Annual Report • Apr 30, 2017
Annual Report
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Annual Report and Financial Statements for the year ended 30 April 2017
| Strategic Report | |
|---|---|
| Financial Highlights | 1 |
| Property Highlights | 1 |
| Chairman's Statement | 2 |
| Business Model and Strategy | 5 |
| Key Performance Indicators | 14 |
| Investment Manager's Report | 17 |
| Principal Risks and Uncertainties | 26 |
| Portfolio | 30 |
| Diversity, Social and Environmental Matters | 45 |
| Governance | |
| Board of Directors | 46 |
| Corporate Governance Statement | 47 |
| Report of the Audit Committee | 51 |
| Report of the Management Engagement and Remuneration Committee |
54 |
| Directors' Remuneration Report | 55 |
| Directors' Report | 60 |
| Directors' Responsibilities Statement | 65 |
| Independent Auditor's Report | 66 |
| Financial Statements | |
| Statement of Comprehensive Income | 70 |
| Statement of Changes in Equity | 71 |
| Statement of Financial Position | 72 |
| Statement of Cash Flows | 73 |
| Notes to the Financial Statements | 74 |
| EPRA Unaudited Performance Measures | 103 |
| Company Information | 106 |
| Glossary | 108 |
All comparative figures relate to the period from 1 April 2015 to 30 April 2016. Prior period was longer than 12 months so cannot be used as a direct comparator.
I am pleased to present the second annual audited results of AEW UK REIT plc (the 'Company') forthe financial yearfrom 1 May 2016 to 30 April 2017.
It has been a very interesting and challenging year due to the uncertainty and market volatility created by various geopolitical and economic events.
In the aftermath ofthe EU referendum in June 2016, and in commonwith other REITs, the Company'sshare price fell to a lowof 90 pence perOrdinary Share. I am pleased to see that the share price hasrecovered steadily and in recent months hasreached its pre-Brexit levels of 102 pence perOrdinary Share. Furthermore ourshare price relative to NAV has been trading at a premium since mid-February 2017 and as at 30 April 2017was at a premium of 3.7%.
The valuation ofthe Company's property portfolio fell by 1.8% in the period from May 2016 to July 2016, following the EU referendum result. Thiswasin comparison to a fall of 3% in capital values of direct properties as measured by MSCI (IPD UKMonthly Property Index), a global independent provider of market indices, overthe same period. Iwas encouraged by the resilience ofthe portfolio to the initial market uncertainty; our exposure to market riskwas no doubt mitigated through having a diversified portfolio. On a like-for-like basis, the Company's property portfolio valuation increased slightly by 0.2% during the financial year.
During the financial year, the Company made a decision to sell down itsinvestment in the AEW UKCore Property Fund (the 'Core Fund') with the aim ofreinvesting the proceedsinto direct property holdings. Thisinvestment in the Core Fundwas accretive to the Company's performance during the initial ramp up phase but has proved lessrelevant to the Company'sstrategy asthe portfolio has matured. The Company sold 20.8% ofitssharesin the Core Fund on 1 February 2017 at a premium of 2% to NAV and the remaining shareswere sold on 9 May 2017 at a 1.5% premium to NAV. Thisinvestment yielded a total return of 13% during the hold period.
The Company raised a further £6.0 million during its financial yearthrough the issuance of newOrdinary Shares. These proceeds, togetherwith amountsraised from the sale ofinvestment properties (£2.8 million), proceedsraised from the Core Fund investment (totalling £9.6 million) and loan drawdowns underthe debt facility (totalling £14.8 million), have been used to invest in newproperties. During the financial year, the Company acquired a further five propertiesfor a total of £24.7 million (excluding acquisition costs), and a further two properties have been acquired since the year end for a total of £4.9 million.
As at 30 April 2017, the Company had established a diversified portfolio of 29 commercial investment propertiesthroughout the UK with aweighted average total equivalent yield of 8.5%.
The Company has continued to deliver an attractive total return, including significant dividend income, asit continuesto followits investment policy against a backdrop of uncertain political and economic conditions.
UnderInternational Financial Reporting Standards('IFRS') as adopted by the European Union, our operating profit forthe yearto 30 April 2017was £6.86 million (30 April 2016: £4.86 million),with total comprehensive income of £6.10 million (30 April 2016: £4.64 million). Basic earnings pershare ('EPS') for the yearwere 5.04 pence (30 April 2016: 4.83 pence).
Under European Public Real Estate Association ('EPRA') methodology, EPS forthe yearwas 7.57 pence (30 April 2016: 6.33 pence) and the NAV pershare at 30 April 2017was 95.95 pence (30 April 2016: 98.97 pence). A full list of EPRA performance figures can be found on page 103.
The audited NAV pershare as at 30 April 2017was 95.98 pence (30 April 2016: 99.03 pence), priorto adjusting forthe interim dividend forthe period 1 February 2017 to 30 April 2017 oftwo pence perOrdinary Share.
The Company had ongoing charges of 1.52% (30 April 2016: 1.14%) forthe year underreview. The main driver of the increase in ongoing charges during the 2016/17 financial yearwas due to the Company paying a full management fee to AEW UK Investment Management LLP of 0.9% on NAV.
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 2017, the Company's portfolio had a fair value of £137.8 million as comparedwith the combined purchase price ofthe portfolio of £133.1 million (excluding purchase costs), an increase of £4.7 million or 3.5%.
On 18 May 2016, the Company amended the terms ofitsloan facilitywith RBSi to increase the facility limit from 20% to 30% ofNAV measured at drawdown. This amendment has enabled the Company to utilise the facility up to an amount calculated asthe equivalent of 25% of the Gross Asset Value ('GAV') (measured at drawdown),which isthe maximum gearing limit asset out in the Company's Prospectus.
During the financial yearto 30 April 2017, the Company made utilisation requeststotalling £14.8 million (30 April 2016: £14.3 million), bringing the total drawdown amount underthe facility to £29.0 million (30 April 2016: £14.3 million).
The loan attractsinterest at three month LIBOR +1.4%, making an all-in rate at 30 April 2017 of 1.736% (30 April 2016: 1.988%). The Company is protected from a significant rise in interest rates asit hasinterest rate capswith a combined notional value of £26.5 million and a strike rate of 2.5%.
As at 30 April 2017, the unexpired term ofthe facilitywas 3.5 years and the gearingwas 19.3% (as calculated on the GAV of the investment portfolio).
On 11 May 2017, the Company amended the terms of its facilitywith RBSi, extending the availability period to 31 March 2019 and reducing the facility limit from £40 million to £32.5 million to mitigate the cost of non-utilisation fees.
The Company continued to deliver on itstarget of declaring dividends oftwo pence perOrdinary Share per quarter. During the financial year, the Company declared and paid four quarterly dividends oftwo pence perOrdinary Share.
On 30 May 2017, the Board declared an interim dividend oftwo pence perOrdinary Share, in respect ofthe period from 1 February 2017 to 30 April 2017. Thisinterim dividendwas paid on 30 June 2017.
During the year, the Board conducted a reviewof AEW UK Investment Management LLP (the 'Investment Manager') and the Investment Management Agreement. The Board concluded that the continuing appointment ofthe Investment Managerwas appropriate and in the best interests ofshareholders and that the terms and conditions ofthe Investment Manager's continuing appointment remained appropriate.
The Board also discussed the potential recruitment of a newDirector and on 5 June 2017 appointed Katrina Hart as an independent non-executive Director.
The Company has continued to develop itsrelationswith investors. In particular, a newwebsite (www.aewukreit.com) has been launched with the aim ofimproving communications and allowing usersto sign up for email alertsto gain accessto the latest Company news and information. Furthermore, the Company's daily share price has been added to the Investment Companies(Direct Property)section ofthe Financial Times. We look forward towelcoming shareholders at our Annual General Meeting ('AGM') on 12 September 2017.
The Board and the Investment Manager are confident of continuing to deliverstrong returnsfor ourshareholdersthrough the diversified and high yielding property portfolio that has been established. We believe that the Company's property portfolio iswell positioned and there are a number of active asset management initiatives ongoing thatshould growthe income stream and provide opportunitiesfor further capital value enhancement.
In the period since the Statement of Financial Position at 30 April 2017, the Company has acquired a furthertwo properties totalling £4.9 million (excluding acquisition costs) and generating a further £0.4 million per annum in rent.
It isstill unknown howthe impact of Brexitwill unfold and it islikelywewill need towait forsome time to knowthe terms ofthe UK's exit from the EU and howthiswill impact on the UK commercial property market. In this period of uncertainty there is a higher chance that the Bank of Englandwill keep interest rates at historical lows and thiswill maintain the fundamentals of property demand asinvestors search for yield.
Our current focusisto continue to growthe Company and,subject to market conditions, look to raise additional capital. Thiswill enable the Company to take advantage of economies ofscale in its cost base and to allowthe Investment Managerto capitalise on the interesting market opportunitiesitsees.
The Investment Managerremainsfocused on searching for propertiesin locationsthat exhibit lowlevels ofsupply,with a particular focus on properties underwritten by vacant possession values and therefore less exposed to capital erosion.
Mark Burton Chairman 7 July 2017
AEW UK REIT plc is a real estate investment company listed on the premium segment of the Official List of the UK Listing Authority and traded on the London Stock Exchange's Main Market. As part of its business model and strategy, the Company has and intends to maintain UK REIT status. HM Revenue and Customs has acknowledged that the Company has met and intends to continue to meet the necessary qualifying conditions to conduct its affairs as a 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 ofrestrictionsset out below(underthe heading 'Investment Restrictions') the Company may invest up to 10% of its Net Assets(at the time of investment) in the AEW UKCore Property Fund and up to 10% of its Net Assets (measured at the commencement of the project) in development opportunities, with the intention of holding any completed development as an investment.
As at 30 April 2017, the Company held an investment valued at £7.59 million in AEW UK Core Property Fund, representing 6.4% of its Net Assets as at that date. The AEW UK Core Property Fund is a property authorised investment fund ('PAIF') managed by the Investment Managerwhich 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 investment was sold on 9 May 2017 and as at the date of this report the Company does not intend to reinvest in the AEW UK Core Property Fund but will keep this under review.
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.
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 Company to qualify as a REIT for the purposes of Part 12 of the CTA 2010 (and the regulations made thereunder).
In the event of a breach of the investment policy or restrictions, the Investment Manager shall inform the Board upon becoming aware ofsuch a breach 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 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% of its NAV in the Core Fund. The Core 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, Core Fund and any funds managed by the Investment Manager.
The Directors, rather than the Investment Manager, determine when to divest the Company's holding in the Core Fund.
The Company's strategy is focused on delivering enhanced returns from the smaller end (up to £15 million) of the UK commercial property market. The Company believesthat there are currently pricing inefficienciesin smaller commercial propertiesrelative to the long term pricing resulting in a significant yield advantage, as demonstrated in the graphs below, which the Company aims to exploit;
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. 2007 has been chosen as a comparator year as this illustrates the difference between the peak market pricing of that year and 2017.
Source: IPD, 31 March 2017
The investment management team average 18 years working together, reflecting stability and continuity.
The Investment Manager's investment philosophy is based on the principle of value investing. The Investment Manager looks to acquire assets with an income profile coupled with underlying 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.
A representation to the investor of what 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.
The average lease term remaining to expiry across the portfolio, weighted by contracted rent.
The Triple Net Initial Yield is in line with the Company'starget dividend yield meaning that, after costs, the Company should have the ability to meet its target 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 its proposed 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.
7.63%
at 30 April 2017 (2016: 8.38%).
at 30 April 2017 (2016: 8.36%).
at 30 April 2017 (2016: 8.27%).
6.37 years
at 30 April 2017 (2016: 6.08 years).
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. As such, it is in line with the Investment Manager's strategy to acquire properties with a WAULT that is generally shorter than the benchmark. 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.
Net asset value (NAV) is the value of an entity's assets minus the value of its liabilities.
7. Leverage (Loan to Gross Asset Value)
The proportion of our property portfolio that is funded by borrowings.
The space in the property portfolio which is currently unlet, as a percentage of the total ERV of the portfolio.
The exposure to real estate development or property development encompassing activities that range from the purchase of land for improvement to material refurbishments.
The NAV reflects the Company's ability to grow the portfolio and add value to it throughout the life cycle of its assets.
The Company utilises borrowings to enhance returns over the medium term. Borrowings will not exceed 25% of GAV (measured at drawdown).
The Company's aim isto minimise vacancy of the properties. A lowlevel ofstructural vacancy provides an opportunity forthe Company to capture rental uplifts and manage the mix of tenantswithin a property.
By nature of its high yielding strategy, the Companywill limit its exposure to property developments which would 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.
5.22 years at 30 April 2017 (2016: 4.94 years).
£118.67 million at 30 April 2017 (2016: £116.38 million).
19.31% at 30 April 2017 (2016: 10.51%).
7.22% at 30 April 2017 (2016: 3.16%).
0% at 30 April 2017 (2016: 0%).
Dividends declared in relation to the year. The Company targets a dividend of between eight and nine pence per Ordinary Share per annum.
The dividend reflects the Company's ability to deliver a sustainable income stream from its portfolio.
The ratio of total administration and operating costs expressed as a percentage of average net asset value throughout the period.
Profit before tax ('PBT') is a profitability measurewhich considersthe Company's profit before the payment ofincome tax.
TheOngoing Chargesratio provides a measure oftotal costs associatedwith managing and operating the Company,which includesthe management fees 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.
for the quarter to 30 April 2017 (quarter to 30 April 2016: 2.0 pence per share).
for the year ended 30 April 2017 (2016: 5.5 pence per share).
for the year ended 30 April 2017 (2016: 1.14%).
for the year ended 30 April 2017 (2016: £4.64 million)
Alex Short – Portfolio Manager
Operating profit before fair value changes and disposalswas £9.81 million for the year ended 30 April 2017 (2016: £6.31 million). The Company has continued to build a diversified portfolio of properties and as at 30 April 2017 held 29 direct property investments (2016: 25).
Net rental income earned from this portfolio during the year under reviewamountsto £11.07 million (2016: £6.88 million). NAV as at 30 April 2017was £118.67 million (2016: £116.38 million).
The Company received dividends during the year totalling £0.58 million (2016: £0.65 million) from its investment in the Core Fund. On 1 February 2017, the Company disposed of part of its holding in the Core Fund for proceeds of £2.00 million, and the remaining holding at 30 April 2017was valued at £7.59 million. After the year-end the Company fully disposed of the remaining holding for proceeds of £7.62 million.
A loss of £3.16 million (2016: £1.94 million) has arisen on the revaluation of investment properties across the portfolio, comprising £1.66 million (2016: £5.64 million) of costs associatedwith asset purchases initially capitalised on acquisition and £1.50 million of unrealised losses (2016: £3.70 million of unrealised gains) across the portfolio.
Administration expenses,which include the Investment Manager'sfee and other costs attributable to the running ofthe Company for the year,were £1.84 million (2016: £1.22 million). The Company's Ongoing Charges for the year is 1.52% (2016: 1.14%).
The Company hasincurred finance costs of £0.76 million during the year under review(2016: £0.23 million).
The total profit before tax forthe period of £6.10 million (2016: £4.64 million) equatesto basic earnings per share of 5.04 pence (2016: 4.83 pence).
The Company's Net Asset Value as at 30 April 2017was £118.67 million or 95.98 pence per share ('pps') comparedwith £116.38 million or 99.03 pps as at 30 April 2016. Thisreflected a decrease of 3.05 pps or 3.08%,with the underlying movement in NAV set out in the table below:
| Pence per share (pps) |
£ million | |
|---|---|---|
| NAV as at 1 May 2016 | 99.03 | 116.38 |
| Change in fair value of investment property | (2.70) | (3.16) |
| Change in fair value of investments | (0.40) | (0.41) |
| Gains on disposal of investment property | 0.59 | 0.73 |
| Loss on disposal of investments | (0.09) | (0.11) |
| Income earned for the year | 10.80 | 13.08 |
| Expenses and net finance costs for the year | (3.31) | (4.03) |
| Dividends paid | (8.00) | (9.65) |
| Issue of equity (net of costs) | 0.06 | 5.84 |
| NAV as at 30 April 2017 | 95.98 | 118.67 |
Net revenue over the yearwas 7.49 ppswhich, based on dividends paid of 8 pps, reflected a dividend cover of 93.63%.
The Company's property portfolio has been independently valued by Knight Frank in accordancewith the RICS Valuation – Professional Standards Global January 2014, including the International Valuations Standards, and RICS Professional Standards UKJanuary 2014 (revised April 2015). References to 'the Red Book' referto either or both of these 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 Valuations for Inclusion in Financial Statements,which adopt the definition of FairValue used by the International Accounting Standards Board.
As at 30 April 2017, the Company's portfolio had a fair value of £137.82 million (2016: £114.34 million).
Our objective isto build a diversified portfolio of commercial properties throughout the UK. Newacquisitions have been selected to provide an income return that is both sustainable and providesthe potential for growth aswell aslimiting downside risk. The majority of assetsthat have been acquired are fully let and the portfolio had a vacancy rate (as a % of ERV) of 7.22% (2016: 3.16%) as at 30 April 2017. The following significant investment transactionstook place during the year:
We undertake active asset management to seek opportunities to achieve rental growth, let vacant space and enhance value through initiatives such asrefurbishments. During the year, key asset management initiatives have included:
As at 30 April 2017, the Company had a £40 million (2016: £40 million) credit facilitywith RBSi, maturing in October 2020. On 8 May 2017, the Company completed an amendment to the terms of itsfacilitywith RBSi. The total commitment has been reduced from £40.0 million to £32.5 million and the availability period has been extended to 31 March 2019.
As at 30 April 2017, the Company had utilised £29.01 million (2016: £14.25 million) of its £40 million facilitywith RBSi. Gearing as at 30 April 2017 was 19.3% (2016: 10.5%) (Loan to GAV). The loan attractsinterest at LIBOR + 1.4% (2016: LIBOR + 1.4%). To mitigate the interest rate risk that arises as a result of entering into a variable rate linked loan, the Company holds interest rate caps on £26.51 million (2016: £14.25 million) of the loan at a strike rate of 2.5% (2016: 2.5%), resulting in the loan being 91% (2016: 100%) hedged.
On 4 May 2017, the Company acquired Unit 1005, Sarus Courtwhich completesthe Company's acquisition ofthewhole ofthe Sarus Court industrial estate,where the Company already owned five ofthe six unitsfollowing acquisitionsin 2015. The estate provideswell specified, modern industrial units of between 11,000 and 17,000 sq ft,which are let to a number oflight-industrial occupiers on a WAULT of overfour years. Sarus Court forms part ofthewiderManor Park industrial estate, strategically located to thewest of Runcorn and five kilometresfrom the MerseyGateway Project, a newsix lane bridge overthe RiverMersey connecting the towns of Runcorn and Widnes and linking the M56 to the M62. The project is due for completion in autumn 2017.
On 9 May 2017, the Company sold its remaining units in the Core Fund fortotal proceeds of £7.62 million. The Company has held an ownership in the Core Fund since launch in May 2015 for the purpose of expediting itsinvestment period and sawa total return of 13% over the hold period. The units have nowbeen sold at a price in excess ofthe Core Fund'slatest published NAV,with proceeds to fund direct investments in the portfolio.
On 29 June 2017 the Company acquired Unit 34, First Avenue, Deeside for £4.31 million. The property provides a WAULT of approximately 5 yearsto break and 10 yearsto expiry. The acquisition provides an initial yield of 7.9%, a reversionary yield of 7.9% and a capital value persq ft of £45.
We continue to see a mixed bag of economic indicators in the aftermath of Brexit and, although the process to leave the EU has now begun, the dominant theme remains that of uncertainty. Many economists had predicted an immediate and significant impact on the UK economy following the vote to leave the EU. Although these predictions did not come to pass, the UK economy suffered a slowdown in the opening months of 2017, as a rise in living costs impacted consumer spending. GDP growth fell to 0.3% in the first quarter of 2017 from 0.7% in the previous quarter(Office ofNational Statistics). The pound'ssharp fall since the Brexit vote haslifted inflation to its highest level for more than three years (Office ofNational Statistics CPIH Measure ofInflation), putting pressure on consumers' incomes.
The general election on 8 June 2017 created further uncertainty aroundwhat happens nextwith the UK's negotiation to exit the EU, which islikely to continue to prolong caution from investors and tenants.
Brexit negotiations and political uncertainty may continue to slowdown the UK economy but the impact on the real estate market should be mitigated by lowinterest rates. It is hoped that the UK economywill continue to showresilience and the International Monetary Fund has revised its UK growth forecast, nowenvisaging the economy expanding by 2.0% in 2017, comparedwith forecasts of 1.1% and 1.5% made in October 2016 and January 2017 respectively.
The property market has proven to be resilient following the initialshock ofthe Brexit referendum,with MSCI data showing that the market hasstarted to regain the value it lost in the immediate aftermath of the Brexit vote. Central London hasthe greatest uncertainty over occupier demand but overseasinvestors are stillshowing a strong appetite for safe haven assetsin the global hub. The shares of the major REITswith significant development exposure to the capital are, however,still at a substantial discount to pre-Brexit prices, reflecting the heightened uncertainty of future demand in the key occupier marketswhere rental growth is a more important driver of total returns due to the lower(prime) initial yields.
Outside central London there are fewer concerns about occupier demand and the greatest risk to property values is if the economy slipstowards recession. Occupiersstillseem to be adopting a pragmatic approach to their property needs and so portfolio income returns remain attractive to investorswho continue to search for yield in thislowinterest rate environment. We sense that theweight of institutional money targeting the sectoris back to pre-Brexit levels and, if anything, a lowlevel of transactions is as much due to lack of willing sellers because multi-asset investors viewproperty as an attractive alternative to historically lowbond yields.
We are not surprised, howeverto see investors often focussing on the prime end ofthe marketwhich, at times of uncertainty, tends to be redefined by length of lease and quality oftenant covenant rather than location. Pricing is then driven largely by the yield premium offered by property investments above gilts.
We see risksto future returnsfrom looking at property as being cheap (relative to gilts) rather than acknowledging that this period of historically lowbond yieldsis unlikely to be maintained, particularly ifinflation continues to rise. In our experience there are risksto capital preservationwhen strategies focus solely on relative income yields at the expense of property fundamentals. The Company aims to deliver an attractive total return to shareholders from investing predominantly in a portfolio of smaller commercial properties in strong commercial locations acrossthe UK. In the Investment Manager's view, it istherefore not as susceptible to capital value erosion as will be experienced by holders of prime asset portfolios.
In terms ofsectorfocus,we foresee the best total returns in the industrial and logisticswarehousing sectors. Thisis driven in part by online retailers' requirementsfor distribution hubs around big cities and majorinfrastructure hubsto enable them to deliver goods more efficiently to shoppers' homes. Forecast total returns for industrial property are 7.1% annualised for 2016-2020 (Colliers International Real Estate Investment Forecasts Q3 2016).
AEW UK Investment Management LLP is authorised and regulated by the Financial Conduct Authority as a full-scope AIFM and provides its servicesto the Company.
The Company has appointed Langham Hall UKDepositary LLP ('Langham Hall') to act as the depositary to the Company, responsible for cash monitoring, asset verification and oversight of the Company.
Underthe AIFM Directive, the Company isrequired to make disclosures in relation to its leverage underthe prescribed methodology of the Directive.
The AIFM Directive prescribestwo methodologies for evaluating leverage, namely the 'Gross Method' and the 'Commitment Method'. The Company's maximum and actual leverage levels are as per below:
| 30 April 2017 | 30 April 2016 | |||
|---|---|---|---|---|
| Leverage Exposure | Gross Method | Commitment Method |
Gross Method | Commitment Method |
| Maximum Limit | 140% | 140% | 140% | 140% |
| Actual | 118% | 124% | 105% | 112% |
In accordancewith the AIFM Directive, leverage is expressed as a percentage ofthe Company's exposure to its NAV and adjusted in linewith the prescribed Gross and Commitment Method. The gross method is representative of the sum of the Company's positions after deducting cash balances andwithout taking into account any hedging and netting arrangements. The Commitment Method is representative ofthe sum ofthe Company's positionswithout deducting cash balances and taking into account any hedging and netting arrangements. Forthe purposes of evaluating the methods above, the Company's positions primarily reflect its current borrowings and NAV.
The AIFM has adopted a Remuneration Policywhich accordswith the principles established by AIFMD.
AIFMD Remuneration Code Staff includesthe members ofthe AIFM's Management Committee, those performing Control Functions, Department Heads, Risk Takers and other members ofstaffthat exert material influence on the AIFM'srisk profile orthe AIFsit manages.
Staff are remunerated in accordancewith the key principles ofthe firm'sremuneration policy,which include (1) promoting sound risk management; (2) supporting sustainable business plans; (3) remuneration being linked to non-financial criteria for Control Function staff; (4) incentivise staff performance over longer periods of time; (5) award guaranteed variable remuneration only in exceptional circumstances; and (6) having an appropriate balance between fixed and variable remuneration.
Asrequired undersection 'Fund 3.3.5.R(5)' of the Investment Fund Sourcebook, the following information is provided in respect of remuneration paid by the AIFM to itsstaff. The information provided belowis provided for the year from 1 January 2016 to 31 December 2016,which isin linewith the most recent financial reporting period ofthe AIFM, and relates to the total remuneration of the entire staff ofthe AIFM.
| Year ended 31 December 2016 |
|
|---|---|
| Total remuneration paid to employees during financial year: | |
| a) remuneration, including, where relevant, any carried interest paid by the AIF |
£2,113,652 |
| b) the number of beneficiaries |
26 |
| The aggregate amount of remuneration, broken down by: | |
| a) senior management |
£604,939 |
| b) members of staff |
£1,508,713 |
| Fixed remuneration |
Variable remuneration |
Total remuneration |
|
|---|---|---|---|
| Senior management | £604,939 | – | £604,939 |
| Staff | £1,212,913 | £295,800 | £1,508,713 |
| Total | £1,817,852 | £295,800 | £2,113,652 |
Fixed remuneration comprises basic salaries and variable remuneration comprises bonuses.
South East, 16% South West, 11% Eastern, 10% West Midlands, 12% East Midlands, 6% North West, 11%
Scotland, 9% Northern Ireland, 8%
The Company'stop ten properties as at 30 April 2017 asset out belowcomprise 58.9% ofthe portfolio value:
| 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 |
| Pearl Assurance House, Nottingham | 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 | <7.5m | Retail warehouse |
| Langthwaite Grange Industrial Estate, South Kirkby | <7.5m | Industrial |
| Odeon Cinema, Southend on Sea | <7.5m | Other |
| Oak Park Rylands Lane, Droitwich | <7.5m | Industrial |
The table belowsets out the Company'stop ten tenants as at 30 April 2017, representing 38.9% of the passing rent of the property portfolio:
| Tenant | Passing Rent (£'000) |
As % of Total Passing Rent |
|---|---|---|
| Ardagh Glass Limited | 676 | 5.6 |
| Egbert H. Taylor & Company Limited | 625 | 5.1 |
| Odeon Cinemas | 535 | 4.4 |
| The Secretary of State for Communities and Local Government | 511 | 4.2 |
| Advance Supply Chain (BFD) Limited | 428 | 3.5 |
| Poundland Limited | 414 | 3.4 |
| HFC Prestige Manufacturing Limited | 410 | 3.4 |
| Go Outdoors Limited | 400 | 3.3 |
| Barclays Bank plc | 375 | 3.1 |
| ROM Group Limited | 350 | 2.9 |
The chart belowshowsthe lease expiry profile ofthe portfolio tenants and the percentage of passing rent expiring at variousintervals.
AEW UK Investment Management LLP 7 July 2017
The Company'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 of the principal risksfacing the Company, including those thatwould threaten its business model, future performance, solvency or liquidity. Twice a year, the Audit Committee reviewsthe adequacy and effectiveness ofthe Company'srisk managementsystem. Some risks are not yet known and some that are currently not deemed material, could turn out to be material in the future. All principal risks are the same as detailed in the 2016 Annual Report,with the exception ofthe inclusion of political/economic risksthat have been added following the EU referendum in June 2016 and a financial risk relating to the availability and cost of the credit facility. Financial risk management and objectives and policies are further detailed in Note 20 of the Financial Statements.
An analysis of the principal risks and uncertaintiesisset out below:
| Principal risks and their potential impact | How risk is managed |
|---|---|
| REAL ESTATE RISKS | |
| Tenant default | |
| Failure by tenantsto complywith theirrental obligations could affect the income that the properties earn and the ability ofthe |
Tenant covenant checks are carried out on newtenantswhere there are concerns asto their creditworthiness. |
| Company to pay dividendsto itsshareholders. | Asset management team conducts ongoing monitoring and liaisonwith tenantsto manage potential bad debt risk. |
| Asset management initiatives | |
| Asset management initiatives,such asrefurbishmentworks, may prove to be more extensive, expensive and take longerthan anticipated. Cost overruns may have a material adverse effect on the Company's profitability, the NAV and the share price. |
Costsincurred on asset management initiatives are closely monitored against budgets and reviewed in regular presentationsto the Investment Management Committee of the Investment Manager. |
| Due diligence | |
| 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 Company's profitability, the Net Asset Value and the price of the Company's Ordinary Shares. |
The Company's due diligence relies on thework (such aslegal reports on title, property valuations, environmental, building surveys) outsourced to third parties who have expertise in their areas. Such third parties have Professional Indemnity cover in place. |
| Fall in rental rates | |
| Rental rates may be adversely affected by general UK economic conditions and other factors that depress rental rates, including local factors relating to particular properties/locations (such as increased competition). |
The Company 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). |
| Any fall in the rental ratesforthe Company's properties may have a material adverse effect on the Company's profitability, the NAV, the price of the Ordinary Shares and the Company's ability to meet interest and capital repayments on any debt facilities. |
Quarterly meetings are heldwith the Investment Strategy Committee ofthe Investment Manager and Board ofDirectors to assesswhether any changesin the market present risksthat should be addressed 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 Company to realise itsinvestments at lower valuations; and (ii) delay the timings of the Company'srealisations. These risks could have a material adverse effect on the ability ofthe Company to achieve itsinvestment objective. |
The Company 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 Company uses an independent valuer(Knight Frank) to value the properties at fair value in accordancewith accepted RICS appraisal and valuation standards. |
|
| There may be an adverse effect on the Company's profitability, the NAV and the price ofOrdinary Sharesin caseswhere properties are soldwhose valuations have previously been materially overstated. |
||
| FINANCIAL RISKS | ||
| Breach of borrowing covenants | ||
| The Company has entered into a term credit facility. | The Company 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 Company's borrowingsthrough a term credit facility are subject to interest rate risk through changing LIBOR rates. Any increasesin LIBOR rates may have an adverse effect on the Company's ability to pay dividends. |
An interest rate cap of 2.5% is in place to mitigate the adverse impact of possible interest rate rises. |
|
| Availability and cost of the credit facility | ||
The term credit facility expiresin October 2020. In the event that RBSi does not renewthe facility the Company may need to sell assets to repay the outstanding loan. Any increase in the financing costs of the facility on renewalwould adversely impact on the Company's profitability.
The Company maintains a good relationshipwith the bank providing the term credit facility.
The Company monitors the projected usage and covenants of the credit facility on a quarterly basis.
| Principal risks and their potential impact | How risk is managed |
|---|---|
| CORPORATE RISKS | |
| Use of service providers | |
| The Company has no employees and isreliant upon the performance of third party service providers. |
The performance ofservice providersin conjunctionwith their service level agreements is monitored via regular calls and face |
| Failure by any service providerto carry out its obligationsto the Company in accordancewith the terms ofits appointment could have a materially detrimental impact on the operation of the Company. |
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 Company. |
The Investment Manager has endeavoured to ensure that the principal members ofits management team are suitably |
| The future ability ofthe Company 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. |
incentivised. |
| Ability to meet objectives | |
| The Company may not meet itsinvestment objective to deliver an attractive total return to shareholders from investing predominantly in a portfolio of smaller commercial properties in the United Kingdom. |
The Company has an investment policy to achieve a balanced portfoliowith a diversified tenant base. The Company also has investment restrictionsin place to limit exposure to potential risk factors. These factors mitigate the risk of fluctuations |
| Poorrelative total return performance may lead to an adverse reputational impact that affectsthe Company's ability to raise new capital. |
in returns. |
| Principal risks and their potential impact | How risk is managed |
|---|---|
| TAXATION RISKS | |
| Company REIT status | |
| The Company has a UK REIT statusthat provides a tax-efficient corporate structure. |
The Company monitors REIT compliance through the Investment Manager on acquisitions; the Administrator on |
| Ifthe Company failsto remain a REIT forUK tax purposes, its profits and gainswill be subject to UK corporation tax. |
asset and distribution levels; the Registrar and Broker on shareholdings and the use ofthird-party tax advisers to monitor REIT compliance requirements. |
| Any change to the tax status orUK tax legislation could impact on the Company's ability to achieve itsinvestment objectives and provide attractive returns to shareholders. |
|
Political and macroeconomic events present risksto the real estate and financial marketsthat affect the Company and the business of ourtenants. The level of uncertainty thatsuch events bring has been highlighted in recent times, most pertinently following the EU referendum vote (Brexit) in June 2016.
The Board considersthe impact of political and macroeconomic eventswhen reviewing strategy.
New10 yearlease, very strong occupational market
| Property characteristics | Adding value | |
|---|---|---|
| Property type | Industrial | |
| Area | 32,932 sq ft | |
| Purchase price | £2.1m (£65 persq ft) | |
| Purchase yield | 8.8% | |
| Constructed | 1980s | |
| Vendor | Tenant | |
| Lease | ||
| Tenants | New10 yearlease to Merson Signs Ltd. |
|
| Rent | Passing rent of £6 per sq ft. |
Income longer than 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 | |
| Lease |
| Tenants | Single letwith an unexpired term of 6.3 years. Secured against National Crash Repair Centre Ltd. |
|---|---|
| Rent | Lowpassing rent of £4.25 per sq ft. |
The current lease provides a strong income stream.
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 | 1960s |
| Property Company | |
| Vendor | |
| Lease | |
| Tenants | Single let for a further 12 years with a tenant break option in 9.5 years. |
Lowpassing rents, very strong occupational market
| Property type | Industrial |
|---|---|
| Area | 68,813 sq ft |
| Purchase price | £4.6m (£66 persq ft) |
| Purchase yield | 7.8% |
| Constructed | 1970s |
| Vendor | Property Company |
| Lease | |
| Tenants | Multi let to 4 tenants. |
| WAULT of 3.4 yearsto breaks. | |
| Largest tenant is Amari Plastics | |
| Plc (53% of passing rent). |
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 1.7 years |
|
| to expiry. | ||
| Rent | Average passing rent of | |
| £2.38 per sq ft. |
Three fully let industrial units,strategically located nearthe M6
| Property type | Industrial |
|---|---|
| Area | 136,171 sq ft |
| Purchase price | £3.85m |
| Purchase yield | 9.80% |
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 11.3 years unexpired term. |
| Rent | Average passing rent of £5.35 per sq ft. |
Income longerthan portfolio level WAULT,strong covenant
| Property type | Industrial |
|---|---|
| Area | 28,348 sq ft |
| Purchase price | £1.53m |
| Purchase yield | 7.66% |
| Constructed | 1980s |
| Vendor | Private |
| Lease | |
| Tenants | Single letwith an unexpired term of 6.3 years. Secured against |
The current lease provides a strong income stream.
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 | 1990s | ||
| Vendor | Private | ||
| ` | Lease | ||
| Tenants | Single letwith an unexpired term of 3.9 years, 10 monthsto break. |
||
| Rent | Passing rent of £4.71 persq ft. |
Modern,single let industrial unit in a prime South East location
| Property type | Industrial |
|---|---|
| Area | 58,445 sq ft |
| Purchase price | £3.39m |
| Purchase yield | 10.00% |
| Vendor | Property Company |
| Lease | |
| Tenants | Fully let to HFC Prestige Manufacturing Ltdwith a WAULT of 2.7 yearsto break and expiry. |
| Rent | Average passing rent of £7.01 per sq ft. |
Located just offthe M62, lowpassing rent
| Property characteristics | Adding value | |
|---|---|---|
| Property type | Industrial | |
| Area | 143,765 sq ft | |
| Purchase price | £4.95m (£34 per sq ft) | |
| Purchase yield | 8.1% | |
| Constructed | 1980s | |
| Vendor | Property Company | |
| Lease | ||
| Tenants | Fully let to Advanced Processing Ltdwith 8 years unexpired. |
|
| Rent | Passing rent of £3 per sq ft. |
Previous owner completed £400,000 of worksto the roof and yard.
Tenant has been in occupation since 2009 and hasrecently extended the lease, creating an unexpired term of 8 years.
Single let industrial unit, long term income stream
| Property type | Industrial |
|---|---|
| Area | 93,588 sq ft |
| Purchase price | £3.44m |
| Purchase yield | 8.24% |
| Vendor | Property Company |
| Lease | |
| Tenants | Single let to Kverneland Group UK Ltdwith a WAULT of 8.4 years to expirywith no break option. |
| Rent | £3.25 per sq ft. |
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 5.5 yearsto expiry. |
||
| Rent | Average passing rent of £3.29 per sq ft. |
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 3.7 years to break and 4.4 yearsto expiry. |
|
| Rent | Average passing rent of | |
| £4.80 per sq ft. |
High yielding industrial units
| Property characteristics | Adding value | |
|---|---|---|
| Property type | Industrial | |
| Area | 230,850 sq ft | |
| Purchase price | £5.80m | area. |
| Purchase yield | 11.00% | |
| Vendor | Property Company | |
| Lease | ||
| Tenants | Fully let to Ardagh Glass Ltdwith a WAULT of 4 months to breaks and 6 monthsto expiry. |
|
| Rent | Average passing rent of £2.95 per sq ft. |
Income longerthan portfolio level WAULT,strong covenant
| Property type | Industrial |
|---|---|
| Area | 12,836 sq ft |
| Purchase price | £0.28m |
| Purchase yield | 11.1% |
| Constructed | 1980s |
| Vendor | Private |
| Lease | |
| Tenants | Single letwith an unexpired term of 6.3 years. Secured against National Crash Repair Centre Ltd. |
£2.50 per sq ft.
Rent Lowpassing rent of
The current lease provides a strong income stream.
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% | to 94%. |
| Vendor | Fund | |
| Lease | rental growth. | |
| Tenants | Multi-let to 8 tenantswith 6% ERVvacancy. WAULT of 3.0 years to break and 4.9 yearsto expiry. |
|
| Rent | Average passing rent of | |
| £20.30 per sq ft (on let space). |
City centre location, attractive yield profile
| Property type | Office |
|---|---|
| Area | 88,159 sq ft |
| Purchase price | £12.20m |
| Purchase yield | 10.00% |
| Constructed | 1980s |
| Vendor | Fund |
| Lease | |
Majorsouth east city, improving occupier demand
| Property type | Office |
|---|---|
| Area | 74,266 sq ft |
| Purchase price | £8.20m |
| Purchase yield | 9.40% |
| Constructed | 1980s |
| Vendor | Property Company |
| Lease | |
| Tenants | 5 tenants providing a WAULT of 6.5 yearsto break and 9.5 years to expiry. |
| Rent | Average passing rent of £10.30 per sq ft. |
Major city centre location, high passing footfall
| Property type | Retailwith office uppers | ||
|---|---|---|---|
| Area | 71,260 sq ft | ||
| Purchase price | £8.15m | ||
| Purchase yield | 9.0% | ||
| Vendor | Property Company | ||
| Lease | |||
| Tenants | Multi let to 16 tenantswith a WAULT of 5.1 yearsto break and 5.6 yearsto expiry. |
||
| 50% of the income from national | |||
| retailersincluding Poundland, Costa Coffee and Lakeland. |
|||
| Rent | Office c.£12 persq ft. |
Prime office location, tenantwedded to the location
| Property type | Office |
|---|---|
| Area | 34,418 sq ft |
| Purchase price | £5.40m |
| Purchase yield | 10.90% |
| Constructed | 1988 |
| Vendor | Fund |
| Tenants | Government tenantwith 2.7 yearsto break and expiry. |
|---|---|
| Rent | Average passing rent of £14.90 per sq ft. |
Lowcapital value persq ft,strong and improving occupier market
| Property type | Office |
|---|---|
| Area | 18,466 sq ft |
| Purchase price | £2.18m |
| Purchase yield | 8.40% |
| Constructed | 1980 |
| Vendor | Private vendor |
| Lease | |
| Tenants | Fully let to 2 tenants providing a WAULT of 5.4 yearsto break and 7.4 yearsto expiry. |
| Rent | Average passing rent of £10.49 persq ft. |
Refurbishment potential ifthe first floortenant breakstheirlease and in the medium term ERV could increase to £15 per sq ft 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 | Charity | rebased rents. |
| Lease Tenants |
B&Q, Sports Direct and Poundland. WAULT of 6.9 years |
6.9 years. |
| to expiry. | ||
| Rent | Average passing rent of £11.97 persq ft. |
Prominent location, attractive yield
| 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 |
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 per sq ft. |
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 | Fund |
| Lease | |
| Tenants | Multi-let to 7 tenants providing a WAULT of 4.3 yearsto break and 7.0 yearsto expiry. |
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 WAULT of 4.2 yearsto expiry. |
|
| Rent | Average passing rent of £197.00 per sq ft In Terms of Zone A ('ITZA')*. |
* Refer to standard zoning convention at www.rics.org.uk
Strong tenant covenants, asset management opportunities
| Property characteristics | Adding value | |
|---|---|---|
| Property type | Retailwith vacant uppers | |
| Area | 100,079 sq ft | |
| Purchase price | £5.05m | |
| Purchase yield | 9.5% | |
| Vendor | Property Company |
| Tenants | Multi-let to national occupiers JD Wetherspoon, Poundland and Sports Direct. WAULT of 6.7 years to break and |
|---|---|
| 9.2 yearsto expiry. | |
| Rent | £5.80 persq ft. |
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 | |
| Lease | ||
| Tenants | Fully let to Odeon Cinemas Ltd providing a WAULT of 5.4 years to expiry. |
|
| Rent | Average passing rent of £13.16 per sq ft. |
In 2016, the Board approved and adopted a diversity policy. The policy acknowledgesthe importance of diversity, including gender diversity, forthe Company.
The Board has established the following objectivesfor achieving diversity on the Board:
When selecting a newnon-executive Director, the Board reviewed a list of candidates from diverse backgrounds and after meetingwith several of them, selected Katrina Hart asshewasthe most qualified candidate.
The Directors do not have service contracts. There are three male Directors and one female Director.
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 respects and seeksto empower each individual and the diverse cultures, perspectives,skills and experienceswithin itsworkforce.
The Company is notwithin the scope ofthe Modern Slavery Act 2015 because it has not exceeded the turnover threshold and is therefore not obliged to make a slavery and human trafficking statement. The Directors are satisfied that, to the best oftheir knowledge, the Company's principal suppliers,which are listed on page 107, complywith the provisions ofthe UKModern Slavery Act 2015.
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 www.aewuk.co.uk.
The Investment Manager believes environmentally responsible fund management means being active, on the ground every day. As part of this process, the Investment Managersubmits disclosuresto GRESB, the Global Real Estate Sustainability Benchmark. GRESB is an industry driven organisation committed to assessing the sustainability ofreal estate portfolios(public, private and direct) around the globe.
The Investment Manageris in the process of submitting the Company's GRESB assessment for the period from 1 May 2016 to 30 April 2017 andwill receive the results of this assessment in September 2017 when itwill be made available on the Company'swebsite.
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 61 and 62 ofthe Directors' Report.
The Strategic Report has been approved by the Board ofDirectors and signed on its behalf by:
Mark Burton Chairman 7 July 2017
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 advisorto Citic Capital Real Estate. Mr. Burton 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.
Appointed: 9 April 2015
Mr. Hyslop is currently a member ofthe 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, Columbus UK Real Estate Fund II, Columbus UK Real Estate Fund LP (all Schrodersfunds) and a consultant to UBS Global Asset Management Limited.
Appointed: 9 April 2015
Mr. Sandhu is chief executive officer and owner of The Santon Groupwhich has developed over £1 billion of property in the last nine 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 manager to 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.
Appointed: 9 April 2015
Ms. Hart is currently a board member ofMiton Group plc and Polar Capital Global Financials Trust plc. She spent her executive career in investment banking,working for a range of banksin corporate finance and equity research roles, including ING Barings, HSBC and Canaccord Genuity.
Appointed: 5 June 2017
This Corporate Governance Statement comprises pages 47 to 50 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 Guidance and Transparency Rules.
The AIC Code can be viewed at: http://www.theaic.co.uk
The UKCode can be viewed at: https://www.frc.org.uk
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 year ended 30 April 2017, the Company has compliedwith the recommendations ofthe AIC Code and the relevant provisions ofthe UKCorporate Governance Code, except asset out belowand on the following pages.
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, gearing 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 Board'sscheduled meetings are quarterly,with an additional meeting dedicated to the reviewofthe financialstatements. There were a further eight ad hoc meetings during the year, attended by those Directors available at the time. During the year to 30 April 2017, the number of scheduled Board and Committee meetings attended by each Directorwere asfollows:
| Board meetings | Audit Committee meetings | Management Engagement and Remuneration Committee Meetings |
|
|---|---|---|---|
| Number attended | Number attended | Number attended | |
| Mark Burton | 5/5 | 3/3 | 1/1 |
| Bim Sandhu | 5/5 | 3/3 | 1/1 |
| James Hyslop | 5/5 | N/A | N/A |
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 committees. The independent Directorslead the appointment processfor any new Directors.
The Board consists offour non-executive Directors. Mark Burton, Bim Sandhu and Katrina Hart 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 meet the expectations ofthe role. 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.
James Hyslop, as a non-independent Director, issubject to annual re-election by shareholders andwill stand for re-election at the 2017 Annual General Meeting. Katrina Hartwillstand for election at the 2017 Annual General Meeting, being the first Annual General Meeting following her appointment to the Board on 5 June 2017. Katrina Hart, alongwith Mark Burton and Bim Sandhu (who both stood for election at the 2016 Annual General Meeting)willstand for re-election at intervals of no longer than three years andwillstand for annual re-election by shareholders after nine years of service asrecommended by the AIC Code.
As set out on page 45, Katrina Hart's appointmentwasin accordancewith the Company's diversity policy. Neither an external search consultancy nor open advertisingwere used as a list of candidates from diverse backgroundsforthe Board to reviewwas presented by the Company's broker.
As a result of the performance evaluation process, the 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 receive 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 assessment (and the Chairman of the Audit Committee leads the assessment ofthe Chairman)which covers:
The assessment involves the completion of anonymous questionnairesfollowed by a discussionwith all Directors, as a group and individually.
The Directors have overall responsibility forthe Company'ssystems of internal controls and risk management. An ongoing process is in place for identifying, evaluating and managing the principal risksfaced by the Company. The processforidentifying, evaluating and managing the principal risksfaced by the Company is in linewith the FRC's Guidance on RiskManagement, Internal Control and Related Financial and Business Reporting published in September 2014 and the FRC's Guidance on Audit Committees published in April 2016. This process has been in place during the year under reviewand up to the date of approval ofthis Report. The processes are regularly reviewed by the Board. The Audit Committee believesthat the Company does not require an internal audit function as it delegates its day to day operations to third partieswhich are monitored by the Committee.
The following are the key internal controlswhich the Company hasin place:
The risks of any failure of the internal controls are identified in the risk register,which isregularly reviewed by the Board through the Audit Committee andwhich also assesses the impact ofsuch risks. The Principal Risks and Uncertainties identified from the risk register can be found in the Strategic Report on pages 26 to 29.
Over and above the ongoing process, as part of the year end reporting process, the Board received letters of comfort from the Investment Manager, Company Secretary and Fund Administrator regarding those service providers' internal controls, accompanied by theirISAE 3402 reportsif available. Following the reviewofthese submissionsfrom service providers and in conjunctionwith the evaluation ofthe Company'sservice providers generally, the Board has determined that the effectiveness ofthe systems of internal controlwere satisfactory.
During the course of the year underreview, no significant failings orweaknessesin the system of internal controls were identified. The internal control systems do not eliminate risk and can only provide reasonable assurance against misstatement or loss.
The Company'ssecond AGMwill take place at noon on 12 September 2017 at The Cavendish Hotel, 81 Jermyn Street, St. James', London SW1Y 6JF. All shareholders have the opportunity to attend and vote, in person or by proxy, at the AGM. The Notice of AGM can be found on the Company'swebsite and in a bookletwhich is being mailed out at the same time as this 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 ofthe Committeeslook forward towelcoming shareholdersto the AGM andwill be available to answershareholders' questions at that meeting.
The Board is keen to engagewith the Company's shareholders and the Investment Manager and Brokerregularly talk to the Company's major shareholders. In addition to the Company's AGM, the Directors are available to speak to or meetwith shareholders on request. Any shareholderwishing to contact the Company should addresstheir query to the Company Secretary at the registered office address.
The Committee comprises the independent Directors. It is chaired by Bim Sandhu and its other members are Mark Burton and Katrina Hart. 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. All members are considered to have experience relevant to the Company'ssector.
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 AIC 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 year, 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 valuation ofthe investment properties. The 29 properties in the portfolio as at 30 April 2017 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 2017 and thesewere discussedwith the Investment Manager and Auditor at the conclusion ofthe audit ofthe financialstatements.
In addition the Committee considered the Company'sshort and medium term cash flows, dividend cover and PID and non-PID distributions. The Committee also monitored the Company's compliancewith the requirements ofHMRC to maintain UK REIT status.
During the year, the Audit Committee approved and implemented a policy on the engagement of the Auditor to supply non-audit services, taking into account the recommendations ofthe FRC. All non-auditservices are reviewed by the Audit Committeewhich makes recommendations for the provision of each non-audit service, and ensure that the statutory auditor is not engaged to perform work that is prohibited under EU lawor exceedsthe maximum limit of 70:30 non-audit to audit fees orthatwould prejudice their independence as auditor. The Auditoris permitted to provide audit-related serviceswhere thework involved is closely related to the work performed in the audit. These include:
The policy isreviewed at least annually by the Audit Committee and its application is monitored.
| Year ended 30 April 2017 |
Period ended 30 April 2016 |
|
|---|---|---|
| Audit | ||
| Statutory audit of Annual Report and Accounts | £66,000 | £65,000 |
| Statutory audit of initial accounts for the period ended 31 October 2015 | – | £20,000 |
| £66,000 | £85,000 | |
| Non-audit | ||
| Review of Interim Report | £22,000 | £10,000* |
| Services provided as Reporting Accountant at IPO | – | £40,000 |
| Renewal of Company's Prospectus | £20,500 | – |
| £42,500 | £50,000 | |
| Total fees paid to KPMG LLP | £108,500 | £135,000 |
| Percentage of total fees attributed to non-audit services | 39% | 37% |
* The lower fee for review of the Company's Interim Report for the period ended 31 October 2015 was agreed in consideration of the work already completed in the statutory audit of the initial accounts for that same period.
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 and that the non-auditserviceswere appropriate, and did not compromise their objectivity and independence.
The Audit Committee meets at least twice a yearwith the Auditor, once at the planning stage before the audit (at the Committee's half-year meeting) 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'sworkwith the Auditorin the absence ofthe Investment Manager. After each audit, the Audit Committee reviewsthe audit process and considersits effectiveness. The reviewofthe 2017 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 2017 AGM and the Audit Committee be authorised to determine theirremuneration. KPMG LLPwere first appointed as Auditor in respect of the period ended 30 April 2016. In accordancewith the EU Audit Regulation, the Companywill be required to conduct a tender for auditservicesfollowing the statutory audit for the year ended 30 April 2025 at the latest.
Bim Sandhu Audit Committee Chairman
7 July 2017
The Management Engagement and Remuneration Committee comprisesthe independent non-executive Directors, Mark Burton, Katrina Hart 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, the Board believesthat Mark Burton remainsthe mostsuitable Directorto chairthe Management Engagement and Remuneration Committee.
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. Thisis due to the Investment Manager successfully managing the Company's portfolio, and continuing to apply the Company's Investment Policy, thereby allowing the Company to continue paying dividendsin accordancewith the targeted investment objective.
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 12 September 2017.
This Policy provides details of the remuneration policy for the Directors ofthe Company. All Directors are non-executive, appointed under the terms of Letters of Appointment, and none have a service contract. The Company has no employees.
A resolution to approve this Directors' Remuneration Policywill be proposed at the Annual General Meeting ofthe Company to be held on 12 September 2017. Ifthe resolution is passed, the Remuneration Policy provisionsset out belowwill apply until they are next put to shareholdersforrenewal ofthat approval,which must be at intervals of not more than three years, or if the 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 of their duties. In linewith the majority of investment trusts, no component of any Director's remuneration issubject to performance factors. There are no provisionsin the Directors' Letters of Appointment for recovery or withholding of fees or expenses. Annual fees are pro-ratedwhere a change takes place during a financial period and the fees for any newDirector appointedwill be in accordancewith this Remuneration Policy. The Board may agree to the payment ofreasonable additional remuneration for the performance of any special duties or services outside the ordinary duties of a Director.
The Company is committed to ongoing shareholder dialogue and any viewswhich are expressed by shareholders on the fees being paid to Directorswould be taken into consideration by the Management Engagement and Remuneration Committeewhen reviewing the Directors' Remuneration Policy and in the annual reviewofDirectors' fees.
| Component | Director Rate at 1 May 2017 |
|
|---|---|---|
| Annual Fee | All Directors | £20,000 |
| Additional Fee | Chairman of the Board | £5,000 |
| Additional Fee | Chairman of the Audit Committee | £4,000 |
| Additional Fee | All Directors | n/a (see note 4) |
Notes:
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' fees for the year ended 30 April 2017were at a level of £25,000 per annum forthe Chairman and £20,000 per annum for otherDirectors. The Chairman ofthe Audit Committee received an additional fee of £4,000 per annum effective from 7 July 2016, making his annual fee £24,000,which the Committee agreedwas consistentwith similar companies and reflected the input and the time spent by the Chairman of the Audit Committee in performing his duties.
The remuneration policywill be put to shareholder approval at the Company's AGM on 12 September 2017 and issubstantially unchanged since the previous policywas approved by shareholders. The only change is the inclusion of the provision in the Company's Articles of Association to pay Directors additional fees for special duties or services. No significant changes are expected in the Company's approach to remuneration.
The Company's Articles of Association permit the 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 of their total remuneration, and it has not reported on those aspects ofremuneration that relate to executive Directors.
A binding Ordinary Resolution approving the Directors' Remuneration Policy and a non-binding Ordinary Resolution adopting the Directors' Remuneration Report for the period ended 30 April 2016were approved by shareholders at the Annual General Meeting held on 7 September 2016. The votes cast by proxywere asfollows:
| For – % of votes cast | 99.97 |
|---|---|
| Against – % of votes cast | 0.03 |
| At Chairman's discretion – % of votes cast | – |
| Total votes cast | 16,927,802 |
| Number of votes withheld | – |
| For – % of votes cast | 99.97 |
|---|---|
| Against – % of votes cast | 0.03 |
| At Chairman's discretion – % of votes cast | – |
| Total votes cast | 16,927,802 |
| Number of votes withheld | – |
The Directorswho served during the yearreceived the following emoluments:
| Fees paid | Taxable benefits | Total | ||||
|---|---|---|---|---|---|---|
| Name of Director | 2017 | 2016 | 2017 | 2016 | 2017 | 2016 |
| Mark Burton | £25,000 | £26,528 | – | – | £25,000 | £26,528 |
| James Hyslop | £20,000 | £21,222 | – | – | £20,000 | £21,222 |
| Bim Sandhu | £23,269 | £21,222 | – | – | £23,269 | £21,222 |
| £68,269 | £68,972 | – | – | £68,269 | £68,972 |
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.
Expenses – The Company's Articles of Association provide that Directors are entitled to be reimbursed forreasonable expensesincurred by them in connectionwith the performance oftheir duties and attendance at Board and General Meetings.
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 Company.
The table belowsets out, in respect ofthe year ended 30 April 2017:
| Year ended 30 April 2017 |
Period ended 30 April 2016 |
|
|---|---|---|
| Directors' fees* | £68,269 | £68,972 |
| Management fee and expenses | £1,033,637 | £652,706 |
| Dividends paid | £9,646,290 | £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 persons closely associated in the equity and debtsecurities ofthe Company at 30 April 2017 are shown in the table below.
| Number of Ordinary Shares | % of Total Voting Rights | |||
|---|---|---|---|---|
| Director | 2017 | 2016 | 2017 | 2016 |
| Mark Burton | 75,000 | 75,000 | 0.06 | 0.06 |
| James Hyslop | 150,000 | 100,000 | 0.12 | 0.08 |
| Bim Sandhu | 575,000* | 400,000** | 0.46 | 0.32 |
* 100,000 Ordinary Shares held in Mr Sandhu's spouse's name, Mrs Pardeep Sandhu, 175,000 Ordinary Shares held in The Santon Pension Fund (a small self-administered pension scheme ('SSAS') for him and his spouse), 250,000 Ordinary Shares held in The Sandhu Charitable Foundation and 50,000 Ordinary Shares held in his own name.
**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.
Katrina Hart acquired 19,145 Ordinary Shares on 5 June 2017. There have been no other changesto Directors' interests between 30 April 2017 and the date of this Report.
The Company is committed to ongoing shareholder dialogue and any viewswhich are expressed by shareholders on the fees being paid to Directorswould be taken into consideration by the Management Engagement and Remuneration Committeewhen reviewing the Directors' Remuneration Policy and in the annual reviewofDirectors' fees.
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 the Directors' Remuneration Policy and the Report on Remuneration Implementation summarises, as applicable, forthe year to 30 April 2017:
7 July 2017
The Directors' Report, prepared in accordancewith the requirements ofthe Companies Act 2006 and the UK Listing Authority's Listing Rules and Disclosure Guidance and Transparency Rules, comprises pages 47 to 64, and incorporatesthe Corporate Governance Statement on page 47 to 50.
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 and significant eventsfollowing the year end and future developmentsisset out in the Strategic Report on pages 1 to 45. The Board has not proposed the payment of a final dividend.
The Directorswho served during the yearwere Mark Burton, Bim Sandhu and James Hyslop. Katrina Hartwas appointed on 5 June 2017. The biographies ofthe Directors ofthe Company at the year end and up to the date ofthisreport can be found on page 46.
The Directors' powers are determined byUKlegislation and the Articles ofAssociation (the 'Articles'),which are available on the Company's website. 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 Company has considered its cash flows, financial position, liquidity position and borrowing facilities. The Company's cash balance as at 30 April 2017was £3.65 million, ofwhich £1.31 millionwasreadily available for potential investments.
As at 30 April 2017, the Company had substantial headroom against its borrowing covenants. The Company hasthe ability to utilise up to 30% ofNAV measured at drawdown underthe current borrowing facility limitswith a Company Loan to NAV of 24.4% as at 30 April 2017.
The Company 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 Company iswell placed to manage its financing and other businessrisks. The Directors believe that there are currently no material uncertainties in relation to the Company's ability to continue for a period of at least 12 monthsfrom the date of these 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 principle 21 ofthe AIC Code, the Directors have assessed the prospects ofthe Company over a period longer than the 12 monthsrequired by the 'Going Concern' provisions. The Board has considered the nature ofthe Company's assets and liabilities and associated cash flows and has determined that five years, up to 30 April 2022, isthe maximum timescale overwhich the performance of the Company can be forecastwith a material degree of accuracy and so is an appropriate period overwhich to consider the Company's viability.
Considerationsin support ofthe Company's viability overthis five year period include:
• The current unexpired term underthe Company's debt facilitiesstands at 3.5 years;
In assessing the Company's viability, the Board has carried out a thorough reviewofthe Company'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 Companywill 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 17 to the Financial Statements.
AEW UK Investment Management LLP isthe Company'sInvestment Manager and has been appointed as AIFM. Under the terms of the 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 of the Directors. The Investment Manageris entitled to receive a management fee in respect ofitsservices of 0.9% per annum of NAV (excluding uninvested proceedsfrom fundraisings). Any investment by the Company into the Core Fund is notsubject to management fees or performance fees otherwise charged to investorsin the Core Fund by the Investment Manager. The Investment Management Agreement may be terminated by the Company orthe Investment Manager giving 12 months' notice.
The financial risk management objectives and policies can be found in Note 20 ofthe Financial Statements.
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 for the year ended 30 April 2017. Namely:
The table belowshowsrelevant GHG emissions(in tonnes carbon dioxide equivalent) that AEW UK REIT plcwasresponsible forin the year ended 30 April 2017.
| GHG Scope | Tonnes of Carbon Dioxide Equivalent (tCO2e) |
Carbon Intensity (ky CO2e/m2 ) |
|
|---|---|---|---|
| Scope 1 | 107.28 (30 April 2016: 86.4) | 8.2 | |
| Scope 2 | 954.25 (30 April 2016: 744.6) | 68.5 |
The Carbon Intensity data for the period ended 30 April 2016was not available and so there is no prior year comparator.
AEW UK REIT plc GHG emissions have been calculated and verified by an independent third party in accordancewith the principles of ISO 14064. A full copy ofthe methodology used, including scope,source or data and conversion factors, is available upon request.
At the AGM held on 7 September 2016, the Companywas granted authority to allot up to 11,751,000 Ordinary Shares on a non pre-emptive basis. On 16 September 2016, the Company issued 2,450,000 Ordinary Shares at a price of 97 pence perOrdinary Share and on 10 October 2016 issued 3,687,250 Ordinary Shares at a price of 98.25 pence per Ordinary Share in the form of tap issues under this authority. The authority to issue Ordinary Shareswill expire at the conclusion ofthe 2017 AGM.
At a general meeting held on 20 May 2016, the Companywas granted authority to allot up to 250,000,000 Ordinary Shares in connectionwith a share issuance programme on a non pre-emptive basis. No Ordinary Shares have been issued under this authority. The authoritywill expire at the end ofthe Company's AGM in 2017 unless the programme is closed before thistime. Further details are set out in Note 18.
At the Company's AGM on 7 September 2016, the Companywas granted authority to purchase up to 14.99% ofthe Company's Ordinary Sharesin issue. No shares have been bought back under this authority,which expires at the conclusion ofthe Company's 2017 AGM. A resolution to renewthe Company's authority to purchase (either for cancellation orfor placing into Treasury) up to 18,534,722 Ordinary Shares(being 14.99% of the issued Ordinary Share capital as at the date ofthisreport),will be put to shareholders at the 2017 AGM. Any purchasewill be made in the market and priceswill be in accordancewith the terms laid out in the Notice of AGM (enclosed separately and available on the Company'swebsite). The authoritywill be usedwhere the Directors consider it to be in the best interests of shareholders.
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 or final 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 of AGM 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.
Listing Rule 9.8.4 requiresthe Company to include specified information in a single identifiable section of the annual report or a cross reference table indicatingwhere the information is set out. The information required under Listing Rule 9.8.4(7) in relation to allotments of shares is set out above. The Directors confirm that no additional disclosures are required in relation to Listing Rule 9.8.4.
As at 30 April 2017 and 7 July 2017 the Company had been notified underDisclosure Guidance 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 2017 | As at 7 July 2017 | |||
|---|---|---|---|---|
| Shareholder | Number of Ordinary Shares held |
% of total voting rights |
Number of Ordinary Shares held |
% of total voting rights |
| Schroders plc | 18,545,127 | 14.99 | 18,545,127 | 14.99 |
| Close Asset Management Limited | 14,657,939 | 11.85 | 13,474,954 | 10.89 |
| Old Mutual plc | 10,963,999 | 8.87 | 11,157,173 | 9.02 |
| Natixis Global Asset Management SA | 10,000,000 | 8.09 | 8,000,000 | 6.47 |
| Coutts Multi Asset Fund plc | 7,400,000 | 5.98 | 7,400,000 | 5.98 |
| Investec Wealth & Investment Limited | 4,813,400 | 3.89 | 4,813,400 | 3.89 |
Related party transactions during the year to 30 April 2017 can be found in Note 22 ofthe Financial Statements.
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 66 to 69), 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.
KPMG LLP has expressed itswillingness to continue asthe Company's Auditor. As outlined in the Report of the Audit Committee on page 53, resolutions proposing their reappointment and to authorise the Audit Committee to determine their remunerationwill be proposed at the 2017 AGM.
On behalf ofthe Board
Mark Burton Chairman
7 July 2017
40 Dukes Place London EC3A 7NH
The Directors are responsible for preparing the Annual Report and Financial Statements in accordance with applicable law and regulations.
Company lawrequires the Directors to prepare financialstatementsfor each financial year. Under that lawthey have elected to prepare the financialstatementsin accordancewith IFRSs as adopted by the EU and applicable law.
Under company lawthe Directors must not approve the financialstatements unless they are satisfied that they give a true and fair view of the state of affairs ofthe Company and ofthe profit or loss of the Company for that period. In preparing these financialstatements, the Directors are required to:
The Directors are responsible for keeping adequate accounting recordsthat are sufficient to showand explain the Company's transactions and disclosewith reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financialstatements complywith the Companies Act 2006. They have general responsibility fortaking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.
Under applicable lawand regulations, the Directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that complieswith that lawand those regulations.
The Directors are responsible forthe maintenance and integrity ofthe corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financialstatements may differfrom legislation in other jurisdictions.
We confirm that to the best of our knowledge:
We consider the Annual Report and Financial Statements, taken as awhole, isfair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy.
On behalf ofthe Board
Mark Burton Chairman 7 July 2017
to the members of AEW UK REIT plc only
We have audited the financialstatements ofAEW UK REIT plc for the year ended 30 April 2017 set out on pages 70 to 102. In our opinion:
| Overview | ||
|---|---|---|
| Materiality: | £1.5m (2016: £1.3m) | |
| Financial statements as a whole | 1% (2016: 1%) of total assets | |
| Lower materiality applied to certain items | £0.25m (2016: £0.30m) 2% (2016:4%) of rental income, management fees and finance expense |
|
| Coverage | 100% (2016: 100%) of total assets | |
| Risks of material misstatement | vs 2016 | |
| Recurring risks | Valuation of investment property |
In arriving at our audit opinion above on the financial statements, the risk of material misstatement, that had the greatest effect on our auditwas asfollows(unchanged from 2016):
| The risk | Our response | |
|---|---|---|
| Valuation of investment property | Subjective valuation | Our procedures included: |
| (£136 million (2016: £114 million)) | Investment properties represent | • Assessing valuer's credentials: We assessed the |
| Refer to page 51 (Audit Committee Report), pages 74 to 80 (accounting policy) and pages 81 to 102 (financial disclosures). |
90% (2016: 84%) of gross assets of the Company. The portfolio comprises 29 (2016: 25) properties which are externally |
Company's external property valuer's objectivity, professional qualifications and resources through discussions with the valuer and reading their valuation report. |
| valued by a qualified independent valuer and held at fair value at the Statement of Financial Position date. |
• Methodology choice: We held discussions with the Company's external property valuer to determine the valuation methodology used. We included our own property valuation specialist to assist us in |
|
| Each property's fair value will be impacted by a number of factors including location, contracted and future potential rental income, quality and condition of the building, tenant covenant, |
critically assessing the results of the valuer's report by checking that the valuations were in accordance with the RICS Valuation Professional Standards 'the Red Book' and IFRS as adopted by the EU and that the methodology adopted was appropriate by reference to acceptable valuation practice. |
|
| and market yields. Whilst comparable market transactions provide good valuation evidence, the individual nature of each property means that a key factor in the property valuations are assumptions which involve significant levels of judgement. |
• Benchmarking assumptions: With the assistance of our own property valuation specialist, we held discussions with the Company's external property valuer to obtain an explanation for the movements in property values. For a sample of properties, we challenged the key assumptions upon which these valuations were based including those relating to forecast rents, yields, vacant periods and irrecoverable expenditure by making a comparison to our own understanding of the market and to industry benchmarks. We challenged significant or unusual movements in property values by forming |
purchase agreements.
our own view on the general market conditions with reference to the key assumptions noted above.
• Test of detail: We compared the information provided by the Company to its external property valuer for a sample, such as lease data, rental income and property costs, to supporting documents including lease agreements and
• Assessing transparency: We considered the adequacy of the Company's disclosures about the degree of estimation and sensitivity to key assumptions made when valuing properties.
Materiality forthe financialstatements as awholewas set at £1.5 million (2016: £1.3 million), determinedwith reference to a benchmark oftotal assets, ofwhich it represents 1% (2016: 1%).
In addition,we applied materiality of £0.25 million (2016: £0.30 million) to rental income, management fees and finance expense, forwhichwe believe misstatement of lesser amounts than materiality for the financial statements as awhole can be reasonably expected to influence the Company's members' assessment of the financial performance of the Company.
We reported to the Audit Committee any corrected or uncorrected misstatements exceeding £74,000 (2016: £65,000) or £12,000 (2016: £3,500) for misstatements relating to procedures performed to the lower materiality.
Based solely on thework required to be undertaken in the course of the audit of the financialstatements and from reading the Strategic Report and the Directors' Report:
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 other information in the annual report that contains a material inconsistencywith eitherthat knowledge orthe financial statements, a material misstatement of fact, or that 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' Responsibilities Statementset out on page 65, the Directors are responsible for the preparation ofthe financialstatements and for being satisfied that they give a true and fair view. A description of the scope of an audit of financial statements is provided on the Financial Reporting Council'swebsite atwww.frc.org.uk/auditscopeukprivate.
Thisreport is made solely to the Company's members as a body and issubject to important explanations and disclaimers regarding our responsibilities, published on ourwebsite atwww.kpmg.com/uk/auditscopeukco2014a,which are incorporated into this report as if set out in full and should be read to provide an understanding of the purpose of this report, theworkwe have undertaken and the basis of our opinions.
7 July 2017
for the year ended 30 April 2017
| Notes | Year ended 30 April 2017 £'000 |
For the period 1 April 2015 to 30 April 2016 £'000 |
|
|---|---|---|---|
| Income | |||
| Rental and other income | 3 | 12,503 | 7,185 |
| Property operating expenses | 4 | (1,434) | (300) |
| Net rental and other income | 11,069 | 6,885 | |
| Dividend income | 3 | 576 | 653 |
| Net rental and dividend income | 11,645 | 7,538 | |
| Investment management fee | 4 | (1,034) | (653) |
| Auditor remuneration | 4 | (88) | (95) |
| Operating costs | 4 | (646) | (403) |
| Directors' remuneration | 5 | (71) | (72) |
| Operating profit before fair value changes and disposals | 9,806 | 6,315 | |
| Change in fair value of investment property | 10 | (3,159) | (1,935) |
| Gains on disposal of investment property | 10 | 731 | – |
| Change in fair value of investments | 10 | (407) | 482 |
| Loss on disposal of investments | 10 | (113) | – |
| Operating profit | 6,858 | 4,862 | |
| Finance expense | 6 | (759) | (226) |
| Profit before tax | 6,099 | 4,636 | |
| Taxation | 7 | – | – |
| Profit after tax | 6,099 | 4,636 | |
| Other comprehensive income | – | – | |
| Total comprehensive income for the year/period | 6,099 | 4,636 | |
| Earnings per share (pence per share) (basic and diluted) | 8 | 5.04 | 4.83 |
for the year ended 30 April 2017
| For the year ended 30 April 2017 | Notes | Share capital £'000 |
Share premium account £'000 |
Capital reserve and retained earnings £'000 |
Total capital and reserves attributable to owners of the Company £'000 |
|---|---|---|---|---|---|
| Balance at beginning of the year | 1,175 | 16,729 | 98,471 | 116,375 | |
| Total comprehensive income | – | – | 6,099 | 6,099 | |
| Ordinary Shares issued | 18/19 | 61 | 5,938 | – | 5,999 |
| Share issue costs | 19 | – | (153) | – | (153) |
| Dividends paid | 9 | – | – | (9,646) | (9,646) |
| Balance at 30 April 2017 | 1,236 | 22,514 | 94,924 | 118,674 |
| Cancellation of share premium Dividends paid |
9 | – – |
(97,565) – |
97,565 (3,730) |
– (3,730) |
|---|---|---|---|---|---|
| Share issue costs | 19 | – | (2,211) | – | (2,211) |
| Ordinary Shares issued | 18/19 | 1,175 | 116,505 | – | 117,680 |
| Balance at beginning of the period Total comprehensive income |
– – |
– – |
– 4,636 |
– 4,636 |
|
| For the period 1 April 2015 to 30 April 2016 | Notes | Share capital £'000 |
Share premium account £'000 |
Capital reserve and retained earnings £'000 |
Total capital and reserves attributable to owners of the Company £'000 |
as at 30 April 2017
| Notes | 30 April 2017 £'000 |
30 April 2016 £'000 |
|
|---|---|---|---|
| Assets | |||
| Non-Current Assets | |||
| Investment property | 10 | 135,570 | 114,387 |
| Investments | 10 | – | 10,109 |
| 135,570 | 124,496 | ||
| Current Assets | |||
| Investments held for sale | 10 | 7,594 | – |
| Receivables and prepayments | 11 | 3,382 | 2,962 |
| Other financial assets held at fair value | 12 | 31 | 77 |
| Cash and cash equivalents | 3,653 | 7,963 | |
| 14,660 | 11,002 | ||
| Total Assets | 150,230 | 135,498 | |
| Non-Current Liabilities | |||
| Interest bearing loans and borrowings | 13 | (28,740) | (14,250) |
| Finance lease obligations | 15 | (55) | (1,791) |
| (28,795) | (16,041) | ||
| Current Liabilities | |||
| Payables and accrued expenses | 14 | (2,756) | (2,959) |
| Finance lease obligations | 15 | (5) | (123) |
| (2,761) | (3,082) | ||
| Total Liabilities | (31,556) | (19,123) | |
| Net Assets | 118,674 | 116,375 | |
| Equity | |||
| Share capital | 18 | 1,236 | 1,175 |
| Share premium account | 19 | 22,514 | 16,729 |
| Capital reserve and retained earnings | 94,924 | 98,471 | |
| Total capital and reserves attributable to equity holders of the Company |
118,674 | 116,375 | |
| Net Asset Value per share (pence per share) | 8 | 95.98 pps | 99.03 pps |
The financialstatements on pages 70 to 102were approved by the Board on 7 July 2017 and signed on its behalf by:
Mark Burton Chairman AEW UK REIT plc Company number: 09522515
for the year ended 30 April 2017
| For the year ended 30 April 2017 £'000 |
For the period 1 April 2015 to 30 April 2016 £'000 |
|
|---|---|---|
| Cash flows from operating activities Operating profit |
6,858 | 4,862 |
| Adjustment for non-cash items: | ||
| Loss from change in fair value of investment property | 3,159 | 1,935 |
| Loss/(gain) from change in fair value of investments | 407 | (482) |
| Gains on disposal of investment properties | (731) | – |
| Loss on disposal of investments | 113 | – |
| Change in fair value of interest rate derivatives | – | (14) |
| Increase in other receivables and prepayments | (438) | (2,962) |
| (Decrease)/increase in other payables and accrued expenses | (283) | 2,936 |
| Net cash flow generated from operating activities | 9,085 | 6,275 |
| Cash flows from investing activities | ||
| Purchase of investment property | (28,062) | (114,408) |
| Purchase of investments | – | (9,627) |
| Disposal of investment property | 2,681 | – |
| Disposal of investments | 1,995 | – |
| Net cash used in investing activities | (23,386) | (124,035) |
| Cash flows from financing activities | ||
| Proceeds from issue of ordinary share capital | 5,999 | 117,680 |
| Share issue costs | (153) | (2,211) |
| Loan draw down | 14,760 | 14,250 |
| Finance costs | (969) | (266) |
| Dividends paid | (9,646) | (3,730) |
| Net cash flow generated from financing activities | 9,991 | 125,723 |
| Net (decrease)/increase in cash and cash equivalents | (4,310) | 7,963 |
| Cash and cash equivalents at start of the year/period | 7,963 | – |
| Cash and cash equivalents at end of the year/period | 3,653 | 7,963 |
for the year ended 30 April 2017
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.
The nature of the Company's operations and its principal activities are set out in the Strategic Report on pages 1 to 45.
These financial statements are prepared and approved by the Directors in accordance with International Financial Reporting Standards ('IFRS') and interpretations issued by the International Accounting Standards Board ('IASB') as adopted by the European Union ('EU IFRS').
The prior period is for a period of greater than 12 months, being the first audited period from the date of incorporation. As a result the comparative information disclosed is not directly comparable.
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 pounds (£'000), except when otherwise indicated.
The Company is exempt by virtue of Section 402 of the Companies Act 2006 from the requirement to prepare group financial statements. These financial statements present information solely about the Company as an individual undertaking.
There are a number of new standards and amendments to existing standards which have been published and are mandatory for the Company's accounting periods beginning after 30 April 2017 or later periods, but the Company has decided not to adopt them early. The following are the most relevant to the Company and their impact on the financial statements:
for the year ended 30 April 2017
2.1 Basis of preparation (continued)
The preparation of financial statements in accordance with EU IFRS requires the Directors of the Company 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 Company's investment property will be at fair value as determined by the independent valuer on the basis of fair value in accordance with the internationally accepted Royal Institution of Chartered Surveyors ('RICS') Appraisal and Valuation Standards.
Investments in collective investment schemes are stated at fair value with any resulting gain or loss recognised in profit or loss. Fair value is assessed by the Directors based on the best available information.
The value of the Company's interest in the Core Fund is stated at NAV of the Core Fund as at 30 April 2017 (30 April 2016: single swinging price). The Directors, in consultation with the Company's professional advisers, have adopted the amended estimation technique from 31 October 2016 in order to provide a better reflection of fair value of the Company's holding in the Core Fund.
In accordance with IFRS 8, the Company is organised into one main operating segment being investment in property and property related investments in the UK.
for the year ended 30 April 2017
The Directors have made an assessment of the Company's ability to continue as a going concern and are satisfied that the Company has the resources to continue in business for at least 12 months. Furthermore, the Directors are not aware of any material uncertainties that may cast significant doubt upon the 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.
These financial statements are presented in Sterling, which is the functional and presentational currency of the Company. The functional currency of the Company is principally determined by the primary economic environment in which it operates. The Company did not enter into any transactions in foreign currencies during the year.
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.
Dividend income is recognised in profit or 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 financing expenses are recognised in profit or loss 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.
for the year ended 30 April 2017
Property is classified as investment property when it is held to earn rentals or for capital appreciation or both. Investment property is measured initially at cost including transaction costs. Transaction costs include transfer taxes and professional fees to bring the property to the condition necessary for it to be capable of operating. The carrying amount also includes the cost of replacing part of an existing investment property at the time that cost is incurred if the 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 independent valuer on the basis of a full valuation with physical inspection at least once a year. Any valuation of an Immovable by the independent valuer must be undertaken in accordance with the current issue of RICS Valuation – Professional Standards (the 'Red Book').
The determination of the fair value of investment property requires the use of estimates such as future cash flows from assets (such as lettings, tenants' profiles, future revenue streams, capital values of fixtures and fittings, plant and machinery, any environmental matters and the overall repair and condition of the property) and discount rates applicable to those assets.
For the purposes of these financial statements, 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.
Investments in collective investment schemes are stated at fair value with any resulting gain or loss recognised in profit or loss.
Investments are derecognised when they have been disposed of or the rights to receive cash flow from the investments have expired or the Company has transferred substantially all risks and rewards of ownership.
for the year ended 30 April 2017
AEW UK REIT 2015 Limited is the subsidiary of the Company. The subsidiary was dormant during the reporting period. The investment in the subsidiary is stated at cost less impairment and shown in note 17.
As permitted by Section 405 of the Companies Act 2006, the subsidiary is not consolidated as its inclusion is not material for the purposes of giving a true and fair view.
Investment property and investments are classified as held for sale when it is highly probable that the carrying amount will be recovered principally through a sale transaction.
Investment property and investments classified as held for sale are included within current assets within the Statement of Financial Position and measured at the lower of their carrying amount and fair value less costs to sell. Any gains or losses between the fair value and the carrying value in the year are recognised in profit or loss.
Derivative financial instruments, comprising interest rate caps for hedging purposes, are initially recognised at fair value and are subsequently measured at fair value, being the estimated amount that the Company 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. Premiums payable under such arrangements are initially capitalised into the Statement of Financial Position.
The Company 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. Changes in fair value of interest rate derivatives are recognised within finance expenses in profit or loss in the period in which they occur.
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 Company will not be able to recover balances in full.
for the year ended 30 April 2017
Capital prepayments are made for the purpose of acquiring future property assets, and held as receivables within the Statement of Financial Position. When the asset is acquired, the prepayments are capitalised as a cost of purchase. Where a purchase is not successful, these costs are expensed within profit or loss as abortive costs in the period.
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 Company. These balances are held as creditors in the Statement of Financial Position.
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 Company 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.
for the year ended 30 April 2017
Finance leases are capitalised at the lease commencement, at the lower of fair value of the property and present value of the minimum lease payments, and held as a liability within the Statement of Financial Position.
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 Company 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 applicable in the period.
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.
The Company 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 Company's Ordinary Shares. For the year ended 30 April 2017, audited EPS and NAV calculations under EPRA's methodology are included in note 8 and further unaudited measures are included on pages 103 to105.
for the year ended 30 April 2017
| Period | ||
|---|---|---|
| Year ended | 1 April 2015 to | |
| 30 April 2017 | 30 April 2016 | |
| £'000 | £'000 | |
| Gross rental income received | 12,147 | 6,153 |
| Surrender premium received | – | 1,000 |
| Dilapidation income received | 301 | 19 |
| Other property income | 55 | 13 |
| Total rental and other income | 12,503 | 7,185 |
| Dividend income: | ||
| Property income distribution * | 552 | 629 |
| Dividend distribution | 24 | 24 |
| 576 | 653 | |
| Total Revenue | 13,079 | 7,838 |
* Property income distribution ('PID') arises on the investment in the Core Fund which holds property directly.
Rent receivable under the terms of the leases, is adjusted, for the effect of any incentives agreed.
| Year ended 30 April 2017 £'000 |
Period 1 April 2015 to 30 April 2016 £'000 |
|
|---|---|---|
| Property operating expenses | 1,434 | 300 |
| Investment management fee | 1,034 | 653 |
| Auditor remuneration | 88 | 95 |
| Operating costs | 646 | 403 |
| Total | 3,202 | 1,451 |
for the year ended 30 April 2017
| Year ended 30 April 2017 |
Period 1 April 2015 to 30 April 2016 |
|
|---|---|---|
| Audit | ||
| Statutory audit of Annual Report and Accounts | £66,000 | £65,000 |
| Statutory audit of initial accounts for the period ended 31 October 2015 | – | £20,000 |
| £66,000 | £85,000 | |
| Non-audit | ||
| Review of Interim Report | £22,000 | £10,000* |
| Services provided as Reporting Accountant at IPO | – | £40,000 |
| Renewal of Company's Prospectus | £20,500 | – |
| £42,500 | £50,000 | |
| Total fees paid to KPMG LLP | £108,500 | £135,000 |
| Percentage of total fees attributed to non-audit services | 39% | 37% |
* The lower fee for review of the Company's Interim Report for the period ended 31 October 2015 was agreed in consideration of the work already completed in the statutory audit of the initial accounts for that same period.
| Year ended 30 April 2017 £'000 |
Period 1 April 2015 to 30 April 2016 £'000 |
|
|---|---|---|
| Directors' fees | 68 | 69 |
| Tax and social security | 3 | 3 |
| Total remuneration | 71 | 72 |
A summary of the Directors' remuneration is set out in the Directors' Remuneration Report on page 57. The Company had no employees in either period.
for the year ended 30 April 2017
| Period | ||
|---|---|---|
| Year ended | 1 April 2015 to | |
| 30 April 2017 | 30 April 2016 | |
| £'000 | £'000 | |
| Interest payable on loan borrowings | 483 | 110 |
| Amortisation of loan arrangement fee | 78 | 40 |
| Agency fee payable on loan borrowings | 21 | 11 |
| Commitment fees payable on loan borrowings | 60 | 51 |
| 642 | 212 | |
| Change in fair value of interest rate derivatives | 117 | 14 |
| Total | 759 | 226 |
| Period | ||
|---|---|---|
| Year ended | 1 April 2015 to | |
| 30 April 2017 | 30 April 2016 | |
| £'000 | £'000 | |
| Total tax charge | – | – |
| Reconciliation of tax charge for the year/period | ||
| Profit before tax | 6,099 | 4,636 |
| Theoretical tax at UK corporation tax standard rate of 19.92% (2016: 20%) 1 |
1,215 | 927 |
| Adjusted for: | ||
| Exempt REIT income | (1,798) | (1,119) |
| UK dividends that are not taxable | (5) | (99) |
| Non deductible investment losses | 588 | 291 |
| Total tax charge | – | – |
1 Standard rate of corporation tax 20% to 31 March 2017, 19% from 1 April 2017. The corporation tax rate is to reduce to 17% with effect from 1 April 2020.
At 30 April 2017 the Company has unrelieved management expenses of £6,826 (30 April 2016: £4,182). It is unlikely that the Company will generate sufficient taxable income in the future to use these expenses to reduce future tax charges and therefore no deferred tax asset has been recognised.
Due to the Company's status as a REIT and the intention to continue meeting the conditions required to obtain approval as a REIT in the foreseeable future, the Company has not provided deferred tax on any capital gains and losses arising on the revaluation or disposal of investments.
for the year ended 30 April 2017
| Year ended 30 April 2017 |
Period 1 April 2015 to 30 April 2016 |
|
|---|---|---|
| Earnings per share: | ||
| Total comprehensive income (£'000) | 6,099 | 4,636 |
| Weighted average number of shares | 121,084,416 | 96,022,424 |
| Earnings per share (basic and diluted) (pence) | 5.04 | 4.83 |
| EPRA earnings per share: | ||
| Total comprehensive income (£'000) | 6,099 | 4,636 |
| Adjustment to total comprehensive income: | ||
| Unrealised loss from change in fair value of investment property (£'000) | 3,159 | 1,935 |
| Realised gain on disposal of investment property (£'000) | (731) | – |
| Loss/(gain) from change in fair value of investment (£'000) | 407 | (482) |
| Realised loss on disposal of investments (£'000) | 113 | – |
| Change in fair value of interest rate derivatives (£'000) | 117 | (14) |
| Total EPRA Earnings (£'000) | 9,164 | 6,075 |
| EPRA earnings per share (basic and diluted) (pence) | 7.57 | 6.33 |
| NAV per share: | ||
| Net assets (£'000) | 118,674 | 116,375 |
| Ordinary Shares | 123,647,250 | 117,510,000 |
| NAV per share (pence) | 95.98 | 99.03 |
| EPRA NAV per share: | ||
| Net assets (£'000) | 118,674 | 116,375 |
| Adjustments to net assets: | ||
| Other financial assets held at fair value (£'000) | (31) | (77) |
| EPRA NAV (£'000) | 118,643 | 116,298 |
| EPRA NAV per share (pence) | 95.95 | 98.97 |
Earnings per share (EPS) amounts are calculated by dividing profit for the period attributable to ordinary equity holders of the Company by the weighted average number of Ordinary Shares in issue during the period. As at 30 April 2017, EPRA NNNAV was equal to IFRS NAV and as such a reconciliation between the two measures has not been performed.
for the year ended 30 April 2017
| For the year ended 30 April 2017 | £'000 |
|---|---|
| Fourth interim dividend paid in respect of the period 1 February 2016 to 30 April 2016 at 2p per Ordinary Share |
2,350 |
| First interim dividend paid in respect of the period 1 May 2016 to 31 July 2016 at 2p per Ordinary Share |
2,350 |
| Second interim dividend paid in respect of the period 1 August 2016 to 31 October 2016 at 2p per Ordinary Share |
2,473 |
| Third interim dividend paid in respect of the period 1 November 2016 to 31 January 2017 at 2p per Ordinary Share |
2,473 |
| Total dividends paid during the year | 9,646 |
| Fourth interim dividend declared for the period 1 February 2017 to 30 April 2017 at 2p per Ordinary Share* Fourth interim dividend declared for the period 1 February 2016 to 30 April 2016 at 2p per |
2,473 |
| Ordinary Share | (2,350) |
| Total dividends in respect of the year | 9,769 |
| Paid as | |
| Property income distributions at 6.95p per Ordinary Share Ordinary dividends at 1.05p per Ordinary Share |
8,471 1,298 |
| Total | 9,769 |
| For the period 1 April 2015 to 30 April 2016 | £'000 |
| First interim dividend paid in respect of the period ended 31 October 2015 at 1.5p per Ordinary Share |
1,507 |
| Second interim dividend paid in respect of the period 1 November 2015 to 14 December 2015 at 0.75p per Ordinary Share Third interim dividend paid in respect of the period 15 December 2015 to 31 January 2016 at |
754 |
| 1.25p per Ordinary Share | 1,469 |
| Total dividends paid during the period | 3,730 |
| Fourth interim dividend declared for the period 1 February 2016 to 30 April 2016 at 2p per Ordinary Share |
2,350 |
| Total dividends in respect of the period | 6,080 |
| Paid as | |
| Property income distributions at 5.5p per Ordinary Share | 6,080 |
| Total | 6,080 |
* The fourth interim dividend declared is not included in the accounts as a liability as at 30 April 2017.
for the year ended 30 April 2017
| 30 April 2017 | ||||
|---|---|---|---|---|
| Investment property freehold £'000 |
Investment property leasehold £'000 |
Total £'000 |
30 April 2016 Total £'000 |
|
| UK investment property | ||||
| As at beginning of the year/period | 92,390 | 21,950 | 114,340 | – |
| Purchases in the year/period | 27,481 | 665 | 28,146 | 114,408 |
| Disposals in the year/period | (1,950) | – | (1,950) | – |
| Revaluation of investment property | (2,076) | (640) | (2,716) | (68) |
| Valuation provided by Knight Frank | 115,845 | 21,975 | 137,820 | 114,340 |
| Adjustment to fair value for rent free debtor | (2,230) | (1,082) | ||
| Adjustment to fair value for rent guarantee debtor | (80) | (785) | ||
| Adjustment for finance lease obligations | 60 | 1,914 | ||
| Total investment property | 135,570 | 114,387 | ||
| Change in fair value of investment property | ||||
| Loss from change in fair value | (2,716) | (68) | ||
| Adjustment for movement in the year/period: | ||||
| in fair value for rent free debtor | (1,148) | (1,082) | ||
| in fair value for rent guarantee debtor | 705 | (785) | ||
| (3,159) | (1,935) | |||
| Gains on sale of the investment property | ||||
| Proceeds from disposals of investment property during the year/period | 2,681 | – | ||
| Cost of disposal | (1,950) | – | ||
| Gains on disposal of investment property | 731 | – |
for the year ended 30 April 2017
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 Company's investment property at fair value is determined by the external valuer on the basis of fair value in accordance with the internationally accepted RICS Valuation – Professional Standards (incorporating the International Valuation Standards).
The determination of the fair value of investment property requires the use of estimates, such as future cash flows from assets (based on 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.
| Year ended 30 April 2017 Total Total £'000 £'000 Investment in AEW UK Core Property Fund As at beginning of the year/period 10,109 Purchases in the year/period – Disposals in the year/period (2,108) (Loss)/gain from change in fair value (407) Total Investment in AEW UK Core Property Fund 7,594 Loss on disposal of the investment in AEW UK Core Property Fund Proceeds from disposals of investments during the year/period 1,995 Cost of disposal (2,108) Loss on disposal of investment (113) |
Period | |
|---|---|---|
| 1 April 2015 to | ||
| 30 April | ||
| 2016 | ||
| – | ||
| 9,627 | ||
| – | ||
| 482 | ||
| 10,109 | ||
| – | ||
| – | ||
| – |
As at 30 April 2017, the investment in the Core Fund was held for sale and is measured above in accordance with IFRS 5, Non Current Assets Held for Sale and Discontinued Operations and reflected within Current Assets in the Statement of Financial Position. The remaining investment was disposed of on 9 May 2017 as described in note 24.
for the year ended 30 April 2017
Investments in collective investment schemes are stated at fair value with any resulting gain or loss recognised in profit or loss. Fair value is assessed by the Directors based on the best available information.
The value of investment in the Core Fund as at 30 April 2017 is based on the latest NAV (30 April 2016: single swinging price) of the Core Fund as the Directors consider this to be a more accurate approximation of fair value.
The following table provides the fair value measurement hierarchy for investments:
| 30 April 2017 | ||||
|---|---|---|---|---|
| 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 property | – | – | 135,570 | 135,570 |
| Investment in AEW UK Core Property Fund | – | – | 7,594 | 7,594 |
| – | – | 143,164 | 143,164 | |
| 30 April 2016 | ||||
| Significant | Significant |
| Quoted prices in | observable | unobservable | ||
|---|---|---|---|---|
| active markets | inputs | inputs | ||
| (Level 1) | (Level 2) | (Level 3) | Total | |
| £'000 | £'000 | £'000 | £'000 | |
| Assets measured at fair value | ||||
| Investment property | – | – | 114,387 | 114,387 |
| Investment in AEW UK Core Property Fund | – | – | 10,109 | 10,109 |
| – | – | 124,496 | 124,496 | |
Level 1 – Quoted prices for an identical instrument in active markets;
for the year ended 30 April 2017
The significant unobservable inputs used in the fair value measurement categorised within Level 3 of the fair value hierarchy of the portfolio of investment property and investments are:
1) Estimated Rental Value ('ERV')
2) Equivalent yield
Increases/(decreases) in the ERV (per sq ft per annum) in isolation would result in a higher/(lower) fair value measurement. Increases/(decreases) in the discount rate/yield (and exit or yield) in isolation would result in a lower/(higher) fair value measurement.
The significant unobservable input used in the fair value measurement categorised within Level 3 of the fair value hierarchy of the Company's investment is:
1) NAV
The Company has updated its accounting policy with regard to the value of investments in the Core Fund to now be based on NAV which is considered to be the best approximation of fair value by the Directors.
Increases/(decreases) in the NAV would result in a higher/(lower) fair value measurement.
The significant unobservable inputs used in the fair value measurement, categorised within Level 3 of the fair value hierarchy of the portfolio of investment property and investments are:
| Class | Fair Value £'000 |
Valuation Technique |
Significant Unobservable Inputs |
Range |
|---|---|---|---|---|
| 30 April 2017 | ||||
| Investment property | 137,820 | Income capitalisation | ERV | £2.00 – £160.00 |
| Equivalent yield | 6.94% – 10.27% | |||
| Investments | 7,594 | NAV | NAV | £1.1942 |
| 30 April 2016 | ||||
| Investment property | 114,340 | Income capitalisation | ERV | £2.00 – £160.00 |
| Equivalent yield | 6.70% – 11.90% | |||
| Investments | 10,109 | Market capitalisation | Single swinging price | £1.2581 |
The single swinging price on investments is equal to the last announced unit price for collective investment schemes as at the Statement of Financial Position date.
Where possible, sensitivity of the fair values of Level 3 assets are tested to changes in unobservable inputs against reasonable alternatives.
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.
for the year ended 30 April 2017
With regards to both investment property and investments, gains and 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 where applicable, are recorded in profit and loss.
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.
| 30 April 2017 | ||||||
|---|---|---|---|---|---|---|
| Change in NAV |
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 property | – | – | 143,606 | 131,979 | 129,906 | 145,906 |
| Resulting fair value of investments | 7,974 | 7,214 | – | – | – | – |
| 30 April 2016 | ||||||
| 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 property | – | – | 119,303 | 109,166 | 107,815 | 121,126 |
| Resulting fair value of investments | 10,615 | 9,604 | – | – | – | – |
for the year ended 30 April 2017
| 30 April 2017 £'000 |
30 April 2016 £'000 |
|
|---|---|---|
| Receivables | ||
| Rent debtor | 461 | 622 |
| Dividend receivable | 110 | 193 |
| Other income debtors | 192 | – |
| Rent agent float account | 57 | 92 |
| Other receivables | 213 | 29 |
| 1,033 | 936 | |
| Rent free debtor | 2,230 | 1,082 |
| Rent guarantee debtor | 80 | 785 |
| 3,343 | 2,803 | |
| Prepayments | ||
| Property related prepayments | 10 | 130 |
| Capital prepayments | 1 | 19 |
| Depositary services | 8 | 8 |
| Listing fees | 8 | 2 |
| Other prepayments | 12 | – |
| 39 | 159 | |
| Total | 3,382 | 2,962 |
The aged debtor analysis of receivables which are past due is as follows:
| 30 April 2017 £'000 |
30 April 2016 £'000 |
|
|---|---|---|
| Less than three months due | 910 | 573 |
| Between three and six months due | 1 | 331 |
| Between six and twelve months due | 122 | 32 |
| Total | 1,033 | 936 |
for the year ended 30 April 2017
| 30 April 2017 £'000 |
30 April 2016 £'000 |
|
|---|---|---|
| At the beginning of the year/period | 77 | – |
| Interest rate cap premium paid | 71 | 91 |
| Changes in fair value of interest rate derivatives | (117) | (14) |
| At the end of the year/period | 31 | 77 |
To mitigate the interest rate risk that arises as a result of entering into variable rate linked loans, the Company entered into an interest rate cap with the combined notional value of £26.51 million (2016: £14.25 million) and a strike rate of 2.5% (2016: 2.5%) for the relevant period in line with the life of the loan.
The total premium payable in the year towards securing the interest rate caps was £71,304 (2016: £91,000).
The following table provides the fair value measurement hierarchy for interest rate derivatives:
| 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 2017 | – | 31 | – | 31 |
| 30 April 2016 | – | 77 | – | 77 |
The fair value of these contracts are recorded in the Statement of Financial Position as at the year end.
There have been no transfers between level 1 and level 2 during the year, nor have there been any transfers between level 2 and level 3 during the year.
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 year ended 30 April 2017
| Bank borrowings | ||
|---|---|---|
| 30 April 2017 £'000 |
30 April 2016 £'000 |
|
| At the beginning of the year/period | 14,250 | – |
| Bank borrowings drawn in the year/period | 14,760 | 14,250 |
| Interest bearing loans and borrowings | 29,010 | 14,250 |
| Less: loan issue costs incurred | (388) | (40) |
| Plus: amortised loan issue costs | 118 | 40 |
| As at 30 April | 28,740 | 14,250 |
| Repayable between two and five years | 29,010 | 14,250 |
| Bank borrowings available but undrawn in the year/period | 10,990 | 25,750 |
| Total facility available | 40,000 | 40,000 |
The Company entered into a £40 million credit facility with The Royal Bank of Scotland International Limited on 20 October 2015, of which £10.99 million remained undrawn as at the year end (2016: £40 million credit facility, £25.75 million undrawn and term to maturity of 4.47 years).
Borrowing costs associated with the credit facility are shown as finance expenses in note 6 to these financial statements.
The term to maturity as at the year end is 3.47 years.
Since the end of the reporting period, the amount of the credit facility available has been reduced to £32.5 million.
The 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.
for the year ended 30 April 2017
| 30 April 2017 £'000 |
30 April 2016 £'000 |
|
|---|---|---|
| Deferred income | 1,513 | 1,675 |
| Accruals | 534 | 1,008 |
| Other creditors | 709 | 276 |
| Total | 2,756 | 2,959 |
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:
| 30 April 2017 £'000 |
30 April 2016 £'000 |
|
|---|---|---|
| Not later than one year | 5 | 123 |
| Later than one year but not later than five years | 15 | 372 |
| Later than five years | 40 | 1,419 |
| 55 | 1,791 | |
| Total | 60 | 1,914 |
for the year ended 30 April 2017
As at 30 April 2017, there were capital commitments of £48,628 relating to alteration and refurbishment works at the property 225 Bath Street, Glasgow.
The Company has entered into commercial property leases on its investment property portfolio. These noncancellable leases have a remaining term of between zero and 23 years.
Future minimum rentals receivable under non-cancellable operating leases as at 30 April 2017 are as follows:
| 30 April 2017 £'000 |
30 April 2016 £'000 |
|
|---|---|---|
| Within one year | 11,878 | 9,902 |
| After one year but not more than five years | 37,936 | 31,651 |
| More than five years | 27,640 | 23,401 |
| Total | 77,454 | 64,954 |
During the year ended 30 April 2017 there were contingent rents totalling £169,724 (30 April 2016: £nil) recognised as income.
The Company has a wholly owned subsidiary, AEW UK REIT 2015 Limited:
| 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% |
AEW UK REIT 2015 Limited is a subsidiary of the Company incorporated in the UK on 2 April 2015. At 30 April 2017, the Company held one share being 100% of the issued share capital. AEW UK REIT 2015 Limited is wholly owned by the Company and is dormant. The cost of the subsidiary is £0.01 (30 April 2016: £0.01). The registered office of AEW UK REIT 2015 Limited is 40 Dukes Place, London, EC3A 7NH.
for the year ended 30 April 2017
| 30 April 2016 | ||
|---|---|---|
| Number of | £'000 | Number of Ordinary Shares |
| 117,510,000 | – | 1 |
| – | 1,005 | 100,499,999 |
| – | 170 | 17,010,000 |
| 2,450,000 | – | – |
| 3,687,250 | – | – |
| 123,647,250 | 1,175 | 117,510,000 |
| 30 April 2017 Ordinary Shares |
On 16 September 2016, the Company issued 2,450,000 Ordinary Shares at a price of 97 pence per share in the form of a tap issue under authority granted on 7 September 2016 at the AGM. On 10 October 2016 the Company issued 3,687,250 Ordinary Shares at a price of 98.25 pence per share in the form of a tap issue under authority granted on 7 September 2016 at the AGM.
The initial raising by the Company involved the issue of Ordinary Shares to relevant subscribers at 100 pence per Ordinary Share.
for the year ended 30 April 2017
| Year ended | Period 1 April 2015 to |
|
|---|---|---|
| 30 April 2017 £'000 |
30 April 2016 £'000 |
|
| The share premium relates to amounts subscribed for share capital in excess of nominal value: |
||
| Balance at the beginning of the year/period | 16,729 | – |
| 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) | (23) | (281) |
| Issued on admission to trading on the London Stock Exchange on 16 September 2016 |
2,352 | – |
| Share issue cost (paid and accrued) | (42) | – |
| Issued on admission to trading on the London Stock Exchange on 10 October 2016 |
3,586 | – |
| Share issue cost (paid and accrued) | (88) | – |
| Balance at the end of the year/period | 22,514 | 16,729 |
for the year ended 30 April 2017
The 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 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 Company's property portfolio.
Set out below is a comparison by class of the carrying amounts and fair value of the Company's financial instruments that are carried in the financial statements.
| 30 April 2017 | 30 April 2016 | |||
|---|---|---|---|---|
| Book Value £'000 |
Fair Value £'000 |
Book Value £'000 |
Fair Value £'000 |
|
| Financial Assets | ||||
| Investment in AEW UK Core Property Fund |
7,594 | 7,594 | 10,109 | 10,109 |
| Receivables and prepayments1 | 1,033 | 1,033 | 936 | 936 |
| Cash and cash equivalents Other financial assets held at |
3,653 | 3,653 | 7,963 | 7,963 |
| fair value | 31 | 31 | 77 | 77 |
| Financial Liabilities Interest bearing loans |
||||
| and borrowings | 28,740 | 29,010 | 14,250 | 14,250 |
| Payables and accrued expenses2 | 2,156 | 2,156 | 2,712 | 2,712 |
| Finance lease obligations | 60 | 60 | 1,914 | 1,914 |
1 Excludes VAT, certain prepayments and other debtors
2 Excludes tax and VAT liabilities
Interest rate derivatives are the only financial instruments classified as fair value through profit and loss. All other financial assets are classified as loans and receivables and all financial liabilities are measured at amortised cost. All financial instruments were designated in their current categories upon initial recognition.
Fair value measurement hierarchy has not been applied to those classes of asset and liability stated above which are not measured at fair value in the financial statements. The difference between the fair value and book value of these items is not considered to be material.
The Company's activities expose it to a variety of financial risks: market risk, real estate risk, credit risk and liquidity risk.
The Company's objective in managing risk is the creation and protection of shareholder value. Risk is inherent in the Company's activities but it is managed through a process of ongoing identification, measurement and monitoring, subject to risk limits and other controls.
The principal risks facing the Company in the management of its portfolio are as follows:
for the year ended 30 April 2017
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 Company diversifies its portfolio geographically in the United Kingdom and across property sectors.
The disciplined approach to the purchase, sale and asset management ensures that the value is maintained to its maximum potential. Prior to any property acquisition or sale, detailed research is undertaken to assess expected future cash flow. The Investment Management Committee ('IMC') of the Investment Manager, meets monthly and reserves the ultimate decision with regards to investment purchases or sales. In order to monitor property valuation fluctuations, the IMC and the Portfolio Management Team of the Investment Manager meet with the independent external valuer on a regular basis. The valuer provides a property portfolio valuation quarterly, so any movements in the value can be accounted for in a timely manner and reflected in the NAV every quarter.
The Company 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 Company. 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 Company.
Credit risk is the risk that the counterparty (to a financial instrument) or tenant (of a property) will cause a financial loss to the Company by failing to meet a commitment it has entered into with the Company.
It is the Company's policy to enter into financial instruments with reputable counterparties. All cash deposits are placed with an approved counterparty, The Royal Bank of Scotland International Limited.
In respect of property investments, in the event of a default by a tenant, the Company 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.
for the year ended 30 April 2017
The table below shows the Company's exposure to credit risk:
| As at 30 April 2017 |
As at 30 April 2016 |
|
|---|---|---|
| £'000 | £'000 | |
| Debtors (excluding incentives and prepayments) | 1,033 | 936 |
| Cash and cash equivalents | 3,653 | 7,963 |
| Total | 4,686 | 8,899 |
Liquidity risk arises from the Company's management of working capital and the finance charges and principal repayments on its borrowings. It is the risk the Company will encounter difficulty in meeting its financial obligations as they fall due as the majority of the Company's assets are investment properties and therefore not readily realisable. The Company'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 Company's financial liabilities based on contractual undiscounted payments:
| 30 April 2017 | On demand £'000 |
< 3 months £'000 |
3–12 months £'000 |
1–5 years £'000 |
> 5 years £'000 |
Total £'000 |
|---|---|---|---|---|---|---|
| Interest bearing loans and borrowings | – | – | – | 29,010 | – | 29,010 |
| Interest payable | – | 134 | 395 | 1,306 | – | 1,835 |
| Payables and accrued expenses | – | 2,156 | – | – | – | 2,156 |
| Finance lease obligation | – | – | 5 | 20 | 425 | 450 |
| – | 2,290 | 400 | 30,336 | 425 | 33,451 | |
| 30 April 2016 | On demand £'000 |
< 3 months £'000 |
3–12 months £'000 |
1–5 years £'000 |
> 5 years £'000 |
Total £'000 |
| 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 year ended 30 April 2017
The primary objectives of the Company'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 Company utilises borrowings on a limited recourse basis for each investment or all or part of the total portfolio. The Company's policy is such that its borrowings will not exceed 25% of GAV (measured at drawdown) of each investment or the total portfolio. It is currently anticipated that the level of total borrowings will typically be at the level of 20% of GAV (measured at drawdown).
Alongside the Company's borrowing policy, the Directors intend, at all times, to conduct the affairs of the Company so as to enable the Company to qualify as a REIT for the purposes of Part 12 of the CTA 2010 (and the regulations made thereunder). The REIT status compliance requirements include 90% distribution test, interest cover ratio, 75% assets test and the substantial shareholder rule, all of which the Company remained compliant with in this reporting period.
The monitoring of the Company's level of borrowing is performed primarily using a Loan to GAV ratio. The Loan to GAV Ratio is calculated as the amount of outstanding debt divided by the total assets of the Company, which includes the valuation of the investment property portfolio. The Company Loan to GAV ratio at the year end was 19.31% (30 April 2016: 10.51%).
Breaches in meeting the financial covenants would permit the bank to immediately call loans and borrowings. During the year under review, the Company 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 Parties 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 year ended 30 April 2017, 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 Company 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 Board 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 Company into the Core 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 year, the Company incurred £1,033,637 (2016: £652,706) in respect of investment management fees and expenses of which £252,850 (2016: £230,631) was outstanding as at 30 April 2017.
On 1 May 2016, the Company had a holding of 8,035,272 shares (share class E) in the Core Fund, which were purchased for a cost of £9,627,000 (net of equalisation) on 1 June 2015. The investment is deemed to be with a related party due to the common influence of the Investment Manager over both parties. During the year, the Company disposed of 1,675,832 shares in the Core Fund for consideration of £1,995,248. As at 30 April 2017, the Company held 6,359,440 shares in the Core Fund which were valued at £7,594,443. The Company disposed of its remaining holding in the Core Fund after the year-end, as detailed in note 24.
for the year ended 30 April 2017
Management has considered the requirements of IFRS 8 'operating segments'. The source of the Company'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 Company as a whole directly to the Board of Directors. Therefore, the Company is considered to be engaged in a single segment of business, being property investment and in one geographical area, United Kingdom.
On 30 May 2017, the Board declared its interim dividend of two pence per share, in respect of the period from 1 February 2017 to 30 April 2017. This was paid on 30 June 2017, to shareholders on the register as at 9 June 2017. The ex-dividend date was 8 June 2017.
On 4 May 2017 the Company acquired Unit 1005, Sarus Court for £0.61 million. This completes the Company's acquisition of the whole of the Sarus Court industrial estate. The property provides a WAULT of approximately 3.7 years to expiry. The acquisition provides an initial yield of 7.8%, a reversionary yield of 9.1% and a capital value per sq ft of £55.
On 29 June 2017 the Company acquired Unit 34, First Avenue, Deeside for £4.31 million. The property provides a WAULT of approximately 5 years to break and 10 years to expiry. The acquisition provides an initial yield of 7.9%, a reversionary yield of 7.9% and a capital value per sq ft of £45.
On 9 May 2017, the Company sold its remaining investment in the Core Fund for £7.62 million. This sale represented a gain of £0.03 million based on its carrying value as at 30 April 2017.
On 8 May 2017, the Company completed an amendment to the terms of its facility with RBSi. The total commitment has been reduced from £40.0 million to £32.5 million and the availability period has been extended to 31 March 2019.
| 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. |
£9.16 million/7.57 pps EPRA earnings for the year ended 30 April 2017 (2016: £6.08 million/6.33 pps) |
| 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. |
£118.64 million/95.95 pps EPRA NAV as at 30 April 2017 (2016: £116.30 million/98.97 pps) |
| 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. |
£118.67 million/95.98 pps EPRA NNNAV as at 30 April 2017 (2016: £116.38 million/99.03 pps) |
| 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. |
7.12% EPRA NIY as at 30 April 2017 (2016: 8.01%) |
| 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. |
8.27% EPRA 'Topped-Up' NIY as at 30 April 2017 (2016: 8.56%) |
| 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. |
7.22% EPRA ERV as at 30 April 2017 (2016: 3.16%) |
| 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. |
24.20% EPRA Cost Ratio (including direct vacancy costs) as at 30 April 2017 (2016: 23.07%) 18.37% EPRA Cost Ratio (excluding direct vacancy costs) as at 30 April 2017 (2016: 21.75%) |
The EPRA Cost Ratios above have been amended and restated. Please refer to page 105.
| Period | ||
|---|---|---|
| Year ended | 1 April 2015 to | |
| 30 April 2017 | 30 April 2016 | |
| £'000 | £'000 | |
| Investment property – wholly-owned | 137,820 | 114,340 |
| Allowance for estimated purchasers' costs | 8,242 | 6,632 |
| Gross up completed property portfolio valuation | 146,062 | 120,972 |
| Annualised passing rental income | 11,283 | 9,842 |
| Property outgoings | (884) | (148) |
| Annualised net rents | 10,399 | 9,694 |
| Rent from expiry of rent-free periods and fixed uplifts | 1,685 | 655 |
| 'Topped-up' net annualised rent | 12,084 | 10,349 |
| EPRA Net Initial Yield | 7.12% | 8.01% |
| EPRA 'topped-up' Net Initial Yield | 8.27% | 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 2017, 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.
| Year ended | Period 1 April 2015 to |
|
|---|---|---|
| 30 April 2017 £'000 |
30 April 2016 £'000 |
|
| Annualised potential rental value of vacant premises | 951 | 342 |
| Annualised potential rental value for the complete property portfolio | 13,164 | 10,821 |
| EPRA Vacancy Rate | 7.22% | 3.16% |
| Calculation of EPRA Cost Ratios | ||
| 2017 £'000 |
2016 £'000 |
|
| Administrative/operating expense per IFRS income statement | 3,272 | 1,523 |
| Less: Net service charge costs | (335) | (70) |
| Ground rent costs | (104) | (64) |
| EPRA Costs (including direct vacancy costs) | 2,833 | 1,389 |
| Direct vacancy costs | (682) | (80) |
| EPRA Costs (excluding direct vacancy costs) | 2,151 | 1,309 |
| Gross Rental Income less ground rent costs | 12,044 | 6,089 |
| Less: service charge costs of rental income | (335) | (70) |
| Gross rental income | 11,709 | 6,019 |
| EPRA Cost Ratio (including direct vacancy costs) | 24.20% | 23.07% |
| EPRA Cost Ratio (excluding direct vacancy costs) | 18.37% | 21.75% |
The Calculation of EPRA Cost Ratios above and the EPRA Cost Ratios, as defined and summarised on page 103 (EPRA Unaudited Performance Measures), have been amended and restated. Performance & management fees had previously (including in the annual report issued on 10 July 2017) been deducted to form the basis of EPRA costs; this adjustment has nowbeen removed and the figures are nowcalculated in accordancewith EPRA Best Practice Recommendations Guidelines.
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 107. You can check your shareholding and find practical help on transferring shares or updating your details atwww.investorcentre.co.uk. Shareholders eligible to receive dividend payments gross oftax may also download declaration formsfrom thatwebsite.
| Ordinary £0.01 Shares | 123,647,250 |
|---|---|
| SEDOL Number | BWD2415 |
| ISIN Number | GB00BWD24154 |
| Ticker/TIDM | AEWU |
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
| 12 September 2017 | Annual General Meeting |
|---|---|
| 31 October 2017 | Half-year end |
| December 2017 | Announcement of half-yearly results |
| 30 April 2018 | Year end |
| July 2018 | Announcement of annual results |
The following table summarisesthe amounts distributed to equity shareholdersin respect of the year:
| £ | |
|---|---|
| Interim dividend for the period 1 May 2016 to 31 July 2016 (payment made on 30 September 2016) |
2,350,200 |
| Interim dividend for the period 1 August 2016 to 31 October 2016 (payment made on 31 December 2016) |
2,472,945 |
| Interim dividend for the period 1 November 2016 to 31 January 2017 (payment made on 31 March 2017) |
2,472,945 |
| Interim dividend for the period 1 February 2017 to 30 April 2017 (payment made on 30 June 2017) |
2,472,945 |
| Total | 9,769,035 |
Mark Burton*(Non-executive Chairman) James Hyslop (Non-executive Director) Bimaljit (''Bim'') Sandhu*(Non-executive Director) Katrina Hart*(Non-executive Director)
40 Dukes Place London EC3A 7NH
AEW UK Investment Management LLP 33 Jermyn Street London SW1Y 6DN
Tel: 020 7016 4880 Website:www.aewuk.co.uk
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
* independent of the Investment Manager
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 (the 'Core 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 of Investment 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 LLP. |
| Company | AEW UK REIT plc. |
| Company Secretary | Capita Company Secretarial Services Limited. |
| Company website | www.aewukreit.com |
| 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 covenants in the lease. |
| DTR | Disclosure Guidance and Transparency Rules, issued by the UKLA. |
| 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 other investment 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 of the 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 of the 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 its fair 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 ('GAV') | The aggregate value of the total assets of the Company as determined in accordance with IFRS. |
| 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 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 rules the value of the lease incentive is amortised through the Statement of Comprehensive Income 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. |
| Loan to Value ('LTV') | The value of outstanding loans and borrowings(before adjustments for issue costs) expressed as a percentage of the combined valuation of the property portfolio (as provided by the valuer) and the fair value of other investments. |
| Net Asset Value ('NAV') | Net Asset Value is the equity attributable to shareholders calculated underIFRS. |
| Net Asset Value per share | Equity shareholders' funds divided by the number ofOrdinary Sharesin issue. |
| Net equivalent yield | Calculated by the Company's External Valuers, equivalent yield is the internal rate of return from an investment property, based on the gross outlays for the purchase of a property (including purchase costs), reflecting reversions to current market rent and items as voids and non-recoverable expenditure but ignoring future changes in capital value. The calculation assumes rent is received annually in arrears. |
| Net initial yield | 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 of the Company. |
| 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 Company. |
| 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 ERV. |
| Share price | The value of a share at a point in time as quoted on a stock exchange. The Company's Ordinary Shares are quoted on the Main Market 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 4800 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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