---|---|---|
| Property type | Industrial | |
| Area | 136,171 sq ft | |
| Purchase price | £3.85m | |
| Purchase yield | 9.80% | |
| Vendor | Property Company | the income. |
| Lease | ||
| Tenants | Multi-let to Tata Steel and Micheldever Tyres providing a WAULT of 5.9 years expiry. |
|---|---|
| Rent | Average passing rent of £2.96 psf. |
Prime Bristol Office Location, refurbishment potential
| Property characteristics | Adding value | |
|---|---|---|
| Property type | Office | |
| Area | 38,326 sq ft | |
| Purchase price | £7.20m | |
| Purchase yield | 8.70% | |
| Vendor | Fund | |
| Lease | ||
| Tenants | Multi-let to 6 tenantswith 46% vacancy in terms of floor area. |
|
| WAULT of 1.6 yearsto break and 2.2 yearsto expiry. |
||
| Rent | Average passing rent of | vacant space. |
£16.70 psf(on letspace).
Single let industrial unit in established location, reversionary potential
| Property characteristics | Adding value | |
|---|---|---|
| Property type | Industrial | |
| Area | 81,979 sq ft | |
| Purchase price | £2.17m | |
| Purchase yield | 8.50% | |
| Vendor | Property Company | |
| Lease | ||
| Tenants | Single let to Sapa Components | |
| UK Ltdwith a WAULT of 2.7 years to expiry. |
||
| Rent | Average passing rent of £2.38 psf. |
Single let industrial unit, long term income stream
| Property characteristics | Adding value | |
|---|---|---|
| Property type | Industrial | |
| Area | 93,588 sq ft | to long lease. |
| Purchase price | £3.44m | |
| Purchase yield | 8.24% | of £3.25 psf. |
| Vendor | Property Company | |
| Lease | ||
| Tenants | Single let to Kverneland Group | |
| UK Ltdwith a WAULT of 9.4 years | ||
| to expirywith no break option. | ||
| Rent | £3.25 psf(ERV). Passing rent is £0 as currently in a rent free period. |
|
Modern,single let industrial unit in prime South East location
| Property type | Industrial |
|---|---|
| Area | 58,445 sq ft |
| Purchase price | £3.39m |
| Purchase yield | 10.00% |
| Vendor | Property Company |
| Tenants | Fully let to Wella UKHoldings Ltdwith a WAULT of 1.7 yearsto break and 3.7 yearsto expiry. |
|---|---|
| Rent | Average passing rent of £7.01 psf. |
Majorsouth east city, improving occupier demand
| Property type | Office |
|---|---|
| Area | 74,266 sq ft |
| Purchase price | £8.20m |
| Purchase yield | 9.40% |
| Constructed | 1980's |
| Vendor | Property Company |
| Lease | |
| Tenants | 5 tenants providing a WAULT of 5.1 yearsto break and 6.9 years to expiry. |
| Rent | Average passing rent of |
£10.95 psf.
Top 20 retailing centre, improving occupier demand
| Property characteristics | Adding value | |
|---|---|---|
| Property type | Retail | |
| Area | 21,936 sq ft | thewider area. |
| Purchase price | £9.25m | |
| Purchase yield | 8.75% | |
| Constructed | 1993 | |
| Vendor | Fund | |
| Lease | ||
| Tenants | Fully let to 3 tenants providing a |
| Tenants | Fully let to 3 tenants providing a WAULT of 5.2 yearsto expiry. |
|---|---|
| Rent | Average passing rent of £197.00 psfIn Terms of Zone A ('ITZA'). |
Prime office location, tenantwedded to the location
| Property characteristics | Adding value | |
|---|---|---|
| Property type | Office | |
| Area | 34,418 sq ft | |
| Purchase price | £5.40m | |
| Purchase yield | 10.90% | |
| Constructed | 1988 | |
| Vendor | Fund | to planning. |
| Lease | |
|---|---|
| Tenants | Government tenantwith 2.9 yearsto break and 4.5 years to expiry. |
| Rent | Average passing rent of £18.16 psf. |
Prominent location, attractive yield
| Property characteristics | Adding value |
|---|---|
| -------------------------- | -------------- |
| Property type | Retailwarehouse | |||
|---|---|---|---|---|
| Area | 17,656 sq ft | |||
| Purchase price | £2.16m | |||
| Purchase yield | 10.00% | |||
| Constructed | 1994 | |||
| Vendor | Fund | |||
| Lease | ||||
| Tenants | Fully let to 3 tenants providing a WAULT of 5.8 yearsto expiry. |
|||
Rent Average passing rent of £12.95 psf.
City centre location, attractive yield profile
| Property characteristics | ||
|---|---|---|
| Property type Office |
||
| 88,159 sq ft | ||
| £12.20m | rental growth. | |
| Purchase price Purchase yield 10.00% |
||
| 1980's | ||
| Fund | ||
| Fully let to 7 tenants providing a | ||
| 4.3 yearsto expiry. | ||
| Average passing rent of £14.68 psf. |
of floor plate. | |
| WAULT of 2.1 yearsto break and | Adding value |
Modern scheme, attractive yield profile
| Property characteristics | Adding value | |||
|---|---|---|---|---|
| Property type | Retailwarehouse | |||
| Area | 100,189 sq ft | |||
| Purchase price | £7.15m | |||
| Purchase yield | 14.00% | |||
| Constructed | 2003 | |||
| Vendor | Asset Manager | |||
| Lease | ||||
| Tenants | Let to 5 tenants providing a WAULT of 10.5 yearsto break and |
13.1 yearsto expiry. Rent Average passing rent of £9.75 psf.
Long income, higher alternative use potential
| Property characteristics | Adding value |
|---|---|
| -------------------------- | -------------- |
| Property type | Industrial | |||
|---|---|---|---|---|
| Area | 121,733 sq ft | |||
| Purchase price | £3.50m | |||
| Purchase yield | 8.82% | |||
| Constructed | 1960's | |||
| Vendor | Property Company | |||
| Lease | ||||
| Tenants | Single let for a further 13.9 years with a tenant break option in 8.9 years. |
|||
| Rent | Average passing rent of £2.87 psf. |
Prime retailing location, attractive yield profile
| Property characteristics | Adding value | ||||
|---|---|---|---|---|---|
| Property type | Retail | ||||
| Area 34,362 sq ft |
|||||
| Purchase price | £5.30m | ||||
| Purchase yield | 8.90% | ||||
| Vendor Lease |
Fund | retailing city. | |||
| Tenants | Multi-let to 7 tenants providing a | ||||
| WAULT of 2.5 yearsto break and 5.0 yearsto expiry. |
|||||
| Rent | Passing rent of £135 psf on the | ||||
| prime units. |
Lowcapital value psf,strong and improving occupier market
| Property characteristics | Adding value | |
|---|---|---|
| Property type Office |
||
| Area 18,466 sq ft |
||
| Purchase price £2.18m |
||
| 8.40% | ||
| Constructed 1980 |
||
| Vendor Private vendor |
park location. | |
| Fully let to 2 tenants providing a | market. | |
| WAULT of 4.1 yearsto break and | ||
| Rent Average passing rent of £10.49 psf. |
||
| 8.4 yearsto expiry. |
Refurbishment potential ifthe first floor tenant breakstheirlease and in the medium term ERV could increase to £15 psf on refurbished accommodation.
Fully let on rebased rents, established location
| Property characteristics | Adding value | ||
|---|---|---|---|
| Property type | Retailwarehouse | ||
| Area | 51,021 sq ft | ||
| Purchase price | £6.79m | ||
| Purchase yield 8.50% |
|||
| Constructed | 1988 | ||
| Vendor | Guy& St Thomas' Charitable Foundation |
rebased rents. | |
| Lease | |||
| Tenants | B&Q, Sports Direct and Poundland. WAULT of 7.93 years to expiry. |
8.6 years. | |
| Rent | Average passing rent of |
£11.97 psf.
Income longerthan portfolio level WAULT,strong covenant
| Property characteristics | Adding value | |
|---|---|---|
| Property type Industrial |
||
| Area | 24,307 sq ft | |
| Purchase price | £1.28m | |
| Purchase yield | 7.64% | |
| Constructed | 2010 | |
| Vendor | Private | |
| Tenants | Single letwith an unexpired term of 7.3 years. Secured against National Crash Repair Centre Ltd. |
|---|---|
| Rent | Lowpassing rent of £4.25 psf. |
The current lease provides a strong income stream.
Income longerthan portfolio level WAULT,strong covenant
| Property characteristics | Adding value | ||
|---|---|---|---|
| Property type | Industrial | ||
| Area | 12,836 sq ft | ||
| Purchase price | £0.28m | ||
| Purchase yield | 11.1% | ||
| Constructed | 1980's | ||
| Vendor | Private | ||
| Lease | |||
| Tenants | Single letwith an unexpired term of 7.3 years. Secured against National Crash Repair Centre Ltd. |
||
| Rent | Lowpassing rent of £2.50 psf. |
Income longerthan portfolio level WAULT,strong covenant
| Property characteristics | Adding value | ||
|---|---|---|---|
| Property type | Industrial | ||
| Area | 28,348 sq ft | ||
| Purchase price | £1.53m | ||
| Purchase yield 7.66% |
|||
| Constructed | 1980's | ||
| Vendor Private |
|||
| Lease | |||
| Tenants Single letwith an unexpired term of 7.3 years. Secured against National Crash Repair Centre Ltd. |
|||
| Rent | Average passing rent of£4.73 psf. |
The current lease provides a strong income stream.
Established industrial location,strong tenant demand
| Property type | Industrial | ||
|---|---|---|---|
| Area | 37,992 sq ft | ||
| Purchase price | £2.00m | ||
| Purchase yield | 9.5% | ||
| Vendor | Property Company | ||
| Lease | |||
| Tenants | Carrs Coatings Limited |
Rent Average passing rent of£5.35 psf.
12.3 years unexpired term.
During the period the Board approved and adopted the diversity policy. The policy acknowledgesthe importance of diversity, including gender diversity, forthe Company.
The Board has established the following measurable objectivesfor achieving diversity on the Board:
Progress against all ofthese objectivesis ongoing and the Boardwill report more fully in the next Annual Report.
The Company has no directsocial, community or employee responsibilities. The Company has no employees and accordingly no requirement to separately report in this area asthe management ofthe portfolio has been delegated to the Investment Manager.
The Investment Manageris an equal opportunities employerwho respect and seek to empower each individual and the diverse cultures, perspectives,skills and experienceswithin theirworkforce.
In light ofthe nature ofthe Company's businessthere are no relevant human rightsissues and there isthus no requirement for a human rights policy.
There are three male Directorswho do not have service contracts.
The Investment Manager acquires and manages properties on behalf ofthe Company. It isrecognised that these activities have both direct and indirect environmental impacts.
The Investment Manager has a Sustainable and Responsible Investment ('SRI') policy. This can be found on the Investment Manager's website (http://www.aeweurope.com/en/Strategies/UK/overview.html).
The Investment Managerbelieves environmentally responsible fund management means being active, on the ground every day. As part ofthis process,the Investment Managersubmitsto theGlobal Real Estate SustainabilityBenchmark ('GRESB').GRESB is an industry driven organisation committed to assessing the sustainability ofreal estate portfolios(public, private and direct) around the globe.
The Investment Managerisin the process ofsubmitting the Company's GRESB assessment andwill receive the results ofthis assessment in September 2016.
As an investment company, the Company's own direct environmental impact is minimal and greenhouse gas('GHG') emissions are therefore negligible. Information on the GHG emissionsin relation to the Company's property portfolio are disclosed on pages 52 and 53 the Directors' Report.
The Strategic Report has been approved and signed on behalf ofthe Board by:
Mark Burton Chairman 7 July 2016
Mr. Burton currently serves as a board member ofValue Retail plc. He also sits on the real estate advisory boardsforNorges Bank Investment Management and GreenOak; and acts as an advisor to Citic Capital Real Estate. Mr. Burton has qualified as a Chartered Surveyor, has been a member ofthe UKGovernment Property AdvisoryGroup andwasformerly chairman of The Investment Property Forum and Urban Land Institute UK.
Mr. Hyslop is currently a member ofthe investment committee of Columbus U.K. Real Estate Fund LP (a Schrodersfund), a member of the Investment Committee of Paloma Real Estate Fund I LP and is a consultant to AEW UK Investment Management LLP. Hewas until recently a member ofthe investment committees ofING Lionbrook Property Partnership, CBRE Investors, Gresham Real Estate Fund I & II and Columbus UK Real Estate Fund II (all Schrodersfunds) and a consultant to UBS Global Asset Management Limited.
Mr. Sandhu is chief executive officer and owner of The Santon Groupwhich has developed over £1 billion of property in the last 8 years. Hewas a founder and chief executive officer of Raven Mount plc, a co-founder of Raven Russia Limited,which Mr. Sandhu helped to list on AIM raising over £450m, and chief executive officer ofthe external fund managerto that company. Mr. Sandhu is a Fellowofthe Institute of Chartered Accountants having qualified as a Chartered Accountantwith KPMG LLP in London. Following qualification, he became secretary ofthe KPMG UK Property& Construction Group.
This Corporate Governance Statement comprises pages 39 to 42 and forms part ofthe Directors' Report.
The Board of AEW UK REIT plc has considered the principles and recommendations ofthe AIC Code of Corporate Governance ('AIC Code') by reference to the AIC Corporate Governance Guide forInvestment Companies('AIC Guide'). The AIC Code, as explained by the AIC Guide, addresses all the principlesset out in the UKCorporate Governance Code ('UKCode'), aswell assetting out additional principles and recommendations on issuesthat are ofspecific relevance to the Company. The Financial Reporting Council ('FRC') has confirmed that AIC member companieswho report against the AIC Code andwho followthe AIC Guidewill meet the obligationsin relation to the UKCode and associated disclosure requirements ofthe Disclosure Rules.
The AIC Code can be viewed at: http://www.theaic.co.uk/sites/default/files/uploads/files/AICCodeofCorporateGovernanceFeb15.pdf
The UKCode can be viewed at: http://www.frc.org.uk/our-work/Publications/Corporate-Governance/UK-Corporate-Governance-Code-2014.pdf
The Board considersthat reporting against the principles and recommendations ofthe AIC Code, and by reference to the AIC Guide (which incorporatesthe UKCorporate Governance Code),will provide betterinformation to shareholders.
Throughout the period ended 30 April 2016, the Company has compliedwith the recommendations ofthe AIC Code and the relevant provisions ofthe UKCorporate Governance Code, except asset out below.
The UKCorporate Governance Code includes provisionsrelating to:
Forthe reasonsset out in the AIC Guide, and as explained in the UKCorporate Governance Code, the Board considersthese provisions not relevant to the position ofthe Company, being an externally managed investment company. In particular, all ofthe Company's dayto-day management and administrative functions are outsourced to third parties. As a result, the Company has no executive directors, employees orinternal operations. The Company hastherefore not reported furtherin respect ofthese provisions.
The Board has adopted a schedule of mattersreserved for decision by the Board. These mattersinclude responsibility forthe determination ofthe Company'sinvestment objective and investment policy and overall responsibility forthe Company's activities, including the reviewofinvestment activity and performance and the control and supervision ofthe Investment Manager.
The Company hastwo Committees, the Audit Committee and the Management Engagement and Remuneration Committee. Having taken account ofthe size ofthe Board, it is not felt appropriate forthe Company to have a separate Nomination Committee, or a Senior Independent Director.
The Directors meet at regular Board meetings,which are held at least fourtimes a year,with additional meetings arranged as necessary. During the period to 30 April 2016, the number of Board and Committee meetings attended by each Directorwere asfollows:
| Board meetings | Audit Committee meetings | Management Engagement and Remuneration Committee Meetings* |
||||||
|---|---|---|---|---|---|---|---|---|
| Number entitled to attend |
Number attended |
Number entitled to attend |
Number attended |
Number entitled to attend |
Number attended |
|||
| Mark Burton | 8 | 8 | 1 | 1 | 0 | 0 | ||
| Bim Sandhu | 8 | 8 | 1 | 1 | 0 | 0 | ||
| James Hyslop | 8 | 8 | 1 | 1 | 0 | 0 |
* The Management Engagement and Remuneration Committee did not meet during the period to 30 April 2016 but met for the first time on 29 June 2016.
The Board considers and reviewsthe independence of each non-executive Director on an annual basis as part ofthe Directors' performance evaluation. In carrying out the review, consideration is given to factorssuch astheir character, judgement, commitment and performance on the Board and relevant committees. The independent Directorswill lead the appointment processfor any new Directors.
The Board consists ofthree non-executive Directors. Mark Burton and Bim Sandhu are considered independent. James Hyslop is not considered by the Board to be independent due to the fact that he is a consultant to AEW UK Investment Management LLP.
All Directorsserve on the basis ofletters of appointmentwhich are available forinspection upon request. On appointment nonexecutive Directors undertake that theywill have sufficient time to meetwhat is expected ofthem. The Board's policy on tenure isthat continuity and experience are considered to add significantly to the strength ofthe Board and, assuch, no limit on the overall length of service of any ofthe Directors, including the Chairman, has been imposed. All Directorswere appointed on 9 April 2015.
James Hyslop, as a non-independent Director,will be subject to annual re-election by shareholders. In accordancewith the Company's Articles of Association, Mark Burton and Bim Sandhuwillstand for election at the 2016 Annual General Meeting, being the first Annual General Meeting following their appointment. Accordingly, all Directorswillstand for election at the Company's first Annual General Meeting. In future years Bim Sandhu and Mark Burtonwill be subject to re-election at intervals of no longerthan three years.
As a result ofthe performance evaluation processthe Board considersthat all Directors continue to be effective, committed to their roles and have sufficient time available to perform their duties.
All Directorsreceive an induction on joining the Board and all Directorsreceive otherrelevant training as necessary. Asthe business environment changes, it isimportant to ensure the Directors'skills and knowledge are refreshed and updated regularly. Accordingly, the Company Secretary ensuresthat updates on corporate governance, regulatory and technical matters are provided to Directors at Board meetings. In thisway, Directors keep theirskills and knowledge relevantso asto enable them to continue to fulfil their duties effectively.
Directors have a statutory duty to avoid situationsinwhich they have or may have intereststhat conflictwith those ofthe Company, unlessthat conflict is first authorised by the Board. Thisincludes potential conflictsthat may arisewhen a Directortakes up a position with another company. The Company's Articles of Association allowthe Board to authorise such potential conflicts, and there is a procedure in place to dealwith any actual or potential conflict ofinterest. The Board dealswith each appointment on itsindividual merit and takesinto consideration all the circumstances.
The Board has a formal processto evaluate its own performance annually. The Chairman leadsthe assessmentwhich covered:
KPMG LLP has expressed itswillingnessto continue asthe Company's Auditor. As outlined in the Report ofthe Audit Committee on pages 43 and 44 resolutions proposing theirreappointment and to authorise the Audit Committee to determine theirremunerationwill be proposed at the 2016 AGM, asrecommended by the Audit Committee.
The Directors have overall responsibility forthe Company'ssystem ofinternal controls. A processisin place foridentifying, evaluating and managing the risksfaced by the Company. This process has been in place since incorporation and up to the date and approval of this Report.
The following are the key componentswhich the Company hasin place:
The risks of any failure ofthe internal controls are identified in the risk registerwhich isregularly reviewed by the Board and assessesthe probability and impact ofsuch risks. The Principal Risks and Uncertaintiesidentified from the risk register can be found in the Strategic Report on pages 21 to 23.
As part ofthe year end reporting processthe Board received letters of comfort from the Investment Manager, Broker, Registrar, Company Secretary and Fund Administratorregarding those service providersinternal controls. Following the reviewofthese submissionsfrom service providers, the Board has determined that the effectiveness ofthe systems ofinternal controlwere satisfactory. The Audit Committee believesthat the Company does not require an internal audit function asit delegatesits day to day operationsto third partieswhich are monitored by the Committee.
The internal controlssystems do not eliminate risk and can only provide reasonable assurance against mis-statement orloss.
The Company's first AGMwill take place at 12 noon on 7 September 2016 at The Cavendish, 81 Jermyn Street, St. James', London SW1Y 6JF. Allshareholders have the opportunity to attend and vote, in person or by proxy, at the AGM. Notice of AGM can be found on ourwebsite and in a bookletwhich is being mailed out at the same time asthis Annual Report. The Notice of AGM sets out the business ofthe meeting and an explanatory note on all resolutions. Separate resolutions are proposed in respect of each substantive issue. The AGM isthe Company's principal forum for communicationwith private shareholders. The Chairman ofthe Board and the Chairman of the Committeeswill be available to answershareholders' questions at the AGM.
The Committee is chaired by Bim Sandhu, and its other memberis Mark Burton. The Board considersthat Bim Sandhu hasrecent and relevant financial experience forthe purposes ofthe Code and the FRC's Guidance on Audit Committees. The Board issatisfied that the combined knowledge and experience ofits membersissuch that the Committee dischargesitsresponsibilitiesin an effective, informed and challenging manner.
The Committee assiststhe Board in discharging itsresponsibilitieswith regard to financial reporting, external audit and internal controls, including:
The ultimate responsibility forreviewing and approving the annual report and accounts and the half-yearly report remainswith the Board. The Committee gives due consideration to laws and regulations, the provisions ofthe Code and the requirements ofthe Listing Rules.
The Committee receivesreportsfrom external advisers and from the Investment Manager, asrequired, to enable it to discharge its duties.
The main activities undertaken during the financial period, and to the date ofthisreport,were that the Committee:
After discussionwith the Investment Manager and the Auditor, the Committee determined that the key area ofrisk in relation to the financialstatements ofthe Companywasthe valuations ofthe investment properties. The 25 propertiesin the portfolio as at 30 April 2016 are externally valued by qualified independent valuers(using the internationally accepted RICS Valuation – Professional Standards) andwhilst comparable market transactions provide good valuation evidence, there are assumptionswhich involve significant levels of judgement. The Committee considered the valuations ofthe Company's portfolio at 30 April 2016 and thesewere discussedwith the Investment Manager and Auditor at the conclusion ofthe Audit ofthe financialstatements.
The Auditoris prohibited from providing certain services, including bookkeeping, payroll administration services and management functions amongst others. Total feesfor non-auditservices provided by KPMG LLP forthe period ended 30 April 2016were £50,000 which is 37.1% oftotal fees paid to KPMG LLP. This consists offees of £40,000 forthe provision ofservices as Reporting Accountant in connectionwith the IPO and fees of £10,000 in relation to the reviewofthe Company's half-yearly accounts.
It isthe Committee'sresponsibility to monitorthe performance, objectivity and independence ofthe Auditor and thisis evaluated by the Committee each year. In evaluating KPMG LLP's performance the Committee examines five main criteria – robustness ofthe audit process, independence and objectivity, quality of delivery, quality of people and service, and value-added advice.
Having carried out the reviewthe Committee issatisfiedwith the Auditor's performance, objectivity and independence.
The Audit Committee meets at least twice a yearwith the Auditor, once at the planning stage before the audit and once afterthe audit at the reporting stage. The Auditor provides a planning report in advance ofthe annual audit, a report on the annual audit, and a report on theirreviewofthe interim financialstatements. The Committee has an opportunity to question and challenge the Auditorin respect of each ofthese reports. In addition, at least once a year, the Audit Committee has an opportunity to discuss any aspect ofthe Auditor's workwith the Auditorin the absence ofthe Investment Manager. After each audit, the Audit Committee reviewsthe audit process and considersits effectiveness. The reviewofthe 2016 audit concluded that the audit process hadworkedwell, and that the significant issues had been adequately addressed.
Following the completion ofthe annual reviewofthe performance ofthe Auditorthe Committee hasrecommended to the Board that the re-appointment of KPMG LLP asthe Company's Auditor be proposed to shareholders at the 2016 AGM and the Audit Committee be authorised to determine their remuneration.
Bim Sandhu Audit Committee Chairman 7 July 2016
This Report is prepared in accordancewith Schedule 8 ofthe Large and Medium-sized Companies and Groups(Accounts and Reports) (Amendment) Regulations 2013.
A resolution to approve this Directors' Remuneration Report (excluding the Directors' Remuneration Policy)will be proposed at the Annual General Meeting ofthe Company to be held on 7 September 2016.
The Management Engagement and Remuneration Committee comprisesthe independent non-executive directors, Mark Burton and Bim Sandhu. The recommendations ofthe AIC Code (Principle 5)state that the Chairman may be a member of, but not chair, the Remuneration Committee. Having taken account ofthe size ofthe Board and the remit ofthe Management Engagement and Remuneration Committee,which extends only to consideration of non-executive remuneration, the Board believesthat Mark Burton remainsthe mostsuitable Directorto chairthe Management Engagement and Remuneration Committee. Bim Sandhu isthe Committee's other member.
The Management Engagement and Remuneration Committee isresponsible forreviewing the appropriateness ofthe continuing appointment ofthe Investment Manager, ensuring the terms and conditions ofthe Investment Manager's continuing appointment alignwith the investment policy and investment objective ofthe Company and setting Director'sremuneration. The remuneration of the Chairmanwill be considered by the Management Engagement and Remuneration Committee in his absence.
The Committee receivesreportsfrom external advisers and from the Investment Manager, asrequired, to enable it to discharge its duties.
The main activities undertaken during the financial period, and to the date ofthisreport,were that the Committee:
The Committee keeps underreviewthe performance ofthe Investment Manager and the level and terms ofthe management fee. In the opinion ofthe Directors, the continuing appointment ofthe Investment Manager on the terms agreed isin the interests ofshareholders as awhole.
This Policy provides details ofthe remuneration policy forthe Directors ofthe Company. All Directors are non-executive, appointed underthe terms of Letters of Appointment, and none have a service contract. The Company has no employees.
A resolution to approve this Directors' Remuneration Policy is proposed at the Annual General Meeting ofthe Company to be held on 7 September 2016.
Ifthe resolution is passed, the Remuneration Policy provisionsset out belowwill apply until they are next put to shareholdersfor renewal ofthat approval,which must be at intervals of not more than three years, orifthe Remuneration Policy is varied, inwhich event shareholder approval forthe newRemuneration Policywill be sought.
The non-executive Directors ofthe Company are entitled to such rates of annual fees asthe Board at its discretion shall from time to time determine,subject to the aggregate annual fees not exceeding £400,000, and reimbursement ofreasonable fees and expenses incurred by them in the performance oftheir duties. In linewith the majority ofinvestment trusts, no component of any Director's remuneration issubject to performance factors. There are no provisionsin the Directors' Letters of Appointment forrecovery or withholding offees or expenses. Annual fees are pro-ratedwhere a change takes place during a financial period and the feesfor any newDirector appointedwill be in accordancewith this Remuneration policy.
| Component | Director | Rate |
|---|---|---|
| Annual Fee | All Directors | £20,000 |
| Additional Fee | Chairman of the Board | £5,000 |
| Additional Fee | Chairman of the Audit Committee | £4,000* |
* From 7 July 2016, the Chairman of the Audit Committee will be entitled to an additional fee of £4,000 per annum.
The remuneration policy ofthe Board is determined by the Management Engagement and Remuneration Committee and each Director abstainsfrom voting on their own individual remuneration. Directors' feesforthe period ended 30 April 2016were at a level of £25,000 per annum forthe Chairman and £20,000 per annum for otherDirectors. The Chairman ofthe Audit Committee received no additional fee. However, from 7 July 2016, the Chairman ofthe Audit Committeewill be entitled to an additional fee of £4,000 per annum making his annual fee £24,000. Therewere no changesrelating to Directors' remuneration made during the period and the only change proposed in the annual reviewofDirectors' feesforthe yearto 30 April 2017wasto entitle the Audit Committee Chairman to an additional annual fee of £4,000.
Article 109 permitsthe Company to provide pensions orsimilar benefitsforDirectors and employees ofthe Company. However, no pension schemes or othersimilar arrangements have been established and no Directoris entitled to any pension orsimilar benefits. No Directoris entitled to any other monetary payment or any assets ofthe Company. Accordingly the Single Total Figure table belowdoes not include columnsfor any ofthese items ortheir monetary equivalents.
Asthe Company does not have a Chief Executive Officer or any executive Directors, there are no percentage increasesto disclose in respect oftheirtotal remuneration, and it has not reported on these aspects ofremuneration that relate to executive directors.
The Directorswho served during the period received the following emoluments:
| Name of Director | Fees paid | Taxable benefits | Total |
|---|---|---|---|
| Mark Burton | £26,528 | – | £26,528 |
| James Hyslop | £21,222 | – | £21,222 |
| Bim Sandhu | £21,222 | – | £21,222 |
| Kristian Rogers* | – | – | – |
| Elliot Weston* | – | – | – |
* Kristian Rogers and Elliot Westonwere appointed as Directors upon incorporation ofthe Company on 1 April 2015 and resigned on 9 April 2015 afterthe current Board members had been appointed.
Directors' & Officers' liability insurance is maintained and paid for by the Company on behalf ofthe Directors.
In linewith market practice, the Company has agreed to indemnify the Directorsin respect of costs, charges, losses, liabilities, damages and expenses, arising out of any claims or proposed claims made for negligence, default, breach of duty, breach oftrust or otherwise, orrelating to any application under Section 1157 ofthe Companies Act 2006, in connectionwith the performance oftheir duties as Directors ofthe Company. The indemnitieswould also provide financialsupport from the Company should the level of cover provided by the Directors' & Officers' liability insurance maintained by the Company be exhausted.
None ofthe feesreferred to in the above tablewere paid to any third party in respect ofthe services provided by any ofthe Directors.
Taxable Benefits – Article 117 ofthe Company's Articles of Association providesthat Directors are entitled to be reimbursed for reasonable expensesincurred by them in connectionwith the performance oftheir duties and attendance at Board and General Meetings. Pensionsrelated benefits – Article 118 permitsthe Company to provide pension orsimilar benefitsforDirectors and employees ofthe Company. However, no pension schemes or othersimilar arrangements have been established and no Directoris entitled to any pension orsimilar benefits.
Directors do not have service contractswith the Company but are engaged under Letters of Appointment. These specifically exclude any entitlement to compensation upon leaving office forwhateverreason.
The chart belowcomparesthe share price total return (assuming all dividendsre-invested) to Shareholders comparedwith the total return on the FTSE 350 and FTSE 350 Real Estate Indices overthe period since inception ofthe Company. These indices have been chosen asthey are considered to be an appropriate benchmark againstwhich to assessthe relative performance ofthe Group.
The table belowsets out, in respect ofthe period ended 30 April 2016:
| Period ended 30 April 2016 |
|---|
| £68,972 |
| £652,706 |
| £3,730,125 |
* As the Company has no employees the total spend on remuneration comprises only the Directors' fees.
Neitherthe Company's Articles of Association northe Directors' Letters of Appointment require a Directorto own sharesin the Company. The interests ofthe Directors and their connected personsin the equity and debtsecurities ofthe Company at 30 April 2016 are shown in the table below:
| Director | Number of Ordinary Shares |
% of Total Voting Rights |
|---|---|---|
| Mark Burton | 75,000 | 0.064 |
| James Hyslop | 100,000 | 0.085 |
| Bim Sandhu | 400,000* | 0.340 |
* 100,000 Ordinary Shares held in Mr Sandhu's spouse's name, Mrs Pardeep Sandhu, 150,000 Ordinary Shares held in The Santon Pension Fund (a SSAS for him and his spouse) and 150,000 Ordinary Shares held in The Sandhu Charitable Foundation.
There have been no changesto Directors' interests between 30 April 2016 and the date ofthis Report.
No viewsin respect ofDirectors' remuneration have been expressed to the Company by shareholders. However, the Company is committed to ongoing shareholder dialogue and any viewswhich are expressed by shareholders on the fees being paid to Directors would be taken into consideration by the Management Engagement and Remuneration Committeewhen reviewing the Directors' Remuneration Policy and in the annual reviewofDirectorsfees. A binding resolution is being put to shareholders on the Remuneration Policy at the Annual General Meeting on 7 September 2016.
On behalf ofthe Board and in accordancewith Part 2 of Schedule 8 ofthe Large and Medium-sized Companies and Groups(Accounts and Reports) (Amendment) Regulations 2013, I confirm that the above Directors' Remuneration Report including Directors' Remuneration Policy and Report on Remuneration Implementation summarises, as applicable, forthe period to 30 April 2016:
7 July 2016
The Directors' Report, prepared in accordancewith the requirements ofthe Companies Act 2006 and the UK Listing Authority's Listing Rules, and Disclosure and Transparency rules, comprises pages 39 to 55.
The interim dividends paid by the Company are set out in Note 9 ofthe Financial Statements. A summary ofthe Company's performance during the period isset out in the Strategic Report on pages 1 to 37.
The Directorswho served during the periodwere Mark Burton, Bim Sandhu, James Hyslop, Kristian Rogers and Elliot Weston. Kristian Rogers and Elliot Westonwere appointed as Directors upon incorporation ofthe Company on 1 April 2015 and resigned on 9 April 2015 afterthe current Board members had been appointed. The biographies ofthe Directors ofthe Company at the period end and up to the date ofthisreport can be found on page 38.
The Directors' powers are determined by UK legislation and the Articles of Association (the 'Articles'),which are available on ourwebsite. The Articles may be amended by a special resolution ofthe members. The Directors may exercise all ofthe Company's powers provided that the Articles or applicable legislation do notstipulate that any such powers must be exercised by the members.
Save forsuch indemnity provisionsin the Company's Articles of Association, there are no qualifying third party indemnity provisions in force. The Board has agreed to a procedure bywhich Directors may seek independent professional advice if necessary and at the Company's expense. The Company has also arranged forthe appropriate provision ofDirectors' and Officers' Liability Insurance.
The Group has considered its cash flows, financial position, liquidity position and borrowing facilities. The Group's cash balance as at 30 April 2016was £7.96 million, ofwhich £4.94 millionwasreadily available for potential investments.
As at 30 April 2016, the Group hassubstantial headroom against its borrowing covenants. The Group hasthe ability to utilise up to 30% ofNAV measured at drawdown underthe current borrowing facility limitswith a current Group LTV of 12.2% as at 30 April 2016.
The Group benefitsfrom a secure diversified income stream from leaseswhich are not overly reliant on any one tenant orsector.
As a result, the Directors believe that the Group iswell placed to manage its financing and other businessrisks. The Directors believe that there are currently no material uncertaintiesin relation to the Group's ability to continue for a period of at least 12 monthsfrom the date ofthe Group's financialstatements. The Board is, therefore, ofthe opinion that the going concern basis adopted in the preparation of the Annual Report is appropriate.
In accordancewith the provision C.2.2 ofthe revised UKCorporate Governance Code, the Directors have assessed the prospects ofthe Group over a period longerthan the 12 monthsrequired by the "Going Concern" provisions. The Board has considered the nature of the Group's assets and liabilities and associated cash flows and has determined that five years, up to 30 April 2021, isthe maximum timescale overwhich the performance ofthe Group can be forecastwith a material degree of accuracy and so is an appropriate period overwhich to considerthe Group's viability.
Considerationsin support ofthe Group's viability overthis five year period include:
• The current unexpired term underthe Group's debt facilitiesstands at 4.5 years;
The Group has a WAULT of 6.08 years, representing a secure income stream forthe period under consideration;
In assessing the Group's viability, the Board has carried out a thorough reviewofthe Group's business model, including future performance, liquidity, dividend cover and banking covenant testsfor a five year period.
The business modelwassubject to a sensitivity analysis,which involves flexing a number of key assumptions underlying the forecasts both individually and in aggregate for normal and stressed conditions. The five yearreviewalso considerswhether financing facilitieswill be renewed asrequired.
Based on the results ofthis analysis, the Directors have a reasonable expectation that the Groupwill be able to continue in operation and meet itsliabilities asthey fall due overthe five year period oftheir assessment.
Details ofthe Company'ssubsidiary, AEW UK REIT 2015 Limited, can be found in Note 1 to the Financial Statements.
AEW UK Investment Management LLP isthe Company'sInvestment Manager. Underthe terms ofthe Investment Management Agreement the Investment Managerisresponsible forthe day to day discretionary management ofthe Company'sinvestmentssubject to the investment objective and investment policy ofthe Company and the overallsupervision ofthe Directors. The Investment Manager is entitled to receive a management fee in respect ofitsservices of 0.9 per cent. per annum ofNAV (excluding uninvested proceeds from fundraisings). Any investment by the Company into the AEW UKCore Property Fundwill not be subject to management fees or performance fees otherwise charged to investorsin the AEW UKCore Property Fund by the Investment Manager. The Investment Management Agreement may be terminated by the Company orthe Investment Manager giving 12 months' notice,such notice not to be given earlierthan the first anniversary of Admission.
The financial risk management objectives and policies can be found in Note 22 ofthe Financial Statements on pages 84 to 86.
AEW UK REIT plc hasfollowed UKGovernment environmental reporting guidelines and used the UKGovernment 2016 greenhouse gas reporting conversion factorsfor company reporting to identify and report relevant GHG emissions overwhich it has operational control forthe period ended 30 April 2016. Namely:
Table 1 showsrelevant GHG emissions(in tonnes carbon dioxide equivalent) that AEW UK REIT plcwasresponsible forin the period ended 30 April 2016.
Table 1: AEW UK REIT plc Tonnes Carbon Dioxide Equivalent for the period ended 30th April 2016
| Tonnes of Carbon Dioxide Equivalent |
|
|---|---|
| GHG Scope | (tCO2e) |
| Scope 1 | 86.4 |
| Scope 2 | 744.6 |
AEW UK REIT plc has chosen to not to state a GHG intensity value in their first GHG emissionsstatement. The Company launched in May 2015 and through acquiring assets,where itwas counterparty to energy supplies, took responsibility forGHG emissionsfrom August 2015. All GHG emissionsrelating to the entity arise through assets owned by the Company. Assuch, AEW UK REIT plc has chosen to deferidentification of a GHG intensity value until GHG emissions covering the full reporting year are available. It istherefore expected that a GHG intensity valuewill be reported in the 2017 GHG emissionsstatement. This approachwill ensure that the reported GHG intensity value reflects an accurate baseline from which future performance can be measured against.
AEW UK REIT plc GHG emissions have been calculated and verified by an independent third party. A full copy ofthe methodology used, including scope,source or data and conversion factors, is available upon request.
At a general meeting held on 9 April 2015, the Companywas granted the authority to allot Ordinary Shares up to an aggregate nominal amount of £2,500,000 on a non pre-emptive basis pursuant to a Placing Programme. On 12 May 2015, gross proceeds of £100,500,000 were raised and 100,500,000 Ordinary Shareswere allotted and admitted to trading on the main market ofthe London Stock Exchange.
On 10 December 2015, the Company raised gross proceeds of £17,180,000 pursuant to the Placing Programmewhich closed on 9 December 2015 at an issue price of 101p pershare. A total of 17,010,000 Ordinary Shareswith an aggregate nominal value of £170,100were issued and admitted to trading on the London Stock Exchange on 15 December 2015. Following thisissue, therewere 117,510,000 Ordinary Shares of 1 pence each in issue. Each Ordinary share is entitled to one vote; accordingly, the total voting rights attaching to Ordinary Sharesin issue is 117,510,000. No shareswere held in treasury during the period or at the period end.
At a general meeting held on 20 May 2016, the Companywas granted authority to allot up to 11,740,000 Ordinary Shares on a non pre-emptive basis and to allot up to 250,000,000 Ordinary Sharesin connectionwith a share issuance programme on a non preemptive basis. No Ordinary Shares have been issued underthese authorities. The authority to allot up to 11,740,000 Ordinary Shares on a non pre-emptive basiswill expire at the end ofthe Company's AGM on 7 September 2016. The authority to allot up to 250,000,000 Ordinary Sharesin connectionwith a share issuance programmewill expire at the end ofthe Company's AGM in 2017 unlessthe programme is closed before thistime.
At the Company's General Meeting held on 9 April 2015, the Companywas granted authority to purchase up to 14.99% ofthe Company's Ordinary Sharesin issue immediately following completion ofthe share issue. No shares have been bought back underthis authoritywhich expires at the earlier ofthe completion ofthe Company's first Annual General Meeting or 31 October 2016.
A resolution to renewthe Company's authority to purchase (eitherfor cancellation orfor placing into Treasury) up to 17,614,749 Ordinary Shares(being 14.99% ofthe issued Ordinary Share capital as at the date ofthisreport),will be put to shareholders at the 2016 AGM. Any purchasewill be made on the market and priceswill be in accordancewith the termslaid out in the Notice of AGM. The authoritywill be usedwhere the Directors considerit to be in the best interests ofshareholders.
Listing Rule 9.8.4 requiresthe Company to include specified information in a single identifiable section ofthe annual report or a cross reference table indicatingwhere the information isset out. The information required under Listing Rule 9.8.4(7) in relation to allotments ofsharesisset out above. The Directors confirm that no additional disclosures are required in relation to Listing Rule 9.8.4.
On incorporation, one Sharewasissued at £1.00 (fully paid) forthe purposes ofincorporation to the subscriberto the Company's memorandum of association. On 9 April 2015 the subscriber Sharewastransferred to the Investment Manager and 50,000 Restricted Shareswere issued at par(fully paid) to the Investment Manager. The Restricted Shareswere redeemed immediately following Admission out ofthe proceeds ofthe issue on 12 May 2015.
The profits ofthe Company (including accumulated revenue reserves) available for distribution and resolved to be distributed shall be distributed byway ofinterim and (where applicable)special dividends among the holders ofOrdinary Shares.
After meeting the liabilities ofthe Company on awinding-up, the surplus assetsshall be paid to the holders ofOrdinary Shares and distributed among such holdersrateably according to the amounts paid up or credited as paid up on theirshares.
Each Ordinary shareholderis entitled to one vote on a showof hands and, on a poll, to one vote for everyOrdinary Share held. The Notice ofMeeting and Form of Proxy stipulate the deadlinesforthe valid exercise of voting rights and, otherthanwith regard to Directors not being permitted to vote theirOrdinary Shares on mattersinwhich they have an interest, there are no restrictions on the voting rights of Ordinary Shares.
As at 30 April 2016 and 5 July 2016 the Company had been notified underDisclosure and Transparency Rule ('DTR') 5 ofthe following significant holdings of voting rightsin its Ordinary Shares. These holdings may have changed since notification, however notification of any change is not required until the next applicable threshold is crossed.
| As at 30 April 2016 | As at 5 July 2016 | |||
|---|---|---|---|---|
| Shareholder | Number of Ordinary Shares held |
% of total voting rights |
Number of Ordinary Shares held |
% of total voting rights |
| Close Asset Management Limited | 15,322,693 | 13.04 | 14,883,249 | 12.670 |
| Old Mutual plc | 11,779,945 | 10.02 | – | – |
| Schroder plc | 17,286,555 | 14.71 | 17,847,129 | 15.188 |
| Natixis Global Asset Management | 10,000,000 | 9.95* | – | – |
| Coutts Multi Asset Fund plc | 6,000,000 | 5.97* | 7,400,000 | 6.297 |
| Investec Wealth & Investment Limited | 4,813,400 | 4.79* | – | – |
| Kames Capital Plc | 3,500,000 | 2.97 | – | – |
* before increase of total voting rights following share issue and admission on 15 December 2015.
Related party transactions during the period to 30 April 2016 can be found in Note 24 ofthe Financial Statements on page 87.
So far as each Directoris aware, there is no relevant information,whichwould be needed by the Company's Auditorin connectionwith preparing their audit report (which appears on pages 57 to 60), ofwhich the Auditoris not aware; and each Director, in accordancewith section 418(2) ofthe Companies Act 2006, hastaken all reasonable stepsthat he ought to have taken as a directorto make himself aware of any such information and to ensure that the Auditoris aware ofsuch information.
Details of property acquisitions, dividends announced, loans drawn down and interest rate derivatives entered into afterthe period end can be found on page 16 ofthe Investment Manager's Report and Note 26 on page 88 ofthe Notesto the Financial Statements.
On behalf ofthe Board
7 July 2016
40 Dukes Place London EC3A 7NH
The Directors are responsible for preparing the Annual Report and Accountsin accordancewith applicable United Kingdom law and regulations.
Company lawrequiresthe Directorsto prepare Group and Parent Company financialstatementsfor each financial period. Underthat lawthey are required to prepare the group financialstatementsin accordancewith International Financial Reporting Standards as adopted by the EU ('IFRS') and have elected to prepare the Parent Company financialstatements on the same basis.
Under company lawthe Directors must not approve the financialstatements unlessthey are satisfied that they give a true and fair view ofthe state of affairs ofthe Group and Parent Company and oftheir profit orlossforthat period. In preparing each ofthe Group and Parent Company financialstatements, the directors are required to:
Undersection 454 ofthe Companies Act 2006 the Directors have the authority to revise the financialstatementsifthey do not comply with the Act. The revised financialstatements must be amended in accordancewith the Companies(Revision ofDefective Accounts and Reports) Regulations 2008. These require that the revised financialstatementsshowa true and fair viewasiftheywere prepared and approved by the Directors as at the date ofthe original financialstatements and accordingly do not take account of eventswhich have taken place afterthe date onwhich the original financialstatementswere approved.
TheDirectors are responsible for keeping adequate accounting recordsthat are sufficientto showand explain the Parent Company's transactions and disclosewith reasonable accuracy at any time the financial position ofthe Parent Company and enable them to ensure thatthe financialstatements and theDirectors' Remuneration Report complywith the Companies Act 2006. They are also responsible for safeguarding the assets ofthe group and hence fortaking reasonable stepsforthe prevention and detection offraud and other irregularities.
Under applicable lawand regulations,the Directors are also responsible forpreparing a Strategic Report, Directors' Report, Directors' Remuneration Report and CorporateGovernance Statementthat complywith thatlawand those regulations, and for ensuring thatthe Annual Reportincludesinformation required by the Listing Rules and Disclosure and Transparency Rules ofthe Financial Conduct Authority.
The Directorslisted on page 38, being the personsresponsible, hereby confirm to the best oftheir knowledge:
In the opinion ofthe Board, the Annual Report and Accountstaken as awhole, isfair, balanced and understandable and it providesthe information necessary to assessthe group's position and performance, business model and strategy.
On behalf ofthe Board
Mark Burton Chairman
30 November 2016
to the members of AEW UK REIT plc only
We have audited the revised financialstatements of AEW UK REIT PLC forthe 13 month period 1 April 2015 (date ofincorporation) to 30 April 2016 set out on pages 61 to 88. These revised financialstatementsreplace the original financialstatements approved by the directors on 7 July 2016. The revised financialstatements have been prepared underthe Companies(Revision ofDefective Accounts and Reports) Regulations 2008 ("the Regulations") and accordingly do not take account of eventswhich have taken place afterthe date on which the original financialstatementswere approved.
In our opinion:
In forming our opinion on the revised financialstatements,which is not modifiedwe have considered the adequacy ofthe disclosures made on page 65 ofthe revised financialstatements concerning the need to revise the financialstatements. The original financial statementswere approved on 7 July 2016 and our previousreportwassigned on that date. We have not performed a subsequent events reviewforthe period from the date of our previousreport to the date ofthisreport.
In arriving at our audit opinion above on the revised financialstatementsthe risk of material misstatement that had the greatest effect on our auditwas asfollows:
Referto pages 43 and 44 (Report ofthe Audit Committee), pages 66 to 71 (Accounting Policies) and pages 75 to 77 (Notes to the Financial Statements).
• The risk – Investment Propertiesrepresent 84% ofthe gross assets ofthe Group.
The portfolio comprises 25 propertieswhich are externally valued by qualified independent valuers and held at fair value at the statement of financial position date. Each property isindividual and itsfair valuewill be impacted by a number offactorsincluding location, contracted and future potential rental income, quality and condition ofthe building, tenant covenant, and market yields. Whilst comparable market transactions provide good valuation evidence, the individual nature of each property meansthat a key factor in the property valuations are assumptionswhich involve significant levels ofjudgement.
As a result, there is a significant risk overthe valuation ofthese investment properties and thisis one ofthe key judgemental areasthat our audit focused on.
• Ourresponse – In this area our proceduresincluded, discussionswith the Group's external property valuersto understand movementsin property valueswithin the portfolio and to determine the valuation methodology used.
In addition,with assistance from our own property valuation specialistwe:
We compared the information provided by the Group to its external valuers,such aslease data, rental income and property costs, to supporting documents including lease agreements and purchase agreements.
We also considered the adequacy ofthe Group's disclosures about the degree of estimation madewhen valuing these properties as disclosed in note 10.
The materiality forthe revised financialstatementswasset at £1.3 million. This has been determinedwith reference to a benchmark of Consolidated Gross Assets of £135.5 million ofwhich it representsjust under 1%. In light ofthe importance ofthe level of dividends paid to investors,we have determined that a lowerlevel of materiality should be applied to itemsin the Statement of Comprehensive Income impacting the dividend, being Profit aftertax excluding unrealised valuation movements on investments and investment properties and associated tax movements. Materiality of £0.3 million being just under 5% of Consolidated profit aftertax of £6.1 million calculated on this basis has been used in the audit ofthese amounts. We reported to the Audit Committee any corrected or uncorrected identified misstatement exceeding £3,500.
Ofthe group's 2 reporting components,we subjected 1 to an audit for group reporting purposes. This 1 component comprised 100% of group revenue, 100% of group profit before tax and 100% of group total assets.
In our opinion:
Based on the knowledgewe acquired during our audit,we have nothing material to add or drawattention to in relation to:
UnderISAs(UK and Ireland)we are required to report to you if, based on the knowledgewe acquired during our audit,we have identified otherinformation in the annual report that contains a material inconsistencywith eitherthat knowledge orthe revised financial statements, a material misstatement offact, orthat is otherwise misleading.
In particular,we are required to report to you if:
Underthe Companies Act 2006we are required to report to you if, in our opinion:
Underthe Listing Ruleswe are required to review:
We have nothing to report in respect ofthe above responsibilities.
As explained more fully in the directors' responsibilitiesstatementset out on page 56, the directors are responsible forthe preparation ofthe revised financialstatements and for being satisfied that they give a true and fair view. Ourresponsibility isto audit and express an opinion on the revised financialstatementsin accordancewith applicable lawand International Standards on Auditing (UK and Ireland). Those standardsrequire usto complywith the UK Ethical StandardsforAuditors.
A description ofthe scope of an audit of financialstatementsis provided on ourwebsite atwww.kpmg.com/uk/auditscopeother2014. In addition the audit ofrevised financialstatementsincludesthe performance of proceduresto assesswhetherthe revisions made by the directors are appropriate and have been properly made. Thisreport is made subject to important explanationsregarding our responsibilities, as published on thatwebsite,which are incorporated into thisreport asifset out in full and should be read to provide an understanding ofthe purpose ofthisreport, theworkwe have undertaken and the basis of our opinions.
Thisreport is made solely to the company's members as a body in accordancewith Chapter 3 of Part 16 ofthe Companies Act 2006 and asrequired by paragraph 7 ofthe Regulations. Our auditwork has been undertaken so thatwe mightstate to the company's members those matterswe are required to state to them in such an auditor'sreport and for no other purpose. To the fullest extent permitted by law,we do not accept or assume responsibility to anyone otherthan the company and the company's members as a body, for our audit work, forthisreport, orforthe opinionswe have formed.
London E14 5GL
30 November 2016
for the period 1 April 2015 to 30 April 2016
| Notes | Group for the period 1 April 2015 to 30 April 2016 £'000 |
Parent Company for the period 1 April 2015 to 30 April 2016 £'000 |
|
|---|---|---|---|
| Income | |||
| Rental and other income | 3 | 7,185 | 7,185 |
| Property operating expenses | 4 | (300) | (300) |
| Net rental and other income | 6,885 | 6,885 | |
| Dividend income | 3 | 653 | 653 |
| Net rental and dividend income | 7,538 | 7,538 | |
| Investment management fees | 4 | (653) | (653) |
| Auditor remuneration | 4 | (95) | (95) |
| Operation costs | 4 | (403) | (403) |
| Directors' remuneration | 5 | (72) | (72) |
| Operating profit before fair value changes | 6,315 | 6,315 | |
| Change in fair value of investment properties | 10 | (1,935) | (1,935) |
| Change in fair value of investments | 10 | 482 | 482 |
| Operating profit | 4,862 | 4,862 | |
| Finance expense | 6 | (226) | (226) |
| Profit before tax | 4,636 | 4,636 | |
| Taxation | 7 | – | – |
| Profit after tax | 4,636 | 4,636 | |
| Other comprehensive income | – | – | |
| Total comprehensive income for the period | 4,636 | 4,636 | |
| Earnings per share (pence per share) (basic and diluted) | 8 | 4.83 | 4.83 |
for the period 1 April 2015 to 30 April 2016
| Group | Share capital £'000 |
Share premium account £'000 |
Capital reduction reserve £'000 |
Retained earnings £'000 |
Total equity attributable to owners of the Group £'000 |
|---|---|---|---|---|---|
| Balance at beginning of the period |
– | – | – | – | – |
| Profit for the period | – | – | – | 4,636 | 4,636 |
| Other comprehensive income | – | – | – | – | – |
| Total comprehensive income | – | – | – | 4,636 | 4,636 |
| Ordinary Shares issued | 1,175 | 116,505 | – | – | 117,680 |
| Share issue costs | – | (2,211) | – | – | (2,211) |
| Cancellation of share premium | – | (97,565) | 97,565 | – | – |
| Dividends paid | – | – | – | (3,730) | (3,730) |
| Balance at 30 April 2016 | 1,175 | 16,729 | 97,565 | 906 | 116,375 |
| Parent Company | Share capital £'000 |
Share premium account £'000 |
Capital reduction reserve £'000 |
Retained earnings £'000 |
Total equity attributable to owners of the Parent Company £'000 |
|---|---|---|---|---|---|
| Balance at beginning of the period |
– | – | – | – | – |
| Profit for the period | – | – | – | 4,636 | 4,636 |
| Other comprehensive income | – | – | – | – | – |
| Total comprehensive income | – | – | – | 4,636 | 4,636 |
| Ordinary Shares issued | 1,175 | 116,505 | – | – | 117,680 |
| Share issue costs | – | (2,211) | – | – | (2,211) |
| Cancellation of share premium | – | (97,565) | 97,565 | – | – |
| Dividends paid | – | – | – | (3,730) | (3,730) |
| Balance at 30 April 2016 | 1,175 | 16,729 | 97,565 | 906 | 116,375 |
as at 30 April 2016
| Group | Parent Company | ||
|---|---|---|---|
| as at | as at | ||
| Note | 30 April 2016 £'000 |
30 April 2016 £'000 |
|
| Assets | |||
| Non-Current Assets | |||
| Investment property | 10 | 114,387 | 114,387 |
| Investments | 10 | 10,109 | 10,109 |
| 124,496 | 124,496 | ||
| Current Assets | |||
| Receivables and prepayments | 11 | 2,962 | 2,962 |
| Cash and cash equivalents | 12 | 7,963 | 7,963 |
| Other financial assets held at fair value | 13 | 77 | 77 |
| 11,002 | 11,002 | ||
| Total assets | 135,498 | 135,498 | |
| Non-Current Liabilities | |||
| Interest bearing loans and borrowings | 14 | (14,250) | (14,250) |
| Finance lease obligations | 16 | (1,791) | (1,791) |
| (16,041) | (16,041) | ||
| Current Liabilities | |||
| Payables and accrued expenses | 15 | (2,959) | (2,959) |
| Finance lease obligations | 16 | (123) | (123) |
| (3,082) | (3,082) | ||
| Total Liabilities | (19,123) | (19,123) | |
| Net Assets | 116,375 | 116,375 | |
| Equity | |||
| Share capital | 19 | 1,175 | 1,175 |
| Share premium account | 20 | 16,729 | 16,729 |
| Capital reduction reserve | 21 | 97,565 | 97,565 |
| Retained earnings | 906 | 906 | |
| Total capital and reserves attributable to equity holders of the Group/Parent Company |
116,375 | 116,375 | |
| Net Asset Value per share (pence per share) | 8 | 99.03 pps | 99.03 pps |
The revised financialstatements on pages 61 to 88were approved by theBoard ofDirectors on 30November2016 and signed on its behalfby:
Mark Burton Chairman AEW UK REIT plc Company number: 09522515
for the period 1 April 2015 to 30 April 2016
| Group for the period 1 April 2015 to 30 April 2016 £'000 |
Parent Company for the period 1 April 2015 to 30 April 2016 £'000 |
|
|---|---|---|
| Cash flows from operating activities | ||
| Operating profit | 4,862 | 4,862 |
| Adjustment for non-cash items: | ||
| Loss from change in fair value of investment property | 1,935 | 1,935 |
| Gain from change in fair value of investments | (482) | (482) |
| Changes in fair value of interest rate derivatives | (14) | (14) |
| Increase in receivables and prepayments | (2,962) | (2,962) |
| Increase in payables and accrued expenses | 2,936 | 2,936 |
| Net cash flow generated from operating activities | 6,275 | 6,275 |
| Cash flows from investing activities | ||
| Purchase of investment properties | (114,408) | (114,408) |
| Purchase of investments | (9,627) | (9,627) |
| Net cash used in investing activities | (124,035) | (124,035) |
| Cash flows from financing activities | ||
| Proceeds from issue of ordinary share capital | 117,680 | 117,680 |
| Share issue costs | (2,211) | (2,211) |
| Loan draw down | 14,250 | 14,250 |
| Finance costs | (266) | (266) |
| Dividends paid | (3,730) | (3,730) |
| Net cash flow generated from financing activities | 125,723 | 125,723 |
| Net increase in cash and cash equivalents | 7,963 | 7,963 |
| Cash and cash equivalents at start of the period | – | – |
| Cash and cash equivalents at end of the period | 7,963 | 7,963 |
for the period 1 April 2015 to 30 April 2016
These revised financial statements for the 13 month period ended 30 April 2016 replace the original financial statements for that period, which had been approved on 7 July 2016. These revised financial statements are now the statutory financial statements for that year.
The financial statements have been prepared as at the date on which the original financial statements were approved by the board of directors and not as at the date of the revision and accordingly do not deal with events between those dates.
In the original financial statements a single column/table had been presented in respect of the Statement of Comprehensive Income, Statement of Changes in Equity, Statement of Financial Position and Statement of Cash Flows in respect of both the Parent Company and the Group financial statements on the basis that to the £'000 level of rounding all amounts were the same for both sets of financial statements.
The Registrar of Companies has refused to accept for filing the original financial statements so presented as in their view such formats meant that they failed to comply with the Companies Act 2006, and as a consequence these revised financial statements have been prepared.
These revised financial statements present two columns or tables, one for the Parent Company financial statements and one for the Group financial statements, in each of the statements of comprehensive income, changes in equity, financial position and cash flows. The amounts in each pair of columns/tables are exactly the same amounts, because, as explained in note 2.1 to the original and revised financial statements, the Parent Company's only subsidiary is dormant and has no balances material for consolidation. Hence the effect of this revision is not to change any reported amounts but is confined to duplicating the presentation of those amounts in order to make clearer that those amounts represent the Parent Company as well as the Group.
Consequential amendments in respect of these financial statement captions and of other minor wording have been made.
AEW UK REIT plc (the 'Company') is a closed ended Real Estate Investment Trust ('REIT') incorporated on 1 April 2015 and domiciled in the UK. The registered office of the Company is located at 40 Dukes Place, London, EC3A 7NH.
The Company's Ordinary Shares were listed on the Official List of the UK Listing Authority and admitted to trading on the Main Market of the London Stock Exchange on 12 May 2015.
AEW UK REIT 2015 Limited is a subsidiary of the Company incorporated in the UK on 2 April 2015. At 30 April 2016, the Company held 1 share being 100% of the issued share capital. AEW UK REIT 2015 Limited is wholly owned by the Company (together known as the 'Group') and is currently dormant.
The consolidated financial statements of the Group for the 13-month period ended 30 April 2016 comprise the results of the Company and its subsidiary.
The nature of the Group's operations and its principal activities are set out in the Strategic Report on pages 1 to 37.
for the period 1 April 2015 to 30 April 2016
These financial statements are prepared and approved by the Directors in accordance with the principles of International Financial Reporting Standards ('IFRS') and interpretations issued by the International Accounting Standards Board ('IASB') as adopted by the European Union ('EU IFRS').
These financial statements have been prepared under the historical-cost convention, except for investment property, investments and interest rate derivatives that have been measured at fair value.
The financial statements are presented in Sterling and all values are rounded to the nearest thousand pound (£'000), except when otherwise indicated.
As the subsidiary AEW UK REIT 2015 Limited is dormant and has no balances material for consolidation, these consolidated financial statements are representative of the accounts of the Group and Company. Therefore notes 2 to 17 and notes 19 to 26 represent items in respect of both the Group and the Parent Company financial statements.
The consolidated financial statements for the period ended 30 April 2016 incorporate the financial statements of AEW UK REIT plc (the 'Company') and its subsidiary undertaking together (the 'Group'). Subsidiary undertaking refers to the entity controlled by the Company, being the entity AEW UK REIT 2015 Limited.
IFRS 10 outlines the requirements for the preparation of consolidated financial statements. The Company has control over an investee if all three of the following elements are present: power over the investee, exposure or rights to variable returns from the investee and the ability of the investor to use its power to affect those variable returns.
The following accounting standards and their amendments were in issue at the period end but will not be in effect until after this financial period and are not expected to have any material impact on the financial statements.
The preparation of financial statements in accordance with EU IFRS requires the Directors of the Group to make judgements, estimates and assumptions that affect the reported amounts recognised in the financial statements. However, uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or liability in the future.
The valuations of the Group's investment property will be at fair value as determined by the independent valuer on the basis of market value in accordance with the internationally accepted Royal Institution of Chartered Surveyors (RICS) Appraisal and Valuation Standards.
for the period 1 April 2015 to 30 April 2016
The valuations of the Group's investment in securities will be the last announced unit price for collective investment schemes as at the Statement of Financial Position date.
In accordance with IAS 39, the Group carries its interest rate derivatives at fair value. The fair values are estimated by the loan counterparty with revaluation occurring on a quarterly basis. The counterparties will use a number of assumptions in determining the fair values including estimations over future interest rates and therefore future cash flows. The fair value represents the net present value of the difference between the cash flows produced by the contracted rate and the valuation rate.
The Directors have made an assessment of the Group's and the Parent Company's ability to continue as a going concern and are satisfied that the Group has the resources to continue in business for at least 12 months from 7 July 2016 being the date of approval of the original financial statements by the directors. Furthermore, the Directors are not aware of any material uncertainties that may cast significant doubt upon the Group's and the Parent Company's ability to continue as a going concern. Therefore, the financial statements have been prepared on the going concern basis.
The principal accounting policies applied in the preparation of these financial statements are set out below.
The primary objective of the Group is to generate returns in Sterling, its capital-raising currency. The Group's performance is evaluated in Sterling. Therefore, the Directors consider Sterling as the currency that most faithfully represents the economic effects of the underlying transactions, events and conditions and it has therefore been adopted as the presentation currency.
Rental income receivable under operating leases is recognised on a straight-line basis over the term of the lease, except for contingent rental income, which is recognised when it arises.
Incentives for lessees to enter into lease agreements are spread evenly over the lease term, even if the payments are not made on such a basis. The lease term is the non-cancellable period of the lease together with any further term for which the tenant has the option to continue the lease, where, at the inception of the lease, the directors are reasonably certain that the tenant will exercise that option.
Deferred income is rental income received in advance during the accounting period.
for the period 1 April 2015 to 30 April 2016
Dividend income is recognised in profit and loss on the date the entity's right to receive a dividend is established.
Financing income comprises interest receivable on funds invested. Financing expenses comprise interest and other costs incurred in connection with the borrowing of funds. All other financing expenses are expensed in the period in which they occur.
Interest income and interest payable are recognised in profit or loss as they accrue, using the effective interest method.
Property held under a lease is classified as investment property when it is held to earn rentals or for capital appreciation or both. Investment property is measured initially at cost including transaction costs. Transaction costs include transfer taxes and professional fees to bring the property to the condition necessary for it to be capable of operating. The carrying amount also includes the cost of replacing part of an existing investment property at the time that cost is incurred if the recognition criteria are met.
Subsequent to initial recognition, investment property is stated at fair value. Gains or losses arising from changes in the fair values are included in profit or loss.
Investment properties are valued by the Valuation Agent on the basis of a full valuation with physical inspection at least once a year. Any valuation of an Immovable by the Valuation Agent must be undertaken in accordance with the current issue of RICS Valuation – Professional Standards (the 'Red Book'), or in the case of overseas immovables, on an appropriate basis, but guided by the FCA Rules.
The determination of the fair value of investment property requires the use of estimates such as future cash flows from assets (such as lettings, tenants' profiles, future revenue streams, capital values of fixtures and fittings, plant and machinery, any environmental matters and the overall repair and condition of the property) and discount rates applicable to those assets.
For the purposes of these financial statements, in order to avoid 'double counting', the assessed fair value is:
Investment property is derecognised when it has been disposed of or permanently withdrawn from use and no future economic benefit is expected after its disposal or withdrawal.
Gains or losses on the disposal of investment property are determined as the difference between net disposal proceeds and the carrying value of the asset in the previous full period financial statements.
Any gains or losses on the retirement or disposal of investment property are recognised in the profit or loss in the year of retirement or disposal.
for the period 1 April 2015 to 30 April 2016
Investments in collective investment schemes are stated at the latest share price for dealing purposes with any resultant gain or loss recognised in profit or loss.
Derivative financial instruments, comprising interest rate caps and swaps for hedging purposes, are initially recognised at fair value and are subsequently measured at fair value being the estimated amount that the Group would receive or pay to terminate the agreement at the period end date, taking into account current interest rate expectations and the current credit rating of the Company and its counterparties. The gain or loss at each fair value remeasurement date is recognised in profit or loss and hedge accounting is not applied. Premiums payable under such arrangements are initially capitalised into the Statement of Financial Position.
The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data is available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs significant to the fair value measurement as a whole.
Cash and short-term deposits in the Statement of Financial Position comprise cash at bank and shortterm deposits with an original maturity of three months or less.
Rent and other receivables are recognised at their original invoiced value. Where the time value of money is material, receivables are discounted and then held at amortised cost. Provision is made when there is objective evidence that the Group will not be able to recover balances in full. Balances are written off when the probability of recovery is assessed as being remote.
Capital prepayments are made for the purpose of acquiring future property assets. When the asset is acquired, the prepayments are capitalised as a cost of purchase. Where a purchase is not successful, these costs are reclassified as abortive costs and written off to profit or loss in the period they arise.
Other payables and accrued expenses are initially recognised at fair value and subsequently held at amortised cost.
Rent deposits represents cash received from tenants at inception of a lease and are consequently transferred to the rent agent to hold on behalf of the Group. These balances are held as creditors in the Statement of Financial Position.
for the period 1 April 2015 to 30 April 2016
All loans and borrowings are initially recognised at fair value less directly attributable transaction costs. After initial recognition, interest bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Borrowing costs are amortised over the lifetime of the facilities through profit or loss.
A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably.
A provision is recognised in the Statement of Financial Position when the Group has a present legal or constructive obligation as a result of a past event, that can be reliably measured and is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects risks specific to the liability.
Equity dividends are recognised when they become legally payable.
The costs of issuing or reacquiring equity instruments (other than in a business combination) are accounted for as a deduction from equity.
Corporation tax is recognised in profit or loss except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.
As a REIT, the Group is exempt from corporation tax on the profits and gains from its investments, provided it continues to meet certain conditions as per REIT regulations.
Taxation on the profit or loss for the period not exempt under UK REIT regulations comprises current and deferred tax. Current tax is expected tax payable on any non-REIT taxable income for the period, using tax rates enacted or substantively enacted at the period end date.
Deferred tax is provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax that is provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantially enacted at the period end date.
for the period 1 April 2015 to 30 April 2016
The Group has adopted European Public Real Estate Association ('EPRA') best practice recommendations, which it expects to broaden the range of potential institutional investors able to invest in the Group's Ordinary Shares. Under EPRA's methodology, EPS and NAV calculations for the period ended 30 April 2016 are presented in note 8 to these financial statements.
| Group and Parent Company for the period 1 April 2015 to 30 April 2016 £'000 |
|
|---|---|
| Gross rental income received | 6,153 |
| Surrender premium received | 1,000 |
| Dilapidation income received | 19 |
| Other property income | 13 |
| Total rental and other income | 7,185 |
| Dividend income: | |
| Property income distribution* | 629 |
| Dividend distribution | 24 |
| 653 | |
| Total Revenue | 7,838 |
* Property income distribution ('PID') is received from the investment in the AEW UK Core Property Fund which holds property directly. Rent available under the terms of the leases, is adjusted, for the effect of any incentives agreed.
for the period 1 April 2015 to 30 April 2016
| Group and | |
|---|---|
| Parent Company | |
| for the period | |
| 1 April 2015 to | |
| 30 April | |
| 2016 | |
| £'000 | |
| Property operating expenses | 300 |
| Investment management fee | 653 |
| Auditor remuneration | 95 |
| Operation costs | 403 |
| Total | 1,451 |
During the period ended 30 April 2016, KPMG LLP as the independent auditor of the Group received £20,000 in relation to the statutory audit of the initial accounts and £65,000 in relation to the statutory audit of the year end accounts. KPMG LLP also received £10,000 in relation to the review of the Company's half-yearly accounts and £40,000, which is included in equity, in relation to work performed as reporting accountant in connection with the IPO.
There are no employees employed by the Group.
| Group and | |
|---|---|
| Parent Company | |
| for the period | |
| 1 April 2015 to | |
| 30 April | |
| 2016 | |
| £'000 | |
| Directors' fees | 69 |
| Tax and social security | 3 |
| Total remuneration | 72 |
A summary of the Directors' remuneration is set out in the Directors' Remuneration Report on page 45.
for the period 1 April 2015 to 30 April 2016
| Group and | |
|---|---|
| Parent Company | |
| for the period | |
| 1 April 2015 to | |
| 30 April | |
| 2016 | |
| £'000 | |
| Interest payable on loan borrowings | 110 |
| Amortisation of loan arrangement fee | 40 |
| Agency fee payable on loan borrowings | 11 |
| Commitment fees payable on loan borrowings | 51 |
| 212 | |
| Change in fair value of interest rate derivatives | 14 |
| Total | 226 |
On 20 October 2015, the Group entered into a 5 year £40 million term credit facility with The Royal Bank of Scotland International Limited.
The Group and Parent Company has used this facility to continue to invest in properties once the net IPO proceeds had been fully invested. The facility can be used up to 30% loan to Net Asset Value measured at drawdown.
| Group and Parent Company for the period 1 April 2015 to 30 April 2016 £'000 |
|
|---|---|
| Analysis of charge in the period | |
| Profit before tax | 4,636 |
| Theoretical tax at UK corporation tax standard rate of 20% | 927 |
| Adjusted for: | |
| Exempt REIT income | (1,119) |
| UK dividend not taxable | (99) |
| Non taxable investment losses | 291 |
| Total | – |
for the period 1 April 2015 to 30 April 2016
| Group and Parent Company | ||||
|---|---|---|---|---|
| Profit after tax £'000 |
Weighted average number of shares |
Pence per share | ||
| Earnings per share (basic and diluted) for the period 1 April 2015 to 30 April 2016 |
4,636 | 96,022,424 | 4.83 | |
| Adjustments to revenue: | ||||
| Loss from change in fair value of investment property | 1,935 | – | 2.02 | |
| Gain from change in fair value of investments | (482) | – | (0.50) | |
| Change in fair value of interest rate derivatives | (14) | – | (0.02) | |
| EPRA earnings per share (basic and diluted) | 6,075 | 96,022,424 | 6.33 |
The ordinary number of shares is based on the time weighted average number of shares throughout the period.
The earnings per share calculation above is from the date of incorporation. From the date of incorporation of 1 April 2015 to the Initial Public Offering ('IPO'), 1 founder share was in existence.
| Group and Parent Company | ||||
|---|---|---|---|---|
| Net assets £'000 |
Ordinary Shares in issue |
NAV per share (pence) |
||
| NAV per share at 30 April 2016 | 116,375 | 117,510,000 | 99.03 | |
| Other financial assets held at fair value | (77) | – | (0.06) | |
| EPRA NAV per share at 30 April 2016 | 116,298 | 117,510,000 | 98.97 |
| Group and Parent Company for the period 1 April 2015 to 30 April 2016 £'000 |
|
|---|---|
| First dividend paid in respect of the period ended 31 October 2015 at 1.5p per Ordinary Share | 1,507 |
| Second dividend paid in respect of the period 1 November 2015 to 14 December 2015 at 0.75p per Ordinary Share |
754 |
| Third dividend paid in respect of the period 15 December 2015 to 31 January 2016 at 1.25p | |
| per Ordinary Share | 1,469 |
| Total dividends paid during the period | 3,730 |
| Fourth dividend declared for the period 1 February 2016 to 30 April 2016 at 2p per Ordinary | |
| Share | 2,350 |
| Total dividends declared in respect of the period | 6,080 |
The fourth dividend is not included in the accounts as a liability as at 30 April 2016.
for the period 1 April 2015 to 30 April 2016
| Group and Parent Company | |||
|---|---|---|---|
| Freehold £'000 |
Long Leasehold £'000 |
Total £'000 |
|
| UK Investment property | |||
| Purchases in the period | 88,798 | 25,610 | 114,408 |
| Revaluation of investment property | 247 | (315) | (68) |
| Valuation provided by Knight Frank | 89,045 | 25,295 | 114,340 |
| Adjustment to fair value for rent free debtor | (1,082) | ||
| Adjustment to fair value for rent guarantee debtor | (785) | ||
| Adjustment for finance lease obligations† | 1,914 | ||
| Total investment property | 114,387 | ||
| Investment in AEW UK Core Property Fund | |||
| Purchases in period | 9,627 | ||
| Gain from change in fair value | 482 | ||
| Total Investment in AEW UK Core Property Fund | 10,109 | ||
| Change in fair value of investment property | |||
| Loss from change in fair value | (68) | ||
| Adjustment to fair value for rent free debtor | (1,082) | ||
| Adjustment to fair value for rent guarantee debtor | (785) | ||
| (1,935) |
† Adjustment in respect of minimum payment under head leases separately included as a liability within the Statement of Financial Position.
Valuation of investment property is performed by Knight Frank LLP, an accredited external valuer with recognised and relevant professional qualifications and recent experience of the location and category of the investment property being valued.
The valuation of the Group's and Parent Company's investment property at fair value is determined by the external valuer on the basis of market value in accordance with the internationally accepted RICS Valuation – Professional Standards (incorporating the International Valuation Standards).
for the period 1 April 2015 to 30 April 2016
The determination of the fair value of investment property requires the use of estimates such as future cash flows from assets (such as lettings, tenants' profiles, future revenue streams, capital values of fixtures and fittings, plant and machinery, any environmental matters and the overall repair and condition of the property) and discount rates applicable to those flows.
The following table provides the fair value measurement hierarchy for non-current assets:
| Group and Parent Company | |||||
|---|---|---|---|---|---|
| Quoted prices in active markets (Level 1) £'000 |
Significant observable inputs (Level 2) £'000 |
Significant unobservable inputs (Level 3) £'000 |
Total £'000 |
||
| Assets measured at fair value | |||||
| Investment properties | – | – | 114,387 | 114,387 | |
| Investment in AEW UK Core Property Fund | – | – | 10,109 | 10,109 | |
| As at 30 April 2016 | – | – | 124,496 | 124,496 |
The Group has considered sensitivity analysis for assets measured at fair value and recognises the significant unobservable inputs relating to investment property and investments.
The significant unobservable inputs used in the fair value measurement categorised within Level 3 of the fair value hierarchy of the entity's portfolios of investment property are:
Increases (decreases) in the ERV (per sq ft p.a.) in isolation would result in a higher (lower) fair value measurement. Increases (decreases) in the discount rate/yield (and exit or yield) in isolation would result in a lower (higher) fair value measurement.
The significant unobservable inputs used in the fair value measurement categorised within Level 3 of the fair value hierarchy of the entity's investment is:
1) Single swinging price
Increase (decreases) in the single swinging price would result in a higher (lower) fair value measurement.
for the period 1 April 2015 to 30 April 2016
The significant unobservable inputs used in the fair value measurement categorised within Level 3 of the fair value hierarchy of the Group and Parents Company's portfolio of investment property and investments are:
| Class | Fair Value £'000 |
Valuation Technique |
Significant Unobservable Inputs |
Range £/psf |
|---|---|---|---|---|
| ERV | £21.81 – £426.24 | |||
| Investment Property | £114,340 | Income capitalisation | Equivalent yield | 6.70% – 11.90% |
| Investments | £10,109 | Market capitalisation | Single swinging price | £1.2581 |
Where possible, sensitivity of the fair values of level 3 assets are tested to changes in unobservable inputs to reasonable alternatives.
All gains and losses recorded in profit or loss for recurring fair value measurements categorised within Level 3 of the fair value hierarchy are attributable to changes in unrealised gains or losses relating to investment property and investments held at the end of the reporting period.
With regards to investment property, losses for recurring fair value measurements categorised within Level 3 of the fair value hierarchy, prior to adjustment for rent free debtor and rent guarantee debtor, are recorded in profit and loss.
With regards to investments, the single swinging price of the AEW UK Core Property Fund can swing to a lower price in the event that the net redemptions in the AEW UK Core Property Fund are over 1% of NAV. This pricing mechanism can be exercised by the managers of the AEW UK Core Property Fund at their discretion when the abovementioned condition is met and is known as the 'single swinging price'.
The carrying amount of the assets and liabilities, detailed within the Statement of Financial Position of the Group and Parent Company, is considered to be the same as their fair value.
| Change in single swinging price |
Change in ERV | Change in equivalent yield |
||||
|---|---|---|---|---|---|---|
| Sensitivity analysis | £'000 +5% |
£'000 -5% |
£'000 +5% |
£'000 -5% |
£'000 +5% |
£'000 -5% |
| Resulting fair value of investment properties | – | – | 119,303 | 109,166 | 107,815 | 121,126 |
| Resulting fair value of investments | 10,615 | 9,604 | – | – | – | – |
for the period 1 April 2015 to 30 April 2016
| Group and Parent Company 30 April 2016 £'000 |
|
|---|---|
| Receivables | |
| Dividend receivable | 193 |
| Rent free debtor | 1,082 |
| Rent guarantee debtor | 785 |
| Rent debtor | 622 |
| Rent agent float account | 92 |
| Other receivables | 29 |
| 2,803 | |
| Prepayments | |
| Property related prepayments | 149 |
| Depositary services | 8 |
| Listing fees | 2 |
| 159 | |
| Total | 2,962 |
| Group and Parent Company 30 April 2016 £'000 |
|
|---|---|
| Less than three months due | 573 |
| Between three and six months due | 331 |
| Between six and twelve months due | 32 |
| Total | 936 |
for the period 1 April 2015 to 30 April 2016
| Group and Parent Company 30 April 2016 £'000 |
|
|---|---|
| Cash at Bank | 7,963 |
| Total | 7,963 |
| Group and | |
|---|---|
| Parent Company | |
| 30 April | |
| 2016 | |
| £'000 | |
| Interest rate cap premium paid | 91 |
| Changes in fair value of interest rate derivatives | (14) |
| Total | 77 |
To mitigate the interest rate risk that arises as a result of entering into variable rate linked loans, the Group entered into an interest rate cap during the period.
The interest rate cap has a strike price of 2.50% and a notional amount of £14.25 million.
The total premium payable in the period towards securing the interest rate cap was £91,000.
The following table provides the fair value measurement hierarchy for interest rate derivatives:
| Group and Parent Company | ||||
|---|---|---|---|---|
| Valuation date |
Quoted prices in active markets (Level 1) £'000 |
Significant observable input (Level 2) £'000 |
Significant unobservable inputs (Level 3) £'000 |
Total £'000 |
| 30 April 2016 | – | 77 | – | 77 |
The fair value of these contracts are recorded in the Statement of Financial Position as at the period end.
There have been no transfers between level 1 and level 2 during the period, nor have there been any transfers between level 2 and level 3 during the period.
The carrying amount of the assets and liabilities, detailed within the Statement of Financial Position, is considered to be the same as their fair value.
for the period 1 April 2015 to 30 April 2016
| Group and Parent Company | ||||
|---|---|---|---|---|
| Bank borrowings drawn £'000 |
Bank borrowings undrawn £'000 |
Total £'000 |
||
| As at 1 April 2015 | – | – | – | |
| Bank borrowings drawn in the period | 14,250 | – | 14,250 | |
| Bank borrowings available but undrawn in the period | – | 25,750 | 25,750 | |
| As at 30 April 2016 | 14,250 | 25,750 | 40,000 |
The Group and Parent Company entered into a £40 million credit facility with the Royal Bank of Scotland on 20 October 2015, of which £25.75 million remained undrawn as at the period end.
Borrowing costs associated with the credit facility are shown as finance costs in note 6 to these financial statements.
The term to maturity as at the period end is 4.47 years as further represented below:
| Group and | |
|---|---|
| Parent Company | |
| 30 April | |
| 2016 | |
| £'000 | |
| Repayable between 1 and 2 years | – |
| Repayable between 2 and 5 years | 14,250 |
| Repayable in over 5 years | – |
| Total | 14,250 |
| Group and Parent Company 30 April 2016 £'000 |
|
|---|---|
| Deferred income | 1,675 |
| Accruals | 1,008 |
| Other creditors | 276 |
| Total | 2,959 |
for the period 1 April 2015 to 30 April 2016
Finance leases are capitalised at the lease's commencement at the lower of the fair value of the property and the present value of the minimum lease payments. The present value of the corresponding rental obligations are included as liabilities.
The following table analyses the minimum lease payments under non-cancellable finance leases for the period:
| Group and Parent Company 30 April 2016 £'000 |
|
|---|---|
| Not later than one year | 123 |
| Later than one year but not later than five years | 372 |
| Later than five years | 1,419 |
| Total | 1,914 |
The Group and Parent Company has entered into commercial property leases on its investment property portfolio. These noncancellable leases have a remaining term of between 0 and 20 years.
Future minimum rentals receivable under non-cancellable operating leases as at 30 April 2016 are as follows:
| Group and Parent Company 30 April 2016 £'000 |
|
|---|---|
| Within one year | 9,902 |
| After one year but not more than 5 years | 31,651 |
| More than five years | 23,401 |
| Total | 64,954 |
for the period 1 April 2015 to 30 April 2016
The company listed below is part of the Group as at 30 April 2016:
| Name and company number | Country of registration and incorporation |
Principal activity | Ordinary Shares held |
|---|---|---|---|
| AEW UK REIT 2015 Limited (Company number 09524699) |
England and Wales | Dormant | 100% |
| Group and Parent Company | ||||
|---|---|---|---|---|
| £'000 | Number of Ordinary Shares |
|||
| Ordinary Shares issued and fully paid | ||||
| At 1 April 2015 | – | 1 | ||
| Issued on admission to trading on the London Stock Exchange on 12 May 2015 | 1,005 | 100,499,999 | ||
| Issued on admission to trading on the London Stock Exchange on 15 December 2015 |
170 | 17,010,000 | ||
| At 30 April 2016 | 1,175 | 117,510,000 |
On 12 May 2015, AEW UK REIT Plc announced that it had raised £100.5 million through its initial public offering and the Ordinary Shares had been admitted to the Official List and to trading on the Main Market of the London Stock Exchange.
The Company ticker is AEWU. The initial raising by the Company involved the issue of Ordinary Shares to relevant subscribers at 100 pence per Ordinary Share.
On 15 December 2015, the Company issued a further 17,010,000 Ordinary Shares at a price of 101 pence per share in the form of a placing as part of the Company's share issuance programme.
for the period 1 April 2015 to 30 April 2016
| Group and Parent Company £'000 |
|
|---|---|
| The share premium relates to amounts subscribed for share capital in excess of nominal value: | |
| At 1 April 2015 | – |
| Issued on admission to trading on the London Stock Exchange on 12 May 2015 | 99,495 |
| Share issue costs (Paid and accrued) | (1,930) |
| Transfer to capital reduction account | (97,565) |
| Issued on admission to trading on the London Stock Exchange on 15 December 2015 | 17,010 |
| Share issue costs (Paid and accrued) | (281) |
| At 30 April 2016 | 16,729 |
| Group and Parent Company £'000 |
|
|---|---|
| At 1 April 2015 | – |
| Transferred from share premium reserve | 97,565 |
| At 30 April 2016 | 97,565 |
On 17 September 2015, the Company by way of Special Resolution cancelled the value of its share premium account, by an Order of the High Court of Justice, Chancery Division.
As a result of this cancellation £97.5 million has been transferred from the share premium account into the capital reduction reserve account. The capital reduction reserve account is classed as a distributable reserve.
for the period 1 April 2015 to 30 April 2016
The Group's and Parent Company's principal financial assets and liabilities are those derived from its operations: receivables and prepayments, cash and cash equivalents and payables and accrued expenses. The Group's and Parent Company's other principal financial liabilities are interest bearing loans and borrowings, the main purpose of which is to finance the acquisition and development of the Group's and Parent Company's property portfolio.
Set out below is a comparison by class of the carrying amounts and fair value of the Group's and the Parent Company's financial instruments that are carried in the financial statements.
| Book Value 30 April 2016 £'000 |
Fair Value 30 April 2016 £'000 |
|
|---|---|---|
| Financial Assets | ||
| Investment in AEW UK Core Property Fund | 10,109 | 10,109 |
| Receivables and prepayments | 936 | 936 |
| Cash and cash equivalents | 7,963 | 7,963 |
| Other financial assets held at fair value | 77 | 77 |
| Financial Liabilities | ||
| Interest bearing loans and borrowings | 14,250 | 14,250 |
| Payables and accrued expenses | 2,712 | 2,712 |
| Finance lease obligations | 1,914 | 1,914 |
The Group's activities expose it to a variety of financial risks: market risk, real estate risk, credit risk and liquidity risk.
The Group's objective in managing risk is the creation and protection of shareholder value. Risk is inherent in the Group's activities but it is managed through a process of ongoing identification, measurement and monitoring, subject to risks limits and other controls.
The principal risks facing the Group in the management of its portfolio are as follows:
for the period 1 April 2015 to 30 April 2016
Market price risk is the risk that future values of investments in direct property and related property investments will fluctuate due to changes in market prices. To manage market price risk, the Group diversifies its portfolio geographically in the United Kingdom and across property sectors.
The disciplined approach to the purchase, sale and assets management ensures that the value is maintained to its maximum potential. Prior to any property acquisition or sale, detailed research is undertaken to assess expected future cash flow. The Investment Management Committee ('IMC') of the Investment Manager, meets monthly and reserves the ultimate decision with regards to investments purchases or sales. In order to monitor property valuation fluctuations, the IMC and the Portfolio Management Team of the Investment Manager meet with independent external valuer on a regular basis. The valuer provides a property portfolio valuation quarterly, so any movements in the value can be accounted for in a timely manner and reflected in the NAV every quarter.
The Group is exposed to the following risks specific to its investments in investment property:
Property investments are illiquid assets and can be difficult to sell, especially if local market conditions are poor. Illiquidity may also result from the absence of an established market for investments, as well as legal or contractual restrictions on resale of such investments. In addition, property valuation is inherently subjective due to the individual characteristics of each property, and thus, coupled with illiquidity in the markets, makes the valuation in the scheme property difficult and inexact.
No assurances can be given that the valuations of properties will be reflected in the actual sale prices even where such sales occur shortly after the relevant valuation date.
There can be no certainty regarding the future performance of any of the properties acquired for the Group. The value of any property can go down as well as up. Property and property-related assets are inherently subjective as regards value due to the individual nature of each property. As a result, valuations are subject to uncertainty.
Real property investments are subject to varying degrees of risk. The yields available from investments in real estate depend on the amount of income generated and expenses incurred from such investments.
There are additional risks in vacant, part vacant, redevelopment and refurbishment situations although these are not prospective investments for the Group.
for the period 1 April 2015 to 30 April 2016
Credit risk is the risk that the counterparty (to a financial instrument) or tenant (of a property) will cause a financial loss to the Group by failing to meet a commitment it has entered into with the Group.
It is the Group's policy to enter into financial instruments with reputable counterparties. All cash deposits are placed with an approved counterparty, The Royal Bank of Scotland.
In respect of property investments, in the event of a default by a tenant, the Group will suffer a rental shortfall and additional costs concerning re-letting the property. The Investment Manager monitors tenant arrears in order to anticipate and minimise the impact of defaults by occupational tenants.
The table below shows the Group's and the Parent Company's exposure to credit risk:
| As at | |
|---|---|
| 30 April | |
| 2016 | |
| £'000 | |
| Debtors (excluding incentives and prepayments) | 936 |
| Cash and cash equivalents | 7,963 |
| Total | 8,899 |
Liquidity risk arises from the Group's management of working capital and the finance charges and principal repayments on its borrowings. It is the risk the Group will encounter difficulty in meeting its financial obligations as they fall due as the majority of the Group's assets are investment properties and therefore not readily realisable. The Group's objective is to ensure it has sufficient available funds for its operations and to fund its capital expenditure. This is achieved by continuous monitoring of forecast and actual cash flows by management.
The table below summarises the maturity profile of the Group's and the Parent Company's financial liabilities based on contractual undiscounted payments:
| 30 April 2016 | On demand |
< 3 months |
3–12 months |
1–5 years |
> 5 years | Total |
|---|---|---|---|---|---|---|
| Interest bearing loans and borrowings | – | – | – | 14,250 | – | 14,250 |
| Interest payable | – | 102 | 301 | 1,400 | – | 1,803 |
| Payables and accrued expenses | – | 2,712 | – | – | – | 2,712 |
| Finance lease obligation | – | – | 123 | 372 | 1,419 | 1,914 |
| – | 2,814 | 424 | 16,022 | 1,419 | 20,679 |
for the period 1 April 2015 to 30 April 2016
The primary objectives of the Group's capital management is to ensure that it qualifies for the UK REIT status and remains within its quantitative banking covenants.
To enhance returns over the medium term, the Group intends to utilise borrowings on a limited recourse basis for each investment or all or part of the total portfolio. The Group's policy is such that its borrowings will not exceed 25% of Gross Asset Value (measured at drawdown) of each investment or Portfolio. It is currently anticipated that the level of total borrowings will typically be at the level of 20% of Gross Asset Value (measured at drawdown).
Alongside the Group's borrowing policy, the Directors intend, at all times, to conduct the affairs of the Group so as to enable the Group to qualify as a REIT of the purposes of Part 12 of the CTA 2010 (and the regulations made thereunder). The REIT status compliance requirements includes the 90% distribution test, interest cover ratio, 75% assets test and the substantial shareholder rule, all of which the Group remained compliant with in this reporting period.
The monitoring of the Group's level of borrowing is performed primarily using a Loan to Gross Asset Value ('GAV') ratio. The Loan to GAV Ratio is calculated as the amount of outstanding debt divided by the total assets of the Group, which includes the valuation of the investment property portfolio. The Group Loan to GAV ratio at the period end was 10.51%
Breaches in meeting the financial covenants would permit the bank to immediately call loans and borrowings. During the current period, the Group did not breach any of its loan covenants, nor did it default on any other of its obligations under its loan agreements.
As defined by IAS 24 Related Party Disclosures, parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions.
For the period ended 30 April 2016, the Directors of the Company are considered to be the key management personnel. Details of amounts paid to Directors for their services can be found within note 5, Directors' remuneration.
The Group is party to an Investment Management Agreement with the Investment Manager, pursuant to which the Company has appointed the Investment Manager to provide investment management services relating to the respective assets on a day-to-day basis in accordance with their respective investment objectives and policies, subject to the overall supervision and direction of the Boards of Directors.
Under the Investment Management Agreement the Investment Manager receives a management fee which is calculated and accrued monthly at a rate equivalent to 0.9% per annum of NAV (excluding un-invested fund raising proceeds) and paid quarterly. The investment by the Group into the AEW UK Core Property Fund is not subject to management fees or performance fees otherwise charged to investors in the AEW UK Core Property Fund by the Investment Manager. During the period 1 April 2015 to 30 April 2016, the Company incurred £652,706 in respect of investment management fees and expenses of which £230,631 was outstanding at 30 April 2016.
On 1 June 2015, the Company purchased 8,035,272 shares (share class E) in the AEW UK Core Property Fund for a cost of £9,627,000 (net of equalisation). The investment is deemed to be with a related party due to the common influence of the Investment Manager has with both parties. As at 30 April 2016, the Company held a 4.1% shareholding in the AEW UK Core Property Fund.
for the period 1 April 2015 to 30 April 2016
Management has considered the requirements of IFRS 8 'operating segments'. The source of the Group's diversified revenue is from the ownership of investment properties across the UK. Financial information on a property by property basis is provided to senior management of the Investment Manager and Directors, which collectively comprise the chief operating decision maker. Responsibilities are not defined by type or location, each property being managed individually and reported on for the Group as a whole directly to the Board of Directors. Therefore, the Group is considered to be engaged in a single segment of business, being property investment and in one geographical area, United Kingdom.
On 31 May 2016, the Board declared its fourth interim dividend of 2.00 pence per share, in respect of the period from 1 February 2016 to 30 April 2016. This was paid on 30 June 2016, to shareholders on the register as at 10 June 2016. The ex-dividend date was 9 June 2016.
On 16 May 2016, the Group made a drawdown request of £12.26 million against its £40 million credit facility with Royal Bank of Scotland giving a drawdown total of £26.51 million and a Loan to Gross Asset Value of 20.0%. The proceeds of the drawdown received were used to finance the acquisition of Nottingham and Blackpool as noted in Property Acquisitions note below.
On 27 May 2016, the Group made a further 2 acquisitions totalling £13.20 million (net of acquisition costs).
Nottingham, acquired for £8.15m, is located on Wheeler Gate with frontage to Old Market Square within the retailing core of the City Centre. The property provides a WAULT of approximately 4.5 years to break and 5.2 years to expiry. The acquisition provides an initial yield of 9.0%, a reversionary yield of 9.9% and a capital value per sq ft of £114.
Blackpool, acquired for £5.05m, is prominently located directly adjacent to the famous Blackpool Tower. The property provides a WAULT of approximately 7.5 years to break and 10 years to expiry. The acquisition provides an initial yield of 9.5%, a reversionary yield of 8.4% and a capital value per sq ft of £50.
On 9 June 2016, to mitigate the interest rate risk that arises as a result of entering into variable rate linked loans, the Group entered into an interest rate cap. The interest rate cap has a strike price of 2.50% and a notional amount of £12.26 million. The total premium payable in the period towards securing the interest rate cap was £66,000.
| MEASURE AND DEFINITION | PURPOSE | PERFORMANCE |
|---|---|---|
| 1. EPRA Earnings Earnings from operational activities. |
A key measure of a company's underlying operating results and an indication of the extent to which current dividend payments are supported by earnings. |
£6.08 million/6.33 pps EPRA earnings for the period to 30 April 2016 |
| 2. EPRA NAV Net asset value adjusted to include properties and other investment interests at fair value and to exclude certain items not expected to crystallise in a long-term investment property business. |
Makes adjustments to IFRS NAV to provide stakeholders with the most relevant information on the fair value of the assets and liabilities within a true real estate investment company with a long-term investment strategy. |
£116.30 million/98.97 pps EPRA NAV as at 30 April 2016 |
| 3. EPRA NNNAV EPRA NAV adjusted to include the fair values of: (i) financial instruments; (ii) debt and; (iii) deferred taxes. |
Makes adjustments to EPRA NAV to provide stakeholders with the most relevant information on the current fair value of all the assets and liabilities within a real estate company. |
£116.38 million/99.03 pps EPRA NNNAV as at 30 April 2016 |
| 4.1 EPRA Net Initial Yield (NIY) Annualised rental income based on the cash rents passing at the balance sheet date, less non-recoverable property operating expenses, divided by the market value of the property, increased with (estimated) purchasers' costs. |
A comparable measure for portfolio valuations. This measure should make it easier for investors to judge themselves, how the valuation of portfolio X compares with portfolio Y. |
8.01% EPRA NIY as at 30 April 2016 |
| 4.2 EPRA 'Topped-Up' NIY This measure incorporates an adjustment to the EPRA NIY in respect of the expiration of rent-free periods (or other unexpired lease incentives such as discounted rent periods and step rents). |
A comparable measure for portfolio valuations. This measure should make it easier for investors to judge themselves, how the valuation of portfolio X compares with portfolio Y. |
8.56% EPRA 'Topped-Up' NIY as at 30 April 2016 |
| 5. EPRA Vacancy Estimated Market Rental Value (ERV) of vacant space divided by ERV of the whole portfolio. |
A "pure" (%) measure of investment property space that is vacant, based on ERV. |
3.16% EPRA ERV as at 30 April 2016 |
| 6. EPRA Cost Ratio Administrative and operating costs (including and excluding costs of direct vacancy) divided by gross rental income. |
A key measure to enable meaningful measurement of the changes in a company's operating costs. |
Including direct vacancy costs EPRA Cost Ratio 12.23% as at 30 April 2016 10.90% EPRA Cost ratio excluding direct vacancy costs as at 30 April 2016 |
| Group and Parent Company 2016 £'000 |
|
|---|---|
| Investment property – wholly-owned | 114,340 |
| Allowance for estimated purchasers' costs | 6,632 |
| Gross up completed property portfolio valuation | 120,972 |
| Annualised cash passing rental income | 9,842 |
| Property outgoings | (148) |
| Annualised net rents | 9,694 |
| Rent expiration of rent-free periods and fixed uplifts | 655 |
| 'Topped-up' net annualised rent | 10,349 |
| EPRA Net Initial Yield | 8.01% |
| EPRA 'topped-up' Net Initial Yield | 8.56% |
EPRA NIY is calculated asthe annualised net rent, divided by the gross value ofthe completed property portfolio.
The valuation of grossed up completed property portfolio is determined by our external valuers as at 30 April 2016, plus an allowance for estimated purchaser's costs. Estimated purchaser's costs are determined by the relevantstamp duty liability, plus an estimate by our valuers of agent and legal fees on notional acquisition. The net rent deduction allowed for property outgoingsis based on our valuers' assumptions on future recurring non-recoverable revenue expenditure.
In calculating the EPRA 'topped-up' NIY, the annualised net rent isincreased by the total contracted rent from expiry ofrent-free periods and future contracted rental upliftswhere defined as not in lieu of growth. Overall 'topped-up' NIY is calculated by adding any other contracted future uplift to the 'topped-up' net annualised rent.
| Group and Parent Company 2016 £'000/% |
|
|---|---|
| Annualised potential rental value of vacant premises | 342 |
| Annualised potential rental value for the completed property portfolio | 10,821 |
| EPRA Vacancy Rate | 3.16 |
| Calculation of EPRA Cost Ratios | |
| 2016 £'000/% |
|
| Administrative/operating expense per IFRS income statement | 1,523 |
| Less: Performance & management fees | (653) |
| Other fees and commission | (70) |
| Ground rent costs | (64) |
| EPRA Costs (including direct vacancy costs) | 736 |
| Direct vacancy costs | (80) |
| EPRA Costs (excluding direct vacancy costs) | 656 |
| Gross Rental Income less ground rent costs | 6,089 |
| Less: service charge costs of rental income | (70) |
| Gross rental income | 6,019 |
| EPRA Cost Ratio (including direct vacancy costs) | 12.23% |
| EPRA Cost Ratio (excluding direct vacancy costs) | 10.90% |
The registerforthe Ordinary Sharesis maintained by Computershare Investor Services PLC. In the event of queriesregarding your holding, please contact the Registrar on 0370 889 4069 or email:[email protected]
Changes of name and/or address must be notified inwriting to the Registrar, at the addressshown on page 93. You can check your shareholding and find practical help on transferring shares or updating your details atwww.investorcentre.co.uk.
| Ordinary £0.01 Shares | 117,510,000 |
|---|---|
| SEDOL Number | BWD2415 |
| ISIN Number | GB00BWD24154 |
The Company's Ordinary Shares are traded on the Main Market ofthe London Stock Exchange.
Copies ofthe Annual and Half-Yearly Reports are available from the Company'swebsite
| 7 September 2016 | Annual General Meeting |
|---|---|
| 31 October 2016 | Half-year End |
| December 2016 | Announcement of half-yearly results |
| 30 April 2017 | Year end |
| July 2017 | Announcement of annual results |
The following table summarisesthe amountsrecognised as distributionsto equity shareholdersin the period:
| £ | |
|---|---|
| Dividend for the period 1 April 2015 to 31 October 2015 | 1,507,500 |
| Dividend for the period 1 November 2015 to 14 December 2015 | 753,750 |
| Dividend for the period 15 December 2015 to 31 January 2016 | 1,468,875 |
| Total | 3,730,125 |
Mark Burton (Non-executive Chairman) James Hyslop (Non-executive Director) Bimaljit (''Bim'') Sandhu (Non-executive Director)
40 Dukes Place London EC3A 7NH
AEW UK Investment Management LLP 33 Jermyn Street London SW1Y 6DN
Tel: 020 7016 4800 Website:www.aeweurope.com
Jones Lang LaSalle Limited 22 Hanover Square London W1S 1JA
Fidante Capital 1 Tudor Street London EC4Y 0AH
Gowling WLG (UK) LLP 4 More London Riverside London SE1 2AU
Langham Hall UK LLP 5 Old Bailey London EC4M 7BA
Capita SinclairHenderson Limited Beaufort House 51 NewNorth Road Exeter EX4 4EP
Capita Company Secretarial Services Limited 40 Dukes Place London EC3A 7NH
Computershare Investor Services PLC The Pavilions Bridgwater Road Bristol BS13 8AE
KPMG LLP 15 Canada Square London E14 5GL
Knight Frank LLP 55 Baker Street London W1U 8AN
| AEW UK Core Property Fund | AEW UKCore Property Fund, a property authorised investment fund ('PAIF') and a sub-fund ofthe AEW UK Real Estate Fund, an open ended investment company. |
|---|---|
| AIC | Association ofInvestment Companies. Thisisthe trade body for Closed-end Investment Companies (www.theaic.co.uk). |
| AIFMD | Alternative Investment Fund Managers Directive. |
| AIFM | Alternative Investment Fund Manager. The entity that provides portfolio management and risk management servicesto the Company andwhich ensuresthe Company complieswith the AIFMD. The Company's AIFM is AEW UK Investment Management UK LLP. |
| Company | AEW UK REIT plc. |
| Company Secretary | Capita Company Secretarial Services Limited. |
| Contracted rent | The annualised rent adjusting for the inclusion ofrentsubject to rent-free periods. |
| Covenant strength | The strength of a tenant's financialstatus and its ability to perform the covenantsin the lease. |
| DTR | Disclosure and Transparency Rules, issued by the United Kingdom Listing Authority. |
| Earnings Per Share (EPS) | Profit forthe period attributable to equity shareholders divided by theweighted average number of Ordinary Shares in issue during the period. |
| EPC | Energy Performance Certificate. |
| EPRA | European Public Real Estate Association, the industry body representing listed companies in the real estate sector. |
| EPRA cost ratio (including direct vacancy costs) |
The ratio of net overheads and operating expenses against grossrental income (with both amounts excluding ground rents payable). Net overheads and operating expensesrelate to all administrative and operating expenses. |
| EPRA cost ratio (excluding direct vacancy costs) |
The ratio calculated above, butwith direct vacancy costsremoved from net overheads and operating expenses balance. |
| EPRA Earnings Per Share | Recurring earnings from core operational activities. A key measure of a company's underlying operating results from its property rental business and an indication of the extent towhich current dividend payments are supported by earnings. |
| EPRA NAV | Net Asset Value adjusted to include properties and otherinvestment interests at fair value and to exclude certain items not expected to crystallise in a long-term investment property business. |
| EPRA NNNAV | EPRA NAV adjusted to reflect the fair value of debt and derivatives and to include deferred taxation on revaluations. |
| EPRA Net Initial Yield ('NIY') | Annualised rental income based on the cash rents passing at the balance sheet date, less non recoverable property operating expenses, divided by the fair value ofthe property, increasedwith (estimated) purchasers' costs. |
| EPRA Topped-Up Net Initial Yield This measure incorporates an adjustment to the EPRA NIY in respect ofthe expiration ofrent-free periods(or other unexpired lease incentivessuch as discounted rent periods and step rents). |
|
| EPRA Vacancy Rate | Estimated Market Rental Value ('ERV') of vacant space as a percentage ofthe ERV ofthewhole portfolio. |
| Equivalent Yield | The internal rate of return of the cash flowfrom the property, assuming a rise to ERV at the next reviewor lease expiry. No future growth is allowed for. |
|---|---|
| Estimated Rental Value (ERV) | The external valuers' opinion as to the open market rentwhich, on the date ofthe valuation, could reasonably be expected to be obtained on a newletting orrent reviewof a property. |
| External Valuer | An independent external valuer of a property. The Company's External Valueris Knight Frank LLP. |
| Fair value | The estimated amount forwhich a property should exchange on the valuation date between awilling buyer and awilling sellerin an arm's length transaction after proper marketing andwhere parties had each acted knowledgeably, prudently andwithout compulsion. |
| Fair value movement | An accounting adjustment to change the book value of an asset orliability to itsfair value. |
| FCA | The Financial Conduct Authority. |
| FRI lease | A leasewhich imposes full repairing and insuring obligations on the tenant, relieving the landlord from all liability for the cost of insurance and repairs. |
| Gross Asset Value | The aggregate value ofthe total assets of the Company as determined in accordance with IFRS. |
| Group | AEW UK REIT plc and itssubsidiary, AEW UK REIT 2015 Limited. |
| IASB | International Accounting Standards Board. |
| IFRS | International Financial Reporting Standards, as adopted by the European Union. |
| Investment Manager | The Company'sInvestment Manageris AEW UK Investment Management UK LLP. |
| IPD | Investment Property Databank. An organisation supplying independent market indices and portfolio benchmarksto the property industry. |
| IPO | The admission to trading on the London Stock Exchange's Main Market ofthe share capital of the Company and admission ofOrdinary Shares to the premium listing segment of the Official List on 12 May 2015. |
| Lease incentives | Incentives offered to occupiers to enter into a lease. Typically thiswill be an initial rent-free period, or a cash contribution to fit-out. Under accounting rulesthe value of the lease incentive is amortised through the Income Statement on a straight-line basis until the lease expiry. |
| Lease Surrender | An agreementwhereby the landlord and tenant bring a lease to an end otherthan by contractual expiry or the exercise of a break option. Thiswill frequently involve the negotiation of a surrender premium by one party to the other. |
| LIBOR | The London InterbankOffered Rate, the interest rate charged by one bank to anotherforlending money. |
| Net Asset Value ('NAV') | Net Asset Value is the equity attributable to shareholders calculated underIFRS. |
| Net Asset Value per share | Equity shareholders' funds divided by the number ofOrdinary Sharesin issue. |
| Net equivalent yield | Calculated by the Group's External Valuers, equivalent yield is the internal rate of return from an investment property, based on the gross outlaysforthe purchase of a property (including purchase costs), reflecting reversionsto current market rent and items as voids and non-recoverable expenditure but ignoring future changes in capital value. The calculation assumes rent isreceived annually in arrears. |
| Net initial yield | The initial net rental income from a property at the date of purchase, expressed as a percentage of the gross purchase price including the costs of purchase. |
| Net rental income | Rental income receivable in the period after payment of ground rents and net property outgoings. |
| Non-PID | Non-Property Income Distribution. The dividend received by a shareholder ofthe Company arising from any source otherthan profits and gains of the Tax Exempt Business ofthe Group. |
| Ongoing charges | The ratio of total administration and property operating costs expressed as a percentage of average net asset value throughout the period. |
|---|---|
| Ordinary Shares | The main type of equity capital issued by conventional Investment Companies. Shareholders are entitled to theirshare of both income, in the form of dividends paid by the Company, and any capital growth. |
| Over-rented | Spacewhere the passing rent is above the ERV. |
| Passing rent | The grossrent, less any ground rent payable under head leases. |
| PID | Property Income Distribution. A dividend received by a shareholder ofthe Company in respect of profits and gains ofthe tax exempt business ofthe Group. |
| Rack-rented | Spacewhere passing rent is the same asthe ERV. |
| REIT | A Real Estate Investment Trust. A companywhich complieswith Part 12 ofthe Corporation tax Act 2010. Subject to the continuing relevant UK REIT criteria being met, the profitsfrom the property business of a REIT, arising from both income and capital gains, are exempt from corporation tax. |
| Reversion | Increase in rent estimated by the Company's External Valuers,where the passing rent is belowthe ERV. |
| Reversionary yield | The anticipated yield,which the initial yieldwill rise (or fall) to once the rent reaches the Estimated Rental Value. |
| Share price | The value of a share at a point in time as quoted on a stock exchange. The Company's Ordinary Shares are quoted on the Main Market ofthe London Stock Exchange. |
| Share Price Total Return | The percentage change in the share price assuming dividends are reinvested to purchase additional Ordinary Shares. |
| Total returns | The returns to shareholders calculated on a per share basis by adding dividend paid in the period to the increase or decrease in the Share Price ofNAV. The dividends are assumed to have been reinvested in the form ofOrdinary Shares or Net Assets. |
| Under-rented | Spacewhere the passing rent is belowthe ERV. |
| UK Corporate Governance Code A code issued by the Financial Reporting Councilwhich sets outstandards of good practice in relation to board leadership and effectiveness, remuneration, accountability and relationswith shareholders. All companieswith a Premium Listing of equity sharesin the UK are required underthe Listing Rulesto report on howthey have applied the Code in their annual report and accounts. |
|
| Voids | The amount ofrent relating to propertieswhich are unoccupied and generating no rental income. Stated as a percentage of ERV. |
| Weighted Average Unexpired Lease Term ('WAULT') |
The average lease term remaining for first break, or expiry, acrossthe portfolioweighted by contracted rental income (including rent-frees). |
| Yield compression | Occurswhen the net equivalent yield of a property decreases, measured in basis points. |
United Kingdom 33 Jermyn Street London SW1Y 6DN
+44 20 7016 4845 www.aeweurope.com
France 8-12 rue des Pirogues de Bercy 75012 Paris France
+33 1 78 40 92 00 www.aeweurope.com
United States of America Two Seaport Lane Boston MA 02210 United States
+1 617 261 9334 www.aew.com
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