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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Regional Reit Limited | LSE:RGL | London | Ordinary Share | GG00BYV2ZQ34 | ORD NPV |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| -0.60 | -2.64% | 22.15 | 22.10 | 22.30 | 23.00 | 21.75 | 23.00 | 887,799 | 16:35:01 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Real Estate Investment Trust | 93.32M | -65.16M | -0.1263 | -1.77 | 115.01M |
From Apr 2019 to Apr 2024
TIDMRGL
RNS Number : 5117I
Regional REIT Limited
22 March 2018
22 March 2018
Regional REIT Limited
Audited Preliminary Full Year Results for the Year Ended 31 December 2017
A year of significant growth from strong foundations
Regional REIT Limited (LSE: RGL) ("Regional REIT", the "Group" or the "Company"), the UK regional office and industrial property focused REIT, today announces its audited results for the year ended 31 December 2017.
Financial Highlights for the year ending 31 December 2017:
-- Gross investment property portfolio of GBP737.3m (31 Dec 2016: GBP502.4m); Like-for-like value increased by 2.6%, adjusting for capital expenditure.
-- Acquisitions of GBP228.1m (before costs) with average net initial yield of c.7.9%. This includes major portfolio acquisitions in both H1 and H2:
o GBP129m multi-asset portfolio in March as part of 'NAV-for-NAV' Conygar transaction
o Acquisition of two portfolios in December for c. GBP88.3m following the GBP73m capital raise
-- Disposals of GBP16.9m net, mature and non-core assets to take advantage of current market demand for industrials, at net initial yields of c.6.3%.
-- Capital expenditure of GBP13.4m net relating to refurbishment programmes on properties in Bristol, Aylesbury, Leeds, and Birmingham.
-- Gross bank borrowings of GBP376.5m (31 Dec 2016: GBP220.1m) increased to fund acquisitions. Cost of debt remains favourable at 3.8% (including hedging costs).
-- New 10-year borrowing facility agreed in December extends the weighted average maturity to 6 years.
-- Net LTV of the Group reduced to 45%, from peak of c.49% following Conygar portfolio acquisition in H1, and will continue to be managed down towards the Group's long-term target of 40%.
-- IFRS NAV - fully diluted 105.1pps (EPRA NAV of 105.9pps) (31 Dec 2016: IFRS NAV 106.3pps; EPRA NAV: 106.9pps) after dividends declared in 2017, predominately due to the issuance of two tranches of new equity and the debt refinancing costs.
-- Operating profit before gains and losses of property assets and other investments GBP36.4m (31 Dec 2016: GBP29.9m) and Profit before tax of GBP28.7m (31 Dec 2016: GBP13.4m), with rental income of GBP52.3m (31 Dec 2016: GBP43.0) and an EPRA costs ratio of 29.7% (31 Dec 2016: 29.6%).
-- Fully diluted IFRS Earnings per Share ("EPS") of 9.1p (EPRA EPS 8.1p) (2016: IFRS EPS 4.9p; EPRA EPS 7.7p).
-- Dividends declared per Share for 2017 amounted to 7.85p (2016: 7.65p).
Operational Highlights included:
-- The Group continued its approach of active asset management - to improve and generate additional income through lease renewals, re-gears and new lettings.
-- Diversified portfolio now sits at 164 properties (31 Dec 2016: 123), 1,368 units (2016: 941) and 1,026 tenants (2016: 717).
-- Occupancy (by value) of 85.0% (31 Dec 2016: 82.7%) and Occupancy (by area) 84.3% (31 Dec 2016: 83.8%).
-- Portfolio continues to focus on core sectors of office (67.3% by value) and industrial sites (23.3%) across the UK, with England & Wales now accounting for an increased proportionate amount of the portfolio (77.6%).
-- Regional REIT senior team strengthened by appointment of Simon Marriott at LSI, with Regional REIT as his primary responsibility.
-- LSI offices for Regional REIT now present in Glasgow, Manchester, and Leeds with continued support from nationwide asset manager network.
-- Total Shareholder Return of 19.9% since IPO (November 2015) and annualised 8.8% in FY 2017.
After the period end:
-- Board strengthened by appointment of Ms. Frances Daley in February 2018 as a Non-Executive Director.
Stephen Inglis, Chief Executive Officer of London & Scottish Investments Limited, the Asset Manager, commented: "It has been a very active period for the Group. During our second full year as a listed entity, we acquired three major portfolios, successfully raised funds in a difficult market, improved our debt terms, and strengthened our management team and regional network. All this while continuing to offer shareholders one of the best yields in the sector. This momentum demonstrates our commitment and belief in the strategy laid out at IPO. Whilst we remain alert to increasing economic uncertainty we remain confident in the strength of our business model."
A meeting for investors and analysts will be held at 09:30 (London time, BST) on 22 March 2018 at the offices of Peel Hunt. If you would like to attend the meeting please contact Jack Gault, +44 (0) 20 3805 4822 or jgault@headlandconsultancy.com. The presentation slides for the meeting will shortly be available to download from the Investors section of the Group's website at www.regionalreit.com.
This announcement contains inside information which is disclosed in accordance with the Market Abuse Regulation that came into effect on 3 July 2016.
Enquiries:
Regional REIT Limited Press enquiries through Headland PR Toscafund Asset Management LLP Tel: +44 (0) 20 7845 6100 Investment Manager to the Group Adam Dickinson, Investor Relations, Regional REIT Limited London & Scottish Investments Limited Tel: +44 (0) 141 248 4155 Asset Manager to the Group Stephen Inglis Headland PR Consultancy LLP Tel: +44 (0) 20 3805 4822 Financial PR Francesca Tuckett, Jack Gault
About Regional REIT
Regional REIT Limited (LSE: RGL) is a London Stock Exchange Main Market traded specialist real estate investment trust focused on office and industrial property interests in the principal regional locations of the United Kingdom outside of the M25 motorway.
Regional REIT is managed by London & Scottish Investments, the Asset Manager, and Toscafund Asset Management, the Investment Manager, and was formed by the combination of two existing funds previously created by the Managers as a differentiated play on the expected recovery in UK regional property, to deliver an attractive total return to Shareholders and with a strong focus on income.
The Group's investment portfolio, as at 31 December 2017, was spread across 164 regional properties, 1,368 units and 1,026 tenants. As at 31 December 2017, the investment portfolio had a value of GBP737.3m and a net initial yield of 6.5%. The weighted average unexpired lease term to first break was 3.5 years.
The Company's shares were admitted to the Official List of the UK's Financial Conduct Authority and to trading on the London Stock Exchange on 6 November 2015. For more information, please visit the Group's website at www.regionalreit.com.
Cautionary Statement
This document has been prepared solely to provide additional information to Shareholders to assess the Group's performance in relation to its operations and growth potential. The document should not be relied upon by any other party or for any other reason. Any forward looking statements made in this document are done so by the Directors in good faith based on the information available to them up to the time of their approval of this document. However, such statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying any such forward-looking information.
Chairman's Statement
"Regional REIT is in a strong position and we have again delivered to our Shareholders a significant dividend, with an attractive total return. In line with our business strategy we have increased our property portfolio, managed the occupancy and contracted rent roll upwards, extended the weighted average lease term to expiry and weighted average debt duration. In an uncertain economic and geopolitical environment, we are well poised for the year ahead." Kevin McGrath, Chairman and Independent Non-Executive Director.
I am pleased to present the third annual report for Regional REIT for the financial year from 1 January 2017 to 31 December 2017. After an active transactional year, the Group generated profit after tax of GBP27.1m (up 102% on 2016), EPRA earnings per share ("pps") diluted, rose by 5% to 8.1pps, and we have declared a total dividend for the year of 7.85pps.
We have continued to implement our strategy of acquiring assets to which our asset management initiatives can be best employed. We also continued to dispose of properties which had met their individual asset plans to realise returns, recycling capital promptly and thereby ensuring minimal cash drag.
During the year, the Group acquired properties for an aggregate value of GBP228.1m (before costs), disposed of properties for an aggregate value of GBP16.9m (net of costs), and undertook GBP13.4m of capital expenditure. This clearly illustrates that it has been a year of growth for the Group with major acquisitions in both halves of the year. In the first half, in March, the Group acquired a c. GBP129m multi-asset portfolio, in exchange for the issuance of 26,326,644 shares, and GBP105m of borrowings. This was followed in the second half, in December, by a successful share capital raise of GBP73m, with the funds being immediately deployed for the purchase of two portfolios for c. GBP88.3m, before costs and GBP35.7m of borrowings. In addition, the Company simplified its borrowings by reducing nine facilities to six and increasing the term of the debts. We continue to target net borrowings of 40% of gross investment properties and though we finished the year above this level at 45% we are focused on reducing this ratio back towards 40% in the coming year.
Despite the uncertainty in the current economic climate, we believe Regional REIT's distinctive portfolio of regional offices and light industrial sites, supported by the depth of experience of our Asset Manager puts us in a good position for the year ahead.
Market Environment
The regional property markets have remained in good health, and whilst letting decisions are taking longer to execute in some instances, we have nonetheless experienced increased tenant demand. There was firm occupational demand for offices and industrial sites in the UK's regions throughout the year. This was evidenced by a steady stream of new lettings and regears, which was particularly pronounced in the second half of the year.
Market optimism continues to focus on the industrial property sector, and we believe this sector provides a broad range of asset management and capital enhancement opportunities in the UK's regions. We also continue to hold the view that the office sector offers good opportunities. This underpins our enduring strategy and income growth prospects.
Going forward the Board remains supportive of the Asset Manager's strategy to target both acquisition and disposal opportunities, to further our aim to grow the asset base in tandem with recycling our capital in pursuit of dividend growth, whilst ensuring the Asset Manager remains focused on enhancing the portfolio and responding to the needs of our tenants.
Dividends
The dividend is the major component of the total return. The Company declared total dividends of 7.85p for 2017, comprising of three quarterly dividends of 1.80pps and a fourth quarterly dividend of 2.45pps.
In the absence of unforeseen circumstances, it remains the Board's intention to pursue a progressive dividend policy and continue to pay quarterly dividends.
Shareholder Engagement
The Company has continued to develop its relations with investors, engaging closely with Shareholders.
The website continues to evolve with the aim of improving the dissemination of information to all our stakeholders. We look forward to welcoming Shareholders to our Annual General Meeting on Thursday 17 May 2018.
Strong Relationships
Ultimately, the experience of our tenants, suppliers, and the communities we operate in, will determine our performance, which is why we endeavour to ensure we maintain strong relationships with all parties, with particular emphasis on our tenants. We continue to monitor the Group's impact on the environment.
Board and the Asset and Investment Managers
I am once again grateful to my fellow Directors, who have contributed their skills and experience to the rigorous discussions during this transformational year of growth. As previously announced Martin McKay stepped down as a Non-Independent Director on 6 July 2017 and was replaced by Tim Bee on the same date.
Following an internal review of the Board's effectiveness to ensure we evolve appropriately with the development of the Group, Frances Daley was appointed as an Independent Director on 1 February 2018. Frances brings extensive financial experience to the Board. No other significant issues were raised and the view of the Board is that the governance structure of the Group operates effectively with a positive and open culture.
The Board has been pleased with the progress and performance of the Asset and Investment Managers, particularly the raising and timely deployment of new monies for asset acquisitions, which meet the business strategy, and secure the earnings required to pursue a progressive dividend policy.
Performance
The total return performance since listing 6 November 2015 has amounted to 19.9%, with an annualised total return of 8.8% for 2017. The 2017 total return was impacted by one off charges for the 10 year GBP165m refinancing package, the costs associated with the capital raise in December 2017, and the capital expenditure programme, the benefits of which are expected to be realised in the coming year. Excluding these costs, the total return for 2017 was 9.4%. Though below our 10+% target return we credit the Asset and Investment Managers for a strong performance in a very active and fee heavy period of growth, and we are confident the significantly enlarged portfolio will generate improved returns in the coming year.
Subsequent Events
On 1 February 2018, the Company announced the appointment of Frances Daley as an Independent Non-Executive Director and as a member of the Audit Committee and Management, Engagement and Remuneration Committee.
Outlook
The outlook for the Group remains positive. We have achieved our plans of acquiring portfolios, simplifying and broadening our borrowing structure and increasing the make-up of the Shareholder base, whilst ensuring our asset management initiatives, benefitting both our tenants and Shareholders, remain on track.
For 2018, the Group is confident of delivering good returns for Shareholders through a diversified, high-yielding property portfolio, as well as continuing to pursue the asset management initiatives of growing the income stream and providing further opportunities for capital value enhancement.
The Board looks forward to building upon the successes of 2017.
Kevin McGrath
Chairman and Independent Non-Executive Director
21 March 2018
Asset and Investment Managers' Report
"It has been a very active year for Regional REIT with significant acquisitions, continuing our strategy of non-core disposals, increasing our geographic spread of properties and growing the number and diversity of our tenants. We continue to implement our successful approach to intensive asset management with our initiatives achieving increased occupancy. We remain confident that our strategy and the strength of our core regional office and light industrial property markets will continue to deliver for our investors." Stephen Inglis, Chief Executive Officer of London & Scottish Investments, the Asset Manager of Regional REIT Limited.
Market Overview
The view of the Asset Manager is that regional commercial real estate performed strongly in 2017 from both an occupational and investment perspective. Overall investment volumes in UK commercial property market in 2017 were 27% higher than 2016 levels, with clear evidence of rising investment in the regional markets, proving that they continue to remain attractive to both domestic and overseas investors who are "searching for value".
The average yield spread between London and the regions continued to narrow in 2017 as a result of investor demand, a trend which the Asset Manager expects to continue. There has also been evidence that the yield gap between prime and secondary property narrowed over the last 12 months. Much of the capital chasing property assets was for "stabilised-income", reflecting investor's aversion to risk. This in turn has led to prices increasing accordingly. The Asset Manager believes that this presents an opportunity to capitalise on strong occupier fundamentals in the secondary market and produce stable income from active and intensive asset management of high quality secondary properties in key locations.
The attraction of the regional cities and towns has continued and regional commercial property occupancy remains robust. We expect this to continue with the unprecedented levels of Government lettings having already taken place under the Government Property Unit's "Hubs" initiative in the office sector and continued competition for space in the industrial and logistics sectors. Our core markets continue to experience beneficial supply-demand dynamics with elements of our portfolio already witnessing headline rental growth across a number of properties.
Regional REIT has been active and opportunistic throughout 2017. The Group undertook property acquisitions of GBP228.1m (before costs), with a weighted average net initial yield of c.7.9%; disposals (net of costs) amounted to GBP16.9m at an average net initial yield of c. 6.3%. Occupancy by value increased to 85.0%, from a low of 82.7% (31 December 2016), mainly as a result of completing 81 new leases in 2017, totalling 564,463 sq. ft.; when fully occupied these will provide approximately c. GBP4m pa of contracted rental income. In addition, 117 leases came up for renewal over the period, totalling 1,029,079 sq. ft.. Including tenants that are currently holding over, lease renewals, and the acquisition of new replacement tenants, c. 64% (by value) has been retained and c. 76% of the units with lease renewals remain occupied.
Investment Activity in UK Commercial property
In 2017, total investment in UK commercial property reached GBP62.1billion, 27% higher than 2016 volumes, with over 5,000 deals taking place throughout 2017, according to research from CoStar. In the final quarter of 2017, investment volumes reached GBP18.9 billion, indicating an increase of 18% when compared to Q4 2016. There has been evidence of a considerable increase in regional investment, which was particularly heightened in Q4 2017 reaching a 10 year high. Despite investment in London rising by 19% year-on-year to GBP24.2 billion in 2017, there was evidence of a decrease in the frequency with which deals took place, as the number of deals fell to their lowest level in the last 10 years.
Overseas investment in UK commercial property accounted for 39% (GBP24.2 billion) of the total volume in 2017, marking a year-on-year increase of 26%. However, this was 14% below the level experienced in 2015. Although the majority of overseas investment in 2017 was in London, research suggests that foreign investment in the regions is increasing, with 21% of foreign spend in Q4 being outside of London, increasing from 13% in Q3. UK investors increased spending in the regions in 2017, with investment in the big six office markets 59% above the 2016 level.
CBRE research indicates that average yields in regional markets fell to 6.60% in January 2018, the lowest figure since before their records began in April 2009, causing the yield spread between London and the regions to narrow when compared to January 2017. The yield spread between prime and secondary properties continued to narrow over the last 12 months from historic highs of 2013-14. Research from CoStar suggests that investors were increasingly risk averse throughout 2017, as a result, investors' preference for prime properties has resulted in pricing increasing accordingly. Against this backdrop and given strong occupier demand, CoStar estimates that the secondary property market may become increasingly attractive to investors throughout 2018.
Occupational Demand in the UK Regional Office Market
Savills estimates that take-up of office space across ten regional office markets(2) reached 10 million sq. ft. in 2017, higher than the 9.6 million sq. ft. recorded in 2016, and 12% above the 10-year average. Occupational demand was driven by the public sector with large Government Property Unit (GPU) deals resulting in the public sector accounting for the highest proportion of total take-up at 22%. Following the public sector, the technology, media & telecoms sector and the business & consumers services sector accounted for the second and third largest proportion of take-up in the regional cities, accounting for 19% and 9% respectively. Demand for regional office space also grew within the flexible workspace sector, Cushman & Wakefield expect this trend to continue with flexibility becoming a key driver of leasing activity(3) . A recent forecast by Savills(4) predicts that total office take-up in ten regional office markets will reach 9.5 million sq. ft. in 2018.
According to Cushman & Wakefield, vacancy levels should not see any significant uplift in 2018, particularly within regional cities. The supply of offices in the core regional markets remains low, with Savills research indicating that occupier demand continues to reduce availability, with total availability falling by 2% in 2017 to 30 million sq. ft..
The most recent Deloitte Crane Survey (January 2018), suggests heightened construction activity in certain regional cities (Birmingham, Manchester, Leeds and Belfast); with a total of approximately 4.2m sq. ft. of office space currently under construction. However, although the supply of office stock is likely to increase, a considerable proportion of office buildings currently under construction are already pre-let, therefore, there is likely to remain a shortage of office stock. Despite a rise in the number of developments currently under construction, JLL(5) estimates that only 1.6m sq. ft. of speculative development space that is currently under construction will be delivered across 2018 and 2019 in the big six regional office markets, noting that the lack of development is increasing demand for refurbished office space in regional cities.
(2) Ten regional markets monitored by Savills include: Aberdeen, Birmingham, Bristol, Cambridge, Cardiff, Edinburgh, Glasgow, Leeds, Manchester, M25
(3) http://www.cushmanwakefield.com/en/research-and-insight/uk/united-kingdom-office-snapshot/
(4) http://pdf.euro.savills.co.uk/uk/office-reports/market-watch-uk-regional-office-report---spring-2018.pdf
(5) http://www.jll.co.uk/united-kingdom/en-gb/Research/JLL_Arrested%20Development%20report.pdf?aad08d41-2741-480d-b036-9bb789b435fe
Rental Growth in the UK Regional Office Market
Robust leasing activity in 2017 combined with a demand supply imbalance for high quality office stock has placed upward pressure on rents in regional office markets. Research from Savills indicates that prime rental growth in regional markets averaged 3.3% in 2017. Rental growth in regional office markets is set to continue, with Savills forecasting further rental growth of approximately 1.8% in 2018.
According to JLL, prime headline rents in the big six markets has increased by an average of 5% over the last two years. JLL estimates that the development shortfall will drive rental growth with average annual growth over 2017-2021 of 2.2% for the big six markets.
With record levels of take-up across numerous regional markets and the ongoing shortage of prime properties set to continue, the Asset Manager anticipates rental growth for good quality secondary properties should remain well supported throughout 2018.
Regional REIT's Office Assets
Occupancy by value of the Group's regional offices was 83.2% (31 December 2016: 80.5%); occupancy by area was 82.4% (31 December 2016: 82.2%). A like-for-like comparison of the Group's regional offices occupancy by value, 31 December 2017 versus 31 December 2016, shows that occupancy remained constant at 81.5% (31 December 2016: 81.5%). WAULT to first-break was 3.1 years (31 December 2016: 3.5 years); like-for-like WAULT to first break was 3.2 years (31 December 2016: 3.5 years).
Occupier Demand Strengthens in the UK Industrial Market
Take-up in 2017 totalled 26.6 million sq. ft., with 6.8 million sq. ft. taken up in the final quarter of 2017(6) . Occupier demand was particularly strong among companies in the manufacturing sector accounting for one third of total take-up with research from Colliers(7) indicating that export and domestic demand for goods remained steady, particularly for investment goods. Knight Frank(8) research shows, that similar to 2016, Midlands, London and the South East continued to account for the highest proportions of take-up in 2017.
In terms of development, Savills indicates that 4.4 million sq. ft. of industrial stock currently under construction will complete in 2018. However, JLL(9) research suggests that supply is constraining demand in the industrial market due to very limited supply and continued demand for new speculative development, particularly for units below 100,000 sq. ft.. The Asset Manager anticipates the combination of growing demand and limited supply for multi-sized, multi-let industrial sites, will result in rental growth in 2018.
Industrial Rental Growth Continues
The industrial market, essentially the regions outside London, experienced annual rental value growth in 2017 of 4.9% according to IPD, which provides evidence of sustained growth. The Investment Property Forum UK Consensus Forecast, February 2018, shows 3.5% and 2.4% average rental growth rates respectively for 2018 and 2019. In comparison, the IPF UK Consensus Forecast predicts that the all property average annual rental value growth expected for 2018 is 0.8%.
Research by Cushman & Wakefield suggests that upward pressure on rents was apparent for both prime and secondary industrial properties. For prime properties, low supply as well as increased construction and land costs resulted in upward pressure on rents for new industrial stock in core markets, whilst limited supply of Grade A space has led to refurbished Grade B space in good locations achieving rental growth in 2017.
Regional REIT's Industrial Assets
Occupancy by value of the Group's industrial sites increased to 87.9% (31 December 2016: 86.2%); occupancy by area also increased to 86.4% (31 December 2016: 85.3%). A like-for-like comparison of the Group's industrial sites occupancy by value, 31 December 2017 versus 31 December 2016, shows that occupancy grew to 88.3% (31 December 2016: 86.4%). WAULT to first-break was 4.1 years (31 December 2016: 3.5 years); like-for-like WAULT to first break was 3.9 years (31 December 2016: 3.6 years).
(6) http://www.cushmanwakefield.com/en/research-and-insight/uk/united-kingdom-industrial-snapshot/
(7) http://www.colliers.com/-/media/files/emea/uk/research/market-overview/colliers_international_property_snapshot_2018_02.pdf?la=en-GB
(8) http://content.knightfrank.com/research/802/documents/en/logic-uk-overview-h2-2017-5270.pdf
(9) http://www.jll.co.uk/united-kingdom/en-gb/Research/The_JLL_UK_Industrial_Market_Tracker_Spring_2018.pdf?ef6876a8-909a-42f0-a414-4c9c2ebdfce0
Property Portfolio
As at 31 December 2017, the Group's property portfolio was valued at GBP737.3 m (31 December 2016: GBP502.4), with contracted rental income of GBP61.9m (31 December 2016: GBP44.0m), and an occupancy rate by value of 85.0% (31 December 2016: 82.7%). Occupancy by area amounted to 84.3% (31 December 2016: 83.8%).
On a like-for-like basis, 31 December 2017 versus 31 December 2016, occupancy by value was 84.1% (31 December 2016 83.4%) and occupancy by area was 84.9% (31 December 2016: 84.2%).
There were 164 properties (31 December 2016: 123), in the portfolio, with 1,368 units (31 December 2016: 941) units and 1,026 tenants (31 December 2016: 717), following the acquisition of 53 properties. If the portfolio was fully occupied at Cushman & Wakefield's and Jones Lang LaSalle's view of market rents, the gross rental income would be GBP73.8m per annum as at 31 December 2017 (31 December 2016: GBP53.1m).
As at 31 December 2017 the net initial yield on the portfolio was 6.5% (31 December 2016: 6.7%), the equivalent yield was 8.3% (31 December 2016: 8.6%), and the reversionary yield was 9.2% (31 December 2016: 9.5%).
Hot Features
Premium
Properties Valuation % by Sq. Occupancy Occupancy WAULT Gross Net Average ERV Capital Yield (%)
valuation ft. (by value) (by area) to rental rental rent rate
first income income GBPpsf
break
============ ====================================
GBPm (mil) (%) (%) (yrs) GBPm GBPm GBPpsf GBPm GBPpsf Net Equivalent Reversionary
initial
============ =========== ========== ========== ====== =========== ========== ====== ======= ======= ======== ===== ======== ======== =========== =============
Office 95 495.9 67.3% 4.02 83.2% 82.4% 3.1 41.4 34.8 12.50 51.0 123.23 6.5% 8.4% 9.4%
------------ ----------- ------ ----------- ---------- ------ ------- ------- -------- ----- -------- -------- ----------- -------------
Industrial 38 171.5 23.3% 4.25 87.9% 86.4% 4.1 14.3 11.9 3.90 16.3 40.33 6.5% 8.1% 8.8%
------------ ----------- ------ ----------- ---------- ------ ------- ------- -------- ----- -------- -------- ----------- -------------
Retail 29 60.0 8.1% 0.58 90.5% 88.1% 4.3 5.4 4.6 10.73 5.7 104.26 7.2% 8.1% 8.3%
------------ ----------- ------ ----------- ---------- ------ ------- ------- -------- ----- -------- -------- ----------- -------------
Other 2 9.9 1.3% 0.12 94.9% 61.1% 9.6 0.7 0.7 9.54 0.8 80.28 6.6% 7.8% 7.3%
------------ ----------- ========== ---------- ------ ----------- ---------- ------ ------- ------- -------- ----- -------- -------- ----------- -------------
Total 164 737.3 100.0% 8.98 85.0% 84.3% 3.5 61.9 52.0 8.18 73.8 82.14 6.5% 8.3% 9.2%
------------ ----------- ---------- ------ ----------- ---------- ------ ------- ------- -------- ----- -------- -------- ----------- -------------
Properties Valuation % by Sq. Occupancy Occupancy WAULT Gross Net Average ERV Capital Yield (%)
valuation ft. (by value) (by area) to rental rental rent rate
first income income GBPpsf
break
============ ====================================
GBPm (mil) (%) (%) (yrs) GBPm GBPm GBPpsf GBPm GBPpsf Net Equivalent Reversionary
initial
============ =========== ========== ========== ====== =========== ========== ====== ======= ======= ======== ===== ======== ======== =========== =============
Scotland 45 164.9 22.4% 2.73 85.7% 81.8% 3.5 15.9 13.2 7.13 18.6 60.41 7.5% 9.3% 10.6%
------------ ----------- ---------- ---------- ------ ----------- ---------- ------ ------- ------- -------- ----- -------- -------- ----------- -------------
South
East 30 198.9 27.0% 1.51 92.5% 92.2% 2.9 16.2 14.6 11.57 17.8 131.30 6.7% 7.3% 8.0%
------------ ----------- ---------- ---------- ------ ----------- ---------- ------ ------- ------- -------- ----- -------- -------- ----------- -------------
North
East 24 95.6 13.0% 1.41 78.6% 84.3% 3.3 7.2 5.3 6.04 9.6 67.72 5.3% 8.7% 9.5%
------------ ----------- ---------- ---------- ------ ----------- ---------- ------ ------- ------- -------- ----- -------- -------- ----------- -------------
Midlands 32 111.9 15.2% 1.33 89.3% 89.5% 3.1 9.9 9.2 8.35 10.2 84.21 7.5% 8.0% 8.3%
------------ ----------- ---------- ---------- ------ ----------- ---------- ------ ------- ------- -------- ----- -------- -------- ----------- -------------
North
West 18 82.2 11.2% 1.16 79.7% 78.6% 5.5 6.2 4.8 6.84 8.6 71.04 5.4% 8.8% 9.5%
------------ ----------- ---------- ---------- ------ ----------- ---------- ------ ------- ------- -------- ----- -------- -------- ----------- -------------
South
West 12 57.4 7.8% 0.45 68.5% 73.9% 3.1 4.3 3.4 12.96 6.5 128.88 5.3% 8.4% 10.1%
------------ ----------- ---------- ---------- ------ ----------- ---------- ------ ------- ------- -------- ----- -------- -------- ----------- -------------
Wales 3 26.4 3.6% 0.39 89.3% 83.1% 5.8 2.2 1.5 6.91 2.4 68.05 5.4% 7.9% 8.4%
============ =========== ========== ========== ====== =========== ========== ====== ======= ======= ======== ===== ======== ======== =========== =============
Total 164 737.3 100.0% 8.98 85.0% 84.3% 3.5 61.9 52.0 8.18 73.8 82.14 6.5% 8.3% 9.2%
------------ ----------- ---------- ---------- ------ ----------- ---------- ------ ------- ------- -------- ----- -------- -------- ----------- -------------
Tables may not sum due to rounding.
Top 15 Investments (market value) as at 31 December 2017
Property Sector Anchor Market % of Lettable Let Let Annualised WAULT
tenants value portfolio area by by gross to
area rental rent first
value break
============= ============ ==============
(GBPm) (Sq. (%) (%) (GBPm) (years)
Ft)
============= ============ ============== ======= ========== ========== ======= ======= =========== ========
Barclays Bank
Plc,
Tay House, University
Bath Street Office of Glasgow 32.4 4.4% 157,525 87.4% 87.1% 2.5 3.5
McCarthy &
Stone
Retirement
Lifestyles
Ltd, Wood
Group
Mustang,
Genesis Oracle
Business Corporation
Park, UK
Woking Office Ltd 24.7 3.3% 99,613 100.0% 100.0% 1.6 3.2
A Share &
Sons
Juniper Ltd,
Park, Schenker
Southfield Ltd,
industrial Vanguard
Estate, Logistics
Fenton Services
Way Industrial Ltd 23.8 3.2% 277,228 98.4% 97.4% 2.0 1.6
The Equitable
Life
Assurance
Buildings Society,
2 & 3 HBOS Scottish
Campus, Widows
Aylesbury Office Limited 23.3 3.2% 146,936 73.9% 76.4% 1.8 4.2
Cummins Ltd,
Balfour
Beatty
Wardpark WorkSmart
Industrial Ltd, Thomson
Estate, Pettie
Cumbernauld Industrial Ltd 19.7 2.7% 686,940 89.6% 88.6% 2.3 1.8
The Royal
Bank
Hampshire of Scotland
Corporate Plc,
Park, Aviva Health
Chandlers UK
Ford Office Ltd 16.4 2.2% 85,422 99.2% 99.5% 1.4 2.7
One and Two
Newstead
Court Office E.ON UK Plc 15.9 2.2% 146,262 100.0% 100.0% 1.4 2.6
Columbus TUI Northern
House, Europe
Coventry Office Ltd 14.6 2.0% 53,253 100.0% 100.0% 1.4 6.0
Road 4
Winsford Jiffy
Industrial Packaging
Estate Industrial Ltd 14.4 2.0% 246,209 100.0% 100.0% 0.9 16.8
Countryside
Properties
(UK) Ltd,
Pulse
Turnford Healthcare
Place, Ltd,
Cheshunt Office Poupart Ltd 14.3 1.9% 59,176 99.5% 100.0% 1.1 3.4
Hill Rom UK
Ltd,
Ceva
Logistics
Ashby Park, Ltd, Alstom
Ashby De UK
La Zouch Office Ltd 13.5 1.8% 91,752 96.6% 95.7% 1.0 3.0
The
University
of Glasgow,
Screwfix
Direct Ltd,
Howden
Joinery
The Point, Properties
Glasgow Industrial Ltd 13.4 1.8% 169,190 94.1% 100.0% 1.0 5.7
New College
Manchester
9 Portland Ltd, Mott
Street, MacDonald
Manchester Office Ltd 12.5 1.7% 54,959 100.0% 96.9% 0.8 3.4
The
Foundation
for Credit
Counselling,
JD
Wetherspoon
Plc, Expotel
Hotel
Arena Point, Reservations
Leeds Office Ltd 12.4 1.7% 82,498 88.5% 84.9% 0.7 2.2
Steinhoff UK
Group
Property
1-4 Ltd,
Llansamlet Wren Living
Retail Ltd,
Park, A Share &
Nantyffin Sons
Rd, Swansea Retail Ltd 12.0 1.6% 71,615 100.0% 100.0% 1.1 5.1
============= ============ ============== ======= ========== ========== ======= ======= =========== ========
Total 263.2 35.7% 2,428,578 93.5% 93.5% 21.0 3.9
Table may not sum due to rounding.
Top 15 Tenants (share of rental income) as at 31 December 2017
Tenant Property Sector WAULT Lettable % of
to first area Gross
break rental
income
(Years) (Sq Ft)
======================== ============================ ======================= ========== ========== ========
Financial and
Barclays Bank Plc Tay House, Glasgow insurance activities 3.9 78,044 2.6%
Electricity,
gas, steam and
One & Two Newstead air conditioning
E.ON UK Plc Court, Annesley supply 2.6 146,262 2.3%
Professional,
TUI Northern Europe scientific and
Ltd Columbus House, Coventry technical activities 6.0 53,253 2.2%
Scottish Widows Buildings 3 HBOS Campus, Financial and
Limited Aylesbury insurance activities 3.9 80,103 2.2%
Jiffy Packaging Road 4 Winsford Industrial
Ltd Estate, Winsford Manufacturing 16.8 246,209 1.5%
Sec of State for Sheldon Court, Solihull
Communities & Local Bennett House, Hanley
Govt Oakland House, Manchester Public Sector 0.2 74,886 1.4%
Fluor Limited Brennan House, Farnborough Construction 1.4 29,707 1.2%
St Brendans Court,
The Secretary of Bristol
State for Transport Festival Court, Glasgow Public Sector 2.5 55,586 1.1%
1-4 Llansamlet Retail
Park, Swansea Wholesale and
A Share & Sons Ltd Juniper Park, Basildon retail trade 6.4 75,791 1.1%
Financial and
Lloyds Bank Plc Victory House, Chatham insurance activities 0.4 48,372 1.1%
Aviva Health UK Hampshire Corporate Financial and
Ltd Park, Eastleigh insurance activities 1.0 42,612 1.1%
The Scottish Ministers
c/o Scottish Prison Calton House, Edinburgh Public Sector 2.3 51,914 1.0%
Information and
Entserv UK Birchwood Park, Warrington communication 3.0 50,549 1.0%
Administrative
Europcar Group UK and support service
Ltd James House, Leicester activities 3.5 66,436 1.0%
The Logic Group Waterfront Business Information and
Holdings Ltd Park, Fleet communication 3.8 30,342 1.0%
======================== ============================ ======================= ========== ========== ========
Total 4.1 1,130,066 21.8%
Table may not sum due to rounding.
Property Portfolio Sector and Region Splits by Valuation and Income
By Valuation
As at 31 December 2017 67.3% (2016: 63.3%) of the portfolio by market value was offices and 23.3% (2016: 29.4%) was industrial. The balance was made up of retail, 8.1% and other, 1.3% (2016: retail and other 7.3%). By UK region, as at 31 December 2017, Scotland represented 22.4% (2016: 26.8%) of the portfolio and England 74.0% (2016: 69.7%); the balance of 3.6% (2016: 3.5%) was in Wales. In England the largest regions were the South East, the Midlands and the North East.
By Income
As at 31 December 2017 66.9% (2016: 63.6%) of the portfolio by income was offices and 23.2% (2016: 29.2%) was industrial. The balance was made up of retail, 8.8% and other, 1.2% (2016: retail and other 7.1%). By UK region, as at 31 December 2017, Scotland represented 25.7% (2016: 29.0%) of the portfolio and England 70.7% (2016: 67.5%); the balance of 3.6% was in Wales (2016: 3.5%). In England, the largest regions were the South East, the Midlands and the North East.
Lease Expiry Profile
The WAULT on the portfolio is 5.4 years (2016: 5.2 years); WAULT to first break is 3.5 years (2016: 3.6 years). As at 31 December 2017, 14.1% (2016: 15.2%) of income was leases which will expire within 1 year, 18.0% (2016: 22.5%) between 1 and 3 years, 22.1% (2016: 19.2%) between 3 and 5 years and 45.8% (2016: 43.1%) after 5 years.
Tenants by Standard Industrial Classification as at 31 December 2017
As at 31 December 2017, 13.8% of income was from tenants in the wholesale and retail trade sector (2016: 13.7%), 10.6% from the professional, scientific and technical activities sector (2016: 11.4%), 9.2% from the manufacturing (2016: 11.7%), 8.9% from the public sector (2016: 10.2%) and 8.7% from the administrative and support service activities sector (2016: 7.0%). The remaining exposure is broadly spread.
No tenant represents more than 5% of the Group's contracted rent roll as at 31 December 2017, the largest being 2.6%.
Net Asset Value
In the year to 31 December 2017, the EPRA Net Asset Value ("NAV") of the Group rose to GBP395.7m from GBP293.2m as at 31 December 2016, which equates to a decrease in diluted NAV of 1 pence per share ("pps") to 105.9pps (31 December 2016: 106.9pps). For the 2017 calendar year the Company has declared of dividends amounting to 7.85pps.
The EPRA NAV increase of some GBP102.5m since 31 December 2016 is predominately from the issuance of two tranches of new equity and the revaluation of the investment property portfolio.
On 24 March 2017, 26,326,644 ordinary shares were issued, at an adjusted EPRA NAV of 106.347pps, with the assumption of some GBP105m of borrowings, in consideration for the acquisition of c. GBP129m excluding transaction costs, of investment properties from The Conygar Investment Company PLC ("Conygar").
On 21 December 2017, 72,277,228 ordinary shares were issued at 101pps, pursuant to a capital raise of gross proceeds of GBP73.0m. As announced on the 27 December 2017, some of the funds were deployed on 22 December 2017 acquiring two portfolios in aggregate for GBP88.3m, excluding transaction costs, the associated borrowing amounted to some GBP35.7m.
In the 12 months to 31 December 2017, the Group completed property acquisitions of GBP228.1m, before costs and gross, including transaction costs, of GBP231.3m (31 December 2016: GBP133.6m, gross GBP140.7m). In the period net disposals amounted to GBP16.9m, and gross, excluding transaction costs, GBP17.4m (31 December 2016: GBP44.9m, gross GBP45.9m). Net capital expenditure amounted to GBP13.4m (31 December 2016 GBP9.1m), after dilapidations gross capital expenditure was GBP14.8m (31 December 2016 GBP12.4m).
The diluted EPRA NAV per share decreased to 105.9pps (31 December 2016: 106.9pps). The EPRA NAV is reconciled in the table below.
Year ending Year ending
2017 2017
Pence per
GBPm Share
Opening EPRA NAV* 389.2 104.2
Net rental income 45.8 12.3
Administration and other expenses (9.4) (2.5)
Gain on the disposal of investment
properties 1.2 0.3
Change in the fair value of investment
properties 5.9 1.6
EPRA NAV after Operating profit 432.8 115.8
Finance expense (14.5) (3.9)
Impairment of Goodwill (0.6) (0.1)
EPRA NAV before Dividends paid
and dilution 417.7 111.8
Dividends paid** (22.8) (6.1)
Performance Fee Shares 0.8 0.2
Closing EPRA NAV - diluted 395.7 105.9
* Opening year ending 2017 adjusted for 26,326,644 and 72,277,228
shares issued in the period
** The 26,326,644 shares issued in March 2017 did not qualify
for the dividend of 2.4pence per share declared on 23 February
2017. The 72,277,228 shares issued pursuant to the Capital Raise
which completed in December 2017 did not qualify for any dividend
paid in 2017 calendar year.
Table may not sum due to rounding
Income Statement
Operating profit before exceptional items and gains and losses on property assets and other investments for the year ended 31 December 2017 amounted to GBP36.4m (31 December 2016: GBP29.9m). Profit after finance items and before taxation was GBP28.7m (31 December 2016: GBP13.4m). 2017 included a full rent roll for properties held as at 31 December 2016, plus the partial rent roll for properties acquired during 2017.
Rental income amounted to GBP52.3m (31 December 2016: GBP43.0m), the increase was primarily the result of the enlarged investment property portfolio as a result of the following acquisitions: Conygar portfolio, Woodlands Court, Equinox North, and on 27 December 2017 the acquisition of two portfolios.
Currently more than 80% of the rental income is collected within 28 days of the due date and bad debts in the period were GBP0.5m (31 December 2016: minimal).
The EPRA cost ratio was 29.7% (31 December 2016: 29.6%), adjusting for ground rent. The minimal movement in the cost ratio is a reflection of increased non-recoverable property costs, which are offset by costs trending down due to the scale of the business and the Company registering for VAT. The allowable VAT recovery will amount to GBP0.8m for 2015 and 2016, and GBP0.3m for 2017. Non recoverable property costs were impacted due to the refurbishment programmes. Administrative expenses included an accrued performance fee of GBP1.6m.
Finance expense increased due to the increased amount of debt and the refinancing during the period. The increase debt reflects the portfolio acquisition in March 2017, with the assumption of GBP69.4m of bank borrowing and some GBP35.7m of Zero Dividend Preference shares ("ZDP"); and the GBP35.7m of additional borrowings in relation to the acquisitions in December 2017. On the 12 December 2017, a new 10-year borrowing facility was agreed, replacing five existing debt facilities and extending the weighted average maturity to 6.0 years. The associated fees amounted to GBP2.5m.
The Company is a member of the Association of Investment Companies ("AIC"). In accordance with the AIC Code of Corporate Governance, the ongoing charges for the year ending 31 December 2017 were 4.5% (31 December 2016: 4.2%). The total return from 6 November 2015 to 31 December 2017 was 19.9%, an annualised rate of 8.8%.
Dividend
In relation to the period 1 January 2017 to 31 December 2017, the Company declared dividends totalling 7.85pps (2016: 7.65pps). Since the end of the period, the Company has declared a dividend for the fourth quarter of 2017 of 2.45pps.
Announcement Pence Per
Period Covered Date Ex-Date Record Date Payment Date Share
1 Jan 2016 to 31
Mar 2016 27 May 2016 9 Jun 2016 10 Jun 2016 8 Jul 2016 1.75p
1 Apr 2016 to 30
Jun 2016 1 Sep 2016 8 Sep 2016 9 Sep 2016 7 Oct 2016 1.75p
1 Jul 2016 to 30
Sep 2016 17 Nov 2016 24 Nov 2016 25 Nov 2016 22 Dec 2016 1.75p
1 Oct 2016 to 31
Dec 2016 23 Feb 2017 2 Mar 2017 3 Mar 2017 13 Apr 2017 2.40p
1 Jan 2017 to 31
Mar 2017 25 May 2017 8 Jun 2017 9 Jun 2017 14 Jul 2017 1.80p
1 Apr 2017 to 30
Jun 2017 31 Aug 2017 7 Sep 2017 8 Sep 2017 13 Oct 2017 1.80p
1 Jul 2017 to 30
Sep 2017 14 Nov 2017 23 Nov 2017 24 Nov 2017 22 Dec 2017 1.80p
1 Oct 2017 to 31
Dec 2017 22 Feb 2018 1 Mar 2018 2 Mar 2017 12 Apr 2018 2.45p
Debt Financing and Gearing
Borrowings comprise third-party bank debt which is secured over properties owned by the Group and repayable over the next 2 to 10 years, with a weighted average maturity of 6.0 years (31 December 2016: 2.9 years).
The Group's borrowing facilities are with ICG Longbow Ltd., Royal Bank of Scotland, HSBC, Santander UK, Scottish Widows Ltd. and Aviva Investors Real Estate Finance and have been fully drawn down. During the period properties have been sold, resulting in debt repayment where debt substitution was not possible. Total bank borrowing at 31 December 2017 amounted to GBP339.1m (31 December 2016: GBP220.1m) (before unamortised debt issuance costs). Bank facilities with Lloyds Banking Group and HSBC were acquired with the purchase of the Conygar property portfolio in late March of 2017, totalling GBP69.4m. In December 2017, the Scottish Widows Ltd. and Aviva Investors Real Estate Finance 10 year GBP165m facility replaced five existing secured debt facilities and increased the average maturity of the Group.
At 31 December 2017, the Group's cash and cash equivalent balances amounted to GBP44.6m (31 December 2016: GBP16.2m), which includes proceeds from the December 2017 capital raise not deployed at the year-end.
The Group's net loan-to-value ratio stands at 45.0% (31 December 2016: 40.6%) before unamortised costs. This has been managed down from the c.49% in the aftermath of the acquisition of investment properties from Conygar, in late March 2017. The Board targets a Group net loan-to-value ratio of 40%, with a maximum limit of 50%.
The Managers continue to monitor the borrowing requirements of the Group.
Lender Original Outstanding Maturity Gross Annual Interest
Facility Debt* Date Loan Rate
to Value**
GBP'000 GBP'000
ICG Longbow Ltd GBP65,000 GBP65,000 Aug-19 44.6% 5.00% Fixed
Royal Bank of over 3mth
Scotland GBP19,336 GBP17,376 Dec-20 40.0% 2.00% GBP LIBOR
over 3mth
HSBC GBP20,998 GBP20,998 Dec-21 53.2% 2.15% GBP LIBOR
over 3mth
Santander UK GBP70,700 GBP70,700 Nov-22 43.4% 2.15% GBP LIBOR
Scottish Widows
Ltd. & Aviva
Investors Real
Estate Finance GBP165,000 GBP165,000 Dec-27 48.9% 3.28% Fixed
GBP341,034 GBP339,074
Zero Dividend GBP39,879 GBP37,389 Jan-19 N/A 6.50% Fixed
Preference Shares
GBP380,913 GBP376,463
* Before unamortised debt issue costs
** Based on Cushman and Wakefield and Jones Lang LaSalle property
valuations
As at 31 December 2017, the Group had substantial headroom against its borrowing covenants.
The net gearing ratio, net debt to ordinary shareholders' equity (diluted), of the Group was 84.5% as at 31 December 2017 (31 December 2016: 69.9%). The increase is predominantly a result of the borrowings acquired during 2017.
Interest cover stands at 3.2 times (31 December 2016: 3.8 times) including the ZDP, and 3.8 times excluding the ZDP (acquired March 2017).
Hedging
The Group applies an interest hedging strategy that is aligned to the property management strategy, and aims to mitigate interest rate volatility on at least 90% of the debt exposure.
31 Dec 31 Dec
2017 2016
Borrowings interest rate hedged(Incl.
ZDP) 89.8% 106.5%
Thereof :
Fixed 71.0% 29.5%
Swap 9.4% 41.3%
Cap 9.4% 35.7%
WACD(1) 3.8% 3.7%
WACD - Excluding the ZDPs(2) 3.5% 3.7%
(1) Weighted Average Cost of Debt - Weighted Average Effective
Interest Rate including the cost of hedging
(2) Zero Dividend Preference Shares which were assumed
on 24th March 2017
Tax
The Group entered the UK REIT regime on 7 November 2015 and all of the Group's UK rental operations became exempt from UK corporation tax from that date. The exemption remains subject to the Group's continuing compliance with the UK REIT rules.
On 9 January 2018, the Company registered for VAT purposes in England. Following developments in case law, HMRC have updated their policy and have published new guidance on the circumstances in which VAT can be recovered. In accordance with the new guidelines, and in consultation with the Company's advisors, the Company has registered for VAT and intends to recover VAT which it incurs in the future as well as that which it has incurred since November 2015, when it first became active.
At 31 December 2017, the Group's taxation charge amounted to GBP1.6m, which comprised GBP1.4m of deferred tax for the potential future sale of a property held by Hamilton Hill Estates Ltd., and GBP0.2m of income tax for revenue generated outside the REIT regime.
Subsequent Events after the Reporting Period
On 1 February 2018, the Company announced the appointment of Frances Daley as a Non-Executive Director and as a member of the Audit Committee and Management, Engagement and Remuneration Committee
Principal Risks and Uncertainties
The Board acknowledges that it faces a number of risks which could impact its ability to achieve its strategy. While it is not possible to identify or anticipate every risk due to the changing business environment, the Group has established a risk management process to monitor and mitigate identifiable risks. The Board and the Audit Committee robustly reviews the risk management plan on a bi-annual basis.
The prospectus issued in December 2017 (available from the Company's website: www.regionalreit.com) includes details of what the Group considers to be the key principal risks faced. The below list sets out the current identifiable principal risks in no particular order which the Board is monitoring, but does not purport to be an exhaustive list of all the risks faced by the Group. The Board is aware that material new risks will arise which, to date, are not deemed material nor warrant significant resources to monitor. As and when such risks are identified the Group will put in place controls to monitor and mitigate these.
Strategic Risks
POTENTIAL MITIGATION MOVEMENT IN THE PERIOD
IMPACT [UNCHANGED]
-------------- ------------------------------------------------------------ ------------------------------------------------------------
Investment
decisions * An annual review of the investment strategy. * The property portfolio remains balanced across a
and deviation range of geographical areas and large number of
from the investment properties.
investment * A defined investment appraisal process.
strategy
could
result in * Acquire portfolios which offer Shareholders
lower diversification of investment risk by investing in a
income and range of geographical areas and number of properties.
capital
returns to
Shareholders.
-------------- ------------------------------------------------------------ ------------------------------------------------------------
* Only acquiring office and industrial properties, in * The Group continues to purchase properties in the UK
the UK and outside of the M25 motorway. However, the outside the M25 motorway.
Group may invest in property portfolios in which up
to 50% of the properties (by market value) are
situated within the M25 motorway.
-------------- ------------------------------------------------------------ ------------------------------------------------------------
* No single property, in the ordinary course of * Tay House is the highest valued property which
business, is expected to exceed 10% of the Group's equates to 4.4% of the Group's investment properties.
aggregate Investment Properties. However, the Board
may, in exceptional circumstances, consider a
property having a value of up to 20% of the Group's
investment property value at the time of investment.
-------------- ------------------------------------------------------------ ------------------------------------------------------------
* No more than 20% of the Group's investment property * The Group's largest single tenant exposure is 2.6% of
value shall be exposed to any single tenant or group gross rental income.
undertaking of that tenant.
-------------- ------------------------------------------------------------ ------------------------------------------------------------
* Speculative development (i.e., properties under * No speculative construction was undertaken in the
construction, but excluding any refurbishment works, year.
which have not been pre-let) is prohibited.
-------------- ------------------------------------------------------------ ------------------------------------------------------------
* The value of the assets is protected by an active * The Asset Manager continues to actively manage the
asset management programme, which is regularly investment properties in accordance with market
reviewed against the business plan for each property. conditions and the individual asset programme.
-------------- ------------------------------------------------------------ ------------------------------------------------------------
Economic and Political Risk
POTENTIAL MITIGATION MOVEMENT IN THE PERIOD
IMPACT [TRING UPWARDS]
------------- -------------------------------------------------------------------- -----------------------------------------------------------
Significant
political * The Board receives advice on macro-economic risks * Following the vote to end the UK's membership of the
events, from the Investment Manager and other advisors and EU on 23 June 2016, there remains a risk that
including will act accordingly. property valuations and the occupancy market may be
the decision impacted while this period of uncertainty is
to leave the negotiated.
EU, and the
triggering
of Article
50
of the
Lisbon
Treaty on
the
29 March
2017
could impact
the health
of
the UK
economy,
resulting in
borrowing
constraints,
change in
demand
by tenants
for
suitable
properties
and the
quality
of the
tenants.
------------- -------------------------------------------------------------------- -----------------------------------------------------------
Bank
reference * Policy of hedging at least 90% of variable interest * Continued adherence to the hedging policy and the
interest rate borrowings. increased weighted average duration of debt.
rates
may be set
to * Borrowings are currently provided by a range of
rise institutions with targeted staggered maturities.
accompanying
higher
inflation. * Funding options are constantly reviewed with an
emphasis on lengthening the maturity of borrowings
------------- -------------------------------------------------------------------- -----------------------------------------------------------
Tenant Risk
POTENTIAL IMPACT MITIGATION MOVEMENT IN THE PERIOD
[UNCHANGED]
------------------ --------------------------------------------------------------- -----------------------------------------------------------------
Type of tenant
and concentration * An active asset management programme. * The tenant mix and their underlying activity business
of tenant could remains diversified, and the number of tenants has
result in lower risen to 1,026 as at 31 December 2017.
income from * Diversified portfolio of properties let, where
reduced possible, to a large number of low risk tenants
lettings or across a wide range of different business sectors
defaults. throughout the UK.
------------------ --------------------------------------------------------------- -----------------------------------------------------------------
A high
concentration * The portfolio lease and maturity concentrations are * The WAULT to first break as at 31 December 2017 was
of lease term monitored by the experienced Asset Manager to 3.5 years. The largest tenant is 2.6% of the gross
maturity and/or minimise concentration. rental. income.
break options.
* There is a focus on securing early renewals and * The Asset Management team remains vigilant to the
increased lease period. health of current tenants and continues to liaise
with occupiers and agents
* The requirement for suitable tenants and the quality
of the tenant is managed by the experienced Asset
Manager which maintains close relationships with
current tenants and with letting agents
------------------ --------------------------------------------------------------- -----------------------------------------------------------------
Financial and Tax Change Risk
POTENTIAL MITIGATION MOVEMENT IN THE PERIOD IMPACT [UNCHANGED] ------------- ------------------------------------------------------------ ------------------------------------------------------------ Changes to the * The REIT and non-REIT regime, tax and financial * Advice is received from a number of corporate UK REIT and legislative changes may have an adverse impact on the advisors and the Group adapts to changes as required. non - REIT Group. The Board receives advice on these changes regimes, where appropriate and will act accordingly. tax and financial legislation. ------------- ------------------------------------------------------------ ------------------------------------------------------------
Operational Risk
POTENTIAL MITIGATION MOVEMENT IN THE PERIOD
IMPACT UNCHANGED]
----------- ------------------------------------------------------------ -----------------------------------------------------------
Business
disruption * The Asset and Investment Managers each have * Both the Asset and Investment Managers annually
could contingency plans in place to ensure there are no review their Disaster and Business Continuity Plans.
impinge disruptions to the core infrastructure, including
on the cyber security measures, which would impinge on the
normal normal operations of the Group.
operations
of
the Group.
----------- ------------------------------------------------------------ -----------------------------------------------------------
* An annual due diligence exercise is carried out on * Annual due diligence visits were undertaken with the
all principal vendors. Company's principal vendors.
----------- ------------------------------------------------------------ -----------------------------------------------------------
* As an externally managed Company, there is a * Both the Asset and Investment Manager are viable
continued reliance on the Asset and Investment long-term concerns.
Managers.
----------- ------------------------------------------------------------ -----------------------------------------------------------
* All properties undergo an annual comprehensive fire * The Asset Manager remains vigilant to changes in
risk assessment to ensure correct cladding or Health and Safety regulations.
construction materials are in place.
* Close relationships maintained with Health and Safety
Executive.
----------- ------------------------------------------------------------ -----------------------------------------------------------
Accounting, Legal, and Regulatory, including Environmental Risk
POTENTIAL MITIGATION MOVEMENT IN THE PERIOD
IMPACT [UNCHANGED]
------------ ------------------------------------------------------------ -----------------------------------------------------------------------
Changes to
the * Robust processes are in place to ensure adherence to * The Group continues to receive advice from its
accounting accounting, tax, legal, regulatory requirements, and corporate advisors and has incorporated changes where
legal the Listing Rules. required.
and/or
regulatory
legislation * All contracts are reviewed by the Group's legal * The Company Secretary continues to attend all Board
could advisors. meetings and advise on the Listing Rules in
result conjunction with the financial advisor.
in changes
to * The Administrator, Sub Administrator, in its capacity
current as Group accountant and the Company Secretary attend
operating all Board meetings and provide advice to the Board as
processes. required,
* All compliance issues are raised with the financial
advisor.
* Property acquisitions undergo a rigorous due
diligence process, including an environmental
assessment.
* The Asset Manager monitors the portfolio for any
detrimental environmental impact, by way of frequent
inspections of the properties, and the annual
insurance review process.
------------ ------------------------------------------------------------ -----------------------------------------------------------------------
On behalf of the Board
Kevin McGrath
Chairman and Independent Non-Executive Director
21 March 2018
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report and the Group and Company Financial Statements in accordance with applicable law and regulations.
The Companies (Guernsey) Law 2008, as amended (the "Law") requires the Directors to prepare group and company financial statements for each financial year in accordance with generally accepted accounting principles. The Directors are required under the Listing Rules of the Financial Conduct Authority ("FCA") to prepare group financial statements in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union ("EU") and have elected to prepare the Company's Financial Statements in accordance with IFRS as adopted by the EU.
The financial statements are required by law to give a true and fair view of the state of the Group's and the Company's affairs at the end of the financial period and of the profit or loss of the Group and the Company for that period and are required by IFRS adopted by the EU to present fairly the financial position of the Group and the Company and the financial performance of the Group and the Company.
In preparing the Group and the Company Financial Statements, the Directors are required to:
-- select suitable accounting policies and then apply them consistently;
-- present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;
-- make judgements and estimates that are reasonable and prudent;
-- state that the Financial Statements have been prepared in accordance with IFRS as adopted by the EU, subject to any material departures disclosed and explained in the financial statements; and
-- prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the Company will continue in business.
The Directors are responsible for keeping accounting records which are sufficient to show and explain the Group's and the Company's transactions and are such as to disclose with reasonable accuracy at any time the financial position of the Group and the Company and enable them to ensure that the Financial Statements comply with the requirements of the Law and, as regards the Group Financial Statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Group and the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website.
Legislation in Guernsey governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
RESPONSIBILITY STATEMENT OF THE DIRECTORS IN RESPECT OF THE CONSOLIDATED ANNUAL REPORT
Each of the Directors, whose names and functions are listed in the full Annual Report and Accounts 2017, confirms that to the best of each person's knowledge:
-- The Financial Statements, prepared in accordance with the International Financial Reporting Standards as adopted by the EU give a true and fair view of the assets, liabilities, financial position and profit of the Company and Group and the undertakings included in the consolidation taken as a whole;
-- The Asset and Investment Managers' Report include a fair review of the development and performance of the business and the position of the Company and Group and the undertakings included in the consolidation taken as a whole, together with a description of the principle risks and uncertainties they face; and
-- The Annual Report and Accounts, taken as a whole, are fair balanced and understandable and provide the information necessary for shareholders to assess the Company's and Group's performance, business model and strategy.
This responsibility statement was approved by the Board of Directors on 21 March 2018 and signed on its behalf by:
Kevin McGrath
Chairman and Independent Non-Executive Director
21 March 2018
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2017
Year ended Year ended
31 December 31 December
2017 2016
Notes GBP'000 GBP'000
Continuing Operations
Revenue
Rental income 5a 52,349 42,994
Non-recoverable property costs 6 (6,502) (4,866)
----------------- -------------
Net rental income 45,847 38,128
Administrative and other expenses 7 (9,429) (8,217)
----------------- -------------
Operating profit before gains and
losses on property assets and other
investments 36,418 29,911
Gain on disposal of investment properties 14 1,234 518
Change in fair value of investment
properties 14 5,893 (6,751)
----------------- -------------
Operating profit 43,545 23,678
Finance income 9 215 193
Finance expense 10 (14,728) (8,822)
Impairment of goodwill 16 (557) (557)
Net movement in fair value of derivative
financial instruments 25 217 (1,097)
----------------- -------------
Profit before tax 28,692 13,395
Taxation 11 (1,632) 23
----------------- -------------
Total comprehensive income for the
year
(attributable to owners of the parent
company) 27,060 13,418
----------------- -------------
Total comprehensive income arises from continuing operations.
Earnings per share - basic 12 9.1p 4.9p Earnings per share - diluted 12 9.1p 4.9p EPRA earnings per share - basic 12 8.1p 7.7p EPRA earnings per share - diluted 12 8.1p 7.7p Company specific adjusted earnings per share - basic 12 8.6p 7.8p Company specific adjusted earnings per share - diluted 12 8.6p 7.8p
The notes below are an integral part of these consolidated financial statements.
Consolidated Statement of Financial Position
As at 31 December 2017
31 December 31 December
2017 2016
Notes GBP'000 GBP'000
Assets
Non-current assets
Investment properties 14 737,330 502,425
Goodwill 16 1,672 2,229
Non-current receivables on lease
surrender 17a - 206
Non-current receivables on tenant
loan 17b 1,926 1,541
------------ ------------
740,928 506,401
Current assets
Trade and other receivables 18 21,947 11,375
Cash and cash equivalents 19 44,640 16,199
------------ ------------
66,587 27,574
Total assets 807,515 533,975
------------ ------------
Liabilities
Current liabilities
Trade and other payables 20 (26,941) (14,601)
Deferred income 21 (12,667) (8,022)
Taxation liabilities 22 (2,636) (662)
Bank and loan borrowings 23 (400) -
------------ ------------
(42,644) (23,285)
Non-current liabilities
Bank and loan borrowings 23 (333,981) (217,442)
Zero dividend preference shares 24 (37,239) -
Derivative financial instruments 25 (752) (1,513)
------------ ------------
(371,972) (218,955)
Total liabilities (414,616) (242,240)
------------ ------------
Net assets 392,899 291,735
------------ ------------
Equity
Stated capital 26 370,318 274,217
Retained earnings 22,581 17,518
------------ ------------
Total equity attributable to
owners of the parent 392,899 291,735
------------ ------------
Net assets per share - basic 27 105.4p 106.4p
Net assets per share - diluted 27 105.1p 106.3p
EPRA net assets per share - basic 27 106.1p 106.9p
EPRA net assets per share - diluted 27 105.9p 106.9p
The notes below are an integral part of these consolidated financial statements.
These consolidated group financial statements were approved by the Board of Directors and authorised for issue on 21 March 2018 and signed on its behalf by:
Kevin McGrath,
Chairman and Independent Non-Executive Director
21 March 2018
Consolidated Statement of Changes in Equity
For the year ended 31 December 2017
Attributable to owners of
the parent
Notes Stated Retained
capital earnings Total
GBP'000 GBP'000 GBP'000
Balance at 1 January
2017 274,217 17,518 291,735
Total comprehensive
income - 27,060 27,060
Share based payments 34 - 814 814
Issue of share capital 26 98,687 - 98,687
Share issue costs 26 (2,586) - (2,586)
Dividends paid 13 - (22,811) (22,811)
--------- ---------- ----------
Balance at 31 December
2017 370,318 22,581 392,899
--------- ---------- ----------
Consolidated Statement of Changes in Equity
For the year ended December 2016
Attributable to owners of
the parent
Notes Stated Retained
capital earnings Total
GBP'000 GBP'000 GBP'000
Balance at 1 January
2016 274,217 21,124 295,341
Total comprehensive
income - 13,418 13,418
Share based payments 34 - 115 115
Dividends paid 13 - (17,139) (17,139)
--------- ---------- ----------
Balance at 31 December
2016 274,217 17,518 291,735
--------- ---------- ----------
The notes below are an integral part of these consolidated financial statements.
Consolidated Statement of Cash Flows
For the year ended 31 December 2017
Year ended Year ended
31 December 31 December
2017 2016
GBP'000 GBP'000
Cash flows from operating activities
Profit for the year before taxation 28,692 13,395
- Change in fair value of investment
properties (5,893) 6,751
- Change in fair value of financial
derivative instruments (217) 1,097
- Gain on disposal of investment
properties (1,234) (518)
Impairment of goodwill 557 557
Finance income (215) (193)
Finance expense 14,728 8,822
Share based payments 814 115
Increase in trade and other receivables (5,479) (716)
Increase in trade and other payables 8,617 9
(Decrease)/increase in deferred income (119) 2115
--------------- -------------
Cash generated from operations 40,251 31,434
Financial income 988 988
Finance costs (10,155) (7,614)
Taxation paid (236) (1,715)
--------------- -------------
Net cash flow generated from operating
activities 30,848 23,093
--------------- -------------
Investing activities
Purchase of investment properties (25,188) (144,143)
Sale of investment properties 16,921 44,857
Interest received 25 60
Acquisition of subsidiaries, net
of cash acquired (51,866) (5,573)
--------------- -------------
Net cash flow used in investing activities (60,108) (104,799)
--------------- -------------
Financing activities
Proceeds from the issue of shares 72,654 -
Share issue costs (1,398) -
Dividends paid (23,321) (15,723)
Net costs paid on the disposal of (441) -
derivatives
Bank borrowings advanced 179,540 107,762
Bank borrowings repaid (165,619) (16,345)
Bank borrowing costs paid (3,714) (1,744)
--------------- -------------
Net cash flow generated from financing
activities 57,701 73,950
--------------- -------------
Net increase/(decrease) in cash and
cash equivalents 28,441 (7,756)
Cash and cash equivalents at the
start of the year 16,199 23,955
--------------- -------------
Cash and cash equivalents at the
end of the year 44,640 16,199
--------------- -------------
The notes below are an integral part of these consolidated financial statements.
Company Statement of Comprehensive Income
For the year ended 31 December 2017
Year ended Year ended
31 December 31 December
2017 2016
Notes GBP'000 GBP'000
Revenue
Amounts charged to group entities 5b 920 837
Administrative and other expenses 7 (2,765) (3,343)
------------- -------------
Operating loss (1,845) (2,506)
Finance income 9 25,635 19,061
------------- -------------
Profit before tax 23,790 16,555
Taxation 11 - -
------------- -------------
Total comprehensive income for
the year
(attributable to equity shareholders) 23,790 16,555
------------- -------------
Total comprehensive income arises from continuing operations.
Earnings per share - basic 12 8.0p 6.0p Earnings per share - diluted 12 8.0p 6.0p
The notes below are an integral part of these financial statements.
Company Statement of Financial Position
As at 31 December 2017
31 December 31 December
2017 2016
Notes GBP'000 GBP'000
Assets
Non-current assets
Investment in subsidiaries 15 351,461 274,286
------------ ------------
351,461 274,286
Current assets
Trade and other receivables 18 2,303 870
Cash and cash equivalents 19 20,336 65
------------ ------------
22,639 935
Total assets 374,100 275,221
------------ ------------
Liabilities
Current liabilities
Trade and other payables 20 (3,304) (2,319)
------------ ------------
Total liabilities (3,304) (2,319)
------------ ------------
Net assets 370,796 272,902
------------ ------------
Equity
Stated capital 26 370,318 274,217
Retained earnings/Accumulated
losses 478 (1,315)
------------ ------------
Total equity 370,796 272,902
------------ ------------
Net assets per share - basic 27 99.5p 99.5p
Net assets per share - diluted 27 99.2p 99.5p
The notes below are an integral part of these financial statements.
These financial statements were approved by the Board of Directors and authorised for issue on 21 March 2018 and signed on its behalf by:
Kevin McGrath,
Chairman and Independent Non-Executive Director
21 March 2018
Company Statement of Changes in Equity
For the year ended 31 December 2017
Notes Stated Retained
capital earnings Total
GBP'000 GBP'000 GBP'000
Balance at 1 January
2017 274,217 (1,315) 272,902
Total comprehensive
income - 23,790 23,790
Share based payments 34 - 814 814
Issue of share capital 26 98,687 - 98,687
Share issue costs 26 (2,586) - (2,586)
Dividends paid 13 - (22,811) (22,811)
---------- ---------- ----------
Balance at 31 December
2017 370,318 478 370,796
---------- ---------- ----------
Company Statement of Changes in Equity
For the year ended 31 December 2016
Notes Stated Accumulated
capital losses Total
GBP'000 GBP'000 GBP'000
Balance at 1 January
2016 274,217 (846) 273,371
Total comprehensive
income - 16,555 16,555
Share based payments 34 - 115 115
Dividends paid 13 - (17,139) (17,139)
--------- ------------ ----------
Balance at 31 December
2016 274,217 (1,315) 272,902
--------- ------------ ----------
The notes on pages below are an integral part of these financial statements.
Company Statement of Cash Flows
For the year ended 31 December 2017
Year ended Year ended
31 December 31 December
2017 2016
GBP'000 GBP'000
Cash flows from operating activities
Profit for the year before taxation 23,790 16,555
Share based payments 323 46
Increase in trade and other receivables (913) (867)
Increase in trade and other payables
and deferred income 310 35
------------------- --------------
Net cash flow generated from operating
activities 23,510 15,769
------------------- --------------
Investing activities
Acquisition of subsidiaries (51,000) -
------------------- --------------
Net cash flow used in investing activities (51,000) -
------------------- --------------
Financing activities
Proceeds from the issue of shares 72,654 -
Share issue costs (1,398) -
Dividends paid (23,321) (15,723)
Amounts paid on behalf of group companies (174) -
------------------- --------------
Net cash flow generated from/(used
in) financing activities 47,761 (15,723)
------------------- --------------
Net increase in cash and cash equivalents
for the year 20,271 46
Cash and cash equivalents at the
start of the year 65 19
------------------- --------------
Cash and cash equivalents at the
end of the year 20,336 65
------------------- --------------
The notes below are an integral part of these financial statements.
Notes to the Financial Statements
For the year ended 31 December 2017
1. Corporate Information
The Group's consolidated financial statements for the year ended 31 December 2017 comprise the results of the Company and its subsidiaries (together constituting "the Group") and, together with the Company's financial statements, were approved by the Board and authorised for issue on 21 March 2018.
Regional REIT Limited ("the Company") is a company limited by shares incorporated in Guernsey under The Companies (Guernsey) Law, 2008, as amended (the "Law"). The Company's Ordinary Shares are admitted to the Official List of the UK Listing Authority ("UKLA"), a division of the Financial Conduct Authority ("FCA"), and traded on the London Stock Exchange ("LSE").
The Company was incorporated on 22 June 2015 and is registered with the Guernsey Financial Services Commission as a Registered Closed-Ended Collective Investment Scheme pursuant to The Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended, and the Registered Collective Investment Schemes Rules 2015.
The Company did not begin trading until 6 November 2015 when the shares were admitted to trading on the LSE.
The nature of the Group's operations and its principal activities are set out in the Chairman's Statement.
The address of the registered office is: Mont Crevelt House, Bulwer Avenue, St. Sampson, Guernsey, GY2 4LH.
2. Basis of preparation
In accordance with Section 244 of The Companies (Guernsey) Law 2008, the Group confirms that the financial information for the year ended 31 December 2017 are derived from the Group's audited financial statements and that these are not statutory accounts and, as such, do not contain all information required to be disclosed in the financial statements prepared in accordance with International Financial Reporting Standards ("IFRS").
The statutory accounts for the year ended 31 December 2017 have been audited and approved, but have not yet been filed.
The Group's audited financial statements for the year ended 31 December 2017 received an unqualified audit opinion and the auditor's report contained no statement under section 263(2) or 263(3) of The Companies (Guernsey) Law 2008.
The financial information contained within this preliminary statement was approved and authorised for issue by the Board on 21 March 2018.
2.1 Functional and presentation currency
The financial information is presented in Pounds Sterling which is also the functional currency, and all values are rounded to the nearest thousand (GBP'000s) pound, except where otherwise indicated.
2.2 Going concern
The assessments of going concern are prepared in accordance with the FRC Guidance issued September 2014.
The Directors have carefully considered areas of potential financial risk and have reviewed cash flow forecasts. Regional REIT ZDP PLC zero dividend preference shares mature on 9 January 2019. The Board of Directors are currently considering refinancing options. No material uncertainties have been detected which would influence the Group or the Company's ability to continue as a going concern for a period of not less than 12 months from approval of these financial statements. The Directors have satisfied themselves that the Group and the Company has adequate financial resources to continue in operational existence for the foreseeable future.
Accordingly, the Board of Directors continue to adopt the going concern basis in preparing the financial statements.
2.3 Business combinations
At the time of acquisition, the Group considers whether each acquisition represents the acquisition of a business or the acquisition of an asset. For an acquisition of a business where an integrated set of activities are acquired in addition to the property, the Group accounts for the acquisition as a business combination under IFRS 3 Business Combinations ("IFRS 3").
Where such acquisitions are not judged to be the acquisition of a business they are not treated as business combinations. Rather, the cost to acquire the corporate entity is allocated between the identifiable assets and liabilities of the entity based upon their relative fair values at the acquisition date. Accordingly, no goodwill or additional deferred tax arises.
2.4 New standards, amendments and interpretations
New standards, amendments to standards and interpretations which came into effect for accounting periods starting on or after 1 January 2017 have had an impact on the financial statements as follows:
Amendments to IAS 7 'Statement of Cash Flows', is effective for annual reporting periods beginning on or after 1 January 2017. The amendments require the disclosure of cash and non-cash changes in liabilities arising from financing activities.
2.5 New standards, amendments and interpretations effective for future accounting periods
A number of new standards, amendments to standards and interpretations are effective for periods beginning on or after 1 January 2018, and have not been applied in preparing these financial statements. These are:
IFRS 9, 'Financial Instruments', effective for annual periods beginning on or after 1 January 2018, addresses the classification, measurement and recognition of financial assets and financial liabilities. IFRS 9 was issued in July 2014. It replaces the parts of IAS 39 that relate to the classification and measurement of financial instruments. IFRS 9 requires financial assets to be classified into two measurement categories: those measured as at fair value and those measured at amortised cost. The determination is made at initial recognition. The classification depends on the entity's business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. For financial liabilities, the standard retains most of the IAS 39 requirements. The main change is that, in cases where the fair value option is taken for financial liabilities, the part of a fair value change due to an entity's own credit risk is recorded in other comprehensive income rather than the income statement, unless this creates an accounting mismatch. Other changes include changes to the model for impairments from "expected loss" to "incurred loss".
The Group anticipates the main impact on the financial statements will be some minor additional disclosures and intends to adopt IFRS 9 no later than the accounting period beginning on or after 1 January 2018.
IFRS 15, 'Revenue from contracts with customers', is effective for accounting periods beginning on or after 1 January 2018. IFRS 15 provides a single, principles based five-step model to be applied to all contracts with customers. The five steps in the model are as follows:
-- Identify the contract with the customer. -- Identify the performance obligations in the contract. -- Determine the transaction price. -- Allocate the transaction price to the performance obligations in the contracts. -- Recognise revenue when (or as) the entity satisfies a performance obligation.
The Group does not anticipate there will be any impact on the financial statements because the Group's rental contacts are outside the scope of the standard. The Group intends to adopt IFRS 15 no later than the accounting period beginning on or after 1 January 2018.
Amendment to IFRS 2, 'Classification and measurement of share-based payment transactions', is effective for annual periods beginning on or after 1 January 2018. Amendments to IFRS 2 are intended to eliminate diversity in practice in three main areas:
-- The effects of vesting conditions on the measurement of a cash-settled share-based payment transaction.
-- The classification of a share-based payment transaction with net settlement features for withholding tax obligations.
-- The accounting where a modification to the terms and conditions of a share-based payment transaction changes its classification from cash-settled to equity-settled.
The Group does not anticipate there will be a significant impact on the financial statements of the amendments to IFRS 2 and intends to adopt them no later than the accounting period beginning on or after 1 January 2018.
Amendment to IAS 40, "Investment Property", is effective for annual periods beginning on or after 1 January 2018. The amendment states that an entity shall transfer a property to or from investment property when, and only when, there is evidence of a change in use. A change of use occurs if property meets, or ceases to meet, the definition of investment property. A change in management's intentions for the use of a property by itself does not constitute evidence of a change in use.
IFRS 16, 'Leases', is effective for accounting periods beginning on or after 1 January 2019. Under IFRS 16, most leased assets are capitalised as "right-to-use-assets" by recognising the present value of the lease payments as an asset and a financial liability representing the obligation to make future lease payments. This is a significant change for the lessee, however IFRS 16 substantially carries forward existing lessor accounting from IAS 17.
The Group has yet to assess the full impact of IFRS 16 and intends to adopt the standard no later than the accounting period beginning on or after 1 January 2019.
3. Significant accounting judgements, estimates and assumptions
The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities and the disclosure of contingent liabilities at the reporting date. However, uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or liability affected in future periods.
3.1. Critical accounting estimates and assumptions
The principal estimates that may be material to the carrying amount of assets and liabilities are as follows:
3.1.1 Valuation of investment property
The fair value of investment property, which has a carrying value at the reporting date of GBP737,330,000 (31 December 2016: GBP502,425,000), is determined by independent property valuation experts to be the estimated amount for which a property should exchange on the date of the valuation in an arm's length transaction. Properties have been valued on an individual basis. The valuation experts use recognised valuation techniques applying the principles of both IAS 40 and IFRS 13.
The valuations have been prepared in accordance with the Royal Institution of Chartered Surveyors ("RICS") Valuation - Professional Standards January 2014 ("the Red Book"). Factors reflected include current market conditions, annual rentals, lease lengths and location. The significant methods and assumptions used by valuers in estimating the fair value of investment property are set out in note 14.
3.1.2 Fair valuation of interest rate derivatives
In accordance with IAS 39, the Group values its interest rate derivatives at fair value. The fair values are estimated by the respective counterparties with revaluation occurring on a quarterly basis. The counterparties will use a number of assumptions in determining the fair values including estimations over future interest rates and therefore future cash flows. The fair value represents the net present value of the difference between the cash flows produced by the contracted rate and the valuation rate. The carrying value of the derivatives at the reporting date was GBP752,000 (31 December 2016: GBP1,513,000). The significant methods and assumptions used in estimating the fair value of the interest rate derivatives are set out in note 25.
3.1.3 Estimated impairment of goodwill
The Group tests annually whether goodwill has suffered any impairment. The recoverable amounts of cash generating units have been determined based on value-in-use calculations. These calculations require the use of estimates. The carrying value of the goodwill at the reporting date was GBP1,672,000 (31 December 2016: GBP2,229,000).
3.2. Critical judgements in applying the Group's accounting policies
In the process of applying the Group's accounting policies, management has made the following judgements, which have the most significant effect on the amounts recognised in the financial statements.
3.2.1 Operating lease contracts - the Group as lessor
The Group has acquired investment properties that are subject to commercial property leases with tenants. The Group has determined, based on an evaluation of the terms and conditions of the arrangements, particularly the duration of the lease terms and minimum lease payments, that it retains all of the significant risks and rewards of ownership of these properties and so accounts for the leases as operating leases.
3.2.2 Performance Fee
The Asset Manager and the Investment Manager are each entitled to 50% of the Performance Fee. The fee is calculated at a rate of 15% of the Total Shareholder Return in excess of the Hurdle rate of 8% per annum for the relevant Performance Period. Total Shareholder Return for any Performance Period consists of the sum of any increase or decrease in EPRA NAV per Ordinary Share and the total dividends per Ordinary Share declared in the Performance Period.
A Performance Fee is only payable in respect of a Performance Period where the EPRA NAV per Ordinary Share exceeds the High-water mark which is equal to the greater of the highest year-end EPRA NAV Ordinary Share in any previous Performance Period or the Placing price (100p per Ordinary Share). The Performance Fee is to be calculated initially on 31 December 2018, and annually thereafter. Full details of the Managers' Performance Fee are given on pages 183-85 of the IPO Prospectus.
In the period from incorporation to date, the Group has met the criteria of the Performance Fee, however, future circumstances may dictate that no performance fee is ultimately due. Further details are disclosed in note 34.
3.3 Consolidation of entities in which the Group holds less than 50%
Management considers the Group has de facto control of Credential Investment Holdings Limited, and its 28 subsidiaries (the "Credential Sub Group") by virtue of the Amended and restated Call Option Agreement dated 3 November 2015. Under this option the Group may acquire any of the properties held by the Credential Group for a nominal consideration. Despite having no equity holding the Group controls the Credential Group as the option agreement which means that the Group is exposed to, and has rights to, variable returns from its involvement with the Credential Group through its power to control. The Credential Sub Group has a deficiency of shareholders' funds and for this reason the non-controlling interest in the Group's results for the year and in the net assets of the Group are nil. There is no recourse to the non-controlling interest. Further details are disclosed in note 15.
3.4 Acquisition of subsidiary companies by the issue of share capital
On 24 March 2017, the Group acquired 11 property-owning SPVs and Conygar ZDP PLC (renamed Regional REIT ZDP PLC). Consideration was in the form of 26,326,644 Ordinary Shares issued by Regional REIT Limited, and the novation of an intercompany loan and contribution agreement to the Group.
The Directors considered whether this acquisition met the definition of the acquisition of a business or the acquisition of a group of assets and liabilities.
A business is defined in IFRS 3 as an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs or other economic benefits directly to investors or other owners, members or participants. Furthermore a business consists of inputs and processes applied to those inputs that have the ability to create outputs.
The acquisition consisted of a portfolio of investment properties and existing leases with multiple tenants over varying periods however there was little in the way of processes acquired. It was therefore concluded the acquisition did not meet the criteria for the acquisition of a business as outlined IFRS 3 above. Furthermore, as the consideration for the acquisition was in the form of the issue of Ordinary Shares, the accounting treatment follows the rules outlined in IFRS 2 share-based payments as detailed below.
Under IFRS 2, assets and liabilities acquired are recognised at their fair value and transaction costs of the acquisition are allocated to the individual identifiable assets and liabilities on the basis of their relative fair values at the date of purchase. The issue of shares is recognised as an increase to equity. The value of the consideration equates to the fair value of the assets and liabilities acquired. Any associated costs of the issue of shares, for example, registrar's fees and listing fees, are deducted from the consideration received for the shares issued in accordance with the Law.
The Directors have reviewed all the assets and liabilities acquired and made the following assumptions to determine the fair value of each asset and liability:
-- Investment property is measured at fair value at 30 September 2016, as valued by an independent valuer. The Directors consider that the fair value at the date of acquisition is not materially different.
-- Interest rate caps are measured at mark-to-market value. -- Debtor balances are measured at the amounts actually recoverable.
-- Debtor balances where there are no recoverable amounts, for example prepayments and amounts arising from rent smoothing and lease incentives, give future benefits to the Group through enhanced lease terms and services not yet consumed. The fair value of these amounts is taken as being the value recorded in the accounts of the Companies being acquired, being the best estimate of their worth.
-- Bank balances are measured at the balance held in the bank accounts. -- Creditor balances are measured at the amounts actually payable.
-- The liability to Zero Dividend Preference ("ZDP") shareholders is determined by the fair value of the ZDP shares at completion of the acquisition on 24 March 2017. Whilst these preference shares, listed on the London Stock Exchange, had a price of GBP1.24 per share at that date, the Directors do not consider that this value is an appropriate amount to base the fair value calculation because there was no intention for the ZDP shares to be acquired on the open market. It is intended that the ZDP shares will exist for the full term of the obligation, and thus, the Directors consider that the accrued capital value is the best estimate of the fair value of this liability. This is equivalent to amortised cost as calculated in the books of Regional REIT ZDP PLC excluding the unamortised issue costs concerning the original issue.
-- Bank loans have been valued at net present value based on the discounting of future cash flows.
Based on the assumptions above the total fair value of the assets and liabilities acquired under the acquisition was GBP25,687,000. The table below shows the fair value of assets and liabilities acquired through this non-cash transaction.
Fair Value
at Acquisition
GBP'000
Investment properties acquired 128,665
Derivative financial instruments 103
Trade and other receivables 3,316
Cash and cash equivalents 1,940
Deferred income, trade
and other payables (2,946)
Taxation liabilities (374)
Bank and loan borrowings (69,397)
Zero dividend preference
shares (35,620)
----------------
Total 25,687
----------------
3.5 Acquisition of subsidiary companies for cash consideration
On 22 December 2017 the Group made two further corporate acquisitions. Consideration was in the form of cash paid to the vendors. With both acquisitions, new bank borrowings were taken out at completion to replace the borrowings and shareholder loans held within those companies prior to acquisition.
As part of the purchase transactions an amount was received for rental guarantees and top ups representing funds equivalent to the loss of income from properties purchased where a rent free is in place. The Directors consider that this amount does not form part of the consideration but should be treated within the accounts of the companies acquired as both an asset (being the cash received) and a liability (deferred income). The deferred income should be released to income over the remainder of the rent free periods.
The Directors considered whether this acquisition met the definition of the acquisition of a business or the acquisition of a group of assets and liabilities. The acquisition consisted of a portfolio of investment properties and existing leases with multiple tenants over varying periods however there was little in the way of processes acquired. It was concluded the acquisition did not meet the criteria for the acquisition of a business as outlined IFRS 3. The Group has followed the following accounting treatment. Assets and liabilities acquired are recognised at their fair value and transaction costs of the acquisition are allocated to the individual identifiable assets and liabilities at the date of purchase. In practice, costs associated with the issue of bank loans have been allocated to bank loans and the remainder of costs have been allocated to investment properties.
The Directors have reviewed all the assets and liabilities acquired and made the following assumptions to determine the fair value of each asset and liability:
-- Investment property is measured at fair value at 8 November 2017, as valued by an independent valuer. The Directors consider that the fair value at the date of acquisition is not materially different.
-- Debtor balances are measured at the amounts actually recoverable.
-- Debtor balances where there are no recoverable amounts, for example prepayments and amounts arising from rent smoothing and lease incentives, give future benefits to the Group through enhanced lease terms and services not yet consumed. The fair value of these amounts is taken as being the value recorded in the accounts of the Companies being acquired, being the best estimate of their worth.
-- Bank balances are measured at the balance held in the bank accounts. -- Creditor balances are measured at the amounts actually payable.
-- Deferred income representing rental income, rent guarantees and top ups received by the companies acquired. The Directors consider that these amounts have a fair value which is the value of the amount received in advance.
-- Bank loans taken out at completion have been recognised at the principal issued which on the point of issue is fair value.
Based on the assumptions above the total fair value of the assets and liabilities acquired under the acquisition was GBP53,089,000. The table below shows the fair value of assets and liabilities acquired
Fair Value
at Acquisition
GBP'000
Investment properties acquired 88,250
Trade and other receivables 4,081
Cash and cash equivalents 1,093
Deferred income, trade and other
payables (5,177)
Bank and loan borrowings (35,695)
Bank loan issue costs paid
at completion 537
----------------
Total 53,089
----------------
The figures above are based on the accounting records available at the completion date. Revised accounting records prepared by the vendors to the completion date have recently been received. The figures for current assets and liabilities (trade and other receivables, cash and cash equivalents and deferred income and trade payables) have been reviewed and are not significantly different to those disclosed above.
Income and expenditure relating to the companies acquired has been forecasted for the period from acquisition to 31 December 2017 and included within the Consolidated Statement of Comprehensive Income. The current assets and liabilities of the companies acquired have been forecasted forward to 31 December 2017 based on the value of the assets listed above and the forecasted income and expenditure movements. The forecasted assets and liabilities of the companies acquired are included in the Consolidated Statement of Financial Position.
4. Summary of significant accounting policies
The accounting policies adopted in this report are consistent with those applied in the financial statements for the year ended 31 December 2016 and have been consistently applied for the year ended 31 December 2017. There are no significant changes apart from new disclosures in note 28 to the financial statements arising from accounting standards effective for the first time.
4.1. Basis of consolidation
The consolidated financial statements comprise the financial statements of the Company and its subsidiaries, as at the date of the Statement of Financial Position.
4.2 Subsidiaries
Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases.
The Group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Group. Identifiable assets and liabilities acquired and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The Group recognises any non-controlling interest in the acquiree on an acquisition-by-acquisition basis, either at fair value or at the non-controlling interest's proportionate share of the recognised amounts of acquiree's identifiable net assets. Acquisition-related costs are expensed as incurred.
Any contingent consideration to be transferred by the Group is recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration is recognised in profit or loss. Contingent consideration that is classified as equity is not re-measured, and its subsequent settlement is accounted for within equity.
For acquisitions of subsidiaries not meeting the definition of a business, the Group allocates the cost between the individual identifiable assets and liabilities in the Group based on their relative fair values at the date of acquisition. Such transactions or events do not give rise to goodwill.
Inter-company transactions, balances and unrealised gains and losses on transactions between Group companies are eliminated in full. When necessary, amounts reported by subsidiaries have been adjusted to conform to the Group's accounting policies.
The excess of the consideration transferred, and the amount of any non-controlling interest in the acquiree over the fair value of the identifiable net assets acquired is recognised as goodwill.
At Company level, the investments in subsidiary companies are included in the Statement of Financial Position at cost less impairment.
4.2.1. Disposal of subsidiaries
When the Group ceases to have control over an entity any retained interest in the entity is re-measured to its fair value at the date when control is lost, with the change in the carrying amount recognised in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in other comprehensive income are reclassified to profit or loss.
4.3. Segmental information
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker is the person or group that allocates resources to and assesses the performance of the operating segments of an entity. The Group has determined that its chief operating decision-maker is the Board of Directors.
After a review of the information provided for management purposes, it was determined that the Group has one operating segment and therefore segmental information is not disclosed in these consolidated financial statements.
4.4. Investment property
Investment property comprises freehold or leasehold properties that are held to earn rentals or for capital appreciation, or both rather than for sale in the ordinary course of business or for use in production or administrative functions.
Investment property is recognised, usually, on legal completion, when the risks and rewards of ownership have been transferred and is measured initially at cost including transaction costs. Transaction costs include transfer taxes, professional fees for legal services and other costs incurred in order to bring the property to the condition necessary for it to be capable of being utilised in the manner intended. Subsequent to initial recognition investment property is stated at fair value. Gains or losses arising from changes in the fair values are included in the Group's Consolidated Statement of Comprehensive Income in the period in which they arise under IAS 40, 'Investment Property'.
Additions to investment property include costs of a capital nature only. Expenditure is classified as capital when it results in identifiable future economic benefits, which are expected to accrue to the Group. All other property expenditure is charged in the Group's Consolidated Statement of Comprehensive Income as incurred.
Investment properties cease to be recognised when they have been disposed of or withdrawn permanently from use and no future economic benefit is expected. The difference between the net disposal proceeds and the carrying amount of the asset (being the fair value at the start of the financial year) would result in either gains or losses at the retirement or disposal of investment property. Any gains or losses are recognised in the Group's Consolidated Statement of Comprehensive Income in the period of retirement or disposal.
4.5. Goodwill
Goodwill arises on the acquisition of subsidiaries and represents the excess of the consideration transferred over the Group's interest in the fair value of the net identifiable assets, liabilities and contingent liabilities of the acquiree plus the fair value of the non-controlling interest of the acquiree.
For the purpose of impairment testing, goodwill acquired in a business combination is allocated to each of the subsidiaries, or groups of subsidiaries, that is expected to benefit from the synergies of the combination. Each subsidiary or group of subsidiaries, to which the goodwill is allocated, represents the lowest level within the entity at which the goodwill is monitored for internal management purposes.
Goodwill impairment reviews are undertaken annually, or more frequently if events or changes in circumstances indicate a potential impairment. The carrying value of goodwill is compared to the recoverable amount, which is the higher of value in use and the fair value less costs of disposal. Any impairment is recognised immediately as an expense and is not subsequently reversed.
4.6. Derivative financial instruments
Derivative financial instruments, comprising interest rate caps and swaps for hedging purposes, are initially recognised at fair value at acquisition and are subsequently measured at fair value being the estimated amount that the Group would receive or pay to sell or transfer the agreement at the period end date, taking into account current interest rate expectations and the current credit rating of the lender and its counterparties. The gain or loss at each fair value remeasurement date is recognised in the Group's Consolidated Statement of Comprehensive Income. Premiums payable under such arrangements are initially capitalised into the Group's Consolidated Statement of Financial Position, subsequently they are remeasured and held at their fair values.
The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data is available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs significant to the fair value measurement as a whole.
4.7 Financial assets
The Group classifies its financial assets at initial recognition either as at fair value through profit or loss or loans and receivables.
Loans and receivables are non-derivative financial assets with fixed or determinate payments that are not quoted in an active market. They are included in current assets, except for maturities of greater than twelve months from the end of the reporting period.
The tenant loan relates to a loan made to a tenant which is subject to interest. The amount receivable has been recognised at amortised cost using the effective interest method.
The lease surrender receivable relates to a lease surrender payment which has been received in instalments. The amount receivable has been recognised at amortised cost using the effective interest method
The Group's loans and receivables comprise 'trade and other receivables' and 'cash and cash equivalents'.
4.8. Trade and other receivables
Trade and other receivables are recognised initially at fair value, being carried at the lower of their original invoiced value and recoverable amount. Where the time value of money is material, receivables are carried at amortised cost using the effective interest method. A provision for impairment is made when there is objective evidence that the Group will not be able to recover balances in full. Balances are written-off when identified. Lease premiums and other lease incentives provided to tenants are recognised as an asset and amortised over the period from date of lease commencement to termination date.
4.9. Cash and cash equivalents
Cash and cash equivalents include cash in hand and deposits held at banks with original maturities of three months or less. Cash also includes amounts held in restricted accounts that are unavailable for everyday use.
4.10. Trade payables
Trade payables are initially recognised at their fair value; being at their invoiced value inclusive of any VAT that may be applicable. Payables are subsequently measured at amortised cost using the effective interest method.
4.11. Bank and other borrowings
All bank and other borrowings are initially recognised at cost net of attributable transaction costs. Any attributable transaction costs relating to the issue of the bank borrowings are amortised through the Group's Statement of Comprehensive Income over the life of the debt instrument on a straight-line basis. After initial recognition, all bank and other borrowings are measured at amortised cost, using the effective interest method.
4.12 Zero Dividend Preference Shares
Zero Dividend Preference Shares ("ZDP shares") are recognised as liabilities in the Group's Consolidated Statement of Financial Position in accordance with IAS 32 Financial Instruments: Presentation. After initial recognition, these liabilities are measured at amortised cost, which represents the value the liability is recognised at initial recognition, plus the accrued entitlement to the date of these financial statements.
4.13 Dividends payable to Shareholders
Equity dividends are recognised when paid.
4.14 Rental income
Rental income arising from operating leases on investment property is accounted for on a straight-line basis over the lease terms and is included in gross rental income in the Group's Consolidated Statement of Comprehensive Income. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the lease asset and are recognised as an expense over the lease term on the same basis as the lease income.
For leases which contain fixed or minimum uplifts, the rental income arising from such uplifts is recognised on a straight-line basis over the lease term.
Tenant lease incentives are recognised as a reduction of rental revenue on a straight-line basis over the term of the lease. The lease term is the non-cancellable period of the lease together with any further term for which the tenant has the option to continue the lease where, at the inception of the lease, the Directors are reasonably certain that the tenant will exercise that option.
Surrender premiums received from tenants to terminate leases or surrender premises are recognised in the Group's Statement of Comprehensive Income when the right to receive them arises.
When the Group is acting as an agent, the commission, rather than gross income, is recorded as revenue.
4.15 Non recoverable property costs - service and management charges
Service and management charges are recognised in the accounting period in which the services are rendered.
4.16. Interest income
Interest income is recognised as interest accrues on cash balances held by the Group. Interest charged to a tenant on any overdue rental income is also recognised within interest income.
4.17. Dividend income
Dividend income is recognised when the right to receive payment is established.
4.18. Finance costs
Interest costs are expensed in the period in which they occur. Arrangement fees, that an entity incurs in connection with bank and other borrowings are amortised over the term of the loan.
4.19. Taxation
As the Company is managed and controlled in the UK, it is considered to be tax resident in the UK.
The tax currently payable is based on the taxable profit for the period. Taxable profit differs from net profit as reported in the Consolidated Statement of Comprehensive Income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group's liability for current and deferred tax is calculated using tax rates that have been enacted or substantively enacted at the date of the Statement of Financial Position.
The Group elected to be treated as a UK REIT with effect from 7 November 2015. The UK REIT rules exempt the profits of the Group's UK property rental business from UK Corporation Tax. Gains on UK properties are also exempt from tax, provided that they are not held for trading or sold in the three years after completion of development. The Group is otherwise subject to UK Corporation Tax.
There are a small number of entities within the Group which fall outside the REIT rules and are subject to UK taxes on profits and property gains.
4.20 Deferred tax
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates that are expected to apply in the period when the liability is settled or the asset is realised based on tax rates (and tax laws) enacted or substantively enacted at the date of the Statement of Financial Position. A deferred tax asset is recognised only to the extent that it is probable that future profits will be available for offset.
Deferred tax has been recognised on the unrealised property valuation gains of properties owned by Group entities which fall outside of the REIT tax rules.
The current rate of UK Corporation Tax is 19%. Reductions in UK Corporation Tax have been enacted, reducing the rate to and 18% with effect from 1 April 2020. It has been enacted that the rate will be further reduced to 17% from 1 April 2020.
4.21. Stated capital
Stated capital represents the consideration received by the Company for the issue of Ordinary shares. Ordinary shares are classed as equity.
4.22. Share based payments
The Group has entered into Performance Fee arrangements with the Asset Manager and Investment Manager which depend on the growth in the net asset value of the Group exceeding a Hurdle Rate of return over a Performance Period. The fee will be partly settled in cash and partly in equity, and the equity portion is therefore a share-based payment arrangement. The fair value of the obligation is measured at each reporting period, and the cost recognised as an expense. The part of the obligation to be settled in shares is credited to Equity reserves.
Where the Company has an obligation to issue shares under the Performance Fee arrangements and the Performance Fee cost is recognised in a subsidiary company, the Company should recognise an increase in the investment of the subsidiary and the obligation to settle shares, where this arises, should be credited to equity.
Where the Group has issued Ordinary Shares as consideration for the acquisition of subsidiary companies and the acquisition is not a business combination, the value attributed to the Ordinary Shares issued is equal to the fair value of the assets and liabilities acquired.
5. Revenue
5a. Rental income
Year ended Year ended
31 December 31 December
2017 2016
GBP'000 GBP'000
Group
Rental income - freehold property 44,505 36,233
Rental income - long leasehold property 7,844 6,761
------------- -------------
Total 52,349 42,994
------------- -------------
5b. Amounts charged to group entities
Amounts charged to group entities of GBP920,000 (31 December 2016: GBP837,000) represent investment management fees and Performance Fees which have been recharged from Regional REIT Limited down to its subsidiary companies.
6. Non-recoverable property costs
Year ended Year ended
31 December 31 December
2017 2016
GBP'000 GBP'000
Group
Other property expenses and irrecoverable
costs 6,502 4,866
-------------- --------------
Total 6,502 4,866
-------------- --------------
Non-recoverable property costs represent direct operating expenses which arise on investment properties generating rental income
7. Administrative and other expenses
Year ended Year ended
31 December 31 December
2017 2016
(Restated)
GBP'000 GBP'000
Group
Investment management fees 1,732 1,651
Property management fees 1,972 1,698
Performance fees 1,610 249
Asset management fees 1,739 1,675
Directors' remuneration (see note
8) 190 186
Administration fees 702 530
Legal and professional fees 1,493 1,687
Marketing and promotion 68 63
Other administrative costs (including
bad debts) 689 63
Bank charges 28 24
VAT recoverable for previous periods (794) -
VAT recoverable deducted from comparative
expenses above - 391
-------------- --------------
Total 9,429 8,217
-------------- --------------
Company
Investment management fees 1,386 1,320
Performance fees 633 110
Directors' remuneration (see note
8) 190 186
Administration fees 215 210
Legal and professional fees 1,007 1,024
Marketing and promotion 66 63
Other administrative costs 62 39
VAT recoverable for previous periods (794) -
VAT recoverable deducted from comparative
expenses above - 391
-------------- --------------
Total 2,765 3,343
-------------- --------------
The Company has registered for VAT and is recovering VAT where applicable incurred since launch. Previously expenses for the Company were shown gross of VAT costs. Expenses are now shown net of VAT recoverable and comparative figures have been reanalysed to be shown net of VAT.
The number of persons employed by the Group and Company in the year was 5, being the Directors, whose remuneration is set out in note 8.
Services provided by the Company's auditor and its associates
The Group has obtained the following services from the Company's auditor and its associates:
Year ended Year ended
31 December 31 December
2017 2016
GBP'000 GBP'000
Group
Audit of the consolidated and parent
company financial statements 70 63
Audit related services in respect
of the half year financial statements 30 25
Audit of the subsidiaries for their
respective periods of account 140 131
Fees associated with share issue 108 -
-------------- --------------
Total 348 219
-------------- --------------
8. Directors' remuneration
Key management comprises the Directors of the Company. A summary of the Directors' emoluments is set out in the Directors' Remuneration Report.
Year ended Year ended
31 December 31 December
2017 2016
GBP'000 GBP'000
Group & Company
Directors' fees 170 170
Employers National Insurance contributions 20 16
-------------- --------------
Total 190 186
-------------- --------------
9. Finance income
Year ended Year ended
31 December 31 December
2017 2016
GBP'000 GBP'000
Group
Interest income 25 60
Other finance income - (99)
Unwinding of the discount on financial
assets 190 232
-------------- --------------
Total 215 193
-------------- --------------
Company
Group dividend income received 25,635 19,061
------- -------
Total 25,635 19,061
------- -------
10. Finance expense
Year ended Year ended
31 December 31 December
2017 2016
GBP'000 GBP'000
Group
Interest payable on bank borrowings 9,550 7,821
Accrued capital entitlement on ZDP 1,769 -
shares
Amortisation of loan arrangement fees 722 1,001
Amortisation of ZDP share acquisition 114 -
costs
Break costs associated with refinancing 605 -
Loan arrangement fees recognised early 1,968 -
due to refinancing
-------------- --------------
Total 14,728 8,822
-------------- --------------
11. Taxation
Year ended Year ended
31 December 31 December
2017 2016
GBP'000 GBP'000
Group
Income tax charge/(credit) 208 (36)
Increase in deferred tax creditor 1,424 13
-------------- --------------
Total 1,632 (23)
-------------- --------------
The current tax charge/(credit) is reduced by the UK REIT tax exemptions. The Tax credit is due to the release of a historic accrual. The tax charge/(credit) for the year can be reconciled to the profit/(loss) in the Statement of Comprehensive Income as follows:
Group
Profit before taxation 28,692 13,395
--------- ---------
UK Corporation tax rate 19.25% 20%
Theoretical tax at UK Corporation
tax rate 5,523 2,679
Effects of:
Revaluation loss/(gain) on investment
properties (1,134) 1,350
Permanent differences 461 (3,601)
Profits from the tax exempt business (4,642) -
Deferred tax movement 1,424 -
Utilisation of losses brought forward - 14
Taxation losses and other timing differences - (343)
Prior year adjustment - (122)
--------- ---------
Total 1,632 (23)
--------- ---------
Permanent differences are the differences between an entity's
taxable profits and its results as stated in the financial statements.
These arise because certain types of income and expenditure
are non-taxable or disallowable, or because certain tax charges
or allowances have no corresponding amount in the financial
statements.
The Group elected to be treated as a UK REIT with effect from
7 November 2015. The UK REIT rules exempt the profits of the
Group's UK property rental business from corporation tax. Gains
on UK properties are also exempt from tax, provided they are
not held for trading or sold in the three years after completion
of development. The Group is otherwise subject to corporation
tax.
As a REIT, Regional RIET Ltd is required to pay Property Income
Distributions equal to at least 90% of the Group's exempted
net income. To retain UK REIT status, there are a number of
conditions to be met in respect of the principal company of
the Group, the Group's qualifying activity and its balance of
business. The Group continues to meet these conditions.
Income tax and deferred tax above arise on entities which form
part of the Group consolidated accounts but do not form part
of the REIT group.
Due to the Group's REIT status and its intention to continue
meeting the conditions required to obtain approval in the foreseeable
future, no provision has been made for deferred tax on any capital
gains or losses arising on the revaluation or disposal of investments
held by entities within the REIT group.
No deferred tax asset has been recognised in respect of losses
carried forward due to the unpredictability of future taxable
profits.
Company
Profit/(loss) before taxation 23,790 16,555
--------- ---------
UK Corporation tax rate 19.25% 20%
Theoretical tax at UK Corporation
tax rate 4,580 3,311
Effects of:
Permanent differences (4,580) (3,311)
--------- ---------
Total - -
--------- ---------
12. Earnings per share
Earnings per share ("EPS") amounts are calculated by dividing profits for the year attributable to ordinary equity holders of the Company by the weighted average number of Ordinary Shares in issue during the year. As there are dilutive instruments outstanding both basic and diluted earnings per share are disclosed below.
Dilutive instruments relate to the partial settlement of the Performance Fee by the issue of Ordinary shares. As detailed in note 34, an estimate of Performance Fee for the period from commencement of trading to 31 December 2017 has been recognised in the financial statements. An estimate has been made of the number of shares that would be issued based on the EPRA NAV at 31 December 2017. It should be noted that the Performance Fee period is from 6 November 2015 to 31 December 2018 and the number of shares to be issued to settle the fee charge will be based on the EPRA NAV as at 31 December 2018.
Group
The calculation of basic and diluted earnings per share is based on the following:
Year ended Year ended
31 December 31 December
2017 2016
GBP'000 GBP'000
Calculation of Earnings per share
Net profit attributable to Ordinary
Shareholders 27,060 13,418
Adjustments to remove:
Changes in value of investment properties (5,893) 6,751
Changes in fair value of interest
rate derivatives
and financial assets (407) 865
Gain on disposal of investment property (1,234) (518)
Impairment of goodwill 557 557
Deferred tax charge 1,424 -
Close out costs on borrowings and 2,507 -
derivatives
------------- -------------
EPRA Net profit attributable to
Ordinary Shareholders 24,014 21,073
Add performance fee 1,610 249
------------- -------------
Company specific adjusted earnings
figure 25,624 21,322
------------- -------------
Weighted average number of Ordinary
Shares 296,807,647 274,217,264
Dilutive instruments 875,752 107,729
------------- -------------
Adjusted weighted average number
of Ordinary Shares 297,683,399 274,324,993
------------- -------------
Earnings per share - basic 9.1p 4.9p
------------- -------------
Earnings per share - diluted 9.1p 4.9p
------------- -------------
EPRA Earnings per share - basic 8.1p 7.7p
------------- -------------
EPRA Earnings per share - diluted 8.1p 7.7p
------------- -------------
Company specific adjusted earnings
per share - basic 8.6p 7.8p
------------- -------------
Company specific adjusted earnings
per share - diluted 8.6p 7.8p
------------- -------------
Company
The calculation of basic and diluted earnings per share is based on the following:
Year ended Year ended
31 December 31 December
2017 2016
GBP'000 GBP'000
Calculation of Earnings per share
Net profit attributable to Ordinary
Shareholders 23,790 16,555
-------------- --------------
Weighted average number of Ordinary
Shares 296,807,647 274,217,264
Dilutive instruments 875,752 107,729
-------------- --------------
Adjusted weighted average number
of Ordinary Shares 297,683,399 274,324,993
-------------- --------------
Earnings per share - basic 8.0p 6.0p
-------------- --------------
Earnings per share - diluted 8.0p 6.0p
-------------- --------------
13. Dividends
Year ended Year ended
31 December 31 December
2017 2016
GBP'000 GBP'000
Group and Company
Dividend of 2.40 (2016: 1.00) pence
per Ordinary share
for the period 1 October 2016 - 31
December 2016 6,581 2,742
Dividend of 1.80 (2016: 1.75) pence
per Ordinary share
for the period 1 January 2017 - 31
March 2017 5,410 4,799
Dividend of 1.80 (2016: 1.75) pence
per Ordinary share
for the period 1 April 2017 - 30 June
2017) 5,410 4,799
Dividend of 1.80 (2016: 1.75) pence
per Ordinary share
(for the period 1 July 2017 - 30 September
2017) 5,410 4,799
-------------- --------------
22,811 17,139
-------------- --------------
On 23 February 2017 the Company announced a dividend of 2.40 pence per share in respect of the period 1 October 2016 to 31 December 2016. The dividend payment was made on 13 April 2017 to shareholders on the register as at 3 March 2017.
On 25 May 2017 the Company announced a dividend of 1.80 pence per share in respect of the period 1 January 2017 to 31 March 2017. The dividend payment was made on 14 July 2017 to shareholders on the register as at 9 June 2017.
On 31 August 2017 the Company announced a dividend of 1.80 pence per share in respect of the period 1 April 2017 to 30 June 2017. The dividend payment was made on 13 October 2017 to shareholders on the register as at 8 September 2017.
On 14 November 2017 the Company announced a dividend of 1.80 pence per share in respect of the period 1 July 2017 to 30 September 2017. The dividend payment was made on 22 December 2017 to shareholders on the register as at 24 November 2017.
On 22 February 2018 the Company announced a dividend of 2.45 pence per share in respect of the period 1 October 2017 to 31 December 2017. The dividend will be paid on 12 April 2018 to shareholders on the register as at 2 March 2018. The financial statements do not reflect this dividend.
The Board intends to peruse a progressive dividend policy and continue to pay quarterly dividends.
14. Investment properties
In accordance with International Accounting Standard, IAS 40, 'Investment Property', investment property has been independently valued at fair value by Cushman & Wakefield, and Jones Lang LaSalle, Chartered Surveyors who are both accredited independent valuers with recognised and relevant professional qualifications and with recent experience in the locations and categories of the investment properties being valued. The valuations have been prepared in accordance with the RICS Valuation - Professional Standards (January 2014) ("the Red Book") and incorporate the recommendations of the International Valuation Standards Committee which are consistent with the principles set out in IFRS 13.
The valuations are the ultimate responsibility of the Directors. Accordingly, the critical assumptions used in establishing the independent valuation are reviewed by the Board.
All corporate acquisitions during the year have been treated as properties purchased rather than business combinations.
Group Long Leasehold
Freehold Property
Movement in investment properties Property GBP'000 Total
for the year ended 31 December GBP'000 GBP'000
2017
Valuation at 1 January 2017 424,310 78,115 502,425
Property additions - acquisitions 212,332 18,994 231,326
Property additions - subsequent
expenditure 12,444 929 13,373
Property disposals (16,921) - (16,921)
Gain on the disposal of investment
properties 1,234 - 1,234
Change in fair value during the
year 3,201 2,692 5,893
----------- --------------- ----------
Valuation at 31 December 2017 636,600 100,730 737,330
----------- --------------- ----------
Movement in investment properties
for the year ended 31 December
2016
Valuation at 1 January 2016 332,052 71,650 403,702
Property additions- acquisitions 132,827 7,883 140,710
Property additions - subsequent
expenditure 5,848 3,255 9,103
Property disposals (41,907) (2,950) (44,857)
Gain/(loss) on the disposal of
investment properties 538 (20) 518
Change in fair value during the
period (5,048) (1,703) (6,751)
----------- --------------- ----------
Valuation at 31 December 2016 424,310 78,115 502,425
----------- --------------- ----------
The historic cost of the properties is GBP628,723,000 (31 December 2016: GBP488,104,000).
The following table provides the fair value measurement hierarchy for investment property:
Significant Significant
Quoted active observable unobservable
prices inputs inputs
Total (level 1) (level 2) (level
Date of valuation: GBP'000 GBP'000 GBP'000 3)
GBP'000
31 December 2017 737,330 - - 737,330
---------- ---------------- ------------ --------------
31 December 2016 502,425 - 504,425 -
---------- ---------------- ------------ --------------
The hierarchy levels are defined in note 25.
It has been determined that the entire investment properties portfolio should be classified under the level 3 category and the assets have been transferred to level 3 at the beginning of the year. The table below shows the movement in the year on the level 3 category:
Year ended Year ended
31 December 31 December
2017 2016
GBP'000 GBP'000
Balance at the start of the year - -
Assets transferred from level 2 504,425 -
Additions 244,699 -
Disposals (16,921) -
Gain on the disposal of investment 1,234 -
properties
Change in fair value during the year 5,893 -
-------------- --------------
Balance at the end of the year 737,330 -
-------------- --------------
The determination of the fair value of the investment properties held by each consolidated subsidiary requires the use of estimates such as future cash flows from investment properties, which take into consideration lettings, tenants' profiles, future revenue streams, capital values of fixtures and fittings, plant and machinery, any environmental matters and the overall repair and condition of the property, and discount rates applicable to those assets. Future revenue streams comprise contracted rent (passing rent) and estimated rental value ("ERV") after the contract period. In calculating ERV, the potential impact of future lease incentives to be granted to secure new contracts is taken into consideration. All these estimates are based on local market conditions existing at the reporting date.
The current volatility in the global financial system is reflected in commercial real estate markets. In arriving at their estimates of market values as at 31 December 2017, the valuers used their market knowledge and professional judgement and did not rely solely on historical transactional comparables. With greater volatility in the global financial system, there was a greater degree of uncertainty in estimating the market values of investments than would exist in a more stable market.
Techniques used for valuing investment properties
The following descriptions and definitions relate to valuation techniques and key observable inputs made in determining the fair values:-
Valuation technique: market comparable method
Under the market comparable method (or market approach), a property fair value is estimated based on comparable transactions in the market.
Observable Input: Market Rental
The rent at which space could be let in the market conditions prevailing at the date of valuation range: GBP2,860- GBP3,092,125 per annum (2016: GBP3,100 - GBP3,119,381 per annum).
Observable Input: Rental growth
The estimated average increase in rent is based on both market estimations and contractual agreements.
Observable Input: net initial yield
The initial Net Income from a property at the date of purchase, expressed as a percentage of the gross purchase price including the costs of purchase range: 0%-29.94 % (2016: 0.28%-29.23%).
As set out within the significant accounting estimates and judgements above, the Group's property portfolio valuation is open to judgement and is inherently subjective by nature, and actual values can only be determined in a sales transaction.
15. Investment in subsidiaries
31 December 31 December
2017 2016
GBP'000 GBP'000
Company
Cost at start of year 274,286 274,217
Acquisitions of subsidiaries during
the year 98,686 69
Disposal of subsidiaries during the (21,511) -
year
------------ ------------
Cost at end of year 351,461 274,286
------------ ------------
Investment in subsidiaries is recorded at cost, which is the fair value of the consideration paid.
In the opinion of the Directors the value of the subsidiary undertakings is not less than the book amount.
List of subsidiaries which are 100% owned and controlled by the Group
Country of Ownership
incorporation %
Blythswood House LLP United Kingdom 100%
Regional Commercial MIDCO Limited Jersey 100%
RR Aspect Court Limited Jersey 100%
RR Bristol Ltd Jersey 100%
RR Eureka SARL Luxembourg 100%
RR Hounds Gate Limited Jersey 100%
RR Rainbow (Aylesbury) Limited Jersey 100%
RR Rainbow (North) Limited Jersey 100%
RR Rainbow (South) Limited Jersey 100%
RR Range Limited Jersey 100%
RR Sea Dundee Ltd. United Kingdom 100%
RR Sea Hannover Street Ltd. United Kingdom 100%
RR Sea Lamont I Ltd Jersey 100%
RR Sea Lamont II Ltd Jersey 100%
RR Sea Lamont III Ltd Jersey 100%
RR Sea St. Helens Ltd. United Kingdom 100%
RR Sea Stafford Ltd. United Kingdom 100%
RR Sea Strand Limited United Kingdom 100%
RR Sea TAPP Ltd Guernsey 100%
RR Sea TOPP Bletchley Ltd Guernsey 100%
RR Sea TOPP I Ltd Guernsey 100%
RR UK (Central) Limited Jersey 100%
RR UK (Cheshunt) Limited Jersey 100%
RR UK (South) Limited Jersey 100%
RR Wing Portfolio Limited Jersey 100%
Regional REIT ZDP PLC United Kingdom 100%
Tay Properties Limited Jersey 100%
TCP Arbos Limited Jersey 100%
TCP Channel Limited Jersey 100%
Tosca Chandlers Ford Limited Jersey 100%
Tosca Churchill Way Limited Jersey 100%
Tosca Garnet Limited Jersey 100%
Tosca Glasgow II Limited United Kingdom 100%
Tosca Midlands Limited Jersey 100%
Tosca North East Limited Jersey 100%
Tosca North West Limited Jersey 100%
Tosca Rosalind Ltd Jersey 100%
Tosca Scotland Limited Jersey 100%
Tosca South East Limited Jersey 100%
Tosca South West Limited Jersey 100%
Tosca Swansea Limited Jersey 100%
Tosca Thorpe Park Limited Jersey 100%
Tosca UK CP II Limited Jersey 100%
Tosca UK CP Limited Jersey 100%
Tosca Victory House Limited Jersey 100%
Tosca Winsford Limited Jersey 100%
Toscafund Bennett House Limited Jersey 100%
Toscafund Bishopgate Street Limited Jersey 100%
Toscafund Blythswood Limited Jersey 100%
Toscafund Brand Street Limited Jersey 100%
Toscafund Chancellor Court Limited Jersey 100%
Toscafund Crompton Way Limited Jersey 100%
Toscafund Espedair Limited Jersey 100% Toscafund Fairfax House Limited Jersey 100% Toscafund Glasgow Limited Jersey 100% Toscafund Harvest Limited Jersey 100% Toscafund Milburn House Limited Jersey 100% Toscafund Minton Place Limited Jersey 100% Toscafund Newstead Court Limited Jersey 100% Toscafund North Esplanade Limited Jersey 100% Toscafund Portland Street Limited Jersey 100% Toscafund Sheldon Court Limited Jersey 100% Toscafund South Gyle Limited Jersey 100% Toscafund St Georges House Limited Jersey 100% Toscafund St James Court Limited Jersey 100% Toscafund Strathclyde BP Limited Jersey 100% Toscafund Wallington Limited Jersey 100% Toscafund Welton Road Limited Jersey 100% Toscafund Westminster House Limited Jersey 100%
All of the above entities have been included in the Group's consolidated financial statements.
By virtue of the Amended and Restated Call Option Agreement, dated 3 November 2015, the Directors consider that the Group has control of Credential Investment Holdings Limited and its 28 subsidiaries ("the Credential Group").
Under this option, the Group may acquire any of the properties held by the Credential Group by issuing an option notice for a nominal consideration of GBP1. The recipient of the option notice is obliged to convey its title within one month after receipt of the option notice. The option may be exercised in whole by serving one option notice in respect of all the remaining relevant assets or on any number of occasions by servicing any number of separate option notices.
Despite having no equity holding, the Group controls the Credential Group as the option agreement means that the Group is exposed to, and has rights to, variable returns from its involvement with the Credential Group through its power to control.
The companies which make up the Credential Group are as follows:
List of subsidiaries that are controlled by the Group:
Country of Effective
incorporation Ownership
%
Castlestream Limited United Kingdom 100%
Caststop Limited United Kingdom 100%
Credential (Baillieston) Limited United Kingdom 100%
Credential (Greenock) Limited United Kingdom 100%
Credential (Peterborough) Limited United Kingdom 100%
Credential (Wardpark North) Limited United Kingdom 100%
Credential (Wardpark South) Limited United Kingdom 100%
Credential Bath Street Limited United Kingdom 100%
Credential Charring Cross Limited United Kingdom 100%
Credential Estates Limited United Kingdom 100%
Credential Investment Holdings Limited United Kingdom 100%
Credential Muirhouse Limited United Kingdom 100%
Credential Residential Finance Limited United Kingdom 100%
Credential SHOP Limited United Kingdom 100%
Credential Tay House Limited United Kingdom 100%
Douglas Shelf Seven Limited United Kingdom 100%
Dumbarton Road Limited United Kingdom 100%
Hamiltonhill Estates Limited United Kingdom 100%
Lilybank Church Limited United Kingdom 100%
Lilybank Terrace Limited United Kingdom 100%
London & Scottish Property Management
Limited United Kingdom 100%
Old Mill Studios Limited United Kingdom 100%
Old Rutherglen Road Limited United Kingdom 100%
Rocket Unit Trust Jersey 100%
Squeeze Newco (Elmbank) Limited United Kingdom 100%
Squeeze Newco 2 Limited United Kingdom 100%
Stock Residential Lettings Limited United Kingdom 100%
The Legal Services Centre Limited United Kingdom 100%
All of the above entities have been included in the Group's consolidated financial statements.
Business Combinations
There has been no new business combinations entered into in the financial year.
During the year there were several subsidiary company acquisitions that took place in order for the Group to acquire the investment property owned by that company. These acquisitions have not been treated as a business combination. For further details please refer to the Group's basis of preparation note 3.4.
16. Goodwill
31 December 31 December
2017 2016
GBP'000 GBP'000
Group
At start of year 2,229 2,786
Impairment (557) (557)
------------ ------------
At end of year 1,672 2,229
------------ ------------
Goodwill arises on the acquisition of subsidiaries and represents the excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets acquired. If the total of consideration transferred, non-controlling interest recognised and previously held interest measured at fair value is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised directly in the Group's Statement of Comprehensive Income.
Goodwill impairment reviews are undertaken annually or more frequently if events or changes in circumstances indicate a potential impairment. The goodwill is compared to the recoverable amount, which is the higher of value in use and the fair value less costs of disposal. Any impairment is recognised immediately as an expense and is not subsequently reversed. The impairment review is based on group pre-tax-tax cash flow projections of cost savings of the Group as a whole as a single cash generating unit, using a discount factor of 2.3%, which is based on the borrowing margins currently available. If a reasonable change occurs in a key assumption the recoverable amount of goodwill would still be expected to be equal to the carrying value. The impairment review was conducted over a five-year period, which is predominately derived from the borrowings facility terms, and will result in a nil terminal value.
17. Non-current receivables
17a. Non-current receivables on lease surrender premium
31 December 31 December
2017 2016
GBP'000 GBP'000
Group
At start of year 1,004 1,760
Movement in year (988) (988)
Unwinding of discount 190 232
------------ ------------
At end of year 206 1,004
------------ ------------
Asset due within 1 year 206 798
Asset due after 1 year - 206
---- ------
206 1,004
---- ------
In May 2014, the tenant of one of the subsidiaries (Blythswood House) surrendered their lease resulting in a lease surrender premium to be paid by the tenant in equal instalments over four years with the final instalment to be paid in the quarter ending 31 March 2018. The amount due was recognised initially at fair value and subsequently recorded at amortised cost using the effective interest method. The unwinding of the discount is included in finance income.
17b. Non-current receivables on tenant loans
31 December 31 December
2017 2016
GBP'000 GBP'000
Group
At start of year 1,926 -
Amounts loaned in the year - 1,926
------------ ------------
At end of year 1,926 1,926
------------ ------------
Asset due within 1 year - 385
Asset due after 1 year 1,926 1,541
------ ------
1,926 1,926
------ ------
During 2016 the Group entered into a loan agreement with a tenant for GBP1,926,000. The loan is subject to interest of 4% above the base rate of the Bank of Scotland and is repayable in instalments over ten years.
18. Trade and other receivables
31 December 31 December
2017 2016
GBP'000 GBP'000
Group
Gross amount receivable from tenants 8,171 4,384
Less provision for impairment (1,033) (258)
------------ ------------
Net amount receivable from tenants 7,138 4,126
Current receivables - surrender premium
(note 17a) 206 798
Current receivables - tenant loans
(note 17b) - 385
Other receivables 4,715 2,487
Prepayments 9,888 3,579
------------ ------------
21,947 11,375
------------ ------------
31 December 31 December
2017 2016
GBP'000 GBP'000
Company
Other debtors 1,113 837
VAT recoverable 1,143 -
Prepayments 47 33
------------ ------------
2,303 870
------------ ------------
The maximum exposure to credit risk at the reporting date is the carrying value of the amounts disclosed above. The Group does not hold any collateral as security.
The aged analysis of trade receivables that are past due but not impaired was as follows:
31 December 31 December
2017 2016
GBP'000 GBP'000
Current 6,662 1,176
< 30 days 264 1,692
30-60 days 859 806
> 60 days 1,959 710
------------ ------------
9,744 4,384
Less provision for impairment (1,033) (258)
------------ ------------
8,711 4,126
------------ ------------
The Directors consider the fair value of receivables equals their carrying amount.
The table above shows the aged analysis of trade receivables included in the table above which are past due but not impaired. These relate to tenants for whom there is no recent history of default.
Provision for impairment of trade receivables movement as follows:
31 December 31 December
2017 2016
GBP'000 GBP'000
Group
At start of year 258 228
Provision for impairment in the year 607 184
Upon acquisition of subsidiary companies 225 -
Receivables written off as uncollectable - (7)
Unused provision reversed (57) (147)
------------ ------------
At end of year 1,033 258
------------ ------------
Other categories within trade and other receivables do not include impaired assets.
19. Cash and cash equivalents
31 December 31 December
2017 2016
GBP'000 GBP'000
Group
Cash held at bank 33,433 10,850
Restricted cash held at bank 11,207 5,349
------------ ------------
At end of year 44,640 16,199
------------ ------------
31 December 31 December
2017 2016
GBP'000 GBP'000
Company
Cash held at bank 20,336 65
------------ ------------
At end of year 20,336 65
------------ ------------
Restricted cash balances of the Group comprise:
-- GBP2,499,000 (2016: GBP2,000) of funds held in blocked bank accounts which are controlled by one of the Group's lenders and are released to free cash once certain loan conditions are met. The restricted funds arose on net proceeds from investment property disposals and were released after the year end.
-- GBP4,198,000 (2016: GBP4,025,000) of funds which represent service charge income received from tenants for settlement of future service charge expenditure.
-- GBP2,144,000 (2016: GBP1,322,000) of funds which represent tenants' rental deposits.
-- GBP1,957,000 (2016: GBPnil) of funds held in blocked bank accounts which are controlled by one of the Group's lenders and are released to free cash once certain conditions are met. The restricted funds arose on net proceeds held in relation to rental guarantees given by the seller of properties purchased by the Group. These funds can only be withheld by the lender and used to repay outstanding loans in the event of a default. GBP414,000 of this balance will be released to free cash before 31 March 2018.
-- GBP409,000 (2016: GBPnil) of funds held in blocked rent accounts which are controlled by one of the Group's lenders and will be released to free cash post year end without restriction.
All restricted cash balances will be available before 31 March 2018.
20. Trade and other payables
31 December 31 December
2017 2016
GBP'000 GBP'000
Group
Withholding tax due on dividends paid 906 1,416
Trade payables 3,739 3,381
Other payables 9,493 5,164
Value added tax 298 1,136
Accruals of incidental costs for fund 2,593 -
raise and acquisitions
Accruals 9,912 3,504
------------ ------------
At end of year 26,941 14,601
------------ ------------
31 December 31 December
2017 2016
GBP'000 GBP'000
Company
Withholding tax due on dividends paid 906 1,416
Accruals of incidental costs for fund 1,187 -
raise
Accruals 1,211 903
------------ ------------
At end of year 3,304 2,319
------------ ------------
21. Deferred income
Deferred rental income represents rent received in advance from tenants.
22. Taxation liabilities
31 December 31 December
2017 2016
GBP'000 GBP'000
Group
Income tax 586 36
Deferred tax 2,050 626
------------ ------------
2,636 662
------------ ------------
The movement on Deferred tax liability
is shown below:
At start of year 626 612
Deferred tax on the valuation of investment
properties 1,424 14
------ ----
At end of year 2,050 626
------ ----
23. Bank and loan borrowings
Bank borrowings are secured by charges over individual investment properties held by certain asset-holding subsidiaries. The banks also hold charges over the shares of certain subsidiaries and any intermediary holding companies of those subsidiaries. Any associated fees in arranging the bank borrowings unamortised as at the year end are offset against amounts drawn on the facilities as shown in the table below:
31 December 31 December
2017 2016
GBP'000 GBP'000
Group
Bank borrowings drawn at start of
year 220,060 128,643
Bank borrowings drawn 284,633 107,762
Bank borrowings repaid (165,619) (16,345)
------------ ------------
Bank borrowings drawn at end of year 339,074 220,060
Less: unamortised costs at start of
year (2,618) (1,875)
Less: loan issue costs incurred in
the year (4,765) (1,744)
Add: loan issue costs amortised in
the year 2,690 1,001
------------ ------------
At end of year 334,381 217,442
------------ ------------
Maturity of bank borrowings
Repayable within 1 year 400 -
Repayable between 1 to 2 years 65,400 58,960
Repayable between 2 to 5 years 108,274 161,110
Repayable after more than 5 year 165,000 -
Unamortised loan issue costs (4,693) (2,618)
------------ ------------
334,381 217,442
------------ ------------
During the year, the Group assumed new loan facilities which were held in the group of subsidiary companies acquired from The Conygar Investment Company PLC. As detailed in note 24 the Group also has 30,000,000 ZDP shares in issue.
The table below lists the Group's loan facilities held and the liability due to the ZDP shares.
Gross
Lender Original Outstanding Maturity Loan to Annual Interest Amortisation
Facility Debt** Date Value*** rate
GBP'000 GBP'000 %
5.00% pa
ICG Longbow Ltd 65,000 65,000 Aug-19 44.6 for term none
2.00% over
Royal Bank of 3mth GBP
Scotland 19,336 17,376 Dec -20 40.0 LIBOR MP
2.15% over
3mth GBP
HSBC* 20,998 20,998 Dec-21 53.2 LIBOR MP
2.15% over
3mth GBP
Santander UK 70,700 70,700 Nov-22 43.4 LIBOR MP
Scottish Widows
& Aviva Investors 3.28% pa
Real Estate Finance 165,000 165,000 Dec-27 48.9 for term MP
----------- --------------
Total bank borrowings 341,034 339,074
6.5% pa to
ZDP Shares 39,879 37,389 Jan-19 n/a maturity none
----------- --------------
Total 380,913 376,463
----------- --------------
LIBOR = London Interbank Offered Rate (Sterling)
MP = Mandatory prepayment
* Acquired upon the acquisition of the SPV companies from The Conygar Investment Company PLC
** Before unamortised debt issue costs
*** Based upon Cushman & Wakefield and Jones Lang LaSalle property valuations
The weighted average term to maturity of the Group's debt at the period end was 6.0 years (31 December 2016: 2.9 years). The weighted average interest rate payable by the Group on its debt portfolio, excluding hedging costs, as at the period end was 3.7% (31 December 2016: 3.3%).
The Group weighted average interest rate, including the ZDP shares and hedging costs at the period end amounted to 3.8% pa (31 December 2016: 3.7% pa).
The Group has been in compliance with all of the financial covenants relating to the above facilities as applicable throughout the year covered by these consolidated financial statements. Each facility has distinct covenants which generally include: historic interest cover, projected interest cover, loan to value cover, and debt service cover. A breach of agreed covenant levels would typically result in an event of default of the respective facility, giving the lender the right, but not the obligation, to declare the loan immediately due and payable. Where a loan is repaid in these circumstances early repayment fees will apply, which are generally based on a percentage of the loan repaid or calculated with reference to the interest income foregone by the lenders as a result of the repayment.
As shown in note 26, the Group uses a combination of interest rate swaps and fixed rate bearing loans to hedge against interest rate risks. The Group's exposure to interest rate volatility is minimal.
24. Zero dividend preference shares
31 December 31 December
2017 2016
GBP'000 GBP'000
Fair value arising on the acquisition 35,620 -
of subsidiaries
Acquisition costs (264) -
Amortisation of acquisition costs 114 -
Accrued capital entitlement 1,769 -
------------ ------------
At end of year 37,239 -
------------ ------------
During the year the Group acquired 100% of the voting capital of Conygar ZDP PLC (subsequently renamed Regional REIT ZDP PLC), a company which has 30,000,000 zero dividend preference shares ("ZDP shares") in issue. The ZDP shares were originally issued at 100 pence per share. The ZDP shares have an entitlement to receive a fixed cash amount on 9 January 2019, being the maturity date, but do not receive any dividends or income distributions. Additional capital accrues to the ZDP shares on a daily basis at a rate equivalent to 6.5% per annum (5.5% per annum until 24 March 2017), resulting in a final capital entitlement of 132.9 pence per share. The ZDP shares are listed on the London Stock Exchange (LSE: RGLZ).
During the period, the Group accrued GBP1,769,000 (31 December 2016: GBPnil) of additional capital payable. The total amount repayable at maturity will be GBP39,879,269.
The ZDP shares do not carry the right to vote at general meetings of Regional REIT ZDP PLC, although they carry the right to vote as a class on certain proposals which would be likely to materially affect their position. In the event of a winding-up of Regional REIT ZDP PLC, the capital entitlement of the ZDP shares will rank ahead of ordinary shares but behind other creditors of Regional REIT ZDP PLC.
25. Derivative financial instruments
Interest rate caps and swaps are in place to mitigate the interest rate risk that arises as a result of entering into variable rate borrowings.
31 December 31 December
2017 2016
GBP'000 GBP'000
Group
Fair value at start of year (1,513) (416)
Fair value of derivative financial
instruments arising on the acquisition 103 -
of subsidiaries
Net costs of disposing of derivative
financial instruments 441
Revaluation in the year 217 (1,097)
------------ ------------
Fair value at end of year (752) (1,513)
------------ ------------
The calculation of fair value of interest rate caps and swaps is based on the following calculation: the notional amount multiplied by the difference between the swap rate and the current market rate and then multiplied by the number of years remaining on the contract.
The table below details the hedging and swap notional amounts and rates against the details of the Group's loan facilities.
Original Outstanding Maturity Notional
Lender Facility Debt Date Annual Interest Amount Rate
rate
GBP'000 GBP'000 GBP'000 %
ICG Longbow 5.00% pa for
Ltd 65,000 65,000 Aug-19 term n/a n/a
Royal Bank of 2.00% over 3mth
Scotland 19,336 17,376 Dec -20 GBP LIBOR nil n/a
2.15% over 3mth
HSBC* 20,998 20,998 Dec-21 GBP LIBOR nil n/a
Swap
35,350 1.605%
2.15% over 3mth Cap
Santander UK 70,700 70,700 Nov-22 GBP LIBOR 35,350 1.605%
Scottish Widows
& Aviva Investors
Real Estate 3.28% pa for
Finance 165,000 165,000 Dec-27 term n/a n/a
----------- --------------
Total 341,034 339,074
----------- --------------
LIBOR = London Interbank Offered Rate (Sterling)
As at 31 December 2017, the swap notional arrangements were GBP35.35m (31 December 2016: GBP90.8m).
The Group weighted average effective interest rate of 3.5% (31 December 2016: 3.7%) inclusive of hedging costs but excluding the ZDP.
The maximum exposure to credit risk at the reporting date is the fair value of the derivative liabilities.
It is the Group's target to hedge at least 90% of the total debt portfolio using interest rate derivatives and fixed-rate facilities. As at the year end the total proportion of hedged debt equated to 88.5% (31 December 2016: 106.5%), as shown below. The minimal under-hedge remains under review.
31 December 31 December
2017 2016
GBP'000 GBP'000
Total bank borrowings 339,074 220,060
------------ ------------
Notional value of interest rate caps
and swaps 70,700 169,441
Value of fixed rate debts 230,000 65,000
------------ ------------
300,700 234,441
------------ ------------
Proportion of hedged debt 88.7% 106.5%
------------ ------------
Fair value hierarchy
The following table provides the fair value measurement hierarchy for interest rate derivatives.
The different levels are defined as follows.
Level 1: Quoted (unadjusted) market prices in active markets for identical assets or liabilities.
Level 2: Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable.
Level 3: Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable.
For assets and liabilities that are recognised in the consolidated financial statements on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by reassessing categorisation at the end of each reporting period.
Significant Significant
Quoted active observable unobservable
prices inputs inputs
Total (level 1) (level 2) (level
Interest rate derivatives GBP'000 GBP'000 GBP'000 3)
GBP'000
31 December 2017 (752) - (752) -
31 December 2016 (1,513) - (1,513) -
The fair value of these contracts are recorded in the Consolidated Statement of Financial Position and is determined by forming an expectation that interest rates will exceed strike rates and discounting these future cash flows at the prevailing market rates as at the year end.
There have been no transfers between levels during the year.
The Group has not adopted hedge accounting.
26. Stated capital
Stated capital represents the consideration received by the Company for the issue of Ordinary shares.
Group & Company 31 December 31 December
2017 2016
Issued and fully paid shares of GBP'000 GBP'000
no par value
At start of the year 274,217 274,217
Shares issued 24/03/2017 25,687 -
Shares issued 21/12/2017 73,000 -
Share issue costs (2,586) -
------------ ------------
At end of the year 370,318 274,217
------------ ------------
Number of shares in issue
At start of the year 274,217,264 274,217,264
Shares issued 24/03/2017 26,326,644 -
Shares issued 21/12/2017 72,277,228
------------ ------------
At end of the year 372,821,136 274,217,264
------------ ------------
On 24 March 2017 the Company issued 26,326,644 Ordinary Shares as consideration for the acquisition of 11 property owning SPVs and Conygar ZDP PLC (renamed Regional REIT ZDP PLC).
On 21 December 2017, the Company issued 72,277,228 Ordinary Shares for consideration of GBP73,000,000.
27. Net asset value per share (NAV)
Basic NAV per share is calculated by dividing the net assets in the Statement of Financial Position attributable to ordinary equity holders of the parent by the number of Ordinary Shares outstanding at the end of the year. As there are dilutive instruments outstanding, basic and diluted NAV per share are disclosed below.
Dilutive instruments relate to the partial settlement of the Performance Fee by the future issue of Ordinary Shares. As detailed in note 34, an estimate Performance Fee for the period from commencement of trading to 31 December 2017 has been recognised in the financial statements. An estimate has been made of the number of shares that would be issued based on the EPRA NAV at 31 December 2017. It should be noted that the first Performance Fee charge runs for the period from 6 November 2015 to 31 December 2018 and the shares issued to settle the charge will be based on the diluted EPRA NAV as at 31 December 2018.
EPRA Net Asset Value (NAV) is a key performance measure used in the real estate industry which highlights the fair value of net assets on an ongoing long-term basis. Assets and liabilities that are not expected to crystallise in normal circumstances such as the fair value of derivatives and deferred taxes on property valuation surpluses are therefore excluded.
Net asset values have been calculated as follows:
Group 31 December 31 December
2017 2016
GBP'000 GBP'000
Net asset value per Consolidated Statement
of Financial Position 392,899 291,735
Adjustment for calculating EPRA net
assets:
Derivative financial instruments 752 1,513
Deferred tax liability 2,050 -
-------------- --------------
EPRA net assets 395,701 293,248
-------------- --------------
Number of Ordinary Shares in issue 372,821,136 274,217,264
Dilutive instruments 875,752 107,729
-------------- --------------
Adjusted number of Ordinary Shares 373,696,888 274,324,993
-------------- --------------
Net asset value per share - basic 105.4p 106.4p
-------------- --------------
Net asset value per share - diluted 105.1p 106.3p
-------------- --------------
EPRA net asset value per share - basic 106.1p 106.9p
-------------- --------------
EPRA net asset value per share - diluted 105.9p 106.9p
-------------- --------------
Company 31 December 31 December
2017 2016
GBP'000 GBP'000
Net asset value per Company Statement
of Financial Position 370,796 272,902
------------ ------------
Number of Ordinary Shares in
issue 372,821,136 274,217,264
Dilutive instruments 875,752 107,729
------------ ------------
Adjusted number of Ordinary
Shares 373,696,888 274,324,993
------------ ------------
Net asset value per share -
basic 99.5p 99.5p
------------ ------------
Net asset value per share -
diluted 99.2p 99.5p
------------ ------------
28. Notes to the Statement of Cash Flows
28.1. Non cash transactions
The Group has accounted for the following non-cash transactions:
-- A non cash transaction relating to the acquisition of the subsidiary companies acquired from The Conygar Investment Company PLC by issue of Ordinary shares is detailed in note 3.4.
-- The value of Performance fees expensed within the Group where Ordinary shares will be issued for the consideration.
The Company's acquisitions and disposals of subsidiaries are made up of the following non-cash transactions:
-- Investment in Regional Commercial Midco Ltd of GBP25,686,000 associated with the acquisition of the portfolio of companies from The Conygar Investment Company PLC by issue of Ordinary shares is detailed in note 3.4.
-- The acquisition of and immediate sale to Regional Commercial Midco Ltd for GBP21,511,000 of subsidiary companies. This transaction did not involve any cash or result in any gain or loss.
-- The value of Performance fees expensed in subsidiary companies where the Company will issue Ordinary shares for the payment of the Performance fee of GBP489,000.
28.2 Reconciliation of changes in liabilities to cash flows arising from financing activities
Group at 31 December 2017
Bank loans Zero dividend Derivative
and borrowings preference financial
GBP'000 shares instruments Total
GBP'000 GBP'000 GBP'000
Balance at 1 January 2017 217,442 - 1,513 218,955
----------------- ---------------- -------------- ----------
Changes from financing
cash flows:
Net costs paid on the
disposal of derivatives - - (441) (441)
Bank borrowings advanced 179,540 - - 179,540
Bank borrowings repaid (165,619) - - (165,619)
Bank borrowing costs paid (3,714) - - (3,714)
----------------- ---------------- -------------- ----------
Total changes from financing
cash flows 10,207 - (441) 9,766
----------------- ---------------- -------------- ----------
Arising from subsidiary
acquisitions 105,093 35,620 (103) 140,610
Costs of subsidiary acquisitions
allocated (1,051) (264) - (1,315)
Amortisation of issue
costs 2,690 114 - 2,804
Accrued capital entitlement - 1,769 - 1,769
Change in fair value - - (217) (217)
----------------- ---------------- -------------- ----------
Total other changes 106,732 37,239 (320) 143,651
----------------- ---------------- -------------- ----------
Balance at 31 December
2017 334,381 37,239 752 372,372
----------------- ---------------- -------------- ----------
Balances are included in the Statement of financial
position as follows:
Current liabilities 400 - - 400
Non-current liabilities 333,981 37,239 752 371, 972
----------------- ---------------- -------------- ----------
Balance at 31 December
2017 334,381 37,239 752 372,372
----------------- ---------------- -------------- ----------
29. Financial risk management
29.1 Financial instruments
The Group's principal financial assets and liabilities are those that arise directly from its operations: trade and other receivables, trade and other payables and cash and cash equivalents. The Group's other principal financial liabilities are bank and other loan borrowings, amounts due to Zero Dividend preference shareholders and interest rate derivatives, the main purpose of which is to finance the acquisition and development of the Group's investment property portfolio.
Set out below is a comparison by class of the carrying amounts and fair value of the Group's financial instruments that are carried in the financial statements:
Group 31 December 2017 31 December 2016
Book value Fair value Book value Fair value
GBP'000 GBP'000 GBP'000 GBP'000
Loans and receivables
- measured at amortised
cost
Trade and other receivables 13,985 13,985 9,543 9,543
Cash and short-term deposits 44,640 44,640 16,199 16,199
Financial liabilities
- measured at amortised
cost
Trade and other payables (26,035) (26,035) (15,263) (15,263)
Bank and loan borrowings (334,381) (334,381) (217,442) (217,442)
Zero dividend preference
shares (37,239) (38,550) - -
Financial liabilities
- measured at fair value
through profit or loss
Interest rate derivatives (752) (752) (1,513) (1,513)
----------- ----------- ----------- -----------
Set out below is a comparison by class of the carrying amounts and fair value of the Company's financial instruments that are carried in the financial statements:
31 December 2017 31 December 2016
Company Book value Fair value Book value Fair value
GBP'000 GBP'000 GBP'000 GBP'000
Loans and receivables
- measured at amortised
cost
Trade and other receivables 2,256 2,256 837 837
Cash and short-term deposits 20,336 20,336 65 65
Financial liabilities
- measured at amortised
cost
Trade and other payables (2,398) (2,398) (2,319) (2,319)
----------- ----------- ----------- -----------
29.2 Risk management
The Group is exposed to market risk (including interest rate risk), credit risk and liquidity risk. The Board of Directors oversees the management of these risks. The Board of Directors reviews and agrees policies for managing each of these risks that are summarised below.
29.3 Market risk
Market risk is the risk that the fair values of financial instruments will fluctuate because of changes in market prices. The financial instruments held by the Group that are affected by market risk are principally the Group's bank balances along with a number of interest rate swaps entered into to mitigate interest rate risk.
The Group's interest rate risk arises from long term borrowings issued at variable rates, which expose the Group to cash flow interest rate risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk.
The Group manages its cash flow interest rate risk by using floating to fixed interest rate swaps, interest rate caps and interest rate swaptions. Interest rate swaps have the economic effect of converting borrowings from floating rates to fixed rates. Interest rate caps limit the exposure to a known level.
If interest rates were to increase by the following rates, this would increase the annual interest charge to the Group and thus reduce profits and net assets as follows:
Interest rate increase Increase to the annual interest
charge
31 December 31 December
2017 2016
GBP'000 GBP'000
0.00% - -
0.25% 184 186
0.50% 368 372
0.75% 552 529
1.00% 737 592
29.4 Credit risk
Credit risk is the risk that a counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss. The Group is exposed to credit risk from both its leasing activities and financing activities, including deposits with banks and financial institutions. The Company is exposed to credit risk from its deposits with banks. Credit risk is mitigated by tenants being required to pay rentals in advance under their lease obligations. The credit quality of the tenant is assessed based on an extensive credit rating scorecard at the time of entering into a lease agreement.
Outstanding trade receivables are regularly monitored. The maximum exposure to credit risk at the reporting date is the carrying value of each class of financial asset.
29.5 Credit risk related to trade receivables
Trade receivables, primarily tenant rentals, are presented in the Group's Statement of Financial Position net of provisions for impairment. Credit risk is primarily managed by requiring tenants to pay rentals in advance and performing tests around strength of covenant prior to acquisition. Any trade receivables past due as at the year end were received shortly after the year end.
29.6 Credit risk related to financial instruments and cash deposits
One of the principal credit risks of the Group arises with the banks and financial institutions. The Board of Directors believes that the credit risk on short-term deposits and current account cash balances are limited because the counterparties are banks, who are committed lenders to the Group, with high credit ratings assigned by international credit-rating agencies.
The list of bankers for the Group, with their latest Fitch credit ratings, was as follows:
Bankers Fitch Ratings Barclays A Rating Watch Positive Royal Bank of Scotland BBB + Stable Santander UK A Rating Watch Positive
29.7 Liquidity risk
Liquidity risk arises from the Group's management of working capital and, going forward, the finance charges and principal repayments on its borrowings. It is the risk that the Group will encounter difficulty in meeting its financial obligations as they fall due, as the majority of the Group's assets are investment properties and are therefore not readily realisable. The Group's objective is to ensure it has sufficient available funds for its operations and to fund its capital expenditure. This is achieved by continuous monitoring of forecast and actual cash flows by management.
The table below summarises the maturity profile of the Group's financial liabilities based on contractual undiscounted payments:
Group at 31 December Within Between Between After
2017 1 year 1 to 2 years 2 to 5 5 years Total
GBP'000 GBP'000 years GBP'000 GBP'000 GBP'000
Trade and other payables (26,035) - - - (26,035)
Bank borrowings (12,019) (75,599) (131,712) (191,793) (411,123)
Interest rate derivatives (242) (242) (700) - (1,184)
Zero dividend preference
shares - (39,879) - - (39,879)
--------- -------------- --------------- ---------- -----------
(38,296) (115,720) (132,412) (191,793) (478,221)
--------- -------------- --------------- ---------- -----------
Group at 31 December Within Between Between After
2016 1 year GBP'000 1 to 2 years 2 to 5 years 5 years Total
GBP'000 GBP'000 GBP'000 GBP'000
Trade and other payables (15,263) - - - (15,263)
Bank borrowings (7,177) (66,093) (164,942) - (238,212)
Interest rate derivatives (884) (874) (528) - (2,286)
---------------- -------------- -------------- --------- ----------
(23,324) (66,967) (165,470) - (255,761)
---------------- -------------- -------------- --------- ----------
The table below summarises the maturity profile of the Company's financial liabilities based on contractual undiscounted payments:
Company at 31 December Within Between Between
2017 1 year GBP'000 1 to 2 years 2 to 5 Total
GBP'000 years GBP'000 GBP'000
Trade and other payables (3,304) - - (3,304)
---------------- -------------- --------------- ----------
Company at 31 December Within Between Between
2016 1 year GBP'000 1 to 2 years 2 to 5 years Total
GBP'000 GBP'000 GBP'000
Trade and other payables (2,319) - - (2,319)
---------------- -------------- -------------- ----------
30. Capital management
The primary objective of the Group's capital management is to ensure that it remains a going concern and continues to qualify for UK REIT status.
The Group's capital is represented by reserves and bank borrowings. The Board, with the assistance of the Investment Manager, monitors and reviews the Group's capital so as to promote the long-term success of the business, facilitate expansion and to maintain sustainable returns for Shareholders.
The Group's policy on borrowings is as follows: the level of borrowing will be on a prudent basis for the asset class, and will seek to achieve a low cost of funds, while maintaining flexibility in the underlying security requirements, and the structure of both the portfolio and of Regional REIT.
Based on current market conditions, the Board will target Group net borrowings of 40% of Investment Property Values at any time. However, the Board may modify the Company's borrowing policy (including the level of gearing) from time to time in light of then-current economic conditions, relative costs of debt and equity capital, fair value of the Company's assets, growth and acquisition opportunities or other factors the Board deems appropriate. The Group's net borrowings may not exceed 50 per cent. of the Investment Property Values at any time without the prior approval of Ordinary shareholders in a General Meeting.
Debt will be secured at the asset level subject to the assessment of the optimal financing structure for the Group and having consideration to key metrics including lender diversity, debt type and maturity profile.
31. Operating leases
The future minimum lease payments receivable under non-cancellable operating leases in respect of the Group's property portfolio are as follows
31 December 31 December
2017 2016
Group GBP'000 GBP'000
Receivable within 1 year 49,621 37,229
Receivable between 1 - 2 years 38,678 28,000
Receivable between 2 - 5 years 66,437 50,777
Receivable after 5 years 47,979 34,744
------------ ------------
202,715 150,750
------------ ------------
The Group has in excess of 939 operating leases. The number of years remaining on these operating leases varies between 1 and 82 years. The amounts disclosed above represent total rental income receivable up to the next lease break point on each lease. If a tenant wishes to end a lease prior to the break point a surrender premium will be charged to cover the shortfall in rental income received.
32. Operating lease commitments
Total commitments on operating leases in respect of land and buildings are as follows:
31 December 31 December
2017 2016
Group GBP'000 GBP'000
Payable within 1 year 471 485
Payable between 1 - 2 years 471 485
Payable between 2 - 5 years 1,414 1,456
Payable after 5 years 36,001 37,794
------------ ------------
38,357 40,220
------------ ------------
33. Segmental information
After a review of the information provided for management purposes during the current year, it was determined that the Group has one operating segment and therefore segmental information is not disclosed in these consolidated financial statements.
34. Transactions with related parties
Transactions with the Directors
Directors' remuneration is disclosed within the Remuneration Report and note 8 to the financial statements. Directors' beneficial interests in the Ordinary shares of the Company are disclosed within the Directors' Report. During the year, the following dividends were received by the Directors (and their spouses) on the holdings:
Year ended 31 December
2017
GBP'000
Kevin McGrath -
William Eason 10
Daniel Taylor 16
Stephen Inglis 49
Frances Daley -
Timothy Bee 11
-------------------------
Total 86
-------------------------
Transactions with the Asset Manager, London & Scottish Investments Limited and the Property Manager, London & Scottish Property Asset Management Limited
Stephen Inglis is a non-executive Director of Regional REIT Limited, as well as being the Chief Executive Officer of London & Scottish Investments Limited ("LSI") and a director of London & Scottish Property Asset Management Limited. The former company has been contracted to act as the Asset Manager of the Group and the latter as the Property Manager.
In consideration for the provision of services provided, the Asset Manager is entitled in each financial year (or part thereof) to 50% of an annual management fee on a scaled rate of 1.1% of the EPRA net asset value (NAV), reducing to 0.9% on net assets over GBP500,000,000. The fee shall be payable in cash quarterly in arrears.
In respect of each portfolio property the Asset Manager has procured and shall, with the Company in future, procure that London & Scottish Property Asset Management Limited is appointed as the Property Manager. A property management fee of 4% per annum is charged by the Property Manager on a quarterly basis: 31 March, 30 June, 30 September, and 31 December, based upon the gross rental yield. Gross rental yield means the rents due under the property's lease for the peaceful enjoyment of the property, including any value paid in respect of rental renunciations but excluding any sums paid in connection with service charges or insurance costs.
The Asset Manager is also entitled to a Performance Fee. Details of the Performance Fee are given below.
The following tables show the fees charged in the year and the amount outstanding at the end of the year:
Year ended Year ended
31 December 31 December
2017 2016
GBP'000 GBP'000
Asset management fees charged* 1,739 1,675
Property management fees charged* 1,972 1,698
Performance fees charged 814 115
-------------- --------------
Total 4,525 3,488
-------------- --------------
31 December 31 December
2017 2016
GBP'000 GBP'000
Total fees outstanding ** 1,882 563
-------------- --------------
* Including irrecoverable VAT charged where appropriate
** Including amounts to be settled by the issue of ordinary shares
Transactions with the Investment Manager, Toscafund Asset Management LLP
Martin McKay was a non-executive Director of Regional REIT Limited and the Chief Financial Officer of Toscafund Asset Management LLP until 7 July 2017. With effect from that date he was replaced on the Board of Regional REIT Limited by Tim Bee, Chief Legal Counsel of Toscafund Asset Management LLP. Toscafund Asset Management LLP has been contracted as the Investment Manager of the Group.
In consideration for the provision of services provided, the Investment Manager is entitled in each financial year (or part thereof) to 50% of an annual management fee on a scaled rate of 1.1% of the EPRA net asset value (NAV), reducing to 0.9% on net assets over GBP500,000,000. The fee is payable in cash quarterly in arrears.
The Investment Manager is also entitled to a Performance Fee. Details of the Performance Fee are given below.
The following tables show the fees charged in the year and the amount outstanding at the end of the year:
Year ended Year ended
31 December 31 December
2017 2016
GBP'000 GBP'000
Investment management fees charged* 1,732 1,914
Performance fees charged 814 115
Irrecoverable VAT on performance fees
charged (19) 19
-------------- --------------
Total 2,527 2,048
-------------- --------------
31 December 31 December
2017 2016
GBP'000 GBP'000
Total fees outstanding** 1,378 609
-------------- --------------
*Including irrecoverable VAT charged where appropriate
** Including amounts to be settled by the issue of Ordinary shares
Performance Fee
The Asset Manager and the Investment Manager are each entitled to 50% of a Performance Fee. The fee is calculated at a rate of 15% of the Total Shareholder Return in excess of the Hurdle Rate of 8% per annum for the relevant performance period. Total Shareholder Return for any financial year consists of the sum of any increase or decrease in EPRA NAV per Ordinary Share and the total dividends per Ordinary Share declared in the financial year. A Performance Fee is only payable in respect of a performance period where the EPRA NAV per Ordinary Share exceeds the High-water Mark which is equal to the greater of the highest year-end EPRA NAV Ordinary Share in any previous performance period or the Placing price (100p per Ordinary Share). The Performance Fee is to be calculated initially on 31 December 2018, and annually thereafter. Full details of the Managers' Performance Fee are given on pages 183-85 of the IPO Prospectus.
The Performance Fee for the first Performance Period, 6 November 2015 to 31 December 2018, is payable 50% in cash, and 50% in Ordinary Shares. The shares are to be issued at the prevailing price per Ordinary Share at the date of issue, and are to be locked-in for 1 year.
The Performance Fees for subsequent years are payable 34% in cash and 66% in Ordinary Shares, again at the prevailing price per share, with 50% of the shares locked-in for 1 year and 50% of the shares locked-in for 2 years.
Based on the EPRA NAV of the Group as at 31 December 2017 and assuming the Hurdle annual rate of return is exceeded on average over the remainder of the period to 31 December 2018 the Performance Fee liability, including irrecoverable VAT, for the period from commencement of trading to 31 December 2017 was estimated at GBP1,859,000 (31 December 2016: GBP249,000). This fee has been accrued in the consolidated financial statements. To reflect the nature of the future payment of the performance fee charge, 50% of the fee, along with the irrecoverable VAT thereon of GBPnil (31 December 2016: GBP19,000), has been accrued as a liability totalling GBP930,000 (31 December 2016: GBP134,000) and the 50% of the fee which is payable by the issue of Ordinary Shares has been reflected as a share based payment in the consolidated statement of changes in equity.
35. Subsequent events
On 1 February 2018, the Company announced the appointment of Frances Daley as a Non-Executive Director and as a member of the Audit Committee and Management, Engagement and Remuneration Committee.
EPRA Performance Measures
The Group is a member of the European Public Real Estate Association ("EPRA").
EPRA have developed and defined the following performance measures to give transparency, comparability and relevant of financial reporting across entities which may use different accounting standards. The Group is pleased to disclose the following measures which are calculated in accordance with EPRA guidance:
EPRA Performance Definition EPRA Performance Measure 31 December 31 December
Measure 2017 2016
================== ======================= ========================== =============== ===============
EPRA EARNINGS Earnings from GBP24,014,000 GBP21,073,000
operational EPRA Earnings
activities. 8.1p 7.7p
EPRA Earnings per
share (basic) 8.1p 7.7p
EPRA Earnings per
share (diluted)
================== ======================= ========================== =============== ===============
Company Company Specific GBP25,624 GBP21,322,000
Adjusted Earnings Measure Adjusted Earnings ,000
Earnings which adds back 7.8p
the performance EPRA Earnings per 8.6p
fee charged share (basic) 7.8p
in the accounts 8.6p
EPRA Earnings per
share (diluted)
================== ======================= ========================== =============== ===============
EPRA NAV Net Asset Value GBP395,701,000 GBP293,248,000
adjusted to
include properties EPRA Net Asset Value 106.1p 106.9p
and other investment
interest at EPRA NAV per share 105.9p 106.9p
fair value and (basic)
to exclude certain
items not expected EPRA NAV per share
to crystallise (diluted)
in a long-term
investment property
business model.
================== ======================= ========================== =============== ===============
EPRA NNNAV EPRA NAV adjusted EPRA NNNAV GBP392,899,000 GBP291,735,000
to include the
fair values EPRA NNNAV per share 105.4p 106.4p
of (i) financial (basic)
instruments, 105.1p 106.3p
(ii) debt and EPAR NNNAV per share
(iii) deferred (diluted)
taxes.
================== ======================= ========================== =============== ===============
Annualised rental
income based
on the cash
rents passing
at the balance
sheet date,
less non-recoverable
property operating
expenses, divided
by the market
value of the
property with
EPRA NET (estimated)
INITIAL purchasers'
YIELD costs. EPRA Net Initial Yield 6.5% 6.7%
================== ======================= ========================== =============== ===============
Estimated Market
Rental Value
(ERV) of vacancy
space divided
EPRA VACANCY by ERV of the
RATE whole portfolio EPRA Vacancy Rate 15.0% 17.8%
================== ======================= ========================== =============== ===============
EPRA COSTS Administrative EPRA Costs Ratio 29.7% 29.6%
RATIO & operating
costs (including EPRA Costs Ratio 19.0% 20.3%
& excluding (excluding direct
costs of direct vacancy costs)
vacancy divided
by gross rental
income
================== ======================= ========================== =============== ===============
Forthcoming Events
Q1 2018 Trading Update, AGM Statement and Dividend Announcement 17 May 2018 2018 Annual General Meeting 17 May 2018
Q2 2018 Dividend Announcement 31 August 2018
2018 Interim Results Announcement 11 September 2018
Q3 2018 Trading Update and Dividend Announcement 16 November 2018
Note: all future dates are provisional and subject to change.
Shareholder Information
Share Register Enquires:
Phone: 0871 664 0300
Calls cost 12p per minute plus your provider's access charge. If outside the United Kingdom call +44 371 664 0300. Calls outside the UK will be charged at applicable international rate. Lines are open between 09:00-17:30 Monday to Friday (excluding public holidays in England and Wales). For shareholder enquiries please email shareholderenquiries@linkgroup.co.uk.
Dividend History
Period Announcement Ex-Date Record Date Payment Total Dividend
Date Date Pence per share (pps)
---------- ------------- ------------ ------------ ------------ ---------------------------
Q4 2017 22 February 1 March 2 March 12 April 2.45pps
2018 2018 2018 2017
---------- ------------- ------------ ------------ ------------ ---------------------------
of which PID: 2.205pps
---------- ------------- ------------ ------------ ------------ ---------------------------
of which non-PID:0.245pps
---------- ------------- ------------ ------------ ------------ ---------------------------
Q3 2017 14 November 23 November 24 November 22 December 1.80pps
2017 2017 2017 2017
---------- ------------- ------------ ------------ ------------ ---------------------------
of which PID: 1.62pps
---------- ------------- ------------ ------------ ------------ ---------------------------
of which non-PID:0.18pps
---------- ------------- ------------ ------------ ------------ ---------------------------
Q2 2017 31 August 7 September 8 September 13 October 1.80pps
2017 2017 2017 2017
---------- ------------- ------------ ------------ ------------ ---------------------------
of which PID: 1.08pps
---------- ------------- ------------ ------------ ------------ ---------------------------
of which non-PID:
0.72pps
---------- ------------- ------------ ------------ ------------ ---------------------------
Q1 2017 25 May 8 June 2017 9 June 2017 14 July 1.80pps
2017 2017
---------- ------------- ------------ ------------ ------------ ---------------------------
of which PID: 1.26pps
---------- ------------- ------------ ------------ ------------ ---------------------------
of which non-PID:
0.54pps
---------- ------------- ------------ ------------ ------------ ---------------------------
Q4 2016 23 February 2 March 3 March 13 April 2.40pps
2017 2017 2017 2017
---------- ------------- ------------ ------------ ------------ ---------------------------
of which PID:2.1600pps
---------- ------------- ------------ ------------ ------------ ---------------------------
of which non-PID:0.2400pps
---------- ------------- ------------ ------------ ------------ ---------------------------
Q3 2016 17 November 24 November 25 November 22 December 1.75pps
2016 2016 2016 2016
---------- ------------- ------------ ------------ ------------ ---------------------------
of which PID:1.6345pps
---------- ------------- ------------ ------------ ------------ ---------------------------
of which non-PID:0.1155pps
---------- ------------- ------------ ------------ ------------ ---------------------------
Q2 2016 1 September 8 September 9 September 7 October 1.75pps
2016 2016 2016 2016
---------- ------------- ------------ ------------ ------------ ---------------------------
of which PID: 1.5013pps
---------- ------------- ------------ ------------ ------------ ---------------------------
of which non-PID:
0.2487pps
---------- ------------- ------------ ------------ ------------ ---------------------------
Q1 2016 27 May 2016 9 June 216 10 June 8 July 2016 1.75pps
2016
---------- ------------- ------------ ------------ ------------ ---------------------------
of which PID: 1.3579pps
---------- ------------- ------------ ------------ ------------ ---------------------------
of which non-PID:
0.3921pps
---------- ------------- ------------ ------------ ------------ ---------------------------
Full Year 7 March 2016 17 March 18 March 15 April 1.00pps
2015 2016 2016 2016
---------- ------------- ------------ ------------ ------------ ---------------------------
of which PID: 0.6572pps
---------- ------------- ------------ ------------ ------------ ---------------------------
of which non-PID:
0.3428pps
---------- ------------- ------------ ------------ ------------ ---------------------------
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR JBMRTMBMTBFP
(END) Dow Jones Newswires
March 22, 2018 03:00 ET (07:00 GMT)
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