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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Medicx Fund | LSE:MXF | London | Ordinary Share | GG00B1DVQL92 | ORD NPV |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 96.40 | 95.80 | 96.00 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
From Apr 2019 to Apr 2024
TIDMMXF
RNS Number : 0226Z
The MedicX Fund Limited
12 December 2017
For immediate release
12 December 2017
MedicX Fund Limited
("MedicX Fund", "the Fund" or "the Company")
Results for the year ended 30 September 2017
BUILDING A BRIGHTER FUTURE FOR PRIMARY HEALTHCARE INVESTMENT
MedicX Fund is a leading investor in modern purpose-built primary healthcare properties. Our investment supports the transformation of the primary healthcare estate in the United Kingdom and Republic of Ireland.
FINANCIAL HIGHLIGHTS AND KEY ACHIEVEMENTS
A strong year, reflecting progress and achieving notable milestones.
FINANCIAL RESULTS
-- Continued increase in rent receivable, up 5.7% to GBP37.1million (2016: GBP35.1 million);
-- Profit before tax was GBP33.3 million for the year; 18.1% higher than the profit after before for 2016 of GBP28.2 million;
-- 7.5% increase in annualised rent roll(1) from GBP37.2 million to GBP40.0 million;
-- 89.7% (2016: 89.2%) of rent roll was directly from or reimbursed by the NHS, Irish GPs or HSE;
-- 2.9% increase in EPRA(11) earnings per Ordinary Share, from 3.4p per share to 3.5p per share;
-- Increase in underlying dividend cover to 69.5% (2016: 68.5%); -- 12.7% total return on EPRA NAV(2) for the financial year (2016: 11.8%); and -- Total Shareholder Return(3) of 9.6% (2016: 22.5%).
GOOD PROGRESS ON INVESTMENTS
-- 11.1% increase in the value of the property portfolio to GBP680.4 million(1,4) . This is as a result of GBP51.1 million of capital investment to acquire standing let properties and fund developments through forward funding schemes and a GBP18.6 million net valuation gain;
-- New committed investments in UK and Republic of Ireland, since 1 October 2016, of GBP49.4 million with an average cash yield of 5.22%(1) ;
-- GBP8 million average value of new committed investments and selective disposals improved portfolio quality; and
-- Substantially increased strong pipeline of approximately GBP175 million of acquisition opportunities(1) (2016: GBP108 million).
CAPITAL MANAGEMENT
-- Quarterly dividend of 1.5p per share announced on 1 November 2017(5) ; total dividends of 6.0p per Ordinary Share for the year or 6.6% dividend yield on a share price of 91 pence per share at 30 September 2017(6) (2016: total dividends of 5.95p per Ordinary Share; 6.7% dividend yield);
-- Total drawn debt facilities of GBP372.8 million with an average all-in fixed rate cost of debt of 4.29% and an average unexpired term of 12.7 years, close to the average unexpired lease term of the investment properties of 14.1 years and compared with 4.45% and 14.0 years for the prior year(1) ;
-- Net debt of GBP340.7 million equating to 49.5% adjusted gearing at 30 September 2017 (30 September 2016: GBP315.3 million; 50.8%)(1,7) ; and
-- Market capitalisation GBP390.0 million1 following share price appreciation and GBP34.6 million net proceeds raised from 39.8 million shares issued since 1 October 2016 at an average issue price of 87.9 pence per share.
Unadjusted performance measures
Hot Features
Premium
2017 2016
------------------------------ ------ ------ ----------
Rent receivable (GBPm) 37.1 35.1 +5.7%
Profit before tax (GBPm) 33.3 28.2 +18.1%
Earnings per Ordinary Share
(pence)(1) 9.4 7.1 +32.4%
Dividend cover(8) 59.2% 64.0% -4.8(10)
Property valuation (GBPm)(4) 680.4 612.3 +11.1%
Weighted average debt term
(years) 12.7 14.0 -1.3
Net Asset Value per Ordinary
Share (pence)(1) 76.3 71.7 +6.4%
Total Shareholder Return(3) 9.6% 22.5% -12.9(10)
------------------------------ ------ ------ ----------
Adjusted performance measures
2017 2016
----------------------------------- ------ ------ ---------
EPRA earnings per Ordinary
Share (pence)(9) 3.5 3.4 +2.9%
EPRA Net Asset Value per Ordinary
Share (pence)(9) 76.5 73.2 +4.5%
Total return on EPRA Net Asset
Value(2) 12.7% 11.8% +0.9(10)
Underlying dividend cover(8) 69.5% 68.5% +1.0(10)
----------------------------------- ------ ------ ---------
The Directors believe that presenting the above adjusted performance measures assists readers of the financial statements in understanding and analysing the performance and position of the Group, as well as providing industry standard measures for benchmarking against other companies. In particular, the Directors believe EPRA measures provide more meaningful industry standard key performance indicators.
Underlying dividend cover shows the expected outcome once all properties under construction are completed from existing resources and generating rental income.
1 As at the financial year end of 30 September 2017
2 Movement on EPRA NAV per share between 30 September 2016 and 30 September 2017 and dividends paid during the year, divided by opening EPRA NAV per share
3 Based on share price movement between 30 September 2016 and 30 September 2017 and dividends paid and reinvested during the year
4 As shown in note 8 to the financial statements
5 Ex-dividend date 16 November 2017, record date 17 November 2017, payment date 29 December 2017
6 Total dividends declared for the year divided by share price at 30 September 7 As shown in note 24 to the financial statements
8 Dividend cover is based on EPRA NAV. Underlying dividend cover includes impact of properties under construction treated as completed properties
9 As disclosed in note 7 to the financial statements 10 Percentage point change 11 EPRA is the European Public Real Estate Association
For further information please contact:
MedicX Fund +44 (0) 1481 723 450
David Staples, Chairman
Octopus Healthcare Group +44 (0) 20 3142 4820
Mike Adams, Chief Executive Officer
Canaccord Genuity +44 (0) 20 7523 8000
Andrew Zychowski/Helen Goldsmith
Buchanan +44 (0) 20 7466 5000
Charles Ryland/Vicky Hayns/Henry Wilson
A meeting for analysts will be held at Buchanan, 107 Cheapside, London, EC2V 6DN today, Tuesday 12 December 2017 commencing at 9:30am. MedicX Fund Full Year Results 2017 are available at www.medicxfund.com
An audio webcast of the analysts' meeting will be available from 12 noon today:
http://vm.buchanan.uk.com/2017/medicx121217/registration.htm
Information on MedicX Fund Limited
MedicX Fund Limited (the "Fund" or the "Company", or together with its subsidiaries, the "Group") is the specialist primary care infrastructure investor in modern, purpose-built primary healthcare properties in the United Kingdom and Ireland, listed on the London Stock Exchange, with a portfolio comprising 152 properties.
The Investment Adviser to the Company is Octopus Healthcare Adviser Ltd, which is part of the Octopus Healthcare group. Octopus Healthcare invests in and develops properties as well as creating partnerships to deliver innovative healthcare buildings to improve the health, wealth and wellbeing of the UK. It currently manages over GBP1.2 billion of healthcare investments across a number of platforms, with a focus on five core areas: GP surgeries, care homes, special education schools, retirement housing and private hospitals. Octopus Healthcare is part of the Octopus group, a fast-growing UK fund management business with leading positions in several specialist sectors including healthcare property, energy, property finance and smaller company investing. Octopus manages GBP7 billion of funds for more than 50,000 retail and institutional investors as well as supplying energy to more than 100,000 customers
Octopus Healthcare Adviser Ltd is authorised and regulated by the Financial Conduct Authority.
The Company's website address is www.medicxfund.com. Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website), nor the contents of any website accessible from hyperlinks within this announcement, are incorporated into, or forms part of, this announcement.
The Company's Legal Entity Identifier is 2138008POF35FTNFCB25
Chairman's statement
I am pleased to present the eleventh annual report for the Company, on behalf of the Board.
"This year the Fund has continued to execute its strategy of selectively buying high quality, larger, locally strategic and sustainable properties. The Board believes this focus and its discipline of not overpaying will deliver better long term returns"
The need for modern purpose built primary healthcare premises remains a high priority in order that the NHS can deliver its five year forward view. The Government announced in the 2017 Autumn Budget new additional funding of GBP6.3 billion for frontline NHS services and upgrades to buildings and facilities in England. Despite wider market uncertainty following the result of the EU referendum, primary healthcare property investment values remain resilient with the assets becoming more important for society in general. Underpinned by a high quality portfolio generating secure, long term income and long term fixed rate funding, the Company continues to offer a compelling investment proposition as it looks to support primary healthcare transformation in both the UK and Republic of Ireland.
During the year, the Fund grew its portfolio by over 11%, diversified its capital base and achieved a number of notable milestones. Year on year, both IFRS reported earnings and Net Asset Value per share grew as did the industry standard adjusted measures of EPRA earnings and EPRA Net Asset Value per share at a time when the number of new primary healthcare schemes being commissioned remains low and rent review uplifts remained challenging.
Highlights and strategic progress
Entry into the UK REIT Regime
Following approval by more than 99% of voting members at the Extraordinary General Meeting on 12 September 2017, the Fund elected to enter the UK REIT regime with effect from 1 October 2017. The Fund is now exempt from corporation tax on its UK qualifying property income and capital gains on disposals of UK investment properties. The Board believes that as the Fund matures and generates increasing amounts of taxable profit, conversion to UK REIT status will have the benefit of protecting shareholder returns by virtue of the tax exemptions, as well as potentially widening the appeal of the Company's shares to new investors.
Joint venture with key developer
In January 2017 the Company announced that it had entered into a joint venture agreement with General Practice Investment Corporation Limited ("GPIC"). A new company, jointly controlled by the two parties, was established to invest in UK primary healthcare properties, let to GPs or directly to the NHS, which either have asset management potential or where it is expected that by partnering with the tenants looking to relocate, new development opportunities will arise. The joint venture has already acquired its first investment property valued at just under GBP1 million but more importantly, from the relationship with the new GP tenants, significant progress has been made in helping them locate and plan a new site for their enlarged practice which will be formed by a merger with other local practices. This is expected to be an opportunity for the Fund to directly forward fund the new scheme.
At the same time as agreeing the joint venture, the framework agreement with GPIC, which has delivered c.GBP77 million of assets to the Fund since 2012, has been extended for a further five years. The relationship continues to work for the benefit of both parties and there is a pipeline of forward funding opportunities for the Fund including one in due diligence being proposed by GPIC.
New loan facilities reducing cost of debt
During the year, the Fund established two new loan facilities, diversifying its lender base and reducing its cost of debt and capital.
In March, the Fund entered into a new facility agreement for up to EUR29.1 million with the Bank of Ireland which initially provides development finance, followed by a five year term loan once the four Irish secured assets reach practical completion. The margin on the new facility is 4% over EURIBOR during the development phase, stepping down to 3% once practical completion and rent commences at each property. The Fund has drawn down funds under this facility from April 2017 and since then has not needed to purchase any Euros from its Sterling capital. This facility provides a natural part hedge against the Fund's Euro denominated properties and now established, is sustaining dividend cover which dipped during the initial period when the Irish investments were funded from the Company's equity capital. Through to the end of September 2017 the Fund drew down approximately EUR16.2 million against deployment of EUR30 million.
In July, the Fund raised GBP27.5 million through a private placement of loan notes bought by a new institutional lender to the Fund. The loan notes at the time had a duration of eleven years and two months maturing on 30 September 2028, with no amortisation and the principal repayable on maturity. The all-in interest rate payable on the notes is fixed for their term at 3.00% the lowest fixed long term rate the Fund has achieved to date.
This new facility, together with the full draw down of the Bank of Ireland development loan facility described above, reduces the average fixed rate of debt for the Fund to 4.29% from 4.45% with an average unexpired term of 12.7 years at 30 September, closely matching the average remaining unexpired lease term of the Fund's portfolio of 14.1 years.
Disciplined acquisition progress
During the first six months of the year the Fund achieved a strong start despite new scheme approvals remaining very scarce in the UK. Over the year, the Fund committed the equivalent of GBP49.4 million at an average cash yield of 5.22%. Although the committed funds for the financial year 2017 compare favourably to GBP35.0 million in 2016, we expected more. Asset prices continue to strengthen and we have continued to be very disciplined in our approach to what we buy and careful not to overpay. This, we believe, will pay off in the long run when the quality of the portfolio will realise its advantages.
I am pleased to report that progress in the Republic of Ireland was very encouraging. The Fund's first forward funding scheme in the Ireland, in Mullingar, reached practical completion in February 2017 and is fully let and delivering services to its local community with a rent roll of just over EUR1 million per annum. Since completion the HSE has commissioned a Child and Adolescent Mental Health Services ("CAMHS") unit from an extension on the site which will increase the rent roll further. The Fund is forward funding three other schemes in Ireland, two of which are expected to reach practical completion within the next three months and we have conditionally exchanged contracts on a fifth asset in Ireland which is fully occupied. Once fully let, the Fund's Irish properties will generate rent equivalent to approximately GBP3.0 million per annum.
Fund performance
The financial highlights reflect another solid period of growth for the Fund, with new commitments of GBP49.4 million and a revaluation uplift of GBP18.6 million driving portfolio growth of 11.1% over the financial year to GBP680.4 million. Over the year the rent roll increased 7.5% to GBP40 million which led to a 5.7% increase in rent receivable from GBP35.1 million to GBP37.1 million. This portfolio growth has led to an increase in EPRA Net Asset Value per share of 4.5% from 73.2 pence per share to 76.5 pence per share together with a 3% growth in EPRA earnings per share from 3.4 pence per share to 3.5 pence per share.
This growth enabled the Company to follow its planned progressive dividend policy, with total dividends declared of 6.0p per Ordinary Share in respect of the year ended 30 September 2017, an increase of 0.8% compared with 5.95p per Ordinary Share in the prior year. This represented a dividend yield of 6.6% relative to a share price of 91 pence at the end of the year.
During the year, demand for the Fund's shares remained high and in February 2017 and August 2017 the Company put in place additional block listings of 17.8 million and 14.7 million shares respectively. Prior to putting in place the loan facilities described above, the Company raised GBP34.5 million net proceeds to fund investment through the issue of 39.75 million new shares at an accretive premium of approximately 20% to the Company's EPRA NAV.
Overall, IFRS earnings per Ordinary Share grew 32.4% from 7.1 pps to 9.4 pps and the basic Net Asset Value grew 6.4% from 71.7 pps to 76.3 pps. The total return on EPRA NAV for the financial year was 12.7% (2016: 11.8%) from the payment of dividends of 5.9875 pence per share and EPRA NAV growth of 3.3 pence per share.
The Company's share price has remained resilient and stable throughout the year, trading in a narrow range between 87.0 and 92.25 pence per share since the beginning of 2017 through to 15 November 2017. Since then, the Company's share price has dipped which we believe is a result of a number of factors including, the share price going ex-dividend, general market volatility, a significant volume of primary and secondary fundraising activity in the investment company sector, and an expectation of higher interest rates in the medium term.
Funding
As detailed above, new debt facilities were put in place which have enabled the Fund to reduce its average cost of debt to 4.29% with a weighted average unexpired term of 12.7 years at 30 September 2017, closely matching the average remaining unexpired lease term of the Fund's portfolio of 14.1 years.
The new loan facilities were put in place as and when the Fund needed the cash which, together with judicious use of the RBS revolving credit facility, meant we were able to reduce cash drag. The adjusted gearing as at 30 September 2017, as detailed in note 24, was 50.0% (30 September 2016: 50.8%) which is in line with target and at the bottom of the range of 50 - 55% that the Directors are currently targeting within the policy of borrowings of approximately 50% on average over time but not exceeding 65% of the Company's total assets.
Dividends and dividend cover
As described above, the Company followed its planned progressive dividend policy for the year, with total dividends declared of 6.0p per Ordinary Share in respect of the year ended 30 September 2017 representing a dividend yield of 6.6%.
In keeping with the position at the mid-year, dividend cover measured against EPRA earnings remained at 59.2% for the full year to 30 September 2017 (30 September 2016: 64%), the reduction resulting from share issues in the year causing the Company's dividend commitment to grow more quickly than its earnings whilst funds raised were deployed into assets under construction generating no income. During the year GBP20.7 million had been invested into four such assets in the Republic of Ireland which at that time, had been solely funded through equity which had the effect of reducing dividend cover by 3.6%. Over the second half of the year the Company has drawn down debt financing to forward fund the Irish assets and once these assets are completed their combined expected rents of EUR3.5 million per annum will have the effect of significantly increasing dividend cover. Underlying dividend cover, which we calculate off an assumed fully built and let portfolio, was slightly higher however at 69.5% compared with 68.5%.
The Company remains committed to increasing dividend cover over time and is currently focusing on measures to grow EPRA earnings at a faster pace than the dividend. For the forthcoming year in response to the current dividend cover, low interest rate environment and continued low rental growth of the portfolio, the dividend increase will be a minimal 0.04 pence per Ordinary Share. Therefore, subject to unforeseen circumstances, the Directors expect that the Company will pay dividends totaling 6.04p for the financial year ending 30 September 2018.
Corporate governance
Board changes
Succession planning is regularly discussed at board meetings and in line with our plans, Shelagh Mason retired from the Board on 29 September 2017 having served for just over 11 years, the entire life of the Fund. On behalf of the Board, I would like to express my thanks to Shelagh for her fantastic contribution to the Fund and the Board during her term. In anticipation of Shelagh's retirement and to benefit from her wealth of knowledge and experience, on 1 April 2017 the Board appointed Helen Mahy, who has a legal background, as Director.
On 29 September, the Board was delighted to appoint Laure Duhot to the Board. Laure currently acts for a number of property firms and investors across Europe and brings additional skills and experience to the Board in the areas of real estate debt, corporate finance and UK REITs.
John Hearle, having been with the Company since launch, has served on the Board for eleven years and is standing again for re-appointment as director at the forthcoming Annual General Meeting. John, who has over 40 years of experience in primary healthcare property, is widely recognised within the industry as a leading figure through his previous and current roles with Aitchison Raffety, RICS, the Primary Care Premises Forum and from acting as an expert witness and arbitrator. His experience of the asset class is an enormous benefit to the Board and its ability to constructively challenge the Investment Adviser. These are the reasons that, despite his length of service, the Board is fully supportive of John's reappointment and believes he is still independent.
It has been my privilege to serve this Company as Chairman of the Board since October 2008, a period of more than nine years. In line with good corporate governance therefore and the belief that it is a good time for a change, I have decided not to stand for re-election at the next AGM in February 2018. I will continue to Chair the Company until then. The Board has decided that my replacement will be Helen Mahy. Helen is an experienced chairman and investment company director and I fully support her appointment. I would like to thank all those who have contributed over the years to the success of MedicX, my fellow Board members and Mike Adams and his dedicated team at Octopus Healthcare.
Commitment to diversity and other matters
At the current time the Board consists of five members, two of whom are resident in Guernsey, with three resident in the UK. The Board has members who hold professional qualifications in accountancy, law, property and taxation and is made up of three male and two female members.
The Board assesses its performance and composition annually and is of the view that it functions effectively and has an appropriate mix of skills to perform properly.
Sustainability
The Board is committed to adopting responsible environmental, social and governance policies. In support of these policies the Company has invited its members to register for electronic communications which will reduce the number of communications sent by post resulting in cost savings to the Company, whilst reducing the impact that the unnecessary printing and distribution of reports has on the environment. It is the Board's preference to provide, as far as possible, all documents via the Company's website to all shareholders who have not specifically elected to receive the information in hard copy.
Brexit
Following the results of the referendum in June 2016 where the UK voted to leave the European Union, the long-term impact on the UK remains highly uncertain with Brexit negotiations having progressed slowly.
The Fund however invests in a sector with ever increasing demand driven by growing, ageing populations and so independently of the macro economic factors, the assets that the Fund invests in will remain important and in demand and it is unlikely that a hard or soft exit would have a different direct effect on the Company since it does not rely on EU trade arrangements or staff from EU overseas countries. The Fund has reviewed its leases and facility agreements in relation to expected changes in legislation resulting from Brexit and no significant issues have been identified.
Global political factors do appear to be creating economic volatility and uncertainty. In the UK the NHS is being affected by EU citizens looking to repatriate. There will undoubtedly be some indirect effects on the Fund through volatility in the Sterling/Euro exchange rate, inflation, interest rates and new tax and regulatory legislation as Brexit unfolds but these will be monitored by the Fund.
The Market and Outlook
Following the publication of the Sir Robert Naylor report on the NHS Estate in March 2017, which highlighted the important role of primary healthcare premises in delivering the NHS Five Year Forward View policy, the Fund and its Investment Adviser has engaged with key stakeholders and influencers within the NHS and Government to demonstrate the potential benefits of the third party development ("3PD") procurement model.
The review recommended that the public sector partner with the private sector in supporting GPs and transforming the primary healthcare estate. We believe we have an important role to play in delivering value for money for the taxpayer as an investor in modern purpose-built primary healthcare properties. The Fund's focus on its portfolio quality together with healthcare transformation driven from modern purpose-built healthcare property places the Company in a strong position for further sustainable growth. The need for new primary care infrastructure is as compelling as it has ever been with GPs moving to work together at scale and the lack of new developments following the formation of Clinical Commissioning Groups.
The Fund has a strong pipeline of GBP175 million of investment opportunities and a track record of partnering with primary healthcare providers to deliver high quality services and a better patient experience through investment in modern purpose-built properties.
In light of the strong emerging pipelines in both the UK and Ireland as well as the positive experience of large purpose-built high quality assets in Ireland, the Board are of the view that the Fund is well positioned for growth.
David Staples
Chairman
11 December 2017
Market overview
The demand for new modern primary care infrastructure continues to be in both the UK and Republic of Ireland as the population ages and a wider range of clinical services is sought to be delivered over longer hours by GPs in their local communities. The Fund has a strong pipeline of live investment opportunities and a track record of partnering with primary healthcare providers to deliver high quality services and a better patient experience through investment in modern purpose-built properties.
United Kingdom
The long awaited independent report on NHS Property and Estates by Sir Robert Naylor was published in early 2017. It made a number of recommendations focussed on supporting the vision of the NHS Five Year Forward View and the 44 new Sustainability Transformation Plans ("STPs") across England, creating an affordable and efficient NHS estate, and selling surplus land for new housing development. The report highlights the importance of the private sector and how it can play an instrumental role in driving forward the strategic aims of the Forward View. The Department of Health's response is awaited.
An additional GBP325 million was given to the NHS in the 2017 Spring Budget to support the 15 strongest STPs. Cross-party support for increased NHS spending remains in place since the UK general election. In the recent Autumn Budget, the UK government has pledged to increase funding on frontline NHS services and upgrades to NHS buildings and facilities by a further GBP6.3 billion (above the GBP10 billion more per year pledged for the NHS by 2020-21) including GBP3.5 billion for capital investment for the NHS in England by 2022-23.
There continues to be a move towards formation of Accountable Care Organisations ("ACOs") to create locally integrated health systems spanning primary, secondary and social care. These are likely to need new premises solutions to deliver cost savings. Final funding allocations will be made upon business cases being successfully approved and will depend on robust wider estates and capital strategies.
As well as rising clinical demand and transformation from the UK government and the NHS, it has been well publicised that pressure on GPs continues to mount from increased regulation, rising numbers of consultations and recruitment challenges. Practices are continuing the move towards more collaborative working either through federations, super practices or the emerging ACOs.
Republic of Ireland ("RoI")
In the RoI there are similar demographic pressures requiring new primary care infrastructure and the Irish government continues to support their Primary Care Centre strategy delivering modern purpose built centres serving the local community.
Pricing and rents
The primary care investment sector has continued to see further yield compression during the year due to investor demand, reinforcing the attractiveness of the asset class. Market rental growth remains challenging for the sector due to a lack of new schemes to set new rental evidence but there is increasing acknowledgement from District Valuers that rising land costs and build costs are supporting higher rents for new schemes. In addition, UK RPI inflation increased to 3.9% over the twelve months to 30 September 2017 providing another strong indication of upward pressure on market rents.
Investment Advisor's Report
Building a brighter future for primary healthcare investment
"Practices are continuing the move towards more collaborative working either through federations, super practices or the emerging Accountable Care Organisations"
The market overview on above sets out the drivers of continuing strong demand in the UK and Irish markets. The Sir Robert Naylor report has made a number of recommendations and highlights the importance of the private sector in supporting the visions of the NHS Five Year Forward View and "STPs" in helping the commissioners create effective estates. The Fund is well positioned to rise to the challenge of supporting primary healthcare transformation through its enhancement and investment in modern purpose-built premises.
In the Republic of Ireland the Fund continues to build strong relationships with framework developers and now has four schemes committed. Mullingar is fully let having reached practical completion in February. The second scheme at Crumlin is expected to reach practical completion in December 2017 and the remaining schemes at Tallaght and Rialto are due to be completed in early 2018 and early 2019 respectively.
The Fund continues to work with its strategic development partners, engaging with provider groups and working with its tenants to deliver new schemes and premises improvements and to invest in "best in class" properties that meet the requirements of the STPs' underlying clinical and estates strategies and which will generate long term returns for shareholders. The Fund is well positioned to deliver new schemes by working closely with its preferred developers and provider groups to help the project commissioners transform the provision of primary healthcare.
Portfolio update
The UK market has remained highly competitive with continued downward pressure on yields, more competition and relatively high values being seen for assets of varied quality. During the year, the Group remained disciplined in committing new investment of GBP49.4 million and growing the portfolio to a value of GBP680.4 million across 156 properties, of which five were under construction at 30 September 2017 (2016: GBP612.3 million across 152 properties; 6 under construction).
In March 2017 MSCI published their primary care benchmark report. The Fund has recorded a consistent total property return of 9.1%, 9.8% and 9.7% over 1, 3 and 5 years comparing well with the primary healthcare benchmark of 9.1%, 9.6% and 8.7% over the same time periods.
The annualised rent roll of the property portfolio was GBP40.0 million, increased from GBP37.2 million at 30 September 2016, providing improving economies of scale and a stable platform to its operations.
The valuation of the portfolio undertaken by Jones Lang LaSalle Limited and Cushman & Wakefield, independent valuers to the Group, in aggregate stood at GBP689.9 million as at 30 September 2017 on the basis that all properties were complete, reflecting a UK net initial yield of 5.08% (2016: 5.17%).
The carrying value of GBP680.4 million reflects the cost to complete the assets currently under development and includes two sites valued at cost which is a strong proxy for their fair value.
At 30 September 2017, the property portfolio had an average age of 8.7 years, remaining average unexpired lease length of 14.1 years and an average property value of GBP4.4 million (30 September 2016: 8.5 years; 14.3 years; and GBP4.3 million). At 30 September 2017 the rents profile was as follows: 84.2% were from UK government-funded doctors and the NHS, 6.4% from the HSE and Irish GPs, 7.9% from pharmacies and 1.5% from other tenants.
During the year ended 30 September 2017, the Fund acquired a total of six properties to complement the existing portfolio, representing a total commitment of GBP49.4 million. In addition, successful completions were achieved for four properties previously under construction at Benllech, Brynhyfryd, Streatham and Mullingar. All completed projects, with a combined initial value of GBP22 million, were delivered within budget under fixed price contracts.
Construction continued on the existing projects at Crumlin and Rialto. Projects commenced at Brynmawr, Cromer and Tallaght, on the outskirts of Dublin. The outstanding commitment on these five properties at 30 September 2017 was GBP19.1 million, with all properties with the exception of Rialto expected to complete within the next six months.
In addition to new acquisitions, two capital expenditure asset management projects were funded during the year to enhance its existing portfolio of completed properties. Capital expenditure of GBP700,000 was incurred during the year with approximately GBP541,000 to complete the projects. This investment was focused on the two extensions at Pudsey and Shoreham which will result in new leases with a combined passing rent of GBP232,000 per annum at completion.
The Fund has a pipeline of identified investment opportunities of approximately GBP175 million and is described in more detail below.
Despite only two small disposals during the year, the Fund will continue to look to sell properties which no longer meet its long term investment criteria or have been identified within the CCG's estates strategy as less likely to be used for delivery of primary care beyond their existing lease term. Following the year end, in November, five such properties located in Wolverhampton, Southampton, Gravesend, Leicester and Grimsby were sold for consideration of GBP5,575,000, representing a gain of approximately GBP250,000 over the most recent external valuation.
The net initial valuation yield on UK investments was 5.08% compared with the Group's weighted average fixed rate debt of 4.29% and a benchmark 20-year gilt rate of 2.00% at 30 September 2017. Assuming the revolving credit facility is utilised and the new Bank of Ireland facility is drawn down, the Group's average cost of debt would fall further towards 4.17% which will enhance future returns. The spreads being achieved for Irish assets are significantly wider than those seen in the UK market.
Rent review performance
During the year, the portfolio averaged an overall uplift of 3.12%, equating to 1.02% per annum on its rent reviews. A total of 92 rent reviews have been concluded during the year, with a combined rental value of GBP9.0 million. Of these reviews, 0.52% per annum was achieved on open market reviews, 1.7% per annum was achieved on RPI based reviews and 2.38% per annum on fixed uplift reviews.
Outstanding rent reviews of GBP20.9 million of passing rent are currently under negotiation as at 30 September 2017.
Asset management
The Investment Adviser, on behalf of the Fund frequently reviews its portfolio for asset management opportunities and has identified a number of opportunities to enhance the portfolio mainly through extensions, re-configurations of internal space, new pharmacy opportunities and lease re-gearing. The Investment Adviser is actively engaging with CCGs to identify further asset management opportunities and is monitoring closely how GP federations, new provider groups and 'Super Practices' are forming in each locality. Two extensions and lease re-gear were completed in the period and the Investment Adviser is in detailed discussions on a further twelve asset management projects.
Overheads and progress on ongoing charges
During the year the Company incurred exceptional costs of GBP240,000 (2016: GBPnil) related to its conversion to a UK REIT. All these conversion costs have been incurred or accrued on entry to the REIT regime with effect from 01 October 2017. The Group has made further progress in reducing its Ongoing Charges Ratio ("OCR") (relative to average EPRA Net Asset Value) to 2.24% from 2.49% for 2016, (both including direct property costs), as the Group continues to scale its operations.
Discounted cash flow valuation of assets and debt
On the Fund's behalf, the Investment Adviser carries out a discounted cash flow ("DCF") valuation of the Group assets and associated debt at each period end. The basis of preparation is similar to that utilised by infrastructure funds. The values of each investment are derived from the present value of the property's expected future cash flows, after allowing for debt and taxation, using reasonable assumptions and forecasts based on the predominant lease at each property. The total of the present values of each property and associated debt cash flows so calculated is then aggregated with the surplus cash position of the Group.
At 30 September 2017, the DCF valuation stood at 98.5 pence per share compared with 96.6 pence per share at 30 September 2016, the increase resulting primarily from the property acquisitions made in the year.
We are aware that a number of infrastructure funds have lowered their UK and Ireland discount rates. However, in order to provide a consistent approach the assumptions applied in previous periods remain unchanged. The discount rates used were 7% for completed and occupied properties and 8% for properties under construction. These represented 2.5% and 3.5% risk premiums to an assumed 4.5% long term gilt rate. The weighted average discount rate is 7.07% and this represented a 5.07% risk premium to the 20 year gilt rate at 30 September 2017 of 2.0%.
The discounted cash flows assume an average 2.5% per annum increase in individual property rents at their respective review dates and also assume the level of gearing and cost of debt are maintained at current levels. Residual values continue to be based upon capital growth at 1% per annum from the current valuation until the expiry of leases (when the properties are notionally sold).
For the discounted cash flow net asset value to equate to the share price as at 30 September 2017 of 91.0 pence per share, the discounted cash flow calculation would have to assume a 1.2% increase in rents per annum, or a weighted average discount rate of 7.9% or capital growth of 0.1%.
Pipeline and investment opportunity
The spread between the yields at which the Fund can acquire properties and the cost of long term debt and government gilts remains significant but had narrowed noticeably over the year. The Investment Adviser has continued to successfully source properties both through Octopus Healthcare's development arm, Octopus Healthcare Property Ltd, and through its established relationships with investors, developers and agents in the sector. The Fund currently has access to a growing high quality property pipeline, subject to contract, which has a value of approximately GBP175 million when fully developed.
At 30 September the UK pipeline was GBP85.0 million and the Irish pipeline was the equivalent of GBP90.0 million. Of these opportunities, GBP15.8 million of assets in the UK, and GBP20.3 million of assets in Ireland were undergoing legal due diligence.
Since 30 September a further GBP38.2 million of UK schemes in the pipeline have moved into legal due diligence and the commitment at Vale of Neath of GBP4.6 million was completed. These opportunities have been sourced from best in class developers and tailored specifically to the needs of the GPs and other care service providers to produce the highest quality sustainable end product. All are important healthcare premises within their locality.
Financing
The Fund entered into a new facility agreement on 6 March 2017 for up to EUR29.1 million with the Bank of Ireland, as well as a new loan note facility agreement on 27 July 2017 with a new institutional investor for GBP27.5 million.
The weighted average unexpired term of all drawn debt at 30 September 2017 was 12.7 years, closely matching the average remaining unexpired lease term of 14.1 years of the Fund's portfolio. The debt strategy remains to try to pick the optimal time to put in place the best available debt facilities with the most favourable terms whilst ensuring adherence to the Company's gearing target.
The adjusted gearing as at 30 September 2017 was 49.5% which is in line with target and marginally decreased from 50.8% as at 30 September 2016. The Directors will continue to target borrowings of approximately 50% on average over time but not exceeding 65% of the Company's total assets.
The covenants on all debt facilities were complied with, within the period and since the year end.
Net asset value and sensitivity
The Fund's progress and performance has been positive with unadjusted NAV at 30 September 2017, having increased 6.4% to 76.3 pence per share (30 September 2016: 71.7 pence per share). EPRA Net Asset Value ("EPRA NAV") as at 30 September 2017 increased by 15.4% to GBP327.8 million or by 4.5% to 76.5 pence per share (30 September 2016: GBP284 million or 73.2 pence per share).
A review of sensitivities has been carried out in relation to the valuation of properties. If valuation yields firmed by 0.25% to a net initial yield of 4.83%, the EPRA NAV would increase by approximately 8.4 pence per share to 84.9 pence per share and the EPRA NNNAV would increase to 74.8 pence per share. However, if valuation yields widened by 0.25% to a net initial yield of 5.33%, the EPRA NAV would decrease by approximately 7.7 pence per share to 68.8 pence per share and the EPRA NNNAV would decrease to 58.7 pence per share.
Interest in voting rights of the Company
The Investment Adviser has a beneficial interest in the following number of shares in the Company:
30 September 30 September
2017 2016
-------------------------------- ------------- -------------
Octopus Healthcare Adviser Ltd 2,297,336 2,149,537
-------------------------------- ------------- -------------
The number of shares held by Octopus Healthcare Adviser Ltd as at the date of this report is 2,297,336, equivalent to 0.54% of the issued share capital of the Company.
During the year the Investment Adviser received dividends on its holding in the Company in addition to fees received for services. With the Scrip Dividend Scheme in place, the Investment Adviser received all its dividends in the form of new Ordinary Shares. The cash equivalent of the dividends received by the Investment Adviser was GBP132,147 compared with GBP116,543 in the prior year.
Mike Adams
Chief Executive Officer - Octopus Healthcare Adviser Ltd
11 December 2017
Principal risks and uncertainties
The principal risks and uncertainties relating to the Group are regularly reviewed by the Board along with the internal controls and risk management processes that are used to mitigate these risks.
STRATEGIC RISKS
Description Mitigation Movement
----------------------------------------------------------------- ---------------------------------------------------------------------------- --------
Government policy:
* Changes to the NHS funding model for the primary
healthcare sector could lead to a reduction in * The Investment Adviser provides an update on any
development opportunities available to the Company. expected changes in NHS provision at each Board
meeting for consideration by the Board. The current
government has stated that one of its policy
objectives is to increase the provision of primary
* The NHS currently reimburses GP's rental costs for healthcare services in the community so a reduction
premises used for providing primary healthcare. In in funding or support in this sector is considered
the event of a change to this mechanism, the Company unlikely given the long term structural policies in
may not receive rental income when due and/or the place.
total income received may be lower than due under the
current contract.
* The GPs have contracts with the NHS to cover the
length and beyond of their lease (on average 14.1
* A change in political policies as a result of the years on properties held by the Company) and so a
referendum vote for the UK to exit the EU is likely change to this reimbursement policy would be expected
to continue to cause uncertainty in the economic to have little impact in the immediate future.
environment and create volatility in prices, interest
rates, investment yields and inflation.
* The Board monitors the political and economic
environment on a regular basis with input from its
* A change in government following a snap general advisors. There is no exposure to primary care
election as a result of withdrawal of support for the outside the UK and Republic of Ireland.
current one could lead to significant delays in
commissioning primary healthcare and a change in
funding policies and priorities.
* It has been published that the Labour Party are
cautious about the benefits provided by private
sector infrastructure investment. The Investment
Adviser attends meetings and industry events where
the benefits and value for money of private sector
third party development are presented.
----------------------------------------------------------------- ---------------------------------------------------------------------------- --------
OPERATIONAL RISKS
Description Mitigation Movement
----------------------------------------------------------------- ------------------------------------------------------------------ ----------
Property yields:
* A significant reduction in property yields could
result in them falling below the cost of capital, or * For existing properties contractual cash flows are
not being available with an acceptable rate of return fixed over the long-term so have little impact on
and low yields artificially limit the pressure for EPRA returns.
higher rents at new schemes.
* The Board regularly review the Group's budget and
* A property recession could materially adversely five year forecast and completes a risk assessment
affect the value of properties which could put and a long-term viability assessment which
financial covenants under pressure. incorporates the Group Weighted Average Cost of
Capital ("WACC"), dividend policy and sets the
minimum property yield boundaries for future
acquisitions.
Description Mitigation Movement
----------------------------------------------------------------- ------------------------------------------------------------------ ----------
Cyber Security:
* There are a number of risks related to cyber security * The security of the systems are internally monitored
which include the risk of having the internal systems and regularly reviewed. Training is provided to
of the Investment Adviser infiltrated, information employees of the Investment Adviser on cyber security
corrupted or information stolen matters to increase awareness and vigilance. Incident
management is used to establish an incident response
and disaster recovery response.
* The review of suppliers to the Company includes an
assessment of the quality of their cyber security
systems and processes.
----------------------------------------------------------------- ------------------------------------------------------------------ ----------
FINANCIAL RISKS
Description Mitigation Movement
----------------------------------------------------------------- ---------------------------------------------------------------------- ------------
Financing and debt management:
* A significant reduction in the availability of
financing could affect the Company's ability to * The Company mainly holds long-term facilities which
source new funding for both refinancing purposes and greatly reduce the refinancing risk. The Company
to use for future acquisitions. maintains relationships with a number of potential
financing sources ensuring a range of financing
options.
* The Investment Adviser also regularly monitors and
manages the debt facilities and reports on a regular
* A significant rise in interest rates could make basis to the Board.
returns from alternative investments more attractive
which could put downward pressure on the Company's
share price making equity finance more expensive.
* The Company has maintained its acquisition discipline
and dividend policy whilst putting in place two new
debt facilities during the year to bring down the
cost of capital. The Company also has 14.8 million
Ordinary Shares under its block listing which can be
sold quickly and cost effectively to meet demand at a
price near to the prevailing market share price.
Description Mitigation Movement
----------------------------------------------------------------- ---------------------------------------------------------------------- ------------
Covenants:
* A significant reduction in property valuations or * Covenants are measured and monitored on a monthly
income could result in a breach of loan covenants. basis by the Investment Adviser, with results
reported to the Board for consideration.
* The impact of potential property de-valuations on the
covenants are considered by the Investment Adviser
and discussed by the Board at quarterly Board
meetings.
Description Mitigation Movement
----------------------------------------------------------------- ---------------------------------------------------------------------- ------------
REIT status:
* Ongoing REIT status (and exemption from corporation * The Company maintains a tax forecast and receives
tax on the Group's qualifying property income and regular reports from its tax advisers and the
gains) requires compliance with a number of REIT Investment Adviser. This includes keeping the REIT
conditions including the requirement to distribute at conditions under review.
least 90% of property income each year and
maintenance of the Group's balance of business.
------------------------------------------------------------------- -------------------------------------------------------------------- ------------
Consolidated Statement of Comprehensive Income
For the year ended 30 September 2017
2017 2016
Notes GBP'000 GBP'000
------------------------------------------ ------ --------- ---------
Income
Rent receivable 1 37,108 35,145
Service charge income 1 114 -
Other income 193 372
------------------------------------------ ------ --------- ---------
Total income 37,415 35,517
Direct property expenses (1,354) (1,195)
Service charge expenses (114) -
Net rental income 35,947 34,322
Share of net profit of equity accounted
joint venture 20 13 -
------------------------------------------ ------ --------- ---------
Realised and unrealised valuation
movements
Net valuation gain on investment
properties 8 18,654 15,523
(Loss)/profit on disposal of investment
properties 8 (65) 31
18,589 15,554
------------------------------------------ ------ --------- ---------
Expenses
Investment advisory fee 19 3,867 3,852
Investment advisory performance
fee 19 - 1,553
Property management fee 19 925 889
Administrative fees 19 115 116
Audit fees 3 175 171 Professional fees and other expenses 603 584 REIT conversion expenses 240 - Directors' fees 2 163 144 Total expenses 6,088 7,309 ------------------------------------------ ------ --------- --------- Profit before interest and tax 48,461 42,567 Finance costs 4 (15,581) (15,529) Finance income 5 432 1,149 ------------------------------------------ ------ --------- --------- Net finance costs (15,149) (14,380) Profit before tax 33,312 28,187 Taxation 6 5,312 (1,556) ------------------------------------------ ------ --------- --------- Profit attributable to equity holders of the parent 38,624 26,631 ------------------------------------------ ------ --------- --------- Other comprehensive income Items that are or may be reclassified subsequently to profit or loss: Foreign currency translation differences - foreign operations (95) 53 ------------------------------------------ ------ --------- --------- Total comprehensive income attributable to equity holders of the parent 38,529 26,684 ------------------------------------------ ------ --------- --------- Earnings per Ordinary Share Basic and diluted 7 9.4p 7.1p ------------------------------------------ ------ --------- ---------
Consolidated Statement of Financial Position
As at 30 September 2017
2017 2016
Notes GBP'000 GBP'000
--------------------------------- ------ --------- ---------
Non-current assets
Investment properties 8 680,355 612,264
Investments in equity accounted 1,035 -
joint venture
--------------------------------- ------ --------- ---------
Total non-current assets 681,390 612,264
--------------------------------- ------ --------- ---------
Current assets
Trade and other receivables 9 7,176 8,519
Cash and cash equivalents 15 32,145 20,968
--------------------------------- ------ --------- ---------
Total current assets 39,321 29,487
--------------------------------- ------ --------- ---------
Total assets 720,711 641,751
--------------------------------- ------ --------- ---------
Current liabilities
Trade and other payables 10 18,682 19,923
Loans due within one year 11 2,213 1,983
Total current liabilities 20,895 21,906
--------------------------------- ------ --------- ---------
Non-current liabilities
Loans due after one year 11 370,583 334,307
Head lease liabilities 12 1,456 1,430
Rental deposits - 60
Deferred tax liability 6 575 5,887
Total non-current liabilities 372,614 341,684
--------------------------------- ------ --------- ---------
Total liabilities 393,509 363,590
--------------------------------- ------ --------- ---------
Net assets 327,202 278,161
--------------------------------- ------ --------- ---------
Equity
Share capital 13 - -
Share premium 13 269,419 234,846
Treasury shares 13 (6,148) (6,835)
Foreign currency translation
reserve 14 (42) 53
Other reserve 14 63,973 50,097
--------------------------------- ------ --------- ---------
Total attributable to equity
holders of the parent 327,202 278,161
--------------------------------- ------ --------- ---------
Net asset value per share
Basic and diluted 7 76.3p 71.7p
--------------------------------- ------ --------- ---------
The presentation of the comparative period has been updated to show the foreign currency translation reserve separately from the other reserve.
The financial statements were approved and authorised for issue by the Board of Directors on 11 December 2017 and were signed on its behalf by
Helen Mahy
Non-Executive Director
11 December 2017
Consolidated Statement of Changes in Equity
For the year ended 30 September 2017
Foreign
currency
Share Treasury translation Other Total
premium shares reserve reserve equity
Notes GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
-------------------------- ------ --------- --------- ------------- --------- ---------
Balance at 1 October
2015 232,770 (24,321) - 45,648 254,097
Shares issued
from block listing 1,763 - - - 1,763
Shares sold from
treasury 503 16,909 - - 17,412
Scrip issue of
shares from treasury
(net of costs) 26 577 - - 603
Share issue costs (216) - - - (216)
Dividends paid 16 - - - (22,182) (22,182)
-------------------------- ------ --------- --------- ------------- --------- ---------
Transactions with
owners 2,076 17,486 - (22,182) (2,620)
Profit attributable
to equity holders
of the parent - - - 26,631 26,631
Other comprehensive
income:
Foreign currency
translation differences - - 53 53
-------------------------- ------ --------- --------- ------------- --------- ---------
Total comprehensive
income for the
year - - 53 26,631 26,684
Balance at 30
September 2016 234,846 (6,835) 53 50,097 278,161
-------------------------- ------ --------- --------- ------------- --------- ---------
Shares issued
from block listing 34,932 - - - 34,932
Scrip issue of
shares from treasury
(net of costs) 47 687 - - 734
Share issue costs (406) - - - (406)
Dividends paid 16 - - (24,748) (24,748)
-------------------------- ------ --------- --------- ------------- --------- ---------
Transactions with
owners 34,573 687 - (24,748) 10,512
Profit attributable
to equity holders
of the parent - - - 38,624 38,624
Other comprehensive
income: Foreign
currency translation
differences - - (95) - (95)
-------------------------- ------ --------- --------- ------------- --------- ---------
Total comprehensive
income for the
year - - (95) 38,624 38,529
Balance at 30
September 2017 269,419 (6,148) (42) 63,973 327,202
-------------------------- ------ --------- --------- ------------- --------- ---------
The presentation of the comparative period has been updated to show the foreign currency translation reserve separately.
Consolidated Statement of Cash Flows
For the year ended 30 September 2017
2017 2016
Notes GBP'000 GBP'000
----------------------------------------- ------ --------- ---------
Operating activities
Profit before taxation 33,312 28,187
Adjustments for:
Net valuation gain on investment
properties 8 (18,654) (15,523)
Loss/(profit) on disposal of investment
properties 8 65 (31)
Share of net profit of equity accounted (13) -
joint venture
Finance income 5 (432) (1,149)
Finance costs 4 15,581 15,529
----------------------------------------- ------ --------- ---------
29,859 27,013
Decrease/(increase) in trade and
other receivables 1,336 (1,736)
(Decrease)/increase in trade and
other payables (1,616) 672
Decrease in rental deposits held (60) -
Interest paid (14,479) (14,616) Interest received 61 75 Net cash inflow from operating activities 15,101 11,408 ----------------------------------------- ------ --------- --------- Investing activities Acquisition of investment properties (29,706) (15,732) Cash acquired with subsidiaries - (631) Proceeds from sale of investment properties 8 1,164 121 Additions to investment properties and properties under construction (21,101) (20,039) Payment for the acquisition of (1,025) - joint venture Dividends received from joint venture 3 - ----------------------------------------- ------ --------- --------- Net cash outflow from investing activities (50,665) (36,281) ----------------------------------------- ------ --------- --------- Financing activities Net proceeds from issue of share capital 34,526 18,962 New loan facilities drawn 11 39,880 - Repayment of borrowings 11 (2,810) (1,895) Loan issue costs 11 (859) (554) Repayment of acquired loans - (6,000) Dividends paid 16 (24,013) (21,582) ----------------------------------------- ------ --------- --------- Net cash inflow/(outflow) from financing activities 46,724 (11,069) ----------------------------------------- ------ --------- --------- Increase/(decrease) in cash and cash equivalents 11,160 (35,942) Effects of currency translation 17 - on cash and cash equivalents Opening cash and cash equivalents 20,968 56,910 ----------------------------------------- ------ --------- --------- Closing cash and cash equivalents 15 32,145 20,968 ----------------------------------------- ------ --------- ---------
Notes to the Financial Statements
For the year ended 30 September 2017
1. Principal accounting policies
Basis of preparation and statement of compliance
The financial statements of the Group have been prepared in accordance with International Financial Reporting Standards ("IFRS") issued by the International Accounting Standards Board ("IASB") and as adopted by the European Union, interpretations issued by the International Financial Reporting Interpretations Committee ("IFRIC") and applicable legal and regulatory requirements of Guernsey Law. The principal accounting policies are set out below.
The Group has cash reserves and assets available to secure further funding if required, together with long term leases across different geographic areas within the United Kingdom and the Republic of Ireland. The Directors have reviewed the Group's forecast commitments, including commitments to development projects and proposed acquisitions, against the future funding availability, with particular reference to the utilisation of, and continued access to, existing debt facilities and also access to restricted cash balances. The Directors have also reviewed the Group's compliance with covenants on lending facilities.
The Group's financial forecasts show that it can remain within its lending facilities and meet its financial obligations as they fall due for at least the next twelve months. The Directors also believe that the Group is well placed to manage its business risks successfully in the current economic environment. Accordingly, they continue to adopt the going concern basis of accounting in preparing the annual financial statements.
These consolidated financial statements are presented in pounds sterling, which is the company's functional currency and the Group's presentational currency. All amounts have been rounded to the nearest thousand, unless otherwise indicated.
Impact of revision to International Financial Reporting Standards
The accounting policies applied are consistent with those of the annual financial statements for the year ended 30 September 2016, except that the Group has adopted and applied IFRS11 'Joint Arrangements' and IAS28 'Investments in Associates and Joint Ventures' in evaluating and accounting for its new interest in joint venture undertakings. As disclosed at the foot of the Consolidated Statement of Financial Position and the Consolidated Statement of Changes in Equity, the presentation of the comparative figure for the foreign currency translation reserve has been detailed separately to the other reserve to make the component clearer.
The following standards and interpretations have been issued by the IASB and IFRIC with effective dates falling after the date of these financial statements. The Board has chosen not to adopt early any of the revisions contained within these standards in the preparation of these financial statements:
International Accounting Effective date - periods
Standards (IAS/IFRS) beginning on or after
--------------------------- ----------------------------------------
IFRS 9 Financial Instruments 1 January 2018
IFRS 15 Revenue from contracts 1 January 2018
with customers
IFRS 16 Leases 1 January 2019
------------------------- ------------------------- ---------------
The Directors have assessed the impact of the new standards in issue but not currently effective and do not believe these will have a material impact on the financial statements.
IFRS 9 Financial Instruments replaces IAS 39 Financial Instruments: Recognition and Measurement. The new standard includes requirements for classification, recognition and measurement, impairment, de-recognition and hedge accounting. The Directors have completed an assessment of the impact of IFRS 9 and believe its impact on the Company will be limited because the Group currently has no complex financial instruments, does not hedge account and does not have significant trade receivables that may be impaired. The recognition and classification of the Company's financial instruments is expected to be unchanged. In the future, the new standard aims to simplify the documentation required for hedge accounting which may be of benefit and the rules for the treatment of debt break or modification costs will be slightly different to those under IAS 39.
IFRS 15 Revenue from Contracts with Customers excludes from its scope amounts receivable from leases which fall under the scope of IAS 17 which is due to be replaced by IFRS 16 and amounts receivable from joint ventures which fall under the scope of IAS 28. IFRS 15 therefore only provides guidance on the Company's other income which represents less than 1% of the Company's income. On this basis IFRS 15 is not expected to have a significant effect on the Company's future position or performance.
IFRS 16 Leases specifies how to recognise, measure, present and disclose leases. The standard adopts a single model which is expected to have a high impact on lessees and leases of low value and of less than twelve months. The Directors have completed an assessment of the impact of IFRS 16 and believe its impact on the Company will be limited because the Group is not a lessee with short leases and does issue finance leases. As a lessor the Group will continue to classify its investment property leases as operating in nature. The group as a lessee has a small number of long leasehold interests where those long leases have a head lease rent. These are currently treated as finance leases because substantially all the risks and rewards incidental to ownership are with the Company and that will continue to be the case under IFRS 16 with a head lease liability recorded.
In addition, IFRS 16 could have an indirect impact on the Group's business if it leads to a change in tenant behaviour. In future tenants or potential tenants who will be required to account for operating leases as a liability and right to use asset may seek shorter lease terms.
Basis of consolidation
The Group financial statements consolidate the financial statements of MedicX Fund Limited and entities controlled by the Company (its subsidiary undertakings) made up to 30 September 2017. Control requires exposure or rights to variable returns and the ability to affect those returns through power over an investee. All intra-group transactions, balances, income and expenses are eliminated on consolidation.
Accounting for acquisitions of investment properties
Where the Group acquires subsidiaries that own real estate, at the time of acquisition, the Group considers whether each acquisition represents the acquisition of an asset or a business. The Group accounts for an acquisition as a business combination where an integrated set of activities, including processes, is acquired in addition to the property.
When the acquisition of subsidiaries does not represent a business combination, it is accounted for as an acquisition of a group of assets and liabilities. The cost of the acquisition is allocated to the assets and liabilities acquired based upon their relative fair values, and no goodwill or deferred tax is recognised.
Segmental reporting
The Directors are of the opinion that the Group is engaged in a single segment of business, being investment in primary healthcare properties in the United Kingdom and the Republic of Ireland.
Revenue recognition
Rent receivable comprises rent for the year in relation to the Group's investment properties exclusive of Value Added Tax. Rent is recognised on a straight line basis over the period of the lease. Rent is accrued for any outstanding rent reviews from the date that the review was due based on a best estimate of the new expected rent. Any lease incentives taken by tenants to enter into lease agreements, any premium paid by tenants to the Group or any fixed rent uplifts during the lease term are recognised on a straight line basis over the full lease term.
Service charge income is recognised on an accrual basis when services have been provided and the Group has to a right to a defined amount of consideration.
Expenses
All expenses are accounted for on an accruals basis.
Finance costs
Borrowing costs are charged to profit and loss in the year to which they relate on an accruals basis except where they relate to properties under construction when borrowing costs are capitalised forming part of the cost of the asset produced.
Current and deferred taxation
The tax liability represents the sum of the current tax and deferred tax payable. The current tax payable is based on taxable profit for the year.
Deferred tax is the tax that may become payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit and is accounted for using the liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent it is probable that taxable profits will be available against which deductible temporary differences can be utilised.
Full provision is made for deferred tax assets and liabilities arising from all temporary differences between the recognition of gains and losses in the financial statements and recognition in the tax computation, other than in respect of asset acquisitions in corporate vehicles where deferred tax is recognised in relation to temporary differences arising after acquisition.
Following the conversion of the Group to a UK REIT, deferred tax liabilities on unrealised revaluation gains are only recognised where an asset is located outside the UK or where a developed asset is expected to be sold within three years of completion.
Deferred tax assets and liabilities are calculated at the tax rates expected to be effective at the time the temporary differences are expected to reverse by reference to the tax rates substantively enacted at the balance sheet date. Deferred tax assets and liabilities are not discounted.
Investment properties
The Group's completed investment properties are held for long-term investment. Freehold and long-leasehold properties acquired are initially recognised at cost, being fair value of the consideration given including transaction costs associated with the property. After initial recognition, freehold and long-leasehold properties are measured at fair value, with unrealised gains and losses recognised in profit and loss. Both the base costs and valuations take account of core fixtures and fittings.
Investment properties under construction are initially recognised at cost and are revalued at the period end as determined by professionally qualified external valuers. Gains or losses arising from the changes in fair value of investment properties under construction are recognised in profit and loss in the period in which they arise.
The fair values of completed investment properties and investment properties under construction located in the UK are based upon the valuations of the properties as provided by Jones Lang LaSalle Limited, an independent firm of chartered surveyors, as at each period end, adjusted as appropriate for costs to complete, head lease liabilities (the net present value of which are recognised as separate liabilities) and lease incentives. The fair value of investment properties located in the Republic of Ireland are based upon valuations provided by Cushman & Wakefield, an independent firm of chartered surveyors at each period end.
In rare situations where the Group has purchased a site intended to be developed, but where construction has not started, the site is held at cost unless there are indications of a significant change in value. Two sites with a combined cost and net book value of GBP2.7 million were not formally revalued at 30 September 2017.
Costs of financing specific developments are capitalised and included in the cost of each development. During the year the loan facilities, as disclosed in note 11, were utilised to fund development work on investment properties under construction.
Trade and other receivables
Trade and other receivables are initially recognised at their fair value inclusive of any Value Added Taxes that may be applicable and are subsequently held at amortised cost and net of any provision for any doubtful debts which are not deemed recoverable.
Cash and cash equivalents
Cash and deposits in banks are carried at cost. Cash and cash equivalents are defined as cash, demand deposits, and highly liquid investments readily convertible to known amounts of cash and subject to insignificant risk of changes in value. For the purposes of the Consolidated Statement of Cash Flows, cash and cash equivalents consist of cash and deposits in banks.
Trade and other payables
Trade and other payables are initially recognised at their fair value inclusive of any Value Added Taxes that may be applicable and are subsequently held at amortised cost.
Bank loans and borrowings
All bank loans and borrowings are initially recognised at fair value of the consideration received, less issue costs where applicable. After initial recognition, all interest-bearing loans and borrowings are subsequently measured at amortised cost. Amortised cost is calculated by taking into account any discount or premium on settlement.
Bank loans that are acquired by means of asset acquisitions are recognised at fair value as at the date of acquisition with any resulting fair value adjustment being amortised and recognised as a part of finance costs over the life of the loans, on an effective interest basis.
Impairment of assets
The Group assesses annually whether there are any changes in circumstances indicating that any of its assets have been impaired. If such indication exists, the asset's recoverable amount is estimated and compared to its carrying value. Where it is impossible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the smallest cash-generating unit to which the asset is allocated.
If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, an impairment loss is recognised immediately in profit and loss.
Fair value measurements
The Group measures certain financial instruments and non-financial assets such as investment property, at fair value at the end of each reporting period. Fair value is the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their best economic interest. A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.
The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are 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 for applying the following hierarchy:
-- Level 1 - Quoted (unadjusted) market prices in active markets for identical assets or liabilities
-- Level 2 - Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable
-- Level 3 - Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable
For assets and liabilities that are recognised in the financial statements on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.
Foreign exchange
Transactions in foreign currencies are recorded at the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency at the foreign exchange rate ruling at the reporting date. Differences are recognised in profit and loss.
Non-monetary assets and liabilities that are measured at historical cost in a foreign currency are translated to the functional currency using the exchange rate at the date of the transaction.
Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to the functional currency at foreign exchange rates ruling at the dates the fair values were determined. Differences are recognised in profit and loss.
The results and financial position of all the Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows:
-- Assets and liabilities for each statement of financial position presented are translated at the closing rate at the date of the statement of financial position;
-- Income and expenses for each statement of comprehensive income are translated at average monthly rates (unless the average rate is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and
-- Exchange differences resulting from the difference in rates applied to income statement balances and financial position items are recognised directly within equity in the Group's foreign currency translation reserve.
Accounting for associates and joint ventures
A joint venture generally involves the establishment of a corporation, partnership or other entity in which each party venture has an interest in the joint control over strategic, financial and operating decisions. The results, assets and liabilities of jointly controlled entities are incorporated in the financial statements using the equity method of accounting.
Where the Group's share of losses exceeds its equity accounted investment in joint venture, the carrying amount of the equity interest is reduced to nil and the recognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations. Appropriate adjustment is made to the results of joint ventures where material differences exist between a joint venture's accounting policies and those of the Group.
Dividend income from joint ventures is recognised when the shareholders' right to receive payment have been established. Any dividends received are deducted from the carrying amount of the investment.
Use of judgements and estimates
In the process of applying the Group's accounting policies, the Directors are required to make certain judgements and estimates to arrive at the carrying value for its assets and liabilities. The most significant areas requiring judgement in the preparation of these financial statements were:
Valuation of investment property
The Group obtains valuations performed by external valuers in order to determine the fair value of its investment properties. These valuations are based upon assumptions including future rental income, anticipated maintenance costs, future development costs and the appropriate discount rate. The valuers also have regard for observable market evidence of transaction prices for similar properties. Further information in relation to the valuation and sensitivity analysis of investment property is disclosed in note 8.
Asset acquisitions
The Group's approach to recognising investment properties acquired in a corporate entity is to treat the acquisition as an asset purchase, as described in IAS 40, if the corporate entity is not considered to contain any material processes. Each corporate entity acquired is considered to determine if it meets the criteria to be recognised as a business combination in accordance with IFRS 3 or if it is more appropriate to treat it as an asset acquisition.
Rent reviews
The Group estimates and accrues the expected uplift in rent for rent reviews from the effective review date to the period end. This estimation of future rent takes into account the terms of the underlying occupational leases and the available observable market rental evidence.
Compliance with the UK REIT regime
As a consequence of the Group's REIT Status, income and capital gains on the qualifying property rental business are exempt from corporation tax. In order that the Group maintains this status it must continue to meet a number of conditions each accounting period. The Group comfortably meets these criteria and therefore deferred taxes are recognised on the basis of ongoing REIT status.
Identifying joint ventures and associates
The Group assesses its power over the operations of investees and its rights to variable returns related to that power. The Group has determined that it jointly controls GP Property Limited into which it has made an equity investment because there is no contractual right to guaranteed cash returns.
2. Directors' fees
2017 2016
GBP'000 GBP'000
---------------------------------------- --------- ---------
During the year the directors received
the following fees:
D Staples (Chairman) 46 46
S Mason 31 31
S Le Page (Audit Committee Chairman) 36 36
J Hearle 35 31
H Mahy 15 -
---------------------------------------- --------- ---------
Total charged in the Consolidated
Statement of Comprehensive Income 163 144
---------------------------------------- --------- ---------
3. Auditor's remuneration
The amount disclosed in the Consolidated Statement of Comprehensive Income relates to an accrual for audit fees for the year ended 30 September 2017, payable to KPMG LLP (2016: KPMG LLP).
2017 2016
GBP'000 GBP'000
--------------------------------------- --------- ---------
Group audit fees for the current year 108 106
Audit fees for the subsidiaries 46 45
--------------------------------------- --------- ---------
Total group audit fees 154 151
Review of the interim report 21 20
--------------------------------------- --------- ---------
Total audit and other fees 175 171
--------------------------------------- --------- ---------
4. Finance costs
2017 2016
GBP'000 GBP'000
------------------------------------- --------- ---------
Interest payable on long-term loans 15,762 15,326
Amortisation of facility costs 336 431
------------------------------------- --------- ---------
16,098 15,757
Interest capitalised on properties
under construction (517) (228)
------------------------------------- --------- ---------
15,581 15,529
------------------------------------- --------- ---------
During the year interest costs on funding attributable to investment properties under construction were capitalised at an effective interest rate of 4.29% (2016: 4.45%). The funding was sourced from all of the loan facilities outlined within note 11. Where properties under construction were secured against a specific loan, the interest for that facility was capitalised.
5. Finance income
2017 2016
GBP'000 GBP'000
-------------------------- --------- ---------
Bank interest receivable 54 75
Foreign exchange gain 378 1,074
-------------------------- --------- ---------
432 1,149
-------------------------- --------- ---------
The foreign exchange gain is derived from the retranslation of monetary assets and liabilities denominated in Sterling (which is a foreign currency for the Group's Irish property owning subsidiary, MedicX Properties Ireland Limited, which has a functional currency of the Euro). The Company has provided Sterling loans to MedicX Properties Ireland Limited which are eliminated on consolidation.
6. Taxation
2017 2016
GBP'000 GBP'000
------------------------------ --------- ---------
Deferred tax
(Credit)/charge for the year (5,312) 1,556
------------------------------ --------- ---------
Total tax (credit)/charge (5,312) 1,556
------------------------------ --------- ---------
On 29 September 2017, the Group elected to become a UK REIT with effect from 1 October 2017. The UK REIT rules exempt income and gains of the Group's UK property rental business from corporation tax. On entry to the UK REIT regime, UK deferred tax liabilities related to revaluation gains were released.
For the year under review, the Company does not have any profits chargeable to tax in jurisdictions outside Guernsey. The Company has obtained exempt company status in Guernsey under the terms of Income Tax (Exempt Bodies) (Guernsey) Ordinance 1989 so that it is exempt from Guernsey taxation on income arising outside Guernsey and on bank interest receivable. The Company is, therefore, only liable to a fixed fee of GBP1,200 per annum. The Directors intend to conduct the Group's affairs such that the Company continues to remain eligible for the exemption.
A reconciliation of the actual tax charge to the notional tax charge applying the average standard rate of UK corporation tax of 19.5% (2016: 20.0%) is set out below:
2017 2016
GBP'000 GBP'000
------------------------------------------ --------- ---------
Profit before tax 33,312 28,187
------------------------------------------ --------- ---------
Profit before tax multiplied by the
average standard rate of corporation
tax in the UK of
19.5% (2016: 20.0%) 6,496 5,637
Expenses/(income) not deductible/taxable
for tax purposes 833 (1,860)
Profits not subject to UK taxation (4,838) (1,858)
Adjustments in respect of prior periods - 614
Change in closing deferred tax rate - (977)
Release of brought forward deferred (5,887) -
tax on entry into UK REIT regime
Release of current year deferred tax (1,916) - on entry into UK REIT regime Total tax (credit)/charge (5,312) 1,556 ------------------------------------------ --------- ---------
Deferred Taxation
Accelerated Unrelieved
Fair value capital management
gains allowances expenses Total
GBP'000 GBP'000 GBP'000 GBP'000
------------------------ ----------- ------------ ------------ ---------
At 1 October 2015 770 6,085 (2,524) 4,331
Provided in the year 178 531 847 1,556
------------------------ ----------- ------------ ------------ ---------
At 30 September 2016 948 6,616 (1,677) 5,887
------------------------ ----------- ------------ ------------ ---------
Released on entry into
the REIT regime (948) (6,616) 1,677 (5,887)
Provided/(released)
in the year 613 153 (191) 575
------------------------ ----------- ------------ ------------ ---------
At 30 September 2017 613 153 (191) 575
------------------------ ----------- ------------ ------------ ---------
At 30 September 2017 the Group has recognised deferred tax liabilities on the revaluation of its properties located in the Republic of Ireland at a rate of 33%.
7. Earnings and net asset value per Ordinary Share
Basic and diluted earnings and net asset value per share
The basic and diluted earnings per Ordinary Share are based on the profit for the year attributable to Ordinary Shares of GBP38,624,000 (2016: GBP26,631,000) and on 413,134,343 (2016: 374,517,179) Ordinary Shares, being the weighted average aggregate of Ordinary Shares in issue calculated over the year, excluding amounts held in treasury. This gives rise to a basic and diluted earnings per Ordinary Share of 9.4 pence (2016: 7.1 pence) per Ordinary Share.
The basic and diluted net asset value per Ordinary Share are based on the net asset position at the year end attributable to Ordinary Shares of GBP327,202,000 (2016: GBP278,161,000) and on 428,640,144 (2016: 388,066,844) Ordinary Shares being the aggregate of Ordinary Shares in issue at the year end, excluding amounts held in treasury. This gives rise to a basic and diluted net asset value per Ordinary Share of 76.3 pence per Ordinary Share (2016: 71.7 pence per Ordinary Share).
EPRA earnings per share and net asset value per share
The Directors consider that the following EPRA and adjusted earnings per Ordinary Share and net asset value per Ordinary Share are more meaningful industry standard key performance indicators for the Group:
2017 2016
GBP'000 GBP'000
--------------------------------------- ------------ ------------
Profit attributable to equity holders
of the parent 38,624 26,631
Adjusted for:
Deferred tax (credit)/charge (5,312) 1,556
Revaluation gain (18,654) (15,523)
Fair value gain on acquired loans - (30)
--------------------------------------- ------------ ------------
EPRA earnings 14,658 12,634
EPRA EPS 3.5p 3.4p
Company specific adjustments:
Performance fee - 1,553
REIT conversion fees and expenses 240 -
Adjusted earnings 14,899 14,187
Adjusted earnings per Ordinary Share
- basic and diluted 3.6p 3.8p
Weighted average number of Ordinary
Shares 413,134,343 374,517,179
--------------------------------------- ------------ ------------
2017 2016
GBP'000 GBP'000
--------------------------------------- ------------ ------------
Net assets 327,202 278,161
Adjusted for:
Deferred tax liability 575 5,887
EPRA net assets 327,777 284,048
EPRA net asset value per Ordinary
Share - basic and diluted 76.5p 73.2p
--------------------------------------- ------------ ------------
2017 2016
GBP'000 GBP'000
--------------------------------------- ------------ ------------
Net assets 327,202 278,161
Adjusted for:
Fair value of debt (42,574) (59,134)
--------------------------------------- ------------ ------------
EPRA NNNAV 284,628 219,027
EPRA NNNAV per Ordinary Share - basic
and diluted 66.4p 56.4p
Ordinary Shares in issue at the year
end 428,640,144 388,066,844
--------------------------------------- ------------ ------------
8. Investment properties
Completed Properties Total
investment under investment
properties construction properties
GBP'000 GBP'000 GBP'000
---------------------------------- ------------ -------------- ------------
Fair value 1 October 2015 544,490 8,989 553,479
Additions 22,527 20,825 43,352
Disposals at valuation (90) - (90)
Transfer to completed properties 14,928 (14,928) -
Revaluation 15,555 (32) 15,523
---------------------------------- ------------ -------------- ------------
Fair value 30 September 2016 597,410 14,854 612,264
Additions 30,182 20,883 51,065
Disposals at valuation (2,068) - (2,068)
Transfer to completed properties 18,013 (18,013) -
Revaluation 17,590 1,064 18,654
Foreign exchange movements - 440 440
---------------------------------- ------------ -------------- ------------
Fair value 30 September 2017 661,127 19,228 680,355
---------------------------------- ------------ -------------- ------------
Total
investment
properties
GBP'000
------------------------------------------------- ------------
Fair value per JLL UK valuation report 603,380
Fair value per JLL Ireland 18,366
Sites purchased for forward funding schemes 2,339
Ground rents recognised as finance leases 1,430
Rent incentives (1,513)
Cost to complete properties under construction (11,738)
------------------------------------------------- ------------
Fair value 30 September 2016 612,264
------------------------------------------------- ------------
Fair value per JLL UK valuation report 656,651
Fair value per C&W Ireland 33,275
Sites purchased for forward funding schemes 2,735
Ground rents recognised as finance leases 1,456
Rent incentives (497)
Cost to complete properties under construction (13,265)
------------------------------------------------- ------------
Fair value 30 September 2017 680,355
------------------------------------------------- ------------
Investment properties are initially recognised at cost and then subsequently measured at fair value, which has been determined based on the market valuations performed by Jones Lang LaSalle Limited ("JLL") for the properties held within the United Kingdom as at 30 September 2017. The valuation takes account of the fact that a purchaser's offer price to the Group would be net of purchaser's costs (which are estimated at 6.53% (2016: 6.1%) of what would otherwise be the purchase price).
Investment properties completed and under construction located in the Republic of Ireland have been valued by Cushman & Wakefield ("C&W"). The properties have been valued in line with the approach taken within the UK outlined below although purchasers' costs are lower since Irish stamp duty was generally charged at a rate of 2% (Notional purchasers cost of 4.46% were therefore assumed). Subsequent to the year end, the rate of Irish stamp duty on commercial properties was increased from 2% to 6%. This will put pressure on the reported net valuation of the Irish properties by approximately 4% after October 2017 however, the C&W have advised that tightening yields are expected to compensate for this and result in valuations holding ground.
The sites purchased for forward funding schemes were acquired before the year end, and as part of the acquisition process were valued by JLL, and are valued at cost which approximates to fair value at 30 September 2017.
The freehold and long leasehold interests in the property investments of the Group were valued at an aggregate of GBP689,926,000 as at 30 September 2017 (2016: UK only; GBP621,746,000) by JLL and C&W. This valuation assumes that all properties, including those under construction, are complete and includes the value of assets under construction translated at an exchange rate of GBP0.88 per EUR1 for those assets located in the Republic of Ireland.
The valuers' opinions of market value were derived using valuation techniques and comparable recent market transactions on arm's length terms. JLL has valued these properties for reporting purposes since 31 March 2008 and C&W have valued the properties for reporting purposes since 1 June 2017. During the year, the Group tendered the valuation contract for the UK properties and after a robust competitive process, JLL retained the valuation contact.
The market valuation was carried out in accordance with the requirements of the Valuation Standards published by the Royal Institution of Chartered Surveyors, and accounting standards. The properties were valued to market value assuming that they would be sold in single lots (i.e. not as portfolios) subject to the existing leases, or agreements for lease where the leases had not yet been completed at the date of valuation.
The valuers' fee is a set fee applied to the number of properties in the portfolio, the JLL fees for the year were GBP97,000 (2016: GBP77,000).
On 14 December 2016 one investment property was sold for cash of GBP837,500. The sale price was close to the net book value and after deducting sales cost a loss on disposal of GBP25,000 was recorded.
On 11 August 2017, one investment property was sold for cash of GBP391,000 after the de-recognition of associated loans. After deducting sales cost a loss on disposal of GBP18,000 as recorded.
In addition, further disposal costs of GBP22,000 have been incurred in the year on fee relation to properties sold after the year end.
During the prior year, a garage, which was acquired as part of a portfolio acquisition, was disposed of because it did not fit the criteria of the Group acquisition policy. This was disposed of for cash of GBP121,000 which resulted in a profit on disposal of GBP31,000.
The average net initial yield for assets located within the UK at 30 September 2017 was 5.08% (2016: 5.25%).
Fair value hierarchy
The valuation of all investment properties is classified in accordance with the fair value hierarchy described in note 1. As at 30 September 2017 (and as at 30 September 2016), the Group determined that all investment properties be included at fair value as Level 3, reflecting significant unobservable inputs.
There were no transfers between Levels 1, 2 or 3 during the year.
Valuation techniques
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As is common for investment property, valuation appraisals are performed using a combination of market and income approaches.
Under the market comparable method (or market comparable approach), a property's fair value is estimated based on comparable observable transactions.
Under income approaches, unobservable inputs are applied to model a property's fair value. The following unobservable inputs are applied:
-- The Estimated Rental Value is the amount that an area could be let for, based on prevailing market conditions at the valuation date;
-- The Equivalent Yield is the internal rate of return from the cash flows generated from renting a property;
-- Rental Growth is an estimate of rental increases expected for contractual or prevailing market conditions; and
-- The physical condition of a property, which would normally be visited by a valuer on a rotational basis.
Properties under construction have been measured at their fair value by taking the fair value at completion and subtracting the contractual costs to complete the assets under the development contracts. The technique inherently assumes that construction will be completed to an acceptable standard and leases will be entered into under the terms and time line agreed.
The fair value of investment properties is considered to be based on a number of significant assumptions. If the valuation yield were to shift by 0.25% on each property, this would result in an impact on the valuation of the properties of approximately GBP36 million. If rent reviews of 2% were achieved on the full portfolio with no yield movement the valuation of properties would increase by approximately GBP14 million.
The property yields of the Group excluding two outlying properties range from 7.62% to 3.81%.
The property ERVs of the Group range from GBP104 to GBP387 per square metre.
The majority of investment properties are charged as security for the long-term loans as disclosed in note 11.
Of the completed investment properties GBP154,662,000 (2016: GBP141,823,000) are long leasehold properties.
During the year the loan facilities, as disclosed in note 11, were utilised to fund development work on investment properties under construction. Interest costs of GBP517,000 (2016: GBP228,000) attributable to development work in progress were capitalised during the year.
9. Trade and other receivables
2017 2016
GBP'000 GBP'000
------------------------------- --------- ---------
Rent receivable 4,030 4,376
Other debtors and prepayments 3,146 4,143
------------------------------- --------- ---------
7,176 8,519
------------------------------- --------- ---------
10. Trade and other payables
2017 2016
GBP'000 GBP'000
-------------------------------------- --------- ---------
Trade payables 1,266 1,470
VAT payable 908 233
Other payables 508 771
Interest payable and similar charges 3,353 3,092
Accruals 3,360 5,207
Deferred rental income 9,287 9,150
18,682 19,923
-------------------------------------- --------- ---------
11. Loans
2017 2016
GBP'000 GBP'000
--------------------------------------- --------- ---------
Total facilities drawn down 373,544 336,705
Loan issue costs (15,544) (14,662)
Amortisation of loan issue costs 5,917 4,683
Fair value arising on acquisition
of subsidiaries 11,645 11,645
Amortisation of fair value adjustment
on acquisition (4,979) (4,064)
--------------------------------------- --------- ---------
370,583 334,307
Loans due within one year 2,213 1,983
--------------------------------------- --------- ---------
372,796 336,290
--------------------------------------- --------- ---------
The current portion of long term loans relates to the amount due in the next twelve months on the Aviva PMPI, GPG and Fakenham loan facilities; the terms of these loans are described below.
The Group has eight primary debt facilities drawn. On 6 March 2017 the Group completed a seventh debt facility with a new lender, the Bank of Ireland, for up to EUR29.1 million. At 30 September 2017 an amount of EUR14.0 million has been drawn down. On 27 July 2017 the Group entered into an eighth debt facility, for which GBP27.5 million has been drawn. On 11 August 2017, the group sold an investment property which had a small loan facility attached which was repaid from the net proceeds. In addition the Group has a revolving loan facility with RBS. The RBS facility was undrawn at 30 September 2017. Details of each facility are disclosed below. Repayments of the loans listed above fall due as follows:
2017 2016
GBP'000 GBP'000
--------------------- -------------- --------------- ---------
Due within one
year 2,213 1,983
Between one and
two years 2,517 2,288
Between two and
five years 8,802 8,403
Over five years 359,264 323,616
--------------------- -------------- --------------- ---------
Due after one
year 370,583 334,307
--------------------- -------------- --------------- ---------
372,796 336,290
--------------------- -------------- --------------- ---------
Interest 2017 2016
Rate Expiry Date GBP'000 GBP'000
--------------------- -------------- --------------- --------- ---------
Aviva GBP100m
loan facility 5.008% December 2036 99,682 99,679
Aviva GBP50m
loan facility 4.370% February 2032 49,035 48,984
Aviva PMPI loan 4.450% February 2027
facility
November 2032
October 2031 57,750 59,445
Aviva GPG loan December 2031
facility 4.130%-5.000% onwards 22,173 22,649
Aviva Fakenham December 2031
loan facility 4.130%-5.000% onwards 3,997 4,098
Aviva Verwood
loan facility(1) 6.250% July 2026 - 827
Standard Life
loan note facility 3.838% October 2028 49,276 49,483
Loan note facility
#2 3.000% September 2028 27,500 -
RBS loan facility 2.000% September 2019 (247) (332)
Loan note facility 3.990% December 2028 49,506 49,474
Bank of Ireland
facility 3.030% September 2024 11,911
Current portion
of long term
loans 2,213 1,983
--------------------- -------------- --------------- --------- ---------
372,796 336,290
--------------------- -------------- --------------- --------- ---------
(1) During the year, the GBP827,000 Aviva Verwood loan facility was repaid in full following the sale of the property.
Covenants
All of the financial covenants on the loan facilities were complied with during the year and subsequently.
Mark to market of fixed rate debt
The Group does not mark to market its fixed interest debt in its financial statements, other than the recognition of a fair value adjustment on the acquisition of debt facilities. The unamortised fair value adjustment on acquired loans was GBP6,666,000 as at 30 September 2017 (30 September 2016: GBP7,581,000).
A mark to market calculation gives an indication of the benefit or liability to the Group of the fixed rate debt given the estimated prevailing cost of debt over the remaining life of the debt. An approximate mark to market calculation has been undertaken following advice from the Group's lenders, with reference to the fixed interest rate on the individual debt facilities, and the fixed interest rate, including margin, achievable on the last business day of the financial year for a loan with similar terms to match the existing facilities. The debt benefit or liability is calculated as the difference between the present values of the debt cash flows at the two rates over the remaining term of the loan, discounting the cash flows at the prevailing LIBOR rate. The approximate mark to market liability of the total fixed rate debt to the Group was GBP42,574,000 as at 30 September 2017 (30 September 2016: GBP59,134,000).
Fair value hierarchy
The valuation of loans is classified in accordance with the fair value hierarchy described in note 1. As at 30 September 2017 (and as at 30 September 2016), the Group determined that loans be included at fair value as Level 3, reflecting significant unobservable inputs.
There were no transfers between Levels 1, 2 or 3 during the year.
Cash flow movements
During the year, the principal cash flow movements on the Group's loan facilities were as follows:
2017 2016
GBP'000 GBP'000
------------------------------------------- --------- ---------
Draw down of Bank of Ireland facility 12,380 -
Draw down of Loan note #2 facility 27,500 -
------------------------------------------- --------- ---------
New loan facilities drawn 39,880 -
------------------------------------------- --------- ---------
Repayment of mortgage principal (897) (66)
Repayment of Aviva PMPI loan facility (1,326) (1,267)
Repayment of Aviva GPG loan facility (486) (466)
Repayment of Aviva Fakenham loan facility (101) (96)
Repayment of long-term borrowings (2,810) (1,895)
------------------------------------------- --------- ---------
Aviva GBP100m loan facility costs (12) -
Aviva GPG loan facility costs - (11)
Aviva Fakenham loan facility costs - (67)
RBS loan facility costs (22) (320)
Loan note facility #2 costs (226) -
Standard Life facility costs (12) (156)
Bank of Ireland facility costs (587) -
------------------------------------------- --------- ---------
Loan issue costs (859) (554)
------------------------------------------- --------- ---------
Any directly attributable costs incurred relating to the loans are added to the loan issue costs and amortised over the remaining life of the specific loan facility.
12. Head lease liabilities
30 September 30 September
2017 2016
Minimum Minimum
Present lease Present lease
value payments value payments
GBP'000 GBP'000 GBP'000 GBP'000
---------------------- --------- ---------- --------- ----------
Due within one year 93 102 93 102
Between one and five
years 297 407 299 407
Over five years 1,066 7,745 1,038 7,806
---------------------- --------- ---------- --------- ----------
1,456 8,254 1,430 8,315
Less future interest
costs - (6,798) - (6,885)
---------------------- --------- ---------- --------- ----------
1,456 1,456 1,430 1,430
---------------------- --------- ---------- --------- ----------
The Group holds certain long leasehold properties which are classified as investment properties. The head leases are accounted for as finance leases. These leases typically have lease terms between 32 and 999 years and fixed rentals.
13. Share capital
Ordinary Shares of no par value were issued during the year as detailed below:
Issue
Number price
of shares per share
---------------------------------------- ------------ -----------
Total shares issued as at 30 September
2016 396,252,182
Shares issued under Company's Block
listing facility:
4 October 2016 3,000,000 88.50p
20 October 2016 1,250,000 88.00p
26 October 2016 1,500,000 87.50p
17 November 2016 1,000,000 87.25p
18 November 2016 1,000,000 87.25p
28 November 2016 1,150,000 87.75p
19 December 2016 1,000,000 87.25p
5 January 2017 2,750,000 88.00p
27 January 2017 1,600,000 88.00p
9 February 2017 2,000,000 87.50p
17 February 2017 5,000,000 87.50p
21 March 2017 2,000,000 87.00p
4 April 2017 1,500,000 88.00p
12 April 2017 1,500,000 87.00p
13 April 2017 2,500,000 87.00p
25 April 2017 500,000 88.00p
26 April 2017 3,181,818 88.00p
2 May 2017 1,500,000 88.00p
3 May 2017 1,700,000 88.00p
9 May 2017 1,850,000 88.75p
18 May 2017 1,300,000 90.25p
15 June 2017 968,399 90.25p
Total shares issued as at 30 September
2017 436,002,399
---------------------------------------- ------------ -----------
Shares held in treasury (see below) (7,362,255)
---------------------------------------- ------------ -----------
Total voting rights in issue as at
30 September 2017 428,640,144
---------------------------------------- ------------ -----------
Demand for shares remained strong throughout the year and the Company issued 39,750,217 shares during the first three quarters of the financial year. In order to satisfy the demand the Company made two applications to the UK Listing Authority for a block listing of 17,769,108 Ordinary Shares of no par value on 28 February 2017 and 14,771,668 Ordinary Shares of no par value on 14 August 2017. At 30 September 2017 the Company had 14,771,668 Ordinary Shares remaining under its block listing facility.
During the year, treasury shares were utilised to satisfy demand for shares in lieu of cash for dividends elected under the Company' scrip dividend scheme. The transactions and relevant price per share are shown below:
Number Price
of shares per share
----------------------------------------- ----------- -----------
Total shares held in treasury as at 8,185,338 83.50
30 September 2016 pence
Shares utilised in lieu of cash payment
of dividends:
31 December 2016 (402,011) 89.30
pence
31 March 2017 (163,434) 88.05
pence
30 June 2017 (147,743) 90.25
pence
28 September 2017 (109,895) 89.55
pence
----------------------------------------- ----------- -----------
(823,083)
----------------------------------------- ----------- -----------
Total shares held in treasury as at
30 September 2017 7,362,255
----------------------------------------- ----------- -----------
The closing value of shares held in treasury issued at 83.50 pence per share each is GBP6,148,000 (2016: GBP6,834,000).
Any cash consideration received in excess of the price the treasury shares were purchased at has been included as part of share premium.
14. Other reserves
The movement in other reserve is set out in the Consolidated Statement of Changes in Equity.
In accordance with the Companies (Guernsey) Law 2008, as amended ("2008 Law") the other reserve is freely distributable with no restrictions. In addition, distributions from the share premium account do not require the sanction of the court. The Directors may authorise a distribution at any time from share premium or accumulated gains provided that they are satisfied on reasonable grounds that the Company will immediately after the distribution satisfy the solvency test prescribed in the 2008 Law and that it satisfies any other requirements in the Company's Articles of Incorporation.
The Company's other reserve is used to accumulate annual profits or losses for each year, less dividends declared and paid. The foreign currency translation reserve comprises foreign exchange differences created on consolidation of foreign operations.
15. Cash and cash equivalents
2017 2016
GBP'000 GBP'000
------------------------------ --------- ---------
Cash and balances with banks 32,145 20,968
------------------------------ --------- ---------
Cash and cash equivalents comprise cash held by the Group and short term bank deposits with an original maturity of three months or less. The carrying amount of these assets approximates their fair value.
Included in the above amounts are balances that are held in restricted accounts which are not immediately available for use by the Group of GBP5,245,000 (2016: GBP100,000). These amounts are ring-fenced for investment in the completion of the properties under construction which they finance.
16. Dividends
Year ended 30
Year ended 30 September
September 2017 2016
----------------------------- --------------------- ---------------------
Dividend Dividend
GBP'000 per share GBP'000 per share
----------------------------- -------- ----------- -------- -----------
Quarterly dividend declared
and paid
30/31 December 5,858 1.4875p 5,385 1.475p
Quarterly dividend declared
and paid
31 March 6,071 1.5000p 5,538 1.4875p
Quarterly dividend declared
and paid
30 June 6,392 1.5000p 5,585 1.4875p
Quarterly dividend declared
and paid
28/30 September 6,427 1.5000p 5,674 1.4875p
----------------------------- -------- ----------- -------- -----------
Total dividends declared
and paid during the
year 24,748 22,182
----------------------------- -------- ----------- -------- -----------
Quarterly dividend declared
after year end 6,430 1.5000p 5,858 1.4875p
Cash flow impact of
scrip dividends paid
on:
30 December 2016 359 164
31 March 2017 144 142
30 Jun 2017 133 153
28 Sept 2017 99 141
----------------------------- -------- ----------- -------- -----------
Total cash equivalent
value of scrip shares
issued 735 600
----------------------------- -------- ----------- -------- -----------
Cash payments made for
dividends declared and
paid 24,013 21,582
----------------------------- -------- ----------- -------- -----------
Dividends are scheduled for the end of March, June, September and December of each year, subject to Board approval and shareholder approval at the AGM of the dividend policy. On 1 November 2017, the Board approved a dividend of 1.5 pence per share, bringing the total dividend declared in respect of the year to 30 September 2017 to 6.0 pence per share. The record date for the dividend was 17 November 2017 and the payment date is 29 December 2017. The amount disclosed above is the cash equivalent of the declared dividend. The option to issue scrip dividends in lieu of cash dividends, with effect from the quarterly dividend paid in June 2010, was approved by a resolution of shareholders at the Company's Annual General Meeting on 10 February 2010. On 1 November 2017 the Board announced an opportunity for qualifying shareholders to receive the December 2017 dividend in new Ordinary Shares fully paid up instead of cash.
17. Financial instruments risk management
The Group's operations expose it to a number of financial instrument risks. A risk management programme has been established to protect the Group against the potential adverse effects of these financial instrument risks. There has been no significant change in these financial instrument risks since the prior year.
The financial instruments of the Group at both 30 September 2017 and 30 September 2016 comprised trade receivables and payables, other debtors, cash and cash equivalents, non-current borrowings and current borrowings. It is the Directors' opinion that, with the exception of the non-current borrowings for which the mark to market liability or benefit is set out in note 11, the carrying value of all financial instruments in the statement of financial position was equal to their fair value.
Credit risk
From time to time the Group invests surplus funds in high quality liquid market instruments with a maturity of no greater than six months. To reduce the risk of counterparty default, the Group deposits its surplus funds subject to immediate cash flow requirements in A- rated (or better) institutions.
Concentrations of credit risk with respect to customers are limited due to the Group's revenue being largely receivable from a high number of UK government backed tenants. As at the year end 89.7% (2016: 89%) of rental income receivable was derived from government backed tenants who are spread across a large number of Clinical Commissioning Groups which further reduces credit risk in this area. The default risk is considered low due to the nature of government backed funding for GP practices.
The Group's maximum exposure to credit risk on financial assets was as follows:
2017 2016
GBP'000 GBP'000
--------------------------- --------- ---------
Financial assets
Rent receivable 3,146 4,376
Other current assets 4,030 4,143
Cash and cash equivalents 32,145 20,968
--------------------------- --------- ---------
It is the Group's policy to assess debtors for recoverability on an individual basis and to make provision where it is considered necessary. Of the Group's trade receivables balance GBP2,697,000 (2016: GBP3,862,000) is neither impaired nor past due. GBP466,000 (2016: GBP514,000) is past due and of this GBP198,000 (2016: GBP216,000) is more than 120 days past due. The Company takes active steps to recover all amounts and has assessed that a provision of GBP50,000 (2016: GBP51,000) against trade receivables is appropriate at the year end.
Market risk
Market risk is the risk that the fair value or future cash flows of the Group's financial instruments will fluctuate because of changes in market prices. The Group operates primarily within Guernsey and the United Kingdom and the majority of the Group's assets, liabilities and cash flows are in pounds sterling which is the reporting currency. Third party independent valuations are received on a quarterly basis and the portfolio is kept under review for any assets which may no longer meet the criteria of the Group.
Foreign currency risk
At the year end, the Company has committed approximately EUR50 million to investments in the Republic of Ireland. To mitigate the risk of valuation movements driven by foreign exchange movements, the Company has entered into a facility of up to EUR29.1 million. This creates a natural foreign currency hedge at a group level.
Interest rate risk
Interest rate risk is the risk that the value of a financial instrument or cash flows associated with the instrument will fluctuate due to changes in market interest rates. Interest rate risk arises on interest bearing financial assets and liabilities the Group uses.
The Group's Aviva borrowing facilities of GBP100,000,000 (2016: GBP100,000,000), GBP50,000,000 (2016: GBP50,000,000) and GBP59,777,000 (2016: GBP59,777,000) were negotiated at a fixed rate of interest of 5.008%, 4.37% and 4.45% respectively. 12 of the Aviva GPG and Fakenham loan facilities are also fixed, with a weighted average interest rate of 4.29%, as disclosed in note 11. The remaining two Aviva GPG loan facilities are charged at variable interest rates with a 2.5% margin.
On 15 September 2016, the Group extended the term of the RBS loan facility for a further three years. The amendment also provides for an option, with lender consent, that the immediately committed GBP20 million revolving credit facility may be extended by a further GBP10 million to GBP30 million or additional lenders be added with a view to increasing the facility on existing terms. Interest is payable on amounts drawn under the amended facility at a rate equal to LIBOR plus a lending margin of 2.00% per annum. A non-utilisation fee of between 1.10% and 0.75% will be payable on the undrawn, GBP20 million immediately available commitment.
During the year the extension was exercised and committed facilities of GBP30 million were available between 16 May 2017 and 1 September 2017.
The Group's private loan note facility of GBP50,000,000 (2016: GBP50,000,000) has a fixed rate of 3.99% and the loan note facility with Standard Life of GBP50,000,000 has a fixed rate of 3.838%.The new private loan note entered into on 27 July 2017 of GBP27,500,000 has a fixed rate of 3.000%.
On 6 March 2017 the Group entered into a debt facility with Bank of Ireland for an amount of EUR29,100,000, which initially provides development finance, followed by a five year term loan once the four Irish secured assets reach practical completion. The margin on the new facility is 4% over EURIBOR during the development phase, stepping down to 3% once practical completion and rent commences at each scheme. The average rate as at 30 September 2017 on this facility is 3.03%
These facilities represented 99.5% of the drawn borrowing facilities at the year end and if the RBS loan facility was fully drawn at the year end, the exposure to variable rate borrowings would be approximately 8%. Therefore the Directors consider interest rate risk on borrowings to be immaterial and do not consider it appropriate to perform sensitivity analysis on these items.
Liquidity risk
Liquidity risk is the risk that the Group will encounter difficulty in realising assets or otherwise raising funds to meet financial commitments. The Directors regularly review the Group's forecast commitments against the future funding availability, with particular reference to the utilisation of and continued access to existing debt facilities and access to restricted cash balances and the ongoing commitments to development projects and proposed acquisitions. The Directors also review the Group's compliance with covenants on lending facilities.
Contractual maturity analysis for financial liabilities including interest payments at 30 September:
Due
or
due Due Due
less Due between between Due
than between 3 months 1 and after
one 1 and and 5 5
month 3 months 1 year years years Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------- --------- ---------- ---------- --------- --------- ---------
Trade and other
payables 1,234 - - - - 1,234
Accruals 127 901 2,332 - - 3,360
Non-current borrowings
Principal - - - 11,319 360,012 371,331
Interest payments 2,731 977 12,522 64,173 140,224 220,627
------------------------- --------- ---------- ---------- --------- --------- ---------
2,731 977 12,522 75,492 499,488 591,958
Current portion
of non-current
borrowings
Principal 153 501 1,559 - - 2,213
Interest payments 7 22 69 - - 98
------------------------- --------- ---------- ---------- --------- --------- ---------
160 523 1,628 - - 2,311
Liabilities at
30 September 2017 1,514 1,402 3,891 11,319 359,264 377,390
Future costs of
non-current borrowings 2,738 999 12,591 64,173 140,224 220,725
------------------------- --------- ---------- ---------- --------- --------- ---------
Balances at 30
September 2017 4,252 2,401 16,482 75,492 499,488 598,115
------------------------- --------- ---------- ---------- --------- --------- ---------
Due
or
due Due Due Due
less between between between Due
than 1 and 3 months 1 and after
one 3 and 5 5
month months 1 year years years Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------- --------- ---------- ---------- --------- --------- ---------
Trade and other
payables 1,470 - - - - 1,470
Accruals 2,009 217 2,981 - - 5,207
Non-current borrowings
Principal - - - 10,691 326,014 336,705
Interest payments 1,798 - 9,309 59,100 144,901 215,108
------------------------- --------- ---------- ---------- --------- --------- ---------
1,798 - 9,309 69,791 470,915 551,813
Current portion
of non-current
borrowings
Principal 164 324 1,495 - - 1,983
Interest payments 369 623 2,942 - - 3,934
------------------------- --------- ---------- ---------- --------- --------- ---------
533 947 4,437 - - 5,917
Liabilities at
30 September 2016 3,643 541 4,476 10,691 326,014 345,365
Future costs of
non-current borrowings 2,167 623 12,251 59,100 144,901 219,042
------------------------- --------- ---------- ---------- --------- --------- ---------
Balances at 30
September 2016 5,810 1,164 16,727 69,791 470,915 564,407
------------------------- --------- ---------- ---------- --------- --------- ---------
18. Commitments
At 30 September 2017, the Group had commitments of GBP21.3 million (2016: GBP21.2 million) to complete properties under construction including sites purchased for forward funding schemes.
19. Material contracts
Investment Adviser
Octopus Healthcare Adviser Ltd is appointed to provide investment advice under the terms of an agreement dated 17 October 2006 as subsequently amended 20 March 2009, 17 February 2013, 24 September 2013, 20 November 2015 and 29 September 2017 (the "Investment Advisory Agreement" or "Agreement"). Fees payable under this agreement are:
(i) a tiered investment advisory fee set at 0.50% per annum on healthcare property assets up to GBP750 million, 0.40% per annum payable on assets between GBP750 million and GBP1 billion, and 0.30% per annum payable on assets over GBP1 billion subject to a total minimum annual fee of GBP3.878 million or, if lower, the fee that would have been payable under the old fee structure until the consolidated property asset value reaches GBP782 million after which no minimum fee shall apply;
(ii) a property management fee of 3% of gross rental income up to GBP25 million, and 1.5% property management fee on gross rental income over GBP25 million;
(iii) a corporate transaction fee of 1% of the gross asset value of any property owning subsidiary company acquired; and
(iv) a performance fee based upon total shareholder return.
Currently the investment advisor fee is being charged at GBP3.878 million per annum. The annual performance fee is 15% of the amount by which the total shareholder return (using an average share price for the month of September) exceeds a compound hurdle rate calculated from the 69.0 pence issue price at 8 April 2009, subject to a high watermark. If in any year the total shareholder return falls short of this hurdle, the deficit in the total shareholder return has to be made up in subsequent years before any performance fee can be earned. The compounding of the hurdle rate is adjusted upwards to compound from the high watermark level at which the performance fee was last earned.
The hurdle rate applied in the year ended 30 September 2017 was 10% per annum (2016: 10%). The high watermark used for the calculation of the performance fee for the year to 30 September 2017 was the price which would have given a compounded 10% total shareholder return over the high watermark at 30 September 2016 (89.60 pence per share) with dividends reinvested. The current high watermark as at 30 September 2017 is set with reference to the theoretical share price, which would have triggered a performance fee for 2017, of approximately 92.25 pence per share which will form a base for measuring shareholder return over the next year for the purpose of assessing whether a performance fee is payable.
The investment advisory base fee and performance fee earned in aggregate in any one financial year cannot be paid in excess of 1.5% of gross assets (excluding cash), such limit being equivalent to the investment advisory base fee that was in existence prior to the change. The excess, if any, of the aggregate of the investment advisory base fee and performance fee earned in any one financial year over 1.5% of gross assets (excluding cash) is not payable but is carried forward to future years or termination of the Investment Advisory Agreement, subject at all times to the annual 1.5% of gross assets (excluding cash) fee limit. On 29 September 2017 the Investment Advisor Agreement was amended following the Company's entry into the UK REIT regime. The fee structure remained unchanged and the with revised notice terms to provide a rolling contract subject to the Company's ability to serve two years' notice.
The Investment Adviser provides accounting administration services for no additional fee. In addition Octopus AIF Management Limited acts as the Company's Alternative Investment Fund Manager for no additional fee.
During the year, the agreements with Octopus Healthcare Adviser Ltd gave rise to GBP4,792,000 (2016: GBP6,362,000) of fees as follows:
2017 2016
GBP'000 GBP'000
--------------------------------------------- --------- ---------
Expensed to the consolidated statement
of comprehensive income:
Investment advisory fee 3,867 3,852
Investment advisory performance fee - 1,553
Property management fees 925 889
Capitalised as part of property acquisition
costs:
Corporate acquisition fees - 68
--------------------------------------------- --------- ---------
Total Fees 4,792 6,362
--------------------------------------------- --------- ---------
Of these fees, GBPNil (2016: GBPnil) remained unbilled and GBP1,146,000 (2016: GBP1,116,000) remained outstanding at the end of the year.
Administrator
Each Group company has entered into a separate administration agreement with International Administration Group (Guernsey) Limited for the provision of administrative services which was renewed with effect from 1 May 2015. Under these agreements fees were incurred totalling GBP115,000 (2016: GBP116,000) for the provision of corporate secretarial services to all Group companies and other administrative services.
Of these fees GBP25,000 (2016: GBP1,000) remained unbilled or outstanding at the year end.
20. Investments in joint ventures
The Group has joint control over GP Property Limited which has issued two ordinary GBP1 voting shares to each of the parties who have joint control.
GP Property Limited is a Guernsey company which is a joint venture with General Practice Investment Corporation Limited and its principal activity is investment in and enhancement of primary healthcare properties. Joint control is exercised through the joint venture's board of directors which includes 3 members appointed by the holders of each class of ordinary share. As at 30 September 2017 the Group holds all the preference shares of the joint venture which gives the Group rights to 99.99% of the joint venture's net assets.
Investments in equity accounted joint venture are as follows
2017
GBP'000
--------------------------------------- ---------
1 October -
Equity accounted share of net profits 13
Dividends received (3)
Preference share capital 1,025
Total 1,035
---------------------------------------- ---------
All of the dividends received in the current year were paid in cash.
Financial information related the joint venture is set out below.
2017
GBP'000
------------------------------------------- ---------
Non-current assets -
Current assets (100%) 967
Current liabilities (100%) (17)
Net assets reported 950
-------------------------------------------- ---------
Proportion of the Group's rights (99.99%) 950
-------------------------------------------- ---------
Revenue (100%) 24
Expenses (100%) (11)
-------------------------------------------- ---------
Net profit (100%) 13
-------------------------------------------- ---------
21. Related party transactions
During the year the Group entered into a joint venture agreement with General Practice Investment Corporation Limited through a company called GP Property Limited. The agreement states the Group will have joint control over the joint venture Company. During the year, the Company has invested GBP940,000 of preferred share capital into the joint venture. In the period, dividends of GBP3,000 were received and capitalised.
During the year, the Group continued its procurement of assets from General Practice Investment Corporation under existing arm's length agreements.
22. Operating leases
At 30 September 2017 the Group had entered into leases in respect of investment properties for the following rental income, excluding any future rent reviews:
2017 2016
GBP'000 GBP'000
--------------------------------- --------- ---------
Amounts receivable under leases
Within one year 40,003 37,177
Between one and five years 160,014 148,707
After more than five years 372,609 389,210
--------------------------------- --------- ---------
Total 572,626 575,094
--------------------------------- --------- ---------
The length of a typical new lease is between 18 and 25 years, with provision for rent reviews mostly every three years. Rent reviews are usually agreed by reference to open market value or the Retail Price Index.
23. Subsidiary companies
The following were the subsidiary companies in the Group at 30 September 2017:
Nominal
value Type of
Country Principal Ownership of shares share
Name of incorporation activity percentage in issue held
----------------------- ------------------- ------------- ------------ ----------- ---------
Held Directly:
MedicX Properties Property
I Limited Guernsey Investment 100% 2 Ordinary
MedicX Properties England Property
II Ltd & Wales Investment 100% 2 Ordinary
MedicX Properties England Property
III Ltd & Wales Investment 100% 1,000 Ordinary
MedicX Properties England Property
IV Ltd & Wales Investment 100% 50,000 Ordinary
MedicX Properties Property
V Limited Guernsey Investment 100% 2 Ordinary
MedicX Properties Guernsey Property 100% Nil Ordinary
VI Limited Investment
MedicX Properties Guernsey Property 100% Nil Ordinary
VII Limited Investment
MedicX GPG Holdings Guernsey Property 100% Nil Ordinary
Limited Investment
MedicX Properties Guernsey Property 100% Nil Ordinary
VIII Limited Investment
MedicX Properties Guernsey Property 100% Nil Ordinary
Ireland Limited Investment
MedicX Properties Guernsey Non Trading 100% Nil Ordinary
Northern Ireland
Limited
MedicX Properties Guernsey Non Trading 100% Nil Ordinary
Ireland 2 Limited
Held indirectly:
MedicX (Verwood) England Non
Ltd & Wales Trading 100% 1,000 Ordinary
England Holding
CSPC (3PD) Limited & Wales company 100% 550 Ordinary
Primary Medical England Holding
Properties Limited & Wales company 100% 8,420 Ordinary
Primary Medical
Property Investments England Property
Limited & Wales Investment 100% 966,950 Ordinary
DK Properties England Property
(Woolston) Ltd* & Wales Investment 100% 2 Ordinary
England Property
GPG No5 Limited & Wales Investment 100% 48,500 Ordinary
England
MedicX LHP Limited* & Wales Dormant 100% 100,000 Ordinary
England
MedicX LHF Limited* & Wales Dormant 100% 1 Ordinary
MedicX (Fakenham) England Property
Ltd & Wales Investment 100% 100 Ordinary
----------------------- ------------------- ------------- ------------ ----------- ---------
24. Capital management
The Group's objectives when managing capital are:
-- To safeguard the Group's ability to continue as a going concern and provide returns for shareholders and benefits for other stakeholders; and
-- To provide an adequate return to shareholders by sourcing appropriate investment properties and securing long term debt at attractive rates commensurate with the level of risk.
The Group sets the amount of capital in proportion to risk. The Group manages the capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, purchase shares in the Company, issue new shares or sell assets to reduce debt.
The Group monitors capital on the basis of the adjusted gearing ratio. This is calculated as net debt divided by adjusted capital. Net debt is calculated as total debt, per the statement of financial position, less cash and cash equivalents. Adjusted capital comprises total assets less cash and cash equivalents and goodwill. The Group is not subject to any externally imposed capital requirements, however the Directors intend to secure and utilise long term borrowings of approximately 50% on average over time and not exceeding 65% of the Company's total assets.
The adjusted gearing ratios at 30 September 2017 and 30 September 2016 were as follows:
2017 2016
GBP'000 GBP'000
--------------------------------- --------- ---------
Total debt 372,796 336,290
Less: cash and cash equivalents (32,145) (20,968)
--------------------------------- --------- ---------
Net debt 340,651 315,322
--------------------------------- --------- ---------
Total assets 720,712 641,751
Less: cash and cash equivalents (32,145) (20,968)
--------------------------------- --------- ---------
Adjusted capital 688,567 620,783
--------------------------------- --------- ---------
Adjusted gearing ratio 0.50:1 0.51:1
--------------------------------- --------- ---------
25. Post year end events
On 16 November the Group completed the sale of five primary healthcare properties located in Wolverhampton, Southampton, Gravesend, Leicester and Grimsby. The total gross sale price was GBP5.6 million representing a gain of approximately GBP250,000 over the 30 September 2017 valuation. This disposal was in line with the Fund's strategy of seeking to sell smaller assets or those with shorter leases with a lower likelihood of providing primary healthcare services over the long term.
On 20 November, the Group contracted to acquire, by way of forward funding at a cost of GBP4.6 million, a new primary healthcare medical centre near Glynneath in the Vale of Neath, South Wales.
The property is due to be completed in September 2018 and will be 1,536 m(2) , let to the Health Board, the Vale of Neath Practice and a local pharmacy on leases with a term of 20 years from practical completion.
The acquisition was made under a framework agreement which gives the Fund the right to forward fund new primary healthcare schemes from Healthcare Property Company Ltd, a leading developer of primary healthcare centres.
As described in the Investment Adviser's report the Fund's pipeline stood at GBP175 million at 30 September 2017. Since then GBP38.2 million of UK schemes have moved forward into legal due diligence and the Fund has secured two sites and conditionally exchanged contracts on a third asset with initial consideration of GBP3.5 million having been deployed.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR DGBDDGXBBGRB
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