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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Secure Income Reit Plc | LSE:SIR | London | Ordinary Share | GB00BLMQ9L68 | ORD 10P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 461.00 | 461.00 | 461.50 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
From May 2019 to May 2024
TIDMSIR
RNS Number : 9583Q
Secure Income REIT PLC
18 September 2017
18 September 2017
Secure Income REIT Plc
(the "Company" or the "Group")
Interim results for the six months ended 30 June 2017
Secure Income REIT Plc (AIM: SIR), the specialist long term income UK REIT, today announces its interim results for the six months ended 30 June 2017.
Highlights
-- EPRA NAV per share up: - 9.9% to 355.5p over the six months to 30 June 2017 - over 100% since listing in June 2014 -- Adjusted EPRA EPS up 24.1% to 6.7p in the six months to 30 June 2017
-- Quarterly distributions currently yielding an annualised 3.9% on 30 June 2017 EPRA NAV, with strong and predictable growth prospects underpinned by annual contractual fixed and RPI linked rental uplifts
-- EPRA NAV per share growth plus dividends result in Total Accounting Return of 11.9%, with Total Shareholder Return of 11.7% over six months
-- Portfolio valuation up 4.8% since 31 December 2016 to GBP1.72 billion, valued at a blended net initial yield of 5.2% (5.3% as at 31 December 2016)
-- Rents up 2.7% over six months to 30 June 2017 and up 3.0% including July's increases -- Net Loan To Value ratio of 51.0%, down from 53.5% at 31 December 2016
-- Highly defensive portfolio of assets producing GBP95.2 million of passing rent with a weighted average unexpired lease term of 22.7 years as at 30 June 2017 with no break options
Hot Features
Premium
-- External management team significantly aligned, with a 16.7% stake worth over GBP136 million
Change since
30 June 2017 31 December 2016 31 December 2016
--------------------------------- ------------ ---------------- -----------------
Net assets GBP813.3m GBP737.4m 10.3%
EPRA net asset value GBP823.0m GBP745.9m 10.3%
EPRA net asset value per share 355.5p 323.6p 9.9%
--------------------------------- ------------ ---------------- -----------------
Change since
30 June 2017 30 June 2016 30 June 2016
--------------------------------- ------------ ---------------- -----------------
Adjusted EPRA earnings per share 6.7p 5.4p 24.1%
Dividends per share 6.6p - n/a
--------------------------------- ------------ ---------------- -----------------
Martin Moore, Non-Executive Chairman of the Company, commented:
"I am delighted to announce another healthy increase in values for Secure Income REIT with EPRA NAV per share up 10% over six months and over 100% since float three years ago. The Group continues to benefit from being an early mover into the inflation protected, long lease alternative property sector where investment demand continues to build against a limited supply of high quality assets."
ENQUIRIES:
Prestbury Investments LLP Tel: 020 7647 7647
Nick Leslau
Mike Brown
Sandy Gumm
FTI Consulting Tel: 020 3727 1000
Richard Sunderland
Claire Turvey
Stifel Nicolaus Europe (Nominated Adviser and Broker) Tel: 020 7710 7600
Mark Young
David Arch
Tom Yeadon
Notes to Editors
Secure Income REIT Plc is a specialist UK REIT, investing in key operating real estate assets that provide long term rental income with inflation protection. Its investment strategy is designed to satisfy investors' growing requirements for high quality, secure, inflation protected income flows. The Group owns a portfolio of 81 high quality assets including some of the UK's top visitor attractions and theme parks (Alton Towers theme park and hotel, Thorpe Park and Warwick Castle), as well as 20 private hospitals and 55 Travelodge hotels in the UK.
Forward looking statements
This document includes forward looking statements which are subject to risks and uncertainties. You are cautioned that forward looking statements are not guarantees of future performance and that if risks and uncertainties materialise, or if the assumptions underlying any of these statements prove incorrect, the actual results of operations and financial condition of the Group may differ materially from those made in, or suggested by, the forward looking statements. Other than in accordance with its legal or regulatory obligations, the Company undertakes no obligation to review, update or confirm expectations or estimates or to release publicly any revisions to any forward looking statements to reflect events that occur or circumstances that arise after the date of this document.
Chairman's Statement
Dear shareholder,
I am pleased to report another positive set of results for the Group for the first half of 2017.
Results and financial position
The Group's EPRA NAV at 30 June 2017 is 355.5 pence per share, having grown by 9.9% since 31 December 2016 and which, when added to the dividends paid in the period, results in a Total Accounting Return of 11.9% over the six months.
GBPm Pence per share
---------------------------------- --------- ---------------
EPRA NAV at 1 January 2017 745.9 323.6
Investment property revaluation* 76.1 33.0
Other retained earnings* 16.1 5.5
Dividends paid (15.1) (6.6)
EPRA NAV at 30 June 2017 823.0 355.5
---------------------------------- --------- ---------------
* Amounts reported in the Group income statement adjusted by GBP6.0 million (2.6 pence per share) to remove the spreading of fixed rental uplifts over the term of the lease. The adjustment reduces rental income and increases revaluation movement in equal amounts.
In the six months to 30 June 2017, the portfolio valuation rose by 4.8% to GBP1.72 billion, showing a net initial yield of 5.2% (5.3% at 31 December 2016). The majority of the rent reviews occur before 30 June each year and rents increased by 2.7% from an annualised GBP92.6 million at 31 December 2016 to GBP95.2 million at 30 June 2017. On completion of the fixed rental uplifts on the German leisure portfolio on 29 July 2017, the total portfolio passing rent increased to GBP95.4 million or a 3.0% increase since 31 December 2016.
Following the uplift in the portfolio valuation, our net loan to value ratio has further reduced to 51.0%, down from 53.5% at the end of 2016. Annualised interest cover is 1.9 times and we maintain healthy headroom on financial covenants in our non-recourse facilities.
Adjusted EPRA EPS for the six months to 30 June 2017 was 6.7 pence per share compared to 5.4 pence per share for the six months to 30 June 2016. The Group's policy is to distribute Adjusted EPRA earnings and 6.6 pence per share of distributions were paid in the period. The quarterly distribution was increased to 3.5 pence per share for the third quarter dividend paid in August, reflecting an annualised yield on EPRA NAV of 3.9%. With fixed interest costs and our annually increasing property income, we remain confident that we can continue to deliver a growing dividend and attractive total returns to our shareholders.
The prospects for growth in the dividend and in Total Shareholder Return are underpinned by the Group's unusually long leases, with just under 23 years unexpired as at 30 June 2017 and no break options, and by the high degree of certainty of income growth inherent in the rent review structures. 58% of the Group's rental income is subject to annual minimum fixed rental uplifts averaging 2.8% per annum, with the remaining 42% of rental income subject to uncapped, upwards only RPI linked uplifts. 85% of portfolio rents are subject to annual reviews with the balance on a staggered five year cycle. The Group therefore generates annually increasing income even if there is no inflation, as well as the ability to capture further income growth during inflationary times.
Outlook
The commercial property market is currently polarised between strong investment demand for very well let properties but muted interest in short let or weak covenanted income streams. A similar divide operates between enthusiasm for assets in logistics and alternative sectors such as healthcare but much weaker interest elsewhere. This is reflected in REIT share prices with companies in the favoured sectors trading at or above NAV whilst the remainder typically trade at 20-30% discounts. This has been the position for over a year now since the Brexit vote and, in our view, is unlikely to change any time soon. In a lacklustre UK economy, interest rates and bond yields are likely to continue to remain low, underpinning the search for yield - particularly a sustainable, growing yield. With the outlook for rents in most property sectors now either flat or declining, an increasing amount of capital is bidding for the limited amount of stock that occupies the few remaining bright spots in the market. This continues to put upward pressure on our valuations, adding to our returns but makes sourcing new acquisitions that are accretive to shareholder returns more challenging.
Our goal remains to maximise shareholder returns without reducing the quality of our portfolio. Acquisitions need to meet two sets of criteria. Our financial hurdle is that deals should enhance earnings and NAV per share; in addition, the real estate should be secured on key operating assets in alternative sectors let to companies with strong covenants on long leases with guaranteed uplifts. Throughout 2017 the deals we have considered that have met our property selection criteria have been much lower yielding than our existing portfolio, so failed the financial hurdle. With a myriad of new long income vehicles coming to market we are now in a world where, in our judgement, it is easier to raise money than invest it wisely. In the rush to build up portfolios we now regularly see buyers loosening their criteria in order to secure deals but we remain resolute that shareholders' best interests are served in this climate by being patient and highly selective. Operating in this manner can prove a frustrating process, not least as all ambitious property operators are happiest when doing deals. However, as major shareholders, our manager is firmly aligned in putting shareholder returns first and foremost and fully supports the Board's approach to current market conditions.
What is increasingly apparent is how difficult it would be to replicate our current portfolio of GBP1.7 billion of high quality assets mainly secured on global covenants. This reinforces our view that the business is well positioned to continue to deliver attractive returns in the current environment and we view the future with confidence.
Martin Moore
Chairman
18 September 2017
Investment Adviser's Report
Prestbury Investments LLP is the investment adviser to Secure Income REIT Plc and is pleased to report on the operations of the Group for the six months ended 30 June 2017.
The portfolio
The portfolio comprises 81 properties with secure, long term rental income from key operating assets, with contractual uplifts offering inflation protection and producing GBP95.2 million of annualised passing rent at 30 June 2017. The majority of the rent is derived from large listed groups whose businesses offer global spread and which have performed very well over many years, demonstrating strong defensive qualities. The portfolio is fully let for a weighted average term of 22.7 years from 30 June 2017 on full repairing and insuring leases with no break options.
Healthcare Leisure Hotels Total
------------------------- ----------- ----------- ----------- -------------
Number of assets 20 6 55 81
Passing rent at 30 June
2017 GBP48.9m GBP32.4m GBP13.9m GBP95.2m
External valuation at
30 June 2017 GBP925.9m GBP585.2m GBP209.1m GBP1,720.2m
------------------------- ----------- ----------- ----------- -------------
Healthcare assets (54% of portfolio value)
The healthcare assets comprise 20 freehold private hospitals: a portfolio of 19 located throughout England let to a subsidiary of Ramsay Health Care Limited, the listed Australian healthcare company, and one in central London let to a subsidiary of Groupe Sinoué, a French company specialising in mental health. Passing rent on the healthcare portfolio is as follows:
30 June 31 December
2017 2016
GBPm GBPm
--------------------------------------------- --------- -------------
Acute hospitals guaranteed by Ramsay Health
Care Limited 46.9 45.6
Lisson Grove psychiatric hospital guaranteed
by Orpea SA 2.0 1.9
48.9 47.5
--------------------------------------------- --------- -------------
The leases on the acute hospitals are all guaranteed by Ramsay Health Care Limited, one of the top five private hospital operators in the world and a constituent of the ASX 50 index of Australia's largest listed companies, with a market capitalisation at 15 September 2017 of GBP7.4 billion.
The Ramsay hospitals are let on full repairing and insuring leases with a term to expiry at 30 June 2017 of 19.9 years without break. The rent increases in May each year by a minimum of a fixed 2.75% per annum throughout the lease term. In addition, at Secure Income REIT's option, rent may be increased with effect from May 2017 to the higher of a 2.75% per annum uplift or 57.525% of site earnings before interest, tax, depreciation, amortisation, rent and head office costs, and every fifth year thereafter to the higher of a 2.75% per annum uplift and open market rental value. The May 2017 review is a calculation based on estimated site earnings and negotiations for any further uplift are ongoing with the tenant. As a result, these financial statements reflect only the 2.75% fixed uplift and not any further uplift on settlement of the review.
The lease on the London psychiatric hospital is guaranteed by Orpea SA, a leading European operator of nursing homes, post-acute care and psychiatric care, listed on Euronext Paris with a market capitalisation at 15 September 2017 of GBP5.5 billion. The hospital is let on a full repairing and insuring lease with a term to expiry at 30 June 2017 of 27.1 years without break, and the rent increases by a fixed 3.0% per annum throughout the lease term in May each year.
Leisure assets (34% of portfolio value)
The leisure assets comprise four well known visitor attractions and two hotels, located in England and Germany, and include two of the UK's top three theme parks. The UK assets are Alton Towers theme park and the Alton Towers hotel, Thorpe Park theme park and Warwick Castle. The German assets are Heide Park theme park (the largest in Northern Germany) and the Heide Park hotel, both located in Soltau, Saxony. Passing rent on the leisure portfolio is as follows:
30 June 31 December
2017 2016
GBPm GBPm
--------------------------------------- --------- -------------
UK 26.3 25.5
Germany at constant Euro exchange rate 5.9 5.9
Movement in Euro exchange rate 0.2 -
32.4 31.4
--------------------------------------- --------- -------------
The properties are held freehold and are let to substantial operating subsidiaries of Merlin Entertainments Plc, the guarantor of the leases. Merlin is a FTSE 100 company with a market capitalisation at 15 September 2017 of GBP4.5 billion. Measured by the number of visitors, it is Europe's largest and the world's second largest operator of leisure attractions.
The average term to expiry of the leisure leases is 25.0 years from 30 June 2017 and the tenants have two successive rights to renew them for 35 years at the end of each term. The leases are on full repairing and insuring terms with no contractual break options. There are upwards only uncapped RPI-linked rent reviews every June throughout the term (based on RPI in the twelve months to April each year) for the UK assets, which in 2017 resulted in a rental increase of 3.5%. The German properties are subject to fixed annual increases of 3.34% every July throughout the term, as a result of which the German rents increased from GBP6.1 million to GBP6.3 million on 29 July 2017 (translated at the 30 June 2017 rate).
Hotel assets (12% of portfolio value)
The hotel assets comprise 55 Travelodge hotels, located in England and Scotland, let to Travelodge Hotels Limited which is the main operating company within the Travelodge Group trading in the UK, Ireland and Spain. Travelodge is the UK's second largest budget hotel brand, with 546 hotels and over 41,000 rooms as at 30 June 2017.
The average unexpired lease term is 26.0 years as at 30 June 2017 with no break clauses. The leases are on full repairing and insuring terms and Travelodge is also responsible for the cost of headlease rentals and any other amounts owing to the superior landlords of the 17 leasehold properties. There are upwards only uncapped RPI-linked rent reviews every five years throughout the term of each lease, with reviews falling due over a staggered pattern across the portfolio. 12% of the Hotel portfolio rents (1.8% of all Group rent) were reviewed in the six months to 30 June 2017, resulting in an 11.8% increase in rental income for those properties and a 1.5% overall increase in passing rent to GBP13.9 million for the Travelodge portfolio at the balance sheet date.
Portfolio valuation yields at 30 June 2017
Total
30 June
UK Germany 2017
-------------------------------------------- ---------- ---------- ----------
Healthcare:
Net initial yield 4.9% - 4.9%
Running yield following May 2018 fixed
uplifts * 5.1% - 5.1%
Leisure:
Net initial yield 5.1% 5.4% 5.2%
Running yield following July 2017/June
2018 fixed uplifts and reviews 5.2% 5.6% 5.3%
Hotels:
Net initial yield 6.2% - 6.2%
Running yield following October 2017 rent
reviews 6.3% - 6.3%
Total portfolio:
Net initial yield 5.2% 5.4% 5.2% Running yield by June 2018 * 5.3% 5.6% 5.3% Weighted average unexpired lease term 22.5 years 25.1 years 22.7 years -------------------------------------------- ---------- ---------- ----------
* this takes no account of any uplift on the May 2017 site earnings review
assuming RPI linked rents increase in line with the estimates of the external valuers, which amounted to 2.0% for UK leisure and 2.5% for Hotels
The healthcare valuation yields include the effect of the fixed rental uplifts that took effect in May 2017 but do not reflect any additional uplift that might arise from the May 2017 review based on site earnings, as this review is currently being negotiated and the extent of any uplift is uncertain. The UK leisure valuation yields include the effect of the RPI-linked rental uplifts that took effect in June 2017 and resulted in a 3.5% uplift on those rents. The German leisure valuation yield of 5.4% reflects the passing rent at 30 June 2017 and that yield has since increased to 5.6% following the July 2017 fixed rental uplifts. The hotels valuation yields include the effect of RPI-linked rental uplifts on three properties that took effect in April 2017 and resulted in a 1.5% increase in total hotels rent.
Portfolio valuation by location
30 June 31 December
2017 2016
GBPm GBPm
----------------------------------------- --------- -----------
Healthcare
England 925.9 892.9
Leisure
England 480.5 454.2
Germany at constant Euro exchange rate 102.4 96.5
Movement in Euro exchange rate 2.3 -
Hotels
England 169.6 160.2
Scotland 39.5 37.9
--------------------------------------------- --------- -----------
1,720.2 1,641.7
----------------------------------------- --------- -----------
The portfolio valuation uplift in the period comprised:
Change in the period
GBPm %
------------------------------------------------ ----------- -----------
Healthcare assets 33.0 3.7%
English leisure assets 26.3 5.8%
German leisure assets at constant Euro exchange
rate 5.9 6.1%
Hotels 10.9 5.5%
------------------------------------------------ ----------- -----------
Portfolio revaluation at constant currency 76.1 4.6%
Movement in gross-up of headlease liabilities 0.1 -
Movement in Euro exchange rate 2.3 2.4%
78.5 4.8%
------------------------------------------------ ----------- -----------
The favourable currency translation movement of GBP2.3 million has arisen on the German properties, reflecting the strength of the Euro against Sterling: the 31 December 2016 exchange rate was EUR1:GBP0.8583 and at 30 June 2017 was EUR1:GBP0.8779. This gain is partially offset by movements in the value of the Euro-denominated debt secured on those properties to leave a net currency translation effect on EPRA NAV of GBP0.9 million arising from the Group's German investments. These German investments make up 5% of EPRA NAV and the rest is all Sterling denominated.
In addition to these valuation movements, a rent smoothing adjustment to investment property revaluations arises from the Group's accounting policy, consistent with International Financial Reporting Standards, to spread the impact of fixed rental uplifts evenly over the term of each relevant lease. The adjustments relate to those rents on the healthcare assets which increase by 2.75% (on 96% of healthcare rents) and 3.0% (on 4% of healthcare rents) every May, and those rents on the German leisure assets which increase by 3.34% every July.
The impact of this accounting treatment is to reflect a receivable, included in the book value of investment property, for the amount of rent included in the income statement ahead of actual cash receipts. This receivable increases over the first half of each lease term then unwinds, reducing to zero over the second half of each lease term. The impact over time for each of the rental income flows subject to smoothing is as follows:
Maximum
------------------------------
Receivable receivable Midway
------------------------------
at 30 June at midway point
2017 point in lease
GBPm GBPm term
------------------------------ ------------ ------------ -------------
Healthcare - acute hospitals 141.4 165.2 May 2022
Healthcare - Lisson Grove 8.0 20.6 Nov 2025
German leisure* 30.6 41.2 Jan 2025
------------------------------ ------------ ------------ -------------
Total 180.0 227.0
------------------------------ ------------ ------------ -------------
* at the period end Euro conversion rate of EUR1:GBP0.8779
In order that the rent smoothing receivable does not, when included in the book value of the investment properties, overstate the value of the portfolio, any movement in the receivable is offset against property revaluation movements. As a result, this adjustment affects only the income statement presentation, increasing rental income and reducing property revaluation gains, and does not change the Group's retained earnings or net assets. The annual impact of this adjustment is known in advance with certainty on the assumption that there are no acquisitions, disposals or lease variations. The additional revenue and reduced valuation movement that is expected to be recognised on the existing portfolio during the current year and the next three financial years is as follows:
Healthcare German leisure* Total
GBPm GBPm GBPm
------ ------------ ----------------- ----------
2017 9.3 2.1 11.4
2018 7.9 1.9 9.8
2019 6.6 1.7 8.3
2020 5.1 1.5 6.6
------ ------------ ----------------- ----------
* at the year to date average Euro conversion rate of EUR1:GBP0.8603
Financing
The Group's operations are financed by a combination of cash resources and non-recourse debt finance, where the assets at risk in the event of a loan default are limited to those within four ring-fenced sub-groups. Each sub-group is self-contained, with no cross default provisions between the four of them. The weighted average interest cost is 5.1% per annum and the weighted average term to maturity is 7.0 years from 30 June 2017. Key terms of the facilities are as follows:
Healthcare Healthcare Leisure Hotels
--------------------------- ---------- ------------ ------------- ------------
Loan principal at 30
June 2017 GBP218.3m GBP310.6m GBP379.8m* GBP60.0m
Number of assets securing
loan 9 11 6 55
Fixed interest rate 4.29% 5.30% 5.68% 2.71%
Annual cash amortisation GBP3.8m
assuming full covenant (years 6 and
compliance GBP1.0m GBP3.2m 7) None
September
Final repayment date 2025 October 2025 October 2022 October 2023
--------------------------- ---------- ------------ ------------- ------------
* Comprising GBP316.8 million of senior and mezzanine Sterling loans secured on the UK assets and EUR71.8 million of senior and mezzanine Euro denominated loans secured on the German assets (translated at the period end exchange rate of EUR1:GBP0.8779) with all Leisure portfolio loans cross-collateralised. The amortisation in each of the years ending October 2021 and October 2022 comprises GBP3.2 million on the sterling facility and EUR0.7 million on the Euro facility.
The Group's gross and net debt at 30 June 2017 was as follows:
Portfolio Group
Healthcare Healthcare Leisure Hotels total Other total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------------- ---------- ---------- -------- ------- --------- -------- ---------
Gross debt 218.3 310.6 379.8 60.0 968.7 - 968.7
Secured cash (5.5) (6.7) (8.2) (2.9) (23.3) (0.5) (23.8)
Free cash - - (1.7) (5.2) (6.9) (60.0) (66.9)
-------------------- ---------- ---------- -------- ------- --------- -------- ---------
Net debt 212.8 303.9 369.9* 51.9 938.5 (60.5) 878.0
-------------------- ---------- ---------- -------- ------- --------- -------- ---------
Property valuation 410.0 515.9 585.2* 209.1 1,720.2 1,720.2
-------------------- ---------- ---------- -------- ------- --------- -------- ---------
Net LTV 51.9% 58.9% 63.2% 24.9% 54.6% 51.0%
Interest cover 233% 164% 150% 854% 194%
-------------------- ---------- ---------- -------- ------- --------- -------- ---------
* including EUR71.8 million of Euro loans, EUR2.2 million of cash and EUR119.3 million of property translated at the period end exchange rate of EUR1:GBP0.8779
interest cover for these purposes is measured as current passing rent divided by current annualised interest cost as at the balance sheet date
Following scheduled amortisation payments in July 2017, the total gross debt at the date of this report, including Euro denominated debt at the 30 June 2017 exchange rate, is GBP967.7 million.
The extent of headroom on financial covenants at the balance sheet date is analysed in the business review on the following pages. There have been no defaults or potential defaults in any facility during the period or since the balance sheet date.
Financial review
Key performance indicator - Total Accounting Return
The principal financial outcome that the Board seeks to achieve is attractive growth in shareholder returns. The Board monitors both Total Accounting Return, which is the movement in EPRA NAV per share plus distributions, and Total Shareholder Return, which is the share price movement plus distributions. As the share price is influenced by factors outside the control of the Group, the principal focus for the Board is Total Accounting Return.
The Group's EPRA NAV per share at 30 June 2017 was 355.5 pence, which represents a 9.9% increase over the six months since 31 December 2016. This 31.9 pence per share uplift, together with 6.6 pence per share of distributions, totals a 38.5 pence per share Total Accounting Return, equivalent to an 11.9% return over the period.
Pence per
GBPm share
-------------------------------------------------- --------- --------------
EPRA NAV at 1 January 2017 745.9 323.6
Investment property revaluation* 76.1 33.0
Rental less finance and administrative costs* 15.6 6.8
Tax (0.2) (0.1)
Currency translation and other movements 1.0 0.3
Distributions (15.1) (6.6)
Incentive fee - 0.4% dilution from provision for
shares to be issued - (1.4)
Incentive fee - irrecoverable VAT (0.3) (0.1)
EPRA NAV at 30 June 2017 823.0 355.5
-------------------------------------------------- --------- --------------
* adjusted by GBP6.0 million (2.6 pence per share) to remove from the gross rent and revaluation uplift amounts reported in the income statement of rent smoothing adjustments. These adjustments arise from the requirements of the accounting standards to spread the impact of fixed rental uplifts evenly over the term of relevant leases. The rent smoothing adjustments reflected in these financial statements increase rental income and reduce property valuation gains, and are adjusted in this table to better reflect the Group's actual rental income flows.
EPRA NAV takes the balance sheet measure of net asset value and excludes items that are considered to have no relevance to the assessment of long term performance. The Board considers EPRA NAV to be an appropriate measure as it provides for clearer and more consistent comparisons between the Company's performance and that of its peer group than the balance sheet measure of NAV.
In accordance with the EPRA guidance, to calculate EPRA NAV the Group's NAV is adjusted to exclude deferred tax on investment property revaluations relating to the German assets and is also adjusted to include the dilutive impact of any shares to be issued in satisfaction of the estimated incentive fee arising in the period. The latter adjustment arises because, despite the incentive fee being accounted for in the results for the period, basic net asset value per share does not include the impact of the shares to be issued in satisfaction of that fee.
EPRA NAV is reconciled to the balance sheet net asset value measured in accordance with IFRS in note 17 to the financial statements.
Key performance indicator - Adjusted EPRA earnings per share
The Company's intention is to distribute its Adjusted EPRA EPS through payment of a fully covered cash dividend, paid quarterly.
EPRA EPS excludes from basic EPS any investment property revaluations, profits on the sale of investment properties and related deferred tax to give a measure of underlying earnings from core operating activities.
Adjusted EPRA EPS takes EPRA EPS and removes the effect of smoothing the fixed rental uplifts (in order not to artificially flatter dividend cover calculations) and any significant non-recurring costs (such as the GBP2.0 million costs of the secondary placing in 2016). The measure also excludes any incentive fee and the associated irrecoverable VAT, which is considered to be linked to revaluation movements and therefore best treated consistently with revaluations.
Adjusted EPRA Earnings and EPS comprise:
Six months to Six months to
30 June 2017 30 June 2016
------------------------- -------------------------
Pence per Pence per
GBPm share GBPm share
------------------------------- --------- -------------- --------- --------------
Rental income net of property
outgoings
Like for like portfolio 39.6 17.2 38.4 21.3
Travelodge 6.9 3.0 - -
Net finance costs
Like for like portfolio (24.3) (10.5) (24.5) (13.6)
Travelodge (0.9) (0.4) - -
Administrative expenses (5.7) (2.5) (4.2) (2.3)
Tax (0.2) (0.1) - -
Adjusted EPRA Earnings 15.4 6.7 9.7 5.4
------------------------------- --------- -------------- --------- --------------
Adjusted EPRA EPS is reconciled to basic EPS in note 8 to the financial statements.
The key components of the Group's earnings are its rental income, administrative expenses and financing costs. An analysis of the Group's rental income is included in the portfolio review earlier in this report and the other items are analysed below.
Adjusted EPRA earnings per share - administrative expenses
The administrative expenses included in Adjusted EPRA EPS for the period are as follows:
Six months to Six months to
30 June 2017 30 June 2016
-------------------- --------------------
Pence per Pence per
GBPm share GBPm share
------------------------------- ---- -------------- ---- --------------
Advisory fees 5.0 2.2 3.6 2.0
Other administrative expenses 0.5 0.2 0.3 0.1
Corporate costs 0.2 0.1 0.3 0.2
------------------------------- ---- -------------- ---- --------------
5.7 2.5 4.2 2.3
------------------------------- ---- -------------- ---- --------------
As an externally managed business, the majority of the Group's overheads are covered by the advisory fees paid to the Investment Adviser. It is the Investment Adviser that then meets all office running costs and remuneration for the whole management and support team. The other recurring administrative expenses are principally professional fees, including tax compliance and audit fees, which are billed directly to Group companies.
Corporate costs are those costs necessarily incurred as a result of the Company being listed and comprise:
-- the cost of the Board of seven Directors, four of whom received fees totalling GBP0.1 million in the period. The other three Directors are partners in the Investment Adviser and receive no remuneration from the Company; and
-- other costs of being listed, including listing fees, nominated advisers' fees and registrars' fees, which totalled GBP0.1 million in the period.
Because VAT cannot be charged on the rents on the healthcare assets, there is an element of irrecoverable VAT incurred on the Group's running costs and included within the relevant line items in the table above. The proportion of disallowed VAT on administrative expenses and corporate costs was 51% during the period and at the balance sheet date on an annualised basis.
An incentive fee becomes due if total returns to investors over a financial year exceed a compound growth rate of 10% per annum above the EPRA NAV per share the last time any incentive fee was paid. In the current year the threshold EPRA NAV plus distributions is 355.9 pence per share at 31 December 2017. If the threshold return is exceeded, the Investment Adviser receives 20% of any surplus above that priority return to shareholders, payable in shares. Any such shares received are not permitted to be sold, save in certain limited circumstances, for a period of between 18 and 42 months following the end of the year for which they were earned. The entitlement to any fee only arises after the publication of the Group's audited financial statements for the relevant year.
An incentive fee of GBP3.2 million plus irrecoverable VAT of GBP0.3 million has been recognised in the period, which if ultimately earned would be settled by the issue of 0.9 million shares (representing a 0.4% dilution). In order to make a reasonable assessment of whether or not such a fee will be payable, the Board has estimated the EPRA NAV of the Group at 31 December 2017, assuming that:
-- the property portfolio valuation yields do not change from those applied as at 30 June 2017;
-- there are no acquisitions, disposals or lease variations;
-- any additional uplift in rent from the outstanding Ramsay rent review is not included, on the basis that the outcome of the review is not yet known with sufficient certainty;
-- there are no currency translation gains or losses;
-- RPI uplifts are consistent with the expectations reflected in the June 2017 external investment property valuations;
-- shares are issued in settlement of the fee at the weighted average share price for the period; and
-- the Group's Adjusted EPRA EPS over the remainder of the year is fully distributed on a quarterly basis.
This estimate does not constitute a forecast but represents an illustrative case considered to provide a reasonable basis for assessing whether an incentive fee will be payable, while recognising the limitations inherent in any estimate of future values. On the basis of these assumptions a fee of GBP6.4 million would be payable for the whole year on which irrecoverable VAT of GBP0.6 million would be incurred. Half of the estimated cost is recognised in the first half of the year, reflecting the period over which the services for which the fee is earned have been discharged so far. All other things being equal, the balance of the incentive fee would be incurred in the second half of 2017 resulting in a further GBP3.5 million charge to administrative expenses and a GBP3.2 million share issue. In total 1.9 million new shares would be issued, representing a 0.8% dilution, of which the impact of issuing 0.9 million is already reflected in these financial statements. The result would be further reductions of GBP0.3 million in EPRA NAV (reflecting the irrecoverable VAT) and 1.5 pence in EPRA NAV per share.
Adjusted EPRA earnings per share - tax
The Group operates under the UK REIT regime, so its UK and German rental operations (which make up the majority of the Group's earnings) are exempt from UK corporation tax, subject to the Group's continuing compliance with the UK REIT rules. The Group is otherwise subject to UK corporation tax.
German tax was payable in the period at an effective rate of 8% on realised profits from the Group's German rental operations and the resulting tax charge for the period was GBP0.2 million. The balance sheet also includes a deferred tax liability of GBP9.7 million relating to unrealised German capital gains tax on the investment properties which would only be crystallised on a sale of those assets. There are currently no plans to sell any of the Group's assets.
Adjusted EPRA earnings per share - currency translation
The majority of the Group's assets are located in the UK and the financial statements are therefore presented in Sterling. 5% of the Group's EPRA NAV relates to assets and liabilities relating to properties located in Germany, valued in and generating net earnings in Euros. The fact that both assets and liabilities are Euro denominated acts as a partial hedge of currency fluctuations, but the Group remains exposed to translation differences on the net results and net assets of these operations which are not hedged, with movements recognised in the statement of other comprehensive income.
The German properties are valued at EUR119.3 million as at 30 June 2017, with the Euro denominated secured debt amounting to EUR71.8 million. The Euro strengthened against Sterling over the period by over 2% and as a result there was a net currency translation gain of GBP0.9 million in EPRA NAV in relation to the German net assets.
Key performance indicator - headroom on debt covenants
Debt covenants have been negotiated with the aim of protecting the Group as far as possible from movements in investment property valuations which are not related to changes in the rental cash flows. Key financial covenants are as follows:
-- the GBP310.6 million Healthcare facility and the GBP60.0 million Travelodge facility, which together account for 38% of gross secured debt, are subject to LTV and interest cover tests throughout the loan terms;
-- the GBP218.3 million Healthcare facility, 23% of total gross secured debt, is tested annually for LTV with effect from September 2019 and an interest cover cash trap test operates throughout the loan term; and
-- the GBP379.8 million Leisure facilities, which account for 39% of total secured debt, are not subject to any LTV default covenant or interest cover tests throughout the loan term. There are LTV tests from August 2018 which could if breached trigger a cash trap or full cash sweep.
The Board reviews the headroom on all financial covenants at least quarterly. The headroom on key financial covenants at 30 June 2017 is set out below, together with the net initial valuation yield, the fall in valuation or the fall in projected rent that would trigger a breach of the relevant covenant at the balance sheet date or the first test date if later:
Initial yield Valuation Rental headroom
triggering headroom over ICR
Actual Covenant LTV test* on LTV test test
---------------------------------------- ------ ----------- ------------- ------------ ---------------
Leisure facility
(GBP379.8 million loan at
30 June 2017)
Cash trap LTV test (from August
2018 - 1% per annum loan amortisation
if triggered) 65% <80.0% 6.7% 19%
Cash trap LTV test (from August
2018 - full cash sweep if triggered) 65% <85.0% 7.1% 24%
Healthcare facility
(GBP218.3 million loan at
30 June 2017)
LTV test (from September 2019) 53% <80.0% 8.0% 33%
Cash trap projected debt service
cover test (full cash sweep
if triggered) 211% >150% 29%
Projected debt service cover
test 211% >125% 41%
Healthcare facility
(GBP310.6 million loan at
30 June 2017)
Cash trap LTV test (full cash
sweep if triggered) 60% <80.0% 6.5% 25%
LTV test 60% <85.0% 6.9% 29%
Cash trap projected interest
cover test (full cash sweep
if triggered) 167% >140% 16%
Projected interest cover test 167% >120% 28%
Historic interest cover test 161% >120% 26%
Hotels facility
(GBP60.0 million loan at 30
June 2017)
Partial cash trap LTV test
(50% of surplus cash swept
to lender if triggered) 29% 40% - 45% 8.7% 28%
Cash trap LTV test (full cash
sweep if triggered) 29% 45% - 50% 9.8% 36%
LTV test 29% <50% 10.8% 43%
Cash trap projected interest
cover test (full cash sweep
if triggered) 857% >300% 65%
Projected interest cover test 857% >250% 71%
Cash trap historic interest
cover test (full cash sweep
if triggered) 834% >300% 64%
Historic interest cover test 834% >250% 70%
---------------------------------------- ------ ----------- ------------- ------------ ---------------
* assuming RPI linked rents increase in line with the RPI swap curve as at 5 September 2017
Key performance indicator - Net Loan To Value ratio
The Board ensures that debt facilities are structured with a view to maintaining a capital structure that will withstand varying market conditions. During the period the Group's Net LTV fell from 53.5% to 51.0%, reflecting the impact of GBP76.1 million of property valuation uplifts and GBP2.1 million of scheduled debt amortisation.
Key performance indicator - uncommitted cash
The Board considers that the ability to manage potential debt covenant breaches is at least as important as the level of the financial covenants themselves. The Group has negotiated headroom on financial covenants considered appropriate to the business and also certain cure rights, including the ability to inject cash into ring-fenced financing structures in the event of actual or prospective breaches of financial covenants. Consequently, along with managing the execution risk inherent in arranging and documenting credit facilities, the Board regularly monitors the Group's levels of uncommitted cash. Uncommitted cash is measured as cash balances outside ring-fenced structures secured to lenders, net of any creditors or other cash commitments and net of any cash required to be retained under the regulatory capital rules of the AIFMD regime.
The Group's uncommitted cash was GBP63.4 million as at 30 June 2017, compared to GBP64.3 million as at 31 December 2016.
Cash flow
The movement in cash over the period comprises:
Six months to Six months to
30 June 2017 30 June 2016
---------------------- -----------------
Pence per Pence per
GBPm share GBPm share
-------------------------------------- ----------- --------- ------ ---------
Cash from operating activities 40.7 17.7 34.5 19.1
Net interest and finance costs
paid (24.5) (10.6) (25.1) (13.9)
Distributions paid (15.1) (6.6) - -
Scheduled debt amortisation (2.1) (0.9) (2.3) (1.3)
Amounts received in respect of
advisory fee subsidy - - 2.8 1.6
Costs of secondary placing - - (2.1) (1.2)
Cash flow in the period (1.0) (0.4) 7.8 4.3
Cash at the start of the period 91.7 40.3 81.6 45.3
Effect of exchange rate movements - - 0.2 0.1
Dilution from 2016 incentive
fee share issue - (0.6) - -
Cash at the end of the period 90.7 39.3 89.6 49.7
-------------------------------------- ----------- --------- ------ ---------
Pence per Pence per
Comprising: GBPm share GBPm share
-------------------------------------- ----------- --------- ------ ---------
Free cash 66.9 29.0 69.3 38.5
Cash reserved for regulatory
capital 0.5 0.2 0.6 0.3
Cash secured under lending facilities 23.3 10.1 19.7 10.9
-------------------------------------- ----------- --------- ------ ---------
90.7 39.3 89.6 49.7
-------------------------------------- ----------- --------- ------ ---------
The Company's dividend policy is to fully distribute its earnings. The Group's investment properties are let on full repairing and insuring terms, with each tenant obliged to keep the premises in good and substantial repair and condition, including rebuilding, reinstating, renewing or replacing premises where necessary. Consequently, no capital expenditure, property maintenance or insurance costs have been incurred in the period and it is not expected that material costs of that nature will be incurred on the current portfolio in future. As a result, in the absence of asset purchases or disposals cash balances should remain relatively stable over time.
Nick Leslau
Chairman, Prestbury Investments LLP
18 September 2017
Group Income Statement
Unaudited
six months Audited Unaudited
to year to six months
30 June 31 December to 30 June
2017 2016 2016
Notes GBP000 GBP000 GBP000
-------------------------------- ----- ------------ ------------- ------------
Revenue 3,4 52,984 93,214 45,014
Property outgoings (341) (88) (14)
-------------------------------- ----- ------------ ------------- ------------
Gross profit 52,643 93,126 45,000
-------------------------------- ----- ------------ ------------- ------------
Administrative expenses 5 (9,201) (21,590) (7,744)
Other income 131 - -
Investment property revaluation 9 70,120 72,181 13,077
Operating profit 113,693 143,717 50,333
Finance income 31 115 69
Finance costs 6 (25,477) (49,766) (24,546)
-------------------------------- ----- ------------ ------------- ------------
Profit before tax 88,247 94,066 25,856
Tax charge 7 (1,241) (1,737) (458)
-------------------------------- ----- ------------ ------------- ------------
Profit for the period 87,006 92,329 25,398
-------------------------------- ----- ------------ ------------- ------------
Pence Pence per Pence per
Earnings per share per share Share share
-------------------------------- ----- ------------ ------------- ------------
Basic 8 37.7 48.2 14.1
Diluted 8 37.6 47.4 14.1
-------------------------------- ----- ------------ ------------- ------------
All amounts relate to continuing activities.
Group Statement of Other Comprehensive Income
Unaudited
six months Audited Unaudited
to year to six months
30 June 31 December to 30 June
2017 2016 2016
GBP000 GBP000 GBP000
-------------------------------------------- ------------ ------------- ------------
Profit for the period 87,006 92,329 25,398
Items that may subsequently be reclassified
to profit or loss:
Currency translation differences 709 3,307 1,948
Total comprehensive income for
the period, net of tax 87,715 95,366 27,346
--------------------------------------------- ------------ ------------- ------------
The notes form part of this financial information.
Group Statement of Changes in Equity
Share
Share premium Other Retained
capital reserve reserves earnings Total
GBP000 GBP000 GBP000 GBP000 GBP000
--------------------------- ---------- ---------- ----------- ----------- ---------
Period ended 30 June 2017 (unaudited)
At 1 January 2017 22,723 187,947 13,048 513,705 737,423
--------------------------- ---------- ---------- ----------- ----------- ---------
Profit for the period - - - 87,006 87,006
Other comprehensive income - - 709 - 709
Total comprehensive income - - 709 87,006 87,715
Issue of shares 331 9,028 (9,359) - -
Shares to be issued - - 3,224 - 3,224
Dividends paid - - - (15,111) (15,111)
--------------------------- ---------- ---------- ----------- ----------- ---------
At 30 June 2017 23,054 196,975 7,622 585,600 813,251
--------------------------- ---------- ---------- ----------- ----------- ---------
Year ended 31 December 2016 (audited)
At 1 January 2016 18,034 52,377 652 433,348 504,411
--------------------------- ---------- ---------- ----------- ----------- ---------
Profit for the year - - - 92,329 92,329 Other comprehensive income - - 3,037 - 3,037 Total comprehensive income - - 3,037 92,329 95,366 Issue of shares 4,689 135,570 - - 140,259 Shares to be issued - - 9,359 - 9,359 Dividends paid - - - (11,972) (11,972) --------------------------- ---------- ---------- ----------- ----------- --------- At 31 December 2016 22,723 187,947 13,048 513,705 737,423 --------------------------- ---------- ---------- ----------- ----------- --------- Period ended 30 June 2016 (unaudited) At 1 January 2016 18,034 52,377 652 433,348 504,411 --------------------------- ---------- ---------- ----------- ----------- --------- Profit for the period - - - 25,398 25,398 Other comprehensive income - - 1,948 - 1,948 Total comprehensive income - - 1,948 25,398 27,346 Issue of shares - 2,788 - - 2,788 --------------------------- ---------- ---------- ----------- ----------- --------- At 30 June 2016 18,034 55,165 2,600 458,746 534,545 --------------------------- ---------- ---------- ----------- ----------- ---------
Interim dividends totalling 6.6 pence per share (31 December 2016: 5.8 pence per share; 30 June 2016: nil) were paid during the period.
The notes form part of this financial information.
Group Balance Sheet
Unaudited Audited Unaudited
30 June 31 December 30 June
2017 2016 2016
Notes GBP000 GBP000 GBP000
---------------------------- ----- ------------- ------------- -----------
Non-current assets
Investment properties 3,9 1,731,914 1,653,505 1,378,492
Headlease rent deposits 1,686 1,678 -
---------------------------- ----- ------------- ------------- -----------
1,733,600 1,655,183 1,378,492
Current assets
Cash and cash equivalents 10 90,661 91,667 89,639
Trade and other receivables 11 310 603 67
Current tax receivable 22 - -
90,993 92,270 89,706
Total assets 1,824,593 1,747,453 1,468,198
---------------------------- ----- ------------- ------------- -----------
Current liabilities
Trade and other payables 12 (34,073) (34,130) (30,576)
Secured debt 13 (2,236) (2,238) (2,469)
Current tax liability - (60) (57)
(36,309) (36,428) (33,102)
Non-current liabilities
Secured debt 13 (953,566) (953,302) (893,622)
Head rent obligations under
finance leases (11,734) (11,804) -
Deferred tax liability 14 (9,733) (8,496) (6,929)
(975,033) (973,602) (900,551)
Total liabilities (1,011,342) (1,010,030) (933,653)
---------------------------- ----- ------------- ------------- -----------
Net assets 813,251 737,423 534,545
---------------------------- ----- ------------- ------------- -----------
Share capital 15 23,054 22,723 18,034
Share premium reserve 16 196,975 187,947 55,165
Retained earnings 16 585,600 513,705 458,746
Other reserves 16 7,622 13,048 2,600
Total equity 813,251 737,423 534,545
---------------------------- ----- ------------- ------------- -----------
Pence per Pence per Pence per
share share share
---------------------------- ----- ------------- ------------- -----------
Basic NAV per share 17 352.8 324.5 296.4
Diluted NAV per share 17 351.3 319.9 296.4
EPRA NAV per share 17 355.5 323.6 300.2
---------------------------- ----- ------------- ------------- -----------
The notes form part of this financial information.
Group Cash Flow Statement
Unaudited
six months Audited Unaudited
to year to six months
30 June 31 December to 30 June
2017 2016 2016
Notes GBP000 GBP000 GBP000
------------------------------------ ----- ------------ ------------- ------------
Operating activities
Profit before tax 88,247 94,066 25,856
Adjustments for non-cash
items:
Investment property revaluation 9 (70,120) (72,181) (13,077)
Movement in gross-up of headlease
liabilities (70) - -
Movement in rent smoothing
adjustment 9 (5,962) (12,783) (6,587)
Administrative expenses payable
in shares 3,224 9,359 -
Finance income (31) (115) (69)
Finance costs 6 25,477 49,766 24,546
------------------------------------ ----- ------------ ------------- ------------
Cash flows from operating
activities before changes
in working capital 40,765 68,112 30,669
Changes in working capital:
Headlease rent deposits (8) - -
Trade and other receivables 293 (489) 46
Trade and other payables (61) 5,608 2,487
------------------------------------ ----- ------------ ------------- ------------
Cash generated from operations 40,989 73,231 33,202
Tax paid (281) (829) (847)
------------------------------------ ----- ------------ ------------- ------------
Cash flows from operating
activities 40,708 72,402 32,355
------------------------------------ ----- ------------ ------------- ------------
Investing activities
Interest received 31 115 69
Headlease rent deposits acquired - (1,678) -
Acquisition of investment
properties - (194,348) -
Cash flows from investing
activities 31 (195,911) 69
------------------------------------ ----- ------------ ------------- ------------
Financing activities
Interest and finance costs
paid (24,597) (48,975) (25,013)
Dividends paid (15,111) (11,972) -
Scheduled amortisation of
secured debt (2,079) (4,386) (2,308)
Net proceeds of share issues - 140,259 2,788
Drawdown of secured debt - 60,000 -
Loan costs paid on new facility - (1,659) (87)
Cash flows from financing
activities (41,787) 133,267 (24,620)
------------------------------------ ----- ------------ ------------- ------------
(Decrease) / increase in
cash and cash equivalents (1,048) 9,758 7,804
Cash and cash equivalents
at the beginning of the period 91,667 81,611 81,611
Effect of currency translation
movements 42 298 224
------------------------------------ ----- ------------ ------------- ------------
Cash and cash equivalents
at the end of the period 90,661 91,667 89,639
------------------------------------ ----- ------------ ------------- ------------
The notes form part of this financial information.
Notes to the Interim Report
1. General information about the Group
The financial information set out in this report covers the six month period to 30 June 2017, with comparative amounts relating to the year to 31 December 2016 and the six month period to 30 June 2016, and includes the results and net assets of the Company and its subsidiaries, together referred to as the Group.
The Company is incorporated in the United Kingdom. The address of the registered office and principal place of business is Cavendish House, 18 Cavendish Square, London, W1G 0PJ.
The Company is listed on the AIM market of the London Stock Exchange. Further information about the Group and Company can be found on its website, www.SecureIncomeREIT.co.uk.
2. Basis of preparation and accounting policies
The financial information contained in this report has been prepared in accordance with IAS 34 "Interim Financial Reporting" as adopted by the European Union, and on a going concern basis. The accounting policies adopted in this report are consistent with those applied in the Group's statutory accounts for the year ended 31 December 2016 and are expected to be consistently applied in the year to 31 December 2017.
The Directors are required to assess whether it is appropriate to make provision at the balance sheet date for the relevant proportion of any incentive fee payable for the current financial year. In making this assessment, the Directors estimate the EPRA NAV per share of the Group at the end of the financial year. As described in note 18, this estimate does not constitute a forecast but represents an estimated illustrative case only, and is considered to provide a reasonable basis for estimating whether an incentive fee will be payable while recognising the limitations inherent in any estimate of future values.
Euro denominated results for the German operations have been converted to Sterling at an average exchange rate for the period of EUR1:GBP0.8603 and period end balances converted to Sterling at the 30 June 2017 exchange rate of EUR1:GBP0.8779.
The condensed financial statements for the period are unaudited and do not constitute statutory accounts for the purposes of the Companies Act 2006. The annual report and financial statements for 2016 have been filed at Companies House. The independent auditor's report on the annual report and financial statements for 2016 was unqualified, did not draw attention to any matters by way of emphasis, and did not contain a statement under sections 498 (2) or 498 (3) of the Companies Act 2006.
The Group's financial performance is not subject to material seasonal fluctuations.
The IASB has issued the following standards that are mandatory for periods subsequent to 31 December 2017 (the date to which the Group's next annual financial statements will be prepared), and which are relevant to the Group but have not been adopted early. The Directors' assessment of the impact of these new accounting standards remains unchanged from that reported in the 2016 financial statements. No other new or revised standard is expected to have a material effect on the Group's financial statements.
Effective date
------------------------------------- ---------------
IFRS 9 "Financial instruments" 1 January 2018
IFRS 15 "Revenue from contracts with
customers" 1 January 2018
IFRS 16 "Leases" 1 January 2019
------------------------------------- ---------------
IFRS 9 deals with the classification and measurement of financial instruments and the Directors do not anticipate that its adoption will have a material impact on the Group's financial statements assuming that the existing capital structure and financing arrangements remain in place at the time that the standard becomes effective.
The Group's revenue is derived entirely from leases, which are outside the scope of IFRS 15 but within the scope of IFRS 16. IFRS 15 is not therefore expected to have an impact on the Group. Since IFRS 16 will not result in significant changes of accounting policies for lessors, the Directors do not expect that the adoption of this standard will have a material impact on the Group's financial statements.
3. Operating segments
IFRS 8 "Operating Segments" requires operating segments to be identified on a basis consistent with internal reports about components of the Group that are reviewed by the chief operating decision maker to make decisions about resources to be allocated between segments and assess their performance. The Group's chief operating decision maker is considered to be the Board.
The Group owns 81 properties originally acquired in three portfolios. Although certain information about these portfolios is described individually within the Investment Adviser's report, when considering resource allocation and performance the Board reviews quarterly management accounts prepared on a basis which aggregates the performance of the portfolios and focuses on Total Accounting Return. The Board has therefore concluded that the Group has operated in, and was managed as, one business segment of property investment in both the current period and prior year.
The geographical split of revenue and applicable non-current assets required by IFRS 8 was as follows:
Unaudited Audited Unaudited
six months to year to six months to
30 June 31 December 30 June
2017 2016 2016
GBP000 GBP000 GBP000
--------------------------------- ------------- ----------- -------------
Revenue
UK 48,907 85,447 41,320
Germany 4,077 7,767 3,694
--------------------------------- ------------- ----------- -------------
52,984 93,214 45,014
--------------------------------- ------------- ----------- -------------
Investment property valuation
UK 1,627,224 1,557,032 1,292,898
Germany 104,690 96,473 85,594
--------------------------------- ------------- ----------- -------------
1,731,914 1,653,505 1,378,492
--------------------------------- ------------- ----------- -------------
Revenue, which is stated after taking account of the impact of rent smoothing adjustments, includes:
Unaudited Audited Unaudited
six months to year to six months to
30 June 31 December 30 June
2017 2016 2016
GBP000 GBP000 GBP000
----------------------------- ------------- ----------- -------------
Largest tenant 27,131 54,410 27,143
Second largest tenant 16,782 33,061 16,229
Third largest tenant 7,429 2,453 -
Other tenant (less than 10%
of revenue) 1,642 3,290 1,642
----------------------------- ------------- ----------- -------------
52,984 93,214 45,014
----------------------------- ------------- ----------- -------------
4. Revenue
Unaudited Audited Unaudited
six months to year to six months to
30 June 31 December 30 June
2017 2016 2016
GBP000 GBP000 GBP000
----------------------------------- ------------- ----------- -------------
Rental income 46,472 80,371 38,427
Rent smoothing adjustments 5,962 12,783 6,587
Recovery of head rent and service
charge costs from occupational
tenants 550 60 -
----------------------------------- ------------- ----------- -------------
52,984 93,214 45,014
----------------------------------- ------------- ----------- -------------
The rent smoothing adjustment arises through the Group's accounting policy in respect of leases, which requires the recognition of rental income on a straight line basis over the lease term in certain circumstances, including for the 58% (31 December 2016: 58%; 30 June 2016: 68%) of passing rent as at 30 June 2017 which increases by a fixed percentage each year. At this stage in the lease terms, which is before the midway point in each lease, this results in an increase in revenue and an offsetting entry is recognised in the income statement as a reduction in the gains on investment property revaluation.
5. Administrative expenses
Unaudited Audited Unaudited
six months to year to six months to
30 June 31 December 30 June
2017 2016 2016
GBP000 GBP000 GBP000
------------------------------- ------------- ----------- -------------
Advisory fee (note 18) 4,952 7,776 3,601
Incentive fee (note 18) 3,539 10,457 -
Other administrative expenses 474 735 278
Corporate costs 236 615 326
Costs of March 2016 secondary
placing - 2,007 2,123
Investment feasibility costs - - 1,416
9,201 21,590 7,744
------------------------------- ------------- ----------- -------------
Amounts shown above include irrecoverable VAT as appropriate.
At 30 June 2016, GBP1.4 million of costs had been incurred in exploring the feasibility of the Travelodge acquisition, which had been expensed as the decision to acquire the portfolio had not been made at the balance sheet date. When the acquisition completed in October 2016, these costs were included in the acquisition cost of the portfolio.
6. Finance costs
Unaudited Audited Unaudited
six months to year to six months to
30 June 31 December 30 June
2017 2016 2016
GBP000 GBP000 GBP000
------------------------------ ------------- ----------- -------------
Interest on secured debt 24,379 48,025 23,705
Amortisation of loan costs
(non-cash) 951 1,741 841
Interest charge on headlease
liabilities 147 - -
25,477 49,766 24,546
------------------------------ ------------- ----------- -------------
7. Tax
Unaudited Audited Unaudited
six months to year to six months to
30 June 31 December 30 June
2017 2016 2016
Analysis of tax charge in the
period GBP000 GBP000 GBP000
------------------------------- ------------- ----------- -------------
Current tax - UK
Adjustments in respect of
prior periods (6) (182) (182)
Current tax - Germany
Corporation tax charge 168 214 147
Adjustments in respect of
prior periods 57 (61) -
Deferred tax
Deferred tax charge 1,022 1,766 493
------------------------------- ------------- ----------- -------------
1,241 1,737 458
------------------------------- ------------- ----------- -------------
The tax assessed for the period varies from the standard rate of corporation tax in the UK applied to the profit before tax. The differences are explained below:
Unaudited Audited Unaudited
six months to year to six months to
30 June 31 December 30 June
2017 2016 2016
GBP000 GBP000 GBP000
----------------------------------- ------------- ----------- -------------
Profit before tax 88,247 94,066 25,856
----------------------------------- ------------- ----------- -------------
Profit before tax at the standard
rate of corporation tax in
the UK of 19.25% (31 December
2016 and 30 June 2016: 20%) 16,988 18,813 5,171
Effects of:
Investment property revaluation
not taxable (13,624) (15,227) (3,440)
Qualifying property rental
business not taxable (2,759) (3,387) (2,598)
Tax losses 413 1,140 935
German current tax charge 168 214 147
Adjustments in respect of prior
periods 51 (243) (182)
Amounts not deductible for
tax 4 427 425
Tax charge for the period 1,241 1,737 458
----------------------------------- ------------- ----------- -------------
The Company and its subsidiaries operate as a UK Group REIT. Subject to continuing compliance with certain rules, the UK REIT rules exempt the profits of the Group's UK and German property rental business from UK corporation tax. Gains on the Group's UK and German properties are also generally exempt from UK corporation tax, provided they are not held for trading or in certain circumstances sold in the three years after completion of a development.
To remain a UK REIT, there are a number of conditions to be met in respect of the Company, the Group's qualifying activity and the Group's balance of business. Since entering the UK REIT regime the Group has met all applicable conditions.
The Group is subject to German corporation tax on its German property rental business at an effective rate of 8%, resulting in a tax charge of GBP0.2 million (year to 31 December 2016: GBP0.2 million; six months to 30 June 2016: GBP0.1 million). A deferred tax liability of GBP9.7 million (31 December 2016: GBP8.5 million; 30 June 2016: GBP6.9 million) is recognised for the German capital gains tax that would potentially be payable at 15.8% on the sale of the relevant investment properties.
8. Earnings per share
Earnings per share is calculated as profit attributable to ordinary shareholders of the Company for each period divided by the weighted average number of ordinary shares in issue throughout the relevant period.
Diluted EPS reflects shares to be issued, including any to be issued in settlement of incentive fees that may be earned in the relevant period as if those shares had been issue throughout the period over which the incentive fee was earned. Where shares are issued in one reporting period relating to the results of the prior period, the shares are treated, for the purposes of calculating the weighted average of shares in issue, as having been issued on the earlier of the last day of that prior period and the actual date of issue.
Unaudited Audited Unaudited
six months to year to six months to
30 June 31 December 30 June
2017 2016 2016
GBP000 GBP000 GBP000
--------------------------------- ------------- ----------- -------------
Profit 87,006 92,329 25,398
--------------------------------- ------------- ----------- -------------
Weighted average number of
shares in issue Number Number Number
--------------------------------- ------------- ----------- -------------
Basic EPS 230,536,874 191,361,039 180,344,231
Shares issued in satisfaction
of incentive fee - 3,307,168 -
Estimate of shares to be issued
in satisfaction of accrued
incentive fee 958,532 - -
--------------------------------- ------------- ----------- -------------
Diluted EPS 231,495,406 194,668,207 180,344,231
--------------------------------- ------------- ----------- -------------
Pence Pence per Pence per
per share share share
------------- ---------- --------- ---------
Basic EPS 37.7 48.2 14.1
Diluted EPS 37.6 47.4 14.1
------------- ---------- --------- ---------
The European Public Real Estate Association ("EPRA") publishes guidelines for calculating adjusted earnings designed to represent core operational activities. As well as the standard EPRA earnings figure, an adjusted EPRA earnings calculation has also been presented. This removes the effect of smoothing the fixed rental uplifts (in order not to artificially flatter dividend cover calculations) and any non-recurring costs, such as those for share placings or share issues. The adjusted measure also excludes any incentive fees, as they are considered to be linked to revaluation movements and are therefore best treated consistently with revaluations.
Unaudited Audited Unaudited
six months to year to six months to
30 June 31 December 30 June
2017 2016 2016
GBP000 GBP000 GBP000
----------------------------------- ------------- ----------- -------------
Basic earnings attributable
to shareholders 87,006 92,329 25,398
EPRA adjustments:
Investment property revaluation (70,120) (72,181) (13,077)
Other income (131) - -
German deferred tax on investment
property revaluations 1,022 1,766 493
EPRA earnings 17,777 21,914 12,814
Other adjustments:
Rent smoothing (5,962) (12,783) (6,587)
Incentive fee 3,539 10,457 -
Secondary placing and investment
feasibility costs - 2,007 3,539
Adjusted EPRA earnings 15,354 21,595 9,766
----------------------------------- ------------- ----------- -------------
As a result of those adjustments, the various EPRA EPS figures are as follows:
Pence per Pence per
Pence per share share Share
--------------------------- ---------------- --------- ---------
EPRA EPS 7.7 11.5 7.1
Diluted EPRA EPS 7.7 11.3 7.1
Adjusted EPRA EPS 6.7 11.3 5.4
Diluted adjusted EPRA EPS 6.6 11.1 5.4
--------------------------- ---------------- --------- ---------
9. Investment properties
Unaudited Audited Unaudited
six months to year to six months to
30 June 31 December 30 June
2017 2016 2016
Freehold investment properties GBP000 GBP000 GBP000
----------------------------------- ------------- ----------- -------------
At the start of the period 1,573,281 1,349,547 1,349,547
Additions - 133,291 -
Revaluation movement 72,142 77,601 19,664
Currency translation movement 2,327 12,842 9,281
At the end of the period 1,647,750 1,573,281 1,378,492
----------------------------------- ------------- ----------- -------------
Leasehold investment properties
----------------------------------- ------------- ----------- -------------
At the start of the period 80,224 - -
Additions - 61,057 -
Recognition of Hotels headlease
liabilities (70) 11,804 -
Revaluation movement 4,010 7,363 -
At the end of the period 84,164 80,224 -
----------------------------------- ------------- ----------- -------------
Total investment properties
----------------------------------- ------------- ----------- -------------
At the start of the period 1,653,505 1,349,547 1,349,547
Additions - 194,348 -
Recognition of Hotels headlease
liabilities (70) 11,804 -
Revaluation movement 76,152 84,964 19,664
Currency translation movement 2,327 12,842 9,281
----------------------------------- ------------- ----------- -------------
1,731,914 1,653,505 1,378,492
----------------------------------- ------------- ----------- -------------
As at 30 June 2017 the properties were externally valued at GBP1,720.2 million (31 December 2016: GBP1,641.7 million; 30 June 2016: GBP1,378.5 million) by either CBRE Limited or Jones Lang Lasalle Limited, Commercial Real Estate Advisors, in their capacity as external valuers. The valuations were prepared on a fixed fee basis, independent of the portfolio value, and were undertaken in accordance with RICS Valuation - Professional Standards January 2014 on the basis of fair value, supported by reference to market evidence of transaction prices for similar properties.
The following table reconciles the carrying values of the investment properties to their external valuations:
Unaudited Audited Unaudited
30 June 31 December 30 June
2017 2016 2016
GBP000 GBP000 GBP000
----------------------------------- ---------- ----------- ---------
Carrying value 1,731,914 1,653,505 1,378,492
Gross-up of headlease liabilities (11,734) (11,804) -
----------------------------------- ---------- ----------- ---------
External valuation 1,720,180 1,641,701 1,378,492
----------------------------------- ---------- ----------- ---------
Included within the carrying value of investment properties at 30 June 2017 is GBP180.0 million (31 December 2016: GBP173.4 million; 30 June 2016: GBP166.2 million) in respect of the smoothing of fixed contractual rental uplifts as described in note 4. The difference between rents on a straight line basis and rents actually receivable is included within the carrying value of investment properties but does not increase that carrying value over fair value. The revaluation movement therefore comprises:
Unaudited Audited Unaudited
six months to year to six months to
30 June 31 December 30 June
2017 2016 2016
GBP000 GBP000 GBP000
----------------------------------- ------------- ----------- -------------
Revaluation movement 76,152 84,964 19,664
Movement in gross-up of headlease
liabilities (70) - -
Rent smoothing adjustment (5,962) (12,783) (6,587)
----------------------------------- ------------- ----------- -------------
Revaluation movement in the
income statement 70,120 72,181 13,077
----------------------------------- ------------- ----------- -------------
The historic cost of the Group's investment properties as at 30 June 2017 was GBP1,258.0 million (31 December 2016: GBP1,258.0 million; 30 June 2016: GBP1,063.6 million). All of the investment properties are held, within four ring-fenced security pools, as security under fixed charges in respect of secured debt.
The Board determines the Group's valuation policies and procedures, and is responsible for overseeing the valuations. Valuations are based on information provided from the Group's financial and property reporting systems, such as current rents and the terms and conditions of lease agreements, together with assumptions used by the valuers (based on market observation and their professional judgement) in the valuation models.
At each reporting date, certain partners of the Investment Adviser who have recognised professional qualifications and are experienced in valuing the types of property owned by the Group, initially analyse the external valuers' assessments of movements in the property valuations from the prior reporting date. Fair value changes (positive or negative) over a certain materiality threshold are considered. Changes in fair value are also compared to external sources (such as the Investment Property Databank and other relevant benchmarks) for reasonableness. Once the Investment Adviser has considered the valuations, the results are discussed with the Group's external valuers, focusing on properties with unexpected fair value changes or any with unusual characteristics. The Audit Committee considers the valuation process as part of its overall responsibilities, including meetings with the external valuers, and reports on its assessment of the procedures to the Board.
The fair value of the investment property portfolio has been determined using an income capitalisation technique, whereby contracted and market rental values are capitalised with a market capitalisation rate. This technique is consistent with the principles in IFRS 13 and uses significant unobservable inputs, such that the fair value measurement of each property within the portfolio has been classified as level 3 in the fair value hierarchy as defined in IFRS 13. There have been no transfers to or from other levels of the fair value hierarchy during the period.
The key inputs for the level 3 valuations were as follows:
Inputs
---------------------------
Fair value
Portfolio GBP000 Key unobservable input Range Blended yield
------------------- ----------- ----------------------- ------------ -------------
At 30 June 2017:
Healthcare 925,850 Net initial yield 4.0% - 5.5% 4.9%
Running yield by June
2018 4.1% - 5.7% 5.1%
Leisure - UK 480,525 Net initial yield 5.0% - 5.7% 5.1%
Running yield by June
2018 5.1% - 5.9% 5.2%
Future RPI assumption
per annum 2.0%
Leisure - Germany 104,700 Net initial yield 5.4% 5.4%
Running yield by June
2018 5.6% 5.6%
Hotels 209,105 Net initial yield 5.2% - 9.3% 6.2%
Running yield by June
2018 5.3% - 9.4% 6.3%
Future RPI assumption
per annum 2.5%
------------------- ----------- ----------------------- ------------ -------------
At 31 December
2016:
Healthcare 892,891 Net initial yield 4.3% - 5.5% 5.0%
Running yield by June
2017 4.4% - 5.7% 5.1%
Leisure - UK 454,190 Net initial yield 5.1% - 6.0% 5.2%
Running yield by June
2017 5.2% - 6.1% 5.4%
Future RPI assumption
per annum 2.0%
Leisure - Germany 96,470 Net initial yield 5.8% 5.8%
Running yield by July
2017 5.9% 5.9%
Hotels 209,954 Net initial yield 5.4% - 9.9% 6.5%
Running yield by June
2017 5.5% - 9.9% 6.6%
Future RPI assumption
per annum 2.0%
------------------- ----------- ----------------------- ------------ -------------
At 30 June 2016:
Healthcare 849,652 Net initial yield 4.5% - 5.8% 5.2%
Running yield by June
2017 4.5% - 5.9% 5.4%
Leisure - UK 443,240 Net initial yield 5.2% - 6.1% 5.4%
Running yield by June
2017 5.3% - 6.2% 5.5%
Future RPI assumption
per annum 2.0%
Leisure - Germany 85,600 Net initial yield 6.1% 6.1%
Running yield by June
2017 6.5% 6.5%
------------------- ----------- ----------------------- ------------ -------------
The principal sensitivity of measurement to variations in the significant unobservable outputs is that decreases in net initial yield, decreases in running yield and increases in RPI will increase the fair value (and vice versa).
10. Cash and cash equivalents
Unaudited Audited Unaudited
30 June 31 December 30 June
2017 2016 2016
GBP000 GBP000 GBP000
-------------------- ---------- ----------- ---------
Free cash 66,895 68,462 69,353
Secured cash 23,292 22,542 19,665
Regulatory capital 474 663 621
90,661 91,667 89,639
-------------------- ---------- ----------- ---------
Secured cash is held in accounts over which the providers of secured debt have fixed security. As the Company is considered to be an internally managed Alternative Investment Fund, it is also required by the Financial Conduct Authority to hold a balance of regulatory capital in liquid funds, which is maintained in cash.
11. Trade and other receivables
Unaudited Audited Unaudited
30 June 31 December 30 June
2017 2016 2016
GBP000 GBP000 GBP000
-------------------------------- ---------- ----------- ---------
Trade receivables 120 128 -
Other receivables 19 111 -
Prepayments and accrued income 171 364 67
-------------------------------- ---------- ----------- ---------
310 603 67
-------------------------------- ---------- ----------- ---------
12. Trade and other payables
Unaudited Audited Unaudited
30 June 31 December 30 June
2017 2016 2016
GBP000 GBP000 GBP000
------------------------------ ---------- ----------- ---------
Trade payables 74 276 110
Tax and social security 2,584 3,102 1,410
Accruals and deferred income 31,415 30,752 29,056
------------------------------ ---------- ----------- ---------
34,073 34,130 30,576
------------------------------ ---------- ----------- ---------
13. Secured debt
Unaudited Audited Unaudited
30 June 31 December 30 June
2017 2016 2016
GBP000 GBP000 GBP000
-------------------------------- ---------- ----------- ---------
Amounts falling due within
one year
Secured debt - current portion
of long term facilities 4,156 4,156 4,156
Unamortised finance costs (1,920) (1,918) (1,687)
-------------------------------- ---------- ----------- ---------
2,236 2,238 2,469
-------------------------------- ---------- ----------- ---------
Unaudited Audited Unaudited
30 June 31 December 30 June
2017 2016 2016
GBP000 GBP000 GBP000
-------------------------------- ---------- ----------- ---------
Amounts falling due in more
than one year
Secured debt 964,544 965,215 905,100
Unamortised finance costs (10,978) (11,913) (11,478)
-------------------------------- ---------- ----------- ---------
953,566 953,302 893,622
-------------------------------- ---------- ----------- ---------
Secured debt, which comprises fixed rate loans, is measured at amortised cost. As at 30 June 2017 its fair value was GBP1,017.4 million (31 December 2016: GBP1,012.6 million; 30 June 2016: GBP968.8 million). The secured debt was externally valued in accordance with IFRS 13 by reference to interbank bid market rates at the close of business on the balance sheet date by JC Rathbone Associates Limited. All secured debt was classified as level 2 in the fair value hierarchy as defined in IFRS 13 and its fair value was calculated using the present values of future cash flows, based on market benchmark rates (interest rate swaps) and the estimated credit risk of the Group for similar financings.
The debt is secured by charges over the Group's investment properties and by fixed and floating charges over the other assets of certain Group companies, not including the Company itself save for a limited share charge over the parent company of one of the ring-fenced subgroups. There have been no defaults or breaches of any loan covenants during the current or any prior period.
The Group had no undrawn, committed borrowing facilities at either balance sheet date.
14. Deferred tax
The movements in the deferred tax liability, which relate entirely to unrealised gains on the Group's German investment properties, were as follows:
Unaudited Audited Unaudited
six months to year to six months to
30 June 31 December 30 June
2017 2016 2016
GBP000 GBP000 GBP000
-------------------------------- ------------- ----------- -------------
At the start of the period 8,496 5,687 5,687
Charge to the income statement 1,022 1,766 493
Charge to other comprehensive
income 215 1,043 749
At the end of the period 9,733 8,496 6,929
-------------------------------- ------------- ----------- -------------
15. Share capital
Share capital represents the aggregate nominal value of shares issued. At 30 June 2017, the Company had an issued and fully paid share capital of 230,536,874 ordinary shares of GBP0.10 each (31 December 2016: 227,229,706 shares; 30 June 2016: 180,344,240 shares).
The movement in the number of shares in issue over the period was as follows:
Unaudited Audited Unaudited
30 June 31 December 30 June
2017 2016 2016
Number Number Number
------------------------------------------------- ----------- ----------- -----------
At the start of the period 227,229,706 180,344,228 180,344,228
Issue of ordinary shares in settlement
of 2016 incentive fee 3,307,168 - -
Issue of ordinary shares in respect
of placing - 46,885,466 -
Issue of ordinary shares under Commitment
Agreement - 12 12
Actual shares in issue at the end of
the period 230,536,874 227,229,706 180,344,240
Shares issued in satisfaction of incentive
fee - 3,307,168 - Estimate of shares to be issued in satisfaction of accrued incentive fee 958,532 - - ------------------------------------------------- ----------- ----------- ----------- Diluted shares in issue at the end of the period 231,495,406 230,536,874 180,344,240 ------------------------------------------------- ----------- ----------- -----------
16. Reserves
The share premium reserve represents the surplus of the gross proceeds of share issues over the nominal value of the shares, net of the direct costs of equity issues.
Other reserves represent the cumulative exchange gains and losses on the translation of the Group's net investment in its German operations, as well as the impact on equity of any shares to be issued after the balance sheet date, as described in note 18, under the terms of the incentive fee arrangements.
Retained earnings represent the cumulative profits and losses recognised in the income statement, together with any amounts transferred or reclassified from the other Group reserves, less dividends paid.
17. Net asset value per share
The net asset value per share of 352.8 pence (31 December 2016: 324.5 pence; 30 June 2016: 296.4 pence) is calculated as the net assets of the Group attributable to shareholders divided by the number of shares in issue at the end of the period of 230,536,874 (31 December 2016: 227,229,706; 30 June 2016: 180,344,240). Diluted NAV per share is adjusted for any shares that will be issued, including those in settlement of incentive fees that may become payable as explained in note 18.
The European Public Real Estate Association ("EPRA") has issued guidelines aimed at providing a measure of net asset value on the basis of long term fair values. The EPRA measure excludes items that are considered to have no impact in the long term, such as the deferred tax on investment properties held for long term benefit. The Group's EPRA NAV is calculated as follows:
Unaudited Audited Unaudited
30 June 2017 31 December 2016 30 June 2016
------------------------ -------------------- -------------------- --------------------
Pence per Pence per Pence per
GBP000 share GBP000 share GBP000 share
------------------------ --------- --------- --------- --------- --------- ---------
Basic NAV 813,251 352.8 737,423 324.5 534,545 296.4
Dilution from shares
issued for 2016
incentive fee - - - (4.6) - -
Dilution from estimate
of shares to be
issued for 2017
incentive fee - (1.5) - - - -
------------------------ --------- --------- --------- --------- --------- ---------
Diluted NAV 813,251 351.3 737,423 319.9 534,545 296.4
EPRA adjustments:
Deferred tax on
investment property
revaluations 9,733 4.2 8,496 3.7 6,929 3.8
EPRA NAV 822,984 355.5 745,919 323.6 541,474 300.2
------------------------ --------- --------- --------- --------- --------- ---------
18. Related party transactions and balances
Interests in shares
The direct and indirect interests of the Directors and their families in the share capital of the Company are as follows:
Unaudited 30 June 2017
-------------------------
Percentage of
Number of issued share
shares capital
--------------- ---------- -------------
Nick Leslau * 23,194,179 10.06%
Mike Brown 909,608 0.39%
Sandy Gumm 165,176 0.07%
Martin Moore 90,960 0.04%
Jonathan Lane 57,471 0.02%
Ian Marcus 51,023 0.02%
Leslie Ferrar 22,739 0.01%
---------------- ---------- -------------
* Comprises 22,466,916 ordinary shares held by PIHL Property LLP, 669,792 shares held by Yoginvest Limited and 57,471 ordinary shares held by the Saper Trust. Nick Leslau has a 71% indirect interest in PIHL Property LLP, owns Yoginvest Limited and is a beneficiary of the Saper Trust.
In addition to the amounts shown in the table above, as at 30 June 2017 a further 13,233,645 ordinary shares (31 December 2016: 9,876,243 ordinary shares; 30 June 2016: 9,826,009 ordinary shares), representing 5.7% (31 December 2016: 4.4%; 30 June 2016: 5.4%) of the issued share capital, were owned by a subsidiary of Prestbury Investments LLP ("Prestbury"), the Investment Adviser to the Group. Nick Leslau, Mike Brown and Sandy Gumm hold partnership interests in, and are respectively Chairman, Chief Executive and Chief Operating Officer of Prestbury.
Directors' fees
Fees totalling GBP185,000 per annum are payable to the four non-executive Directors not connected to Prestbury Investments LLP. The Directors connected to Prestbury (Nick Leslau, Mike Brown and Sandy Gumm) do not receive Directors' fees. Directors' fees of GBP93,000 were payable for the period (year ended 31 December 2016: GBP185,000; six months ended 30 June 2016: GBP93,000). No fees were outstanding at any balance sheet date.
Advisory fees payable
Nick Leslau, Mike Brown and Sandy Gumm are Directors of the Company and also hold partnership interests in, and are Chairman, Chief Executive and Chief Operating Officer respectively of Prestbury Investments LLP, which is Investment Adviser to the Group under the terms of an agreement that became effective on listing in June 2014 (the "Investment Advisory Agreement"). Under the terms of the Investment Advisory Agreement, advisory fees of GBP4.6 million (year to 31 December 2016: GBP7.0 million; six months to 30 June 2016: GBP3.2 million) plus VAT were payable in cash to Prestbury in respect of the period of which GBP0.2 million (31 December 2016: GBP0.1 million; 30 June 2016: GBPnil) was outstanding at the balance sheet date.
Incentive fee
Under the terms of the Investment Advisory Agreement between the Company and Prestbury, a Prestbury group company may become entitled to an incentive fee intended to reward growth in Total Accounting Return ("TAR") above an agreed benchmark and to strongly align Prestbury's interests with those of shareholders. TAR is measured as growth in EPRA NAV per share plus dividends paid in the year. The fee entitlement is calculated annually on the basis of the Group's audited financial statements, with any fee payable settled in shares in the Company (subject to certain limited exceptions). Sales of shares are restricted, with the restriction lifted on a phased basis over a period from 18 to 42 months from the date of issue, subject to a specific release in the event that Prestbury needs to sell shares to settle the tax liability on the fee income it earns.
The incentive fee is calculated by reference to growth in TAR: if this growth exceeds a hurdle rate of 10% per annum, an incentive fee equal to 20% of this excess is payable to Prestbury. In the event of an incentive fee being payable at the end of an accounting period, a "high water mark" is established, represented by the closing EPRA NAV per share after the impact of the incentive fee, which is then the starting point for the cumulative hurdle calculations for future periods. The hurdle will therefore be set at the higher of the EPRA NAV at the start of the year plus 10% or the most recent high water mark EPRA NAV plus 10% per annum. Dividends or other distributions paid in any period are treated as payments on account against achievement of the hurdle rate of return.
A high water mark EPRA NAV per share of 323.6 pence per share was established at 31 December 2016 when a fee was last earned. Assuming no changes in the Company's capital structure, EPRA NAV per share growth plus distributions will have to exceed 32.4 pence per share for the year ending 31 December 2017 for a fee to be earned; that is, EPRA NAV before distributions for the year will have to exceed 356.0 pence per share (GBP820.7 million) at 31 December 2017 before any incentive fee becomes payable.
Irrecoverable VAT arises on any element of the Group's costs, including any incentive fee, that relate to the healthcare portfolio. Since new ordinary shares are issued in satisfaction of an incentive fee, the cost of that fee in the financial statements only impacts the net asset value of the Group to the extent of the irrecoverable VAT but the shares to be issued do reduce the Group's net asset value per share.
An incentive fee of GBP3.2 million plus irrecoverable VAT of GBP0.3 million has been charged to the income statement in the period, which if ultimately paid would be settled by the issue of 0.9 million shares. In order to make a reasonable assessment of whether or not such a fee will be payable, the Board has estimated the EPRA NAV of the Group at 31 December 2017, assuming that:
-- the property portfolio valuation yields do not change from those applied as at 30 June 2017;
-- there are no acquisitions, disposals or lease variations;
-- any additional uplift in rent from the outstanding Ramsay rent review is not included, on the basis that the outcome of the review is not yet known with sufficient certainty;
-- there are no currency translation gains or losses:
-- RPI uplifts are consistent with the expectations reflected in the June 2017 external investment property valuations;
-- shares are issued in settlement of the fee at the weighted average share price for the period; and
-- the Group's Adjusted EPRA EPS over the remainder of the year is fully distributed on a quarterly basis.
This estimate does not constitute a forecast but represents an illustrative case considered to provide a reasonable basis for assessing whether an incentive fee will be payable, while recognising the limitations inherent in any estimate of future values. On the basis of these assumptions a fee of GBP6.4 million would be payable for the whole year on which irrecoverable VAT of GBP0.6 million would be incurred. Half of the estimated cost is recognised in the first half of the year, reflecting the period over which the services for which the fee is earned have been discharged so far. All other things being equal, the balance of the incentive fee would be incurred in the second half of 2017 resulting in a further GBP3.5 million charge to administrative expenses and a GBP3.2 million share issue. In total 1.9 million new shares would be issued, of which the impact of issuing 0.9 million is already reflected in these financial statements.
19. Events after the balance sheet date
On 25 August 2017, the Company paid a distribution of GBP8.1 million.
Supplementary information
Total Shareholder Return
Shareholder return is one of the Company's principal measures of performance. Total Shareholder Return ("TSR") is measured by reference to the growth in the Company's share price over a period, plus distributions. When providing illustrations of future performance, the Company measures TSR by reference to illustrative EPRA NAV as a proxy for the share price performance, referred to in these report and accounts as Total Accounting Return ("TAR"). The tables below show the calculation of TAR and TSR for the 2017 and 2016 interim periods.
TAR - EPRA NAV performance
Six months Six months
to to
30 June 30 June
2017 2016
Pence per Pence per
share share
---------------------------------------- ---------- ----------
EPRA NAV:
at the start of the period 323.6 282.8
at the end of the period 355.5 300.2
----------------------------------------- ---------- ----------
Increase in EPRA NAV 31.9 17.4
Distributions (commenced August 2016) 6.6 -
----------------------------------------- ---------- ----------
Increase in EPRA NAV plus distributions 38.5 17.4
----------------------------------------- ---------- ----------
TAR - EPRA NAV basis 11.9% 6.2%
----------------------------------------- ---------- ----------
TSR - share price performance
Six months Six months
to to
30 June 30 June
2017 2016
Pence per Pence per
share share
------------------------------------------- ---------- ----------
Mid market closing share price:
at the start of the period 315.5 247.5
at the end of the period 345.8 267.0
-------------------------------------------- ---------- ----------
Increase in share price 30.3 19.5
Distributions (commenced August 2016) 6.6 -
-------------------------------------------- ---------- ----------
Increase in share price plus distributions 36.9 19.5
-------------------------------------------- ---------- ----------
TSR - share price basis 11.7% 7.9%
-------------------------------------------- ---------- ----------
Additional EPRA measure
EPRA Cost Ratio
Six months Six months
to Year to to
30 June 31 December 30 June
2016 2016 2016
GBP000 GBP000 GBP000
----------------------------------- ---------- ----------- ----------
Revenue (note 4) 52,984 93,214 45,014
Property outgoings borne
by tenants (550) (60) -
------------------------------------ ---------- ----------- ----------
Revenue net of tenant receivables 52,434 93,154 45,014
Property outgoings 27 32 14
Administrative expenses 8,965 20,975 7,418
Corporate costs 236 615 326
------------------------------------ ---------- ----------- ----------
Total costs 9,228 21,622 7,758
------------------------------------ ---------- ----------- ----------
EPRA cost ratio 17.6% 23.2% 17.2%
------------------------------------ ---------- ----------- ----------
The Group had no vacant property in any period, therefore the EPRA cost ratio is the same inclusive and exclusive of vacant property costs.
Glossary
Adjusted EPRA EPS EPRA EPS excluding the effect of smoothing
the fixed rental uplifts, any significant non-recurring
costs and incentive fees
AIFMD Alternative Investment Fund Managers Directive
Diluted EPS/EPRA EPS/Adjusted The relevant measure of EPS reflecting any
EPRA EPS shares to be issued, including those in settlement
of incentive fees
EPRA European Public Real Estate Association
EPRA EPS A measure of EPS designed by EPRA to present
underlying earnings from core operating activities
EPRA NAV A measure of NAV designed by EPRA to present
the fair value of a company on a long term
basis by excluding items such as deferred tax
on investment properties held for long term
benefit
EPS Earnings per share, calculated as the profit
for the period after tax attributable to members
of the parent company divided by the weighted
average number of shares in issue in the period
ERV Estimated rental value, which is the open market
rental value expected to be achievable at the
date of valuation
IFRS International Financial Standards adopted for
use in the European Union
Net Initial Yield Annualised net rents on investment properties
as a percentage of the investment property
valuation, less purchaser's costs
Loan To Value or LTV The outstanding amount of a loan as a percentage
of property value
NAV Net asset value
Net Loan To Value LTV calculated on the gross loan amount and
or Net LTV any other secured liabilities, less cash balances
REIT Real Estate Investment Trust
Running yield The anticipated Net Initial Yield at a future
date, taking account of any rent reviews in
the intervening period
Total Accounting Return The movement in EPRA NAV over a period plus
or TAR distributions paid in the period, expressed
as a percentage of the EPRA NAV at the start
of the period
Total Shareholder The movement in share price over a period plus
Return or TSR distributions paid in the period, expressed
as a percentage of the share price at the start
of the period
This information is provided by RNS
The company news service from the London Stock Exchange
END
IR SFDFWIFWSEDU
(END) Dow Jones Newswires
September 18, 2017 02:00 ET (06:00 GMT)
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