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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Secure Income Reit Plc | LSE:SIR | London | Ordinary Share | GB00BLMQ9L68 | ORD 10P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 461.00 | 461.00 | 461.50 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
From Apr 2019 to Apr 2024
TIDMSIR
RNS Number : 5434Y
Secure Income REIT PLC
10 September 2020
10 September 2020
Secure Income REIT Plc
(the "Company" or the "Group")
Results for the six months ended 30 June 2020
Secure Income REIT Plc (AIM: SIR) (the "Company" or the "Group"), the specialist long term income UK REIT, today announces its results for the six months ended 30 June 2020.
This has been an extraordinary period for the Company and the economy. Almost every one of our tenants was producing record breaking results up to the point of the pandemic, in turn driving our strong performance which met an abrupt but hopefully temporary period of disruption. With the exception of our healthcare portfolio tenants who remained trading throughout the pandemic, two thirds of our tenants had to shut down their operations across the world as a result of Covid-19 related lockdowns and restrictions, including the assets owned by our Group. This has created unprecedented trading challenges for our leisure and hotel tenants who earned zero revenue for over half our reporting period. Our strong financial position and experienced external management team have, however, enabled us to take a proactive approach to provide support where needed, with the aim that affected businesses will be better placed to resume their growth trajectory once the effects of the pandemic diminish. In turn, we hope that this will also shore up the value of our assets and better position the Company for growth.
Whilst there is still considerable uncertainty resulting from the unknown future impact of Covid-19, the Company has a robust balance sheet with some GBP220 million of uncommitted and unfettered cash, well structured non-recourse debt, excellent real estate and leases which are very difficult to replicate. Our Investment Adviser remains as committed and aligned as ever to restoring the prospects of our shareholders.
Highlights
Hot Features
Premium
30 June 31 December
2020 2019 Change in period
----------------------------------- ------------- ------------- ------------------
Investment properties at external
valuation GBP1,958.7m GBP2,083.1m Down 6.0%
Net assets GBP1,244.1m GBP1,384.5m Down 10.1%
EPRA NTA GBP1,252.0m GBP1,391.3m Down 10.0%
EPRA NTA per share 386.4p 429.4p Down 10.0%
Net Loan To Value ratio 35.3% 31.9% Up 10.7%
Uncommitted Cash GBP219.6m GBP234.2m Down 6.2%
Passing rent before Covid-19 rent
concessions GBP111.8m GBP110.7m Up 1.0%
Weighted Average Unexpired Lease
Term 20.8 years 21.0 years Down 1.0%
----------------------------------- ------------- ------------- ------------------
Six months
Six months to
to 30 June 30 June
2020 2019 Change in period
------------------------------------------ ------------- ------------ ------------------
Total Accounting Return (8.1)% 7.0%
Adjusted EPRA earnings per share 5.1p 8.1p Down 37.0%
Earnings per share (35.5)p 23.1p
Dividends per share 8.4p 7.9p Up 6.3%
Latest dividend per share of 3.65
pence declared in July 2020 annualised,
as a percentage of EPRA NTA 3.8% 4.0% Down 5.0%
------------------------------------------ ------------- ------------ ------------------
-- Balance sheet strength and liquidity has enabled the Company to support certain of its tenants through the Covid-19 pandemic without compromising on its resilience and while paying a quarterly cash dividend throughout
-- Like for like portfolio valuation was down 6.0% to GBP1.96 billion in the period:
-- Budget hotel valuations adversely impacted by the Travelodge CVA account for 79% of the net decline in property valuation, with budget hotel values down by 20.3%
-- Leisure asset valuations down 5.5% -- Healthcare asset valuations up by 2.8%
-- Results reflect temporary rent concessions to support our leisure tenants and granted to Travelodge by way of its CVA:
-- Under current arrangements, total rents will revert to their previously contracted levels within 16 months
-- Travelodge rents are reduced by a total of GBP22.9 million over the period from 1 April 2020 to 31 December 2021, of which GBP4.8 million relates to cash flows in the period to 30 June 2020; 119 of the 123 hotel leases now include a landlord only break right exercisable at any time up to 20 November 2020
-- Merlin rents of GBP17.8 million for June and September 2020 have been deferred for collection in September 2021, with rental cash flows returning to their previously contracted levels at the December 2020 collection date
-- Stonegate pubs were granted a GBP1.1 million six month rent free period from April to September 2020 in exchange for strengthened lease alienation provisions and lease extensions to a 25 year term
-- Healthcare rents (34% of passing rents before concessions) have continued to be received on time, in full, with no concessions
-- Adjusted EPRA EPS of 5.1 pence per share after the full earnings impact of the rent concessions granted, which are reflected in this measure on a cash flow basis
-- The Group's 20.8 year Weighted Average Unexpired Lease Term remains one of the longest in the UK public real estate sector
-- Total Accounting Return of -8.1% in the period reflects a 43.0 pence per share fall in EPRA NTA net of 8.4 pence per share of dividend payments
-- Neither the Company nor the Investment Adviser has requested or received any form of Covid-19 Government support
-- The Management Team's alignment with all shareholders remains very strong, with an interest of 12.4% in the Company worth GBP155 million at 30 June 2020 EPRA NTA
Martin Moore, Non-Executive Chairman of the Company, commented:
"There is no doubt that Covid-19 has created very challenging conditions for the Company. Whilst our Key Operating Assets are in less cyclical sectors with high barriers to entry, the impact of the lockdown and sharply curtailed international travel has hit leisure and hotel businesses particularly hard across the globe. Having taken action in 2019 to further reduce the Company's leverage and maintain a much enhanced liquidity buffer, the Company was able to provide appropriate assistance to those tenants who needed it to protect shareholder value while maintaining the payment of quarterly dividends, without the Company having had any recourse to Government financial support or tax deferrals.
Negative real interest rates continue to pose a challenge for investors to protect their savings against inflation. This environment sets the investment case for long-dated inflation-linked rental income, including for Secure Income REIT, albeit one which has been interrupted by the impact of Covid-19. We retain the balance sheet flexibility to respond to further challenges, and the Board and our Management Team remain energised and fully aligned with our shareholders. Beyond the current disruption lies significant potential for recovery and the resumption of the strong performance seen from flotation in 2014 up to February of this year."
For further information on the Company, please contact:
Secure Income REIT Plc +44 20 7647 7647 Nick Leslau enquiries@SecureIncomeREIT.co.uk Mike Brown Sandy Gumm Stifel Nicolaus Europe Limited +44 20 7710 7600 (Nominated Adviser) stifelsecureincomereit@stifel.com Mark Young Stewart Wallace FTI Consulting LLP +44 20 3727 1000 Dido Laurimore SecureIncomeREIT@fticonsulting.com Claire Turvey Eve Kirmatzis
Interim Results Presentation
Secure Income REIT will be holding a presentation for analysts and investors today at 9am. If you would like to attend, please contact FTI Consulting on 020 3727 1000, or email SecureIncomeREIT@fticonsulting.com.
The presentation will be on the Company's website www.SecureIncomeREIT.co.uk and a conference call facility will be available. The dial-in details are:
Participants, - Local, United Kingdom : +44 (0)330 336 9411 Confirmation code : 7970289
Webcast link : https://webcasting.brrmedia.co.uk/broadcast/5f3e4654b14d87262643a166
About Secure Income REIT Plc
Secure Income REIT Plc ("SIR") is a specialist UK REIT, investing in real estate assets that provide long term rental income with inflation protection.
The Company owns a GBP1.96 billion portfolio at the 30 June 2020 independent external valuation. With net assets of GBP1.25 billion and some GBP220 million of Uncommitted Cash held at 30 June 2020, the Company has been well positioned to provide support to its tenants through the Covid-19 pandemic while maintaining its strong financial discipline and balance sheet strength.
SIR has a highly experienced board, chaired by Martin Moore, and is advised by Prestbury Investment Partners Limited. Prestbury is owned and managed by Nick Leslau, Mike Brown, Tim Evans, Sandy Gumm and Ben Walford, a team with a long-standing and successful track record in real estate investment and asset management and, with an investment worth GBP155 million in the Company (at 30 June 2020 EPRA NTA), very close alignment with the interests of SIR shareholders.
The Company is a UK REIT which floated on the AIM market of the London Stock Exchange in June 2014.
The Company's LEI is 213800M1VI451RU17H40
Further information on Secure Income REIT is available at www.SecureIncomeREIT.co.uk.
Forward looking statements
This document includes forward looking statements which are subject to risks and uncertainties. You are cautioned that forward looking statements are not guarantees of future performance and that if risks and uncertainties materialise, or if the assumptions underlying any of these statements prove incorrect, the actual results of operations and financial condition of the Group may differ materially from those made in, or suggested by, the forward looking statements. Other than in accordance with its legal or regulatory obligations, the Company undertakes no obligation to review, update or confirm expectations or estimates or to release publicly any revisions to any forward looking statements to reflect events that occur or circumstances that arise after the date of this document.
Chairman's Statement
Dear shareholder,
There is no doubt that Covid-19 has created very challenging conditions for the Company. Whilst our Key Operating Assets are in less cyclical sectors with high barriers to entry, the impact of the lockdown and sharply curtailed international travel has hit leisure and hotel businesses particularly hard across the globe. Having taken action in 2019 to further reduce the Company's leverage and maintain a much enhanced liquidity buffer, the Company was able to provide appropriate assistance to those tenants who needed it while maintaining the payment of quarterly dividends, without the Company having had any recourse to Government financial support or tax deferrals.
The impact of the rent concessions and the current investment market conditions on the Group for the six month period to 30 June 2020 has, disappointingly, ended our unbroken record of delivering strong Total Accounting Returns, rising net assets and falling leverage. However, the concessions granted to our tenants are all temporary, with the full rent roll due to return to its original contractual level within the next 16 months. We have the balance sheet resilience to provide further support to our tenants should it become necessary and we remain in close dialogue with all of them while they gradually restore their businesses.
Results and financial position
The Group's net asset value per share at 30 June 2020 reported under IFRS was 383.9 pence, down 10.5% from 428.8 pence at 31 December 2019. Using the industry standard EPRA measures for ease of comparison with other quoted real estate businesses, the Group's EPRA NTA per share at 30 June 2020 was 386.4 pence, down 10.0% since 31 December 2019.
IFRS Net Assets EPRA NTA
---------------------------------- ------------------ ------------------
Pence per Pence per
GBPm share GBPm share
---------------------------------- ------- --------- ------- ---------
At 1 January 2020 1,384.5 428.8 1,391.3 429.4
Investment property revaluation (142.0) (43.9) (132.1) (40.8)
Other retained earnings 28.8 8.9 20.0 6.2
Dilution from issue of incentive
fee shares - (1.5) - -
Dividends paid (27.2) (8.4) (27.2) (8.4)
At 30 June 2020 1,244.1 383.9 1,252.0 386.4
---------------------------------- ------- --------- ------- ---------
The Total Accounting Return for the period was minus 8.1%, with the negative return for the period principally attributable to the effects of the rent concessions and the impact of the pandemic on the investment market at the date of valuation.
As explained in more detail in the Investment Adviser's Report, 79% of the fall in property valuation is attributable to the Travelodge Hotels. The full effect of the rent concessions granted as at 30 June 2020 has been taken into account in these results, and no further concessions have been granted since that date. We note that the 30 June 2020 valuation date falls after the effective date of the Travelodge CVA and after the other rent concessions had been agreed with tenants, but before the UK Government permitted the commencement of the release of the lockdown measures for those businesses.
The impact on the Group's reported earnings of the support provided to our tenants is, unfortunately, rather complicated by the requirements of accounting standards which, broadly, mean that we must spread the impact of rent reductions over the whole remaining term of the leases. As those leases are unusually long, this means that rent reductions that are material over the concession period when cash flow is reduced (1 April 2020 to 31 December 2021) must be spread evenly in the income statement over the full term remaining on those leases, which is over 22 years on average. The impact on the income statement reported under the IFRS rules is therefore relatively modest. We believe that shareholders and other users of these reports are best served by an earnings measure that much more closely reflects the cash flow earnings of the business, so we retain our focus, as we always have done, on Adjusted EPRA Earnings which remove these rent smoothing effects. These adjustments are explained in the Investment Adviser's Report which follows this report.
The reduction in earnings and our changed income profile over the short term led the Board to carefully reconsider the Company's dividend policy. Historically, since we commenced payment of dividends four years ago, we have paid out all of the Company's Adjusted EPRA EPS in cash each quarter, which has resulted in dividends per share increasing year on year, consistent with our inflation protected rental income stream which has also grown every year. Having regard to the temporary nature of the rent concessions, the significant unfettered cash held by the Company, our headroom on debt covenants and the status of the easing of the lockdowns in the UK and elsewhere, we have continued to pay dividends at the levels that would have been achieved absent the rent concessions, as explained in more detail in the Investment Adviser's report. That decision remains subject to our continuing reassessment of those crucial factors underpinning the appropriateness of maintaining the dividend payments.
The share price on 30 June 2020 was 270.0 pence per share, a discount of 30% to the EPRA NTA at that date. Since we last reported results to shareholders in March 2020, Board members and the Management Team invested a further GBP556,000 in shares purchased in the market, adding to their already significant holding. Share buy-backs by the Company have been considered, but to date have not been deemed a prudent use of the Company's liquidity buffer given the resulting increase in the Company's leverage, an increase which is currently considered inappropriate at this time of heightened uncertainty.
Outlook
The easing of restrictions has allowed over 90% of our leisure and hotel assets to reopen in the short period since our tenants were permitted to do so, which is expected to rise to 95% by 1 October 2020. Whilst the future path of the pandemic remains uncertain, the UK Government has made it clear that it is keen to avoid the cost and disruption of a second national lockdown, instead imposing travel quarantines and local restrictions. In the meantime, the Bank of England's base rate stands at an historic low of 0.1%, ten year gilts yield little more at just 0.2% and, with widespread dividend cuts across the quoted universe, it has become increasingly difficult for savers to earn a satisfactory income return. At over 100% of GDP, the high level of UK Government debt is likely to usher in an era of financial repression, where interest rates are kept below the rate of inflation for a protracted period in order to reduce the real value of the debt; a policy that worked successfully over some two decades after World War Two.
Negative real interest rates pose a challenge for investors to protect their savings against inflation. This environment underpins the investment case for long-dated inflation-linked rental income, including for Secure Income REIT, albeit one which has been interrupted by the impact of Covid-19. We retain the balance sheet flexibility to respond to further challenges, and the Board and our Management Team remain energised and fully aligned with our shareholders. Beyond the current disruption lies significant potential for recovery and the resumption of the strong performance seen from flotation in 2014 up to February of this year.
Martin Moore
Chairman
10 September 2020
Investment Adviser's Report
Prestbury Investment Partners Limited, the investment adviser to Secure Income REIT Plc, presents its report on the operations of the Group for the six months ended 30 June 2020. Also included with these reports, following the interim financial statements, is Supplementary Information which includes calculations of the various performance measures referred to in this report.
The results presented in these interim financial statements reflect the significant impact of the Covid-19 pandemic, including the effects of the assistance provided by the Group to a number of its tenants operating in the leisure and budget hotel sectors. This support, and the general market uncertainty which has arisen during the pandemic, has continued into the second half of the year. The path of the pandemic and the shape of any recovery in the UK and global economies remain uncertain. With the easing of restrictions we are starting to see business activity return gradually, whilst the Group's robust balance sheet and its strong liquidity position should provide further flexibility in meeting further challenges or indeed opportunities.
Tenant support provided
The tenants of the Group's healthcare assets, which account for 34% of passing rent before concessions and 39% of investment properties by value at 30 June 2020, remained trading throughout the UK lockdown and beyond. No support from the Company has been requested nor concessions required for those tenants. However, the sudden, forced closure of all of the Group's leisure assets and the majority of its budget hotels created intense operational and liquidity pressures on certain tenants.
No additional support measures have been provided since the Company announced a summary of concessions in place on 24 June 2020:
-- Merlin Entertainments Limited took prudent action in April to significantly bolster its liquidity position, and part of the package of measures taken by Merlin was an open and constructive discussion and then agreement with the Company to reschedule certain rental payments. Deferrals of rent were agreed ahead of the rent payment date, deferring amounts due in June 2020 and September 2020 amounting to GBP17.8 million in total before reverting to the full amounts due from December 2020. Payment of the deferred rent is due in full in September 2021.
-- Travelodge Hotels Limited was unable to come to suitable bilateral agreements for rent concessions with its many landlords and launched a Company Voluntary Arrangement ("CVA") which was approved by its creditors on 19 June 2020. As a consequence of the CVA, rent of GBP14.4 million has been foregone by the Group this year of which GBP4.8 million relates to the period ended 30 June 2020, and GBP8.6 million is foregone in 2021, after which rents return to the levels originally contracted. Certain other lease amendments are also now in effect, including landlord only break options which are in place on 119 of the Group's 123 Travelodge leases, allowing a break option exercisable before 20 November 2020 at no cost to the Company on 114 leases (representing 83% of the hotels passing rent) and before 31 December 2021 at no cost on the remaining five leases (5% of the hotels passing rent). Unusually for a CVA, Travelodge did not disclaim any of its leases, preferring to keep its entire trading estate intact - perhaps a reflection of the fact that the business had been performing well ahead of the pandemic, with a strong five year track record of profits growth and sector outperformance in its key metric of revenue per available room.
-- A six month rent free period has been agreed in respect of the Stonegate pubs portfolio from 1 April 2020, a total reduction of GBP1.1 million of which GBP0.5 million relates to the period ended 30 June 2020, in consideration for extending lease terms from 19.6 to 25.0 years and strengthening the lease alienation clauses.
The accounting policies for rent concessions are explained in the Financial Review section of this Investment Adviser's Report and in note 2 to the interim financial statements.
The impact of these concessions on the Group's rental cash flows for the 2020 and 2021 financial years is set out below, assuming that there are no changes in the composition of the portfolio or further variations to any of the leases.
Actual Contracted Contracted Contracted Contracted Contracted
Six months Six months Year to Six months Six months Year to
to 30 June to 31 Dec 31 Dec to 30 June to 31 Dec 31 Dec
2020 2020 2020 2021 2021 2021
Annual cash rents GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------- ----------- ----------- ---------- ----------- ----------- ----------
Leisure attractions
deferral (8.9) (8.9) (17.8) - 17.8 17.8
Hotels rent reduction (4.8) (9.6) (14.4) (4.3) (4.3) (8.6)
Rent on pubs reduced
in exchange for improved
lease terms (0.5) (0.6) (1.1) - - -
--------------------------- ----------- ----------- ---------- ----------- ----------- ----------
Cash flow impact on
rent (14.2) (19.1) (33.3) (4.3) 13.5 9.2
Contractual rent at
start of period 55.3 55.4 110.7 56.0 56.0 112.0
Fixed rental uplifts 0.3 0.7 1.0 1.0 1.4 2.4
--------------------------- ----------- ----------- ---------- ----------- ----------- ----------
Rents after temporary
concessions 41.4 37.0 78.4 52.7 70.9 123.6
--------------------------- ----------- ----------- ---------- ----------- ----------- ----------
The impact on Adjusted EPRA EPS has a slightly different profile over 2020, because of the deferral of the rents due from Merlin for June 2020 are rents receivable in advance, therefore only seven days' of that amount due relates to earnings in the first half of the year. The impact on Adjusted EPRA earnings, assuming that there are no changes in the composition of the portfolio or further variations to any of the leases, is:
Actual Contracted Contracted Contracted Contracted Contracted
Six months Six months Year to Six months Six months Year to
to 30 June to 31 Dec 31 Dec to 30 June to 31 Dec 31 Dec
Adjusted EPRA earnings: 2020 2020 2020 2021 2021 2021
rent GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------- ----------- ----------- ---------- ----------- ----------- ----------
Leisure attractions
deferral (0.6) (17.2) (17.8) - 17.8 17.8
Hotels rent reduction (4.8) (9.6) (14.4) (4.3) (4.3) (8.6)
Rent on pubs reduced
in exchange for improved
lease terms (0.5) (0.6) (1.1) - - -
--------------------------- ----------- ----------- ---------- ----------- ----------- ----------
Adjusted EPRA earnings
impact (5.9) (27.4) (33.3) (4.3) 13.5 9.2
--------------------------- ----------- ----------- ---------- ----------- ----------- ----------
Adjusted EPRA earnings
impact (pence per share) (1.9) (8.4) (10.3) (1.3) 4.2 2.9
--------------------------- ----------- ----------- ---------- ----------- ----------- ----------
Costs of GBP0.7 million (0.2 pence per share) have also been charged to the income statement in the six months to 30 June 2020.
These concessions are designed in each case to give the tenants the breathing space needed to assist with the recovery of their businesses and to support the Company's return to its growth trajectory. Under current arrangements, all rents arising from the Group's property portfolio are contracted to revert to their original contractual levels by 1 January 2022 at the latest.
Rent collections
Tenants accounting for 41% of the Group's passing rents before concessions have not entered into any rent concession agreements. All rents due from them have been collected on time and nothing is outstanding from them at 30 June 2020 or at the date of this report. 34% of the pre concession passing rents are currently subject to rent deferral (32%) or a rent free period (2%) so no rent was due from those tenants at 30 June 2020 or currently. The vast majority of the balance relates to Travelodge, which has abided by its revised payment terms since its CVA and no amounts were due from them at 30 June 2020 or have been overdue from them since. One tenant accounting for less than 0.2% of the passing rents before concessions has been able to reopen following the easing of lockdown restrictions but has been unable to reach agreement on revised payment terms. As at 30 June 2020 GBP30,000 was owing from them and at the date of this report GBP75,000 is past due.
The portfolio
The Group held 161 properties at 30 June 2020 (no change since 31 December 2019) with passing rent before temporary concessions of GBP111.8 million, up from GBP110.7 million at 31 December 2019.
Passing
rent before
temporary
Number of Valuation concessions
properties GBPm GBPm
----------------------------- ----------- --------- ------------
At the start of the period 161 2,083.1 110.7
Change at constant currency - (132.0) 0.7
Exchange rate movements - 7.6 0.4
At the end of the period 161 1,958.7 111.8
----------------------------- ----------- --------- ------------
Portfolio valuation
The portfolio is valued by qualified independent external valuers every six months and there was a 6.0% net decrease in valuation over the six month period. The most material movement was a 20.3% reduction in the valuation of the budget hotels, reflecting the impact of the CVA rent reductions and an increase in the blended Topped Up Net Initial Yield from 5.5% to 6.9%.
Leisure Healthcare Budget hotels Total
-------------- ------------- --------------- ---------------
Passing rent Change Change Change Change
before concessions GBPm % GBPm % GBPm % GBPm %
--------------------- ------ ------ ----- ------ ------ ------- ------- ------
31 Dec 2019 46.8 35.6 28.3 110.7
Change in rent (0.3) (0.8)% 1.0 2.8% - - 0.7 0.6%
Exchange rate
movement 0.4 1.0% - - - - 0.4 0.4%
30 June 2020 46.9 0.2% 36.6 2.8% 28.3 - 111.8 1.0%
--------------------- ------ ------ ----- ------ ------ ------- ------- ------
Leisure Healthcare Budget hotels Total
-------------- ------------- --------------- ---------------
Change Change Change Change
Valuation GBPm % GBPm % GBPm % GBPm %
--------------------- ------ ------ ----- ------ ------ ------- ------- ------
31 Dec 2019 851.9 748.4 482.8 2,083.1
Revaluation (54.7) (6.4)% 20.7 2.8% (98.0) (20.3)% (132.0) (6.4)%
Exchange rate
movement 7.6 0.9% - - - - 7.6 0.4%
30 June 2020 804.8 (5.5)% 769.1 2.8% 384.8 (20.3)% 1,958.7 (6.0)%
--------------------- ------ ------ ----- ------ ------ ------- ------- ------
The movement in valuation in the period comprises:
Six months Six months
to 30 June to 30 June
2020 2019
GBPm GBPm
----------------------------------------------------- ----------- -----------
Investment properties at the start of the period 2,083.1 2,306.7
----------------------------------------------------- ----------- -----------
Portfolio held throughout the period:
Revaluation movement at constant currency (132.0) 48.9
Currency translation movements on Euro denominated
investment properties 7.6 (0.2)
----------------------------------------------------- ----------- -----------
Like for like portfolio revaluation (124.4) 48.7
Budget hotel disposals - (4.8)
Net change in portfolio valuation (124.4) 43.9
----------------------------------------------------- ----------- -----------
Investment properties at the end of the period 1,958.7 2,350.6
----------------------------------------------------- ----------- -----------
The leisure and budget hotels valuations as at 30 June 2020 have been reported by the independent external valuers as being subject to material valuation uncertainty in light of Covid-19. Based on the provisions of the Royal Institution of Chartered Surveyors guidelines in force at that time, this was the case for the majority of property valuations in the UK as at that date where properties had been forced to close. The healthcare assets, which account for 39% of assets at independent valuation, are not subject to the material valuation uncertainty proviso. Material valuation uncertainty does not mean that the valuations cannot be relied upon, but that less certainty can be attached to them than would otherwise be the case.
In the case of the budget hotels portfolio, the date of the valuation was after the date of approval of the CVA but prior to the expiry of the CVA challenge period. That challenge period subsequently expired without any successful challenge being mounted, but was a relevant factor at the valuation date.
Further details of valuations are given in note 10 to the interim financial statements.
In reaching their assessment of market values, the independent external valuers had all details of the rent concessions that have been agreed, and no additional concessions have been agreed since the valuation date. The valuations therefore take into account the full effect of the concessions agreed to date and also recognise that under the terms of all of the concessions, rental income returns to its previously contracted levels by, at the latest, 1 January 2022.
Yields
Leisure Healthcare Budget hotels Total
--------------- --------------- --------------- ---------------
30 June 31 Dec 30 June 31 Dec 30 June 31 Dec 30 June 31 Dec
2020 2019 2020 2019 2020 2019 2020 2019
---------------- ------- ------ ------- ------ ------- ------ ------- ------
Topped Up Net
Initial Yield
* 5.39% 5.07% 4.46% 4.46% 6.90% 5.50% 5.32% 4.95%
Running Yield
by
1 January
2022 5.71% 5.40% 4.58% 4.71% 7.31% 5.83% 5.58% 5.25%
---------------- ------- ------ ------- ------ ------- ------ ------- ------
* Topped Up Net Initial Yield ignores the temporary rent concessions. The healthcare valuation and yields take no account of any uplift from an outstanding May 2018 open market review on the Ramsay hospitals; the Ramsay rents account for 94% of the healthcare rents at 30 June 2020
the leisure and budget hotels Running Yields are calculated using the independent external valuers' estimates of RPI averaging 2.5% per annum
The growth in like for like passing rent before concessions was 1.0% over the period and follows the completion of reviews on 65% of portfolio rents in the period and also the expiry of the car park lease at Manchester Arena, where the previous passing rent was GBP1.3 million per annum and where the new car park operator had been unable to fully reopen the car park in the period as a result of the lockdown restrictions.
Basis of rent reviews
While the rents on three of the portfolios have been subject to deferrals or reductions in the short term, on the basis of the concessions granted to date all rental cash flows are contracted to revert to their originally contracted terms by, at latest, 1 January 2022. Considering that medium to longer term trajectory and the expected reversion to originally contracted terms, the income arising on the portfolio benefits from fixed contractual rental uplifts which average 2.8 % per annum on 42% of the income and upwards only RPI-linked rent reviews on the remaining 58%. 68% of the rent is subject to annual review.
Temporary rent concessions have been agreed with both Merlin Entertainments Limited and Travelodge Hotels Limited, where in each case the leases include upward only RPI-linked rent review provisions (in the case of Merlin, on the UK assets only). The terms of the concessions are such that the contractual provisions relating to the rent reviews continue throughout the relevant concession period, with any rental increases that arise being payable at the end of that period, which is September 2021 in the case of Merlin and January 2022 for Travelodge. Consequently, the Group retains the potential to capture any RPI-linked rental uplifts.
31 December
30 June 2020 2019
-------------------------------- ----------------------------------- -----------
Reviewed
Percentage of contracted rents Reviewed three or Total Total
before temporary concessions annually five yearly portfolio portfolio
-------------------------------- --------- ------------ ---------- -----------
Upwards only RPI:
Uncapped 25% 27% 52% 53%
Collared 4% 2% 6% 6%
-------------------------------- --------- ------------ ---------- -----------
Total upwards only RPI-linked
reviews 29% 29% 58% 59%
-------------------------------- --------- ------------ ---------- -----------
Fixed uplifts:
Annual reviews 39% - 39% 38% Five-yearly reviews - 3% 3% 3% -------------------------------- --------- ------------ ---------- ----------- Total fixed uplifts 39% 3% 42% 41% -------------------------------- --------- ------------ ---------- ----------- Total portfolio 68% 32% 100% 100% -------------------------------- --------- ------------ ---------- -----------
Lease lengths
The leases on the Group's portfolio are very long, with a Weighted Average Unexpired Lease Term of 20.8 years without tenant break from 30 June 2020. Only 2% of the Group's leases expire within 16.9 years of the balance sheet date.
Leisure Healthcare Budget hotels Total
--------------- --------------- --------------- ---------------
30 June 31 Dec 30 June 31 Dec 30 June 31 Dec 30 June 31 Dec
2020 2019 2020 2019 2020 2019 2020 2019
------------------ ------- ------ ------- ------ ------- ------ ------- ------
Weighted Average
Unexpired Lease
Term (years) 22.8 22.5 17.3 17.8 21.9 22.4 20.8 21.0
------------------ ------- ------ ------- ------ ------- ------ ------- ------
The increase in the Weighted average Unexpired Lease Term of the Leisure assets is attributable to the extensions of the Pubs leases to a term of 25.0 years as at 30 June 2020, which was negotiated in exchange for a six month rent reduction (GBP1.1 million of cash flow).
No material vacancies or landlord costs
The portfolio is fully let. All occupational leases are on full repairing and insuring ("FRI") terms, meaning that property running costs are low and there is no material capital expenditure requirement. There is one small income stream that arises from an operating agreement rather than an FRI lease, which currently accounts for a negligible percentage of the Group's income.
Portfolio total rents before temporary concessions
The Group's principal lease counterparties, analysed by contracted rent before temporary concessions, are as follows:
30 June 31 December
2020 2019
Tenant/guarantor GBPm GBPm
--------------------------------------- --------- -------------
Merlin Entertainments Limited * 35.4 34.5
Ramsay Health Care Limited 34.4 33.5
Travelodge Hotels Limited 28.3 28.3
SMG Europe Holdings Limited & SMG 4.0 4.0
The Brewery on Chiswell Street Limited 3.4 3.4
Orpea SA 2.2 2.1
Stonegate Pub Company Limited 2.2 2.0
Others 1.9 2.9
111.8 110.7
--------------------------------------- --------- -------------
* GBP6.9 million (31 December 2019: GBP6.5 million) of the Merlin rents are Euro denominated
Further information on the principal portfolio tenants and guarantors is given within the portfolio analyses that follow.
Leisure assets ( 41 % of portfolio value)
30 June 31 December
2020 2019
Contracted rents before temporary rent concessions GBPm GBPm
--------------------------------------------------- --------- -------------
UK assets 40.0 40.3
German assets (at constant Euro exchange rate) 6.9 6.5
46.9 46.8
--------------------------------------------------- --------- -------------
The leisure properties comprise four well known visitor attractions let to subsidiaries of Merlin Entertainments Limited together with Manchester Arena, the Brewery events venue on Chiswell Street in the City of London and a portfolio of 18 freehold high street pubs located in England and Scotland.
The Merlin assets include two of the UK's top three theme parks, Alton Towers and Thorpe Park, together with the Alton Towers hotel and Warwick Castle. The German assets operated by Merlin are Heide Park theme park in Soltau, Saxony, which is the largest in Northern Germany, and its adjacent hotel. These assets are held freehold and are let to subsidiaries of Merlin Entertainments Limited, which owns all of Merlin's operating businesses and which is the guarantor of all lease obligations for these assets. Measured by the number of visitors, Merlin is Europe's largest operator of leisure attractions and the second largest in the world behind Disney.
The average term to expiry of the Merlin leases is 22.0 years without break from 30 June 2020 and the tenants have two successive rights to renew them for 35 years at the end of each term. The leases are on full repairing and insuring terms. There are upwards only uncapped RPI-linked rent reviews every June throughout the term (based on RPI over the year to April) for the UK properties, which in 2020 resulted in a rental increase of 1.5%. The German properties are subject to fixed annual increases of 3.34% every July throughout the term, as a result of which the German rents increased from GBP6.9 million to GBP7.2 million on 29 July 2020 (translated at the 30 June 2020 exchange rate).
By mutual agreement in advance of the June rent due date, rents receivable for the June 2020 and September 2020 quarters have been deferred for payment in September 2021, timed to coincide with the tenant's expectation of their peak liquidity position. Among their other measures to meet the challenges of the pandemic, the Merlin group took action to access the capital markets by way of a EUR500 million bond issue (upsized from EUR400 million), which was announced on 24 April 2020, and acted to further strengthen its liquidity position by drawing available debt facilities in full, managing their cash flows and resource allocation, and striking rent deferral deals with certain of its other landlords. The lease guarantor is the owner of the Merlin group's entire international operations, some of which remained open throughout the pandemic but most of which were subject to local lockdowns and restrictions at varying times. Heide Park reopened on 25 May 2020 and Alton Towers, Thorpe Park and Warwick Castle on 4 July 2020.
Manchester Arena is a strategic site of eight acres, held long leasehold and located above Manchester Victoria Railway and Metrolink station. It comprises the UK's largest indoor arena by capacity, some 160,000 sq ft of office and leisure space, a multi-storey car park with approximately 1,000 spaces, and advertising hoardings. The leases on the Manchester site as a whole have an average term to expiry of 19.0 years from 30 June 2020 and produce passing rent, net of head rent, of GBP5.2 million per annum at that date.
The Arena is let on a full repairing and insuring lease to SMG and SMG Europe Holdings Limited, both wholly owned subsidiaries of ASM Global, the world's largest venue management company. The lease term is 25.0 years unexpired without break from 30 June 2020 and rent is reviewed annually every June in line with RPI collared between 2% and 5%, which in 2020 resulted in a rental increase of 2.0%. While the Arena remains closed given the current restrictions on large gatherings, ASM Global operates over 322 venues in 21 countries with pro forma annualised revenues for 2019 estimated at some $500 million. The offices and ancillary leisure space at Manchester Arena are let to tenants including Serco, Citipark, Unison, JCDecaux and go-karting operator TeamSport, all of which are now open for business and the majority of which remained so throughout the lockdown.
The Brewery on Chiswell Street is a predominantly freehold investment let to a specialist venue operator on a full repairing and insuring lease. It is the largest catered event space in the City of London and is located within five minutes' walk of the Moorgate entrance to the new Crossrail Station at Liverpool Street. The lease term to expiry is 36.0 years without break from 30 June 2020. The lease terms include five-yearly fixed uplifts of 2.5% per annum compounded and the passing rent is GBP3.4 million per annum as at 30 June 2020. The next rental uplift to GBP3.8 million will take effect in July 2021. The venue has been closed since commencement of the lockdown given the current restrictions on large gatherings but we understand that, under current government guidance, the venue is expected to reopen on 1 October 2020.
The portfolio of 18 high street pubs produces passing rent before temporary concessions of GBP2.2 million per annum as at 30 June 2020 and the leases have an average term to expiry from that date of 25.0 years without break. Rents are subject to five-yearly RPI-linked increases collared between 1% and 4% per annum compounded. The rent reviews in February 2020 resulted in an increase in passing rent of GBP0.2 million per annum (13.2% or 2.5% per annum compounded). Prior to 30 June 2020, a six month rent free period was exchanged for improved alienation provisions within the leases and a lease extension which increased the term to expiry without break for these assets by five and a half years. While the pubs owned by the Group closed at commencement of the UK lockdown, all have since reopened.
The pubs are let on individual full repairing and insuring leases either to, or guaranteed by, Stonegate Pub Company Limited. Stonegate acquired Ei Group Plc in a GBP1.3 billion acquisition which completed in March 2020. The combined group is the largest pub company in the UK, with 4,749 pubs as at 12 April 2020, 88% by value of which are held freehold by Stonegate.
Healthcare assets ( 39% of portfolio value)
30 June 31 December
2020 2019
Contracted rents GBPm GBPm
---------------------------- --------- -------------
Ramsay hospitals 34.4 33.5
London psychiatric hospital 2.2 2.1
36.6 35.6
---------------------------- --------- -------------
The healthcare assets are 11 freehold private hospitals located throughout England and let to a subsidiary of Ramsay Health Care Limited, the listed Australian healthcare company, and a private psychiatric hospital in central London, held freehold and let to Groupe Sinoué, a French company specialising in mental health care.
The Ramsay hospitals are let on full repairing and insuring leases with a term to expiry at 30 June 2020 of 16.9 years without break. The rents increase in May each year by a minimum of a fixed 2.75% per annum throughout the lease term. Following the May 2020 fixed uplifts, the rents on the hospitals portfolio increased from GBP33.5 million to GBP34.4 million. In addition, there is an upwards only open market review within each lease as at 3 May 2018 and then in May 2022 and every five years thereafter. The May 2018 open market review remains outstanding as it is subject to a formal arbitration process which is ongoing, but which has been delayed as a result of the practical limitations on the arbitrator's inspection of the hospitals during the Covid-19 pandemic. These interim financial statements take no account of any potential increase in rental income that may arise from it.
The leases on the Ramsay hospitals are all guaranteed by Ramsay Health Care Limited, the listed parent company of one of the top five private hospital operators in the world and a constituent of the ASX 50 index of Australia's largest companies, with a market capitalisation at 8 September 2020 (and using the exchange rate on that date) of GBP8.3 billion.
The London psychiatric hospital is let on a full repairing and insuring lease with a term to expiry at 30 June 2020 of 24.1 years without break. The rent increases in May each year by a fixed 3.0% per annum throughout the lease term and as a result increased from GBP2.1 million to GBP2.2 million in May 2020. The lease is guaranteed by Orpea SA, a leading European operator of nursing homes, post-acute care and psychiatric care, listed on Euronext Paris with a market capitalisation at 8 September 2020 (and using the exchange rate on that date) of GBP5.8 billion.
Budget hotel assets (20% of portfolio value)
At 30 June 2020, the Group owned 123 Travelodge hotels in England, Wales and Scotland with contracted rent before temporary concessions of GBP28.3 million. The properties are let to Travelodge Hotels Limited which is the main operating company within the Travelodge group trading in the UK, Ireland and Spain. Travelodge is the UK's second largest budget hotel brand, with 589 hotels and over 45,000 rooms as at 30 June 2020.
Unlike the consensual agreements with our leisure tenants, Travelodge's shareholders adopted a very different approach to resolving the immediate liquidity challenges brought about by the UK lockdown, ultimately resulting in a combative and hard fought CVA which was approved by Travelodge creditors on 19 June 2020.
As a consequence of the CVA, GBP14.4 million of rent has been foregone this year of which GBP4.8 million relates to the six months ended 30 June 2020, and GBP8.6 million has been foregone for 2021, after which rents are due to return to the levels originally contracted for the period from 1 January 2022. The rent owed by Travelodge from 1 July to 31 December 2020 totals GBP4.6 million, of which GBP1.6 million is receivable quarterly in advance as has always been the case in the Travelodge leases, and the balance is payable monthly in advance. The total amount receivable in 2021 is GBP19.7 million, of which GBP3.3 million is receivable quarterly in advance and GBP16.4 million monthly in advance. From 1 January 2022 all rents are receivable quarterly in advance.
It is typical for companies undergoing a CVA to hand back leases on properties they no longer wish to operate, but Travelodge has opted to retain the whole of its portfolio, subject to landlord only break options on certain of their hotels. It is uncommon in a CVA to see rents reverting to their originally contracted levels following a rent concession period. We believe that these unusual features reflect Travelodge management's faith in the quality of their business before the pandemic struck, with a strong five year performance track record and a leading position within the UK budget hotels market.
Certain other lease amendments are also now in effect, including landlord only break options which are available on 119 of the Group's 123 Travelodge leases, exercisable at no cost before 20 November 2020 on 114 leases (representing 83% of the hotels by passing rent before concessions) and before 31 December 2021 on the remaining five leases (5% of the hotels by passing rent before concessions). The majority by number of Travelodge's property owners were granted these landlord only break options. Travelodge has since announced that, through a combination of hotels not granted termination rights and those where landlords opted to extend leases and therefore forego their break options, they had by 2 September 2020 secured hotels representing some two thirds of their 2019 UK EBITDA, with nearly three months left of the break option period.
Travelodge is a major brand with very high levels of brand recognition and a management team that has proved its competence with its strong pre-pandemic performance track record. Against the background of a still challenging environment, we continue to conduct extensive analysis as to whether the prospects for the Group are better served by retaining the current lease arrangements, entering into a possible lease restructure with the existing tenant or selling part or all of the hotels portfolio. The Board and Management Team consider that the landlord break rights provide optionality for the Group and continue to evaluate how best to maximise any value arising from them. Any conclusions drawn from that process would be expected to have been reached before the first option expiry date of 20 November 2020.
Travelodge reported on 26 August that all of their hotels had reopened by mid August, following the lifting of restrictions on 4 July 2020.
The average term to expiry of the Travelodge leases is 21.9 years from 30 June 2020 with no tenant break clauses. While the CVA terms introduced a lease extension option, exercisable by 28 August 2020, which could have extended the weighted average term to expiry of the Group's Travelodge portfolio by 2.8 years, had those options been exercised the landlord break options would have been terminated. The Board's assessment was that the small marginal valuation benefit of the lease extension was outweighed by the greater optionality of the landlord lease break option, and therefore the extension options were allowed to lapse.
The leases are on full repairing and insuring terms and Travelodge is also responsible for the cost of any headlease payments and other amounts owing to the freeholders of the 52 leasehold properties. The CVA did not compromise the FRI basis of the leases. There are upwards only uncapped RPI-linked rent reviews every five years throughout the term of each lease, with reviews falling due over a staggered pattern across the portfolio. There were no scheduled rent reviews in the six months to 30 June 2020. Reviews on 22% of the rents, at their contracted levels before any temporary concessions, take place in the second half of 2020, with a further 24% in 2021, 39% in 2022, 10% in 2023 and 5% in 2024. Any uplifts arising in the period from 1 April 2020 to 31 December 2021 will become payable following the end of the rent concession period in January 2022.
Financing
The Group's operations are financed by a combination of cash resources and non-recourse debt finance, where the equity at risk is limited to the net assets within six ring-fenced subgroups. Each subgroup is self-contained, with no cross-default provisions or cross collateralisation between the six of them. In all cases, substantial financial covenant headroom was negotiated into loan terms at their inception, together with appropriate remedial cure rights where cash can be diverted to a security group in order to maintain covenant compliance if and when necessary.
Where the Company has agreed rent concessions, in each case this has been with the consent of the relevant lenders. In certain cases this has also included covenant waivers during the concession period. Save for the waivers, the terms of the various loan agreements remain unchanged.
The Group's total gross debt increased by GBP1.0 million in the six month period, being a reduction of GBP1.7 million by way of scheduled loan repayments and GBP1.5 million repaid out of the net proceeds of non-core hotels sold in 2019, offset by GBP4.2 million of foreign currency translation movements on the Group's Euro denominated debt. Net debt has increased by GBP27.0 million, broadly equivalent to the dividends paid in the period out of the Group's cash resources.
The Group's Net Loan To Value ratio increased from 31.9% to 35.3% over the period.
Unsecured Group
Secured amounts amounts total
GBPm GBPm GBPm
-------------------- --------------- --------- -------
Gross debt 931.7 - 931.7
Secured cash (14.7) - (14.7)
Free cash * (0.6) (225.8) (226.4)
-------------------- --------------- --------- -------
Net debt 916.4 (225.8) 690.6
-------------------- --------------- --------- -------
Property valuation 1,958.7 1,958.7
-------------------- --------------- --------- -------
Net LTV 46.8% 35.3%
-------------------- --------------- --------- -------
* free cash within secured facilities is released to the parent company after each quarterly interest payment date for as long as all loan covenants are complied with, increasing the balance of unfettered cash within the Group.
Key terms of the facilities are as follows:
Number of Maximum
properties annual
Principal securing interest Interest Annual cash Final repayment
GBPm loan rate rate protection amortisation date
-------------------- --------- ----------- --------- ---------------- ------------- ---------------
GBP3.8m
from Oct
Merlin Leisure 382.0* 6 5.7% Fixed 2020 Oct 2022
Budget hotels loan 80% fixed
2 65.4 70 3.3% 20% capped None April 2023
83% fixed
Leisure loan 2 60.0 20 3.2% 17% capped None June 2023
Budget hotels loan
1 59.0 53 2.7% Fixed None Oct 2023
Healthcare loan
1 64.0 2 4.3% Fixed GBP0.3m Sept 2025
Healthcare loan
2 301.3 10 5.3% Fixed GBP3.2m Oct 2025
Total 931.7 161 4.9%
-------------------- --------- ----------- --------- ---------------- ------------- ---------------
* GBP316.8 million of senior and mezzanine Sterling loans secured on UK assets and EUR71.8 million of senior and mezzanine Euro denominated loans secured on German assets (translated at the period end exchange rate of EUR1:GBP0.91) with all loan tranches cross-collateralised.
amortisation in each of the years ending October 2021 and October 2022 comprises GBP3.2 million on the Sterling facility and EUR0.7 million on the Euro facility.
The Board ensures that interest rate risk is managed by either fixing or capping rates over the term of each loan. As at 30 June 2020, 92% of the Group's borrowings were fixed rate facilities. The weighted average interest rate payable in the period remained the same as in 2019 at 4.9% per annum.
There have been no defaults in any facility during the period or since the balance sheet date. The extent of headroom on financial covenants at the balance sheet date is analysed in the Financial Review on the following pages.
Financial review
In this report, we focus on various financial measures recommended by the European Public Real Estate Association ("EPRA") to facilitate comparison with other real estate investment companies. The calculation of the EPRA measures and their reconciliation to the interim financial statements prepared under IFRS is presented in the Supplementary Information which follows the financial statements.
New EPRA guidelines which became effective on 1 January 2020 have been applied and comparative figures have been provided on a consistent basis. The new EPRA guidelines set out three measures of Net Asset Value, including EPRA Net Tangible Assets ("EPRA NTA"), each of which is disclosed and reconciled to the interim financial statements in note 19 and in the Supplementary Information. In this report we highlight EPRA NTA as the most meaningful measure of long term performance.
The Board monitors the following key performance indicators, which are further commented on in this report.
Six months
Six months Year to to
to 31 Dec 30 June
30 June 2020 2019 2019
------------------------------------------- ------------- --------- ----------
Financial measures:
Total Accounting Return (8.1)% 11.7% 5.8%
Total Shareholder Return (35.9)% 19.4% 8.2%
Adjusted EPRA EPS 5.1p 15.3p 8.1p
Net LTV ratio 35.3% 31.9% 42.2%
Uncommitted Cash GBP219.6m GBP234.2m GBP68.0m
Other measures:
Headroom on debt covenants before any
preventative cash cure or other remedial
action:
Valuation decline before tightest LTV
default test is triggered 33% 38% 32%
Rent decline before tightest interest
cover default test is triggered 26% 33% 34%
------------------------------------------- ------------- --------- ----------
Dividend policy
The Company's dividend policy since listing was to distribute Adjusted EPRA earnings by way of a fully covered cash dividend, paid quarterly. This has served the Company well and enabled it to distribute increasing dividends in line with the geared increases in net rental income, driven by the combination of annual fixed and RPI rental uplifts together with largely fixed debt costs and stable and predictable administrative expenses.
Following completion of the sale of a portfolio of eight private hospitals in August 2019, the Board concluded that the significant cash surplus raised at that time would be partially deployed in topping up the dividends to make up for the yield on the sold hospitals for as long as the surplus cash remained undeployed. The surplus was at that time earmarked for:
i) acquisitions, giving the Company the ability to move quickly to take advantage of opportunities; and/or
ii) special dividends or capital returns; and/or
iii) reserves for application to debt to ride out economic shocks arising from external sources.
The pandemic was not known about at that time, but its effects have heightened the importance of the cash reserve for external shocks.
The support provided to certain of the Group's tenants to alleviate their Covid-19 related business shutdowns has resulted in a temporary reduction in the net cash flows of the Group, in turn reducing the level of covered dividend that would be payable under the terms of the original dividend policy.
The effects of the pandemic on the Group's net income and the heightened uncertainty during this period prompted a review by the Board of the prudent and appropriate dividend policy to apply in the circumstances. The materially higher than usual liquidity buffer held by the Company following the sale of the private hospital portfolio affords significant flexibility, not only in supporting the Group's tenants but also in providing appropriate returns to shareholders without putting at risk the strength of the balance sheet. With the Company's liquidity buffer directed in the main to supporting tenants and ensuring that the balance sheet remains robust during such uncertain times, the Board concluded that the element of the dividend relating to the topping up of income on the sold hospitals should be discontinued. The basis of dividend payment therefore reverts to the 'core' dividend as guided with he 2019 annual results announcement, without the previous top slice of the hospitals net income top-up. This equates to a quarterly dividend of 3.65 pence per share payable in each of the last two quarters of 2020 and the first two quarters of 2021, increasing to 3.95 pence per share in the third quarter of 2021.
The analysis of the core and top-up dividends paid to date is as follows:
Quarter
Year to Year to Year to Year to Six months 3 dividend
GBPm paid in the 31 Dec 31 Dec 31 Dec 31 Dec to 30 June paid August
period 2016 2017 2018 2019 2020 2020
------------------- -------- -------- -------- -------- ----------- ------------
Core dividend GBP12.0m GBP16.1m GBP41.4m GBP49.0m GBP22.8m GBP11.8m
Hospitals top-up
dividend - - - GBP3.5m GBP4.4m -
Total dividend
paid GBP12.0m GBP16.1m GBP41.4m GBP52.5m GBP27.2m GBP11.8m
------------------- -------- -------- -------- -------- ----------- ------------
Pence per share
paid
Core dividend 5.9p 13.6p 13.9p 15.2p 7.1p 3.65p
Hospitals top-up
dividend - - - 1.1p 1.3p -
Total dividend
paid 5.9p 13.6p 13.9p 16.3p 8.4p 3.65p
------------------- -------- -------- -------- -------- ----------- ------------
Ahead of the declaration of the dividend for the third quarter of 2020, the Board concluded that it is appropriate to continue to pay dividends at a level that recognises that the rent concessions granted are temporary, using some of the surplus liquidity to fund the dividend in excess of the Group's Adjusted EPRA Earnings. For as long as uncertainty remains elevated, given the unknown future path of the pandemic, uncertainties about consumer behaviour and the performance of the economy, and the possibility of another national lockdown or widespread local lockdowns, the dividend policy remains under review. The importance of the dividend to many investors is acknowledged and is carefully considered in any evaluation of the appropriateness of declaring a dividend in the context of the conditions prevailing at that time.
Impact of rent concessions on KPIs and IFRS financial statements
Recognising the Group's long term relationships with its tenants, and the very sudden and extensive impact on them of the pandemic and subsequent lockdown imposed in the UK and elsewhere, the Company provided support to certain of its tenants, as summarised at the start of this report where we also highlight the materially altered cash flow profile of the Group's rental income.
In simple terms, the IFRS accounting standards applicable to the Group require that a landlord assesses the rental income to be earned over the whole term of a lease (to the earlier of a reasonably certain tenant break option or expiry), and then spreads the aggregate income evenly over that whole term. The gross income assessed is, broadly, the income that is contractually certain. Consequently, the Group's leases with fixed or fixed minimum uplifts (which equate to 48% of the Group's entire contracted pre-concession passing rent) require a 'smoothing' adjustment to reflect the mismatch between the rents actually receivable and those recognised in the income statement. This effect is explained in more detail in the Supplementary Information which follows the interim financial statements. The remaining 52% of the Group's rental income which is subject to RPI-linked or open market reviews is not subject to a smoothing adjustment. The accounting policies set out in note 2 to the interim financial statements are consistent with these principles.
Applying these accounting policies and principles to the Group's income following the agreement of the rent concessions has affected the Group's IFRS income in each case as follows:
-- The rent deferral on the Merlin assets does not change the total lease income over the life of the lease. It merely changes the timing of receipt, therefore there is no change to the IFRS income that would otherwise have been reported in the period. The rents deferred are held as an asset on the balance sheet, separate from and not valued as part of the investment properties. The carrying value of the rent receivable will be reassessed at each balance sheet date and it is held at 30 June 2020 at its face value of GBP8.9 million as it is considered to be recoverable in full.
-- The reductions in rent receivable from Travelodge following their CVA reduce the Group's cash flows over the period 1 April 2020 to 31 December 2021, with the original contractual rents receivable (and any accrued RPI uplifts arising in the concession period) due to be restored from 1 January 2022. While the cash flow impact is temporary, it has the effect of reducing the total rents receivable over the life of the leases and this impact must be spread over the remaining lease term, which on a weighted average basis is 21.9 years. The effect of spreading a total GBP23 million reduction in rents over an unexpired term of 21.9 years on average results in rental income reported in the income statement being higher than cash rents receivable during the concession period and lower than cash rents receivable thereafter. Rents reported in the IFRS income statement for the six months ended 30 June 2020 are GBP4.6 million higher than the rents on a cash basis. The mismatch for the whole of 2020 is expected to be GBP13.7 million, then GBP7.4 million in 2021. From the start of 2022 it will unwind, with cash rents higher than the reported income by GBP1.1 million per annum through to the end of the term of each lease.
-- The six month rent free period granted to Stonegate on the pubs portfolio in consideration for extending lease terms to 25.0 years and strengthening the lease alienation provisions is treated in a similar way to the Travelodge rent reduction. Rents reported in the income statement for the six months ended 30 June 2020 are GBP0.6 million higher than the rents on a cash basis, and the mismatch for the whole of 2020 is expected to be GBP1.1 million. From the start of 2021 it will unwind, with cash rents higher than the income reported in the income statement by GBP47,000 per annum through to the end of the term of the leases.
The Group has, from the time of its listing six years ago, had a high proportion of income with fixed rental increases over very long lease terms. The requirements to spread rents over the whole of any lease has always created a mismatch between cash rents receivable and rental income reported under IFRS. That mismatch was a major contributing factor to the adoption by the company of its Adjusted EPRA earnings measure. This measure is further explained under the "Adjusted EPRA earnings per share" heading later in this report and in the Supplementary Information which follows the interim financial statements. In order to calculate Adjusted EPRA earnings on a basis consistent with the Group's definition of the measure and prior reporting periods, the cash and income mismatches arising as a result of the rent concessions are taken into account in Adjusted EPRA earnings in order to give a clearer calculation of dividend cover on a basis that more closely reflects the Group's actual cash flows.
Key performance indicator - Total Accounting Return
In measuring progress towards the Board's objective to deliver attractive and sustainable shareholder returns, both Total Accounting Return (the movement in EPRA NTA per share plus dividends) and Total Shareholder Return (the share price movement plus dividends) are monitored. The principal focus for the Board is on Total Accounting Return as the Total Shareholder Return, while important, is also subject to wider market fluctuations not necessarily related to the Group itself.
Six months to 30 June Six months to 30 June
2020 2019
------------------------ ------------------------
Pence per Pence per
Movements in Net Asset Value GBPm share GBPm share
----------------------------------- ---------- ------------ ---------- ------------
NAV at the start of the period 1,384.5 428.8 1,281.6 398.5
Investment property revaluation* (142.0) (43.9) 43.1 13.3
Rental income less administrative
expenses and finance costs 27.1 8.4 32.3 10.1
Dividends paid (27.2) (8.4) (25.3) (7.9)
Currency translation differences 2.6 0.8 - -
Derivative revaluation (0.9) (0.3) (0.9) (0.3)
Tax charge - - (0.9) (0.3)
Dilution from shares issued
in settlement of previous
year's incentive fee - (1.5) - (1.5)
NAV at the end of the period 1,244.1 383.9 1,329.9 411.9
----------------------------------- ---------- ------------ ---------- ------------
(Reduction)/growth in NAV (140.4) (44.9) 48.3 13.4
Dividends paid 27.2 8.4 25.3 7.9
----------------------------------- ---------- ------------ ---------- ------------
IFRS Total Accounting Return (113.2) (36.5) 73.6 21.3
----------------------------------- ---------- ------------ ---------- ------------
IFRS Total Accounting Return
- percentage (8.5)% 5.3%
----------------------------------- ---------- ------------ ---------- ------------
* including GBP9.8 million or 3.0 pence (2019: GBP5.5 million or 1.7 pence) of Rent Smoothing Adjustments
The industry standard EPRA NTA measure takes IFRS net asset value and excludes items that are considered to have no relevance to the assessment of long term performance. Consistent with the EPRA Guidance, which requires an assessment of the likelihood of investment properties being sold, the Group's reported IFRS NAV is adjusted to exclude 50% of the deferred tax on investment property revaluations (in this case relating to the German assets) and all of the fair value movements on derivatives. EPRA NTA and EPRA NTA per share is reconciled to net asset value measured in accordance with IFRS in note 19 to the interim financial statements.
The Group's EPRA NTA per share at 30 June 2020 was 386.4 pence, down 10.0% since 31 December 2019. The 43.0 pence per share reduction, together with dividends of 8.4 pence per share, results in a Total Accounting Return over the period of minus 8.1%.
The analysis of movements in the Group's EPRA NTA and EPRA NTA per share is as follows:
Six months to 30 June Six months to 30 June
2020 2019
----------------------- -----------------------
Pence per Pence per
GBPm share GBPm share
---------------------------------- --------- ------------ ------- --------------
EPRA NTA at the start of the
period 1,391.3 429.4 1,292.9 400.5
Investment property revaluation* (132.1) (40.8) 48.6 15.0
Rental income* and other income
less administrative expenses,
finance costs and current
tax 17.1 5.3 26.6 8.3
Dividends paid (27.2) (8.4) (25.3) (7.9)
Currency translation movements 2.9 0.9 - -
EPRA NTA at the end of the
period 1,252.0 386.4 1,342.8 415.9
---------------------------------- --------- ------------ ------- --------------
(Reduction)/growth in EPRA
NTA (139.3) (43.0) 49.9 15.4
Dividends paid 27.2 8.4 25.3 7.9
---------------------------------- --------- ------------ ------- --------------
Total Accounting Return (112.1) (34.6) 75.2 23.3
---------------------------------- --------- ------------ ------- --------------
Total Accounting Return -
percentage (8.1)% 5.8%
---------------------------------- --------- ------------ ------- --------------
* adjusted by GBP9.8 million or 3.0 pence per share (2019: GBP5.5 million or 1.7 pence per share) of Rent Smoothing Adjustments
The analysis of the investment property revaluation in the period is presented in the Portfolio section of this report.
The Total Shareholder Return is calculated as:
Six months
Six months to to
30 June 2020 30 June 2019
Pence per
Pence per share share
-------------------------- -------------------- --------------
Share price at the end
of the period 270.0 400.0
Share price at the start
of the period (434.0) (377.0)
(Decrease)/increase in
the period (164.0) 23.0
Dividends paid 8.4 7.9
---------------------------- -------------------- --------------
Total Shareholder Return (155.6) 30.9
---------------------------- -------------------- --------------
Total Shareholder Return
- percentage (35.9)% 8.2%
---------------------------- -------------------- --------------
Key performance indicator - Adjusted EPRA earnings per share
The calculation of basic EPS under IFRS, as reported in the interim financial statements, is shown below.
Six months to 30 June Six months to 30 June
2020 2019
----------------------- -----------------------
Pence per Pence per
GBPm share GBPm share
Rental income net of property
outgoings 59.8 18.5 68.4 21.1
Net finance costs (24.7) (7.6) (28.1) (8.6)
Administrative expenses (8.1) (2.5) (8.4) (2.5)
Tax charge - - (0.9) (0.3)
--------------------------------- ------- -------------- ------- --------------
Earnings before revaluations
and profits on sale 27.0 8.4 31.0 9.7
Investment property revaluation (142.0) (43.9) 43.1 13.3
Profit on disposal of non-core
budget hotels - - 0.4 0.1
Basic and diluted earnings (115.0) (35.5) 74.5 23.1
--------------------------------- ------- -------------- ------- --------------
The reduction in IFRS earnings before revaluations and profits on sale in the first half of 2020 compared with the same period in 2019 is attributable to the Covid-19 rent reductions for the period, together with the impact of the disposal of eight private hospitals which were owned throughout the period to 30 June 2019 but sold in the second half of that year, and which contributed 1.4 pence per share of rental income net of financing costs in the six months ended 30 June 2019.
The IFRS earnings measure includes unrealised property revaluations, gains and losses on property disposals and certain other factors which are considered to distort an assessment of underlying long term performance and which are therefore excluded from the EPRA measure of earnings. EPRA earnings and EPRA earnings per share are presented in this report and the calculation of these measures is presented in note 9 to the interim financial statements.
The EPRA measures are presented in a way that is consistent with other public European real estate companies applying the EPRA Guidance. However, the Board has considered how best to show the underlying performance of the business taking account of some unusual features that are specific to the Group and material to its results. These are the Rent Smoothing Adjustments, arising from the required smoothing of fixed uplifts over the Group's very long leases, and the impact of non-cash incentive fee payments in periods where those are earned, including the impact of the timing of the share issues relating to those payments. The Group's basic and diluted EPS, calculated in accordance with IFRS, must be calculated on the assumption that any shares issued in settlement of an incentive fee are treated as having been issued on the first day of the year, regardless of when they are actually issued.
A further measure, Adjusted EPRA Earnings, is therefore presented, both for comparison of the performance of the Group from year to year and with its peer group, and to avoid distortions which would result in unreliable measures of Dividend Cover.
Adjusted EPRA EPS is derived from EPRA EPS by:
-- removing from rental income the Rent Smoothing Adjustments and any deferred rents; -- excluding any significant non-recurring costs;
-- excluding the charge for any incentive fee, on the basis that it is a non-cash payment and considered to be linked to revaluation movements and therefore best treated consistently with revaluations; and
-- calculating the weighted average number of shares to reflect the actual dates on which shares are issued.
Six months to 30 June Six months to 30 June
2020 2019
----------------------- -----------------------
Pence per Pence per
GBPm share GBPm share
------------------------------- --------- ------------ --------- ------------
Rental income net of property
outgoings 59.0 18.2 67.6 20.9
Net finance costs (23.9) (7.4) (27.3) (8.5)
Administrative expenses (8.1) (2.5) (8.4) (2.5)
Tax charge (0.1) - (0.2) (0.1)
EPRA earnings 26.9 8.3 31.7 9.8
Rent Smoothing Adjustments (9.8) (3.0) (5.5) (1.7)
Theme parks rent deferral (0.6) (0.2) - -
Adjusted EPRA earnings 16.5 5.1 26.2 8.1
------------------------------- --------- ------------ --------- ------------
Adjusted EPRA EPS is reconciled to basic EPS in note 9 to the interim financial statements. The table below shows the analysis of the Adjusted EPRA earnings in the period in order to demonstrate where the adjusting items take effect.
Six months to 30 June Six months to 30 June
2020 2019
----------------------- -----------------------
Pence per Pence per
GBPm share GBPm share
-------------------------------------- ------- -------------- ------- --------------
Rental income net of property
outgoings:
Portfolio with no rent concessions,
owned throughout the period 22.5 6.9 22.0 6.8
Portfolio where temporary
rent concessions have been
granted, owned throughout
the period 26.1 8.1 32.3 10.0
Hospitals sold August 2019 - - 7.8 2.4
-------------------------------------- ------- -------------- ------- --------------
48.6 15.0 62.1 19.2
Net finance costs:
Facilities drawn throughout
the period (24.3) (7.5) (24.1) (7.5)
Healthcare loan prepaid August
2019 - - (3.4) (1.0)
Finance income 0.4 0.1 0.2 0.1
Administrative expenses (8.1) (2.5) (8.4) (2.6)
Tax charge (0.1) - (0.2) (0.1)
Adjusted EPRA earnings 16.5 5.1 26.2 8.1
-------------------------------------- ------- -------------- ------- --------------
An analysis of the Group's rental income is included in the portfolio review earlier in this report and the other components of earnings are analysed below.
Adjusted EPRA earnings per share - property outgoings
The Group's property outgoings comprise:
Six months to 30 June Six months to 30 June
2020 2019
----------------------- -----------------------
Pence per Pence per
GBPm share GBPm share
---------------------------------- ------ --------------- ------ ---------------
Head rent net of recoveries
from tenants 0.3 0.1 0.2 0.1
Rent concession costs 0.5 0.2 - -
Cost of prospective capital
projects 0.1 - 0.2 0.1
Other net property outgoings 0.2 - 0.1 -
Rent review costs - - 0.2 -
Property outgoings (IFRS basis) 1.1 0.3 0.7 0.2
Head rent recovered from tenants
included in IFRS rental income (0.9) (0.3) (0.8) (0.3)
Head rent included in IFRS
finance costs and investment
property revaluations 0.9 0.3 0.9 0.3
Property outgoings (Adjusted
EPRA EPS basis) 1.1 0.3 0.8 0.2
---------------------------------- ------ --------------- ------ ---------------
On an IFRS basis, the interest charge and leasehold property revaluation elements of the head rents are classified as finance costs and property revaluation movements respectively, while head rents recovered from tenants are classified as revenue.
The costs of capital projects are expensed if they relate to feasibility studies for projects that have not commenced and are not certain to commence, or where the expenditure is not reflected in the independent valuation of the underlying property.
Adjusted EPRA earnings per share - administrative expenses
The Group's administrative expenses for the period are the same under IFRS and the EPRA measure.
Six months to 30 June Six months to 30 June
2020 2019
----------------------- -----------------------
Pence per Pence per
GBPm share GBPm share
------------------------------- ----- ---------------- ----- ----------------
Advisory fees 7.1 2.2 7.3 2.3
Other administrative expenses 0.7 0.2 0.8 0.2
Corporate costs 0.3 0.1 0.3 0.1
------------------------------- ----- ---------------- ----- ----------------
Total administrative expenses 8.1 2.5 8.4 2.6
------------------------------- ----- ---------------- ----- ----------------
As an externally managed business, the majority of the Group's overheads are covered by the advisory fees paid to the Investment Adviser, which meets office running costs, administrative expenses and remuneration for the whole management and support team out of those fees. The basis of calculating the advisory fees is explained in note 20 to the interim financial statements. The advisory fee for the period amounted to GBP6.7 million plus irrecoverable VAT of GBP0.4 million (six months to 30 June 2019: GBP6.8 million plus irrecoverable VAT of GBP0.5 million).
The fees are calculated on a reducing scale based on the Group's EPRA NAV. The Remuneration Committee concluded in March 2020 that, in order for the calculation of the fees to remain consistent with the way that those fees have been calculated since the Company's listing, the fees would continue to be calculated on the basis of EPRA NAV originally in place . As that basis is set out in the EPRA Guidance previously issued in 2016, we refer to that measure in these statements as "2016 basis EPRA NAV" and this differs from the calculation of EPRA net assets in the rest of this report which is based on the latest guidance. The calculation of 2016 basis EPRA NAV is set out in note 20 to the interim financial statements.
-- 1.25% per annum on 2016 basis EPRA NAV up to GBP500 million; plus -- 1.0% on 2016 basis EPRA NAV from GBP500 million to GBP1 billion; plus -- 0.75% on 2016 basis EPRA NAV from GBP1 billion to GBP1.5 billion: plus -- 0.5% thereafter.
Had the fees been calculated on the basis of EPRA NTA the results would not have been materially different.
In February 2020 the Independent Directors approved a proposal made by the Investment Adviser to exclude the surplus cash on the hospitals portfolio disposal in August 2019 from the advisory fee calculation to the extent that it has not been:
-- deployed in topping up dividends (GBP9.0 million cumulatively to 30 June 2020); -- invested in acquisitions (none invested to 30 June 2020); -- used for liability management (none used to 30 June 2020); or -- returned to shareholders other than by way of dividend top-up (none to 30 June 2020).
The current annualised saving as a result of this change is estimated at GBP1.1 million excluding irrecoverable VAT and GBP0.3 million of saving is reflected in the income statement for the six months ended 30 June 2020. The balance of the surplus cash at 30 June 2020 was GBP149.4 million.
The management contract between the Company and the Investment Adviser has a term through to December 2025 and will be subject to its next review in the ordinary course by the Remuneration Committee in December 2022. There are no renewal rights or payments at the time of expiry. Any payments triggered by a change of control of the Company are limited to four times the most recent quarterly fee at the time any such change occurs which is the maximum amount payable on any form of termination of the contract.
The other recurring administrative expenses are principally professional fees which include the costs of independent external property valuations, external trustee and administration costs, tax compliance fees and audit fees.
Corporate costs are those costs necessarily incurred as a result of the Company being listed and comprise:
-- fees payable to the four Independent Directors amounting to GBP0.1 million in the period (2019: GBP0.1 million ), with the other three Directors being partners in the Investment Adviser who receive no Directors' fees from the Company; and
-- other costs of being listed, such as the fees of the nominated adviser required under the AIM Rules, registrars' fees and AIM fees, whi ch together total GBP0.2 million (six months to 30 June 2019: GBP0.2 million) in the period.
If the Total Accounting Return to investors over a financial year as set out in the audited accounts exceeds a compound growth rate of 10% per annum above the 2016 basis EPRA NAV per share the last time any incentive fee was paid, the Investment Adviser earns an incentive fee amounting to 20% of any surplus above that priority return to shareholders, subject to a cap of 5% of 2016 basis EPRA NAV (other than in the event of a sale of the business, where an incentive fee would not be capped). Any such fee is payable in shares which are not permitted to be sold, save in certain limited circumstances, for a period of between 18 and 42 months following the end of the year for which they were earned.
In order to make a reasonable assessment of whether or not such a fee is likely to be payable in respect of the 2020 financial year, the Board has estimated the 2016 basis EPRA NAV of the Group at 31 December 2020 on the basis of the assumptions set out in note 20 to the interim financial statements . On the basis of that assessment no fee would be payable for the 2020 financial year and as a result no fee is accrued at 30 June 2020 (30 June 2019: GBPnil). In order for an incentive fee to be earned in respect of the 2020 financial year, the 2016 basis EPRA NAV at 31 December 2020 plus dividends paid during the year would need to total 477.5 pence per share.
Because VAT cannot be applied to the rents on the Healthcare assets, there is an element of irrecoverable VAT incurred on the Group's running costs which is included within each relevant line item in the table above. The proportion of disallowed VAT on administrative expenses averaged 21% during the period and was 40% as at 30 June 2020, with the increase attributable to the higher current weighting of healthcare income following the agreement of rent concessions in the leisure and hotels portfolios.
Adjusted EPRA EPS: net finance costs
Six months to 30 June Six months to 30 June
2020 2019
----------------------- -----------------------
Pence per Pence per
GBPm share GBPm share
------ --------------- ------ ---------------
Interest on secured debt facilities:
Outstanding throughout the
period 22.9 7.0 22.9 7.2
Repaid in August 2019 - - 3.3 1.0
-------------------------------------- ------ --------------- ------ ---------------
22.9 7.0 26.2 8.2
Amortisation of costs of arranging
facilities
(non-cash) 1.2 0.4 1.2 0.4
Interest charge on headlease
liabilities 0.8 0.2 0.8 0.1
Loan agency fees and other
lender costs 0.2 0.1 0.2 -
Interest income (0.4) (0.1) (0.2) (0.1)
Net finance costs for the
period
(IFRS and EPRA basis) 24.7 7.6 28.1 8.6
Reclassification of interest
charge on headlease liabilities
against revenue * (0.8) (0.2) (0.8) (0.1)
Net finance costs for the
period
(Adjusted EPRA basis) 23.9 7.4 27.3 8.5
-------------------------------------- ------ --------------- ------ ---------------
* headlease interest is reclassified against property outgoings in Adjusted EPRA EPS to better reflect the nature of these costs.
The nature and principal terms of the Group's loan facilities are explained in the Financing section earlier in this report.
Adjusted EPRA EPS - tax
The Group is a UK Group REIT, so its rental operations, which make up the majority of the Group's earnings, are exempt from UK corporation tax, subject to the Group's continuing compliance with the UK REIT rules. The Group is otherwise subject to UK corporation tax on any net income not arising from its rental operations.
German corporation tax is payable on the Group's German rental operations at an effective tax rate in the period of 8% (six months to 30 June 2019: 15%), resulting in a current tax charge of GBP0.2 million (six months to 30 June 2019: GBP0.2 million). The balance sheet includes a deferred tax liability of GBP11.9 million (31 December 2019: GBP11.8 million) relating to unrealised German capital gains tax on the German properties, which would only be crystallised on a sale of those assets. There are no plans at present to sell these assets, so the deferred tax is not currently expected to be crystallised.
On an IFRS basis, there is a current tax charge of GBP0.1 million (six months to 30 June 2019: GBP0.2 million) and a GBP0.1 million deferred tax credit (six months to 30 June 2019: GBP0.7 million charge), which results in a net tax charge of GBPnil (six months to 30 June 2019: GBP0.9 million). Deferred tax is excluded from Adjusted EPRA EPS as shown in note 9 to the interim financial statements.
Adjusted EPRA EPS - currency translation
84% by value of the Group's property assets are located in the UK and the interim financial statements are therefore presented in Sterling. 3.6% (31 December 2019: 3.1%) of the Group's EPRA NTA comprises assets and liabilities relating to properties located in Germany, valued in and generating net earnings in Euros. Exposure to currency fluctuations is partially hedged through assets, liabilities, rental income and interest costs being Euro denominated. The Group remains exposed to currency translation differences on the net results and net assets of these unhedged operations. Foreign currency movements are recognised in the statement of other comprehensive income.
The German properties are valued at EUR128.2 million as at 30 June 2020 (31 December 2019: EUR129.7 million), with the Euro denominated secured debt amounting to EUR71.8 million (31 December 2019: EUR71.8 million). The Euro strengthened against Sterling over the period by c. 7% and as a result there was a net currency translation gain of GBP2.6 million (six months to 30 June 2019: GBPnil) on an IFRS basis. Half of the deferred tax liability is excluded from EPRA NTA and as a result a further currency translation gain of GBP0.3 million arises in the movement in EPRA NTA in relation to the German operations (six months to 30 June 2019: loss of GBP0.3 million).
Key performance indicator - Net Loan To Value ratio
The Board structures debt facilities with a view to maintaining a capital structure that will enhance shareholder returns while withstanding a range of market conditions. During the period, the Group's Net LTV increased from 31.9% to 35.3% which reflects the fall in property valuations in the period. While the Net LTV ratio is one indicator of borrowing risk it is not the complete picture and the Board always considers it in conjunction with a wider assessment of headroom and financial covenants within debt facilities and the security of portfolio rental income. Those factors are addressed in the following sections.
Key performance indicator - headroom on debt covenants
The Board's approach to managing the Group's capital structure includes ensuring that the risk of any breach of covenants within secured debt facilities is carefully managed. This includes monitoring and stress testing the covenant tests for current and future periods on the basis of a realistic range of scenarios and potential outcomes. The options available to the Board to manage any risk of covenant breach are then considered. The Board's approach to prudent capital management starts with structuring facilities to ring-fence the extent to which the Group's assets are at risk, ensuring that levels of headroom over financial covenants are set at appropriate levels and then maintaining a level of Uncommitted Cash to apply in curing debt defaults in the event that it is needed.
When evaluating the appropriateness of the level of secured debt, the Board has regard to the unusual nature of the Group's income streams, specifically that all of the occupational leases are significantly longer than conventional UK real estate leases and that the Group's contracted rental income streams feature fixed or RPI-linked uplifts with just over two thirds of the contracted portfolio rents subject to annual review and the remainder subject to three or five yearly reviews. This structure gives rise, under more normal conditions, to predictable improvements in interest cover over time and a naturally deleveraging debt profile on the assumption of constant valuation yields. It has also provided the flexibility and the relatively good visibility over future cash inflows to allow for the various rent concessions granted to tenants needing support following the impact of the pandemic.
The Board reviews the headroom on all financial covenants at least quarterly and more often as required, including stress tested scenarios. The headroom on key financial covenants at 30 June 2020 is summarised below, including the Topped Up Net Initial Yield, the fall in valuation or the fall in rent that would trigger a breach of the relevant covenant at the first test date after the balance sheet date, before any preventative or remedial actions were taken. Defensive actions could include deploying the Group's significant Uncommitted Cash of GBP219.6 million as at 30 June 2020 and which is further explained in the following section.
Scenarios before any remedial
action
---------------------------------------------
Topped
Up Net Valuation Rental
Initial fall before fall before
Yield triggering LTV test ICR test
Actual Covenant LTV test triggered triggered
----------------------------------- ------ --------- ----------------- ------------ ------------
Merlin leisure facility
(GBP382.0 million loans at
30 June 2020)
Cash trap LTV test (1% per annum
loan amortisation if triggered) 62% <80% 7.0% 23%
Cash trap LTV test (full cash
sweep if triggered) 62% <85% 7.4% 27%
Rental fall (after waiver period)
before interest is covered by
rent 1:1 (for information: not
strictly a covenant test) 28%
Healthcare facility
(GBP301.3 million loan at 30
June 2020)
Cash trap LTV test (full cash
sweep if triggered) 48% <74% 6.8% 35%
LTV test 48% <80% 7.4% 40%
Cash trap projected interest
cover test (full cash sweep
if triggered) 189% >140% 26%
Projected interest cover test 189% >120% 37%
Budget hotels facility
(GBP65.4 million loan at 30
June 2020)
Partial cash trap LTV test (50%
of surplus cash swept to lender if triggered) 33% 40% - 45% 8.2% 16% Cash trap LTV test (full cash sweep if triggered) 33% 45% - 50% 9.3% 26% LTV test 33% <50% 10.3% 33% Cash trap projected interest cover test (full cash sweep if triggered) 340% >300% 12% Projected interest cover test 340% >250% 26% Healthcare facility (GBP64.0 million loan at 30 June 2020) LTV test 44% <80% 8.2% 45% Cash trap projected debt service cover test (full cash sweep if triggered) 221% >150% 32% Projected debt service cover test 221% >125% 44% Leisure facility (GBP60.0 million loan at 30 June 2020) Partial cash trap LTV test (50% of surplus cash swept to lender if triggered) 32% 40% - 45% 6.8% 20% Cash trap LTV test (full cash sweep if triggered) 32% 45% - 50% 7.6% 29% LTV test 32% <50% 8.5% 36% Projected interest cover test 492% >150% 70% Budget hotels facility (GBP59.0 million loan at 30 June 2020) Partial cash trap LTV test (50% of surplus cash swept to lender if triggered) 31% 40% - 45% 8.9% 22% Cash trap LTV test (full cash sweep if triggered) 31% 45% - 50% 10.0% 31% LTV test 31% <50% 11.1% 38% Cash trap projected interest cover test (full cash sweep if triggered) 492% >300% 39% Projected interest cover test 492% >250% 49% ----------------------------------- ------ --------- ----------------- ------------ ------------
It is a feature of the Company's debt financing structure that significant headroom was built in at the outset, to act as a "shock absorber" in cases where tenant difficulty or property investment market disruption puts pressure on those covenants. In the cases of leisure and hotels facilities where the effects of the pandemic have manifested themselves, the headroom over covenant levels has reduced since those reported for 31 December 2019, however in all cases headroom has still been preserved. While the credit facilities include various cash cure rights in the event needed to avoid covenants being breached, no cash cures have been implemented to date.
In each case where concessions have been granted, lender consent was required and was granted by the lenders without penalty or cost, other than the modest costs of their legal fees. Temporary covenant waivers or adjustments were requested and granted on two facilities; on those and one further facility, where the rental income arising on assets subject to rent concessions was or will be insufficient to cover the finance costs payable during the rent concession period, the Company will finance those costs from its centrally held, unsecured free cash surplus. That amounted to GBP0.9 million in the six months to 30 June 2020 and a further GBP10.8 million is expected to be funded in the remainder of 2020, with nothing expected to be required for 2021. On the basis of concessions currently operational, no additional funding of uncovered interest costs is expected to be required.
Key performance indicator - Uncommitted Cash
The ability to prevent or mitigate debt covenant breaches is an important part of the Board's leverage strategy. Headroom considered appropriate to the business and to each underlying portfolio individually has been negotiated on all financial covenants together with certain contractual cure rights, including the ability to inject cash (subject to some limitations as to the frequency and duration of cash cures) into ring-fenced financing structures in the event of actual or prospective breaches of financial covenants. The Board regularly monitors the Group's level of Uncommitted Cash, which is cash freely available to the Group, net of any creditors or other commitments.
The Group's Uncommitted Cash as at 30 June 2020 was GBP219.6 million (31 December 2019: GBP234.2 million). The level of Uncommitted Cash retained is assessed regularly in the light of property market and wider economic conditions and outlook. At present, the Board's assessment is that at a time of heightened uncertainty, largely but not solely related to the pandemic, the retention of a significant liquidity buffer remains appropriate.
Cash flow
The business is structured to provide an efficient flow through of net income to the payment of dividends. Rents are in the ordinary course predictable, financing costs are in the main fixed and the majority of operating costs are represented by the advisory fees which are transparently calculated relative to the Group's net assets.
The rent concessions granted in the period have reduced the cash flow from operating activities by GBP5.3 million in rent reductions, and GBP8.9 million in deferral of rents due from Merlin which should reverse in September 2021. Costs of GBP0.5 million relating to the rent concessions have been paid in the period.
Six months to 30 June Six months to 30 June
2020 2019
----------------------- -----------------------
Pence per Pence per
GBPm share GBPm share
-------------------------------- --------- ------------ --------- ------------
Cash from operating activities 25.8 8.0 47.1 14.8
Net interest and finance costs
paid (23.6) (7.3) (27.1) (8.4)
Tax paid (0.3) (0.1) (0.1) -
-------------------------------- --------- ------------ --------- ------------
1.9 0.6 19.9 6.4
Dividends paid (27.2) (8.4) (25.3) (7.9)
-------------------------------- --------- ------------ --------- ------------
(25.3) (7.8) (5.4) (1.5)
Scheduled repayments of secured
debt (1.7) (0.5) (2.1) (0.7)
Disposals of non-core budget
hotels net of debt repayment 1.2 0.4 4.0 1.2
Acquisition of fixed assets (0.2) (0.1) - -
Cash flow in the period (26.0) (8.0) (3.5) (1.0)
Cash at the start of the period 267.1 82.7 101.8 31.6
Dilution from incentive fee
share issues - (0.3) - (0.1)
Cash at the end of the period 241.1 74.4 98.3 30.5
-------------------------------- --------- ------------ --------- ------------
The cash balance comprises:
Six months to 30 June Six months to 30 June
2020 2019
----------------------- -----------------------
Pence per Pence per
GBPm share GBPm share
------------------------------- -------- ------------- -------- -------------
Free cash 226.4 69.9 234.8 72.7
Cash held in secured subgroups 14.7 4.5 26.8 8.3
Cash reserved for regulatory
capital - - 0.7 0.2
Cash at the end of the period 241.1 74.4 262.3 81.2
------------------------------- -------- ------------- -------- -------------
The Group's investment properties are in the vast majority of cases let on full repairing and insuring terms, with each tenant obliged to keep the premises in good and substantial repair and condition, including rebuilding, reinstating, renewing or replacing premises where necessary. Consequently, no material unrecovered capital expenditure, property maintenance or insurance costs have been incurred in the period and it is not currently expected that material costs of that nature will be incurred on the portfolio as it stands at 30 June 2020.
Nick Leslau
Chairman, Prestbury Investment Partners Limited
10 September 2020
Principal Risks and Uncertainties
The Board's responsibilities for risk management include assessing the principal risks facing the Group and how they may be mitigated, including the consideration of matters that may threaten the performance of the Group, its business model or its viability. These responsibilities are summarised on page 47 of the 2019 annual report. Following the approval of the annual report on 12 March 2020, the impact of the Covid-19 pandemic has become significantly more far reaching, including the adverse economic impact of lockdowns and other restrictions in the UK and elsewhere. This is not to diminish the very distressing impact of the loss of lives and other social burdens of the pandemic.
From the start of the lockdown period, Board updates attended by all Directors and by all Management Team members were held weekly to ensure that there was regular, thorough and timely engagement with the issues arising. Weekly meetings continued through to the end of June, since when they have been held monthly in addition to the scheduled quarterly Board meetings. The safety and wellbeing of the Board and of the Investment Adviser's staff and suppliers was given very early attention, with the Investment Adviser moving to remote working on 17 March 2020, ahead of the national lockdown which commenced the following week. Following a detailed risk assessment, the Investment Adviser's office reopened on 3 August 2020 and a phased return of staff to office based working commenced at that time.
The Group's risk register is reviewed at least annually and more often as circumstances require. Given the current elevated risks following the pandemic, the risk register, which was most recently reviewed in connection with the publication of the annual report in March 2020, has been updated. The Board considers that the impact of the pandemic and potential future globally disruptive events on this scale are overarching risks which heighten certain of the specific risks facing the business. We have previously identified Brexit and climate risks within that category of overarching risk. We have added pandemic disruption to our overarching risks and have increased the risk rating of each of our principal risks, as all are impacted by the consequences of the virus and the response of governments and public health bodies to it.
The Board considers that the principal risks and uncertainties facing the Group over the medium to long term are as follows:
Risk and change in
assessment since prior
year Impact on the Group Mitigation
------------------------------ ------------------------------- ---------------------------------------
Tenant risk
During the period A default of lease 34% (31 December 2019: 32%)
the Group derived obligations by a of passing rent before concessions
its income from ten material tenant and at the balance sheet date
(2019 year: ten) tenant its guarantor (if is contractually backed by
groups, two (2019 any) would have an large listed companies and
year: two) of which impact on the Group's a further 32% (31 December
have the benefit of revenue, earnings 2019: 31%) by global businesses
guarantees from or and cash flows and with multi billion pound valuations,
joint tenancies with could have an impact all with capital structures
substantial listed on debt covenant considered by the Board to
parent companies. compliance. The specialised have been strong and with
The three largest use of the properties impressive long term earnings
tenant groups account may mean that, in growth and (where relevant)
for 88% of passing the event of an unexpected share price track records
rent before concessions vacancy, re-letting up until the start of the
as at the balance takes time. pandemic. The balance of the
sheet date (31 December income is payable by substantial
2019: 87%). Investment property businesses also considered
valuations reflect by the Board to be sufficiently
Although the Board an independent external financially strong in the
considers the tenant valuer's assessment context of their lease obligations.
and guarantor groups of the future security
to be financially of income. A loss The properties themselves
strong in ordinary of income would therefore are Key Operating Assets,
circumstances, there impact net asset which should have the effect
can be no guarantee value as well as of enhancing rental income
that they will remain earnings. It could security.
able to comply with also lead to a breach
their obligations of interest cover The Board reviews the financial
throughout the term or debt service cover position of the tenants and
of the relevant leases. covenants, resulting guarantors at least every
in increased interest quarter and more often when
The severe impact rate margins payable relevant, based on publicly
of Covid-19 on the to lenders, restricted available financial information
Group's leisure and cash flows out of and any other trading information
hotels tenants, which secured debt groups which may be obtained either
suffered an abrupt or ultimately default under the terms of the leases
and almost complete under secured debt or informally.
closure of their operations agreements. The availability
as a result of the of distributable The Board reserves unsecured
pandemic, creates reserves could also and Uncommitted Cash outside
heightened tenant be restricted. ring-fenced debt structures
risk in the current which would be available to
circumstances. The be used to cure certain covenant
reopening of their defaults.
businesses in the
UK since 4 July 2020
has brought some easing
of risk but pressures
on tenants remain
elevated.
------------------------------ ------------------------------- ---------------------------------------
Property valuation
movements Investment properties The Group uses experienced
The Group invests make up the majority independent external valuers
in commercial property of the Group's assets, whose work is reviewed by
which is held on the so material changes suitably qualified members
balance sheet at its in their value will of the Investment Adviser
fair value at each have a significant and, separately, the Audit
balance sheet date. impact on measures Committee before being considered
The Company is therefore of net asset value by the Board in the context
exposed to movements including EPRA NTA, of the interim financial statements
in property valuations, with any effect of as a whole.
which are subjective the valuation changes
and may vary as a on net assets magnified The Board seeks to structure
result of a number by the impact of the Group's capital such that
of factors, many of borrowings. the level of borrowing and
which are outside the protections available
the control of the Falls in the value to cure a covenant default
Board. of investment properties are appropriate having regard
could lead to a breach to market conditions and financial
As a result of the of financial covenants covenant levels.
pandemic, this risk in secured debt facilities,
has increased as a resulting in increased The Board reserves unsecured
result of the relative interest margins and Uncommitted Cash outside
lack of liquidity payable to lenders, ring-fenced debt structures
in certain sectors restricted cash flows which would be available to
in which the Company out of secured debt cure certain covenant breaches
invests, namely the groups, restrictions to the extent of the Uncommitted
leisure and budget of distributable Cash available.
hotel sectors. The reserves available
risk relating to valuations for dividend payments
of the healthcare or default under
assets is not considered secured debt agreements.
to be similarly affected
by the pandemic. The Board notes the
relative resilience
in value demonstrated
by long lease properties
through the dramatic
property market decline
in 2008-11.
------------------------------ ------------------------------- ---------------------------------------
Borrowing
Certain Group companies In the event of a The Group's borrowing arrangements
have granted security breach of a debt comprise six ring-fenced subgroups
to lenders in the covenant, the Group with no cross-guarantees between
form of mortgages may be required to them and no recourse to other
over each of the Group's pay higher interest assets outside the secured
investment properties costs or increase subgroups. A financial covenant
and fixed and floating debt amortisation issue in one portfolio should
charges over other out of cash flows therefore be limited to that
assets. arising on a particular portfolio, save for tenant
portfolio, affecting related events (such as a
Following the sale Group cash flows tenant insolvency) where the
of eight hospitals and earnings. If two healthcare subgroups would
in August 2019, the a financial covenant both be affected by any issue
Group holds an Uncommitted breach is the result relating to Ramsay and the
Cash balance that of financial weakness two budget hotel facilities
is substantially higher of a tenant or a would be affected by any issue
than the level of guarantor, the property relating to Travelodge.
c. GBP60 million it valuations and therefore
has held historically. net asset value may Five of the facilities have
For such time as significant also be adversely LTV default covenants (the
surplus cash is retained affected. In certain Merlin Leisure facility has
on the balance sheet, circumstances the no LTV default covenant) and
the borrowing risk Company's ability all facilities have interest
can be considered to make cash distributions cover or debt service cover
to be lower than in to shareholders may covenants. The Board reviews
prior periods as the be reduced. compliance with all financial
ability to cure breaches covenants at least every quarter,
of financial covenants, Where a Group company including forward-looking
should they occur, is unable to make tests for at least twelve
is significantly greater. loan repayments out months, and considers whether
of existing cash there is sufficient headroom
While to date the resources, it may on relevant loan covenants
Group has had the be forced to sell to withstand stress test scenarios.
support of its lenders assets to repay part
in agreeing any consents or all of the Group's The Board seeks to structure
or waivers required debt. It may be necessary the Group's capital such that
to accommodate the to sell assets at gearing is appropriate having
support provided to below book value, regard to market conditions
its tenants throughout which would adversely and financial covenant levels,
the pandemic, for impact net assets with appropriate cure rights
as long as Tenant and future earnings. within debt facilities.
risk is elevated, Early debt repayments
Borrowing risk is would in most cases The Board reserves unsecured
also considered to crystallise penalties, and Uncommitted Cash outside
be elevated. which would also ring-fenced debt structures
adversely impact which would be available to
cash balances and cure certain covenant defaults
net assets and reduce to the extent of the Uncommitted
distributable reserves. Cash available.
------------------------------ ------------------------------- ---------------------------------------
Tax risk
The Group is subject If subject to UK The Board reviews compliance
to the UK REIT regime. corporation tax, with the UK REIT rules at
A failure to comply the Group's current least every quarter.
with certain UK REIT tax charge would
conditions resulting increase, impacting The REIT conditions which,
in the loss of this cash flows, net asset if breached, could result
status could result value and earnings, in automatic expulsion from
in property income and reducing cash the REIT regime are those
being subject to UK and reserves available relating to the Company's
corporation tax. for distributions. share and loan capital, and
Further, any asset are therefore (with the exception
This risk has increased sales would be subject of a successful hostile takeover
as a result of the to corporation tax, of the Company by a non-REIT)
pandemic. The pressures reducing the net within the control of the
on the UK Treasury amounts receivable Group.
of providing financial on sale and requiring
support throughout deferred tax to be
the pandemic is considered provided on inherent
to have increased capital gains.
the risk of changes
in the tax regime.
------------------------------ ------------------------------- ---------------------------------------
Liquidity risk
Working capital must A breach of a lending Unless there is a tenant default
be managed to ensure covenant, or the (the risk of which is explained
that both the Group insolvency of either under Tenant risk) the Group's
as a whole and all the Group as a whole cash flows are generally highly
individual entities or an individual predictable. The cash position
are able to meet their entity within a secured is reported to the Board at
liabilities as they subgroup could result least quarterly, projections
fall due, though with in a loss of net at least two years ahead are
highly predictable assets, impacting included in the Group budget
income and costs there net asset value and and are updated for review
is limited scope for earnings, and reducing when the interim and annual
unexpected liquidity cash and reserves reports are approved, and
pressures outside available for distributions projections for a five year
those risks described period are reviewed for the
under Tenant risk. As a result, there viability statement in the
could be insufficient annual report.
The Group holds a cash and/or distributable
material Uncommitted reserves to meet The Group has Uncommitted
Cash balance providing the Property Income Cash reserves out of which
the benefit of a very Distribution ("PID") any tax liabilities or increases
substantial liquidity requirement under in required PIDs above the
buffer. For as long the UK REIT rules, cash flow generated from operations
as the risks of further which could result could be met in the short
economic disruption in UK corporation to medium term. A scrip dividend
arising from the pandemic tax becoming payable alternative could also be
remain elevated, the on the Group's property offered to meet the PID requirement.
potential for the rental business.
liquidity buffer to This would in turn
be called on to provide reduce free cash
support to tenants flows.
and/or to deploy in
debt management is
also elevated.
------------------------------ ------------------------------- ---------------------------------------
There are certain overarching risks where the direct impact on the Group's operations is limited, but which the Board considers to be relevant to most of the major risk areas identified. These are:
-- the risks of extensive economic and social disruption, including from a pandemic;
-- disruption from the terms of the departure of the UK from the European Union following the end of the current transition period (generally referred to as Brexit risk); and
-- climate risk including the risks and costs of decarbonisation.
These are not classified as direct risks in their own right, but as general risks affecting many of the specific risk factors faced by the Group and which are also kept under review.
Global economic and social disruption: Pandemic risk
The Board and Management Team of the Company and those of the Group's major tenants have operated through various cycles of economic boom and bust, through varying degrees of political stability and have dealt with deep recessions and periods of great disruption. However, the global reach, sudden onset and extensive impact of the spread of Covid-19 is in a class of its own in its scale and unpredictability. While the full force of the lockdowns has been felt by our tenants in the leisure and hotels sectors, this has been mitigated, from the Company's perspective, through its significant weighting in healthcare assets which account for just over one third of the Group's annualised rents before Covid-related concessions. The Company's Uncommitted Cash balance, which is significantly larger than the level held historically, remains available to deal with further threats arising. While the path of the virus, of consumer behaviour in the face of it and of the related recession cannot be known, the experience of the Board and Management Team members is being brought to bear on every aspect of the Company's risk profile.
Brexit risk
The Board does not consider that Brexit presents a risk to the Group in and of itself, largely as the Group is not dependent on access to European markets and is not expected to be directly impacted by changes in regulations or tariffs. The tax treatment of the German assets (the only non-UK assets held which represent 5.2% of the Group's gross assets at the balance sheet date) is considered unlikely to change as a result of Brexit, although the terms of access to non-UK financial markets may be of relevance in any future equity and debt issues.
Nevertheless, the Board considers that Brexit does potentially weigh on all of the risks described above, principally through the heightened risk of market uncertainty or disruption and in particular on how the Group's tenants are affected. In this respect we take some comfort from the fact that a large majority of passing rents are underpinned by businesses with globally diverse sources of income, not solely dependent on the UK and its trade relations with the rest of the world.
There have been periods of significant political, economic and market uncertainty since the referendum to leave the EU in 2016 and this has at times affected equity, debt, property and foreign exchange markets. Delivery of the Group's growth aspirations depends on access to capital markets and external factors, including market volatility, can have an impact on the ability to implement the growth strategy. Given the Group's long term income profile and the characteristics of its debt, where the finance costs are ultimately fixed or capped, such conditions are currently considered unlikely to have a material impact on the status quo for the Group, but are considered to be relevant to the Group's growth aspirations in so far as there is an impact on the availability of debt and equity capital.
Climate risk
As the Company has very limited direct impact on the environment, this risk is not one where the Company can take steps to make a material impact. However, in assessing the strength of the credit quality of our tenants and of potential tenants, we take climate risk into account. This forms an integral part of the way that we consider how any assets that we are considering for acquisition meet the criteria for 'defensive business sectors' set out in the Company's business model.
Independent Review Report
Introduction
We have been engaged by the Company to review the condensed financial statements included within this interim report for the six months to 30 June 2020 which comprise the Group Income Statement, the Group Statement of Other Comprehensive Income, the Group Statement of Changes in Equity, the Group Balance Sheet, the Group Cash Flow Statement and the related notes.
We have read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed financial statements.
Directors' responsibilities
The interim report, including the financial information contained therein, is the responsibility of and has been approved by the Directors. The Directors are responsible for preparing the interim report in accordance with the rules of the London Stock Exchange for companies trading securities on the Alternative Investment Market ("AIM"). Those rules require that the interim report be presented and prepared in a form consistent with that which will be adopted in the Company's annual accounts having regard to the accounting standards applicable to such annual accounts.
As disclosed in note 2, the annual financial statements of the Group will be prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union. The condensed financial statements included in this interim report have been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting" as adopted by the European Union.
Our responsibility
Our responsibility is to express to the Company a conclusion on the condensed financial statements in the interim report based on our review.
Scope of review
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity", issued by the Financial Reporting Council for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
Emphasis of matter: property valuations
We draw your attention to the disclosures made in note 10 to the condensed financial statements. As described in the note, as a result of the impact of the outbreak of the Novel Coronavirus on the market, the Group's independent external property valuers have advised that less certainty, and a higher degree of caution, should be attached to their valuations of the leisure and budget hotel properties, which comprise 61% of the total investment property portfolio by value, than would normally be the case. Our review report is not modified in respect of this matter.
Conclusion
Based on our review, nothing has come to our attention that causes us to believe that the condensed financial statements in the interim report for the six months to 30 June 2020 are not prepared, in all material respects, in accordance with International Accounting Standard 34, as adopted by the European Union, and the rules of the London Stock Exchange for companies trading securities on AIM.
Use of our report
Our report has been prepared in accordance with the terms of our engagement to assist the Company in meeting the requirements of the rules of the London Stock Exchange for companies trading securities on AIM and for no other purpose. No person is entitled to rely on this report unless such a person is a person entitled to rely upon this report by virtue of and for the purpose of our terms of engagement or has been expressly authorised to do so by our prior written consent. Save as above, we do not accept responsibility for this report to any other person or for any other purpose and we hereby expressly disclaim any and all such liability.
BDO LLP
Chartered Accountants and Registered Auditors
London, United Kingdom
10 September 2020
BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).
Group Income Statement
Unaudited Unaudited
Six months Audited Six months
to Year to to
30 June 31 December 30 June
2020 2019 2019
Notes GBP000 GBP000 GBP000
--------------------------------- ----- ----------- ------------ -----------
Revenue 3 , 4 60,887 132,677 69,040
Property outgoings 5 (1,052) (1,327) (668)
--------------------------------- ----- ----------- ------------ -----------
Gross profit 59,835 131,350 68,372
Administrative expenses 6 (8,096) (22,128) (8,353)
Profit on disposal of investment
properties 30 53,074 421
Investment property revaluation 10 (142,026) 75,708 43,089
Operating (loss)/profit (90,257) 238,004 103,529
Finance income 385 730 193
Finance costs 7 (25,072) (84,234) (28,354)
--------------------------------- ----- ----------- ------------ -----------
(Loss)/profit before tax (114,944) 154,500 75,368
Tax charge 8 (26) (1,141) (857)
--------------------------------- ----- ----------- ------------ -----------
(Loss)/profit for the period 9 (114,970) 153,359 74,511
--------------------------------- ----- ----------- ------------ -----------
Pence per Pence per Pence per
share share share
--------------------------------- ----- ----------- ------------ ----------- Earnings per share Basic 9 (35.5) 47.5 23.1 Diluted 9 (35.5) 47.3 23.1 --------------------------------- ----- ----------- ------------ -----------
All amounts relate to continuing activities.
Group Statement of Other Comprehensive Income
Unaudited Unaudited
Six months Audited Six months
to Year to to
30 June 31 December 30 June
2020 2019 2019
Notes GBP000 GBP000 GBP000
--------------------------------------- ----- ----------- ------------ -----------
(Loss)/profit for the period (114,970) 153,359 74,511
Items that may subsequently be reclassified
to profit or loss:
Currency translation movements 2,541 (2,000) 26
Fair value movements in
interest rate derivatives 7 (852) (851) (929)
Other comprehensive income/(loss) 1,689 (2,851) (903)
Total comprehensive (loss)/income
for the period (113,281) 150,508 73,608
--------------------------------------- ----- ----------- ------------ -----------
The notes form part of these condensed financial statements.
Group Statement of Changes in Equity
Share
Share premium Other Retained Total
capital reserve reserves earnings equity
GBP000 GBP000 GBP000 GBP000 GBP000
-------------------------------- -------- -------- --------- --------- ---------
Six months to 30 June 2020 (unaudited)
At 1 January 2020 32,285 518,415 7,164 826,678 1,384,542
-------------------------------- -------- -------- --------- --------- ---------
Loss for the period - - - (114,970) (114,970)
Other comprehensive income - - 1,689 - 1,689
Total comprehensive loss - - 1,689 (114,970) (113,281)
Issue of shares 119 4,791 (4,910) - -
Interim dividends of 8.4 pence
per share - - - (27,169) (27,169)
-------------------------------- -------- -------- --------- --------- ---------
At 30 June 2020 32,404 523,206 3,943 684,539 1,244,092
-------------------------------- -------- -------- --------- --------- ---------
Year to 31 December 2019 (audited)
At 1 January 2019 32,156 513,675 9,977 725,780 1,281,588
-------------------------------- -------- -------- --------- --------- ---------
Profit for the year - - - 153,359 153,359
Other comprehensive loss - - (2,851) - (2,851)
Total comprehensive income - - (2,851) 153,359 150,508
Issue of shares 129 4,740 (4,869) - -
Shares to be issued - - 4,907 - 4,907
Interim dividends of 16.3 pence
per share - - - (52,461) (52,461)
-------------------------------- -------- -------- --------- --------- ---------
At 31 December 2019 32,285 518,415 7,164 826,678 1,384,542
-------------------------------- -------- -------- --------- --------- ---------
Six months to 30 June 2019 (unaudited)
At 1 January 2019 32,156 513,675 9,977 725,780 1,281,588
-------------------------------- -------- -------- --------- --------- ---------
Profit for the period - - - 74,511 74,511
Other comprehensive loss - - (903) - (903)
Total comprehensive income - - (903) 74,511 73,608
Issue of shares 129 4,743 (4,872) - -
Interim dividends of 7.9 pence
per share - - - (25,342) (25,342)
-------------------------------- -------- -------- --------- --------- ---------
At 30 June 2019 32,285 518,418 4,202 774,949 1,329,854
-------------------------------- -------- -------- --------- --------- ---------
The notes form part of these condensed financial statements.
Group Balance Sheet
Unaudited Audited Unaudited
30 June 31 December 30 June
2020 2019 2019
Notes GBP000 GBP000 GBP000
---------------------------- ------ --------- ------------ -----------
Non-current assets
Investment properties 3 , 10 1,986,790 2,111,297 2,378,998
Headlease rent deposits 2,740 2,742 2,775
Tangible fixed assets 233 - -
Interest rate derivatives 15 14 43 82
---------------------------- ------ --------- ------------ -----------
1,989,777 2,114,082 2,381,855
---------------------------- ------ --------- ------------ -----------
Current assets
Cash and cash equivalents 11 241,120 267,119 98,338
Trade and other receivables 12 9,948 3,798 4,539
251,068 270,917 102,877
Total assets 2,240,845 2,384,999 2,484,732
---------------------------- ------ --------- ------------ -----------
Current liabilities
Trade and other payables 13 (31,086) (38,290) (34,604)
Secured debt 14 (4,090) (1,170) (1,715)
Interest rate derivatives 15 (484) (246) (229)
Current tax liability (31) (129) (66)
---------------------------- ------ --------- ------------ -----------
(35,691) (39,835) (36,614)
---------------------------- ------ --------- ------------ -----------
Non-current liabilities
Secured debt 14 (919,641) (920,408) (1,077,224)
Head rent obligations under
finance leases 10 (28,098) (28,190) (28,424)
Deferred tax liability 16 (11,931) (11,267) (11,768)
Interest rate derivatives 15 (1,392) (757) (848)
(961,062) (960,622) (1,118,264)
Total liabilities (996,753) (1,000,457) (1,154,878)
---------------------------- ------ --------- ------------ -----------
Net assets 1,244,092 1,384,542 1,329,854
---------------------------- ------ --------- ------------ -----------
Share capital 17 32,404 32,285 32,285
Share premium reserve 18 523,206 518,415 518,418
Other reserves 18 3,943 7,164 4,202
Retained earnings 18 684,539 826,678 774,949
Total equity 1,244,092 1,384,542 1,329,854
---------------------------- ------ --------- ------------ -----------
Pence per Pence per Pence per
share share share
---------------------------- ------ --------- ------------ -----------
Basic NAV per share 19 383.9 428.8 411.9
Diluted NAV per share 19 383.9 427.3 411.9
EPRA NTA per share 19 386.4 429.4 414.1
---------------------------- ------ --------- ------------ -----------
The notes form part of these condensed financial statements.
Group Cash Flow Statement
Unaudited Unaudited
Six months Audited Six months
to Year to to
30 June 31 December 30 June
2020 2019 2019
Notes GBP000 GBP000 GBP000
---------------------------------- ----- ----------- ------------ -----------
Operating activities
(Loss)/profit before tax (114,944) 154,500 75,368
Adjustments for non-cash
items:
Investment property revaluation 10 131,978 (86,727) (48,851)
Depreciation 6 - -
Administrative expenses payable
in shares - 4,907 -
Profit on disposal of investment
properties (30) (53,074) (421)
Finance income (385) (730) (193)
Finance costs 7 25,072 84,234 28,354 ---------------------------------- ----- ----------- ------------ ----------- Cash flows from operating activities before changes in working capital 41,697 103,110 54,257 Changes in working capital: Trade and other receivables (8,722) (265) (139) Trade and other payables (7,209) (2,144) (7,014) Headlease rent deposits 2 24 (9) Cash generated from operations 25,768 100,725 47,095 Tax paid (248) (233) (67) ---------------------------------- ----- ----------- ------------ ----------- Cash flows from operating activities 25,520 100,492 47,028 ---------------------------------- ----- ----------- ------------ ----------- Investing activities Disposal of investment properties 2,595 357,744 4,351 Interest received 385 695 193 Acquisition of tangible fixed assets (239) - - Acquisition of investment properties - (307) - Cash flows from investing activities 2,741 358,132 4,544 ---------------------------------- ----- ----------- ------------ ----------- Financing activities Dividends paid (27,169) (52,461) (25,342) Interest and finance costs paid (23,991) (53,638) (27,247) Scheduled repayments of secured debt (1,742) (3,988) (2,078) Repayment of secured debt from proceeds of disposal of investment properties (1,494) (154,519) (307) Fees on accelerated prepayment of secured debt - (27,868) - Loan arrangement costs paid - (670) - Cash flows from financing activities (54,396) (293,144) (54,974) ---------------------------------- ----- ----------- ------------ ----------- (Decrease)/increase in cash and cash equivalents (26,135) 165,480 (3,402) Cash and cash equivalents at the beginning of the period 267,119 101,745 101,745 Currency translation movements 136 (106) (5) ---------------------------------- ----- ----------- ------------ ----------- Cash and cash equivalents at the end of the period 11 241,120 267,119 98,338 ---------------------------------- ----- ----------- ------------ -----------
The notes form part of these condensed financial statements.
Notes to the Condensed Financial Statements
1. General information about the Group
The financial information set out in this report covers the six months to 30 June 2020, with comparative amounts shown for the year to 31 December 2019 and the six months to 30 June 2019, and includes the results and net assets of the Company and its subsidiaries, together referred to as the Group.
The Company is incorporated in the United Kingdom. The registered office and principal place of business is Cavendish House, 18 Cavendish Square, London, W1G 0PJ.
The Company is listed on the AIM market of the London Stock Exchange.
Further information about the Group and Company can be found on its website, www.SecureIncomeREIT.co.uk.
2. Basis of preparation and accounting policies
The financial information contained in this report has been prepared in accordance with IAS 34 "Interim Financial Reporting" as adopted by the European Union and on a going concern basis, which the Directors have considered and believe remains appropriate for the condensed financial statements. In conducting their review of the appropriateness of the going concern basis, the Board had regard to the principal risks and uncertainties identified in their review of the Group's risk register.
The accounting policies adopted in this report are consistent with those applied in the Group's statutory accounts for the year to 31 December 2019 and are expected to be consistently applied in the financial statements for the year to 31 December 2020. The Group's accounting policy for revenue is stated below in full, given the importance in this period of the treatment of revenue recognition and specifically in the circumstances of the rent concessions granted to various tenants as a result of Covid-19. This expands the existing policy for clarity and is not a change of accounting policy.
Revenue comprises rental income exclusive of VAT, recognised in the income statement on an accruals basis.
Future anticipated rental income is spread over the term of a lease on a straight line basis, giving rise to a Rent Smoothing Adjustment in cases where future rental uplifts can be determined with sufficient certainty. Where income is recognised in advance of the contractual right to receive that income, such as from leases with fixed rent uplifts, an adjustment is made to ensure that the carrying value of the relevant investment property including accrued rent does not exceed the fair value of the property as assessed by the independent expert valuers. Income arising from contractual rights that are subject to external factors, such as RPI-linked or open market rent reviews, is recognised in the income statement in the period in which it is determinable and reasonably certain.
Where there has been a change in the scope of a lease or the consideration for a lease that was not part of the original terms and conditions of the lease, this is accounted for as a lease modification. This treatment applies to cases where rent reductions have been agreed. Such modifications are accounted for as new leases from the effective date of the modification, being the date at which both parties agree to the terms of the modification. Any prepaid or accrued lease payments relating to the original lease at the date of modification are treated as part of the lease payments for the new lease. Future anticipated rental income is spread over the term of the lease on a straight line basis, giving rise to a Rent Smoothing Adjustment in the event that rent is reduced for a period.
No new or revised standard is expected to be relevant to the Group for the year ending 31 December 2020 or to have a material effect on the Group's financial statements in future.
Euro denominated results for the Group's German operations have been converted to Sterling at an average exchange rate for the period of EUR1:GBP0.87 (year to 31 December 2019: EUR1:GBP0.88; six months to 30 June 2019: EUR1:GBP0.87) and period end balances converted to Sterling at the 30 June 2020 exchange rate of EUR1:GBP0.91 (31 December 2019: EUR1:GBP0.85; 30 June 2019: EUR1:GBP0.89).
The condensed financial statements for the period are unaudited and the financial information for the year ended 31 December 2019 contained therein does not constitute statutory accounts for the purposes of the Companies Act 2006. The annual report and financial statements for 2019 have been filed at Companies House. The Independent Auditor's report on the annual report and financial statements for 2019 was unqualified, did not draw attention to any matters by way of emphasis, and did not contain a statement under sections 498 (2) or 498 (3) of the Companies Act 2006.
The Group's financial performance is not subject to material seasonal fluctuations.
The principal area of estimation uncertainty is the investment property valuation where, as described in note 10 , the opinion of independent external valuers has been obtained. The principal areas of judgement are:
-- the recognition of any additional revenue in the period as a result of an outstanding May 2018 open market rent review on the Ramsay hospitals, where no uplift has been recognised on the basis that the Directors consider that it is not possible at present to make a reasonably certain estimate of any uplift that might result. This position has not changed from that disclosed in the annual report and financial statements for 2019; and
-- assessing whether it is appropriate to make provision at the balance sheet date for the relevant proportion of any incentive fee expected to be payable for the whole of the current financial year. In making their assessment that no such provision is required in the period, the Directors estimate the net assets per share of the Group at the end of the financial year on a basis consistent with that applied in prior periods. As described in note 20 , this does not constitute a forecast but represents an estimated illustrative case only, and is considered to provide a reasonable basis for assessing whether an incentive fee will be payable while recognising the limitations inherent in any estimate of future values.
3. Operating segments
IFRS 8 "Operating Segments" requires operating segments to be identified on a basis consistent with internal reports about components of the Group that are reviewed by the chief operating decision maker to make decisions about resources to be allocated between segments and assess their performance. The Group's chief operating decision maker is the Board of the Company.
The Group owned 161 properties at 30 June 2020, originally acquired in five separate portfolios. Although certain information about these portfolios is described on a portfolio basis within the Investment Adviser's report or grouped by property type (Healthcare, Leisure and Budget hotels), when considering resource allocation and performance the Board reviews quarterly management accounts and budgets prepared on a basis which aggregates the performance of the portfolios and focuses on the Group's Total Accounting Return. The Board has therefore concluded that the Group has operated in, and was managed as, one reportable segment of property investment in both the current period and prior year.
The geographical split of revenue and applicable non-current assets was as follows:
Unaudited
Unaudited Audited Six months
Six months Year to to
to 30 June 31 December 30 June
2020 2019 2019
Revenue GBP000 GBP000 GBP000
----------------------- ------------ ------------- ------------
UK 56,742 124,348 64,902
Germany 4,145 8,329 4,138
----------------------- ------------ ------------- ------------
60,887 132,677 69,040
----------------------- ------------ ------------- ------------
Unaudited Audited Unaudited
30 June 31 December 30 June
2020 2019 2019
Investment properties GBP000 GBP000 GBP000
----------------------- ------------ ------------- ------------
UK 1,870,265 2,001,047 2,262,948
Germany 116,525 110,250 116,050
----------------------- ------------ ------------- ------------
1,986,790 2,111,297 2,378,998
----------------------- ------------ ------------- ------------
Revenue by tenant comprises:
Unaudited
Unaudited Audited Six months
Six months Year to to
to 30 June 31 December 30 June
Revenue including Rent Smoothing 2020 2019 2019
Adjustments GBP000 GBP000 GBP000
------------------------------------ ------------ ------------- ------------
Ramsay Healthcare UK Operations
Limited 18,543 48,072 27,320
Travelodge Hotels Limited 14,885 30,400 15,318
Merlin Attractions Operations
Limited 14,003 27,654 13,592
Other tenants (each less than
10% of revenue) 13,456 26,551 12,810
------------------------------------ ------------ ------------- ------------
Reported revenue 60,887 132,677 69,040
------------------------------------ ------------ ------------- ------------
Revenue excluding Rent Smoothing
Adjustments
------------------------------------ ------------ ------------- ------------
Ramsay Healthcare UK Operations
Limited 17,037 43,317 24,425
Merlin Attractions Operations
Limited 14,003 27,654 13,592
Travelodge Hotels Limited 10,329 30,400 15,318
Other tenants (each less than
10% of revenue) 9,732 20,742 10,212
------------------------------------ ------------ ------------- ------------
Revenue on Adjusted EPRA Earnings
basis 51,101 122,113 63,547
------------------------------------ ------------ ------------- ------------
4. Revenue
Unaudited
Unaudited Audited Six months
Six months Year to to
to 30 June 31 December 30 June
2020 2019 2019
GBP000 GBP000 GBP000
----------------------------------- ------------ ------------- ------------
Rental income 50,202 120,533 62,742
Rent Smoothing Adjustments (note
10 ) 9,786 10,564 5,493
Recovery of head rent and service
charge costs from occupational
tenants 899 1,580 805
----------------------------------- ------------ ------------- ------------
60,887 132,677 69,040
----------------------------------- ------------ ------------- ------------
The Rent Smoothing Adjustments arise through the Group's accounting policy in respect of revenue recognition which requires the recognition of rental income on a straight line basis over the lease term, including rental uplifts throughout the term in certain circumstances. Uplifts that must be smoothed over the lease term are those for the 42% of passing rent as at 30 June 2020 (31 December 2019 and 30 June 2019: 41%) that increases by a fixed percentage at each review date and the 6% of passing rent as at 30 June 2020 (31 December 2019 and 30 June 2019: 5%) that is subject to minimum fixed uplifts on RPI-linked reviews. A new feature of this calculation in the current reporting period is the impact of the temporary rent reductions agreed to assist tenants as a result of the Covid-19 pandemic which in the short term result in rental income being recognised in the income statement ahead of cash flows but which, after the end of each relevant concession period, reverse so that rental income recognised in the income statement will be lower than cash rents received on those leases.
Further detail on the Rent Smoothing Adjustments is provided in note 10 and the Supplementary Information which follows the condensed financial statements.
5. Property outgoings
Unaudited
Unaudited Audited Six months
Six months Year to to
to 30 June 31 December 30 June
2020 2019 2019
GBP000 GBP000 GBP000
------------------------------------ ------------ ------------- ------------
Property outgoings in the income
statement 1,052 1,327 668
Finance element of head rent
included in finance costs (note
7 ) 811 1,702 822
Movement in headlease liabilities
included in property revaluations
(note 10 ) 94 100 87
------------------------------------ ------------ ------------- ------------
Total property outgoings 1,957 3,129 1,577
Recovery of head rents and other
costs from occupational tenants,
included in revenue (note 4
) (899) (1,580) (805)
Net property outgoings 1,058 1,549 772
------------------------------------ ------------ ------------- ------------
Property outgoings in the income statement comprise:
Unaudited
Unaudited Audited Six months
Six months Year to to
to 30 June 31 December 30 June
2020 2019 2019
GBP000 GBP000 GBP000
-------------------------------------- ------------ ------------- ------------
Cost of documenting rent concessions 534 - -
Head rents 296 441 244
Costs of prospective capital
projects 105 215 178
Irrecoverable property costs 69 121 65
Managing agent costs and other
net property outgoings 41 134 13
Rent review costs 7 416 168
1,052 1,327 668
-------------------------------------- ------------ ------------- ------------
Amounts shown above include any irrecoverable VAT. The costs of prospective capital projects relate largely to feasibility studies and may subsequently be capitalised if those projects proceed.
6. Administrative expenses
Unaudited
Unaudited Audited Six months
Six months Year to to
to 30 June 31 December 30 June
2020 2019 2019
GBP000 GBP000 GBP000
------------------------------- ------------ ------------- ------------
Advisory fee (note 20 ) 7,065 14,732 7,306
Other administrative expenses 743 1,546 774
Corporate costs 288 594 273
Incentive fee (note 20 ) - 5,256 -
8,096 22,128 8,353
------------------------------- ------------ ------------- ------------
Amounts shown above include any irrecoverable VAT.
7. Finance costs
Unaudited
Unaudited Audited Six months
Six months Year to to
to 30 June 31 December 30 June
2020 2019 2019
GBP000 GBP000 GBP000
--------------------------------------- ------------ ------------- ------------
Interest on secured debt 22,670 49,920 26,019
Amortisation of loan arrangement
costs (non-cash) 1,151 2,382 1,211
Interest charge on headlease
liabilities 811 1,702 822
Amortisation of interest rate
derivatives, transferred from
other reserves 186 269 117
Cost of documenting rent concessions,
including lenders' legal costs 108 - -
Loan agency fees and other lender
costs 80 546 124
Fair value adjustment of interest
rate derivatives 50 104 61
Amortisation of loan arrangement
costs on accelerated loan repayments
(non-cash) 16 1,443 -
Fees on accelerated loan repayments
on property disposals - 27,868 -
Finance costs recognised in
the income statement 25,072 84,234 28,354
--------------------------------------- ------------ ------------- ------------
Fair value adjustment of interest
rate derivatives 1,038 1,120 1,046
Amortisation of interest rate
derivatives, transferred to
the income statement (186) (269) (117)
Finance costs recognised in
other comprehensive income/(loss) 852 851 929
------------------------------------ ----- ----- -----
8. Tax
Unaudited
Unaudited Audited Six months
Six months Year to to
to 30 June 31 December 30 June
Analysis of tax charge in the 2020 2019 2019
period GBP000 GBP000 GBP000
---------------------------------- ------------ ------------- ------------
Current tax - Germany
Corporation tax charge 171 341 167
Adjustments in respect of prior
periods (31) 41 22
Deferred tax - Germany
Deferred tax (credit)/charge (114) 759 668
---------------------------------- ------------ ------------- ------------
26 1,141 857
---------------------------------- ------------ ------------- ------------
The tax assessed for the period varies from the standard rate of corporation tax in the UK applied to the (loss)/profit before tax. The differences are explained below:
Unaudited
Unaudited Audited Six months
Six months Year to to
to 30 June 31 December 30 June
2020 2019 2019
GBP000 GBP000 GBP000
------------------------------------- ------------ ------------- ------------
(Loss)/profit before tax (114,944) 154,500 75,368
------------------------------------- ------------ ------------- ------------
Tax (credit)/charge at the standard
rate of corporation tax in the
UK of 19% (21,839) 29,355 14,320
Effects of :
Investment property revaluation
not taxable 25,968 (15,652) (8,579)
Qualifying property rental business
not taxable under UK REIT rules (5,379) (4,001) (5,597)
Recognition of tax losses 841 721 384
Finance costs disallowed under
corporate interest restriction
rules 301 420 220
German current tax charge 171 341 167
Adjustments in respect of prior
periods (31) 41 22
Profit on disposal of investment
properties not taxable (6) (10,084) (80)
Tax charge for the period 26 1,141 857
------------------------------------- ------------ ------------- ------------
The Company and its subsidiaries operate as a UK Group REIT. Subject to continuing compliance with certain rules, the UK REIT rules exempt the profits of the Group's UK and German property rental business from UK corporation tax. Gains on the Group's UK and German properties are also generally exempt from UK corporation tax, provided they are not held for trading or in certain circumstances sold in the three years after completion of a development. None of the Group's properties was developed in the last three years.
To remain a UK REIT, there is a number of conditions to be met in respect of the Company, the Group's qualifying activity and the Group's balance of business. Since entering the UK REIT regime the Group has complied with all applicable conditions.
The Group is subject to German corporation tax on its German property rental business at an effective rate of 8% (year to 31 December 2019 and six months to 30 June 2019: 15%), resulting in a tax charge of GBP0.2 million (year to 31 December 2019: GBP0.3 million; six months to 30 June 2019: GBP0.2 million). A deferred tax liability of GBP11.9 million (31 December 2019: GBP11.3 million; 30 June 2019: GBP11.8 million) is recognised for the German capital gains tax that would potentially be payable on the sale of the relevant investment properties.
Certain non-resident unit trust Group entities intend to enter into transparency elections prior to 30 September 2020 under schedule 5AAA to the Taxation of Chargeable Gains Act 1992, such that any disposals of UK investment properties by those entities will be deemed to arise in their parent companies and can therefore benefit from the REIT exemption.
9. Earnings per share
Basic EPS
Earnings per share ("EPS") is calculated as the profit attributable to ordinary shareholders of the Company for each period divided by the weighted average number of ordinary shares in issue throughout the relevant period. In calculating the weighted average number of shares in issue:
-- where shares have been issued during the period in settlement of an incentive fee relating to the results of the prior year, they are treated for the purposes of the EPS calculation as having been issued on the first day of the period rather than their actual date of issue, which is typically in March; and
-- shares to be issued at the balance sheet date in settlement of an incentive fee relating to the results of that period are not taken into account.
Diluted EPS
The weighted average number of shares used in the calculation of diluted EPS is required to include any shares to be issued in respect of an incentive fee, as if those shares had been in issue throughout the whole of the period over which the fee was earned, although in fact they will not have been issued until the following period.
Unaudited
Unaudited Audited Six months
Six months Year to to
to 30 June 31 December 30 June
2020 2019 2019
GBP000 GBP000 GBP000
------------------------------------- ------------ ------------- ------------
(Loss)/profit for the period (114,970) 153,359 74,511
------------------------------------- ------------ ------------- ------------
Weighted average number of shares
in issue Number Number Number
------------------------------------- ------------ ------------- ------------
Basic EPS calculation 324,035,146 322,850,595 322,850,595
Shares to be issued in satisfaction
of incentive fee - 1,184,551 -
Diluted EPS calculation 324,035,146 324,035,146 322,850,595
------------------------------------- ------------ ------------- ------------
Pence Pence per Pence per
per share Share share
------------- ---------- --------- ---------
Basic EPS (35.5) 47.5 23.1
Diluted EPS (35.5) 47.3 23.1
------------- ---------- --------- ---------
EPRA EPS
EPRA, the European Public Real Estate Association, publishes guidelines for calculating adjusted earnings designed to represent core operational activities. These guidelines have been applied and the calculation of EPRA EPS is set out below.
An Adjusted EPRA earnings calculation has also been presented. This removes the effect of the Rent Smoothing Adjustments and, in the current period, the rent on the theme parks that has been deferred to 2021 (in order not to artificially flatter Dividend Cover calculations) and any non-recurring costs such as those for share placings. The adjusted measure also excludes any incentive fees which are paid in shares, as they are considered to be linked to revaluation movements and are therefore best treated consistently with revaluations.
In calculating Adjusted EPRA EPS, the weighted average number of shares is 323,514,464 (31 December 2019: 322,540,246; 30 June 2019: 322,224,754), calculated using the actual date on which any shares are issued during the period so as not to create a mismatch between the basis of calculation of Adjusted EPRA EPS and the dividends per share paid in the period. In this way the Group's measure of Dividend Cover is considered to be more precisely calculated.
The weighted average number of shares applied in calculating Adjusted EPRA EPS has been derived as follows:
Unaudited
Unaudited Audited Six months
Six months Year to to
to 30 June 31 December 30 June
2020 2019 2019
Number Number Number
---------------------------------- ------------ ------------- ------------
Shares in issue throughout the
period 322,850,595 321,563,353 321,563,353
Pro rata adjustment for:
Shares issued in March 2020
in settlement of 2019 incentive
fee 663,869 - -
Shares issued in March 2019
in settlement of 2018 incentive
fee - 976,893 661,401
Weighted average shares in issue 323,514,464 322,540,246 322,224,754
---------------------------------- ------------ ------------- ------------
EPRA and Adjusted EPRA earnings are calculated as:
Unaudited
Unaudited Audited Six months
Six months Year to to
to 30 June 31 December 30 June
2020 2019 2019
GBP000 GBP000 GBP000
--------------------------------------- ------------ ------------- ------------
(Loss)/profit for the period (114,970) 153,359 74,511
EPRA adjustments :
Investment property revaluation
(note 10 ) 142,026 (75,708) (43,089)
German deferred tax on investment
property revaluations (note
8 ) (114) 759 668
Profit on disposal of investment
properties (30) (53,074) (421)
Other early debt repayment costs
(note 7 ) 16 1,443 -
Fair value adjustment of interest
rate derivatives 15 36 27
Cost of early repayment of debt
on disposal of investment properties - 27,868 -
EPRA earnings 26,943 54,683 31,696
Other adjustments :
Rent Smoothing Adjustments (note
10 ) (9,786) (10,564) (5,493)
Rent deferral (637) - -
Incentive fee - 5,256 -
Adjusted EPRA earnings 16,520 49,375 26,203
--------------------------------------- ------------ ------------- ------------
As a result of those adjustments, the EPRA EPS and Adjusted EPRA EPS figures are as follows:
Unaudited
Unaudited Audited Six months
Six months Year to to
to 30 June 31 December 30 June
2020 2019 2019
Pence per share Pence per share Pence per share
------------------- ----------------- ----------------- -----------------
EPRA EPS 8.3 16.9 9.8
Adjusted EPRA EPS 5.1 15.3 8.1
------------------- ----------------- ----------------- -----------------
10. Investment properties
Unaudited
Unaudited Audited Six months
Six months Year to to
to 30 June 31 December 30 June
2020 2019 2019
Freehold investment properties GBP000 GBP000 GBP000
------------------------------------- ------------ ------------- ------------
At the start of the period 1,802,390 2,018,115 2,018,115
Revaluation movement (97,375) 88,901 48,851
Currency translation movement 7,565 (5,986) (171)
Disposals - (301,535) (3,480)
Reclassification on acquisition
of freehold interest in leasehold
property - 2,595 -
Acquisition of freehold interest
in leasehold property - 262
Additions - 38 -
At the end of the period 1,712,580 1,802,390 2,063,315
------------------------------------- ------------ ------------- ------------
Leasehold investment properties
------------------------------------- ------------ ------------- ------------
At the start of the period 308,907 317,105 317,105
Revaluation movement (34,603) (2,174) -
Movement in headlease liabilities (94) (100) (87)
Disposals - (3,115) (1,335)
Additions - 7 -
Reclassification on acquisition
of freehold interest in leasehold
property - (2,595) -
Headlease liabilities on disposals - (221) -
At the end of the period 274,210 308,907 315,683
------------------------------------- ------------ ------------- ------------
Total investment properties
------------------------------------- ------------ ------------- ------------
At the start of the period 2,111,297 2,335,220 2,335,220
Revaluation movement (131,978) 86,727 48,851
Currency translation movement 7,565 (5,986) (171)
Movement in headlease liabilities (94) (100) (87) Disposals - (304,650) (4,815) Net cost of acquisition of freehold interest in leasehold property - 262 - Additions - 45 - Headlease liabilities on disposals - (221) - At the end of the period 1,986,790 2,111,297 2,378,998 ------------------------------------- ------------ ------------- ------------
The properties were valued as at 30 June 2020 at GBP1,958.7 million (31 December 2019: GBP2,083.1 million; 30 June 2019: GBP2,350.6 million) by CBRE Limited or Christie & Co in their capacity as independent external valuers. Of the total fair value, GBP116.5 million (31 December 2019: GBP110.3 million; 30 June 2019: GBP116.1 million) relates to the Group's German investment properties, the valuations of which are translated into Sterling at the prevailing exchange rate at each balance sheet date.
The valuations were prepared on a fixed fee basis, independent of the portfolio value, and were undertaken in accordance with RICS Valuation - Global Standards 2020 on the basis of fair value, supported by reference to market evidence of transaction prices for similar properties where available. The valuers considered there to be a shortage of such evidence for the leisure and budget hotels valuations as at the balance sheet date.
While the Royal Institution of Chartered Surveyors mandated that valuations in certain sectors should be subject to "material valuation uncertainty" as at 30 June 2020, this proviso is applied on a sector basis. The 30 June 2020 valuations of the healthcare assets, which account for 39% of the Group's property assets by value as at that date, did not carry such a proviso and none of the June 2019 or December 2019 valuations in any sector were subject to material valuation uncertainty.
The valuation report on healthcare assets accounting for 39% of the Group's investment property valuations as at 30 June 2020 included this wording:
"In the healthcare sector, as at the Valuation Date, transaction volumes provided enough up-to-date comparable market evidence upon which to base opinions of value for the Hospital assets and therefore there is no material uncertainty associated with these properties. We do however recommend that you keep the Valuations of all assets contained in this report under frequent review."
The reports from each valuer included statements about material valuation uncertainty in respect of the leisure and budget hotel properties, which comprise 61% of the Group's investment property valuations as at 30 June 2020. The report on leisure and budget hotel assets accounting for 51% of the Group's investment property valuations as at 30 June 2020 included this wording:
"The outbreak of the Novel Coronavirus (COVID-19), declared by the World Health Organisation as a 'Global Pandemic' on the 11 March 2020, has impacted many aspects of daily life and the global economy - with some real estate markets experiencing significantly lower levels of transactional activity and liquidity.
As at the Valuation Date, in the case of the Visitor Attraction and Hotel properties listed within this report there is a shortage of market evidence for comparison purposes, to inform opinions of value. Our Valuation of these properties is therefore reported as being subject to 'material valuation uncertainty' as set out in VPS 3 and VPGA 10 of the RICS Valuation - Global Standards. Consequently, less certainty - and a higher degree of caution - should be attached to our Valuation than would normally be the case.
For the avoidance of doubt, the inclusion of the 'material valuation uncertainty' declaration above does not mean that the Valuation cannot be relied upon. Rather, the declaration has been included to ensure transparency of the fact that - in the current extraordinary circumstances - less certainty can be attached to the Valuation than would otherwise be the case. The material uncertainty clause is to serve as a precaution and does not invalidate the Valuation. Given the unknown future impact of COVID-19 on the real estate market and the difficulty in differentiating between short-term impacts and longer-term structural market changes, we recommend that you keep the Valuations contained in this report under frequent review."
The report on leisure assets accounting for 10% of the Group's investment property valuations as at 30 June 2020 included this wording:
"The outbreak of the Novel Coronavirus (COVID-19), declared by the World Heath Organisation as a 'Global Pandemic' on the 11 March 2020, has impacted global financial markets. Travel restrictions have been implemented by many countries.
Market activity is being impacted in many sectors. As at the Valuation Date, we consider that we can attach less weight to previous market evidence for comparison purposes, to inform opinions of value. Indeed the current response to COVID-19 means that we are faced with an unprecedented set of circumstances on which to base a judgement.
Our valuations are therefore reported as being subject to 'material valuation uncertainty' as set out in VPS 3 and VPGA 10 of the RICS Valuation - Global Standards. Consequently, less certainty - and a higher degree of caution - should be attached to our valuation than would normally be the case. Given the unknown future impact that COVID-19 might have on the real estate market, we recommend that you keep the valuation of the properties under frequent review.
For the avoidance of doubt, the inclusion of the 'material valuation uncertainty' declaration above does not mean that the valuation cannot be relied upon. Rather, the declaration has been included to ensure transparency of the fact that - in the current extraordinary circumstances - less certainty can be attached to the valuation than would otherwise be the case. The material uncertainty clause is to serve as a precaution and does not invalidate the valuation."
The historic cost of the Group's investment properties as at 30 June 2020 was GBP1,479.6 million (31 December 2019: GBP1,479.6 million; 30 June 2019: GBP1,686.8 million).
All of the investment properties are held within six (31 December 2019 and 30 June 2019: six) ring-fenced security pools as security under fixed charges in respect of separate secured debt facilities.
Under the Group's accounting policy in line with International Financial Reporting Standards, the carrying value of leasehold property is grossed up by the present value of minimum headlease payments. The corresponding liability to the head leaseholder is included in the balance sheet as a finance lease obligation. The reconciliation between the carrying value of the investment properties and their independent external valuation is as follows:
Unaudited Audited Unaudited
30 June 31 December 30 June
2020 2019 2019
GBP000 GBP000 GBP000
----------------------------------- ---------- ------------- ----------
Carrying value 1,986,790 2,111,297 2,378,998
Gross-up of headlease liabilities (28,098) (28,190) (28,424)
----------------------------------- ---------- ------------- ----------
Independent external valuation 1,958,692 2,083,107 2,350,574
----------------------------------- ---------- ------------- ----------
Included within the carrying value of investment properties at 30 June 2020 is GBP167.8 million (31 December 2019: GBP155.7 million; 30 June 2019: GBP202.6 million) in respect of Rent Smoothing Adjustments described in note 4 , representing the amount of any net mismatch between rent included in the income statement and cash rents actually received. This net receivable increases over broadly the first half of each lease term (in the case of fixed or minimum uplifts) or the period of any temporary rent reduction (those agreed with tenants during the period in light of Covid-19) and then unwinds, reducing to zero by the end of the lease term.
The difference between rents on a straight line basis and rents actually receivable is included within, but does not increase over fair value, the carrying value of investment properties. Also included in the revaluation movement for the period is the impact of back rent received during a prior year from a May 2017 rent review on the healthcare portfolio, which is recognised in revenue over the whole lease term despite the cash having been received in 2017, and movements on the headlease liabilities.
Unaudited
Unaudited Audited Six months
Six months Year to to
to 30 June 31 December 30 June
2020 2019 2019
GBP000 GBP000 GBP000
----------------------------------- ------------ ------------- ------------
Revaluation movement (131,978) 86,727 48,851
Rent Smoothing Adjustments (note
4 ) (9,786) (10,564) (5,493)
Adjustment for back rent received (168) (355) (182)
Movement in headlease liabilities (94) (100) (87)
Revaluation movement in the
income statement (142,026) 75,708 43,089
----------------------------------- ------------ ------------- ------------
The Rent Smoothing Adjustments are further explained in the Supplementary Information which follows these condensed financial statements.
The Board determines the Group's valuation policies and procedures and is responsible for overseeing the valuations. Valuations performed by the Group's independent external valuers are based on information extracted from the Group's financial and property reporting systems, such as current rents and the terms of lease agreements, together with assumptions used by the valuers (based on market observation and their professional judgement) in their valuation models.
At each reporting date, certain directors of the Investment Adviser, who have recognised professional qualifications and are experienced in valuing the types of property owned by the Group, initially analyse the independent external valuers' assessment of movements in the property valuations from the prior reporting date or, if later, the date of acquisition. Positive or negative fair value changes over a certain materiality threshold are considered and are also compared to external sources, such as the MSCI indices and other relevant benchmarks, for reasonableness. Once the Investment Adviser has considered the valuations, the results are discussed with the independent external valuers, focusing on properties with unexpected fair value changes or any with unusual characteristics. The Audit Committee considers the valuation process as part of its overall responsibilities, including meetings with the independent external valuers, and reports on its assessment of the procedures to the Board.
The fair value of the investment property portfolio has been determined using an income capitalisation technique whereby contracted and market rental values are capitalised with a market capitalisation rate. This technique is consistent with the principles in IFRS 13 and uses significant unobservable inputs, such that the fair value measurement of each property within the portfolio has been classified as level 3 in the fair value hierarchy as defined in IFRS 13. There have been no transfers to or from other levels of the fair value hierarchy during the period.
The key inputs for the level 3 valuations were as follows:
Fair value Inputs
----------------------------
Portfolio GBP000 Key unobservable input Range Blended yield
---------------------- ----------- -------------------------- ------------- -------------
At 30 June 2020:
Healthcare 769,095 Net Initial Yield 3.9% - 4.5% 4.5%
Running Yield by January
2022 4.0% - 4.6% 4.6%
Topped Up Net Initial
Leisure - UK 697,672 Yield 4.9% - 6.1% 5.4%
Running Yield by January
2022 5.4% - 6.9% 5.7%
Future RPI assumption
per annum 2.1% - 2.5% 2.5%
Topped Up Net Initial
Budget hotels 403,498 Yield 5.1% - 16.2% 6.9%
Running Yield by January
2022 5.1% - 16.2% 7.3%
Future RPI assumption
per annum 2.5% 2.5%
Topped Up Net Initial
Leisure - Germany 116,525 Yield 5.6% 5.6%
Running Yield by January
2022 5.9% 5.9%
---------------------- ----------- -------------------------- ------------- -------------
Total at 30 June
2020 1,986,790
---------------------- ----------- -------------------------- ------------- -------------
At 31 December
2019:
Healthcare 748,385 Net Initial Yield 3.9% - 4.5% 4.5%
Running Yield by December
2020 4.0% - 4.6% 4.6%
Leisure - UK 751,008 Net Initial Yield 3.7% - 6.2% 5.0%
Running Yield by December
2020 4.2% - 6.9% 5.1%
Future RPI assumption
per annum 2.5% - 3.1%
Budget hotels 501,654 Net Initial Yield 4.3% - 10.5% 5.5%
Running Yield by June
2020 4.5% - 10.5% 5.7%
Future RPI assumption
per annum 2.5%
Leisure - Germany 110,250 Net Initial Yield 5.5% 5.5%
Running Yield by July
2020 5.7% 5.7%
---------------------- ----------- -------------------------- ------------- -------------
Total at 31 December
2019 2,111,297
---------------------- ----------- -------------------------- ------------- -------------
At 30 June 2019:
Healthcare 1,012,050 Net Initial Yield 3.9% - 5.5% 4.8%
Running Yield by June
2020 4.0% - 5.7% 4.9%
Leisure - UK 741,478 Net Initial Yield 4.8% - 6.3% 5.1%
Running Yield by June
2020 4.8% - 6.9% 5.2%
Future RPI assumption
per annum 2.6%
Budget hotels 509,420 Net Initial Yield 4.5% - 10.1% 5.5%
Running Yield by June
2020 4.5% - 10.1% 5.5%
Future RPI assumption
per annum 2.5%
Leisure - Germany 116,050 Net Initial Yield 5.3% 5.3%
Running Yield by July
2020 5.5% 5.5%
Total at 30 June
2019 2,378,998
---------------------- ----------- -------------------------- ------------- -------------
The principal sensitivity of measurement to variations in the significant unobservable outputs is that decreases in Net Initial Yield, decreases in Running Yield and increases in RPI will increase the fair value (and vice versa).
Other than headlease payments, the majority of which are recoverable from tenants, the Group did not have any contractual investment property obligations at any balance sheet date. With the exception of a negligible proportion of the Group's income which relates to an operating agreement, all responsibility for property liabilities including repairs and maintenance resides directly with the tenants, except at Manchester Arena where such costs relating to the structure and common areas are liabilities of the Group in the first instance but c. 90% is currently recoverable from tenants.
11. Cash and cash equivalents
Unaudited Audited Unaudited
30 June 31 December 30 June
2020 2019 2019
GBP000 GBP000 GBP000
-------------------------------- ---------- ------------- ----------
Free cash and cash equivalents 226,392 240,254 70,853
Secured cash 14,728 26,261 26,828
Regulatory capital - 604 657
241,120 267,119 98,338
-------------------------------- ---------- ------------- ----------
Secured cash is held in accounts over which the providers of secured debt have fixed security. The Group is unable to access this cash unless and until it is released to free cash each quarter, which takes place after quarterly interest and loan repayments have been made as long as the terms of the associated secured facility are complied with.
In the prior year and until March 2020 the Company was classified as an internally managed Alternative Investment Fund and was required by the Financial Conduct Authority to hold a balance of regulatory capital in liquid funds, which was maintained in cash. This classification ceased to apply during the period so the Company is no longer required to hold regulatory capital.
12. Trade and other receivables
Unaudited Audited Unaudited
30 June 31 December 30 June
2020 2019 2019
GBP000 GBP000 GBP000
------------------------------------ ---------- ------------- ----------
Trade receivables 196 359 51
Accrued income - deferred rents 8,892 - -
Prepayments 860 874 1,021
Amounts receivable from investment
property disposals - 2,565 3,467
9,948 3,798 4,539
------------------------------------ ---------- ------------- ----------
13. Trade and other payables
Unaudited Audited Unaudited
30 June 31 December 30 June
2020 2019 2019
GBP000 GBP000 GBP000
------------------------------ ---------- ------------- ----------
Trade payables 1,099 1,172 400
Rent received in advance and
other deferred income 20,123 24,402 22,732
Interest payable 7,897 8,019 9,082
Accruals and other payables 1,451 1,505 1,169
Tax and social security 516 3,192 1,221
31,086 38,290 34,604
------------------------------ ---------- ------------- ----------
14. Secured debt
Unaudited Audited Unaudited
30 June 31 December 30 June
Amounts falling due within one 2020 2019 2019
year GBP000 GBP000 GBP000
-------------------------------- ---------- ------------- ----------
Fixed rate secured debt 6,345 3,480 4,156
Unamortised finance costs (2,255) (2,310) (2,441)
-------------------------------- ---------- ------------- ----------
4,090 1,170 1,715
-------------------------------- ---------- ------------- ----------
Amounts falling due in more
than one year
-------------------------------- ---------- ------------- ----------
Fixed rate secured debt 852,032 852,411 1,009,619
Floating rate secured debt 73,272 74,766 76,220
Unamortised finance costs (5,663) (6,769) (8,615)
-------------------------------- ---------- ------------- ----------
919,641 920,408 1,077,224
-------------------------------- ---------- ------------- ----------
The Group had no undrawn, committed borrowing facilities at any of the balance sheet dates shown above.
The debt is secured by charges over the Group's investment properties and by fixed and floating charges over the other assets of certain Group companies, not including the Company itself save for a limited share charge over the parent company of one of the ring-fenced subgroups. There were no defaults or breaches of any loan covenants during the current or any prior period.
At each balance sheet date, all financial assets and liabilities other than derivatives in effective hedges and derivatives classified as held for trading were measured at amortised cost.
As at 30 June 2020 the fair value of the Group's secured debt was GBP976.8 million (31 December 2019: GBP961.0 million; 30 June 2019: GBP1,129.9 million). Fair value is not the same as a liquidation valuation, the amount required to prepay the loans at the balance sheet date, and therefore does not represent an estimate of the cost to the Group of repaying the debt before the scheduled maturity date, which would be materially higher.
The secured debt was valued in accordance with IFRS 13 by reference to interbank bid market rates as at the close of business on the balance sheet date by Chatham Financial Europe Limited (31 December 2019: by Chatham Financial Europe Limited; 30 June 2019: by J.C. Rathbone Associates Limited). All secured debt was classified as level 2 in the fair value hierarchy as defined in IFRS 13 and its fair value was calculated using the present values of future cash flows, based on market benchmark rates (interest rate swaps) and the estimated credit risk of the Group for similar financings. There were no transfers to or from other levels of the fair value hierarchy during the current or prior year.
15. Interest rate derivatives
Unaudited Audited Unaudited
30 June 31 December 30 June
2020 2019 2019
Fair value GBP000 GBP000 GBP000
------------------------------- ---------- ------------- ----------
Interest rate swaps (average
rate 1.3%):
Falling due within one year (484) (246) (229)
Falling due in more than one
year (1,392) (757) (848)
Interest rate caps (average
rate 1.5%):
Falling due in more than one
year 14 43 82
(1,862) (960) (995)
------------------------------- ---------- ------------- ----------
The movements in the fair value of interest rate derivatives were as follows:
Unaudited
Unaudited Audited Six months
Six months Year to to
to 30 June 31 December 30 June
2020 2019 2019
GBP000 GBP000 GBP000
-------------------------------- ------------ ------------- ------------
At the start of the period (960) (5) (5)
Charge to the income statement
(note 7 ) (50) (104) (61)
Charge to other comprehensive
income (note 7 ) (852) (851) (929)
At the end of the period (1,862) (960) (995)
-------------------------------- ------------ ------------- ------------
The Group utilises interest rate derivatives in risk management as cash flow hedges to protect against movements in future interest costs on secured loans which bear interest at variable rates. The derivatives have been valued in accordance with IFRS 13 by reference to interbank bid market rates as at the close of business on the last working day prior to each balance sheet date by Chatham Financial Europe Limited (31 December 2019: Chatham Financial Europe Limited; 30 June 2019: J.C. Rathbone Associates Limited). The fair values are calculated using present values of future cash flows based on market forecasts of interest rates and adjusted for the credit risk of the counterparties. The amounts and timing of future cash flows are projected on the basis of the contractual terms of the derivatives. All interest rate derivatives are classified as level 2 in the fair value hierarchy as defined in IFRS 13 and there were no transfers to or from other levels of the fair value hierarchy during the current or prior year.
The entire GBP50.0 million notional amount of the interest rate swaps and GBP10.0 million of the notional amount of the interest rate caps are used to hedge cash flow interest rate risk on GBP60.0 million of the floating rate loans described in note 14 . The notional amounts of the interest rate derivatives equal the loan principal balance, and their maturity dates also match. GBP3.3 million (31 December 2019 and 30 June 2019: GBP3.3 million) of the notional amount of the interest rate caps was not designated for hedge accounting to allow for any future loan prepayments and as a result, although the entire cash flow interest rate is hedged, the hedges as measured for the purposes of IFRS 9 were expected on inception to be 94.5% effective throughout their lives.
The remaining GBP16.5 million notional amount of the interest rate caps is used to hedge cash flow interest rate risk on the remaining GBP13.3 million (31 December 2019: GBP14.8 million; 30 June 2019: GBP16.5 million) of the floating rate loans described in note 14 . Following a rebalancing of the hedging arrangements on GBP3.3 million (31 December 2019: GBP1.7 million; 30 June 2019: GBPnil) of the notional amount of the interest rate caps, matching the loan principal that has been repaid from the proceeds of investment property sales, the notional amounts of the interest rate caps designated for hedge accounting equal the loan principal balance and their maturity dates also match. As a result, these hedges, which have a fair value of GBP7,000 (31 December 2019: GBP40,000; 30 June 2019: GBP54,000), are expected to be 100% effective throughout their lives. The remaining interest rate caps, which have a fair value of GBP2,000 (31 December 2019: GBP3,000; 30 June 2019: GBPnil), have been classified as held for trading.
16. Deferred tax
The movements in the deferred tax liability relate to unrealised gains on the Group's German investment properties.
Unaudited
Unaudited Audited Six months
Six months Year to to
to 30 June 31 December 30 June
2020 2019 2019
GBP000 GBP000 GBP000
---------------------------------------- ------------ ------------- ------------
At the start of the period 11,267 11,110 11,110
(Credit)/charge to the income
statement (note 8 ) (114) 759 668
Charge/(credit) to other comprehensive
income 778 (602) (10)
At the end of the period 11,931 11,267 11,768
---------------------------------------- ------------ ------------- ------------
17. Share capital
Share capital represents the aggregate nominal value of shares issued. The movement in the number of fully paid ordinary shares of 10p each in issue was as follows:
Unaudited
Unaudited Audited Six months
Six months Year to to
to 30 June 31 December 30 June
2020 2019 2019
Number Number Number
---------------------------------- ------------ ------------- ------------
At the start of the period 322,850,595 321,563,353 321,563,353
Issue of ordinary shares:
in settlement of 2019 incentive
fee 1,184,551 - -
in settlement of 2018 incentive
fee - 1,287,242 1,287,242
At the end of the period 324,035,146 322,850,595 322,850,595
---------------------------------- ------------ ------------- ------------
18. Reserves
The share premium reserve represents the surplus of the gross proceeds of share issues over the nominal value of the shares, net of the direct costs of those equity issues.
Retained earnings represent the cumulative profits and losses recognised in the income statement together with any amounts transferred or reclassified from the Group's share premium reserve and other reserves, less dividends paid.
Other reserves represent:
-- the cumulative exchange gains and losses on foreign currency translation; -- the cumulative gains or losses, net of tax, on effective cash flow hedging instruments; and
-- the impact on equity of any shares to be issued after the balance sheet date, as described in note 20 , under the terms of the incentive fee arrangements.
Movements in other reserves comprise:
Currency Cash flow
Shares to
translation be hedging
differences issued instruments Total
GBP000 GBP000 GBP000 GBP000
-------------------------------- ----------- --------- ----------- -------
Period to 30 June 2020
(unaudited)
At the start of the period 3,305 4,910 (1,051) 7,164
Currency translation movements 2,541 - - 2,541
Fair value of derivatives - - (852) (852)
-------------------------------- ----------- --------- ----------- -------
Other comprehensive income 2,541 - (852) 1,689
Shares issued in the period - (4,910) - (4,910)
At the end of the period 5,846 - (1,903) 3,943
-------------------------------- ----------- --------- ----------- -------
Year to 31 December 2019
(audited)
At the start of the year 5,305 4,872 (200) 9,977
Currency translation movements (2,000) - - (2,000)
Fair value of derivatives - - (851) (851)
-------------------------------- ------- ------- ------- -------
Other comprehensive loss (2,000) - (851) (2,851)
Shares issued in the year - (4,869) - (4,869)
Shares to be issued - 4,907 - 4,907
At the end of the year 3,305 4,910 (1,051) 7,164
-------------------------------- ------- ------- ------- -------
Period to 30 June 2019
(unaudited)
At the start of the period 5,305 4,872 (200) 9,977
Currency translation movements 26 - - 26
Fair value of derivatives - - (929) (929)
Other comprehensive loss 26 - (929) (903)
Shares issued in the period - (4,872) - (4,872)
At the end of the period 5,331 - (1,129) 4,202
-------------------------------- ----- ------- ------- -------
19. Net asset value per share
Net asset value ("NAV") per share is calculated as the net assets of the Group attributable to shareholders divided by the number of shares in issue at the end of each period.
Diluted NAV per share includes within the denominator any shares that will be issued in future at the balance sheet date, including those in settlement of any incentive fee that may become payable as explained in note 20 .
EPRA, the European Public Real Estate Association, publishes guidelines for the calculation of three measures of NAV to enable consistent comparisons of different property companies. The Group uses EPRA Net Tangible Assets ("EPRA NTA") as the basis most suitable for reporting its long term fair value since it excludes items that are considered to have no impact in the long term, such as the fair value of derivatives and a portion of the deferred tax on investment properties held for long term benefit. The calculation of EPRA NTA per share uses as its denominator the same number of shares in issue as is used in calculating diluted NAV per share.
The Group's basic NAV, diluted NAV and EPRA NTA are as follows:
Unaudited Audited Unaudited
30 June 2020 31 December 2019 30 June 2019
------------------------ -------------------- -------------------- --------------------
Pence per Pence per Pence per
GBP000 share GBP000 share GBP000 share
------------------------ --------- --------- --------- --------- --------- ---------
Basic NAV 1,244,092 383.9 1,384,542 428.8 1,329,854 411.9
EPRA adjustments:
Dilution from shares
to be issued for
incentive fee - - - (1.5) - -
Diluted NAV 1,244,092 383.9 1,384,542 427.3 1,329,854 411.9
Deferred tax on German
investment property
revaluations 5,965 1.8 5,634 1.8 5,884 1.8
Fair value of interest
rate derivatives 1,951 0.7 1,084 0.3 1,153 0.4
EPRA NTA 1,252,008 386.4 1,391,260 429.4 1,336,891 414.1
------------------------ --------- --------- --------- --------- --------- ---------
The number of shares used in the NAV per share calculations are as follows:
Unaudited Audited Unaudited
30 June 31 December 30 June
2020 2019 2019
Number Number Number
-------------------------- ----------- ------------ -----------
Basic NAV 324,035,146 322,850,595 322,850,595
Diluted NAV and EPRA NTA 324,035,146 324,035,146 322,850,595
-------------------------- ----------- ------------ -----------
20. Related party transactions and balances
Interests in shares
In aggregate, the Management Team and entities related to them own 40,164,756 shares in the capital of the Company which amounts to a 12.4% interest.
The direct and indirect interests of the Directors and their families in the share capital of the Company are as follows:
Unaudited Audited Unaudited
30 June 2020 31 December 2019 30 June 2019
-------------------------- -------------------------- --------------------------
Number Percentage Number Percentage Number Percentage
of of issued of of issued of of issued
shares share capital shares share capital shares share capital
--------------- ---------- -------------- ---------- -------------- ---------- --------------
Nick Leslau * 18,342,009 5.66% 18,342,009 5.68% 24,016,096 7.44%
Mike Brown 1,183,580 0.37% 1,183,580 0.37% 1,183,580 0.37%
Sandy Gumm 192,574 0.06% 192,574 0.06% 192,574 0.06%
Martin Moore 127,226 0.04% 118,357 0.04% 118,357 0.04%
Ian Marcus 95,871 0.03% 87,002 0.03% 87,002 0.03% Jonathan Lane 57,471 0.02% 57,471 0.02% 57,471 0.02% Leslie Ferrar 26,286 0.01% 22,739 0.01% 22,739 0.01% --------------- ---------- -------------- ---------- -------------- ---------- --------------
* comprising 16,850,300 (31 December 2019: 16,850,300; 30 June 2019: 22,466,916) shares held by PIHL Property LLP, 1,491,709 (31 December 2019 and 30 June 2019: 1,491,709) shares held by Yoginvest Limited and nil (31 December 2019: nil; 30 June 2019: 57,471) shares held by the Saper Trust. Nick Leslau has a 95% (31 December 2019: 95%; 30 June 2019: 71%) indirect interest in PIHL Property LLP, owns Yoginvest Limited and is a beneficiary of the Saper Trust.
in addition to the amounts shown in the table above, as at 30 June 2020 a further 19,262,042 (31 December 2019 and 30 June 2019: 19,059,132) shares, representing 5.9% (31 December 2019 and 30 June 2019: 5.9%) of the issued share capital, were owned by Prestbury Incentives Limited and 1,184,551 (31 December 2019: 1,184,551; 30 June 2019: nil) shares, representing 0.4% (31 December 2019: 0.4%; 30 June 2019: nil) of the issued share capital were owned by Prestbury Investment Partners Limited, the Investment Adviser to the Group. Nick Leslau, Mike Brown and Sandy Gumm are shareholders and directors of Prestbury Incentives Limited and Prestbury Investment Partners Limited.
Dividends paid to related parties and key management personnel
Dividends were paid to related parties and key management personnel as follows:
Unaudited
Unaudited Audited Six months
Six months Year to to
to 30 June 31 December 30 June
2020 2019 2019
GBP000 GBP000 GBP000
------------------------------- ------------ ------------- ------------
Nick Leslau * 1,541 3,668 1,889
Prestbury Incentives Limited 1,601 3,049 1,448
Mike Brown 99 193 93
Prestbury Investment Partners
Limited 50 - -
Sandy Gumm 16 31 15
Martin Moore 10 19 9
Ian Marcus 7 14 7
Jonathan Lane 5 9 5
Leslie Ferrar 2 4 2
3,331 6,987 3,468
------------------------------- ------------ ------------- ------------
* comprising dividends paid on ordinary shares held by an LLP in which he has a 95% indirect interest and another company which he wholly owns.
Nick Leslau, Mike Brown and Sandy Gumm are shareholders in and directors of Prestbury Incentives Limited and Prestbury Investment Partners Limited, together with other key management personnel, Tim Evans and Ben Walford.
Directors' fees
Fees totalling GBP200,000 per annum (year to 31 December 2019 and six months to 30 June 2019: GBP200,000 per annum) were payable to the four independent non-executive Directors. The Directors connected to Prestbury Investment Partners Limited (Nick Leslau, Mike Brown and Sandy Gumm) do not receive Directors' fees. Total Directors' fees of GBP100,000 were therefore payable in the period (year to 31 December 2019: GBP200,000; six months to 30 June 2019: GBP100,000). No fees were outstanding at any balance sheet date.
Advisory fees payable
The Investment Advisory Agreement sets out the terms of the relationship between the Company and the Investment Adviser including the calculation of the advisory fee and the incentive fee. The agreement has a termination date in December 2025 and neither party to the agreement has any contractual renewal right. The agreement may be terminated in certain circumstances which are summarised on page 59 of the March 2016 Secondary Placing Disclosure Document which is available in the Investor Centre of the Company's website. It includes a right for the Company to terminate the agreement without compensation in the event of an unremedied breach by the Investment Adviser and a right for the Investment Adviser to terminate in the event of a change of control of the Company. The maximum termination fee is four times the previous quarter's advisory fee, with any such termination payment designed to cover the cost of redundancies and office wind down costs that may be required following the Investment Adviser's loss of the management of the Group.
During the period, the Investment Adviser was Prestbury Investment Partners Limited ("PIP"). Nick Leslau, Mike Brown and Sandy Gumm, who are Directors of the Company, are also directors and shareholders in PIP. Until 10 December 2019, the Investment Adviser was Prestbury Investments LLP ("PILLP"), at which date the Investment Advisory Agreement was novated from PILLP to PIP with the terms of the agreement remaining unchanged. The ownership of PILLP and PIP is identical and PIP had the same resources available to it to perform the services required as PILLP had at the time of transfer. Nick Leslau, Mike Brown and Sandy Gumm hold partnership interests in PILLP.
The fees are calculated on a reducing scale based on the Group's EPRA NAV. The Remuneration Committee concluded in March 2020 that, in order for the calculation of the fees to remain consistent with the way that those fees have been calculated since the Company's listing and as set out in the contract, the fees would continue to be calculated on the basis of EPRA NAV originally in place. As that basis is set out in the EPRA Guidance previously issued in 2016, we refer to that measure in these condensed financial statements as "2016 basis EPRA NAV" and it reconciles to EPRA NTA as follows:
Unaudited Audited Unaudited
30 June 2020 31 December 2019 30 June 2019
--------------------------- -------------------- -------------------- --------------------
Pence per Pence per Pence per
GBP000 share GBP000 share GBP000 share
--------------------------- --------- --------- --------- --------- --------- ---------
EPRA NTA 1,252,008 386.4 1,391,260 429.4 1,336,891 414.1
Add back 50% of deferred
tax on German investment
property revaluations 5,965 1.8 5,633 1.7 5,884 1.8
2016 basis EPRA NAV 1,257,973 388.2 1,396,893 431.1 1,342,775 415.9
--------------------------- --------- --------- --------- --------- --------- ---------
Advisory fees payable to the Investment Adviser are calculated at:
-- 1.25% per annum on 2016 basis EPRA NAV up to GBP500 million, plus -- 1.0% per annum on 2016 basis EPRA NAV between GBP500 million and GBP1 billion, plus -- 0.75% per annum on 2016 basis EPRA NAV between GBP1 billion and GBP1.5 billion, plus -- 0.5% per annum on 2016 basis EPRA NAV over GBP1.5 billion.
In addition, following a proposal made by the Investment Adviser, with effect from 1 April 2020 the advisory fee is reduced to the extent that the net assets used in the fee calculation include the surplus cash realised on the disposal of a portfolio of hospitals in August 2019 to the extent that it remains available for deployment. The balance of the surplus cash at 1 April 2020 was GBP158.3 million and as at 30 June 2020 was GBP149.4 million.
During the period, advisory fees of GBP6.7 million (year to 31 December 2019: GBP0.8 million; six months to 30 June 2019: GBPnil) plus VAT were payable in cash to PIP, of which GBP0.1 million (31 December 2019: GBP0.8 million; 30 June 2019; GBPnil) was outstanding as at the balance sheet date and included in trade and other payables. During the period, advisory fees of GBPnil (year to 31 December 2019: GBP12.3 million; six months to 30 June 2019: GBP6.7 million) plus VAT were payable in cash to PILLP, of which GBPnil (31 December 2019: GBPnil; 30 June 2019; GBP0.1 million) was outstanding as at the balance sheet date included in trade and other payables.
Incentive fee payable
The Investment Adviser may become entitled to an incentive fee intended to reward growth in Total Accounting Return ("TAR") above an agreed benchmark and to maintain strong alignment of the Investment Adviser's interests with those of shareholders. TAR is measured as growth in 2016 basis EPRA NAV per share plus dividends paid in the period. For these purposes the relevant net assets measure is calculated in accordance with 2016 basis EPRA NAV in order to maintain consistency in these calculations over time.
The fee entitlement is calculated annually on the basis of the Group's audited financial statements, with any fee payable settled in shares in the Company (subject to certain limited exceptions). Sales of these shares are restricted (save for certain limited exceptions), with the restriction lifted on a phased basis over a period from 18 to 42 months from the date of issue. Shares may be released from the sale restriction in the event that shares need to be sold to settle the tax liability on receipt of those shares, but this exemption has never been requested.
The incentive fee is calculated by reference to growth in TAR: if that growth exceeds a hurdle rate of 10% over a given financial year, an incentive fee equal to 20% of this excess is payable in shares to the Investment Adviser. In the event of an incentive fee being payable, a high water mark is established, represented by the 2016 basis EPRA NAV per share at the end of the relevant financial year, after the impact of the incentive fee, which is then the starting point for the cumulative hurdle calculations for future periods. The hurdle is set at the higher of the 2016 basis EPRA NAV at the start of the year plus 10% or the high water mark plus 10% per annum for the period since it was established. Dividends or other distributions paid in any period are treated as payments on account against achievement of the hurdle rate of return. The incentive fee payable in any year (save for fees payable in the event of a sale of the Company) is subject to a cap of 5% of 2016 basis NAV.
A high water mark of 431.1 pence per share was established at 31 December 2019 when a fee was last earned, therefore TAR measured on a 2016 basis EPRA NAV calculation will have to exceed 43.1 pence per share for the year ending 31 December 2020 for a fee to be earned; that is, 2016 basis EPRA NAV before distributions for the year will have to exceed 474.2 pence per share (GBP1,536.6 million) at 31 December 2020 before any incentive fee becomes payable.
In order to make a reasonable assessment of whether or not such a fee will be payable, the Board has estimated the 2016 basis EPRA NAV of the Group at 31 December 2020, assuming that:
-- there are no acquisitions, disposals or lease variations in the second half of 2020; -- there is no change to the investment property valuations as at 30 June 2020;
-- no uplift in rent from the outstanding Ramsay rent review is included, on the basis that the outcome of the review is not yet known with sufficient certainty;
-- there are no currency translation gains or losses;
-- RPI uplifts are consistent with the expectations reflected in the June 2020 independent investment property valuations; and
-- distributions over the remainder of the year are paid in line with Board's policy announced in July 2020, with the special assumption that there are no material further lockdowns or other pandemic related events that vary the Board's assessment of the risk of declaring a dividend for the fourth quarter.
This estimate does not constitute a forecast. It represents an illustrative case considered to provide a reasonable basis for assessing whether an incentive fee will be payable, while recognising the limitations inherent in any estimate of future values. On the basis of these assumptions, no fee will be payable for the 2020 year and as a result no fee is accrued at 30 June 2020 (30 June 2019: GBPnil).
21. Events after the balance sheet date
On 28 August 2020, the Company paid a distribution of GBP11.8 million as an interim dividend of 3.65 pence per share.
Supplementary Information
Shareholder Return - TAR and TSR
Shareholder return is one of the Group's principal measures of performance. Total Shareholder Return is measured as the movement in the Company's share price over a period, plus dividends paid in the period. Total Accounting Return is a shareholder return measure calculated as the movement in net assets per share on an EPRA basis plus dividends per share paid over the period. Comparative figures below have been restated to be consistent with the new measure of EPRA Net Tangible Assets (EPRA NTA), which is used as the EPRA basis of net assets for these purposes, that was introduced by EPRA with effect from 1 January 2020.
When providing illustrations of future performance, the Company measures shareholder return by reference to illustrative EPRA NTA as a proxy for the share price performance.
TAR - EPRA NTA performance
Six months Six months
to Year to to
30 June 31 December 30 June
2020 2019 2019
Pence Pence Pence
--------------------------------- ---------- ------------ ----------
EPRA NTA per share:
at the start of the period 429.4 398.8 398.8
at the end of the period 386.4 429.4 414.1
(Decrease)/increase in EPRA NTA
per share (43.0) 30.6 15.3
Dividends per share 8.4 16.3 7.9
---------------------------------- ---------- ------------ ----------
(Decrease)/increase in EPRA NTA
plus dividends per share (34.6) 46.9 23.2
---------------------------------- ---------- ------------ ----------
TAR (8.1)% 11.8% 5.8%
---------------------------------- ---------- ------------ ----------
TSR - share price performance
Six months Six months
to Year to to
30 June 31 December 30 June
2020 2019 2019
Pence Pence Pence
------------------------------------ ---------- ------------ ----------
Mid-market closing share price:
at the start of the period 434.0 377.0 377.0
at the end of the period 270.0 434.0 400.0
(Decrease)/increase in share price (164.0) 57.0 23.0
Dividends per share 8.4 16.3 7.9
------------------------------------- ---------- ------------ ----------
(Decrease)/increase in share price
plus dividends per share (155.6) 17.3 30.9
------------------------------------- ---------- ------------ ----------
TSR (35.9)% 19.4% 8.2%
------------------------------------- ---------- ------------ ----------
EPRA measures
30 June 31 December 30 June
2020 2019 2019
EPRA Net Tangible Assets ("EPRA
NTA") per share 386.4p 429.4p 414.1p
EPRA Net Reinstatement Value per
share 429.0p 474.6p 458.8p
EPRA Net Disposal Value per share 370.0p 417.9p 399.5p
EPRA Net Initial Yield 4.28% 4.94% 5.04%
EPRA Topped Up Net Initial Yield 5.31% 4.94% 5.04%
EPRA Vacancy Rate - - -
------------------------------------ ------- ----------- -------
Six months Six months
to Year to to
30 June 31 December 30 June
2020 2019 2019
EPRA EPS 8.3p 16.9p 9.8p
Adjusted EPRA EPS 5.1p 15.3p 8.1p
EPRA Capital Expenditure GBP0.2m GBP0.3m -
EPRA Cost Ratio excluding direct
vacancy costs 14.6% 17.5% 12.8%
EPRA Cost Ratio including direct
vacancy costs 14.8% 17.6% 12.9%
Adjusted EPRA Cost Ratio excluding
direct vacancy costs 17.5% 14.9% 13.9%
Adjusted EPRA Cost Ratio including
direct vacancy costs 17.6% 15.0% 14.0%
------------------------------------- ---------- ------------ ----------
EPRA Net Tangible Assets per share
30 June 2020 31 December 2019 30 June 2019
---------------------------- -------------------- -------------------- --------------------
Pence per Pence per Pence per
GBP000 share GBP000 share GBP000 share
---------------------------- --------- --------- --------- --------- --------- ---------
Basic NAV 1,244,092 383.9 1,384,542 428.8 1,329,584 411.9
EPRA adjustments
:
Dilution from shares
to be issued for 2019
incentive fee - - - (1.5) - -
Diluted NAV 1,244,092 383.9 1,384,542 427.3 1,329,584 411.9
Deferred tax on investment
property revaluations 5,965 1.8 5,634 1.8 5,884 1.8
Fair value of derivatives 1,951 0.7 1,084 0.3 1,153 0.4
EPRA NTA 1,252,008 386.4 1,391,260 429.4 1,336,621 414.1
---------------------------- --------- --------- --------- --------- --------- ---------
The number of shares in issue at each balance sheet date for the above calculations is as follows:
30 June 31 December 30 June
2020 2019 2019
Number Number Number
------------------------------------- ----------- ----------- -----------
Basic NAV 324,035,146 321,563,353 322,850,595
Shares to be issued in satisfaction
of incentive fee (note 18) - 1,287,242 -
Diluted NAV and EPRA measures 324,035,146 322,850,595 322,850,595
-------------------------------------- ----------- ----------- -----------
EPRA Net Reinstatement Value per share
30 June 2020 31 December 2019 30 June 2019
---------------------------- -------------------- -------------------- --------------------
Pence per Pence per Pence per
GBP000 share GBP000 share GBP000 share
---------------------------- --------- --------- --------- --------- --------- ---------
Basic NAV 1,244,092 383.9 1,384,542 428.8 1,359,584 411.9
EPRA adjustments:
Dilution from shares
to be issued for
2019 incentive fee - - - (1.5) - -
---------------------------- --------- --------- --------- --------- --------- ---------
Diluted NAV 1,244,092 383.9 1,384,542 427.3 1,359,584 411.9
Adjustment for real
estate transfer taxes 132,211 40.8 140,826 43.5 138,340 42.9
Deferred tax on investment
property revaluations 11,931 3.6 11,267 3.5 11,768 3.6
Fair value of interest
rate derivatives 1,951 0.7 1,084 0.3 1,153 0.4
EPRA Net Reinstatement
Value 1,390,185 429.0 1,537,719 474.6 1,480,845 458.8
---------------------------- --------- --------- --------- --------- --------- ---------
EPRA Net Disposal Value per share
30 June 2020 31 December 2019 30 June 2019
---------------------- -------------------- -------------------- --------------------
Pence per Pence per Pence per
GBP000 share GBP000 share GBP000 share
---------------------- --------- --------- --------- --------- --------- ---------
Basic NAV 1,244,092 383.9 1,384,542 428.8 1,329,584 411.9
EPRA adjustments:
Dilution from shares
to be issued for
2019 incentive fee - - - (1.5) - -
---------------------- --------- --------- --------- --------- --------- ---------
Diluted NAV 1,244,092 383.9 1,384,542 427.3 1,329,584 411.9
Fair value of fixed
rate debt (45,195) (13.9) (30,343) (9.4) (39,950) (12.4)
EPRA Net Disposal
Value 1,198,897 370.0 1,354,199 417.9 1,289,634 399.5
---------------------- --------- --------- --------- --------- --------- ---------
The fair value of the fixed rate debt is defined by EPRA as a mark-to-market adjustment measured in accordance with IFRS 9 in respect of all debt not held on the balance sheet at its fair value. It should be noted that the fair value of debt is not the same as a liquidation valuation, so the fair value adjustment above does not reflect the liability that would crystallise if the debt was repaid on the balance sheet date, which would be materially higher.
EPRA Net Initial Yield and EPRA Topped Up Net Initial Yield
30 June 31 December 30 June
2020 2019 2019
GBP000 GBP000 GBP000
----------------------------------------- --------- ----------- ---------
Investment property, all of which
is completed and wholly owned,
at external valuation 1,958,692 2,083,107 2,050,219
Allowance for estimated purchasers'
costs 132,212 140,826 138,340
------------------------------------------ --------- ----------- ---------
Grossed up completed property portfolio
valuation 2,090,904 2,223,933 2,188,559
------------------------------------------ --------- ----------- ---------
Annualised cash passing rental
income 90,392 110,726 111,080
Annualised non-recoverable property
outgoings (845) (866) (813)
------------------------------------------ --------- ----------- ---------
Annualised net rents 89,547 109,860 110,267
Notional rent increase on expiry
of rent concessions, rent free
periods and other lease incentives 21,446 48 97
------------------------------------------ --------- ----------- ---------
Topped-up annualised net rents 110,993 109,908 110,364
------------------------------------------ --------- ----------- ---------
EPRA Net Initial Yield 4.28% 4.94% 5.04%
EPRA Topped Up Net Initial Yield 5.31% 4.94% 5.04%
------------------------------------------ --------- ----------- ---------
The EPRA Net Initial Yield as at 30 June 2020 reflects the temporary rent concessions on the budget hotels and pubs portfolios arising as a result of the Covid-19 pandemic.
EPRA Vacancy Rate
30 June 31 December 30 June
2020 2019 2019
EPRA Vacancy Rate 0% 0% 0%
-------------------- ------- ----------- -------
There was only negligible vacant space at each balance sheet date.
EPRA EPS
Six months Six months
to Year to to
30 June 31 December 30 June
2020 2019 2019
GBP000 GBP000 GBP000
----------------------------------- ---------- ------------ ----------
Basic earnings attributable
to shareholders (114,970) 153,359 74,511
EPRA adjustments :
Investment property revaluation 142,026 (75,708) (43,089)
German deferred tax on investment
property revaluation (114) 759 668
Profit on disposal of investment
properties (30) (53,074) (421)
Fair value adjustment of interest
rate derivatives 15 36 27
Other early debt repayment costs 16 1,443 -
Cost of early debt repayment
on property sales - 27,868 -
EPRA earnings 26,943 54,683 31,696
Other adjustments :
Rent Smoothing Adjustments (9,786) (10,564) (5,493)
Theme parks rent deferral (637) - -
Incentive fee - 5,256 -
Adjusted EPRA earnings 16,520 49,375 26,203
----------------------------------- ---------- ------------ ----------
Six months Six months
to Year to to
30 June 31 December 30 June
Weighted average number of shares 2020 2019 2019
in issue Number Number Number
------------------------------------- ----------- ------------ -----------
Adjusted EPRA EPS 323,514,464 322,540,246 322,224,754
Adjustment for weighting of
shares issued during the period
* 520,682 1,494,900 625,841
------------------------------------- ----------- ------------ -----------
EPRA EPS 324,035,146 324,035,146 322,850,595
Shares to be issued in satisfaction
of 2019 incentive fee - 1,184,551 -
Diluted EPRA EPS 324,035,146 325,219,697 322,850,595
------------------------------------- ----------- ------------ -----------
* Adjusted EPRA EPS is calculated using the weighted average number of shares reflecting the actual date on which shares are issued in settlement of any incentive fee. EPRA EPS and Diluted EPRA EPS are calculated on the assumption that those shares were in issue throughout the period.
Six months Six months
to Year to to
30 June 31 December 30 June
2020 2019 2019
Pence per share Pence per share Pence per share
------------------- ---------------- ---------------- ----------------
EPRA EPS 8.3 16.9 9.8
Diluted EPRA EPS 8.3 16.8 9.8
Adjusted EPRA EPS 5.1 15.3 8.1
------------------- ---------------- ---------------- ----------------
EPRA Capital Expenditure
Six months Six months
to Year to to
30 June 31 December 30 June
2020 2019 2019
GBP000 GBP000 GBP000
-------------------------------------- ---------- ------------ ----------
Acquisitions completed and committed - 307 -
Development - - -
Expenditure on like for like
portfolio - - -
Other 239 - -
-------------------------------------- ---------- ------------ ----------
EPRA Capital Expenditure 239 307 -
-------------------------------------- ---------- ------------ ----------
The expenditure in the current period relates to the acquisition of car park equipment at Manchester Arena, while the expenditure on acquisitions in the prior year represents the purchase of the freehold of an existing leasehold investment property. The Group does not capitalise any overheads or interest into its property portfolio and it does not develop properties.
The Group's properties are let on full repairing and insuring leases, so the Group incurs no routine ongoing capital expenditure on its property portfolio except at Manchester Arena where such costs relating to the structure and common areas are liabilities of the Group but are generally recoverable from tenants via service charges.
There was only negligible vacant space at each balance sheet date.
EPRA Cost Ratios
Six months Six months
to Year to to
30 June 31 December 30 June
2020 2019 2019
GBP000 GBP000 GBP000
---------------------------------------- ---------- ------------ ----------
Revenue (note 4 ) 60,887 132,677 69,040
Tenant contributions to property
outgoings (899) (1,580) (805)
---------------------------------------- ---------- ------------ ----------
EPRA gross rental income 59,988 131,097 68,235
Non-recoverable property operating
expenses * 1,058 1,549 772
Less headlease costs included
in non-recoverable property operating
expenses (300) (662) (349)
Administrative expenses 8,096 22,128 8,353
---------------------------------------- ---------- ------------ ----------
EPRA costs including direct vacancy
costs 8,854 23,015 8,776
Direct vacancy costs (69) (95) (46)
---------------------------------------- ---------- ------------ ----------
EPRA costs 8,785 22,920 8,730
---------------------------------------- ---------- ------------ ----------
EPRA Cost Ratio including direct
vacancy costs 14.8% 17.6% 12.9%
EPRA Cost Ratio excluding direct
vacancy costs 14.6% 17.5% 12.8%
---------------------------------------- ---------- ------------ ----------
* included within GBP2.0 million (31 December 2019: GBP3.1 million; 30 June 2019 GBP1.6 million) of property costs payable by the Group are GBP0.9 million (31 December 2019: GBP1.6 million; 30 June 2019 GBP0.8 million) of headlease costs and costs that are recoverable from the tenant.
The Group capitalises the initial direct costs incurred in obtaining a lease which are then charged to the income statement over the term of the relevant lease. During the period, costs of GBP53,000 (year to 31 December 2019: GBP10,000; six months to 30 June 2019 GBPnil) were capitalised, and GBP15,000 (year to 31 December 2019: GBP19,000; six months to 30 June 2019: GBP11,000) was released from capitalised costs and charged to the income statement. Rent review costs of GBP7,000 (year to 31 December 2019: GBP416,000; six months to 30 June 2019: GBP168,000) are included in non-recoverable property operating expenses. The Group otherwise has no capitalised overheads or other operating expenses and does not capitalise interest.
Adjusted EPRA Cost Ratios excluding non-cash items
The Group also calculates an Adjusted EPRA Cost Ratio excluding the following non-cash items to present what the Board considers to be a measure of cost efficiency more directly relevant to its business model. The Adjusted EPRA Cost Ratio excludes:
-- revenue recognised ahead of cash receipt as a result of Rent Smoothing Adjustments (note 4 ); and
-- any incentive fee, included in administrative expenses, which is settled in shares (note 20 ).
Six months Six months
to Year to to
30 June 31 December 30 June
2020 2019 2019
GBP000 GBP000 GBP000
----------------------------------- ---------- ------------ ----------
EPRA gross rental income 59,988 131,097 68,235
Rent Smoothing Adjustments (9,786) (10,564) (5,493)
----------------------------------- ---------- ------------ ----------
Adjusted EPRA gross rental income
excluding
non-cash items 50,202 120,533 62,742
EPRA costs 8,854 23,015 8,776
Incentive fee settled in shares - (4,907) -
----------------------------------- ---------- ------------ ----------
Adjusted EPRA costs including
direct vacancy costs 8,854 18,108 8,776
Direct vacancy costs (69) (95) (46)
Adjusted EPRA costs excluding
direct vacancy costs 8,785 18,013 8,730
----------------------------------- ---------- ------------ ----------
EPRA Cost Ratio including direct
vacancy costs 17.6% 15.0% 14.0%
EPRA Cost Ratio excluding direct
vacancy costs 17.5% 14.9% 13.9%
----------------------------------- ---------- ------------ ----------
Rent Smoothing Adjustments
The Group's accounting policy, in line with IFRS, requires the impact of any fixed or minimum rental uplifts to be spread evenly over the term of a lease and as a result there is a material mismatch between the rental cash flows and rental revenues shown in the income statement. The adjustments historically related to the 42% of portfolio rents (before rent concessions) that are subject to fixed uplifts and the 6% of portfolio rents with minimum uplifts on RPI-linked reviews. In the current period, the Rent Smoothing Adjustments also reflect the effect of the temporary Covid-19 rent reductions agreed with the tenants on the budget hotels and pubs portfolios. Under IFRS 16 the effect of the reductions is spread over the remaining lease term from the effective date of the modification, which is the date at which both parties agreed to the modification.
A receivable is included in the book value of investment property for the amount of rent included in the income statement ahead of actual cash receipts. A receivable relating to fixed and minimum uplifts increases over broadly the first half of the later of the lease commencement or the date of acquisition term then unwinds to zero over the remainder of each lease term. If a lease is extended, the receivable at the date of modification is not adjusted but the smoothing is recalculated over the new term from that date. A receivable relating to rent concessions increases over the period during which the rent is reduced, then unwinds to zero over the remainder of each lease term.
So as not to overstate the portfolio value, any movement in the receivable is offset against property revaluation movements and since this adjustment increases rental income and reduces property revaluation gains (and vice versa in the second half of each lease term or once the rent concession has expired) it does not change the Group's retained earnings or net assets. Income recognised in this way in excess of cash flow is also taken out of Adjusted EPRA EPS so as not to artificially flatter the Group's dividend cover.
The impact of the Rent Smoothing Adjustments on the Group's balance sheet as at 30 June 2020 is as follows:
Receivable
at
30 June Maximum Date at which
smoothing
2020 receivable starts
GBPm GBPm to unwind
------------------------------------ ---------- ---------- -------------
Fixed/minimum uplifts recognised
ahead of cash receipt:
Healthcare - Ramsay hospitals 107.9 111.8 March 2023
German leisure * 37.5 39.9 June 2026
Healthcare - Lisson Grove hospital 11.7 20.6 March 2035
The Brewery 2.8 23.5 June 2041
Manchester Arena 2.4 8.9 June 2032
Pubs 0.4 2.0 March 2030
------------------------------------ ---------- ---------- -------------
162.7 206.7
Covid-19 related rent concessions:
Budget hotels 4.6 21.1 Dec 2021
Pubs 0.5 1.1 Sept 2020
------------------------------------ ---------- ---------- -------------
167.8 228.9
------------------------------------ ---------- ---------- -------------
* at the period end Euro conversion rate of EUR1:GBP0.91.
The future impact of this adjustment would change if there were acquisitions, disposals or lease variations of properties with fixed or minimum RPI-linked rental uplifts. Assuming no change in the portfolio, the increase/(decrease) in rental income that will be recognised on the portfolio during the current year and is expected for each of the next three financial years (with the German adjustment translated at the 2020 average Euro conversion rate of EUR1:GBP0.87) is as follows:
Fixed/minimum Covid-19 rent
uplifts reductions Total
GBPm GBPm GBPm
------ --------------- --------------- -------
2020 8.9 14.8 23.7
2021 7.3 7.3 14.6
2022 5.7 (1.2) 4.5
2023 4.3 (1.2) 3.1
------- --------------- --------------- -------
Glossary
Adjusted EPRA EPS EPRA EPS adjusted to exclude non-cash and non-recurring
costs, calculated on the basis of the time-weighted
number of shares in issue
CVA A Company Voluntary Arrangement, which is a process
under UK insolvency law which allows a company
to reschedule its debts with the consent of a
specified majority of its creditors
Dividend Cover Adjusted EPRA EPS divided by dividends per share
EPRA European Public Real Estate Association
EPRA EPS A measure of EPS designed by EPRA to present
underlying earnings from core operating activities
EPRA Guidance The EPRA Best Practices Recommendations Guidelines
October 2019
EPRA NTA A measure of NAV designed by EPRA to present
the fair value of a company on a long term basis.
For these purposes, the Group uses EPRA Net Tangible
Assets as defined in the EPRA Guidance.
EPS Earnings per share, calculated as the profit
for the period after tax attributable to members
of the Company divided by the weighted average
number of shares in issue in the period
IFRS International Financial Reporting Standards adopted
for use in the European Union
Investment Adviser Prestbury Investment Partners Limited or, as
the context requires, its predecessor Prestbury
Investments LLP
Investment Advisory The agreement between the Company (and its subsidiaries)
Agreement and the Investment Adviser, key terms of which
are set out on pages 204 to 221 of the Secondary
Placing Disclosure Document as modified by the
amendments to the bases of fee calculation set
out in note 20 to the interim financial statements
Key Operating Asset An asset where the operations conducted from
the property are integral to the tenant's business
LTV Loan to value: the outstanding amount of a loan
as a percentage of property value
Management Team Nick Leslau, Mike Brown, Tim Evans, Sandy Gumm
and Ben Walford, who are directors of the Investment
Adviser
NAV Net asset value
Net Initial Yield Annualised net rents on investment properties
as a percentage of the investment property valuation,
less purchaser's costs
Net Loan To Value LTV calculated on the gross loan amount less
or Net LTV cash balances
REIT Real Estate Investment Trust
Rent Smoothing Adjustments The adjustment required to recognise any mismatch
in rent received in the income statement and
cash received
Running Yield The anticipated Net Initial Yield at a future
date, taking account of any rent reviews in the
intervening period
Secondary Placing The Secondary Placing Disclosure Document dated
Disclosure Document 14 March 2016 which is available in the Investor
Centre of the Company's website under "Circulars
to Shareholders/2016"
Topped Up Net Initial Net Initial Yield adjusted to include notional
Yield rent in respect of let properties which are subject
to a rent free period at the valuation date
Total Accounting The movement in net asset value over a period
Return plus dividends paid in the period, expressed
as a percentage of the net asset value at the
start of the period
Total Shareholder The movement in share price over a period plus
Return dividends paid in that period, expressed as a
percentage of the share price at the start of
the period
Uncommitted Cash Cash balances not subject to fixed charges in
favour of lenders, net of any creditors or other
cash commitments at the balance sheet date
Weighted Average The term to the first tenant break or expiry
Unexpired Lease Term of the leases in the portfolio, weighted by rental
value before rent concessions
Company Information
Registered office Cavendish House, 18 Cavendish Square, London W1G
0PJ
Directors Martin Moore, Non-Executive Chairman
Mike Brown
Leslie Ferrar, Chairman of the Audit Committee
Sandy Gumm
Jonathan Lane, Chairman of the Nominations Committee
Nick Leslau
Ian Marcus, Senior Independent Director and Chairman
of the Remuneration Committee
Company Secretary Sandy Gumm
Investment Adviser Prestbury Investment Partners Limited
Cavendish House, 18 Cavendish Square, London W1G
0PJ
Nominated Adviser Stifel Nicolaus Europe Limited
and Broker 150 Cheapside, London EC2V 6ET
Auditors BDO LLP
55 Baker Street, London W1U 7EU
Property valuers CBRE Limited
Henrietta House, Henrietta Place, London W1G 0NB
Christie & Co
Whitefriars House, 6 Carmelite Street, London EC4Y
0BS
Derivatives valuers Chatham Financial Europe Limited
12 St James's Square, London SW1Y 4LB
Financial PR adviser FTI Consulting LLP
200 Aldersgate, Aldersgate Street, London EC1A
4HD
Email: SecureIncomeREIT@fticonsulting.com
Registrar Link Asset Services
The Registry, 34 Beckenham Road, Beckenham, Kent
BR3 4TU
Helpline: 0871 664 0300
Calls cost 12p per minute plus your phone company's
access charge. If you are outside the United Kingdom,
please call +44 371 664 0300. Calls outside the
United Kingdom will be charged at the applicable
international rate. The helpline is open 9.00am
- 5.30pm, Monday to Friday excluding public holidays
in England and Wales
Registrar's email: shareholderenquiries@linkgroup.co.uk
Company website www.SecureIncomeREIT.co.uk
Company email enquiries@SecureIncomeREIT.co.uk
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END
IR FLFETADIAIII
(END) Dow Jones Newswires
September 10, 2020 02:00 ET (06:00 GMT)
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