Annual Report • Jun 25, 2019
Annual Report
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Announcement of Full Year Results for the year ended 31 March 2019 AEW UKREITPLC (the 'Company') which holds a diversified portfolio of 35 commercial investment properties throughout the UK,is pleased to publish its full year results for the year ended 31 March 2019. Mark Burton, Chairman of AEW UK REIT,commented:"A key feature of the financial year has been achieving the target income returns of8.00 pence per share ('pps') from theCompany's established portfolio of assets. Such returns demonstrate the success ofboth the Company's investment strategy and the stock selection process ofthe Investment Manager when deploying the proceeds of the most recent capital raise, as well as our active asset management. The Board expects this level of return to continue, with further value expected to be gained through asset management initiatives in the short term. Additionally, we continue to see attractive opportunities across our target sectors. The portfolio is defensively positioned forany Brexit outcome, with no exposure to London offices and broad diversification by sector and region. We look forward to raising additional capital to pursue identified opportunities as and when market conditions allow."
Enquiries AEW UK Alex Short [email protected] Nicki Gladstone [email protected] +44(0) 771 140 1021 Liberum CapitalGillian Martin [email protected] +44 (0)20 3100 2217 TB Cardew Ed Orlebar Lucas Bramwell [email protected] +44(0) 7738 724 630 +44(0) 7939 694 437
Financial Highlights
Net Asset Value ('NAV')* of £149.46 million and of 98.61 pps as at 31 March 2019 (31 March 2018: £146.03 million and 96.36 pps). Operating profit before fair value changes of£13.52 million forthe year (11 months ended 31 March 2018: £9.60 million). Unadjusted profit before tax ('PBT')* of£15.54 million and earnings of10.26 pps forthe year (11 months ended 31 March 2018: £9.82 million and of 7.17 pps). EPRA Earnings Per Share ('EPRA EPS')* for the year of 8.07 pence (11 months ended 31 March 2018: 6.56 pence). Total dividends of 8.00 pps have been declared forthe year (11 months ended 31 March 2018: 7.33 pps, equating to an annualised dividend of 8.00 pps). Shareholder Total Return* for the year of 5.44% (11 months ended 31 March 2018: 3.65%). The price of the Company's Ordinary Shares on the Main Market of the London Stock Exchange was 92.80 pps as at31 March 2019 (31 March 2018: 95.60 pps). As at 31 March 2019, the Company had drawn £50.00 million (31 March 2018: £50.00 million) of a £60.00 million (31 March 2018: £60.00 million) term credit facility with the Royal Bank of Scotland International Limited ('RBSi') and was geared to 25.30% of the Gross Asset Value ('GAV')* (31 March 2018: 26.00%) (see note 21 below for further details). The Company held cash balances totalling £2.13 million as at 31 March 2019 (31 March 2018: £4.71 million). Under the terms ofits loan facility, the Company can draw afurther £2.31 million (31 March 2018: £1.11 million) to the maximum 35% loanto NAV at drawdown. On 1 March 2019, the Company published its Prospectus in relation to a Share Issuance Programme of up to 250 million new Ordinary shares and up to 250 million convertible redeemable preference shares ("C shares"). No shares have been issued, to date, under the programme.
Property Highlights The Company acquired one property during the year for a purchase price of £6.93 million, excluding acquisition costs (11 months ended 31 March 2018: 10 properties for £60.11 million). The Company made two full disposals and two partdisposals during the year for gross sales proceeds of£6.80 million (11 month period ended 31 March 2018: one disposal for gross sales proceeds of£11.05 million). As at 31 March 2019, the Company's property portfolio had a fair value of £197.61 million across 35 properties (31 March 2018: £192.34 million across 36 properties) and a historical cost of £196.86 million (31 March 2018: £196.64 million). The majority ofassets that have been acquired are fully let and the portfolio had an EPRA Vacancy Rate** of 2.99% as at 31 March 2019 (31 March 2018: 7.10%). Rental income generated in the year under review was £17.18 million (11 months ended 31 March 2018: £12.33 million). The number of tenants as at 31 March 2019 was 95 (31 March 2018: 104). EPRA Net Initial Yield ('NIY')** of 7.62% as at31 March 2019 (31 March 2018: 7.73%). Weighted Average Unexpired Lease Term ('WAULT')* of 4.87 years to break (31 March 2018: 5.08 years) and 6.10 years to expiry (31 March 2018: 6.16 years).
* See KPIs belowfor definition of alternative performance measures.
** SeeGlossaryin the fullAnnual Report for definition of alternative performance measures. The current period being reported is forthe 12 months from 1April 2018 to 31 March 2019. The prior period ended 31 March 2018 was an 11-month period from 1 May2017 to 31 March 2018 and so cannot be used as a direct comparator. Chairman'sStatement
Overview I am pleased to present the audited annual results ofthe Company forthe year ended 31 March 2019. As at 31 March 2019, the Company had a diversified portfolio of 35 commercial investment properties throughout the UK with a value of £197.61 million. On a like-for-like* basis, the portfolio valuation increased by 2.80% over the year. A key feature of the financial year has been achieving the target income returns of8.00 pps from theCompany's established portfolio of assets. Dividends of 8.00 pps have been declared in relation to the year, equating to a dividend yield of 8.62% based on the share price as at 31 March 2019. Dividends were fully covered by EPRA EPS of 8.07 pps, reflecting the high yielding nature of the portfolio. Over the year, the portfolio achieved total returns of 10.5%, an outperformance of 4.7% relative to the Benchmark (MSCI/AREF UK PFI Balanced Funds Quarterly Property Index) ('the Benmark'). This performance was driven by income returns of8.1% andthe portfolio also achieved capital growth of 2.3%. Such returns demonstrate the success ofboth the Company's investment strategy and the stock selection process ofthe Investment Manager when deploying the proceeds of the most recent capital raise, which occurred in October 2017. From thedate of the share issue and up to 31 March 2018, the Company made seven acquisitions totalling £49.72 million, which fully utilised the capital raised, as well as an additional £17.50 million of debt. These acquisitions have played a major part in the Company achieving EPRA EPS ahead of its dividend target for the current year, with the seven assets having a combined NIY equating to 9.10% on the purchase price.
An active approach to asset management has also played a role in maximising returns from theportfolio. The vacancy rate has fallen from 7.10% as at 31 March 2018 to 2.99% as at31 March 2019, largely as a result of new lettings in the office sector during the year. The most notable of these were the letting of Orion House in Oxford at a contracted rent of £179,410 per annum and the letting of Third Floor East, 255 Bath Street, Glasgow at a contracted rent of £88,608 per annum. Lease renewals have also been completed at 40 Queen Square, Bristol, increasing contracted renton that accommodation from £66,623 to £94,500 perannum and atCedar House, Gloucester, increasing contracted rentfrom £300,000 to £321,000 per annum andsecuring a 10-year term. Another contributor to the fall in the vacancy rate has been the Company's divestment of largely vacant premises. The Company disposed of Floors 1-9, Pearl House, Nottingham in April2018, retaining the fully letground floor accommodation. 18-36, Chapel Walk, Sheffield was sold in August 2018 with the fully letadjoining units, 11-15 Fargate being retained. These disposals for combined gross proceeds of£4.55 million eliminated over a quarter of the Company's vacant Estimated Rental Value ('ERV')* *as at 31 March 2018. Further to these disposals, in December 2018, the Company divested Stoneferry Retail Park, Hull, for gross proceeds of£1.80 million. The asset had c.£165,000 of income due to expire in May 2019. Waggon Road, Mossley, was sold at auction, completing in March 2019, for gross proceeds of£450,000. This price was £100,000 ahead of the asset's most recent valuation in December 2018. The Company reinvested the proceeds from its disposals into an industrial asset, Lockwood Court, Parkside Industrial Estate, Leeds, which was acquired for £6.93 million, net of purchase costs, in February 2019.
The Company's share price was 92.80 pps as at31 March 2019 (31 March 2018: 95.60 pps), representing a 5.89% discount to NAV. The share price has been trading at a discount to NAV since June 2018. The fall in the share price over the year was offset by total dividend payments of 8.00 pps, generating a Shareholder Total Return of 5.44%, compared with a NAV Total Return of 10.64%. Since the year end, the share price has increased and as at31 May 2019 was 96.00 pps, representing a 2.65% discountto NAV. On 1 March 2019, the Company published its prospectus (the "Prospectus") in relation to a share issuance programme (the "Share Issuance Programme") of up to 250 million newOrdinary Shares and up to 250 million convertible redeemable preference shares ("C Shares"). The Share Issuance Programme will close on 28 February 2020 (oron any earlier date on which it is fully subscribed). We continue to see attractive opportunities across our target sectors and look forward to raising additional capital to pursue those opportunities as and when market conditions allow.
Under the Prospectus the long-term gearing target remains 25.00% or less,however, the Company can borrow up to 35.00% of GAV in advance of an expected capital raise orasset disposal. Under the terms of the current loan facility, borrowing is restricted to 35.00% of NAV at drawdown. The Board and Investment Manager will continue to monitor the level of gearing and may adjust the target gearing according to the Company's circumstances and perceived risk levels.
Dividends The Company has continued to deliver on its target of paying dividends of 8.00 pps per annum. During the year, the Company declared and paid four quarterly dividends of2.00 pence per Ordinary Share, in line with its target. On 26April 2019, the Board declared an interim dividend of 2.00 pence per Ordinary Share in respect of the period from 1 January 2019 to 31 March 2019. This interim dividend was paid on 31 May 2019 to shareholders on the register as at9 May 2019. The Directors willdeclare dividends taking into account the current level of the Company's earnings and the Directors' view onthe outlook for sustainable recurring earnings. As such, the levelof dividends paid may increase ordecrease from thecurrent annual dividend of 8.00 pps. Based on the current profile of the portfolio, the Company expects to pay an annualised dividend of 8.00 pps in respect of the year ending 31 March 2020, subject to market conditions.
Outlook The Board and the Investment Manager are pleased with the strong income returns delivered to shareholders to date. Based on annualised dividend payments of 8.00 pps, the Company delivered a dividend yield of 8.62% based on the year-end share price of 92.80 pence. The Company was fully invested at the start of the year and achieved returns during the year which fully covered its dividend payments. The Board expects this level of returns to continue, based on the projected income from theportfolio which had an EPRA NIY of 7.62% anda Reversionary Yield of 7.75% as at 31 March 2019. Whilst the EPRA Vacancy Rate has been reduced significantly during the year to 2.99% as at31 March 2019, there is stillfurther value to be gained through asset management initiatives in the short term. The portfolio has a WAULT of 4.9 years to break and 6.1 years to expiry and those lease events arising in the near future will provide the opportunity to increase and extend income streams from certain assets. In the wider economic environment, it had been hoped thatthere would be more political certainty by the end of this financial year, however with the Brexit deadline being extended further to 31 October 2019, we expect investors to remain cautious. We consider the portfolio to be defensively positioned in any outcome, with no exposure to London offices - the sector most likely to be impacted - and broad diversification by sector and region. Looking forward, our focus remains on continuing to grow the Company with share issues as part of the 12-month Share Issuance Programme, as set out in the Company's Prospectus, subject to market conditions. Subject to future fund raising, the Investment Manager will focus on finding further acquisitions which will deliver an attractive return as part of a well-diversified portfolio.
Annual General Meeting The Company's Annual General Meeting ('AGM') will be held on Thursday, 12 September 2019 at 12 noon at The Cavendish Hotel, 81 Jermyn Street, St James', London SW1Y 6JF. and You will find enclosed with theAnnual Report and Notice ofAGM a letter asking if you would prefer to half-yearly reports and other communication from theCompany in electronic form ratherthan in printed form. Further details regarding this are set out in the Notice ofAGM. Board Composition James Hyslop will retire from theBoard at the forthcoming AGM. The Board would very much like to express its appreciation forhis contribution to the Company which has been greatly valued since the Company was formed.
Mark Burton Chairman
21 June 2019 * See, Glossary in the full Annual Report for definition of alternative performance measures. ** See KPIs below for definition of alternative performance measures.
BusinessModel and Strategy
Introduction The Company is a realestate investment company listed on the premium segment of the Official List of the FCA 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 thatthe Company has met, and intends to continue to meet, the necessary qualifying conditions to conduct its affairs as a UK REIT.
Investment Policy 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, industrial/warehouse properties, retail warehouses and high street retail) to achieve a balanced portfolio with a diversified tenant base.
Within the scope of restrictions setout below (under the heading 'Investment Restrictions') the Company may invest up to 10.00% of itsNAV (at the time of investment) in the AEW UKCore Property Fund (the 'Core Fund') and up to 10.00% of its NAV (measured at the commencement of the project) in development opportunities, with the intention of holding any completed development as an investment.
Investment Restrictions The Company invests and manages its assets with the objective of spreading risk through the following investment restrictions:
| the value of no single property, at the time of investment, will represent more than 15.00% of GAV; |
|---|
| the Company may commit up to a maximum of 10.00% of itsNAV (measured at the commencement of the project) to development activities; |
| the value of properties, measured at the time of each investment, in any one of the following sectors: office properties, retail warehouses, high |
| street retail and industrial/warehouse properties willnot exceed 50.00% of GAV.The 50.00% sector limit may be increased to 60.00% as partof |
| the Investment Manager's efficient portfolio management whereby the Investment Manager determines itappropriate to pursue an attractive |
| investment opportunity which could cause the 50.00% sector limit to be exceeded on a short-term basis pending a repositioning of the portfolio |
| through a sale of assets orother means; |
investment in unoccupied and non-income producing assets will, at the time of investment, not exceed 20.00% of NAV;the Company may commit up to a maximum of 10.00% of the NAV (at the time of investment) in the Core Fund . The Company disposed of its last remaining units in the Core Fund in May 2017 and it is not the current intention of the Directors to invest in the Core Fund; the Company willnot invest in other closed-ended investment companies; and if the Company invests in derivatives for the purposes of efficient portfolio and cash management, the totalnotional value of the derivatives atthe time of investment will not exceed, in aggregate, 35.00% of GAV.
The Directors currently intend, at all times, to conduct the affairs of the Company so as to enable the Group to qualify as a REIT for the purposes ofPart 12 of the Corporation Tax Act 2010 ('CTA') (and the regulations made thereunder). The Company willat all times invest and manage its assets in a way that is consistent with its objective of spreading investment risk and in accordance with its published investment policy and will not, at any time, conduct any trading activity which is significant in the context of the business of the Company as a whole. In the event of a breach of the investment policy and investment restrictions set out above, the Directors upon becoming aware of such breach will consider whether the breach is material, and if itis, notification will be made to a Regulatory Information Service.
Any material change to the investment policy orinvestment restrictions ofthe Company may only be made with the prior approval of shareholders. Our Strategy The Company exploits what it believes to be the compelling relative value opportunities currently offered by pricing inefficiencies in smaller commercial properties leton shorter occupational leases. The Company supplements this core strategy with asset management initiatives to upgrade buildings and
thereby improve the quality ofincome streams. In the current market environment, the focus is to invest in properties which: typically have a value, on investment, of between £2.50 million and £15.00 million; have initial net yields, on investment, of typically between 7.5-10%;
achieve across the whole portfolio an average weighted lease term of between three to six years remaining; achieve, across the whole portfolio, a diverse and broad spread of tenants; and have potential for asset management initiatives to include refurbishment and re-lettings.
The Company's strategy is focused on delivering enhanced returns from thesmaller end (up to £15.00 million) of the UK commercial property market. The Company believes that there are currently pricing inefficiencies in smaller commercial properties relative to the long-term pricing resulting in a significant yield advantage, which the Company aims to exploit.
Active Asset Management
The investment management team averages 20 years working together, reflecting stability and continuity. Value Investing 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. Strategy in Action
Acquired February 2019 Location close to motorway network which is the focus ofregional demand and has seen declining availability A NIY of 7.7% andWAULT of 10 years to expiry
Low passing rentof £3.21 per sq ft Active asset management driving value Eastpoint Business Park, Oxford
Orion House let inAugust 2018 at a rentof £179,410 perannum 25-year term with five-yearly rent reviews linked to the Retail Price Index 27.5% increase in valuation of the property (as provided by the valuers) over the year
Extending existing income streams to maximise value Mangham Road, Rotherham
Lease renewal completed in October 2018 at the c.80,000 sq ft unit 10-year term at a rentof £275,000 per annum, representing an increase of 20% in passing rent30.4% increase in valuation of the property (as provided by the valuer) over the year
Minimising risk through divestment opportunities Stoneferry Retail Park, Hull Sold in December 2018 forgross proceeds of£1.80 million
Over 70% of the passing income due to expire in May 2019 Helped reduce exposure to the retailsector to 15.3% as at 31 March 2019 Key Performance Indicators
| KPI AND DEFINITION |
RELEVANCE TO STRATEGY |
PERFORMANCE |
|---|---|---|
| 1. Net Initial Yield A representation to the investor of what their initial net yield would be ata predetermined purchase price after taking account of all associated costs, e.g. void costs and rent-free periods. |
The NIY isin line with the Company's target dividend yield meaning that, after costs, the Company should have the ability to meet its target dividend through property income. |
7.63% at 31 March 2019 (31 March 2018: 7.74%) |
| 2. True Equivalent Yield The average weighted return a property will produce according to the present income and ERV assumptions, assuming the income is received quarterly in advance. |
A True Equivalent Yield profile in line with the Company's target dividend yield shows that, after costs, the Company should have the ability to meet its proposed dividend through property income. |
7.94% at 31 March 2019 (31 March 2018: 8.20%) |
| 3. Reversionary Yield The will provide once rack-rented. expected return the property |
A Reversionary Yield profile that is in line with 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. |
7.75% at 31 March 2019 (31 March 2018: 8.03%) |
| 4. WAULT to expiry The average lease term remaining to expiry 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 areoften mispriced. It is also the Investment Manager's view that a shorter WAULT isuseful for active asset management as it allows the Investment Manager to engage direct negotiation with tenants rather than via rentreview mechanisms. |
6.10 years at 31 March 2019 in (31 March 2018: 6.16 years) |
| 5. WAULT to break 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 areoften mispriced. As such, it is in line with the Investment Manager's strategy to acquire properties with a WAULT thatis 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. |
4.87 years at 31 March 2019 (31 March 2018: 5.08 years) |
| 6. NAV NAV is the value of an entity's assets minus the value of its liabilities. |
Provides stakeholders with the most relevant information on the fair value of the assets and liabilities ofthe Company. |
£149.46 million at 31 March 2019 (31 March 2018: £146.03 million) |
| 7. Leverage to GAV) The proportion ofour property portfolio (Loan that is funded by borrowings. |
The Company utilises borrowings to enhance returns over the medium term. Borrowings willnot exceed 35% of GAV (measured at drawdown) with a long-term target of 25% or less ofGAV. |
25.30% at 31 March 2019 (31 March 2018: 26.00%) |
| 8. Vacant ERV The space in the property portfolio which is currently unlet, as a percentage of the total ERV of the portfolio. |
The Company's aim is to minimise vacancy ofthe properties. A low level of structural vacancy provides an opportunity for the Company to capture rental uplifts and manage the mix of tenants within a property. |
2.99% at 31 March 2019 (31 March 2018: 7.10%) |
| 9. Dividend Dividends declared in relation to the year. The Company targets a dividend of 8.00 pence per Ordinary Share per annum. |
The dividend reflects the Company's ability to deliver a sustainable income stream from its portfolio. |
8.00 pps for the year ended 31 March 2019 (11 months ended to 31 March 2018: 7.33 pps, equating to an annualised dividend of 8.00 pps) |
| 10. Ongoing Charges The ratio oftotal administration and operating costs expressed as a percentage of average NAV throughout the period. |
The Ongoing Charges ratio provides a measure of total costs associated with managing and operating the Company, which includes the management fees due to the Investment Manager. The Investment Manager presents this measure provide investors with a clear picture of operational costs involved in running the Company. |
1.40% for the year to ended 31 March 2019 (11 months ended 31 March 2018: 1.24%) |
| 11. Profit before tax ('PBT') PBT is a profitability measure which considers the Company's profit before the payment of income tax. |
The PBT isan indication of the Company's financial performance forthe year in which its strategy is exercised. |
£15.54 million for the year ended 31 March 2019 (11 months ended 31 March 2018: £9.82 million) |
| 12. Shareholder Total Return The percentage change in the share price assuming dividends are reinvested to purchase additional Ordinary Shares. |
This reflects the return seen by shareholders on their shareholdings through share price movements and dividends received. |
5.44% for the year ended 31 March 2019 (11 months ended 31 March 2018: 3.65%) |
| 13. EPRA EPS Earnings core operational activities. A key measure of a company's underlying from operating rental business and an indication of the extent results from its property to which current dividend payments are supported by earnings. See note 8 of the Financial Statements. |
This reflects the Company's ability to generate earnings from the portfolio which underpins dividends. |
8.07 pps for the year ended 31 March 2019 (11 months ended 31 March 2018: 6.56 pps) |
| Investment Manager'sReport |
Market Outlook UK Economic Outlook
Retail
The UK's economy strengthened in the firstquarter of 2019, achieving growth of 0.5%. This was due in partto stockpiling by UK manufacturers fearing the impact of a no-deal Brexit. This was an improvement on the Q4 2018 results, which had seen a sharp decline in growth to 0.2% dueto Brexit uncertainty. The extension of Article 50 to 31 October 2019, coupled with the arrival of a new Prime Minister in July 2019, will now prolong this uncertainty and could continue to hamper investment. Although investment has remained subdued, private consumption growth has been steady, supported by strong employment figures and real wage growth over the lasttwo quarters. The Bank of England ("BoE") raised its forecast for GDP growth in 2019 from 1.2% to 1.5% based on a higher level of global GDP growth than had been expected at the start of the year. Despite this improved outlook from theBoE, monetary policy willdepend on a number of factors and it is expected that any rises in interest rates willbe slow and steady over the next few years.
UK Real Estate Outlook With Brexit dominating the economic outlook, this is taking its tollon the macro-economic picture, including financial and property markets. Given the market uncertainty, rental growth is expected to be fairly subdued during the remainder of 2019. There could be a period of volatility in values ahead as the uncertainty surrounding Brexit intensifies, although property is stillexpected to deliver a stable income return. Property appears fairly priced at the current low levels of interest rates, which are expected to rise over time, but in small stages. The scope for further yield compression appears to be limited and a general upward pressure on property yields could occur, depending on the nature of the Brexit transition. Sector Outlook
Industrial Standard industrials and distribution are expected to be a major driver of the occupier market with the growth of e-commerce, although it is thought that rental growth in 2019 will not be to the extent seen in 2018, as some rents are reaching a ceiling. Annual transaction activity in the industrial sector reached £7.8 billion in 2018, which is the second-highest figure on record. The industrial sector represents the largest proportion of our portfolio with 48% of the valuation at 31 March 2019. We generally focus on assets with low capital value in locations with good accessibility from thenational motorway network. Our industrial assets achieved a totalreturn of 16.2% for the year, the highest sector return in the portfolio, outperforming the Benchmark by 1.1%.
Office We expect office rents outside London to remain stable forthe coming years as development in most cities has already peaked. Some rental growth was seen in regional markets in 2018 and rental rates are expected to remain unchanged forthe remainder of 2019. Offices make up the second largest sector holding in the portfolio, representing 22.0% of the portfolio valuation as at 31 March 2019. Our office holding achieved the greatest performance relative to the Benchmark for the year in terms oftotal return, outperforming the Benchmark Total Return by 8.4%. This performance was driven by strong capital growth of 8.6% for the year, which was achieved through significant lettings and lease renewals, as noted in theAsset Management section of the Investments Manger's Report.
Growth in household consumption slowed in 2018, despite seeing realwage growth towards the end of the year, as consumers remained cautious with regards to their spending decisions. As such, there is increasing concern around the weakness in the retailmarket, which is expected to persist during 2019, and headline rents are predicted to continue to fall across all segments except Central London unitshops. In terms ofinvestment, the totalnumber of retail deals in 2018 was at its lowest since 2012. Retail represented the portfolio's smallest sector holding, with only 15.3% of the valuation as at31 March 2019, which somewhat mitigates the risk associated with the sector at a portfolio level. Our assets performed poorly in terms of capital return relative to the Benchmark, with a negative 15.4% capital return. However, our income streams have remained largely intact, despite the myriad of company voluntary arrangements ('CVA's) and company failures in the retailmarket, and delivered income returns of9.5% for the year. Alternatives We think that the Alternatives sector will continue to grow inimportance and could begin to outperform other sectors in terms of total returns.
This is a sector in which we have significant expertise and continue to see compelling opportunities. Our alternatives assets, which include leisure and car parking, represent 15.2% of the valuation as at31 March 2019 and delivered the highest sector income return over the year of 9.3%. Financial Results Net rental income forthe year was £15.72 million (11 months ended 31 March 2018: £11.22 million), contributing to an operating profit before fair value changes and disposals of£13.52 million (11 months ended 31 March 2018: £9.60 million). The portfolio saw again of £4.18 million on revaluation of investment property over the year (11 months ended 31 March 2018: £1.01 million). This performance was largely driven by valuation gains in the portfolio's office assets resulting from several new lettings and lease renewals during the year. The Company's industrial assets also performed strongly, delivering like-for-like valuation growth. There was a small like-for-like increase in the valuation of the Company's alternative assets and only the Company's retail assets suffered a decrease in valuation, which is in common with the overall market performance of the sector. The Company reported a loss on disposal of investment properties of £0.48 million (11 months ended 31 March 2018: £0.22 million), having made two part disposals (Floors 1-9, Pearl House, Nottingham and18-36, Chapel Walk, Sheffield) and two full disposals (Stoneferry Retail Park, Hull and Waggon Road, Mossley) during the year. Administrative expenses, which include the Investment Manager's fee and other costs attributable to the running of the Company, were £2.20 million (11 months ended 31 March 2018: £1.62 million). Ongoing Charges forthe period were 1.40% (11months ended 31 March 2018: 1.24%) and have increased largely as a result of one-off costs during the year relating to the publication of the Company's Prospectus.
The Company incurred finance costs of £1.68 million (11 months ended 31 March 2018: £0.65 million). This increase compared with the prior period comes as a result of having a higher balance of the loan drawn over the course of the year. The Company also entered into additional interest rate caps on a notional value of £46.51 million during the year, becoming effective in October 2020, which saw afairvalue loss of£0.37 million. The totalprofit before tax forthe year of £15.54 million (11 months ended 31 March 2018: £9.82 million) equates to a basic EPS of 10.26 pence (11 months ended 31 March 2018: 7.17 pence). EPRA EPS for the year was 8.07 pps which, based on dividends paid of 8.00 pps, reflects a dividend cover of 101% (11months ended 31 March 2018: EPRA Earnings of 6.56 pps, dividends paid of 7.33 pps and dividend cover of 89.50% The Company's NAV as at31 March 2019 was £149.46 million or98.61 pps (31 March 2018: £146.03 million or 96.36 pps). This is an increase of 2.25 pps or 2.33%, with the underlying movement in NAV set out in the table below:
Financing As at31 March 2019, the Company had utilised £50.00 million (31 March 2018: £50.00 million) of an available £60.00 million (31 March 2018: £60.00 million) credit facility with RBSi, resulting in gearing of 25.30% loan to property valuation. In October 2018, the Company extended the term of the loan facility by three years to October 2023 to mitigate the financing risk associated with Brexit. The loan incurs interest at three-month LIBOR +1.4% (2018: LIBOR +1.4%). To mitigate the interest rate risk that arises from entering into a variable rate linked loan, as at31 March 2019, the Company held interest rate caps with a combined notional value of £36.51 million, at strike rates of2.5% on £26.51 million and 2.0% on £10.00 million (31 March 2018: 2.5% on £26.51 million and 2.0% on £10 million), meaning thatthe loan is 73% hedged (31 March 2018: 73%). In October 2018, the Company entered into interest rate caps on a
Share Issuance Programme On 1 March 2019, the Company published its Prospectus in relation to a Share Issuance Programme of up to 250 million new Ordinary shares and up to 250 million C shares. No shares have been issued, to date, under the programme. Portfolio Activity The Company's objective is to build a diversified portfolio of commercial properties throughout the UK. New acquisitions are selected to provide a sustainable income return and the potential for growth, whilst also limiting downside risk. The majority ofthe Company's assets are fully letand as at31 March 2019, the Company had a vacancy rate of 2.99% (31 March 2018: 7.10%). The following significant investment transactions were made during the year:
In February 2019, the Company acquired Lockwood Court, Parkside Industrial Estate, Leeds, for a gross purchase price of £6.93 million. The 187,626 sq ft industrial warehouse is fully letto LWS Yorkshire Limited, a logistics and storage provider for Harrogate Spring Water, on a 10-year lease from October 2018. The lease provides a low passing rent of £3.21 per sq ft which, together with tight supply, forms a strong base forfuture potential rental growth. Located two miles south of Leeds City Centre and close to J25 of the M62 and J40 of the M1, Parkside Industrial Estate is a well-established industrial and commercial area with a history ofattracting regional and national occupiers.
On 14 March 2019, the Company completed the sale of its industrial asset at Waggon Road, Mossley. The asset was sold at auction for£450,000, ahead of its most recent valuation £350,000. - In December 2018, the Company completed the sale ofStoneferry Retail Park, Hull, for gross proceeds of£1.80 million, reducing the Company's exposure to the retailsector.
On 6 August 2018, the Company completed the sale of 18-36 Chapel Walk, Sheffield, for gross proceeds of £0.90 million. The units sold were 47.10% vacant by floor area. The Company has retained the fully letadjacent units, 11-15 Fargate, totalling 5,495 sq ft. - On 5April 2018, the Company completed the sale of its office accommodation at Pearl House, Nottingham, for gross proceeds of£3.65 million. The sale comprised the first to ninth floors, a ground floor reception and carparking spaces, providing a totalarea of 41,262 sq ft. The Company retained the ground floor accommodation in the busy city centre location, totalling 28,432 sq ft, let to national retail operators including Costa Coffee, Poundland and Lakeland. Acquisition during the year
| Lockwood Court, Leeds Purchase Price (£m): |
|
|---|---|
| Sector: | 6.93 Industrial |
| Area (sq ft): |
187,626 |
| NIY at acquisition (%): |
7.7 |
| WAULT to break as at31 March 2019 (years): 9.5 |
|
| Occupancy by ERV (%): |
100 |
| Constructed: | 1970s |
Property Portfolio Summary by Sector as at31 March 2019
| (£m) Area ('000 |
ft) Occupancy by ERV sq |
(%) WAULT break |
to Rental Income |
||||
|---|---|---|---|---|---|---|---|
| Sector | Number of Properties Valuation | (years) GrossPassing | (£m) ERV (£m) |
||||
| Industrial | 20 | 94.1 | 2,335 | 99.4 | 4.9 | 7.3 | 8.3 |
| Offices | 6 | 43.2 | 287 | 88.9 | 3.7 | 3.2 | 4.2 |
| Alternatives | 3 | 30.0 | 165 | 100.0 | 6.1 | 2.8 | 2.3 |
| Standard Retail |
5 | 23.6 | 169 | 99.9 | 3.6 | 2.7 | 2.1 |
| Retail Warehouse | 1 | 6.7 | 51 | 100.0 | 5.0 | 0.6 | 0.6 |
| Portfolio | 35 | 197.6 | 3,007 | 97.0 | 4.9 | 16.6 | 17.5 |
Summary by Geographical Area as at 31 March 2019
| (£m) Area ('000 |
ft) Occupancy by ERV sq |
(%) WAULT break |
to Rental Income |
||||
|---|---|---|---|---|---|---|---|
| Geographical Area | Number of Properties Valuation | (years) GrossPassing | (£m) ERV (£m) |
||||
| Yorkshire | |||||||
| and Humberside | 8 | 35.2 | 1,028 | 98.5 | 3.6 | 2.8 | 3.4 |
| South East |
5 | 29.8 | 195 | 97.0 | 4.1 | 2.5 | 2.5 |
| Eastern | 5 | 22.9 | 345 | 100.0 | 3.8 | 1.7 | 2.0 |
| South West |
3 | 22.7 | 125 | 100.0 | 3.8 | 1.7 | 1.7 |
| West Midlands | 4 | 17.9 | 397 | 100.0 | 3.7 | 1.7 | 1.8 |
| East Midlands | 2 | 17.9 | 81 | 100.0 | 3.0 | 1.9 | 1.4 |
| North West |
4 | 15.8 | 302 | 98.8 | 4.2 | 1.4 | 1.3 |
| Wales | 2 | 14.8 | 376 | 100.0 | 10.0 | 1.2 | 1.3 |
| Greater London | 1 | 12.0 | 72 | 100.0 | 12.6 | 1.0 | 0.9 |
| Scotland | 1 | 8.6 | 86 | 65.8 | 2.3 | 0.7 | 1.2 |
| Portfolio | 35 | 197.6 | 3,007 | 97.0 | 4.9 | 16.6 | 17.5 |
Please refer to Appendix 5 'Propertiesby Market Value', accessible through the link at the end of this announcement.
| Property | Sector | Region | Market Value Range (£m) |
|
|---|---|---|---|---|
| Top ten: |
||||
| 1. 2 | Geddington Road, Corby |
Other (Car parking) East Midlands | 10.0 - 15.0 |
|
| 2. 40 | Queen Square, Bristol |
Offices | South West |
10.0 - 15.0 |
| 3. London East Leisure Park, Dagenham |
Other (Leisure) Greater London | 10.0 - 15.0 |
||
| 4. Eastpoint Business Park, Oxford |
Offices | South East |
10.0 - 15.0 |
|
| 5. Gresford Industrial Estate, Wrexham |
Industrial | Wales | 7.5 - 10.0 |
|
| 6. 225 Bath Street, Glasgow |
Offices | Scotland | 7.5 - 10.0 |
|
| 7. Lockwood Court, Leeds |
Industrial | Yorkshire and Humberside |
5.0 - 7.5 |
|
| 8. Above Bar Street, Southampton |
Standard Retail South |
East | 5.0 - 7.5 |
|
| 9. Langthwaite Grange Industrial Estate, South |
Kirkby Industrial | Yorkshire and Humberside |
5.0 - 7.5 |
|
| 10. Barnstaple Retail Park |
Retail Warehouse | South West |
5.0 - 7.5 |
Property Sector Region Market Value Range (£m) 11. Storeys Bar Road, Peterborough Industrial Eastern 5.0 - 7.5
| 27. Wella Warehouse, Basingstoke 28. Magham Road, Rotherham 29. Pipps HillIndustrial Estate, Basildon 30. Eagle Road, Redditch 31. Vantage Point, Hemel Hempstead 32. Clarke Road, Milton Keynes 33. Knowles Lane, Bradford 34. Fargate, Sheffield 35. Moorside Road, Salford |
Industrial South Industrial Yorkshire Industrial Eastern Offices Industrial South Industrial Yorkshire Standard Industrial North |
East < 5.0 and Humberside < 5.0 < 5.0 Industrial West Midlands < 5.0 Eastern < 5.0 East < 5.0 and Humberside < 5.0 Retail Yorkshire and Humberside < 5.0 West < 5.0 |
|||
|---|---|---|---|---|---|
| Top | 10 Tenants | ||||
| Tenant | Sector Property | Income | %of Portfolio Passing Total Rental Passing Rental (£'000) Income |
||
| 1. GEFCO UK Limited |
Logistics | 2 Geddington Road, Corby |
1,320 | 7.9 | |
| 2. Plastipak UK Limited |
Manufacturing | Gresford Industrial Estate, Wrexham |
883 | 5.3 | |
| 3. The Secretary ofState |
Government body |
Sandford House, Solihull and Cedar House, Gloucester 832 |
5.0 | ||
| 4. Ardagh Glass Limited |
Manufacturing | Langthwaite Grange Industrial Estate, South |
Kirkby 676 | 4.0 | |
| 5. Mecca Bingo Limited |
Leisure | London East Leisure Park, Dagenham |
625 | 3.7 | |
| 6. Egbert H Taylor & Company Limited |
Manufacturing | Oak Park, Droitwich | 620 | 3.7 | |
| 7. Odeon Cinemas |
Leisure | Odeon Cinema, Southend |
535 | 3.2 | |
| 8. Sports Direct |
Retail | Barnstaple and Bank Hey Street, Blackpool Retail Park |
|||
| 525 | 3.1 | ||||
| 9. Wyndeham Peterborough |
Manufacturing | Storeys Bar Road, Peterborough |
|||
| Limited | 525 | 3.1 | |||
| 10. Advanced Supply Chain (BFD) Limited |
Logistics | Euroway Trading Estate, Bradford |
428 | 2.6 | |
| The | Company's top 10 tenants, listed |
above, represent 41.6% | of the total passing rental income of the portfolio. |
||
| key | Asset Management We undertake asset management to achieve asset management initiatives included: |
rental growth, let vacant space | and enhance value through initiatives |
such as refurbishments. During the year, |
| Tenant | Sector Property | Income | %of Portfolio Passing Total Rental Passing Rental (£'000) Income |
|
|---|---|---|---|---|
| 1. GEFCO UK Limited |
Logistics | 2 Geddington Road, Corby |
1,320 | 7.9 |
| 2. Plastipak UK Limited |
Manufacturing | Gresford Industrial Estate, Wrexham |
883 | 5.3 |
| 3. The Secretary ofState |
Government | Sandford House, Solihull and Cedar House, Gloucester 832 |
||
| 4. Ardagh Glass Limited |
body Manufacturing |
Langthwaite Grange Industrial Estate, South Kirkby 676 |
5.0 4.0 |
|
| 5. Mecca Bingo Limited |
Leisure | London East Leisure Park, Dagenham |
625 | 3.7 |
| 6. Egbert H Taylor & Company Limited |
Manufacturing | Oak Park, Droitwich | 620 | 3.7 |
| 7. Odeon Cinemas |
Leisure | Odeon Cinema, Southend |
535 | 3.2 |
| The Company's top 10 tenants, listed above, represent 41.6% of the total passing rental income of the portfolio. |
|---|
| Asset Management We undertake asset management to achieve rental growth, let vacant space and enhance value through initiatives such as refurbishments. During the year, key asset management initiatives included: |
| - Orion House, Oxford - InAugust 2018, the Company completed the letting of Orion House, Oxford, to Genesis Cancer Care UK Limited. The lease is for a term of 25 years, at a rent of £179,410 per annum. There are five-yearly, upward-only rent reviews linked to the Retail Price Index ("RPI") measure of inflation and the tenant benefits from a 12-month rentfree period, followed by six years athalf rent. The valuation of the property increased by 27.8% over the year, thanks largely to this transaction. |
| - 225 Bath Street, Glasgow - In July 2018, the Company completed the letting of Third Floor East, 225 Bath Street, Glasgow, to International Correspondence Schools Limited. The lease is for a term of five years, with a tenant break option at the end of the third year, at a rentof £88,608 per annum. The tenant benefits from a 10-month rent free period. |
| - Cedar House, Gloucester - In June 2018, the Company completed a lease renewal to the Secretary of State forCommunities and Local Government at its Cedar House office building in Gloucester. The property was acquired in December 2017 with the expectation of achieving a new three-year lease at the passing rentof £300,000 perannum andthis was significantly exceeded with a 10-year lease at a rent of £321,000 per annum. No rent free incentive was offered to the tenant. |
passing rentof £300,000 perannum andthis was significantly exceeded with a 10-year lease at a rent of £321,000 per annum. No rent free incentive was offered to the tenant. - 40 Queen Square, Bristol - In June 2018, the Company completed a reversionary lease renewal at 40 Queen Square, Bristol, with tenant Ramboll Whitbybird Ltd. A 10-year lease commenced in November 2018 and the tenant has the option to break at the end of the fifth year. The letting at a rent of £94,500 per annum proved a new high rental tone forunrefurbished space within the building at £23.00 persq ft, as compared to a passing rentof £16.84 per sq ft.
Diamond Business Park, Wakefield - During June 2018, a new letting was completed at Diamond Business Park, Wakefield which was acquired by the Company in February 2018. Unit 7, totalling c. 13,700 sq ft, was let to Wow Interiors Yorkshire Ltd fora six year term with tenant break options in years two and four. Stepped rental increases have been agreed so that, if the tenant remains in occupation forthe full term, the average rentreceived equates to £3.30 persq ft as compared to an ERV of £3.00 per sq ft.
Sarus Court, Runcorn - In April2018, the Company documented two rentreviews with CJ Services, its largest tenant at Sarus Court, Runcorn. The rent reviews at Units 1 and 2 date back to January 2017 and result in a combined rate of £5.25 persq ft net effective. This supports a headline rent of c.£5.75 per sq ft which was £0.25 per sq ft ahead of the property's ERV at the time of the letting. - Commercial Road, Portsmouth - the Company has completed a 10-year lease renewal with Greggs plc atits retail property located on Commercial Road, Portsmouth. The new rent of£20,500 per annum exceeded the unit's ERV at the time of letting by 11%. Greggs have been in occupation of the unitfor 10 years and have the option to break the lease after five years.
Alternative Investment Fund Manager ('AIFM') AEW UKInvestment Management LLP isauthorised and regulated by the FCA as a full-scopeAIFM andprovides its services to the Company. The Company has appointed Langham Hall UK Depositary LLP ('Langham Hall') to actas the depositary to the Company, responsible forcash monitoring, asset verification and oversight of the Company.
Information Disclosuresunder the AIFM Directive Under theAIFM Directive, the Company is required to make disclosures in relation to its leverage under the prescribed methodology ofthe Directive.
Leverage TheAIFM Directive prescribes two methods forevaluating leverage, namely the 'Gross Method' and the 'Commitment Method'. The Company's maximum and actual leverage levels are as per below:
As required under section '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 its staff. The information provided below is provided forthe year from 1 January 2018 to 31 December 2018, which is in line with the most recent
Principal Risks and Uncertainties The Company's assets consist primarily ofUK commercial property. Its principal risks are therefore related to the commercial property market in general,
The Board has overall responsibility for reviewing the effectiveness ofthe system of risk management and internal control which is operated by the Investment Manager. The Company's ongoing risk management process is designed to identify, evaluate and mitigate the significant risks the Company
Twice each year, the Board undertakes a risk review with the assistance of the Audit Committee, to assess the adequacy and effectiveness ofthe
The Board has carried outa robust assessment of the principal risks facing the Company, including those thatwould threaten its business model, future
An analysis of the principal risks and uncertainties is set out below. This does not purport to be exhaustive as some risks are notyet known and some
standards.
sector exposure).
interest rate rises.
Impact: High Movement: No change CORPORATERISKS
incentivised.
returns.
The Company has considered its cash flows, financial position, liquidity position and borrowing facilities. The Company's cash balance as at31 March 2019 was £2.13 million. The Company can draw afurther £2.31 million (31 March 2018: £1.11 million) of its debt facility up to the maximum 35% loanto NAV at drawdown.
its shareholders. Comprehensive due diligence is undertaken on all new
Principal risks and their potential impact How risk ismanaged Risk
Year ended 31 December 2018
The Company has investment restrictions in place to invest and manage its assets with the objective of spreading and mitigating risk.
The Company uses an independent external valuer (Knight Frank LLP) to value the properties atfair value in accordance with accepted RICS appraisal and valuation
tenants. Tenant covenant checks are carried outon all new tenants where a default would have a significant impact. Asset management team conducts ongoing monitoring and liaison with tenants to manage potential bad debt risk.
Costs incurred on asset management initiatives are closely monitored against budgets and reviewed in regular presentations to the Investment Management Committee of the Investment Manager.
The Company's due diligence relies on work (such as legal reports on title,property valuations, environmental and building surveys) outsourced to third parties who have expertise in their areas. Such third parties have professional indemnity cover in place.
The Company builds a diversified property and tenant base with subsequent monitoring ofconcentration to individual occupiers (top 10 tenants) and sectors (geographical and
The Investment Manager holds quarterly meetings with its Investment Strategy Committee and regularly meets the Board of Directors to assess whether any changes in the market present risks that should be addressed in the Company's strategy.
The Company monitors the use of borrowings on an ongoing basis through weekly cash flow forecasting and quarterly risk monitoring to monitor financial covenants.
The Company uses interest caps on a significant notional value of the loan to mitigate the adverse impact of possible
The Investment Manager and Board of Directors monitor the level of hedging and interest rate movements to ensure that the risk is managed appropriately.
The Company maintains a good relationship with the bank providing the term credit facility. The Company monitors the projected usage and covenants of the credit facility on a quarterly basis.
The performance of service providers in conjunction with their service level agreements is monitored via regular calls and face-to-face meetings and the use of key performance indicators, where relevant.
The Investment Manager has endeavoured to ensure that the principal members ofits management team aresuitably
The Company has an investment policy to achieve a balanced portfolio with a diversified asset and tenant base. The Company also has investment restrictions in place to limit exposure to potential risk factors. These factors mitigate the risk offluctuations in
The Company monitors REIT compliance through the Investment Manager on acquisitions; the Administrator on asset and distribution levels; the Registrar and Broker on shareholdings and the use of third-party tax advisers to monitor REIT compliance requirements.
The Board considers the impact of political and macroeconomic events when reviewing strategy. Probability: Moderate to High
assessment
Probability: Moderate Impact: Moderate to High Movement: Increase
Probability: Moderate Impact: Low toModerate Movement: No change
Probability: Moderate Impact: Low toModerate Movement: Increase
Probability: Low Impact: Low Movement: No change
Probability: Low Impact: Moderate Movement: No change
Probability: Low toModerate Impact: Moderate Movement: Increase
Probability: Low to Moderate Impact: High Movement: Increase
Probability: High Impact: Low Movement: No change
Probability: Low
Probability: Low to Moderate Impact: Moderate Movement: No change
Probability: L o w tomoderate Impact: Moderate Movement: Decrease
Probability: Moderate Impact: High Movement: Increase
Probability: Low Impact: High Movement: No change
Impact: Moderate to High Movement: Increase
Maximum Limit 140% 140% 140% 140% Actual 132% 134% 131% 134% In accordance with the AIFM Directive, leverage is expressed as a percentage of the Company's exposure to its NAV and adjusted in line with the
prescribed 'Gross' and 'Commitment' methods. The Gross method is representative of the sum of the Company's positions after deducting cash balances and without taking into account any hedging and netting arrangements. The Commitment method is representative of the sum of the Company's positions without deducting cash balances and taking into account any hedging and netting arrangements. For the purposes ofevaluating the methods above, the
TheAIFM has adopted a Remuneration Policy which accords with the principles established by the AIFMD Directive. AIFMD Remuneration Code Staff includes the members oftheAIFM's Management Committee, those performing control functions, department heads, risk
takers and other members ofstaff that exert material influence on theAIFM's risk profile or theAIFs it manages. Staff are remunerated in accordance with the key principles ofthe AIFM's remuneration policy, which include: (1) promoting sound risk management; (2) supporting sustainable business plans; (3) remuneration being linked to non-financial criteria forcontrol function staff; (4) incentiving staff performance over longer periods of time; (5) awarding guaranteed variable remuneration only in exceptional circumstances; and (6)having an appropriate balance between
financial reporting period of theAIFM, and relates to the totalremuneration of the entire staffof theAIFM.
but also to the particular circumstances of the individual properties and the tenants within the properties.
Investment Manager and other service providers' risk management and internal control processes.
risks are currently notdeemed material but could turn outto be material in the future.
1. Property market Any property market recession orfuture deterioration in the property market could, inter alia, (i) cause the Company to realise its investments at lower valuations; and (ii) delay the timings of the Company's realisations. These risks could have a material adverse effect on the ability of the Company to achieve its investment objective.
Property and property-related assets are inherently difficult to value due to the individual nature of each property. There may be an adverse effect on the Company's profitability, the NAV and the price of Ordinary Shares in cases where properties are sold whose valuations have previously been materially overstated.
3. Tenant default Failure by tenants to fulfiltheir rental obligations could affect the income that the properties earn and the ability of the Company to pay dividends to
5. Due diligence Due diligence may notidentify all the risks and liabilities in respect of an acquisition (including any environmental, structural or operational defects) that may lead to a material adverse affect on the Company's profitability, the NAV and the price of the Company's Ordinary Shares.
6. 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). Any fallin the rental rates for the Company's properties may have a material adverse affect 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.
8. Interest rate rises The Company's borrowings through a term credit facility are subject to interest rate risk through changing LIBOR rates.Any increases in LIBOR rates may have an adverse effect on the Company's ability to pay dividends.
9. Availability and cost of debt The term credit facility expires in October 2020. In the event that RBSi does notrenew the facility, the Company may need to sell assets to repay the outstanding loan. Any increase in the financing costs ofthe facility on renewal would adversely impact on the Company's profitability.
10. Use ofservice providers The Company has no employees and is reliant upon the performance of
Failure by any service provider to carry out its obligations to the Company in accordance with the terms of its appointment could have a materially detrimental impact on the operation of the Company.
11. Dependence on the Investment Manager The Investment Manager is responsible for providing investment management services to the Company. The future ability ofthe Company to successfully pursue its investment objective and investment policy may, among other things, depend on the ability ofthe Investment Manager to retain its existing staff and/or to recruit individuals ofsimilar experience and calibre.
12. Ability to meet objectives The Company may notmeet its investment objective to deliver an attractive total return to shareholders from investing predominantly in a portfolio of smaller commercial properties in the United Kingdom. Poor relative totalreturn performance may lead to an adverse reputational impact that affects the Company's ability to raise new capital.
13. Company REIT status The Company has a UK REIT status that provides a tax-efficient corporate
If the Company fails to remain a REIT for UK tax purposes, its profits and gains willbe subject to UK corporation tax. Any change to the tax status or UK tax legislation could impact on the Company's ability to achieve its investment objectives and provide attractive returns to shareholders.
Approval The Strategic Report has been approved and signed on behalf of the Board by:Mark Burton Chairman
a) remuneration, including, where relevant, any carried interest paid by theAIFM £2,665,423 b) the number of beneficiaries 24 The aggregate amount of remuneration, broken down by:a) senior management £809,561 b) other staff £1,855,862 Fixed remuneration Variable remuneration Total remuneration
31 March 2019 31 March 2018
Company's positions primarily reflect its current borrowings and NAV.
Total remuneration paid to employees during financial year:
Senior management £759,561 £50,000 £809,561 Other staff £1,419,441 £436,421 £1,855,862 Total £2,179,002 £486,421 £2,665,423 AEW UK Investment Management LLP 21 June 2019
Remuneration
faces.
performance, solvency orliquidity.
REAL ESTATERISKS
2. Property valuation
4. Asset management initiatives Asset management initiatives, such as refurbishment works, may prove to be more extensive, expensive and take longer than anticipated. Cost overruns may have a material adverse effect on the Company's profitability,
the NAV and the share price.
FINANCIAL RISKS 7. Breach of borrowing covenants The Company has entered into a term credit facility. Material adverse changes in valuations and net income may lead to breaches in the LTV and interest cover ratio covenants.
third party service providers.
TAXATION RISKS
14. POLITICAL/ECONOMIC RISKS Political and macroeconomic events present risks to the realestate and financial markets that affect the Company and the business ofits tenants. The level of uncertainty that such events bring has been highlighted in recent times, most pertinently following the EU referendum vote (Brexit) in
structure.
June 2016.
21 June 2019 Extract from the DirectorsReport Directors Mark Burton, non-executive Chairman James Hyslop, non-executive non-independent Director Bimaljit ("Bim") Sandhu, non-executive Director Katrina Hart, non-executive Director Going Concern
fixed and variable remuneration.
Leverage Exposure GrossMethod Commitment Method GrossMethod Commitment Method
As at 31 March 2019, the Company had sufficient headroom againstits borrowing covenants. The Company has the ability to utilise up to 35% of NAV measured at drawdown under the current borrowing facility limits with a Company loan to NAV of 33.5% as at 31 March 2019. The Company benefits from a secure, diversified income stream from leases which are notoverly reliant on any one tenant or sector.
As a result, the Directors believe thatthe Company is well placed to manage its financing and other business risks. There are currently no material uncertainties in relation to the Company's ability to continue fora period of at least 12 months from thedate of approval of these financial statements. The Board is, therefore, of the opinion thatthe going concern basis adopted in the preparation of theAnnual Report is appropriate. Viability Statement In accordance with the principle 21 of the AIC Code,the Directors have assessed the prospects ofthe Company over a period longer than the 12 months
required by the 'Going Concern' provisions. The Board has considered the nature of the Company's assets, liabilities and associated cash flows, and has determined thatfive years, up to 31 March 2024, is the maximum timescale over which the performance of the Company can be forecast with a material degree of accuracy and so is an appropriate period over which to consider the Company's viability. Considerations in support of the Company's viability over this five-year period include:
The current unexpired term under the Company's debt facilities stands at 4.56 years; The Company's property portfolio has a WAULT of 6.10 years to expiry, representing a secure income stream for the period under consideration; The Company's portfolio reflects a diversified strategy that has invested across a broad spectrum of real estate sectors returning a diversified income stream, which should spread the risk ofany default; and Most leases contain a five-year rent review pattern and, therefore, five years allow for the forecasts to include the reversion arising from those reviews. The five-year review considers the Company's cash flows, dividend cover, REIT compliance and other key financial ratios over the period. In assessing the Company's viability, the Board has carried outa thorough review of the Company's business model, including future performance, liquidity, dividend cover and banking covenant tests for a five-year period.
The business model is subject to annual sensitivity analysis, which involves flexing a number of key assumptions underlying the forecasts both individually and in aggregate fornormal and stressed conditions. The five year review also considers whether financing facilities willbe renewed as required. The following scenarios were tested, both individually and combined, in an effort to represent a severe butplausible scenario, which might reasonably be expected to arise as a result of a 'No Deal'Brexit outcome, amongst other factors: An increase in financing costs; Default of the three highest risk tenants within the Company's top 20 tenants (as rated by Coface); and A fall in portfolio valuation.
Based on the results ofthis analysis, the Directors have a reasonable expectation thatthe Company will be able to continue in operation and meet its liabilities as they fall due over the five-year period of their assessment. Subsidiary Company Details ofthe Company's subsidiary, AEW UKREIT 2015 Limited, can be found in Note 17 to the Financial Statements.
Management Arrangements AEW UK Investment Management LLP isthe Company's Investment Manager and has been appointed as the AIFM. Under the terms of the Investment Management Agreement, the Investment Manager is responsible forthe day-to-day discretionary management of the Company's investments subject to the investment objective and policy ofthe Company and the overall supervision of the Directors. The Investment Manager is entitled to receive a quarterly management fee in respect of its services calculated at the rate of one-quarter of 0.9% of the prevailing NAV (excluding uninvested proceeds from
fundraisings). There is no performance fee.Any investment by the Company into the Core Fund is not subject to management fees orperformance fees otherwise charged to investors in the Core Fund by the Investment Manager. The Investment Management Agreement may be terminated by the Company or the Investment Manager giving 12 months' notice. Financial Risk Management The financial risk management objectives and policies can be found in Note 20 to the Financial Statements.
Social, Community and Employee Responsibility The Company has no direct social, community oremployee responsibilities. It has no employees and, accordingly, no requirement to separately report in this area as the management of the portfolio has been delegated to the Investment Manager and other service providers. The Investment Manager is an equal opportunities employer who respects and seeks to empower each individual and the diverse cultures, perspectives, skills and experiences within its workforce.
The Company is not within the scope of the Modern Slavery Act 2015 because it has not exceeded the turnover threshold and therefore, no further disclosure is required in this regard. Environmental Policy The Investment Manager acquires and manages properties on behalf of the Company. It is recognised thatthese 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. As part of this process, the Investment Manager submits disclosures to GRESB, the Global Real Estate Sustainability Benchmark. GRESB isan industry driven organisation committed to assessing the sustainability of real estate portfolios (public, private and direct) around the globe. The Investment Manager is in the process ofsubmitting the Company's GRESB assessment for the year from 1 April 2018 to 31 March 2019 and will receive the results ofthis assessment in September 2019 when it will be made available on the Company's website. 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 emissions in relation to the Company's property portfolio are disclosed in the Directors' Report above. Share Capital Share Issues At theAGM held on 12 September 2018, the Company was granted the authority to allot Ordinary Shares up to an aggregate nominal amount of £151,558 on a non pre-emptive basis. No Ordinary Shares have been allotted under this authority and the authority willexpire at the conclusion of the 2019AGM.
At a general meeting held on 12 September 2018, the Company was granted authority to allot up to (i) 250 million Ordinary Shares of£0.01 each in the capital of the Company and/or (ii) 250 million convertible redeemable preference shares ('C'shares) of £0.01 each in the capital of the Company pursuant to a potential Share Issuance Programme. The Company published its Prospectus in relation to the Share Issuance Programme on 1 March 2019. No Ordinary Shares have been allotted under this authority which will expire, at the earlier of the close of the Share Issuance Programme and 30 June 2020. As at 31 March 2019, the Company had 151,558,251 Ordinary Shares in issue
Purchase of Own Shares At the Company's AGM on 12 September 2018, the Company was granted authority to purchase up to 14.99% of the Company's Ordinary Shares in issue. No shares have been bought back under this authority during the year, which expires atthe conclusion of the Company's 2019 AGM. A resolution to renew the Company's authority to purchase (either for cancellation orfor placing into Treasury) up to 22,718,581 Ordinary Shares (being 14.99% of the issued Ordinary Share capital as atthe date of this report), will be putto shareholders atthe 2019 AGM. Any purchase will be made in the market and prices willbe in accordance with the terms laid outin the Notice of AGM (enclosed separately and available on the Company's website). The authority will be used where the Directors consider it to be in the best interests ofshareholders.
Income Entitlement The profits ofthe Company (including accumulated revenue reserves) available fordistribution and resolved to be distributed shall be distributed in proportion to the amount paid upper share by way ofinterim and, where applicable special or final dividends among the holders of Ordinary Shares. Capital Entitlement
After meeting the liabilities ofthe Company on a winding-up, the surplus assets shall be paid to the holders ofdifferent classes ofmembers and distributed among such holders rateably according to the amounts paid up orcredited as paid up on their shares. Voting Entitlement
Each Ordinary shareholder is entitled to one vote on a show of hands and, on a poll, to one vote forevery Ordinary Share held. The Notice of AGM andForm of Proxy stipulate the deadlines for the valid exercise of voting rights and, other than with regard to Directors not being permitted to vote their Ordinary Shares on matters in which they have an interest, there are no restrictions on the voting rights of Ordinary Shares. There are no restrictions concerning the transfer of securities in the Company oron voting rights; no special rights with regard to control attached to securities; no agreements between holders of securities regarding restrictions on the transfer of securities orvoting rights known to the Company; and no agreements which the Company is party to that might affect its control following a successful takeover bid. Requirementsof the Listing Rules
Listing Rule 9.8.4 requires the Company to include specified information in a single identifiable section of the annual report or a cross reference table indicating where the information is setout. The Directors confirm that there are no disclosures required in relation to Listing Rule 9.8.4. Related Party Transactions Related party transactions during the year ended 31 March 2019 can be found in Note 22 to the Financial Statements.
Post Year-End Events Post balance sheet events can be found in Note 24 to the Financial Statements.
The Directors' Report has been approved by the Board of Directors and signed on its behalf by:
21 June 2019 Statement of Directors' Responsibilities in respect of the Annual Report and Financial Statements
The Directors are responsible forpreparing theAnnual Report and Financial Statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law, they are required to prepare the financial statements in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS asadopted by the EU) and applicable
law. Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs ofthe Company and of its profit or loss for that period. In preparing these financial statements, the Directors are required to:
select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable, relevant and reliable; state whether they have been prepared in accordance with IFRS as adopted by the EU; assess the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and
use the going concern basis ofaccounting unless they either intend to liquidate the Company or to cease operations, or have no realistic alternative butto do so.The Directors are responsible forkeeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy atany time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They are responsible forsuch internal control as they determine is necessary to enable the preparation of financial statements that are free from materialmisstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to
safeguard the assets ofthe Company and to prevent and detect fraud and other irregularities. Under applicable law and regulations, the Directors are also responsible forpreparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that comply with that law and 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 financial statements may differ from legislation in other jurisdictions.
We confirm that to the best of our knowledge: the Financial Statements, prepared in accordance with the applicable setof accounting standards, give a true and fair view of the assets, liabilities, financial position and profit of the Company; and
the Strategic Report includes a fairreview of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces. We consider the Annual Report and the Financial Statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy.
On behalf of the Board
Mark Burton Chairman
21 June 2019 Non-statutory Accounts The financial information setout below does not constitute the Company's statutory accounts for the year ended 31 March 2019 butis derived from those
accounts. Statutory accounts for the year ended 31 March 2019 will be delivered to the Registrar of Companies in due course. The Independent Auditor has reported on those accounts; its report was (i)unqualified, (ii) did notinclude a reference to any matters to which the Independent Auditor drew attention by way of emphasis without qualifying its report and (iii) did notcontain a statement under Section 498 (2)or (3) of the Companies Act 2006. The textof the Independent Auditor's Report can be found in the Company's fullAnnual Report and Financial Statements on the Company's website.
Financial Statements Statement of Comprehensive Income for the year ended 31 March 2019
| Year ended | For the period |
||
|---|---|---|---|
| 31 March |
1 May 2017 to |
||
| 2019 | 31 March 2018 |
||
| Notes | £'000 | £'000 | |
| Income | |||
| Rental and other income |
3 | 17,183 | 12,330 |
| Property operating expenses |
4 | (1,462) (1,106) | |
| Net rental and other income |
15,721 | 11,224 | |
| Other operating expenses |
4 | (2,075) (1,539) | |
| Directors' remuneration | 5 | (122) | (84) |
| Operating profit before fair value changes |
13,524 | 9,601 | |
| Change in fairvalue of investment properties |
10 | 4,184 | 1,014 |
| Realised loss on disposal of investment properties |
10 | (482) | (216) |
| Realised gains on disposal of investments |
- 73 |
||
| Operating profit |
17,226 | 10,472 | |
| Finance expense |
6 | (1,682) | (652) |
| Profit before tax |
15,544 | 9,820 | |
| Taxation | 7 | - | - |
| Profit after tax | 15,544 | 9,820 | |
| Other comprehensive income |
- - |
||
| Total comprehensive income for the year |
15,544 | 9,820 | |
| Earningsper share (pps) (basic and diluted) 8 |
10.26 | 7.17 |
Statement of Changes in Equity for the year ended 31 March 2019
| Total capital | ||||||
|---|---|---|---|---|---|---|
| Capital reserve and | and reserves |
|||||
| Share | premium | attributable to |
||||
| For the year ended | retained earnings |
ownersof the Company |
||||
| 31 March 2019 |
Notes | Share capital £'000 |
account £'000 £'000 |
£'000 | ||
| Balance at1 April 2018 |
1,515 | 49,768 | 94,751 | 146,034 | ||
| Total comprehensive income |
- - 15,544 | 15,544 | ||||
| Share issue costs |
19 | - 2 | - | 2 | ||
| Dividends paid |
9 | - - (12,124) (12,124) | ||||
| Balance at31 March 2019 |
1,515 | 49,770 | 98,171 | 149,456 | ||
| Capital reserve and | Total capital and reserves attributable to | |||||
| Share | ||||||
| premium | retained | owners of the |
||||
| For the period 1 May 2017 to 31 March |
2018 Notes | Share capital £'000 |
account £'000 | earnings | Company £'000 £'000 |
|
| Balance at1 May 2017 |
1,236 | 22,514 | 94,924 | 118,674 | ||
| Total comprehensive income |
- - 9,820 | 9,820 | ||||
| Ordinary Shares issued |
18/19 | 279 | 27,771 | - 28,050 |
||
| Share issue costs |
19 | - (517) | - (517) |
|||
| Dividends paid |
9 | - - (9,993) (9,993) | ||||
| Balance at31 March 2018 |
1,515 | 49,768 | 94,751 | 146,034 | ||
| The notes below form an integral part of these |
financial statements. | |||||
| Statement of Financial Position as at31 March 2019 |
||||||
| 31 March | 2019 31 March |
2018 | ||||
| Notes | £'000 £'000 |
|||||
| Assets | ||||||
| Non-Current Assets | ||||||
| Investment property | 10 | 196,129 187,751 |
||||
| 196,129 187,751 |
||||||
| Current Assets | ||||||
| Investment property held forsale |
10 | - 3,650 |
||||
| Receivables and prepayments |
11 | 4,469 2,938 |
||||
| Other financial assets held at fair value |
12 | 162 26 |
||||
| Cash and cash equivalents |
2,131 4,711 6,762 11,325 |
|||||
| Total Assets | 202,891 199,076 |
|||||
| Non-Current Liabilities | ||||||
| Interest bearing loans and borrowings |
13 | (49,476) (49,643) | ||||
| Finance lease obligations |
15 | (636) | (573) | |||
| (50,112) (50,216) | ||||||
| Current Liabilities | ||||||
| Payables and accrued expenses |
14 | (3,275) (2,779) | ||||
| Finance lease obligations |
15 | (48) (3,323) (2,826) |
(47) | |||
| Total Liabilities | ||||||
| Net Assets | (53,435) (53,042) | |||||
| 149,456 146,034 |
||||||
| Equity | ||||||
| Share capital Share premium account |
18 19 |
1,515 1,515 49,770 49,768 |
||||
| Capital reserve and retained earnings |
||||||
| 98,171 94,751 |
||||||
| Total capital and reserves attributable Net Asset Value per share (pps) |
to equity holdersof the | Company | 8 98.61 |
149,456 146,034 pps 96.36 |
pps | |
| The financial statements were approved |
by the Board on 21 June 2019 and signed | on its behalf by: | ||||
| Mark Burton |
||||||
| Chairman AEW UKREIT plc (Company number: 09522515) |
||||||
| The notes below form an integral part of these |
financial statements. | |||||
| Statement of Cash Flows |
||||||
| for the year ended 31 March 2019 |
||||||
| For the period |
||||||
| Year ended | 1 May 2017 to |
|||||
| Year ended 31 March |
For the period 1 May 2017 to 2019 31 March 2018 |
|---|---|
| £'000 | |
| 15,544 | 9,820 |
| 652 | |
| (4,184) (1,014) | |
| 216 | |
| - (73) |
|
| (701) | |
| 587 | (409) |
| 12,793 | 8,491 |
| £'000 1,682 482 (1,318) |
Purchase of investment properties (7,945) (63,896) Disposal of investment properties 6,629 10,856 Disposal of investments - 7,667
Cash flows from investing activities
Cash and cash equivalents at end of the year/period 2,131 4,711
1. Corporate information AEW UK REIT plc (the 'Company') is a closed ended RealEstate Investment Trust ('REIT') incorporated on 1 April2015 and domiciled in the UK. The registered office of the Company is 6th Floor, 65 Gresham Street,London, EC2V 7NQ.The Company's Ordinary Shares were listed on the Official List of the FCA and admitted to trading on the Main Market of the London Stock Exchange on
12 May 2015. The nature of the Company's operations and its principal activities are setout in the Strategic Report above.
2. Accounting policies 2.1 Basisof preparation
These financial statements are prepared and approved by the Directors in accordance with IFRS and interpretations issued by the International Accounting Standards Board ('IASB') as adopted by the European Union ('EU IFRS'). The current period is for a period of 12 months from 1April 2018 to 31 March 2019. The comparative period is fora period of 11 months from 1 May 2017 to 31 March 2018.
These financial statements have been prepared under the historical cost convention, except for investment property 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 Act2006 from therequirement to
prepare group financial statements. These financial statements present information solely about the Company as an individual undertaking.
New standards, amendments and interpretations The following new standards and amendments to existing standards have been published and approved by the EU.The Company has applied the following standards from 1April 2018, with the year ended 31 March 2019 being the firstyear end reported under the standards: IFRS 9Financial Instruments (effective forannual periods beginning on or after 1 January 2018). The IFRS 9requirements represent a change from the existing requirements in IAS 39 in respect of financial assets. The standard contains two primary measurement categories for financial assets: amortised cost and fair value. A financial asset is measured at amortised cost if it is held within a business model whose objective is to hold assets in order to collect contractual cash flows, and the asset's contractual terms give rise on specified dates to cash flows that are solely payments ofprincipal and interest on the principal outstanding. All other financial assets are measured at fair value. The standard eliminates the
existing IAS 39 categories ofheld-to-maturity, available-for-sale and loans and receivables. Interest rate derivatives IFRS 9 requires that all derivative financial instruments are recognised at fair value in the statement of financial position. Changes in fair value are
recognised in profit or loss unless the contract is designated in an effective hedging relationship. Trade and other receivables Under IFRS 9there is no change to the classification and measurement of trade and other receivables, however there is a requirement to carry out an
ongoing assessment of expected credit losses using a general approach. The Company has made an assessment of expected credit losses ateach period end, using the simplified approach where a lifetime expected loss allowance is always recognised over the expected life of the financial instrument. Any adjustment is recognised in profit or loss as an impairment gain or loss. Following the adoption of IFRS 9, there is no material impact on the Company financial statements.
IFRS 15 Revenue from contracts with customers. IFRS 15 establishes a new framework for revenue recognition and replaces all existing standards and interpretations. IFRS 15 does not apply to lease contracts within the scope of IAS 17 Leases or,from its date of application, IFRS 16 Leases. This standard does not have a material impact on the Company's financial statements as presented forthe current year as the majority ofthe Company's revenue consists ofrental income from theCompany's investment properties, which is outside the scope of IFRS 15. IFRS 7Financial Instruments: Disclosures - amendments regarding additional hedge accounting disclosures (applies when IFRS 9 is applied). The changes did not have a material impact on the financial statements of the Company as hedge accounting is notapplied.
The following new standards and amendments to existing standards have been published and approved by the EU,and are mandatory for the Company's accounting periods beginning after 1April 2019 orlater periods. IFRS 16 Leases. In January 2016, the IASB published the finalversion of IFRS 16 Leases. IFRS 16 specifies how an IFRS reporter will recognise, measure, present and disclose leasing arrangements. The Company has decided against early adoption of IFRS 16 Leases.
The Company does not expect the adoption of new accounting standards issued butnot yet effective to have a significant impact on its financial statements. The right of use finance lease asset relating to head leases willbe required to be measured at the present value of future cash flows, however, the difference from theIAS 17 carrying value is expected to be insignificant in the context of the Company's financial statements. 2.2 Significant accounting judgements and estimates The preparation of financial statements in accordance with EU IFRS requires the Directors ofthe 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. There are notconsidered to be any judgements which have a significant effect on the amounts recognised in the financial statements. i) Valuation of investment property
The Company's investment property is held at fair value as determined by the independent valuer on the basis offair value in accordance with the internationally accepted RICS Appraisal and Valuation Standards. 2.3 Segmental information
In accordance with IFRS 8, the Company is organised into one main operating segment being investment in property in the UK. 2.4 Going concern The Directors have made an assessment of the Company's ability to continue as a going concern and are satisfied thatthe Company has the resources to
continue in business for at least 12 months from thedate of approval of these financial statements. Furthermore, the Directors are notaware 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.
2.5 Summary of significant accounting policies The principal accounting policies applied in the preparation of these financial statements are setout below.
a) Presentation currency These financial statements are presented in Sterling, which is the functional and presentational currency of the Company. The functional currency ofthe 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. b) Revenue recognition
i) Rental income
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 notmade 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 thatoption. ii) Deferred income
c) Dividend income Dividend income is recognised in profit or loss on the date the entity's right to receive a dividend is established.
Deferred income is rental income received in advance during the accounting period.
d) Financing income and expenses Financing income comprises interest receivable on funds invested. Financing expenses comprise interest and other costs incurred in connection with the borrowing of funds. Interest income and interest payable are recognised in profit or loss as they accrue, using the effective interest method.
e) Investment property Property is classified as investment property when it is held to earn rentals orfor capital appreciation or both. Investment property is measured initially atcost 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 partof an existing investment property at the time thatcost 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 fairvalues are included in profit or loss. Investment properties are valued by the independent valuer on the basis ofa 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 offixtures and fittings, plant and machinery, any environmental matters and the overall repair and condition
of the property) and discount rates applicable to those cash flows. For the purposes ofthese financial statements, the assessed fairvalue is: reduced by the carrying amount of any accrued income resulting from thespreading of lease incentives; and increased by the carrying amount of leasehold obligations. Investment property is derecognised when it has been disposed of or permanently withdrawn from useand no future economic benefit is expected after its disposal or withdrawal.
The profit on disposal is determined as the difference between the netsales proceeds and the carrying amount of the asset at the commencement of the accounting period plus capital expenditure in the period. Any gains orlosses on the retirement or disposal of investment property are recognised in the profit or loss in the year of retirement or disposal. f) Investments in subsidiaries AEW UKREIT 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 Act2006, the subsidiary is not consolidated as its inclusion is not material for the purposes of giving a true and fair view. g) Investment property held forsale Investment property is classified as held forsale when it is being actively marketed at year end and it is highly probable that the carrying amount will be recovered principally through a sale transaction within 12 months.
Investment property classified as held for sale is included within current assets within the Statement of Financial Position and measured at fair value. h) Derivative financial instruments 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 orpay 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 fairvalue of interest rate derivatives are recognised within finance expenses in profit or loss in the period in which they occur.
i) Cash and cash equivalents Cash and short-term deposits in the Statement of Financial Position comprise cash at bank and short-term deposits with an original maturity ofthree months orless. j) Receivables Rent and other receivables are initially recognised at fair value and subsequently atamortised cost. Impairment provisions are recognised based upon an
expected credit loss model. The Company has made an assessment of expected credit losses at each period end,using the simplified approach where a lifetime expected loss allowance is always recognised over the expected life of the financial instrument. Any adjustment is recognised in profit or loss as an impairment gain or loss.
k) Capital prepayments Capital prepayments are made forthe 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.
l) Other payables and accrued expenses Other payables and accrued expenses are initially recognised at fair value and subsequently held at amortised cost. m) Rent deposits Rent deposits represent cash received from tenants atinception of a lease and are subsequently transferred to the rent agent to hold on behalf of the Company.
n) Interest bearing loans and borrowings All loans and borrowings are initially recognised at fair value less directly attributable transaction costs. After initial recognition, interest bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Borrowing costs are amortised over the lifetime of the facilities through profit or loss. When the lifetime of a floating rate facility is extended, and this is considered to be a non-substantial modification, the effective interest rate is revised to reflect changes in market rates ofinterest.
o) Provisions 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 willbe required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate thatreflects risks specific to the liability.
p) Dividend payable to shareholders Equity dividends are recognised when they become legally payable.
q) Share issue costs The costs of issuing orreacquiring equity instruments (other than in a business combination) are accounted foras a deduction from equity. r) Finance leases Finance leases are capitalised at the lease commencement, at present value of the minimum lease payments, and held as a liability within the Statement of Financial Position.
s) Taxes Corporation tax is recognised in profit or loss except to the extent that it relates to items recognized 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 forthe period, using tax rates applicable in the period. Deferred tax is provided on temporary differences between the carrying amounts ofassets 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 orsettlement of the carrying
amount of assets and liabilities, using tax rates enacted orsubstantially enacted at the period end date. t) European Public Real Estate Association 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 to 31 March 2019, audited EPS and NAV calculations under EPRA's methodology are included in note 8 and further unaudited measures are included below.
Year ended
* Charged to share premium accountin 11 months ended 31 March 2018. Charged to Statement of Comprehensive Income in year ended 31 March 2019.
For the period
| 3. Revenue | ||
|---|---|---|
| Year ended | For the period 1 May 2017 to |
|
| 31 March £'000 |
2019 31 March 2018 £'000 |
|
| Gross rental income received |
17,179 | 12,330 |
| Other property income |
4 | - |
| Total revenue | 17,183 | 12,330 |
Rent receivable under the terms of the leases is adjusted forthe effect of any incentives agreed. 4. Expenses
Year ended 31 March 2019 £'000 For the period 1 May 2017 to 31 March 2018 £'000 Property operating expenses 1,462 1,106 Other operating expenses Investment management fee 1,302 989 Auditor remuneration 98 88 Costs associated with the drafting of a Prospectus* 181 - Other operating costs 494 462 Total other operating expenses 2,075 1,539 Total operating expenses 3,537 2,645 * During the year, costs were incurred in order to update the Prospectus ofthe Company. As no shares were issued in the year, these costs have been expensed in the year.
March 2019 £'000 May 2017 to March 2018 Audit Statutory audit ofAnnual Report and Financial Statements 79 65 Over accrual 2018 (4) - 65 Non-audit Review of Interim Report 23 23 Renewal of Company's Prospectus 2017* - 30 Renewal of Company's Prospectus 2019* 31 - 53 Total feespaid to KPMG LLP 129 118 Percentage oftotal fees attributed to non-audit services 42% 45%
5. Directors' remunerationYear ended For the period 1 May 2017 to
31 March 2019 £'000 31 March 2018 £'000 Directors' fees 114 80 Tax and social security 8 4 Total remuneration 122 84
A summary of the Directors' remuneration is set out in the Directors' Remuneration Report in the full Annual Report and Financial Statements. The Company had no employees in either period.
6. Finance expenses Year ended 31 March 2019 £'000 For the period 1 May 2017 to 31 March 2018 £'000 Interest payable on loan borrowings 1,103 540 Amortisation of loan arrangement fee 127 79 Agency fee payable on loan borrowings 3 (11) Commitment fees payable on loan borrowings 54 20 1,287 628
Charge in fair value of interest rate derivatives 395 24 Total 1,682 652
Year ended 31 March 2019 £'000 For the period 1 May 2017 to 31 March 2018
£'000 Total tax comprises Analysisof tax charge in the year/period Profit before tax 15,544 9,820
Theoretical tax atUK corporation tax standard rate of 19% (2018: 19.00%)1 2,953 1,866 Adjusted for:Exempt REIT income (2,249) (1,700) Non taxable investment profit (704) (166)
Total tax charge - -
1Standard rate of corporation tax was 19% to 31 March 2019. The corporation tax rate is to reduce to 17% witheffect from 1April 2020. Factors that may affect future tax charges At 31 March 2019, the Company had unrelieved management expenses of £8,405 (31 March 2018: £8,056). It is unlikely that the Company willgenerate 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 notprovided deferred tax on any capital gains and losses arising on the revaluation or disposal of investments. 8. Earningsper share and NAV per share For the period
| Year ended | 1 May 2017 to |
|
|---|---|---|
| 31 March 2019 |
31 March 2018 |
|
| Earningsper share: | ||
| Total comprehensive income (£'000) |
15,544 | 9,820 |
| Weighted average number of shares |
151,558,251 | 136,894,561 |
| Earningsper share (basic and diluted) (pence) |
10.26 | 7.17 |
| EPRA | ||
| earningsper share: Total comprehensive income (£'000) | 15,544 | 9,820 |
| Adjustment to totalcomprehensive income: |
||
| Change in fairvalue of investment properties (£'000) |
(4,184) (1,014) | |
| Realised loss on disposal of investment properties (£'000) |
482 | 216 |
| Realised gain on disposal of investments (£'000) |
- (73) |
|
| Change in fairvalue of interest rate derivatives (£'000) |
395 | 24 |
| Total EPRA Earnings (£'000) |
12,237 | 8,973 |
| EPRA earningsper share (basic and diluted) (pence) |
8.07 | 6.56 |
| NAV per share: |
||
| Net assets (£'000) |
149,456 | 146,034 |
| Ordinary Shares |
151,558,251 | 151,558,251 |
| NAV per share (pence) |
98.61 | 96.36 |
| EPRA NAV per share: |
||
| Net assets (£'000) |
149,456 | 146,034 |
| Adjustments | ||
| to netassets: Other financial assets held at fair value (£'000) |
(162) | (26) |
| EPRANAV (£'000) |
149,294 | 146,008 |
| EPRA NAV per share (pence) |
98.51 | 96.34 |
Earnings per share (EPS) amounts are calculated by dividing profit for the period attributable to ordinary equity holders ofthe Company by the weighted average number of Ordinary Shares in issue during the period. As at 31 March 2019, EPRA NNNAV was equal to IFRS NAV and ,as such, a reconciliation
9. Dividendspaid Year ended 31 March 2019 £'000 For the period 1 May 2017 to 31 March 2018 £'000 Fourth interim dividend paid in respect of the period 1 January 2018 to 31 March 2018 at 2.00p per Ordinary Share 3,031 - First interim dividend paid in respect of the period 1 April 2018 to 30 June 2018 at 2.00p per Ordinary Share 3,031 - Second interim dividend paid in respect of the period 1 July 2018 to 30 September 2018 at 2.00p per Ordinary Share 3,031 - Third interim dividend paid in respect of the period 1 October 2018 to 31 December 2018 at 2.00p per Ordinary Share 3,031 - Fourth interim dividend paid in respect of the period 1 February 2017 to 30April 2017 at 2.00p perOrdinary Share - 2,473 First interim dividend paid in respect of the period 1 May 2017 to 31 July 2017 at 2.00p perOrdinary Share - 2,473
| Second interim dividend paid in respect of the period 1August 2017 to 31 October 2017 at 2.00p per Ordinary Share |
- | 3,031 |
|---|---|---|
| Third interim dividend paid in respect of the period 1 November 2017 to 31 December 2017 at 1.33p per Ordinary |
||
| Share | - | 2,016 |
| Total dividendspaid during the year/period |
12,124 | 9,993 |
| Fourth interim dividend declared in respect of the period 1 January 2019 to 31 March 2019 at 2.00p perOrdinary |
||
| Share* | 3,031 | - |
| Fourth interim dividend declared in respect of the period 1 January 2018 to 31 March 2018 at 2.00p perOrdinary |
||
| Share | (3,031) | - |
| Fourth interim dividend declared in respect of the period 1 January 2018 to 31 March 2018 at 2.00p perOrdinary |
||
| Share** | - | 3,031 |
| Fourth interim dividend declared in respect of the period 1 February 2017 to 30April 2017 at 2.00p per Ordinary |
||
| Share | - (2,473) | |
| Total dividends in respect of the year/period |
12,124 | 10,551 |
* The fourth interim dividend declared is not included in the accounts as a liability as at year ended 31 March 2019. ** The fourth interim dividend declared is notincluded in the accounts as a liability as atperiod ended 31 March 2018. 10. Investments
between the two measures has not been presented.
| 10.a) Investment property | ||||
|---|---|---|---|---|
| 31 | March | 2019 | ||
| Investment property | Investment property | 31 March |
||
| 2018 | ||||
| freehold | leasehold | Total £'000 | Total £'000 | |
| £'000 | £'000 | |||
| UK investment property |
||||
| As at beginning of the year/period |
155,517 | 36,825 | 192,342 | 137,820 |
| Purchases in the year/period |
7,590 | - 7,590 | 64,186 | |
| Disposals in the year/period |
(7,053) | - (7,053) (11,050) | ||
| Revaluation of investment properties |
3,026 | 1,700 | 4,726 | 1,386 |
| Valuation provided by Knight Frank |
159,080 | 38,525 | 197,605 | 192,342 |
| Adjustment to fair value forlease incentive debtor |
(2,160) (1,561) | |||
| Adjustment for finance lease obligations* |
684 | 620 | ||
| Total investment property | 196,129 | 191,401 | ||
| Classified as: |
||||
| Investment properties | 196,129 | 187,751 | ||
| Investment properties held forsale |
- 3,650 | |||
| 196,129 | 191,401 | |||
| Losson disposal of the investment property |
||||
| Net proceeds from disposals ofinvestment property during the year/period |
6,629 | 10,856 | ||
| Carrying value at date of sale |
(7,053) (11,050) | |||
| Lease incentives amortised in current year/period |
(58) (22) | |||
| Loss realised on disposal of investment property |
(482) (216) | |||
| Change in fair value ofinvestment property |
||||
| Change in fairvalue before adjustments for lease incentives |
4,726 | 1,386 | ||
| Adjustment for movement in the year/period: | ||||
| in value of lease incentive debtor |
(542) (452) | |||
| in value of rent guarantee debtor |
- 80 |
Valuation of investment property 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 atfair value is determined by the external valuer on the basis ofmarket value in accordance with the internationally accepted RICS Valuation - Professional Standards (incorporating the International Valuation Standards). The determination of the fairvalue 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 offixtures and fittings, plant and machinery, any environmental matters and the overall repair and condition of the property) and discount rates applicable to those flows.
4,184 1,014
| Valuation of investment property 10.b) Investment |
||
|---|---|---|
| Year ended | For the period 1 May 2017 to |
|
| 31 March £'000 |
2019 31 March 2018 £'000 |
|
| Investment in AEW UKCore Property Fund |
||
| As at beginning of the year/period |
- 7,594 | |
| Disposals in the year/period |
- (7,594) | |
| Total investment in AEW UK Core Property Fund |
- - |
|
| Profit on disposal of the investment in AEW UKCore Property Fund |
||
| Proceeds from disposals of investments during the year/period |
- 7,667 | |
| Cost of disposal | - (7,594) | |
| Profit on disposal of investment |
- 73 |
Valuation of investment
Investments in collective investment schemes were stated at NAV with any resulting gain or loss recognised in profit or loss. Fair value is assessed by the Directors based on the best available information. As at 31 March 2019, the Company had no investment in theAEW UKCore Property Fund (31 March 2018: Nil).
| 10.c) Fair value measurement hierarchy The following table provides the fairvalue measurement hierarchy for investments: |
||||
|---|---|---|---|---|
| Quoted prices in active markets (Level 1) £'000 |
31 March Significant observable inputs (Level 2) £'000 |
2019 Significant unobservable inputs |
(Level 3) £'000 Total £'000 | |
| Assetsmeasured at fair value |
||||
| Investment property | - - |
- 196,129 - 196,129 |
196,129 196,129 |
|
| 31 March |
2018 | |||
| Quoted prices in active markets |
Significant observable inputs |
Significant unobservable inputs |
||
| (Level 1) £'000 | (Level 2) £'000 | (Level 3) £'000 Total £'000 | ||
| Assetsmeasured at fair value |
||||
| Investment property | - - |
191,401 | 191,401 |
191,401 191,401
Explanation of the fair value hierarchy: Level 1 - Quoted prices for an identical instrument in active markets; Level 2 - Prices of recent transactions for identical instruments and valuation techniques using observable market data; and
Level 3 - Valuation techniques using non-observable data. There have been no transfers between Level1 and Level 2 during either period, nor have there been any transfers in orout of Level 3.
Sensitivity analysis to significant changes in unobservable inputswithin Level 3 ofthe hierarchy The significant unobservable inputs used in the fair value measurement categorised within Level 3 of the fair value hierarchy of the entity's portfolio of investment property are: 1) ERV 2) Equivalent yield Increases/(decreases) in the ERV (persq ft per annum) in isolation would result in a higher/(lower) fair value measurement. Increases/(decreases) in the discount rate/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 ofthe portfolio investment property are as follows: Class Fair Value £'000 Valuation Technique Significant Unobservable Inputs Range 31 March 2019
Investment property* 197,605 Income capitalisation ERV Equivalent yield £1.00 - £127.00 5.87% - 10.25% 31 March 2018 Investment property* 192,342 Income capitalisation ERV Equivalent yield £1.00 - £145.00 3.14% - 10.72% *Valuation perKnight Frank LLP.
Where possible, sensitivity ofthe fairvalues 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 held at the end of the reporting period. With regards to investment property, 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 rentguarantee 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.
Change in ERV Change in equivalent yield Sensitivity analysis £'000 +5% £'000 -5% £'000 +5% £'000 -5% Resulting fair value of investment property 205,803 189,720 187,352 208,707 31 March 2018 Change in ERV Change in equivalent yield Sensitivity analysis £'000 +5% £'000 -5% £'000 +5% £'000 -5% Resulting fair value of investment property 203,903 188,297 185,985 206,943 11. Receivables and prepayments 31 March 2019 £'000 31 March 2018 £'000 Receivables Rent debtor 1,438 1,074 Allowance forexpected credit losses (39) - Rent agent float account 92 81 Other receivables 420 179 1,911 1,334 Lease incentive debtor 2,160 1,561
31 March 2019
4,071 2,895 Prepayments Property related prepayments 4 13 Listing fees - 16 Other prepayments 394 14 398 43 Total 4,469 2,938
The aged debtor analysis ofreceivables is as follows: 31 March 2019 £'000 31 March 2018 £'000
Less than three months 1,911 1,334 Between three and six months - - Between six and twelve months - - Total 1,911 1,334
12. Interest rate derivatives 31 March 2019 £'000 31 March 2018 £'000 At the beginning of the year/period 26 31
Interest rate cap premium paid531 19 Changes in fairvalue of interest rate derivatives (395) (24) At the end of the year/period 162 26
The Company is protected from a significant rise in interest rates as it has interest rate caps with a combined notional value of £36.51 million (31 March 2018: £36.51 million), resulting in the loan being 73% hedged (31 March 2018: 73%). These interest rate caps are effective until19 October 2020. The Company has entered into additional interest rate caps on a notional value of £46.51 million at 2.00% covering the extension period of the loan from 20 October 2020 to 19 October 2023.
Fair value hierarchy The following table provides the fairvalue measurement hierarchy for interest rate derivatives:
Valuation Quoted prices in active markets (Level 1) £'000 Significant observable input (Level 2) £'000 Significant unobservable inputs (Level 3) £'000 Total £'000 31 March 2019 - 162 - 162
31 March 2018 - 26 - 26 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 level1 and level 2 during the period, nor have there been any transfers between level2 and level3 during the year. The carrying amount of all assets and liabilities, detailed within the Statement of Financial Position, is
£'000
considered to be the same as their fair value. 13. Interest bearing loans and borrowings Bank borrowings 31 March 2019 31 March 2018
£'000 At the beginning of the year/period 50,000 29,010 Bank borrowings drawn in the year/period - 20,990 Interest bearing loans and borrowings 50,000 50,000
Unamortised loan arrangement fees 524 357 At the end of the year/period 49,476 49,643 Repayable between 2 and 5 years 50,000 50,000
The Company has a £60.00 million (31 March 2018: £60.00 million) credit facility with RBSi of which £50.00 million (31 March 2018: £50.00 million) has been utilised as at 31 March 2019. Under the terms ofthe Prospectus, the Company has a target gearing of 25% Loan to GAV, but can borrow up to 35% Loan to GAV in advance of a capital raise orasset disposal. As at31 March 2019, the Company's gearing was 25.30% Loan to GAV (31 March 2018: 26.00%).
Under the terms ofthe loan facility, the Company can draw up to 35% Loan to NAV at drawdown. As at31 March 2019, the Company could draw a further £2.31 million up to the maximum 35% (31 March 2018: £1.11 million).
Borrowing costs associated with the credit facility are shown as finance costs in note 6 to these financial statements. On 22 October 2018, the Company extended the term of the facility by three years up to 22 October 2023, to mitigate the financing risk associated with Brexit. The margin remains unchanged, with the loan incurring interest at three month LIBOR +1.4%, which equated to an all-in rate of 2.32% as at31 March 2019 (31 March 2018: 2.11%).
Reconciliation to cash flows from financing activitiesBank borrowings 31 March 2019 £'000 31 March 2018 £'000
Balance atthe beginning of the year/period 49,643 28,740 Changes from financing cash flows Loan drawdown - 20,990 Loan arrangement fees (294) (166) Total changes from financing cash flows (294) 20,824 Other changes Amortisation of loan arrangement fees 127 79 Total other changes 127 79 Balance atthe end of the year/period 49,476 49,643
14. Payables and accrued expenses 31 March 2019 £'000 31 March 2018
£'000 Deferred income 1,137 993 Accruals 1,189 831 Other creditors 949 955 Total 3,275 2,779
15. Finance lease obligations 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: 31 March 2019 £'000 31 March 2018 £'000 Within one year 48 47 After one year but not more than five years 160 152 More than five years 476 421
636 573 Total 684 620
16. Guarantees and commitments As at 31 March 2019, there were capital commitments of£210,588 relating to works inApollo Business Park, Basildon (31 March 2018: £nil).
Operating lease commitments - as lessor The Company has entered into commercial property leases on its investment property portfolio. These non-cancellable leases have a remaining term of between zero and 24 years.
Future minimum rentals receivable under non-cancellable operating leases as at 31 March 2019 are as follows: 31 March 2019 £'000 31 March 2018
£'000 Within one year 16,387 16,932 After one year but not more than five years 41,304 47,858 More than five years 29,513 37,574 Total 87,204 102,364 During the year ended 31 March 2019 there were contingent rents totalling £67,591 (11 month period to 31 March 2018: £149,192) recognised as income.
17. Investment in subsidiary The Company has a wholly-owned subsidiary, AEW UKREIT 2015 Limited:
Name and company number Country ofregistration and incorporation Principal activity Ordinary Sharesheld AEW UKREIT 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 31 March 201 9, the Company held one share, 100% of the issued share capital. AEW UKREIT 2015 Limited is dormant and the cost of the subsidiary is £0.01 (31 March 2018: £0.01). The registered office ofAEW UKREIT 2015 Limited is 6th Floor, 65 Gresham Street, London, EC2V 7NQ.
18. Issued share capital 31 March 2019 31 March 2018 £'000 Number of Ordinary Shares £'000 Number of Ordinary Shares Ordinary Shares (nominal value £0.01 per share) authorised, issued and fully paid At the beginning of the year/period 1,515 151,558,251 1,236 123,647,250
Issued on admission to trading on the London Stock Exchange on 24 October 2017 - - 279 27,911,001 At the end of the year/period 1,515 151,558,251 1,515 151,558,251 On 24 October 2017, the Company issued 27,911,001 Ordinary Shares ata price of 100.5 pps, pursuant to the Initial Placing, Initial Offer for Subscription and Intermediaries Offer of the Share Issuance Programme, as described in the prospectus published by the Company on 28 September 2017. 19. Share premium account
31 March 2019 £'000 31 March 2018 £'000 The share premium relates to amounts subscribed forshare capital in excess of nominal value: Balance at the beginning of the year/period 49,768 22,514 Issued on admission to trading on the London Stock Exchange on 24 October 2017 - 27,771 Share issue cost (paid and accrued) 2 (517) Balance atthe end of the period/year 49,770 49,768
20. Financial risk management objectives and policies 20.1 Financial assets and liabilities
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 isa comparison by class ofthe carrying amounts and fairvalue of the Company's financial instruments that are carried in the financial statements.
31 March 2019 31 March 2018 Book Value £'000 Fair Value £'000 Fair Value £'000 Fair Value £'000 Financial assets Receivables 1 1,911 1,911 1,334 1,334 Cash and cash equivalents 2,131 2,131 4,711 4,711 Other financial assets held at fair value 162 162 26 26 Financial liabilities
Interest bearing loans and borrowings 49,476 50,000 49,643 50,000 Payables and accrued expenses 2 1,923 1,923 1,638 1,638 Financial lease obligations 684 684 620 620 1 Excludes lease incentive debtor &prepayments 2 Excludes tax,VATliabilities and deferred income
Interest rate derivatives are the only financial instruments classified as fair value through profit and loss. All other financial assets and 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 notmeasured at fair value in the financial statements. The difference between the fairvalue and book value of these items is not considered to be material. 20.2 Financing management The Company's activities expose it to a variety offinancial 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:
Market price risk Market price risk is the risk that future values ofinvestments in direct property and related property investments willfluctuate due to changes in market prices. To manage market price risk, the Company diversifies its portfolio geographically in the United Kingdom andacross 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 orsale, detailed research is undertaken to assess expected future cash flow. The Investment Management Committee of the Investment Manager meets twice monthly and reserves the ultimate decision with regards to investment purchases orsales. In order to monitor property valuation
fluctuations, the Investment Manager meets with the independent external valuer on a regular basis. The valuer provides a property portfolio valuation quarterly, so any movements in the value can be accounted forin a timely manner and reflected in the NAV every quarter.
Real estate risk The Company is exposed to the following risks specific to its 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 wellas 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 investment property difficult and inexact.
No assurances can be given thatthe valuations ofproperties willbe 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 forthe 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 realestate 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 notprospective investments for the Company. Credit risk Credit risk is the risk that the counterparty (to a financial instrument) or tenant (of a property) will cause a financial loss to the 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 ofScotland International Limited.
In respect of property investments, in the event of a default by a tenant, the Company willsuffer a rental shortfall and additional costs concerning re-letting the property. The Investment Manager monitors tenant arrears in order to anticipate and minimise the impact of defaults by occupational tenants. The table below shows the Company's exposure to credit risk:
As at31 Match 2019 £'000 As at 31 March 2018 £'000 Debtors (excluding incentives and prepayments) 1,911 1,334 Cash and cash equivalents 2,131 4,711 Total 4,042 6,045
Liquidity risk Liquidity risk arises from theCompany's management of working capital, the finance charges and principal repayments on its borrowings. It is the risk that the Company willencounter difficulty in meeting its financial obligations as they fall due, as the majority ofthe Company's assets are investment properties and therefore notreadily 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: 31 March 2019 On demand £'000 < 3 months £'000 3-12 months £'000 1-5 years £'000 > 5 years £'000 Total £'000 Interest bearing loans and borrowings - 290 877 54,145 - 55,312 Payables and accrued expenses - 1,923 - - - 1,923 Finance lease obligation - - 51 205 4,307 4,563 - 2,213 928 54,350 4,307 61,798 31 March 2018 On demand £'000 <3 months £'000 3-12 months £'000 1-5 years £'000 > 5 years £'000 Total £'000
Interest bearing loans and borrowings - 228 678 51,422 - 52,328 Payables and accrued expenses - 1,638 - - - 1,638 Finance lease obligation - - 51 205 3,128 3,384 - 1,866 729 51,627 3,128 57,350 21. Capital management The primary objectives ofthe Company's capital management are to ensure that it continues to qualify for UK REIT status and complies with its 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 totalportfolio. The Company's policy is to target a borrowing levelof 25% loan to GAV and can borrow up to a maximum of 35% loanto GAV in advance of a capital raise orasset disposal. It is currently anticipated that the levelof total borrowings willtypically be at the levelof 25% 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 ofPart 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 year. The monitoring of the Company's level of borrowing is performed primarily using a Loan to GAV ratio,which is calculated as the amount of outstanding debt divided by the totalvaluation of investment property. The Company Loan to GAV ratio at the year end was 25.30% (31 March 2018: 26.00%). Breaches in meeting the financial covenants would permit the bank to immediately callloans and borrowings. During the year under review, the Company did not breach any ofits loan covenants, nor did it default on any other of its obligations under its loan agreements. 22. Transactionswith related parties 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 31 March 2019, the Directors ofthe Company are considered to be the key management personnel. Details ofamounts paid to Directors for their services can be found within note 5, Directors' remuneration. AEW UK Investment Management LLP is the Company's Investment Manager and has been appointed as AIFM. Under the terms ofthe Investment Management Agreement, the Investment Manager is responsible forthe day-to-day discretionary management of the Company's investments subject to the investment objective and investment policy of the Company and the overall supervision of the Directors. The Investment Manager is entitled to receive a quarterly management fee in respect of its services calculated at the rate of one-quarter of 0.9% of the prevailing NAV (excluding uninvested proceeds from fundraisings).
During the year, the Company incurred £1,302,153 (31 March 2018: £988,612) in respect of investment management fees and expenses, of which £328,323 (31 March 2018: £469,239) was outstanding as at31 March 2019. 23. Segmental information Management has considered the requirements ofIFRS 8 'operating segments'. The source of the Company's diversified revenue is from theownership of investment properties across the UK. Financial information on a portfolio basis is provided to senior management of the Investment Manager and the Directors, which collectively comprise the chief operating decision maker. The properties are managed on a portfolio basis and the chief operating decision maker assesses performance and makes resource allocation decisions atthe portfolio level(being the totalinvestment property portfolio held by the
company). Therefore, the Company is considered to be engaged in a single segment of business, being property investment and in one geographical area, United Kingdom.
24. Events after reporting date Dividend On 26 April 2019, the Board declared its fourth interim dividend of 2.00 pps, in respect of the period from 1 January 2019 to 31 March 2019. This was paid on 31 May 2019, to shareholders on the register as at10 May 2019. The ex-dividend date was 9 May 2019.
EPRA Unaudited Performance Measures Detailed below isa summary table showing the EPRA performance measuresof the Company All EPRA performance measures have been calculated in line with EPRA BestPractices Recommendations Guidelines which can be found at www.epra.com.
MEASUREAND 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. £12.24 million/8.07 pps EPRA earnings for year to 31 March 2019 (11 month period to 31 March 2018: £8.97 million/6.56 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 realestate investment company with a long-term investment strategy. £149.29 million/98.51 pps EPRA NAV as at 31 March 2019 (31 March 2018: £146.01 million/96.34 pps) 3. EPRA NNNAV EPRANAV 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. £149.46 million/98.61 pps EPRA NNNAV as at31 March 2019 (31 March 2018: £146.03 million/96.36 pps) 4.1 EPRA 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 ofthe 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 7.62% EPRA NIY as at 31 March 2019 (31 March
2018: 7.73%)
portfolio Y. 4.2 EPRA 'Topped-Up' NIY This measure incorporates an adjustment to the EPRA NIY inA comparable measure for portfolio valuations. This 8.58%
property, increased with (estimated) purchasers' costs.
| 2018: 8.52%) that is 2.99% EPRA ERV as at 31 March 2019 (31 March |
|
|---|---|
| 6. EPRA CostRatio Administrative and operating costs (including by gross rental income. A and excluding key measure to enable meaningful measurement of the costs ofdirect vacancy) divided changes in a company's operating costs. |
2018: 7.10%) 21.04% EPRA Cost Ratio (including direct vacancy |
| costs) as at 31 March 2019 2018: 21.89%) 15.81% (31 March EPRA Cost Ratio (excluding direct vacancy costs) as at 31 March 2019 2018: 14.89%) (31 March |
|
| Calculation of EPRA Net Initial Yield and 'topped-up' Net Initial Yield Year ended For the period 31 March 1 May 2017 to 2019 31 March 2018 |
|
| £'000 £'000 Investment property -wholly-owned 197,605 192,342 Allowance forestimated purchasers' costs 13,437 13,079 Grossed-up completed property portfolio valuation 211,042 205,421 |
|
| Annualised cash passing rental income 16,725 17,046 Property outgoings (651) (1,174) |
|
| Annualised net rents 16,074 15,872 Rent from expiry of rent-free periods and fixed uplifts 2,023 1,626 |
|
| 'Topped-up' net annualised rent 18,097 17,498 EPRA NIY 7.62% 7.73% EPRA 'topped-up' NIY 8.58% 8.52% |
|
| EPRA NIY basisof calculation EPRANIY iscalculated as the annualised netrent, divided by the gross value of the completed property portfolio. |
|
| The valuation of grossed-up completed property portfolio is determined by the Company's external valuers as at 31 March estimated purchaser's costs. Estimated purchaser's costs are determined by the relevant stamp duty liability, plus an estimate legal fees on notional acquisition. The net rent deduction allowed forproperty outgoings is based on the Company's non-recoverable revenue expenditure. |
2019, plus an allowance for by our valuers ofagent and valuers' assumptions on future recurring |
| In calculating the EPRA 'topped-up' NIY, the annualised netrent is increased by the total contracted rentfrom contracted rental uplifts. Calculation of EPRA Vacancy Rate |
expiry ofrent-free periods and future |
| For the period Year ended 1 May 2017 to 31 March 2019 31 March 2018 £'000 £'000 |
|
| Annualised potential rental value of vacant premises 522 1,254 Annualised potential rental value forthe complete property portfolio 17,484 17,677 EPRA Vacancy Rate 2.99% 7.10% |
|
| Calculation of EPRA CostRatios For the period Year ended 1 May 2017 to |
|
| 31 March 2019 31 March 2018 £'000 £'000 Administrative/operating expense perIFRS income statement 3,660 2,729 |
|
| Less: ground rent costs (58) (38) EPRA costs (including direct vacancy costs) 3,602 2,691 |
|
| Direct vacancy costs (see Glossary in full Annual Report for further details) (895) (861) EPRA costs (excluding direct vacancy costs) 2,707 1,830 Gross rental income less ground rent costs 17,121 12,292 |
|
| EPRA CostRatio (including direct vacancy costs) 21.04% 21.89% EPRA CostRatio (excluding direct vacancy costs) 15.81% 14.89% |
|
| Company Information Share Register Enquiries |
|
| The register for the Ordinary Shares is maintained by Computershare Investor Services PLC. In the event of queries regarding the Registrar on +44 (0)370 707 1341 oremail: [email protected]. Changes ofname and/or address must be notified in writing to the Registrar, at the address shown below. You |
your holding, please contact can check your shareholding and find |
| practical help on transferring shares orupdating your details at www.investorcentre.co.uk. Shareholders eligible to receive may also download declaration forms from that website. Share Information |
dividend payments gross oftax |
| Ordinary £0.01 Shares 151,558,251 SEDOL Number BWD2415 ISIN Number GB00BWD24154 Ticker/TIDM AEWU |
|
| Share Prices The Company's Ordinary Shares are traded on the premium segment of the Main Market of the London Stock Exchange. |
|
| Frequency ofNAV publication: The Company's NAV isreleased to the London Stock Exchange on a quarterly basis and is published on the Company's |
website. |
| Annual and Half-Yearly Reports Copies oftheAnnual and Half-Yearly Reports are available from theCompany's website. Financial Calendar |
|
| 12 September 2019 Annual General Meeting 30 September 2019 Half-year end November/December 2019 Announcement of half-yearly results 31 March 2020 Year end June 2020 Announcement of annual results |
|
| Dividends The following table summarises the amounts distributed to equity shareholders in respect of the period: |
|
| £ Interim dividend forthe period 1April 2018 to 30 June 2018 (payment made on 31August 2018) 3,031,165 Interim dividend forthe period 1 July 2018 to 30 September 2018 (payment made on 30 November 2018) 3,031,165 Interim dividend forthe period 1 October 2018 to 31 December 2018 (payment made on 28 February 2019) 3,031,165 |
|
| Interim dividend forthe period 1 January 2019 to 31 March 2019 (payment made on 31 May 2019) 3,031,165 |
|
| Total 12,124,660 |
|
| Directors Mark Burton (Non-executive Chairman) Katrina Hart (Non-executive Director) James Hyslop (Non-executive Director) Bimaljit (''Bim'') Sandhu* (Non-executive Director) |
|
| * independent of the Investment Manager Registered Office |
|
| 6 th Floor 65 Gresham Street London EC2V 7NQ |
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| Investment Manager and AIFM AEW UKInvestment Management LLP 33 Jermyn |
|
| Street London SW1Y 6DN Tel: 020 7016 4880 Website: www.aewuk.co.uk |
|
| Property Manager MJ Mapp 180 Great Portland |
|
| Street London W1W 5QZ Corporate Broker Liberum |
|
| Ropemaker Place 25 Ropemaker Street London EC2Y 9LY |
|
| Legal Adviser Gowling WLG (UK) LLP 4 More London Riverside London |
|
| SE1 2AU Depositary Langham Hall UK LLP |
|
| th Floor 1 Fleet Place 8 London EC4M 7RA |
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| Administrator Link Alternative FundAdministrators Limited Beaufort House 51 New |
|
| North Road Exeter EX4 4EP Company Secretary Link Company Matters Limited |
|
| th Floor 65 Gresham 6 Street London EC2V 7NQ |
|
| Registrar Computershare Investor Services PLC The Pavilions |
|
| Bridgwater Road Bristol BS13 8AE Auditor KPMG LLP 15 Canada Square |
|
| Canary Wharf London E14 5GL Valuer Knight Frank LLP |
Copiesof the Annual Report and Financial Statements and the Notice ofAGM Printed copies ofthe Annual Report and Notice of the 201 9 Annual General Meeting will be sent to shareholders shortly and willbe available on the Company's website.
National Storage Mechanism A copy ofthe Annual Report and Financial Statements willbe submitted shortly to the National Storage Mechanism ('NSM') and will be available for inspection at www.morningstar.co.uk/uk/NSM.
Annual General Meeting TheAGM will be held on 12 September 2019 at 12 noon at The Cavendish Hotel, 81 Jermyn Street, St. James', London SW1Y 6JF.
ISIN: GB00BWD24154 Category Code: ACS
END
TIDM: AEWU LEICode: 21380073LDXHV2LP5K50 OAM Categories:1.1.Annual financial and audit reports Sequence No.: 11011
EQS News ID:828939
End ofAnnouncementEQS News Service
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