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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 : 2496J
Secure Income REIT PLC
08 September 2016
8 September 2016
Secure Income REIT Plc
(the "Company" or the "Group")
Interim results for the six months ended 30 June 2016
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 2016.
Highlights
-- Near doubling of adjusted EPRA EPS to 5.4p, up from 2.9p in the six months to 31 December 2015 and (0.3)p in the six months to 30 June 2015: significant impact of degearing and lower financing costs following 2015 refinancing
-- 6.2% increase in EPRA NAV to 300.2 pence per share as at 30 June 2016
-- Further reduction in net loan to value ratio to 59.5%, down from 61% at 31 December 2015 and 80% at listing in June 2014
-- Portfolio valuation up 2.1% since 31 December 2015 to GBP1.38 billion; net initial yield 5.3% and equivalent yield 6.3%
-- Weighted average unexpired lease term of 23.1 years with no breaks, one of the longest in the sector
-- Passing rent of GBP78.5 million as at 30 June 2016 with annual fixed or RPI uplifts, secured entirely against major global multi-billion pound quoted businesses
-- First distribution paid to shareholders in August 2016: 2.9375 pence per share as first quarterly payment, annualising at 11.75 pence per share and equating to a 3.9% yield on 30 June 2016 EPRA NAV
-- The Company has also announced today its agreement to acquire a GBP192.6 million investment portfolio of 55 Travelodge hotels and a proposed placing of new ordinary shares to raise c. GBP140 million at a placing price (equivalent to the pro forma EPRA NAV, adjusted for the impact of the transaction) of 298.6 pence per share. The acquisition is conditional on the placing and should it complete, the Board estimates a 14% increase in the dividend yield to 4.5% on the placing price
Hot Features
Premium
Change since
30 June 2016 31 December 2015 31 December 2015
--------------------------------- ------------ ---------------- -----------------
EPRA net asset value GBP541.5m GBP510.1m 6.2%
EPRA net asset value per share 300.2p 282.8p 6.2%
Net asset value GBP534.5m GBP504.4m 6.0%
Adjusted EPRA earnings per share 5.4p 2.6p n/a
--------------------------------- ------------ ---------------- -----------------
Martin Moore, Independent Non-Executive Chairman of the Company, commented: "I am delighted to report a very positive first half for the Group. Our EPRA NAV per share has continued to rise, up 6.2% over the six months to 30 June 2016 to just over 300p, and we are pleased to have made our maiden quarterly dividend payment in August. We are very excited to have secured an opportunity to expand our business with the GBP193 million Travelodge transaction which, if supported by shareholders, will raise our dividend yield, lengthen our lease duration even further, degear the business and diversify our covenant profile."
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
David Arch
Tom Yeadon
Mark Young
Notes to Editors
About Secure Income REIT
Secure Income REIT Plc is a UK REIT specialising in generating long term, inflation protected, secure income from real estate investments. Its investment strategy is designed to satisfy investors' growing requirements for high quality, secure, inflation protected income flows. The Group owns a freehold portfolio of 26 well established real estate assets including some of the UK's top visitor attractions and theme parks: namely Alton Towers theme park and hotel, Thorpe Park and Warwick Castle, as well as 20 private hospitals 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,
Following the GBP282 million secondary placing in March, representing 61.4% of the issued share capital, I am delighted to welcome our new shareholders onto the register and to report a very positive first half of 2016 for the Group.
Our highly resilient and growing long term income streams have so far proven a haven of stability at a time of volatility in the listed real estate sector; our shares have consistently held above the placing price despite the sector falling on average more than 20% immediately after the 23 June referendum result.
Our EPRA NAV per share has continued to rise, up 6.2% over the six months to 30 June 2016 to just over 300p, and we are pleased to have made our maiden quarterly dividend payment in August. We can be confident that our dividends will rise for a very long time due to our industry leading weighted average unexpired lease term of over 23 years, with two thirds of our income increasing by 2.8% per annum and the remaining third increasing annually by RPI. All of our tenants have continued to prosper, with Ramsay, Merlin and Orpea trading at or close to all-time share price highs with market capitalisations ranging from GBP4.1 billion to GBP9.3 billion.
Results and financial position
The 6.2% increase in the Group's EPRA NAV since 31 December 2015 arose as follows:
GBPm Pence per share
---------------------------------------- --------- ---------------
EPRA NAV at 1 January 2016 510.1 282.8
Investment property revaluation* 19.7 10.9
Rental income net of finance costs and
recurring administrative expenses* 12.5 7.0
Costs of secondary placing (2.1) (1.2)
Investment feasibility costs (1.4) (0.8)
Currency translation movements 2.7 1.5
EPRA NAV at 30 June 2016 541.5 300.2
---------------------------------------- --------- ---------------
* including a GBP6.6 million (3.7 pence per share) adjustment to strip out the impact of spreading fixed rental uplifts over the term of the lease required by accounting standards - adjustment reduces rental income and increases revaluation movement in equal amounts.
In the six months to 30 June 2016, the portfolio valuation rose by 2.1% to GBP1.38 billion, showing a net initial yield of 5.3% and an equivalent yield of 6.3%.
Adjusted EPRA EPS for the six months to 30 June 2016 was 5.4 pence per share compared to a loss of 0.3 pence per share for the six months to 30 June 2015 as follows:
Six months to Six months to
30 June 2016 30 June 2015
Pence per share Pence per share
-------------------------------------------- ------------------ ----------------
Rental income net of property outgoings:
Portfolio owned at 30 June 2016 21.3 20.8
Sold properties - 4.8
Net finance costs (13.6) (23.6)
Administrative expenses and corporate costs (2.3) (2.2)
Tax - (0.1)
Adjusted EPRA EPS 5.4 (0.3)
-------------------------------------------- ------------------ ----------------
58% of our rent roll is guaranteed by Ramsay Health Care Limited, listed on the Australian Stock Exchange with a market capitalisation of GBP9.3 billion* and one of the five largest healthcare groups in the world. A further 39% of rents are guaranteed by Merlin Entertainments Plc, a FTSE 100 constituent with a market capitalisation of GBP5.0 billion*, the largest operator of visitor attractions in Europe and the second largest in the world. The remainder of our rent roll is guaranteed by Orpea SA, a European leader in dependency care, listed on Euronext Paris with a market capitalisation of GBP4.1 billion*. In addition, as we grow the Group we will diversify our income streams by acquiring assets which meet our investment criteria and deliver enhanced returns to shareholders in line with our strategy, such as the GBP193 million Travelodge hotel acquisition announced today.
* as at 7 September 2016
Chairman's Statement continued
Outlook
Since we last reported to shareholders in March the short term outlook for the UK may have changed significantly, but we anticipate that little of this shift in environment will adversely affect our business and much could prove supportive.
The referendum result led to the Bank of England slashing its economic growth forecast by the biggest margin on record (from 2.3% to 0.8% for 2017), recommencing QE and cutting interest rates. Much has been written about the impact on the commercial property market and particularly the redemptions from open ended funds. Our view is simply that buying pressure over the last two years had driven down the yields offered on most traditional commercial property to a level that seemed expensive when compared to historic trends, and that at some point a correction seemed likely. This has now been triggered by the outcome of the referendum but the extent of this correction is likely to be limited by the relatively small number of forced sellers as well as the valuation level of, and income returns available from, the alternative homes for investment in equities and bonds. Property crashes may be much talked about but are relatively scarce: over the last 50 years, they have only ever followed speculative development or bank lending booms, neither of which have been a feature of recent years.
We have always been keen to make a clear distinction between mainstream commercial property and the composition of our portfolio, which is entirely let to strong covenants on long leases with guaranteed uplifts in less cyclical alternative property sectors. Whereas the rental levels of traditional property assets tend to follow economic growth, both upwards and downwards, our cash flows are much more predictable and resilient. This is a critical feature as the search for yield has become more acute, with 20 year gilt yields halving from 2.5% to 1.2% and 10 year gilt yields plummeting from 2.0% to 0.7% over the last year. Very low bond yields provide a highly supportive backdrop for investments producing predictable income returns, as illustrated by the c. 20% rise in the value of infrastructure funds over the last year.
As the summer market lull followed the referendum outcome, property transactional evidence is relatively thin on the ground. However, we have certainly seen no evidence of a weakening in prices in our sector of the market and we sense that sentiment may well be firming given that investments with similar income characteristics outside the property market have risen in value in recent months. As a consequence we are very excited to have secured an opportunity to expand our business with the Travelodge transaction which, if supported by shareholders, will raise our dividend yield, lengthen our lease duration even further, degear the business and diversify our covenant profile.
Martin Moore
Chairman
8 September 2016
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 2016.
The portfolio
The portfolio comprises 26 properties with secure, long term income and contractual uplifts offering inflation protection. The rent is derived from tenants whose businesses offer global spread and have demonstrated their strong defensive qualities in performing very well over many years, including the recession of 2008 - 2009. The Group's properties form an integral part of those businesses.
Healthcare assets (62% 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, with passing rent as follows:
30 June 31 December
2016 2015
GBPm GBPm
---------------------------------------------- --------- -------------
Acute hospitals - guaranteed by Ramsay Health
Care Limited 45.6 44.4
London psychiatric hospital - guaranteed by
Orpea SA 2.0 1.9
47.6 46.3
---------------------------------------------- --------- -------------
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 7 September 2016 of GBP9.3 billion.
The Ramsay hospitals are let on full repairing and insuring leases with a term to expiry at 30 June 2016 of 20.9 years without break. The rent increases by a fixed 2.75% per annum throughout the lease term in May each year. In addition, every five years commencing in May 2017, the Group has the option to revise the rent to the higher of the then passing rent increased by 2.75% per annum calculated on a compounded basis (the "indexed rent") and the open market rental value, with a special assumption at the first open market review in May 2017 that the rental level is the higher of the indexed rent or the amount calculated by the formula 0.885 x 0.65 x "EBITDARH", where EBITDARH is calculated as earnings from each individual property before interest, tax, depreciation, amortisation, rent and head office costs. In subsequent five yearly reviews the rent is set to indexed rent or open market rent at the Group's option.
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 7 September 2016 of
GBP4.1 billion. Orpea owns 45% of Groupe Sinoué, the parent company of the tenant. The hospital is let on a full repairing and insuring lease with a term to expiry at 30 June 2016 of 28.1 years without break, and the rent increases by a fixed 3.0% per annum throughout the lease term in May each year.
Leisure assets (38% of portfolio value)
The leisure assets are located in England and Germany and comprise four well known visitor attractions and two hotels, including two of the UK's top three theme parks. The English assets are Alton Towers theme park and the Alton Towers hotel, Thorpe Park theme park and Warwick Castle, while 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 portfolio was as follows:
30 June 31 December
2016 2015
GBPm GBPm
---------------------------------------------- --------- -------------
English assets 25.4 25.1
German assets (at 30 June 2016 exchange rate) 5.5 5.5
30.9 30.6
---------------------------------------------- --------- -------------
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 English leisure portfolio, which in 2016 resulted in an increase of 1.3%. 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 GBP5.5 million to GBP5.7 million on 29 July 2016 (translated at the 30 June 2016 rate).
Investment Adviser's Report continued
The portfolio (continued)
Leisure assets (continued)
The properties are all 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 7 September 2016 of GBP5.0 billion. Measured by the number of visitors, it is Europe's largest and the world's second largest operator of leisure attractions. The average unexpired lease term of the leisure assets is 26.0 years and the tenants have two successive rights to renew these leases for 35 years at the end of each term. The leases are on full repairing and insuring terms.
Portfolio valuation yields at 30 June 2016
Total Total
30 June 31 December
England Germany 2016 2015
---------------------------- ---------- ---------- ---------- ------------
Healthcare:
Net initial yield 5.2% n/a 5.2% 5.2%
Equivalent yield 6.2% n/a 6.2% 6.4%
Reversionary yield 5.4% n/a 5.4% 5.4%
Leisure:
Net initial yield 5.4% 6.1% 5.5% 5.5%
Equivalent yield 6.3% 7.7% 6.5% 6.6%
Reversionary yield 5.5% 6.5% 5.6% 5.6%
Total portfolio:
Net initial yield 5.3% 6.1% 5.3% 5.3%
Equivalent yield 6.2% 7.7% 6.3% 6.4%
Reversionary yield 5.4% 6.5% 5.5% 5.5%
Weighted average unexpired
lease term 22.9 years 26.1 years 23.1 years 23.5 years
------------------------------- ---------- ---------- ---------- ------------
The healthcare valuation yields include the effect of the fixed rental uplifts that took effect in May 2016 and the English leisure valuation yields include the effect of the 1.3% RPI-linked rental uplifts that took effect in June 2016. The German leisure valuation yield of 6.1% reflects the passing rent at 30 June 2016, and so has since increased to 6.3% following the July 2016 fixed rental uplifts.
Portfolio valuation
Healthcare Leisure Total
-------------------- -------------------- -----------------------------------
30 June 31 December 30 June 31 December 30 June 31 December Percentage
2016 2015 2016 2015 2016 2015 change in
GBPm GBPm GBPm GBPm GBPm GBPm the period
---------------- ------- ----------- ------- ----------- --------- ----------- -----------
England 849.7 834.4 443.2 441.6 1,292.9 1,276.0 1.3%
Germany at
constant Euro
exchange rate - - 76.0 73.5 76.0 73.5 3.3%
Movement in
Euro exchange
rate - - 9.6 n/a 9.6 n/a 13.0%
---------------- ------- ----------- ------- ----------- --------- ----------- -----------
849.7 834.4 528.8 515.1 1,378.5 1,349.5 2.1%
---------------- ------- ----------- ------- ----------- --------- ----------- -----------
The portfolio valuation uplift in the period comprised:
Percentage
change in
GBPm the period
------------------------------------------------ ------ -------------
Healthcare assets 15.3 1.8%
English leisure assets 1.6 0.4%
German leisure assets at constant Euro exchange
rate 2.5 3.3%
Movement in Euro exchange rate 9.6 13.0%
------------------------------------------------ ------ -------------
29.0 2.1%
------------------------------------------------ ------ -------------
Investment Adviser's Report continued
The portfolio (continued)
Portfolio valuation (continued)
The favourable currency translation movements of GBP9.6 million have arisen on the German properties in the period to 30 June 2016, reflecting the strength of the Euro against Sterling: the 31 December 2015 exchange rate was EUR1:GBP0.7350 and at 30 June 2016 was EUR1:GBP0.82775. This gain is offset by equivalent movements in the value of the Euro-denominated debt secured on those properties (and other Euro-denominated assets and liabilities) to leave a net currency translation gain of GBP2.7 million on the Group's German investments.
In addition to these movements, a rent smoothing adjustment arises on investment property revaluations from the Group's accounting policy, as required by International Financial Reporting Standards, to spread the impact of fixed rental uplifts evenly over the term of the relevant lease. The adjustments relate to those rents on the healthcare assets which increase by 2.75% (58% of the Group's rent roll) and 3.0% (3% of the Group's rent roll) every May, and those rents on the German leisure assets which increase by 3.34% every July (7% of the Group's rent roll).
The impact of this accounting treatment is to reflect a receivable, which is 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
2016 point in lease
GBPm GBPm term
------------------------------------------ ------------ ------------ -------------
Healthcare - acute hospitals 132.9 159.5 May 2022
Healthcare - London psychiatric hospital 6.6 20.6 Nov 2025
German leisure* 26.7 38.8 Jan 2025
------------------------------------------ ------------ ------------ -------------
Total 166.2 218.9
------------------------------------------ ------------ ------------ -------------
* at the period end Euro conversion rate of EUR1:GBP0.82775
In order that the rent smoothing receivable does not, in combination with the book value of the investment properties, overstate the value of the property 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 net assets.
The annual impact of this adjustment is known with certainty unless there are 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
------ ------------ ----------------- ----------
2016 10.6 2.1 12.7
2017 9.3 1.9 11.2
2018 7.9 1.8 9.7
2019 6.6 1.6 8.2
------ ------------ ----------------- ----------
* at the year to date average Euro conversion rate of EUR1:GBP0.77881
Investment Adviser's Report continued
Financial review
EPRA NAV per share
The principal financial outcome that the Board seeks to achieve is attractive growth in total shareholder returns. Progress towards this objective is specifically measured through growth in EPRA NAV plus distributions paid. EPRA NAV is a measure of the fair value of a property company on a long term basis, ignoring the impact of hedging valuations and any deferred tax.
EPRA NAV per share at 30 June 2016 was 300.2 pence per share, a 6.2% increase since 31 December 2015. Distributions commenced after the balance sheet date.
Pence per
GBPm share
--------------------------------------------------------- --------- --------------
EPRA NAV at 1 January 2016 510.1 282.8
Investment property revaluation* 19.7 10.9
Rental income less finance and recurring administrative
costs* 12.5 7.0
Costs of secondary placing (2.1) (1.2)
Investment feasibility costs (1.4) (0.8)
Currency translation movements 2.7 1.5
EPRA NAV at 30 June 2015 541.5 300.2
--------------------------------------------------------- --------- --------------
* including a GBP6.6 million (3.7 pence per share) adjustment to strip out the impact of spreading fixed rental uplifts over the term of the lease required by accounting standards - adjustment reduces rental income and increases revaluation movement in equal amounts.
Adjusted EPRA earnings per share
In order to monitor the Group's recurring profitability and its ability to make distributions, the Board uses the Group's adjusted EPRA earnings per share ("EPRA EPS") as a key performance indicator. EPRA EPS excludes investment property revaluations, fair value movements and early termination costs on interest rate derivatives, and the relevant deferred tax to give a measure of underlying earnings from core operating activities. Adjusted EPRA EPS further excludes:
-- the effect of smoothing the fixed rental income, as the EPRA adjustments already exclude the rent smoothing impact on revaluations but not the impact on rental income, and in order not to distort dividend cover calculations; and
-- certain non-recurring costs, as the Board believes this enables a more consistent comparison of underlying recurring earnings.
The non-recurring costs charged in the period and excluded in the adjusted EPRA EPS calculation relate to:
-- the GBP2.1 million cost to the Group of the secondary placing of 61.4% of the Company's existing share capital in March 2016, to broaden the Company's investor base, to create additional liquidity in share trading and to provide improved flexibility for financing future transactions; and
-- GBP1.4 million of costs incurred in exploring the feasibility of the proposed Travelodge acquisition, principally legal fees and other due diligence costs. The costs have been expensed in the period as the decision to acquire the portfolio had not been made at the balance sheet date. Should the acquisition complete, these costs are expected to remain as an expense in the income statement.
Adjusted EPRA EPS is therefore calculated as follows:
Six months to Six months to
30 June 2016 30 June 2015
------------------------- -------------------------
Pence per Pence per
GBPm share GBPm share
--------------------------------------- --------- -------------- --------- --------------
Rental income net of property
outgoings 45.0 25.0 52.9 29.3
Net finance costs (24.5) (13.6) (42.4) (23.6)
Administrative expenses and corporate
costs (7.7) (4.3) (4.0) (2.2)
Tax - - (0.3) (0.1)
EPRA EPS 12.8 7.1 6.2 3.4
Rent smoothing (6.6) (3.7) (6.8) (3.7)
Costs of secondary placing 2.1 1.2 - -
Investment feasibility costs 1.4 0.8 - -
--------------------------------------- --------- -------------- --------- --------------
Adjusted EPRA EPS 9.7 5.4 (0.6) (0.3)
--------------------------------------- --------- -------------- --------- --------------
Investment Adviser's Report continued
Financial review (continued)
Income statement
The rental income profile and the credit strengths of the businesses paying the rent are disclosed in the Portfolio section of this report, along with details of the investment property revaluations.
The Group's administrative expenses are analysed below:
Six months to Six months to
30 June 2016 30 June 2015
-------------------- --------------------
Pence per Pence per
GBPm share GBPm share
------------------------------- ---- -------------- ---- --------------
Investment Adviser's fee 3.6 2.0 3.3 1.8
Other administrative expenses 0.3 0.1 0.4 0.2
Corporate costs 0.3 0.2 0.3 0.2
------------------------------- ---- -------------- ---- --------------
Recurring costs 4.2 2.3 4.0 2.2
Costs of secondary placing 2.1 1.2 - -
Investment feasibility costs 1.4 0.8 - -
------------------------------- ---- -------------- ---- --------------
Total administrative expenses 7.7 4.3 4.0 2.2
------------------------------- ---- -------------- ---- --------------
The majority of the Group's overheads are borne by the Investment Adviser and are compensated for by way of advisory fees payable to the Investment Adviser under an agreement by which it is entitled to receive cash fees calculated on a sliding scale relative to the Group's EPRA NAV. Fees are payable at 1.25% per annum on EPRA NAV up to GBP500 million, plus 1.0% on EPRA NAV from GBP500 million to GBP1,000 million and 0.75% thereafter. Until 10 July 2016, the cash required to satisfy this advisory fee was subsidised by the pre-listing shareholders of the Company up to a maximum of GBP1.3 million per quarter and GBP1.5 million in the extended period to 10 July 2016. During the period, cash of GBP2.8 million was received from those shareholders towards the GBP3.6 million of fees payable.
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 GBP0.2 million in the period.
Irrecoverable VAT, which is included as appropriate in each of the line items above, arises on the proportion of expenses relating to the healthcare portfolio, as VAT is not chargeable or recoverable on the healthcare assets. The VAT disallowed averaged 61% across the Group in the period.
The average interest rate paid across the Group's three secured debt facilities during the period was 5.2% per annum, significantly down from 6.8% per annum in the period to 2 October 2015 when the last of the new facilities arranged in the second half of 2015 was drawn. All facilities are fixed rate loans, so this rate is expected to apply to these facilities in future years until the first debt maturity in October 2022.
Tax
The Group operates under the UK REIT regime, so its UK and German rental operations 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.
Realised profits from the Group's German rental operations are taxable in Germany, in respect of which a tax charge of GBP0.1 million arose in the period. As the Group's German operations are subject to German tax, the results also include a deferred tax liability of GBP6.9 million relating to unrealised German capital gains tax on those investment properties.
In the event that a UK REIT has financing costs arising on its UK property rental business that are not covered at least 1.25 times by property rental business profits, tax is payable at the UK corporation tax rate on the excess interest over that level, up to a cap of 20% of the taxable profit. In the prior year the Group incurred a GBP1.3 million tax charge as a result but, following completion of the Group's debt refinancing in October 2015, no such excess interest has arisen so there is no tax charge in the current period and none is expected on the current portfolio in future.
Investment Adviser's Report continued
Financial review (continued)
Currency translation
The majority of the Group's assets are located in the UK and the financial statements are therefore presented in Sterling. Just under 4% 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 the currency risk, but the Group remains exposed to translation differences on the net results and net assets of these operations, with movements recognised in the statement of other comprehensive income. The assets are held for long term investment and the net currency exposure is not hedged.
The German properties are valued at EUR103.4 million as at 30 June 2016, with the Euro tranches of the Group's secured debt facilities amounting to EUR71.8 million. The Euro strengthened against Sterling over the period by nearly 13% and as a result there was a net currency translation gain of GBP2.7 million in EPRA NAV in relation to the German net assets.
Cash flow
The movement in cash over the period comprises:
Six months to Six months to
30 June 2016 30 June 2015
---------------------- -----------------
Pence per Pence per
GBPm share GBPm share
-------------------------------------- ----------- --------- ------ ---------
Cash from operating activities 34.5 19.1 39.3 21.6
Net interest and finance costs
paid (25.1) (13.9) (41.8) (23.2)
Amounts received in respect of
advisory fee subsidy 2.8 1.6 2.5 1.4
Repayment of secured debt - loan
amortisation (2.3) (1.3) (3.3) (1.9)
Costs of secondary placing (2.1) (1.2) - -
Sale of investment properties - - 49.0 27.2
Net repayment of secured debt
- accelerated - - (44.7) (24.8)
Early debt repayment costs - - (3.6) (2.0)
Cash flow in the period 7.8 4.3 (2.6) (1.7)
Cash at the start of the period 81.6 45.3 38.8 23.0
Effect of exchange rate movements 0.2 0.1 (0.2) (0.1)
Dilution from 2014 incentive fee
share issue - - - (1.5)
Cash at the end of the period 89.6 49.7 36.0 19.7
-------------------------------------- ----------- --------- ------ ---------
Pence per Pence per
Comprising: GBPm share GBPm share
-------------------------------------- ----------- --------- ------ ---------
Free cash 69.3 38.5 10.3 5.4
Cash reserved for regulatory capital 0.6 0.3 0.5 0.2
Cash secured under lending facilities 19.7 10.9 25.2 14.1
-------------------------------------- ----------- --------- ------ ---------
89.6 49.7 36.0 19.7
-------------------------------------- ----------- --------- ------ ---------
The investment properties of the Group 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.
Investment Adviser's Report continued
Financing
The key terms of the Group's secured loan facilities are as follows:
Healthcare Healthcare Leisure
---------------------------------- ---------- ------------ ------------
Loan principal at 30 June 2016 GBP219.3m GBP313.8m GBP376.2m*
Number of assets securing loan 9 11 6
Fixed interest rate 4.29% 5.30% 5.69%
Amortisation per annum (assuming GBP3.8m
full covenant compliance) (in years
GBP1.0m GBP3.2m 6 and 7)
September
Final repayment 2025 October 2025 October 2022
---------------------------------- ---------- ------------ ------------
* comprising GBP316.8 million of senior and mezzanine Sterling loans secured on the English assets and EUR71.8 million of senior and mezzanine Euro denominated loans secured on the German assets (translated at the 30 June 2016 exchange rate of EUR1:GBP0.82775) with these Sterling and Euro loans cross-collateralised.
The Group's gross and net debt at 30 June 2016 was as follows:
Portfolio Group
Healthcare Healthcare Leisure total Unsecured total
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------ ---------- ---------- ------- --------- --------- ---------
Gross debt 219.3 313.8 376.2 909.3 - 909.3
Secured and regulatory
cash (5.3) (6.6) (7.8) (19.7) (0.6) (20.3)
Free cash - - (1.8) (1.8) (67.5) (69.3)
------------------------ ---------- ---------- ------- --------- --------- ---------
Net debt 214.0 307.2 366.6 887.8 (68.1) 819.7
------------------------ ---------- ---------- ------- --------- --------- ---------
Property value 378.7 471.0 528.8 1,378.5 - 1,378.5
------------------------ ---------- ---------- ------- --------- --------- ---------
Net LTV 56.5% 65.2% 69.3% 64.4% 59.5%
------------------------ ---------- ---------- ------- --------- --------- ---------
Following scheduled amortisation payments in July 2016, total gross debt at the date of this report, including Euro denominated debt at the 30 June 2016 exchange rate, is GBP908.2 million.
Nick Leslau
Chairman, Prestbury Investments LLP
8 September 2016
Group Income Statement
Unaudited
six months Audited Unaudited
to year to six months
30 June 31 December to 30 June
2016 2015 2015
Notes GBP000 GBP000 GBP000
-------------------------------- ----- ------------ ------------- ------------
Revenue 3,4 45,014 99,479 52,886
Property outgoings (14) (33) (24)
-------------------------------- ----- ------------ ------------- ------------
Gross profit 45,000 99,446 52,862
-------------------------------- ----- ------------ ------------- ------------
Administrative expenses (7,418) (7,656) (3,766)
Corporate costs (326) (482) (272)
Total administrative expenses (7,744) (8,138) (4,038)
Investment property revaluation 8 13,077 70,435 76,551
Profit on sale of investment
properties - 23,962 23,967
-------------------------------- ----- ------------ ------------- ------------
Operating profit 50,333 185,705 149,342
Finance income 69 61 24
Finance costs 5 (24,546) (146,613) (46,251)
-------------------------------- ----- ------------ ------------- ------------
Profit before tax 25,856 39,153 103,115
Tax charge 6 (458) (2,382) (1,196)
-------------------------------- ----- ------------ ------------- ------------
Profit for the period 25,398 36,771 101,919
-------------------------------- ----- ------------ ------------- ------------
Pence Pence per Pence per
Earnings per share per share share share
-------------------------------- ----- ------------ ------------- ------------
Basic and diluted 7 14.1 20.4 56.5
-------------------------------- ----- ------------ ------------- ------------
All amounts relate to continuing activities.
The notes form part of this interim report.
Group Statement of Other Comprehensive Income
Unaudited
six months Audited Unaudited
to year to six months
30 June 31 December to 30 June
2016 2015 2015
GBP000 GBP000 GBP000
-------------------------------------------- ------------ ------------- ------------
Profit for the period 25,398 36,771 101,919
Items that may subsequently be reclassified
to profit or loss:
Currency translation differences 1,948 (899) (1,433)
Fair value adjustment of interest
rate derivatives in effective
hedges - 31,703 24,823
Reclassification of interest rate
derivative fair value adjustment
to the income statement - 88,125 3,627
Tax effect of interest rate derivative
fair value adjustment - (147) (161)
Deferred tax written off following
early termination of interest
rate derivatives - (480) -
Total comprehensive income for
the period, net of tax 27,346 155,073 128,775
--------------------------------------------- ------------ ------------- ------------
The notes form part of this interim report.
Group Statement of Changes in Equity
Share Cash flow
Share premium Other hedging Retained
capital reserve reserve reserve earnings Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
-------------------------------- -------- ---------- ---------- ----------- ----------- ---------
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, net
of tax - - 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
-------------------------------- -------- ---------- ---------- ----------- ----------- --------- Year ended 31 December 2015 (audited) At 1 January 2015 16,844 16,156 33,929 (119,201) 396,577 344,305 -------------------------------- -------- ---------- ---------- ----------- ----------- --------- Profit for the year - - - - 36,771 36,771 Other comprehensive income - - (899) 119,201 - 118,302 Total comprehensive income, net of tax - - (899) 119,201 36,771 155,073 Issue of shares 1,190 36,221 (32,378) - - 5,033 -------------------------------- -------- ---------- ---------- ----------- ----------- --------- At 31 December 2015 18,034 52,377 652 - 433,348 504,411 -------------------------------- -------- ---------- ---------- ----------- ----------- --------- Period ended 30 June 2015 (unaudited) At 1 January 2015 16,844 16,156 33,929 (119,201) 396,577 344,305 -------------------------------- -------- ---------- ---------- ----------- ----------- --------- Profit for the period - - - - 101,919 101,919 Other comprehensive income - - (1,433) 28,289 - 26,856 Total comprehensive income, net of tax - - (1,433) 28,289 101,919 128,775 Issue of shares 1,190 33,579 (32,378) - - 2,391 -------------------------------- -------- ---------- ---------- ----------- ----------- --------- At 30 June 2015 18,034 49,735 118 (90,912) 498,496 475,471 -------------------------------- -------- ---------- ---------- ----------- ----------- ---------
The notes form part of this interim report.
Group Balance Sheet
Unaudited Audited Unaudited
30 June 31 December 30 June
2016 2015 2015
Notes GBP000 GBP000 GBP000
---------------------------- ----- ----------- ------------- -------------
Non-current assets
Investment properties 3,8 1,378,492 1,349,547 1,346,867
Deferred tax asset 11 - - 467
---------------------------- ----- ----------- ------------- -------------
1,378,492 1,349,547 1,347,334
Current assets
Cash and cash equivalents 10 89,639 81,611 36,043
Trade and other receivables 9 67 114 152
Investment property sale
proceeds receivable - - 332,361
Current tax asset - - 275
89,706 81,725 368,831
---------------------------- ----- ----------- ------------- -------------
Total assets 1,468,198 1,431,272 1,716,165
---------------------------- ----- ----------- ------------- -------------
Current liabilities
Trade and other payables 12 (30,576) (29,293) (39,310)
Secured debt 13 (2,469) (2,707) (213,246)
Current tax payable (57) (862) (328)
Interest rate derivatives - - (18,501)
(33,102) (32,862) (271,385)
Non-current liabilities
Secured debt 13 (893,622) (888,312) (892,732)
Deferred tax liability 11 (6,929) (5,687) (5,407)
Interest rate derivatives - - (71,170)
(900,551) (893,999) (969,309)
Total liabilities (933,653) (926,861) (1,240,694)
---------------------------- ----- ----------- ------------- -------------
Net assets 534,545 504,411 475,471
---------------------------- ----- ----------- ------------- -------------
Share capital 14 18,034 18,034 18,034
Share premium reserve 15 55,165 52,377 49,735
Retained earnings 15 458,746 433,348 498,496
Other reserve 15 2,600 652 118
Cash flow hedging reserve 15 - - (90,912)
Total equity 534,545 504,411 475,471
---------------------------- ----- ----------- ------------- -------------
Pence per Pence per Pence per
share share share
---------------------------- ----- ----------- ------------- -------------
Basic NAV per share 16 296.4 279.7 263.7
EPRA NAV per share 16 300.2 282.8 316.1
---------------------------- ----- ----------- ------------- -------------
The notes form part of this interim report.
Group Cash Flow Statement
Unaudited
six months Audited Unaudited
to year to six months
30 June 31 December to 30 June
2016 2015 2015
Notes GBP000 GBP000 GBP000
---------------------------------- ----- ------------ ------------- ------------
Operating activities
Profit before tax 25,856 39,153 103,115
Adjustments for non-cash
items:
Investment property revaluation 8 (13,077) (70,435) (76,551)
Profit on sale of investment
properties - (23,962) (23,967)
Movement in rent smoothing
adjustment 8 (6,587) (13,011) (6,756)
Finance income (69) (61) (24)
Finance costs 5 24,546 146,613 46,251
---------------------------------- ----- ------------ ------------- ------------
Cash flows from operating
activities before changes
in working capital 30,669 78,297 42,068
Changes in working capital:
Trade and other receivables 46 (11) (2,510)
Trade and other payables 2,487 (8,155) (143)
---------------------------------- ----- ------------ ------------- ------------
Cash generated from operations 33,202 70,131 39,415
Tax (paid) / received (847) (316) 7
---------------------------------- ----- ------------ ------------- ------------
Cash flows from operating
activities 32,355 69,815 39,422
---------------------------------- ----- ------------ ------------- ------------
Investing activities
Proceeds from sale of investment
properties - 379,316 48,994
Interest received 69 61 24
---------------------------------- ----- ------------ ------------- ------------
Cash flows from investing
activities 69 379,377 49,018
---------------------------------- ----- ------------ ------------- ------------
Financing activities
Drawdown of secured debt - 905,158 -
Repayment of secured debt (2,308) (1,154,923) (48,082)
Interest and finance costs
paid (25,013) (86,804) (45,432)
Costs of early termination
of interest rate derivatives - (60,289) -
Loan costs paid on new facilities (87) (14,437) -
Net proceeds of share issues 2,788 5,033 2,526
---------------------------------- ----- ------------ ------------- ------------
Cash flows from financing
activities (24,620) (406,262) (90,988)
---------------------------------- ----- ------------ ------------- ------------
Increase / (decrease) in
cash and cash equivalents 7,804 42,930 (2,548)
Cash and cash equivalents
at the beginning of the period 81,611 38,771 38,771
Effect of currency translation
movements 224 (90) (180)
---------------------------------- ----- ------------ ------------- ------------
Cash and cash equivalents
at the end of the period 89,639 81,611 36,043
---------------------------------- ----- ------------ ------------- ------------
The notes form part of this interim report.
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 2016, with comparative amounts relating to the year to 31 December 2015 and the six month period to 30 June 2015, 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 AIM. Further information about the Group 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 period ended 31 December 2015 and are expected to be consistently applied in the year to 31 December 2016.
At the end of the interim reporting period, the Directors are required to assess whether it is appropriate to make provision for an incentive fee payable at the end of the current financial year as a result of the Group's performance in that interim period. 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 17, 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 assets have been converted to Sterling at an average exchange rate for the period of EUR1:GBP0.77881 and period end balances converted to Sterling at the 30 June 2016 exchange rate of EUR1:GBP0.82775.
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 2015 have been filed with Companies House. The independent auditor's report on the annual report and financial statements for 2015 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.
3. Operating segments
IFRS 8 "Operating Segments" requires operating segments to be identified on the basis of 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 as a whole.
The Group owns two property portfolios. Although these are described individually within the Investment Adviser's report, the Board receives quarterly management accounts prepared on a basis which aggregates the performance of the portfolios and focuses on Total Shareholder Return. The Board has therefore concluded that the Group has operated in and was managed as one business segment, being property investment, in both the current and prior periods.
Notes to the Interim Report continued
3. Operating segments (continued)
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
2016 2015 2015
GBP000 GBP000 GBP000
--------------------------------- ------------- ----------- -------------
Revenue
UK 41,320 92,587 49,414
Germany 3,694 6,892 3,472
--------------------------------- ------------- ----------- -------------
45,014 99,479 52,886
--------------------------------- ------------- ----------- -------------
Investment property valuation
UK 1,292,898 1,276,003 1,275,997
Germany 85,594 73,544 70,870
--------------------------------- ------------- ----------- -------------
1,378,492 1,349,547 1,346,867
--------------------------------- ------------- ----------- -------------
Revenue, which reflects the impact of rent smoothing adjustments, includes GBP26.9 million (year to 31 December 2015: GBP55.3 million; six months to 30 June 2015: GBP28.1 million) relating to the Group's largest tenant, and GBP16.2 million (year to 31 December 2015: GBP41.8 million; six months to 30 June 2015: GBP23.6 million) relating to the Group's second largest tenant. No other single tenant or guarantor contributed more than 10% of the Group's revenue in any reporting period.
4. Revenue
Revenue comprised:
Unaudited Audited Unaudited
six months to year to six months to
30 June 31 December 30 June
2016 2015 2015
GBP000 GBP000 GBP000
---------------------------- ------------- ----------- -------------
Cash rents receivable 38,427 86,468 46,130
Rent smoothing adjustments 6,587 13,011 6,756
---------------------------- ------------- ----------- -------------
45,014 99,479 52,886
---------------------------- ------------- ----------- -------------
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 68% (31 December 2015 and 30 June 2015: 67%) of passing rent as at 30 June 2016 which increases by a fixed percentage each year. At this stage in the lease terms, 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. Finance costs
Unaudited Audited Unaudited
six months to year to six months to
30 June 31 December 30 June
2016 2015 2015
GBP000 GBP000 GBP000
--------------------------------------- ------------- ----------- -------------
Interest on secured debt 23,705 66,781 38,402
Amortisation of loan costs (non-cash) 841 7,561 1,636
Exit and other fees - 11,646 2,586
Reclassification of fair value
adjustment of interest rate
derivatives from the cash flow
hedging reserve - 60,625 3,627
24,546 146,613 46,251
--------------------------------------- ------------- ----------- -------------
Notes to the Interim Report continued
6. Tax
Unaudited Audited Unaudited
six months to year to six months to
30 June 31 December 30 June
2016 2015 2015
Analysis of tax charge in the
period GBP000 GBP000 GBP000
---------------------------------- ------------- ----------- -------------
Current tax - UK
UK REIT excess interest charge - 1,293 328
Adjustments in respect of prior
periods (182) 50 25
Current tax - Germany
Corporation tax charge 147 242 122
Adjustments in respect of prior
periods - (226) (227)
Deferred tax
Deferred tax charge 493 1,023 948
---------------------------------- ------------- ----------- -------------
458 2,382 1,196
---------------------------------- ------------- ----------- -------------
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
2016 2015 2015
GBP000 GBP000 GBP000
------------------------------------- ------------- ----------- -------------
Profit before tax 25,856 39,153 103,115
------------------------------------- ------------- ----------- -------------
Profit before tax at the standard
rate of corporation tax in the
UK of 20% (31 December 2015
and 30 June 2015: 20.25%) 5,171 7,928 20,881
Effects of:
Investment property revaluation
not taxable (3,440) (15,875) (15,922)
Qualifying property rental business
not taxable (2,598) (3,633) (1,537)
Movement in previously unrecognised
tax losses 935 15,512 2,392
Expenses and financing costs
not deductible 425 1,943 413
Adjustments in respect of prior
periods (182) (176) (202)
German current tax charge 147 242 122
Profit on sale of investment
properties not taxable - (4,852) (4,853)
UK REIT excess interest charge - 1,293 328
Transfer pricing adjustments - - (305)
Double tax relief - - (121)
Tax charge for the period 458 2,382 1,196
------------------------------------- ------------- ----------- -------------
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 continued to meet these conditions. The condition requiring that the Company must not be a close company includes a grace period of three years from entry into the UK REIT regime, which expires in June 2017. The Company was a close company when it entered the UK REIT regime but the secondary share placing in March 2016 has widened the Company's ownership such that it now complies with the relevant condition.
Notes to the Interim Report continued
6. Tax (continued)
Furthermore, one of the ongoing REIT tests is an interest cover test which requires the profits of the tax exempt property rental business of the Group to be at least 1.25 times its cost of financing. If this condition is not met, the Company remains within the UK REIT regime but is required to pay UK corporation tax on an amount equivalent to the excess interest costs or 20% of the tax exempt property rental business profits if that is less. The Group has met this test in the period to 30 June 2016 so no tax was payable, but did not meet it in the prior year when it incurred a tax charge of GBP1.3 million (six months to 30 June 2015: GBP0.3 million).
The Group is subject to German corporation tax on its German property rental business at a rate of 21%, resulting in a tax charge of GBP0.1 million (year to 31 December 2015: GBP0.2 million; six months to 30 June 2015: GBP0.1 million). In the prior year, a German tax credit of GBP0.2 million (year to 31 December 2015: GBP0.2 million; six months to 30 June 2015: GBP0.2 million) also arose following the conclusion of a tax audit relating to the years between 2007 and 2012. A deferred tax liability of GBP6.9 million (31 December 2015: GBP5.7 million; 30 June 2015: GBP5.4 million) is recognised for the German capital gains tax that would potentially be payable on the sale of the relevant investment properties.
7. 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 and is adjusted in diluted EPS to reflect any shares to be issued. 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 at the end of that prior period regardless of the actual date of issue.
Unaudited Audited Unaudited
six months to year to six months to
30 June 31 December 30 June
2016 2015 2015
GBP000 GBP000 GBP000
----------------------------------- ------------- ----------- -------------
Profit 25,398 36,771 101,919
----------------------------------- ------------- ----------- -------------
Number Number Number
----------------------------------- ------------- ----------- -------------
Weighted average number of shares
in issue 180,344,231 180,344,213 180,344,207
----------------------------------- ------------- ----------- -------------
Pence Pence per Pence per
per share share share
----------------------- ---------- --------- ---------
Basic and diluted EPS 14.1 20.4 56.5
----------------------- ---------- --------- ---------
Notes to the Interim Report continued
7. Earnings per share (continued)
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, excluding any incentive fee, which is largely derived from investment property revaluations, and any non-recurring costs. EPRA earnings have also been adjusted to exclude the effect of smoothing fixed rental uplifts in order not to distort dividend cover calculations. This results in a restatement of the prior period comparatives for 30 June 2015 shown in the table below.
Unaudited Audited Unaudited
six months to year to six months to
30 June 31 December 30 June
2016 2015 2015
GBP000 GBP000 GBP000
----------------------------------- ------------- ----------- -------------
Basic earnings attributable
to shareholders 25,398 36,771 101,919
EPRA adjustments:
Investment property revaluation (13,077) (70,435) (76,551)
German deferred tax on investment
property revaluations 493 1,023 948
Profit on sale of investment
properties - (23,962) (23,967)
Costs of early termination of
interest rate swaps - 60,625 3,627
Other early debt repayment costs - 13,666 229
EPRA earnings 12,814 17,688 6,205
Other adjustments:
Rent smoothing (6,587) (13,011) (6,756)
Costs of secondary placing 2,123 - -
Investment feasibility costs 1,416 - -
----------------------------------- ------------- ----------- -------------
Adjusted EPRA earnings 9,766 4,677 (551)
----------------------------------- ------------- ----------- -------------
Pence per Pence per
Pence per share share Share
------------------- ---------------- --------- ---------
EPRA EPS 7.1 9.8 3.4
Adjusted EPRA EPS 5.4 2.6 (0.3)
------------------- ---------------- --------- ---------
Notes to the Interim Report continued
8. Investment properties
Unaudited Audited Unaudited
six months to year to six months to
30 June 31 December 30 June
2016 2015 2015
Freehold investment properties GBP000 GBP000 GBP000
-------------------------------- ------------- ----------- -------------
At the start of the period 1,349,547 1,625,435 1,625,435
Revaluation movement 19,664 83,446 83,307
Currency translation movement 9,281 (3,980) (6,521)
Disposals - (355,354) (355,354)
At the end of the period 1,378,492 1,349,547 1,346,867
-------------------------------- ------------- ----------- -------------
As at 30 June 2016 the properties were externally valued at GBP1,378.5 million (31 December 2015: GBP1,349.5 million; 30 June 2015: GBP1,346.9 million) by CBRE Limited, Commercial Real Estate Advisors, in their capacity as external valuers. The valuation was prepared on a fixed fee basis, independent of the portfolio value, and was 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 valuation report included the following statement from the valuer highlighting the potential future impact on property values of the result of the EU referendum: "Following the Referendum held on 23 June 2016 concerning the UK's membership of the EU, a decision was taken to exit. We are now in a period of uncertainty in relation to many factors that impact the property investment and letting markets. Since the Referendum date it has not been possible to gauge the effect of this decision by reference to transactions in the market place. The probability of our opinion of value exactly coinciding with the price achieved, were there to be a sale, has reduced. We would, therefore, recommend that the valuation is kept under regular review and that specific market advice is obtained should you wish to effect a disposal."
The historic cost of the Group's investment properties as at 30 June 2016 was GBP1,063.6 million (31 December 2015 and 30 June 2015: GBP1,063.6 million).
Included within the carrying value of investment properties at 30 June 2016 is GBP166.2 million (31 December 2015: GBP156.6 million; 30 June 2015: GBP153.7 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, but does not increase, the carrying value of investment properties. The effect of this adjustment on the revaluation movement was as follows:
Unaudited Audited Unaudited
six months to year to six months to
30 June 31 December 30 June
2016 2015 2015
GBP000 GBP000 GBP000
----------------------------- ------------- ----------- -------------
Revaluation movement 19,664 83,446 83,307
Rent smoothing adjustment (6,587) (13,011) (6,756)
----------------------------- ------------- ----------- -------------
Revaluation movement in the
income statement 13,077 70,435 76,551
----------------------------- ------------- ----------- -------------
All of the investment properties are held, within three 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 valuer (based on market observation and their professional judgement) in the valuation model.
Notes to the Interim Report continued
8. Investment properties (continued)
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 valuer's assessment 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 or 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 and, if applicable, properties undergoing significant refurbishment. The Audit Committee also considers the valuation process as part of its overall responsibilities, 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 year.
The key inputs for the level 3 valuations were as follows:
Inputs
------------------------------
Fair value
Portfolio GBP000 Key unobservable input Range Weighted average
---------------------- ----------- ----------------------- ------------ ----------------
At 30 June 2016:
Healthcare 849,652 Net initial yield 4.5% - 5.8% 5.2%
Reversionary yield 4.5% - 5.9% 5.4%
Leisure - England 443,240 Net initial yield 5.2% - 6.1% 5.4%
Reversionary yield 5.3% - 6.2% 5.5%
Future RPI assumption
per annum 2.0% 2.0%
Leisure - Germany 85,600 Net initial yield 6.1% 6.1%
Reversionary yield 6.5% 6.5%
---------------------- ----------- ----------------------- ------------ ----------------
At 31 December 2015:
Healthcare 834,437 Net initial yield 4.5% - 5.8% 5.2%
Reversionary yield 4.6% - 5.9% 5.4%
Leisure - England 441,560 Net initial yield 5.2% - 6.1% 5.4%
Reversionary yield 5.3% - 6.2% 5.5%
Future RPI assumption
per annum 2.0% 2.0%
Leisure - Germany 73,550 Net initial yield 6.3% 6.3%
Reversionary yield 6.5% 6.5%
---------------------- ----------- ----------------------- ------------ ----------------
At 30 June 2015:
Healthcare 834,437 Net initial yield 4.5% - 5.8% 5.2%
Reversionary yield 4.6% - 5.9% 5.4%
Leisure - England 441,560 Net initial yield 5.2% - 6.1% 5.4%
Reversionary yield 5.3% - 6.2% 5.5%
Future RPI assumption
per annum 2.0% 2.0%
Leisure - Germany 70,870 Net initial yield 6.1% 6.1%
Reversionary yield 6.3% 6.3%
---------------------- ----------- ----------------------- ------------ ----------------
The principal sensitivity of measurement to variations in the significant unobservable outputs is that decreases in net initial yield, decreases in reversionary yield and increases in RPI will increase the fair value (and vice versa).
9. Trade and other receivables
Unaudited Audited Unaudited
30 June 31 December 30 June
2016 2015 2015
GBP000 GBP000 GBP000
-------------------------------- ---------- ----------- ---------
Prepayments and accrued income 67 114 152
-------------------------------- ---------- ----------- ---------
Notes to the Interim Report continued
10. Cash and cash equivalents
Unaudited Audited Unaudited
30 June 31 December 30 June
2016 2015 2015
GBP000 GBP000 GBP000
-------------------- ---------- ----------- ---------
Secured cash 19,665 25,598 25,207
Regulatory capital 621 375 479
Free cash 69,353 55,638 10,357
-------------------- ---------- ----------- ---------
89,639 81,611 36,043
-------------------- ---------- ----------- ---------
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. Deferred tax
The movements in deferred tax balances in each period were as follows:
Unrealised gains Interest rate
on investment derivatives at
properties fair value Total
GBP000 GBP000 GBP000
--------------------------------- ----------------- ------------------ --------
Unaudited:
Balance at 1 January 2016 (5,687) - (5,687)
Charge to the income statement (493) - (493)
Movement in other comprehensive
income (749) - (749)
Balance at 30 June 2016 (6,929) - (6,929)
--------------------------------- ----------------- ------------------ --------
Unrealised gains Interest rate
on investment derivatives at
properties fair value Total
GBP000 GBP000 GBP000
--------------------------------- ----------------- ------------------ --------
Audited:
Balance at 1 January 2015 (4,938) 627 (4,311)
Charge to the income statement (1,023) - (1,023)
Movement in other comprehensive
income 274 (627) (353)
Balance at 31 December 2015 (5,687) - (5,687)
--------------------------------- ----------------- ------------------ --------
Unrealised gains Interest rate
on investment derivatives at
properties fair value Total
GBP000 GBP000 GBP000
--------------------------------- ----------------- ------------------ --------
Unaudited:
Balance at 1 January 2015 (4,938) 627 (4,311)
Charge to the income statement (948) - (948)
Movement in other comprehensive
income 479 (160) 319
Balance at 30 June 2015 (5,407) 467 (4,940)
--------------------------------- ----------------- ------------------ --------
12. Trade and other payables
Unaudited Audited Unaudited
30 June 31 December 30 June
2016 2015 2015
GBP000 GBP000 GBP000
------------------------------ ---------- ----------- ---------
Trade payables 110 251 -
Taxation and social security 1,410 1,347 2,116
Accruals and deferred income 29,056 27,695 37,194
------------------------------ ---------- ----------- ---------
30,576 29,293 39,310
------------------------------ ---------- ----------- ---------
Notes to the Interim Report continued
13. Secured debt
Unaudited Audited Unaudited
30 June 31 December 30 June
2016 2015 2015
GBP000 GBP000 GBP000
-------------------------------- ---------- ----------- ---------
Amounts falling due within one
year
Secured debt 4,156 4,387 215,116
Unamortised finance costs (1,687) (1,680) (1,870)
-------------------------------- ---------- ----------- ---------
2,469 2,707 213,246
-------------------------------- ---------- ----------- ---------
Unaudited Audited Unaudited
30 June 31 December 30 June
2016 2015 2015
GBP000 GBP000 GBP000
-------------------------------- ---------- ----------- ---------
Amounts falling due in more
than one year
Secured debt 905,100 900,521 889,712
Exit fee - - 4,095
Unamortised finance costs (11,478) (12,209) (1,075)
-------------------------------- ---------- ----------- ---------
893,622 888,312 892,732
-------------------------------- ---------- ----------- ---------
As at 30 June 2016, the fair value of the Group's secured debt was GBP968.8 million (31 December 2015: GBP912.2 million; 30 June 2015: GBP1,104.8 million). The secured debt was externally valued by JC Rathbone Associates Limited in accordance with IFRS 13 by reference to interbank bid market rates as at the close of business on the last working day prior to each balance sheet date, adjusted for the credit risk of the Group. The Group had no undrawn, committed borrowing facilities at either balance sheet date.
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 period or any prior year.
14. Share capital
Share capital represents the aggregate nominal value of shares issued. At 30 June 2016, the Company had an issued and fully paid share capital of 180,344,240 ordinary shares of GBP0.10 each (31 December 2015: 180,344,228 shares; 30 June 2015: 180,344,216 shares).
Under the terms of the Commitment Agreement described in note 17, the Company's shareholders prior to listing agreed to subscribe in cash for one ordinary share per quarter to cover the fees payable to the Investment Adviser. During the period, 12 ordinary shares of GBP0.10 each were issued under this arrangement for total proceeds of
GBP2.8 million (year to 31 December 2015: 24 shares for total proceeds of GBP5.0 million; six months to 30 June 2015: 12 shares for total proceeds of GBP2.5 million). The excess over nominal value in each case was credited to the share premium account.
As a result of these transactions, the movement in the number of shares in issue over the period was as follows:
Unaudited Audited Unaudited
30 June 31 December 30 June
2016 2015 2015
Number Number Number
---------------------------------------- ----------- ----------- -----------
At the start of the period 180,344,228 168,443,772 168,443,772
Issue of ordinary shares in settlement
of incentive fee earned in respect
of the period to 31 December 2014 - 11,900,432 11,900,432
Issue of ordinary shares under
Commitment Agreement 12 24 12
180,344,240 180,344,228 180,344,216
---------------------------------------- ----------- ----------- -----------
Notes to the Interim Report continued
15. Reserves
The nature and purpose of each of the reserves included within equity at 30 June 2016 is as follows:
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 reserve: represents 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 17, under the terms of both the Commitment Agreement and 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.
16. Net asset value per share
The net asset value per share of 296.4 pence (31 December 2015: 279.7 pence; 30 June 2015: 263.7 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 180,344,240 (31 December 2015: 180,344,228; 30 June 2015: 180,344,216). Diluted NAV per share is adjusted for any shares that will be issued, including any in settlement of incentive fees payable as explained in note 17. Since no incentive fee was payable in the current period or prior year, the diluted NAV per share at each date was the same as the basic NAV per share.
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 fair value of derivative instruments and deferred tax balances. The Group's EPRA NAV is calculated as follows:
Unaudited Audited Unaudited
30 June 2016 31 December 2015 30 June 2015
---------------------------- -------------------- -------------------- --------------------
Pence per Pence per Pence per
GBP000 share GBP000 share GBP000 share
---------------------------- --------- --------- --------- --------- --------- ---------
Basic NAV 534,545 296.4 504,411 279.7 475,471 263.7
EPRA adjustments:
Deferred tax on investment
property revaluations 6,929 3.8 5,687 3.1 5,407 3.0
Fair value of interest
rate derivatives - - - - 89,671 49.7
Deferred tax on interest
rate derivatives - - - - (467) (0.3)
EPRA NAV 541,474 300.2 510,098 282.8 570,082 316.1
---------------------------- --------- --------- --------- --------- --------- ---------
Notes to the Interim Report continued
17. 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 2016
-------------------------
Percentage of
Number of issued share
shares capital
--------------- ---------- -------------
Nick Leslau * 22,524,387 12.49%
Mike Brown 574,712 0.32%
Sandy Gumm 114,942 0.06%
Martin Moore 57,471 0.03%
Jonathan Lane 57,471 0.03%
Ian Marcus 28,735 0.02%
Leslie Ferrar 14,367 0.01%
---------------- ---------- -------------
* Comprises 22,466,916 ordinary shares held by PIHL Property LLP and 57,471 ordinary shares held by the Saper Trust. Nick Leslau has an ultimate beneficial interest of 36.9% in PIHL Property LLP through various indirect holdings. The Saper Trust is a trust whose beneficiaries include Nick Leslau.
In addition to the amounts shown in the table above, as at 30 June 2016 a further 9,826,009 ordinary shares (31 December 2015 and 30 June 2015: 11,900,432 ordinary shares), representing 5.4% (31 December 2015 and 30 June 2015: 6.6%) 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 of 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 2015: GBP185,000; six months ended 30 June 2015: 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 GBP3.2 million were payable in cash to Prestbury in respect of the period (year to 31 December 2015: GBP6.5 million; six months to 30 June 2015: GBP3.1 million), GBPnil (31 December 2015: GBP0.2 million; 30 June 2015: GBP0.2 million) of which was outstanding at the balance sheet date.
Commitment Agreement
In May 2014, in connection with its listing, the Company entered into an agreement (the "Commitment Agreement") with its existing investors at that time in order to fund (in whole or in part) the Company's payment of its contracted advisory fee to Prestbury Investments LLP during the period from listing on 5 June 2014 to 10 July 2016 (the "Commitment Agreement Period").
Under the terms of the Commitment Agreement, the cash funding of the advisory fees was required to be satisfied by way of subscription for shares. Each existing investor agreed to subscribe for one share per quarter over the Commitment Agreement Period amounting to an aggregate of 12 (year to 31 December 2015: 24; six months to 30 June 2015: 12) new shares in the Company during this reporting period. The total subscription price payable by the existing investors for the shares to be issued to them in any quarter was equal to the advisory fee payable by the Company to Prestbury in respect of that quarter, subject to a maximum aggregate subscription price of GBP1.3 million per quarter and GBP1.5 million in the extended period to 10 July 2016. Since the advisory fees have exceeded that maximum in the period, those investors have contributed GBP2.8 million towards the fees and the remaining GBP0.4 million has been borne by the Group. The final subscriptions made in June 2016 covered the period following the balance sheet date to 10 July 2016, so no further payments are receivable from the existing investors under these arrangements.
Notes to the Interim Report continued
17. Related party transactions and balances (continued)
Incentive fee
Under the terms of the Investment Advisory Agreement, Prestbury may become entitled to an incentive fee which rewards growth in Total Shareholder Return above an agreed threshold return and is intended to strongly align Prestbury's interests with those of shareholders. 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 any shares are restricted, with the restriction lifted on a phased basis over a period from 18 to 42 months from the date of listing, subject to a release in the event that Prestbury needs to sell shares to settle any tax liability on the fee income it recognises.
The incentive fee is calculated annually by reference to growth in EPRA NAV per share and distributions paid. If this growth exceeds a hurdle rate of 10% per annum, an incentive fee equal to 20% of this excess is payable to Prestbury. Dividends or other distributions paid in any period are treated as payments on account against achievement of the hurdle rate of return. In the event of an incentive fee being payable at the end of an accounting period, as it was for the period ended 31 December 2014, a "high watermark" 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 high watermark EPRA NAV plus 10% per annum.
Irrecoverable VAT arises on any element of the fee that relates 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 that irrecoverable VAT. However, the shares to be issued do reduce the Group's net asset value per share.
No incentive fee has been recognised in the period (year to 31 December 2015: GBPnil; six months to 30 June 2015: GBPnil). Assuming no changes in capital structure, EPRA NAV growth per share, including any distributions, will have to exceed 30.8 pence per share for a fee to be earned for the year ending 31 December 2016. As a result, assuming dividend payments of 2.9375 pence per share per quarter in the second half of 2016 (in line with the Company's current stated intentions), EPRA NAV will have to exceed 307.6 pence per share (GBP554.8 million) at 31 December 2016 before any incentive fee becomes payable.
In determining whether or not an incentive fee will be payable for the current year, the Directors have estimated the EPRA NAV of the Group at 31 December 2016, assuming that the property portfolio valuation yields do not change from those applied as at 30 June 2016, that there are no material currency translation gains or losses, and that there is no material variation in actual movements in RPI (against which the UK leisure rents are indexed) compared to current expectations. 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.
18. Events after the balance sheet date
On 8 September 2016 the Group announced that it had conditionally agreed to acquire 55 hotels let on long upwards only RPI-linked leases to Travelodge Hotels Limited at a total cost of GBP196.2 million. To finance the acquisition, the Group proposes a placing of up to 46.9 million new ordinary shares in the Company, targeting gross proceeds of c. GBP140 million, together with a new GBP60 million seven year non-recourse secured debt facility in respect of which the Group has credit approval from the lender and is in advanced negotiations on documentation.
This information is provided by RNS
The company news service from the London Stock Exchange
END
IR LLFITAFIDIIR
(END) Dow Jones Newswires
September 08, 2016 02:00 ET (06:00 GMT)
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