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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 2021 to Apr 2024
TIDMSIR
RNS Number : 1930L
Secure Income REIT PLC
09 September 2021
9 September 2021
Results for the six months to 30 June 2021
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 2021.
Highlights
-- Gross property valuation up 2.0% over six months driven by rental uplifts up to the end of July of 1.9% with Topped Up Net Initial Yield steady at 5.4%
-- EPRA NTA per share up 3.1% over six months to 391.1 pence per share
-- Rents have returned to 92% of the levels they would have been without pandemic rent concessions and are anticipated to fully resume the levels originally contracted by January 2022
-- 19.6% uplift in Adjusted EPRA EPS to 6.1p per share
-- Like for like earnings have increased by 8.5% as rents continue to return to their pre pandemic course
-- Impact of temporary rent concessions of 1.6p per share for the six months to 30 June 2021, down from 2.0p per share reflecting some three months of concessions reported in the half year to 30 June 2020
-- Shareholder returns have rebounded: -- Total Accounting Return of 5.0% following a negative 8.1% return for the same period in 2020
-- Total Shareholder Return of 29.1% following share price recovery to within 97% of EPRA NTA at 30 June 2021 and above 30 June 2021 EPRA NTA by 7 September 2021
-- The Group's Weighted Average Unexpired Lease Term of 19.7 years remains one of the longest amongst UK REITs
-- Net LTV at 35.6% down from 36.4% at 31 December 2020 -- EPRA Cost Ratio of 12.6% among the lowest in the UK REIT sector
-- The Company has further formalised its ESG policies including committing to sign up to the UN Principles for Responsible Investment in 2022. We actively engage with our tenants to work with them where possible on their own ESG initiatives and we continue to monitor this evolving area of regulation, reporting and best practice.
-- The Management Team's 12.4% interest in the Company, worth GBP161 million at the 7 September 2021 share price, provides strong alignment with shareholders. Every member of the Prestbury senior Management Team is personally heavily invested in the Company and together invested a further GBP5.3 million of cash in interests in the Company's shares in 2020.
-- In the next six months the Company is seeking to deploy its surplus cash above an appropriate liquidity buffer , firstly to optimise the terms of our debt refinancing with the remainder deployed in asset management opportunities and acquisitions. This should materially enhance shareholder returns.
Hot Features
Premium
30 June 31 December 30 June
2021 2020 2020
Balance sheet and portfolio Unaudited Audited Unaudited
------------------------------------ ------------- ------------- -------------
Properties at independent valuation GBP1,985.7m GBP1,946.9m GBP1,958.7m
Net assets GBP1,260.2m GBP1,221.5m GBP1,244.1m
EPRA NTA GBP1,267.3m GBP1,229.2m GBP1,252.0m
EPRA NTA per share 391.1p 379.3p 386.4p
Uncommitted cash GBP183.6m GBP192.0m GBP219.6m
Net Loan To Value ratio 35.6% 36.4% 35.3%
Annualised passing rent before
Covid 19 concessions GBP114.7m GBP113.3m GBP111.8m
Topped Up Net Initial Yield 5.38% 5.42% 5.32%
Running Yield by January 2022
(1) 5.50% 5.58% 5.58%
Weighted Average Unexpired Lease
Term 19.7 years 20.2 years 20.8 years
------------------------------------ ------------- ------------- -------------
(1) Using independent external valuers' RPI estimates averaging 2.5%
Six months Six months
to to
30 June 30 June
2021 2020
Earnings and returns Unaudited Unaudited
--------------------------------------------- ------------ ------------
Adjusted EPRA EPS:
Like for like rent net of all costs and
tax, before rent concessions 7.7p 7.1p
Temporary rent concessions on a cash basis (1.6)p (2.0)p
------------ ------------
Adjusted EPRA EPS 6.1p 5.1p
IFRS EPS:
Like for like rent net of costs and tax,
before revaluations and rent concessions 8.9p 8.7p
IFRS impact of temporary rent concessions,
spread over lease terms (0.3)p (0.3)p
------------ ------------
IFRS rent net of costs and tax, before
revaluations 8.6p 8.4p
Property revaluations 11.0p (43.9)p
IFRS EPS 19.6p (35.5)p
------------ ------------
Total Accounting Return 5.0% (8.1)%
Total Shareholder Return 29.1% (35.9)%
Dividends per share 7.3p 8.4p
Latest dividend per share annualised:
% of EPRA NTA (1) 4.0% 3.8%
Latest dividend per share annualised:
% of 30 June share price (1) 4.2% 5.4%
Total Accounting Return over 30 June 2014
EPRA NTA 15.0% p.a.
Total Shareholder Return over issue price
at 2014 listing 15.6% p.a.
---------------------------------------------- ------------ ------------
(1) This is illustrative and does not constitute a dividend forecast
Capitalised terms are defined in the glossary at the end of these reports.
Martin Moore, Non-Executive Chairman of the Company, commented:
"Following an undoubtedly turbulent 2020, we are pleased to be able to demonstrate with these results for the six months to 30 June 2021 that the growth trajectory of the Company is recovering. EPRA NTA per share has increased by 3.1% over the period contributing to a 5.0% Total Accounting Return, and with a significant share price recovery over the six months we can report a 29.1% Total Shareholder Return. Testament to the strength of our strategy of focussing on long term growth, in the seven years since listing the Company has delivered a Total Shareholder Return of 15.6% p.a. which compares to the FTSE EPRA NAREIT UK Index equivalent of 4.1% p.a.
"While we have all learned not to call an end to Covid-19 challenges too soon, rents across the entire portfolio are contracted to return to their pre-pandemic trajectory by the start of 2022 and we continue to believe that this Company is well positioned to further benefit from the recovery; our Management Team remains very ambitious and fully aligned to exploit our exceptional portfolio and strong cash position to drive performance, which altogether gives us strong cause for optimism."
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 10.30am. 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 9434 Confirmation code : 6215315
Webcast link : https://webcasting.brrmedia.co.uk/broadcast/61139ca20ddc2b060ef529e2
About Secure Income REIT Plc
Secure Income REIT Plc ("SIR") is a diversified UK REIT, investing in institutional real estate assets that provide long term rental income with upwards only inflation protection.
The Company's robust balance sheet, strong liquidity and experienced Management Team enabled us to support any tenants suffering business disruption through the pandemic, allowing the Company to resume its own strong growth trajectory.
The Company continued to pay quarterly dividends throughout the pandemic without interruption and, over seven years since listing, delivered a Total Accounting Return of 15.0% p.a. and a Total Shareholder Return of 15.6% p.a.. Over the same period, the FTSE EPRA NAREIT UK Index delivered 4.1% p.a..
The Company has GBP2.0 billion of gross property assets, GBP1.3 billion of net assets, GBP184 million of uncommitted and unfettered cash, structurally secure non-recourse debt, and difficult to replicate very long leases on Key Operating Assets in defensive sectors. The Management Team is strongly aligned with shareholders through its 12.4% interest in the business worth GBP161 million at the 7 September 2021 share price.
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
Following an undoubtedly turbulent 2020, we are pleased to be able to demonstrate with these results for the six months to 30 June 2021 that the growth trajectory of the Company is recovering. EPRA NTA per share has increased by 3.1% over the period contributing to a 5.0% Total Accounting Return, and with a significant share price recovery over the six months we can report a 29.1% Total Shareholder Return.
Our major tenants are either in the healthcare sector which was sheltered from the economic impact of Covid-19, or are in the leisure and hospitality sectors, where we have started to see the benefits of supporting them through the challenges of the pandemic. Those businesses have begun their own recovery and appear to be gaining momentum in building their trade back to pre-pandemic levels. While we have all learned not to call an end to Covid-19 challenges too soon, we believe that this Company is well positioned to further benefit from the recovery in future.
Results and financial position
The Group's net asset value per share at 30 June 2021 reported under IFRS was 388.9 pence, up 3.2% since 31 December 2020. 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 2021 was 391.1 pence, up 3.1% since 31 December 2020.
Financial position IFRS Net Assets EPRA NTA
--------------------------------- ------------------ ------------------
Pence per Pence per
GBPm share GBPm share
At 1 January 2021 1,221.5 377.0 1,229.2 379.3
--------------------------------- ------- --------- ------- ---------
Investment property revaluation 36.4 11.2 44.2 13.6
Other retained earnings 26.0 8.0 17.6 5.5
Dividends paid (23.7) (7.3) (23.7) (7.3)
--------------------------------- ------- --------- ------- ---------
38.7 11.9 38.1 11.8
At 30 June 2021 1,260.2 388.9 1,267.3 391.1
--------------------------------- ------- --------- ------- ---------
Total Accounting Return 62.4 19.2 61. 8 19.1
--------------------------------- ------- --------- ------- ---------
Total Accounting Return % 5.1 % 5.0 %
--------------------------------- ------- --------- ------- ---------
A 1.9% increase in rents up to the end of July, captured in the 30 June 2021 valuations, has resulted in a return to the positive momentum in Total Accounting Return reported in pre-pandemic reporting periods with the independent portfolio valuation increasing by 2.0% in the six months to 30 June.
Earnings for the six months to
30 June IFRS EPS Adjusted EPRA EPS
-------------------------------------------- ---------------------- ----------------------
2020 2021 2020
2021 Pence Pence per Pence per Pence per
per share share share share
Like for like earnings before revaluations
and before rent concessions and
dividends 8.9 8.7 7.7 7.1
Temporary rent concessions (0.3) (0.3) (1.6) (2.0)
-------------------------------------------- ---------- ---------- ---------- ----------
Earnings before revaluations 8.6 8.4 6.1 5.1
Property revaluations net of deferred
tax 11.0 (43.9) - -
Earnings per share 19.6 (35.5) 6.1 5.1
-------------------------------------------- ---------- ---------- ---------- ----------
Since 31 December 2020, we have agreed in a small number of cases further short term cash flow smoothing of rental payments amounting to less than 1.5% of total portfolio rents, but there have been no further rent concessions granted with any material impact on the Group's reported earnings. In our 2021 earnings we can see the positive impact from our long term inflation protected lease structure in the increased like for like earnings under both IFRS and Adjusted EPRA earnings measures. Rent collections throughout the period have also remained strong.
Over two thirds of the Company's portfolio has the benefit of annual fixed or inflation linked upwards only rent reviews and the balance is reviewed at five yearly intervals. The reduction in the impact of the temporary rent concessions in our Adjusted EPRA EPS measure in comparison with the same period last year reflects our approach to reporting on the cash impact of these concessions, with earnings reduced by 2.0 pence per share in the first half of 2020, where the concession period was three months, compared with 1.6 pence per share in the six months to 30 June 2021. This culminates in a 19.6% improvement in Adjusted EPRA EPS in the period compared to the same period last year.
We were able to deploy an element of our surplus liquidity toward supporting the dividend through 2020. In 2021 the level of support required is beginning to tail off as our increased earnings and cash flows reflect the expiry of various rent concessions. We were pleased to be able announce an increase of 8.2% in the rate of the quarterly dividend to 3.95 pence per share in July 2021. Unless our earnings change as a result of acquisitions, debt refinancing, lease variations or disposals, that level of dividend is the Board's expectation for the remaining three quarters to June 2022.
Outlook
Throughout the pandemic our hospitals, which represent some 40% of our portfolio by value, have provided a pivotal role in the pandemic response. Our tenant Ramsay, the GBP8.6 billion listed group which is the largest private healthcare provider in Australia, France and Scandinavia, supported the global Covid response, reporting that they have treated more NHS patients than any other UK private sector provider. With waiting lists rising to unprecedented levels and Ramsay predominantly carrying out NHS work even before the pandemic, our hospitals are likely to continue to be in great demand, underpinning this excellent global tenant covenant.
Alton Towers and Thorpe Park are two of the UK's top theme parks and are leased to Merlin, the world's second biggest visitor attraction operator after Disney. Both our theme parks and regional budget hotels have been beneficiaries of the staycation effect with Travelodge reporting revenues within 5% of 2019 levels for the four week period including "Freedom Day" on 19 July 2021 and revenue per available room above 2019 levels in the early weeks of August. Whilst the general economy has also rebounded strongly, there are obstacles in the path of a complete recovery. Labour shortages are feeding through into supply chain interruptions, inflation is rising and a fourth wave of infections is widely predicted in the autumn, albeit with a predominantly vaccinated adult population and a Government eager to avoid the reimposition of restrictions this should temper those headwinds. These elements may hamper the speed of recovery but we do not foresee that they will ultimately knock it off course.
In our long lease property market the combination of low interest rates and rising inflation creates a very supportive environment. Yields for properties let on long inflation protected leases are typically 7% above the gross redemption yield of long dated index linked gilts, providing an attractive blend of income return and inflation protection that is generating strong bidding for these types of assets in the market. However, whilst we have seen a revival in the trading and share prices of many leisure and hospitality businesses and a recovery in their bond prices, the property investment market in this sector remains subdued. We believe that the low number of transactions is primarily due to buyers seeking to obtain a pandemic discount whilst owners feel little compulsion to sell unless they can receive much closer to pre-pandemic pricing. This stand-off is generating little comparable evidence, leaving the valuation yields for our leisure and hospitality assets largely unchanged since the pandemic nadir of last summer, at a time when vaccines were yet to be approved let alone being successfully rolled out. Eventually the bid-offer spread will narrow and whilst we can only speculate on the timing, we strongly believe that it will be resolved in our favour and that as trading continues to improve, our yields will start to re-rate. In
the meantime, the rents across the entire portfolio are contracted to return to their pre-pandemic trajectory by the start of 2022.
We are pleased to have seen a resumption of our performance track record with a Total Shareholder Return of over 15% per annum since float in 2014. We are excited about the opportunity to further drive future returns not only as valuations recover but with a reduction in our cost of our debt. Our biggest loan of GBP376 million, maturing in October 2022, represents over 40% of our total debt and is our most expensive facility, carrying a coupon of 5.7%. We have the flexibility of our considerable uncommitted cash buffer of GBP184 million, some of which may play a part in optimising financial terms of new loans. Our aim is to maintain all the structural safety and covenant headroom that we have always sought while delivering savings on the interest cost to the benefit of shareholders through increased dividends. We also look beyond the Merlin refinancing date to our wider asset pool and will continue to seek opportunities to further drive shareholder returns within a well-managed capital structure. We are also actively seeking opportunities to deploy cash for acquisitions or for asset management within our existing portfolio. We are, therefore, seeking to deploy all of our surplus cash within the next six months in opportunities that we consider will be materially accretive to shareholder returns.
Over the course of last year our share price discount to net assets has closed but with most of our long income peers currently trading at a material NAV premium, we and our Management Team remain very ambitious and fully aligned to exploit our exceptional portfolio and strong cash position to drive performance over the long term as our strategy is designed to deliver.
Martin Moore
Chairman
8 September 2021
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 to 30 June 2021.
The Supplementary Information which follows the condensed financial statements includes calculations of the various EPRA and Adjusted EPRA performance measures referred to in this report. Capitalised terms are explained in the Glossary at the end of the Supplementary Information.
Tenant support provided
No rent reductions have been granted since 31 December 2020. Largely as a consequence of the later than originally expected relaxation of all Covid-19 restrictions, delayed from June to July this year, we have agreed one further rent deferral since the 2020 year end on less than 1.5% of total Group rents as further explained below.
The support measures granted in 2020 with an impact on the 2021 financial year are:
-- June 2020 and September 2020 rents due from Merlin Entertainments Limited, amounting to GBP17.6 million at the 30 June 2021 exchange rate, were deferred to September 2021. The deferred rent was recorded in the income statement for the year to 31 December 2020 but in order to more clearly and logically demonstrate the impact on the Group's results in the period over which the concession was granted, these rents were excluded from Adjusted EPRA EPS for the 2020 financial year and will be recorded in Adjusted EPRA EPS in the period in which they are received, which, under the terms of the agreement made with the tenant, is contracted to be in the second half of the 2021 financial year.
-- A CVA approved by Travelodge Hotels Limited creditors in 2020 has resulted in GBP8.8 million of rent foregone in 2021, of which GBP4.4 million relates to the six months to 30 June 2021. Rents return to the levels originally contracted in January 2022. As a further result of the CVA, receipt of any rental uplifts arising in 2020 and 2021 is deferred until the rents have returned to their contractual levels. Cash flows from a further GBP0.6 million of rent that would otherwise have been receivable in 2021 have therefore been deferred to January 2022, of which GBP0.2 million relates to the six months to 30 June 2021. Consistent with the treatment of the Merlin rent deferral, the deferred uplifts will be recorded in Adjusted EPRA EPS in the period in which they are received. The majority of the Travelodge rent reductions took effect in the 2020 financial year and for the purposes of comparison, the rent reduction in 2020 was GBP14.5 million relating to the nine months from April to December 2020.
Further support provided in the year to date:
-- Monthly rents totalling GBP0.6 million originally due in May and June 2021 from the tenant of the Brewery have been deferred so they are payable in twelve monthly instalments from September 2021. The deferred rent has been recorded in the income statement for the period to 30 June 2021 but will be recorded in Adjusted EPRA EPS in the period in which it is received.
The impact of these concessions on the Group's rental cash flows and on Adjusted EPRA EPS for the six months to 30 June 2021 and the contractually scheduled impact on the second half of the 2021 financial year is set out below.
Actual Contracted
Six months Six months Contracted
to to Year to
30 June 31 December 31 December
2021 2021 (1) 2021 (1)
GBPm GBPm GBPm
----------------------------------------- ----------- ------------ ------------
Hotels rent reduction (4.4) (4.4) (8.8)
Hotels rent deferral (0.2) (0.4) (0.6)
Brewery rent deferral (0.6) 0.2 (0.4)
Merlin rent deferral - 17.6 17.6
----------------------------------------- ----------- ------------ ------------
Impact on rental cash flow and Adjusted
EPRA EPS (5.2) 13.0 7.8
----------------------------------------- ----------- ------------ ------------
(1) This is a contractual position and does not constitute a profit forecast
There are no concessions in place which reduce rents receivable in 2022 or future financial years.
The accounting policy for rent concessions is explained in the Financial Review section of this Investment Adviser's Report and remains unchanged since the 31 December 2020 annual report.
Rent collections
Over the period to 7 July 2021, the Group reported only minimal rent arrears in each quarterly collection cycle.
8 January
to
7 April 8 April to
2021 7 July 2021
Rent collections GBPm GBPm
Originally contracted
rents 28.3 28.7
Rent concessions:
Reduced rents (2.2) (2.2)
Deferred rents (0.1) (0.8)
Due in the period 26.0 25.7
Collected on or before
the due date (25.9) (25.4)
Rent arrears at the date
of this report 0.1 0.3
---------------------------- ---------- -------------
Collected by due date
(%) 99.9% 98.7%
---------------------------- ---------- -------------
Amounts collected by the due date in the prior year, calculated on the same basis, were:
8 January to 7 April 83.1% }Lower collections in April to
2020 July 2020 reflect rent
8 April to 7 July 2020 89.7% }receipts delayed during Travelodge
CVA
8 July to 7 October 2020 99.9%
8 October 2020 to 7 January
2021 97.7%
There were no material impairments of receivables in the period or the prior year.
The portfolio
The Group held 160 properties at 30 June 2021 with passing rent before temporary concessions of GBP114.7 million, up from GBP113.3 million at 31 December 2020.
Passing
rent before
temporary
Number of Valuation concessions
properties GBPm GBPm
------------------------------------------ ----------- --------- ------------
At the start of the period 161 1,946.9 113.3
Change in valuation at constant currency - 44.3 1.7
Exchange rate movements - (5.4) (0.3)
Non-core pub disposal (1) (0.1) -
At the end of the period 160 1,985.7 114.7
------------------------------------------ ----------- --------- ------------
Portfolio valuation and rents by sector
The portfolio is valued by qualified independent external valuers every six months. There was a 2.3% increase in valuation at constant currency over the six month period, resulting in a net movement of 2.0% after exchange rate movements on the German assets.
Leisure * Healthcare Budget Hotels Total
------------- ------------- --------------- ---------------
Passing
rent before Change Change Change Change
concessions GBPm % GBPm % GBPm % GBPm %
---------------- ----- ------ ----- ------ ------ ------- ------- ------
31 Dec 2020 47.5 36.6 29.2 113.3
Change in
rent 0.7 1.6% 1.0 2.8% - - 1.7 1.5%
Exchange
rate movement (0.3) (0.7)% - - - - (0.3) (0.2)%
30 June
2021 47.9 0.9% 37.6 2.8% 29.2 - 114.7 1.3%
---------------- ----- ------ ----- ------ ------ ------- ------- ------
Leisure * Healthcare Budget Hotels Total
------------- ------------- --------------- ---------------
Change Change Change Change
Valuation GBPm % GBPm % GBPm % GBPm %
---------------- ----- ------ ----- ------ ------ ------- ------- ------
31 Dec 2020 793.0 769.1 384.8 1,946.9
Revaluation 19.4 2.4% 21.3 2.8% 3.6 0.9% 44.3 2.3%
Exchange
rate movement (5.4) (0.6)% - - - - (5.4) (0.3)%
Disposal (0.1) - - - - - (0.1) -
30 June
2021 806.9 1.8% 790.4 2.8% 388.4 0.9% 1,985.7 2.0%
---------------- ----- ------ ----- ------ ------ ------- ------- ------
* GBP6.8 million of the passing rent at 30 June 2021 and GBP 113.7 million of the valuations at that date relate to the German Leisure properties which are denominated in Euros, translated at the period end exchange rate of EUR1:GBP 0.86
In reaching their assessment of market values, the independent external valuers had all details of agreed rent concessions. 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 January 2022. While the 30 June 2020 and 31 December 2020 valuations of the Leisure and Budget Hotels assets were required under the RICS rules to be expressed as subject to "material valuation uncertainty", there is no such caveat applied to the 30 June 2021 valuations. Further details of valuations are given in note 10 to the condensed financial statements.
Yields by sector
Leisure Healthcare ^ Budget Hotels Total
--------------- --------------- --------------- ---------------
30 June 31 Dec 30 June 31 Dec 30 June 31 Dec 30 June 31 Dec
2021 2020 2021 2020 2021 2020 2021 2020
---------------- ------- ------ ------- ------ ------- ------ ------- ------
Topped Up Net
Initial Yield
* 5.49% 5.54% 4.46% 4.46% 7.03% 7.10% 5.38% 5.42%
Running Yield
by
January 2022 5.67% 5.76% 4.46% 4.58% 7.24% 7.21% 5.50% 5.58%
---------------- ------- ------ ------- ------ ------- ------ ------- ------
* Topped Up Net Initial Yield ignores the temporary rent concessions. The Leisure Topped Up Net Initial Yield increased to 5.57% and the total Topped Up Initial Yield to 5.41% by the end of July 2021.
^ The healthcare valuations 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 2021.
the Leisure and Budget Hotels Running Yields are calculated using the independent external valuers' estimates of RPI averaging 2.5% per annum (31 December 2020: 2.5%)
The growth in like for like passing rent before concessions was 1.3% over the period. Rent reviews were completed on 62% of portfolio rents in the period. Very shortly after the period end, rents on the German leisure assets increased by their fixed annual uplift of 3.34% and the rents receivable from The Brewery on Chiswell Street also increased from GBP3.4 million to GBP3.8 million per annum following the five yearly fixed uplift on that property. These increases amount to a further 0.6% uplift, bringing the total growth to 1.9% by the end of July 2021.
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
2021 2020
Tenant/guarantor GBPm GBPm
----------------------------------------- --------- -------------
Merlin Entertainments Limited * 36.1 35.6
Ramsay Health Care Limited 35.4 34.4
Travelodge Hotels Limited 29.2 29.2
SMG Europe Holdings Limited & SMG 4.2 4.0
The Brewery on Chiswell Street Limited ^ 3.4 3.4
Orpea SA 2.2 2.2
Stonegate Pub Company Limited 2.2 2.2
Others 2.0 2.3
114.7 113.3
----------------------------------------- --------- -------------
* GBP6.8 million (31 December 2020: GBP7.1 million) of the Merlin annualised rents are Euro denominated. The total Merlin contracted rent increased to GBP36.3 million in July 2021, following the fixed annual uplift on the German assets.
^ contracted rent increased to GBP3.8 million in July 2021
including GBP0.3 million (31 December 2020: GBP0.5 million) of estimated variable net income for the car park at Manchester Arena
Further information on the principal portfolio tenants and guarantors is given within the portfolio analyses that follow.
Basis of rent reviews
The income arising on the portfolio benefits from fixed contractual rental uplifts averaging 2.8 % per annum on 41% of total rents. There are upwards only RPI-linked rent reviews on 58% of the income with 1% subject to upwards only open market rent reviews. 68% of the rent is subject to annual review and the balance to five yearly review cycles.
31 December
30 June 2021 2020
---------------------------------- ----------------------------------- -----------
Percentage of contracted rents Reviewed Reviewed Total Total
before temporary concessions annually five yearly portfolio portfolio
---------------------------------- --------- ------------ ---------- -----------
Upwards only RPI:
Uncapped 26% 26% 52% 52%
Collared * 4% 2% 6% 6%
---------------------------------- --------- ------------ ---------- -----------
Total upwards only RPI-linked
reviews 30% 28% 58% 58%
---------------------------------- --------- ------------ ---------- -----------
Fixed uplifts:
Annual reviews 38% - 38% 38%
Five-yearly reviews ^ - 3% 3% 3%
---------------------------------- --------- ------------ ---------- -----------
Total fixed uplifts 38% 3% 41% 41%
---------------------------------- --------- ------------ ---------- -----------
Upwards only open market reviews - 1% 1% 1%
---------------------------------- --------- ------------ ---------- -----------
Total portfolio 68% 32% 100% 100%
---------------------------------- --------- ------------ ---------- -----------
* annual reviews with a 2% collar and 5% cap; five yearly reviews with collars between 1% and 1.5% and caps between 3.5% and 4.0%
weighted average increase of 2.9% per annum
^ weighted average increase of 2.5% per annum
Change in RPI calculation methodology from 2030
In November 2020, the UK Government and UK Statistics Authority announced changes to its calculation of RPI to align it with the Consumer Prices Index ("CPIH") from February 2030. CPIH has been on average 0.8 percentage points lower than RPI over the past ten years. The exact impact on the Group will depend on precisely how the UK Statistics Agency implements the change because that will have a bearing on how any change interacts with the specific terms of the leases. On a downside basis, if CPIH continues to run below RPI the rental uplifts from 2030 onwards would be lower than they would otherwise have been. However, depending on how the change is implemented, lease provisions may provide protection resulting in there being no change in some or all cases. In the event that rental uplifts do change from 2030, any valuation impact in such circumstances is expected to be insignificant as the market tends not to differentiate materially between RPI and CPIH lease structures, with the other property characteristics carrying greater weight in establishing pricing.
Lease lengths
The leases on the Group's portfolio are very long, with a Weighted Average Unexpired Lease Term of 19.7 years from 30 June 2021 without tenant break, which is significantly longer than the vast majority of the other major UK REITs (defined as those with a market capitalisation in excess of GBP1 billion).
Leisure Healthcare Budget Hotels Total
--------------- --------------- --------------- ---------------
30 June 31 Dec 30 June 31 Dec 30 June 31 Dec 30 June 31 Dec
2021 2020 2021 2020 2021 2020 2021 2020
------------------ ------- ------ ------- ------ ------- ------ ------- ------
Weighted Average
Unexpired Lease
Term (years) 21.7 22.1 16.3 16.8 20.9 21.4 19.7 20.2
------------------ ------- ------ ------- ------ ------- ------ ------- ------
98% of contractual passing rents have an unexpired term without break of more than 15.5 years.
No material vacancies or landlord costs
The portfolio is fully let, other than a small restaurant unit at Manchester Arena. 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.
Leisure assets ( 41 % of portfolio value)
30 June 31 December
2021 2020
Contracted rents before temporary rent concessions GBPm GBPm
--------------------------------------------------- --------- -------------
UK assets 41.1 40.4
German assets (at constant Euro exchange rate) 6.8 6.8
47.9 47.2
--------------------------------------------------- --------- -------------
The Company's leisure assets are:
-- four well established, large scale visitor attractions with accommodation operated by Merlin Entertainments Limited;
-- Manchester Arena, the UK's largest indoor arena by capacity;
-- The Brewery, one of London's largest catered events venues, on Chiswell Street in the City of London; and
-- a portfolio of 17 freehold high street pubs located in England and Scotland.
Merlin attractions and hotels
The Merlin assets include two of the UK's top three resort theme parks by visitor numbers, Alton Towers and Thorpe Park, as well as Warwick Castle, including all of the on-site accommodation at the three attractions. The German assets operated by Merlin are the Heide Park resort theme park and hotel in Soltau, Saxony, which is the largest in Northern Germany. These assets are all held freehold and are let to subsidiaries of Merlin Entertainments Limited, which owns all of Merlin's operating businesses worldwide and which is the guarantor of all lease obligations for these assets. Measured by the number of visitors, Merlin is Europe's largest and the world's second largest operator of leisure attractions, second only to Disney.
Merlin was taken private in 2019 at a price representing an enterprise value of some GBP6 billion. It is owned by a consortium of substantial, established, long term investors: Kirkbi, the owner of the Lego business which has been invested in Merlin since 2005 and which owns 47.5% of Merlin, together with Blackstone Core Equity, a long term fund comprising part of Blackstone's latest reported assets under management of c. GBP495 billion, Canada Pension Plan Investment Board, one of the world's largest pension fund investors with latest reported assets under management of over GBP300 billion and the Wellcome Trust which invested in a 10% interest in 2020 and which has assets under management of c. GBP29 billion. During the pandemic, Merlin was able to access capital from public bond markets as part of their liquidity management strategies. The quoted pricing for Merlin's publicly traded 5.75% bonds maturing in 2026, which have been in issue since before the onset of the pandemic, has recovered to within 95% of the pre pandemic price (taking the quoted price at 1 January 2020) and trading above par at a yield to maturity on 3 September 2021 of 4.9%.
Total contracted rents receivable from Merlin were GBP36.1 million per annum at 30 June 2021 and increased to GBP36.3 million per annum in July 2021 following the fixed annual rental increase on the German assets. This is an increase of 3.0% over GBP35.3 million at 31 December 2020 (on a constant currency basis). The weighted average term to expiry of the Merlin leases is 21.0 years without break from 30 June 2021 and the tenants have two successive rights to renew for 35 years at the end of each term. There are upwards only uncapped RPI-linked rent reviews on the UK properties every June throughout the term, which in the six months to 30 June 2021 resulted in a rental increase of 2.9%. The German properties are subject to fixed annual increases of 3.34% every July throughout the term. The leases are on full repairing and insuring terms.
Manchester Arena and ancillary assets
Manchester Arena is a long leasehold strategic site of eight acres which is located on top of Manchester Victoria Railway and Metrolink station. It comprises a 21,000 seat arena, the UK's largest indoor arena by capacity, some additional 160,000 sq ft of office and leisure space, a multi-storey car park with approximately 1,000 spaces, and other income sources.
The Arena is let to SMG and SMG Europe Holdings Limited, part of ASM Global, with 24.0 years unexpired without break from 30 June 2021. The annual rent is GBP4.1 million (before head rent) and is reviewed annually every June in line with RPI, collared between 2% and 5%, which in 2021 resulted in a rental increase of 3.3%.
ASM Global was created by a merger of AEG Facilities and SMG in October 2019 and is the world's largest venue management company, operating over 300 venues in 21 countries and with pro forma annualised 2019 revenues of $500 million estimated at the time of the merger. The Arena was closed throughout the pandemic period but it was able to reopen in August 2021 and the current expectation is that it is likely to be fully operational from September 2021. Despite not trading as a result of the pandemic restrictions, all Arena rents have been received when due, reflecting the strength of this large and well capitalised global operator as tenant. The office and ancillary leisure space at Manchester Arena is let to tenants including Serco, Unison, JCDecaux and go-karting operator TeamSport. The leases on the Manchester site as a whole have a weighted average term to expiry of 17.3 years from 30 June 2021 and produce net passing rent of GBP5.6 million per annum at that date.
The Brewery on Chiswell Street
The Brewery is a predominantly freehold investment let to an established specialist venue operator on a full repairing and insuring lease. The largest catered event space in the City of London, it is located within five minutes' walk of the new Crossrail Station at Liverpool Street. As with Manchester Arena, the Brewery has been closed throughout the pandemic period but has been permitted to reopen from July 2021. It is now staging events again and is expected to be fully operational from September 2021.
The lease term to expiry is 35.0 years without break from 30 June 2021 and the lease provides for five-yearly fixed uplifts of 2.5% per annum compounded. The passing rent was GBP3.4 million per annum as at 30 June 2021 and increased to GBP3.8 million in July 2021.
Pubs portfolio
At 30 June 2021 the portfolio of 17 high street pubs produced passing rent of GBP2.2 million per annum and the leases have an average term to expiry of 24.0 years without break. The pubs had all reopened for indoor trading , subject to Covid restrictions, by May 2021 and with final social distancing restrictions lifted in July 2021. During the period, one pub with negligible rent was sold with vacant possession for GBP150,000, slightly ahead of its 31 December 2020 book value.
16 of the pubs are let on individual leases either to, or guaranteed by, Stonegate Pub Company Limited. Stonegate acquired the Ei Group for GBP1.27 billion in March 2020, creating the largest pub company in the UK with over 4,500 pubs. Stonegate was able to access public debt markets during the pandemic period in support of the group's liquidity needs. Stonegate's Sterling bonds maturing in 2025, issued in July 2020, were trading above par at a yield to maturity of 6.9% at close on 3 September 2021. The lease of the remaining pub in Palmers Green, London , which was assigned to another operator in the period, represents 1.5% of the pub rents and a negligible proportion of total Group rents.
Pub rents are subject to five-yearly RPI-linked increases collared between 1% and 4% per annum compounded. The next review falls in February 2025.
Healthcare assets ( 39% of portfolio value)
30 June 31 December
2021 2020
Contracted rents GBPm GBPm
---------------------------- --------- -------------
Ramsay hospitals 35.4 34.4
London psychiatric hospital 2.2 2.2
37.6 36.6
---------------------------- --------- -------------
The Group's healthcare assets, 11 freehold private acute hospitals and a central London freehold private psychiatric hospital, have continued to trade throughout the pandemic with no rent concessions required. The private hospitals are located throughout England and are let to a subsidiary of Ramsay Health Care Limited, the ASX50 listed Australian healthcare company. The psychiatric hospital, the only private facility of its kind in Central London, is let to a subsidiary of Orpea SA, a very substantial European operator of retirement homes, rehabilitation clinics and psychiatric care.
The Ramsay hospitals are let on full repairing and insuring leases with a term to expiry at 30 June 2021 of 15.9 years without break. The rents increase in May each year by a fixed minimum of 2.75% per annum throughout the lease term. Following the May 2021 fixed uplifts, the rents on the Ramsay portfolio increased from GBP34.4 million to GBP35.4 million per annum. In addition, there is an upwards only open market rent 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. It is subject to a formal arbitration process which was put on hold by agreement between the parties during 2020 to allow Ramsay management to fully focus on its pandemic response and because the arbitrator would have been unable to inspect the hospitals during the lockdowns. Given the uncertainty over the time taken to resolve the arbitration and the nature of that process, there is currently no indication of the likely review outcome and t hese 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, one of the top five private hospital operators in the world and the largest operator of private hospitals in Australia, France and Scandinavia. Ramsay is a constituent of the ASX 50 index of Australia's largest companies, with a market capitalisation at 7 September 2021 (and using the exchange rate on that date) of GBP8.6 billion (GBP8.1 billion at 9 March 2021).
The Ramsay hospitals continued to trade without pause throughout the pandemic and, through their contracts with NHS England, provided guaranteed capacity to the NHS to tackle the Covid crisis at cost (including the cost of their rents) for approximately a year from late March 2020. Ramsay reported in February 2021 that they had treated more than 500,000 NHS patients over this period, more than any other provider in the independent sector. In their results for the year to 30 June 2021 Ramsay announced 11.9% earnings growth for their worldwide group and 9.9% growth in EBITDAR in the UK segment. The Ramsay balance sheet is strong with low leverage and significant cash flows supporting material capital expenditure over the year in the existing estate and also earmarked for further investment in future. Ramsay noted that private admissions returned strongly after lockdown restrictions eased in April, demonstrating the strength of their business model which allows them to mix private treatment with NHS cases. Ramsay's management highlights the opportunities in the UK and elsewhere from the backlog in demand for both public and private healthcare services alongside the existing demographic and other growth drivers for their business.
The London psychiatric hospital is let on a full repairing and insuring lease with a term to expiry at 30 June 2021 of 23.1 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 GBP2.17 million to GBP2.23 million on 3 May 2021. The lease is guaranteed by Orpea SA, a leading European operator of retirement homes, rehabilitation clinics and psychiatric care, listed on Euronext Paris with a market capitalisation at 7 September 2021 (and using the exchange rate on that date) of GBP6.1 billion (GBP5.7 billion at 9 March 2021).
Budget Hotels assets (20% of portfolio value)
30 June 31 December
2021 2020
GBPm GBPm
--------------------------------------------------- --------- -------------
Contracted rents before temporary rent concessions 29.2 29.2
--------------------------------------------------- --------- -------------
At 30 June 2021 the Group owned 123 Travelodge hotels in England, Wales and Scotland, let to Travelodge Hotels Limited which is the main operating company within the Travelodge group trading in the UK, Ireland and Spain. Travelodge is the UK's second largest budget hotel brand, with 592 hotels and over 45,100 rooms as at 30 June 2021.
As a response to liquidity issues created by the forced closure of nearly all of their hotels, Travelodge concluded a Company Voluntary Arrangement (CVA) in June 2020. As a consequence of the CVA, GBP14.5 million of rent was foregone by the Group in the 2020 financial year but the extent of the rent reduction has reduced significantly in the current financial year. The contractually scheduled rent reduction for the 2021 financial year is GBP8.8 million, of which GBP4.4 million is attributable to the six months to 30 June 2021. Rents are due to return to the levels originally contracted from January 2022. Travelodge rents are currently receivable monthly in advance as part of the concession granted and all rent demanded under the terms of the CVA has been received when due.
Travelodge is a major, established brand with very high levels of brand recognition and a strong pre-pandemic five year performance track record. In addition to the rent reductions secured by Travelodge through their CVA, the company raised GBP40 million of equity from its shareholders and completed a GBP65 million private debt placement in December 2020 to further support liquidity. Travelodge's publicly traded bonds which have been in issue throughout the pandemic period are trading at within 5% of their pre-pandemic levels at the start of 2020, with a yield to maturity of 6.8% on 3 September 2021.
One of the attractions of investment specifically in budget hotels rather than the wider hotel market is their relative resilience in recessionary times, and our expectation of a stronger recovery in this sector of the hotels market has been borne out by industry data showing a widening outperformance by budget hotels over the rest of the sector since UK hotels were permitted to fully reopen in July 2021. The most recent financial statements published by Travelodge cover the six months to 30 June 2021, which is before the date in which the Covid-19 operating restrictions for hotels were fully lifted. However, they also reported strong recovery in trading since restrictions were fully lifted, as the most recent month for which trading has been reported, the four week period in which 19 July's "Freedom Day" fell, saw revenues return to within 5% of the same period in 2019. Trading is also improving at the EBITDA level, with each of the three most recent weeks reported by them seeing revenue per available room retuning to levels above those for the same period in 2019. While uncertainties remain for budget hotel businesses in the UK, including Travelodge, a clear trend towards improvement is shown in their most recent public reports.
The average term to expiry of the Travelodge leases is 20.9 years from 30 June 2021 with no break clauses. 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. 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. 23% of the passing rent is subject to review in 2021, all of which falls in the second half of the year, 38% in 2022, 10% in 2023, 5% in 2024 and 24% in 2025. Reviews arising during the CVA concession period, which runs to January 2022, continue to be calculated and documented but are temporarily reduced in line with the terms of the CVA and any remaining uplifted rent becomes receivable at the end of the concession period.
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.
Any rent concessions agreed have been implemented with the consent of the relevant lenders. In certain cases this included covenant waivers during the concession period which are no longer necessary given the significant recovery in rents payable.
The Group's total gross debt decreased by GBP6.6 million in the period: GBP3.6 million from scheduled loan repayments and GBP3.0 million from foreign currency translation movements on the Group's Euro denominated debt. Net debt decreased by GBP1.3 million, including the impact of the application of GBP4.3 million to topping up dividends paid above Adjusted EPRA EPS in the period.
The Group's Net Loan To Value ratio decreased from 36.4% to 35.6% over the period.
Unsecured Group
Secured amounts amounts total
GBPm GBPm GBPm
-------------------- ----------------- ----------- ---------
Gross debt 921.7 - 921.7
Secured cash (25.4) - (25.4)
Free cash * (2.8) (186.3) (189.1)
-------------------- ----------------- ----------- ---------
Net debt 893.5 (186.3) 707.2
-------------------- ----------------- ----------- ---------
Property valuation 1,985.7
-------------------- ----------------- ----------- ---------
Net LTV 35.6%
-------------------- ----------------- ----------- ---------
* 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.
The terms of the facilities have not changed in the period.
Number of Maximum
properties annual
Principal securing interest Interest Annual cash
GBPm loan rate rate protection amortisation Maturity
----------------- --------- ----------- --------- ---------------- ------------- ----------
Merlin Leisure 375.6 * 6 5.7% Fixed GBP3.8m Oct 2022
80% fixed
Budget Hotels 2 65.4 70 3.3% 20% capped None April 2023
Arena, Brewery, 83% fixed
Pubs 60.0 19 3.2% 17% capped None June 2023
Budget Hotels 1 59.0 53 2.7% Fixed None Oct 2023
Healthcare 1 63.7 2 4.3% Fixed GBP0.3m Sept 2025
Healthcare 2 298.0 10 5.3% Fixed GBP3.2m Oct 2025
Total 921.7 160 4.9%
----------------- --------- ----------- --------- ---------------- ------------- ----------
* GBP 314.4 million of senior and mezzanine Sterling loans secured on UK assets and EUR 71.2 million of senior and mezzanine Euro denominated loans secured on German assets (translated at the period end exchange rate of EUR1:GBP 0.86 ) 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 EUR0.6 million on the Euro facility.
The Board manages interest rate risk by either fixing or capping rates over the term of each loan. As at 30 June 2021, 97.5 % of the Group's borrowings were at fixed rates. The weighted average interest rate payable in the period remained the same as in 2020 at 4.9% per annum.
There have been no defaults in any facility during the period or since the balance sheet date. The headroom on financial covenants at the balance sheet date remains substantial and is analysed in the Financial Review on the following pages.
The Board has launched the detailed work on the refinancing of the Merlin leisure facility with the objective of closing that refinancing before the results for the year to 31 December 2021 are released next year and ahead of the October 2022 maturity date. While it remains too early to state with certainty what terms will be achieved on refinancing, our ambition remains to deliver a robust structure with good covenant protection and to deliver earnings accretion to shareholders by way of lower interest costs to increase dividends payable. The Board keeps under review the prospects for a wider refinancing of the Group's assets with a view to delivering earnings accretion where possible, alongside careful risk management in structuring debt security and covenant headroom.
Financial review
Key Performance Indicators
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 2021 2020 2020
------------------------------------------- ------------- --------- ----------
Financial measures:
Total Accounting Return 5.0% (8.0)% (8.1)%
Total Shareholder Return 29.1% (27.3)% (35.9)%
Adjusted EPRA EPS 6.1p 3.5p 5.1p
Net LTV Ratio 35.6% 36.4% 35.3%
Uncommitted Cash GBP183.6m GBP192.0m GBP219.6m
Other measures:
Headroom on debt covenants before any
preventative cash cure or other remedial
action:
Valuation decline before tightest LTV
default test is triggered 32 % 32% 33%
Rent decline before tightest interest
cover default test is triggered 31 % 29% 26%
------------------------------------------- ------------- --------- ----------
Total impact of existing Rent Smoothing Adjustments and rent concessions
From the time of its listing seven years ago, the Group has had the benefit of a high proportion of income with fixed rental increases over very long lease terms, therefore the requirement 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. Adjusted EPRA earnings is designed to give a clearer calculation of Dividend Cover, on a basis that more closely reflects the Group's actual cash flows, than would be achieved by using EPRA earnings, as that measure would materially overstate Dividend Cover while cash rents are lower than rents required to be recognised in the income statement. As explained at the start of this Investment Adviser's Report we also adjust EPRA Earnings to reflect the cash flow impact of any Covid-19 rent concessions, rather than spreading them over the very long lease terms as required by IFRS reporting standards. 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 condensed financial statements.
The overall composition of Adjusted EPRA earnings is explained later in this report. The impact of the Rent Smoothing Adjustments and the rent concessions on Adjusted EPRA Earnings is as follows:
Six months to 30 June Six months to 30 June
2021 2020
------------------------ ------------------------
Pence per Pence per
GBPm share GBPm share
---------------------------------- --------- ------------- --------- -------------
EPRA earnings 27.8 8.6 26.9 8.3
Rent Smoothing Adjustments:
on pre-concession rental
income (4.0) (1.2) (4.6) (1.4)
from Travelodge rent reductions (3.6) (1.1) (4.6) (1.4)
from Stonegate rent free
period - - (0.6) (0.2)
Rent deferrals (0.8) (0.2) (0.6) (0.2)
Adjusted EPRA earnings 19.4 6.1 16.5 5.1
---------------------------------- --------- ------------- --------- -------------
Dividend policy
The Company's dividend policy established at the time of listing was to distribute Adjusted EPRA earnings by way of a fully covered cash dividend, paid quarterly. This 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.
The dividend policy was varied in August 2019 to reflect the impact of the sale of a portfolio of eight Ramsay hospitals, which reduced Adjusted EPRA EPS and significantly increased the surplus cash balance. This resulted in a decision to use the cash surplus in part to top up dividends to a level that would otherwise have been payable had the hospitals not been sold until such time as the surplus cash was invested, used for debt management or otherwise redeployed for the benefit of shareholders.
The impact of the pandemic on the Group's rental income and on the Board's assessment of risks and uncertainties arising from it resulted in a further review of the dividend policy in early 2020. With the Company's liquidity surplus directed to supporting tenants and ensuring the robustness of the balance sheet during such uncertain times, the Board concluded that the element of the dividend relating to topping up income on the sold hospitals should be discontinued. However, the Board also concluded that it would be appropriate to continue to pay dividends at a level that recognised that the Covid-19 rent concessions granted were temporary, and as a result some of the surplus liquidity was used to fund the dividend in excess of the Group's Adjusted EPRA Earnings.
Consistent with the guidance provided in the 2020 annual report, the basis of dividend payment therefore reverted to the 'core' dividend without the previously applicable hospitals top-up. This equated 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 declared in the third quarter of 2021.
Year to Year to Year to Year to Year to Six months
GBPm paid in the 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec to 30 June
period 2016 2017 2018 2019 2020 2021
------------------- -------- -------- -------- -------- -------- -----------
Core dividend GBP12.0m GBP16.1m GBP41.4m GBP49.0m GBP46.4m GBP23.7m
Hospitals top-up
dividend - - - GBP3.5m GBP4.4m -
Total dividend
paid GBP12.0m GBP16.1m GBP41.4m GBP52.5m GBP50.8m GBP23.7m
------------------- -------- -------- -------- -------- -------- -----------
Pence per share
paid
Core dividend 5.9p 13.6p 13.9p 15.2p 14.4p 7.3p
Hospitals top-up
dividend - - - 1.1p 1.3p -
Total dividend
paid 5.9p 13.6p 13.9p 16.3p 15.7p 7.3p
------------------- -------- -------- -------- -------- -------- -----------
The dividend for the third quarter of 2021 was declared on 22 July 2021 at 3.95p per share, an increase of 8.2% over the rate payable for the prior quarter. While the actual earnings outturn may vary from expectations if there are any acquisitions, disposals, debt refinancing or lease variations, the availability of substantial surplus cash and the near term contracted resumption of rents to their pre pandemic trajectory means that the Board's current expectation is that dividends will continue to be paid at this level for the fourth quarter of 2021 and the first two quarters of 2022.
While the UK's vaccination programme and the reopening of most of the economy has resulted in an easing of the risk environment, uncertainty arising from the pandemic remains elevated. For as long as it does, and in the event of any other material unexpected events arising, 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 and in setting dividend policy.
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
2021 2020
------------------------ ------------------------
Pence per Pence per
Movements in Net Asset Value GBPm share GBPm share
------------------------------------- ---------- ------------ ---------- ------------
NAV at the start of the period 1,221.5 377.0 1,384.5 428.8
Investment property revaluation* 36.4 11.2 (142.0) (43.9)
Rental income * less administrative
expenses, finance costs and
tax 27.3 8.4 27.1 8.4
Dividends paid (23.7) (7.3) (27.2) (8.4)
Currency translation movements
and derivative revaluation (1.3) (0.4) 1.7 0.5
Dilution from shares issued
in settlement of previous
year's incentive fee - - - (1.5)
NAV at the end of the period 1,260.2 388.9 1,244.1 383.9
------------------------------------- ---------- ------------ ---------- ------------
Change in NAV 38.7 11.9 (140.4) (44.9)
Dividends paid 23.7 7.3 27.2 8.4
------------------------------------- ---------- ------------ ---------- ------------
IFRS Total Accounting Return 62.4 19.2 (113.2) (36.5)
------------------------------------- ---------- ------------ ---------- ------------
IFRS Total Accounting Return:
percentage 5.1% (8.5)%
------------------------------------- ---------- ------------ ---------- ------------
* including GBP7.6 million or 2.3 pence (2020: GBP9.8 million or 3.0 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 are reconciled to net asset value measured in accordance with IFRS in note 19 to the condensed financial statements.
Six months to 30 June Six months to 30 June
2021 2020
----------------------- -----------------------
Pence per Pence per
Movements in EPRA NTA GBPm share GBPm share
------------------------------------ --------- ------------ ------- --------------
EPRA NTA at the start of the
period 1,229.2 379.3 1,391.3 429.4
Investment property revaluation* 44.2 13.6 (132.1) (40.8)
Rental income* less administrative
expenses, finance costs and
current tax 19.9 6.1 17.1 5.3
Dividends paid (23.7) (7.3) (27.2) (8.4)
Currency translation movements (2.3) (0.6) 2.9 0.9
EPRA NTA at the end of the
period 1,267.3 391.1 1,252.0 386.4
------------------------------------ --------- ------------ ------- --------------
Change in EPRA NTA 38.1 11.8 (139.3) (43.0)
Dividends paid 23.7 7.3 27.2 8.4
------------------------------------ --------- ------------ ------- --------------
EPRA NTA Total Accounting
Return 61.8 19.1 (112.1) (34.6)
------------------------------------ --------- ------------ ------- --------------
EPRA NTA Total Accounting
Return: percentage 5.0% (8.1)%
------------------------------------ --------- ------------ ------- --------------
* adjusted by GBP7.6 million or 2.3 pence per share (2020: GBP9.8 million or 3.0 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.
Six months Six months
to to
30 June 2021 30 June 2020
-------------- --------------
Pence per Pence per
Total Shareholder Return share share
----------------------------- -------------- --------------
Share price at the end of
the period 380.0 270.0
Share price at the start of
the period (300.0) (434.0)
Increase / (decrease) 80.0 (164.0)
Dividends paid 7.3 8.4
------------------------------- -------------- --------------
Total Shareholder Return 87.3 (155.6)
------------------------------- -------------- --------------
Total Shareholder Return:
percentage 29.1% (35.9)%
------------------------------- -------------- --------------
Key performance indicator - Adjusted EPRA earnings
The calculation of basic EPS under IFRS, as reported in the condensed financial statements, is shown below.
Six months to 30 June Six months to 30 June
2021 2020
----------------------- -----------------------
Basic and diluted EPS (IFRS Pence per Pence per
basis) GBPm share GBPm share
Rental income net of property
outgoings 60.2 18.6 59.8 18.5
Net finance costs (24.6) (7.6) (24.7) (7.6)
Administrative expenses (7.5) (2.3) (8.1) (2.5)
Tax charge (0.2) (0.1) (0.1) -
---------------------------------- ------- -------------- ------- --------------
Earnings before revaluations 27.9 8.6 26.9 8.4
Investment property revaluations
net of tax 35.7 11.0 (141.9) (43.9)
Basic and diluted earnings 63.6 19.6 (115.0) (35.5)
---------------------------------- ------- -------------- ------- --------------
IFRS earnings include unrealised property revaluation movements, gains and losses on any property disposals and certain other elements such as unrealised valuation movements in interest rate derivatives, which are considered to distort an assessment of underlying long term performance of real estate companies and which are therefore required to be excluded from EPRA earnings. The calculation of EPRA earnings and EPRA Earnings Per Share is presented in note 9 to the condensed financial statements.
There are certain items within EPRA earnings which create a material disconnect between those earnings and the Group's funds from operations available for the payment of dividends: principally the Rent Smoothing Adjustments, including those arising as a result of the Covid-19 related rent concessions, and incentive fees which are payable in shares. 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 in the per share figures which in turn would result in unreliable measures of Dividend Cover.
Adjusted EPRA EPS is derived from EPRA EPS by:
-- removing the Rent Smoothing Adjustments, including those arising from Covid-related rent concessions, from rental income to include rents on a basis that is much closer to cash rents receivable;
-- 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 which are excluded from EPRA EPS (last paid in respect of the year to 31 December 2019);
-- excluding any significant non-recurring costs or income (there have been no such adjustments since 2016); and
-- calculating the weighted average number of shares to reflect the actual dates on which shares were issued.
Six months to 30 June Six months to 30 June
2021 2020
----------------------- -----------------------
Pence per Pence per
GBPm share GBPm share
--------------------------------------- --------- ------------ --------- ------------
Rental income net of property
outgoings 59.3 18.4 59.0 18.2
Net finance costs (23.8) (7.4) (23.9) (7.4)
Administrative expenses (7.5) (2.3) (8.1) (2.5)
Tax charge (0.2) (0.1) (0.1) -
EPRA earnings 27.8 8.6 26.9 8.3
Rent Smoothing Adjustments:
Before any Covid-related
rent concessions (4.0) (1.2) (4.6) (1.4)
Impact of Covid-related concessions:
difference between IFRS and
Adjusted EPRA EPS smoothing
methodology (3.6) (1.1) (5.2) (1.6)
R ent deferrals (0.8) (0.2) (0.6) (0.2)
Adjusted EPRA earnings 19.4 6.1 16.5 5.1
--------------------------------------- --------- ------------ --------- ------------
Adjusted EPRA EPS is reconciled to basic EPS in note 9 to the condensed 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
2021 2020
----------------------- -----------------------
Pence per Pence per
GBPm share GBPm share
-------------------------------- ------- -------------- ------- --------------
Like for like earnings:
Rental income net of outgoings
before concessions 56.1 17.5 55.2 17.0
Net finance costs (23.8) (7.4) (23.9) (7.4)
Administrative expenses (7.5) (2.3) (8.1) (2.5)
Tax charge (0.2) (0.1) (0.1) -
-------------------------------- ------- -------------- ------- --------------
Like for like before rent
concessions 24.6 7.7 23.1 7.1
Rent concessions (5.2) (1.6) (6.6) (2.0)
-------------------------------- ------- -------------- ------- --------------
Adjusted EPRA earnings 19.4 6.1 16.5 5.1
-------------------------------- ------- -------------- ------- --------------
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
Six months to 30 June Six months to 30 June
2021 2020
----------------------- -----------------------
Pence per Pence per
Property outgoings GBPm share GBPm share
-------------------------------------- ------ --------------- ------ ---------------
Irrecoverable property costs 0.2 0.1 0.1 -
Head rents on leasehold properties 0.1 - 0.3 0.1
Other net property outgoings - - 0.2 -
Costs of negotiating and documenting
rent concessions - - 0.5 0.2
Property outgoings in the
IFRS income statement and
EPRA earnings 0.3 0.1 1.1 0.3
Financing element of head
rent costs reclassified from
finance costs and investment
property revaluations 0.9 0.3 0.9 0.3
Recovery of head rent and
other costs reclassified from
revenue (0.8) (0.2) (0.9) (0.3)
Costs of negotiating and documenting
rent concessions reclassified
from finance costs - - 0.1 0.1
Property outgoings in Adjusted
EPRA earnings 0.4 0.2 1.2 0.4
-------------------------------------- ------ --------------- ------ ---------------
On an Adjusted EPRA earnings basis, various items are reclassified within the income statement to more accurately reflect the net cost of the Group's property outgoings. The adjusted figure is used in the calculation of the industry standard EPRA Cost Ratio shown in the Supplementary information. This includes the recovery of certain head rent and other costs from the occupational tenants.
Adjusted EPRA Earnings Per Share - administrative expenses
The Group's administrative expenses for the period are the same under IFRS and the EPRA measures.
Six months to 30 June Six months to 30 June
2021 2020
----------------------- -----------------------
Pence per Pence per
Administrative expenses GBPm share GBPm share
------------------------------- ----- ---------------- ----- ----------------
Advisory fees 6.5 2.0 7.1 2.2
Other administrative expenses 0.8 0.2 0.7 0.2
Corporate costs 0.2 0.1 0.3 0.1
------------------------------- ----- ---------------- ----- ----------------
Total administrative expenses 7.5 2.3 8.1 2.5
------------------------------- ----- ---------------- ----- ----------------
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 line item in the table above. The proportion of disallowed VAT on administrative expenses averaged 19% during the period (six months to 30 June 2020: 21%).
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 advisory fee for the period amounted to GBP6.0 million plus irrecoverable VAT of GBP0.5 million (six months to 30 June 2020: GBP6.7 million plus irrecoverable VAT of GBP0.4 million).
The basis of calculating the advisory fees is explained in note 20 to the condensed financial statements. In summary, the fees are calculated on a reducing scale based on the Group's EPRA NAV (as defined in the EPRA recommendations in place at the time of inception of the management contract), at:
-- 1.25% per annum on EPRA NAV up to GBP500 million; plus -- 1.0% on EPRA NAV from GBP500 million to GBP1 billion; plus -- 0.75% on EPRA NAV from GBP1 billion to GBP1.5 billion; plus -- 0.5% thereafter.
In this way, the Investment Adviser is directly exposed to any reduction in the Group's EPRA NAV by way of a reduction in its fee income.
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 EPRA NAV on which the advisory fee is calculated. With effect from 1 April 2020, for the purposes of calculating the advisory fee, EPRA NAV excludes the balance of that surplus cash to the extent that those funds have not been:
-- deployed in topping up dividends or otherwise returned to shareholders; -- invested in acquisitions; or -- used for liability management.
The saving for the six months to 30 June 2021 as a result of this amendment is GBP0.3 million (year to 31 December 2020: GBP0.8 million). The surplus cash realised on the disposal was GBP164.0 million and the balance of the surplus at 30 June 2021 was GBP109.9 million (31 December 2020: GBP113.9 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, including the costs of independent external property valuations, external trustee and administration costs, tax compliance fees and the fees of the external auditor, which are largely billed directly to subsidiary undertakings.
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 ( six months to 30 June 2020: GBP0.1 million ), with the other three Directors being shareholders 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 GBP0.1 million (six months to 30 June 2020: 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 2021 financial year, the Board has estimated the EPRA NAV of the Group at 31 December 2021 on the basis of the assumptions set out in note 20 to the condensed financial statements . On the basis of that assessment, no fee would be payable for the 2021 financial year and as a result no fee is accrued at 30 June 2021 (30 June 2020: GBPnil). In order for an incentive fee to be earned in respect of the 2021 financial year, the aggregate of the Group's EPRA NAV growth and dividends paid in the year would need to exceed 124.4 pence per share which is estimated, based on dividends paid and currently expected to be paid in 2021, to be equivalent to an EPRA NTA of 489.3 pence per share at the year end.
Adjusted EPRA EPS: net finance costs
Six months to 30 June Six months to 30 June
2021 2020
Pence per Pence per
GBPm share GBPm share
Interest on secured debt facilities: 22.6 7.1 22.9 7.0
Amortisation of costs of arranging
facilities
(non-cash) 1.1 0.3 1.2 0.4
Interest charge on headlease
liabilities 0.8 0.2 0.8 0.2
Loan agency fees and other
lender costs 0.1 - 0.2 0.1
Interest income - - (0.4) (0.1)
Net finance costs for the
period
(IFRS and EPRA basis) 24.6 7.6 24.7 7.6
Reclassification of interest
charge on headlease liabilities
against revenue * (0.8) (0.2) (0.8) (0.2)
Net finance costs for the
period
(Adjusted EPRA basis) 23.8 7.4 23.9 7.4
-------------------------------------- ------ --------------- ------ ---------------
* 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 13% (six months to 30 June 2020: 11%), resulting in a current tax charge of GBP0.2 million (six months to 30 June 2020: GBP0.2 million). The balance sheet includes a deferred tax liability of GBP12.0 million (31 December 2020: GBP11.9 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 GBP0.2 million (six months to 30 June 2020: GBP0.1 million) and a GBP0.7 million deferred tax charge (six months to 30 June 2020: GBP0.1 million credit), which results in a total tax charge of GBP0.9 million (six months to 30 June 2020: GBPnil). Deferred tax is excluded from Adjusted EPRA EPS as shown in note 9 to the condensed financial statements.
In the EPRA NTA calculation, in accordance with the EPRA Guidance, half of the deferred tax is excluded. This is on the basis that the Company has neither (i) decided never to sell the German assets, as the Board manages its assets in an opportunistic way and would sell the assets if that presented the best option for shareholders; nor (ii) identified a consistent track record of disposal of assets and related capital gains within the strict criteria set out within the EPRA guidance.
Adjusted EPRA EPS - currency translation
94% by value of the Group's property assets are located in the UK (94% at 31 December 2020) and the condensed financial statements are therefore presented in Sterling. 3.9% (31 December 2020: 3.9%) 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 EUR132.5 million as at 30 June 2021 (31 December 2020: EUR128.2 million) and the Euro denominated secured debt amounts to EUR71.2 million (31 December 2020: EUR71.8 million). The Euro weakened against Sterling over the period by 4.6% and as a result there was a net currency translation loss of GBP2.0 million (six months to 30 June 2020: GBP2.6 million gain) on an IFRS basis. Half of the deferred tax liability is excluded from EPRA NTA and as a result of this adjustment a further currency translation loss of GBP0.3 million arises in the movement in EPRA NTA in relation to the German operations (six months to 30 June 2020: gain of GBP0.3 million).
Key performance indicator - Net Loan To Value ratio
The Board structures the Group's 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 decreased from 36.4% to 35.6%, which largely reflects the rise in property valuations in the period.
While Net LTV is one indicator of borrowing risk, it does not present a complete picture of risk facing the Company. The Board considers Net LTV in conjunction with a wider assessment of headroom on financial covenants within debt facilities and, as part of that assessment, the security of portfolio rental income in order to evaluate risks that the Company and the Group may be facing.
Key performance indicator - headroom on debt covenants
The Board's management of the Group's capital structure includes assessing the risk of any breach of covenants within secured debt facilities and considering the extent to which these risks can be managed. Covenant calculations are regularly monitored on various scenarios within a realistic range of outcomes, including stress tested and reverse stress tested scenarios. At the inception of new loans, facilities have been structured to ring-fence the extent to which the Group's assets are at risk, ensuring that levels of headroom over financial covenants are appropriate. Subsequently, the Board keeps the Group's liquidity needs under review and aims to maintain a level of Uncommitted Cash which could be applied in avoiding or 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 rental income can be expected to increase annually as a result of the annual minimum fixed rental uplifts on 38% of portfolio income, with a further 3% subject to five yearly uplifts and the additional prospect of increases from the upwards only principally RPI-linked reviews on the rest of the portfolio. Overall, just over two thirds of portfolio rents before any Covid related rent concessions are subject to annual review, with the remainder subject to five yearly reviews. This structure gives rise to predictable improvements in interest cover across the Group in aggregate on the basis of contractual income flows and a naturally deleveraging debt profile on the assumption of constant valuation yields. The Board also has regard to other factors including tenant credit risks.
The Board reviews the headroom on all financial covenants at least quarterly, including stress tested and reverse stress tested scenarios. The headroom on key financial covenants at the first test date following the balance sheet date (which in all cases fell before the end of July 2021) is summarised below, including the fall in valuation (and related Net Initial Yield) or the fall in rent that would trigger a breach of the relevant covenant before any preventative or remedial actions are taken. Defensive actions could include utilising some of the Group's significant Uncommitted Cash of GBP183.6 million as at 30 June 2021 and which is further explained under the heading 'Key performance indicator - Uncommitted Cash'.
Scenarios before any remedial
action
--------
Rent
Valuation fall before
Net Initial fall before interest
30 June Yield triggering LTV test cover test
2021 Covenant LTV test triggered triggered
---------------------------------- ------- -------- ----------------- ------------ ------------
Merlin facility
Property security at independent
valuation (GBPm) 629.2
Gross loan outstanding (GBPm) (375.6)
Other subgroup net assets
(GBPm) 10.2
-------
Ring fenced equity (GBPm) 263.8
-------
Ring fenced equity (pence
per share) 81.4
-------
LTV default test n/a none n/a n/a
Cash trap LTV test: 1% per
annum loan amortisation 60% <80% 7.2% 25%
Cash trap LTV test: full cash
sweep 60% <85% 7.6% 30%
Rental fall before interest
covered 1:1 31%
The valuation fall required to trigger the LTV cash sweeps has increased
since 31 December 2020 (from 23% to 25% for 1% amortisation and
from 27% to 30% for the full cash sweep) as a result of the valuation
increase in the period and the modest reduction in finance costs
by way of GBP1.9 million of scheduled loan amortisation. Over the
six month period to 30 June 2021, the Net Initial Yield required
to trigger 1% per annum of additional amortisation has increased
from 7.0% to 7.2%, the full cash sweep trigger point has increased
from 7.4% to 7.6%, and the headroom on the 1:1 interest cover requirement
has increased from 29% to 31%.
Scenarios before any remedial
action
--------
Rent
Valuation fall before
Net Initial fall before interest
30 June Yield triggering LTV test cover test
2021 Covenant LTV test triggered triggered
---------------------------------- ------- -------- ----------------- ------------ ------------
Healthcare facility 1
Property security at independent
valuation (GBPm) 640.2
Gross loan outstanding (GBPm) (298.0)
Other subgroup net assets
(GBPm) (0.2)
-------
Ring fenced equity (GBPm) 342.0
-------
Ring fenced equity (pence
per share) 105.5
-------
Cash trap LTV test: full cash
sweep 47% <74% 6.9% 37%
LTV test 47% <80% 7.3% 41%
Cash trap projected interest
cover: full cash sweep 196% >140% 29%
Projected interest cover test 196% >120% 39%
Headroom on the LTV tests has increased since 31 December 2020,
from 35% (at a 6.8% valuation yield) to 37% (at a 6.9% valuation
yield) for the LTV cash sweep test and from 39% (at a 7.1% valuation
yield) to 41% (at a 7.3% valuation yield) for the LTV default test.
Headroom on the interest cover test has improved from 38% to 39%
and on the cash sweep interest cover test from 27% to 29%, as a
result of a combination of the fixed 2.8% weighted average rental
increase in the period and the modest reduction in finance costs
because of GBP1.6 million of scheduled loan amortisation.
Scenarios before any remedial
action
--------
Rent
Valuation fall before
Net Initial fall before interest
30 June Yield triggering LTV test cover test
2021 Covenant LTV test triggered triggered
---------------------------------- ------- -------- ----------------- ------------ ------------
Healthcare facility 2
Property security at independent
valuation (GBPm) 150.1
Gross loan outstanding (GBPm) (63.7)
Other subgroup net assets
(GBPm) 0.2
-------
Ring fenced equity (GBPm) 86.6
-------
Ring fenced equity (pence
per share) 26.7
-------
LTV test 42% <80% 8.5% 47%
Cash trap projected debt service
cover test (full cash sweep
if triggered) 229% >150% 34%
Projected debt service cover
test 229% >125% 45%
Headroom on the LTV test has increased since 31 December 2020, from
45% (at an 8.2% valuation yield) to 47% (at an 8.5% valuation yield).
Headroom on the interest cover test has improved from 33% to 34%
for the cash sweep test and from 44% to 45% on the default test
largely from the fixed 2.75% rental increase in the period.
Scenarios before any remedial
action
--------
Rent
Valuation fall before
Net Initial fall before interest
30 June Yield triggering LTV test cover test
2021 Covenant LTV test triggered triggered
---------------------------------- ------- -------- ----------------- ------------ ------------
Budget Hotels facility 2
Property security at independent
valuation (GBPm) 198.0
Gross loan outstanding (GBPm) (65.4)
Other subgroup net assets
(GBPm) 1.4
-------
Ring fenced equity (GBPm) 134.0
-------
Ring fenced equity (pence
per share) 41.4
-------
Partial cash trap LTV test
(50% of surplus cash swept
to lender if triggered) 33% <40% 8.5% 17%
Cash trap LTV test (full cash
sweep if triggered) 33% <45% 9.6% 27%
LTV test 33% <50% 10.6% 34%
Cash trap projected interest
cover test (full cash sweep
if triggered) 721% >300% 58%
Projected interest cover test 721% >250% 65%
Budget Hotels facility 1
Property security at independent
valuation (GBPm) 190.4
Gross loan outstanding (GBPm) (59.0)
Other subgroup net assets
(GBPm) 3.2
-------
Ring fenced equity (GBPm) 134.6
-------
Ring fenced equity (pence
per share) 41.6
-------
Partial cash trap LTV test
(50% of surplus cash swept
to lender if triggered) 31% <40% 9.1% 23%
Cash trap LTV test (full cash
sweep if triggered) 31% <45% 10.2% 31%
LTV test 31% <50% 11.4% 38%
Cash trap projected interest
cover test (full cash sweep
if triggered) 967% >300% 69%
Projected interest cover test 967% >250% 74%
The two Budget Hotels facilities are ring fenced from one another
as while they have the same arranger, they each have a different
lender group. However, the comments below relate to both facilities
as they are structured in much the same way and the factors affecting
the covenants in the period were the same for each facility.
Headroom on the LTV covenants is broadly unchanged since 31 December
2020 as there have been no significant valuation movements in either
portfolio. Headroom on the income covenants has improved from 610%
to 721% and from 792% to 967% in the two facilities as the rents
receivable in 2021 are significantly higher than in 2020, which
was the period of the deepest CVA reductions, and the projected
rent now includes periods after the end of the CVA reductions in
January 2022.
Covenant waivers were granted on one of the facilities to accommodate
the rent reductions in the CVA, but these have now expired, being
no longer required following the rental increases during the period.
All covenant tests have reverted to their previous levels.
Scenarios before any remedial
action
--------
Rent
Topped Up Valuation fall before
Net Initial fall before interest
30 June Yield triggering LTV test cover test
2021 Covenant LTV test triggered triggered
---------------------------------- ------- -------- ----------------- ------------ ------------
Leisure facility: Arena, Brewery,
Pubs
Property security at independent
valuation (GBPm) 177.7
Gross loan outstanding (GBPm) (60.0)
Other subgroup net assets
(GBPm) 2.6
-------
Ring fenced equity (GBPm) 120.3
-------
Ring fenced equity (pence
per share) 37.1
-------
Partial cash trap LTV cash
(50% cash sweep) 34% <40% 7.0% 16%
Cash trap LTV test (full cash
sweep if triggered) 34% <45% 7.9% 25%
LTV test 34% <50% 8.8% 32%
Projected interest cover test 342% >150% 56%
The LTV headroom on this facility is broadly unchanged since 31
December 2020 as there has been no significant net portfolio valuation
movement. The headroom on the income test has tightened slightly
from 57% to 56% following exclusion from the income forecast at
the test date of rents from a tenant with rent arrears outstanding
at that date.
Significant headroom was built into each facility at the outset, to act as a "shock absorber" in the event that tenant difficulty or property investment market disruption puts pressure on those debt covenants. In the cases of the Leisure and Budget Hotels facilities where the financial effects of the pandemic have manifested themselves, in the case of all but one test in one facility the headroom over covenant levels has now increased since those reported for 31 December 2020 as the rent concessions gradually expire and income and valuations start to revert to their pre pandemic levels. 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. Any covenant waivers that were required to accommodate the concessions are no longer needed and so are no longer in effect.
Key performance indicator - Uncommitted Cash
Uncommitted Cash is cash freely available to the Group, after allowing for any amounts payable out of free cash.
30 June 31 December
2021 2020 30 June 2020
GBPm GBPm GBPm
------------------------------------ ------- ----------- ------------
Free cash 189.1 196.6 226.4
Tax and social security (3.9) (1.7) (0.5)
Accruals, trade and other payables
and corporation tax (1.6) (2.9) (2.6)
Interest payable * - - (3.7)
Uncommitted Cash 183.6 192.0 219.6
------------------------------------- ------- ----------- ------------
* interest payable is only excluded from Uncommitted Cash to the extent that secured cash within the specific facility is not available to cover the liability, which was the case at 30 June 2020 as a result of the deferral of the Merlin rent immediately prior to that date.
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 level of Uncommitted Cash retained is assessed regularly in light of property market and wider economic conditions and outlook together with an assessment of specific covenant headroom levels in individual debt facilities. The Board's assessment is that while pandemic risks have eased since the last reporting period, uncertainty is still at higher than historic levels therefore the retention of a significant liquidity buffer as at 30 June 2021 continued to be appropriate.
Movements in Uncommitted Cash GBPm ------------------------------------------------ ------ At 31 December 2020 192.0 Dividend support while rent concessions unwind (4.3) Scheduled loan amortisation (3.6) Other (0.5) ------------------------------------------------ ------ At 30 June 2021 183.6 ------------------------------------------------ ------
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.
Rent reductions and deferrals granted in the period have reduced the cash flow from operating activities by GBP4.4 million and GBP0.8 million respectively (six months to 30 June 2020: GBP5.3 million of rent reductions and GBP8.9 million of rent deferrals). No material concession costs arose in the period (six months to 30 June 2020: GBP0.5 million).
Six months to 30 June Six months to 30 June
2021 2020
----------------------- -----------------------
Pence per Pence per
GBPm share GBPm share
-------------------------------- --------- ------------ --------- ------------
Cash from operating activities 45.9 14.2 25.8 8.0
Net interest and finance costs
paid (23.6) (7.3) (23.6) (7.3)
Tax paid (0.2) (0.1) (0.3) (0.1)
-------------------------------- --------- ------------ --------- ------------
22.1 6.8 1.9 0.6
Dividends paid (23.7) (7.3) (27.2) (8.4)
-------------------------------- --------- ------------ --------- ------------
(1.6) (0.5) (25.3) (7.8)
Scheduled repayments of secured
debt (3.6) (1.1) (1.7) (0.5)
Disposal of non-core pub 0.1 - - -
Disposals of non-core budget
hotels net of debt repayment - - 1.2 0.4
Acquisition of fixed assets - - (0.2) (0.1)
Cash flow in the period (5.1) (1.6) (26.0) (8.0)
Cash at the start of the period 219.7 67.8 267.1 82.7
Currency translation movements (0.1) - - -
Dilution from incentive fee
share issue - - - (0.3)
Cash at the end of the period 214.5 66.2 241.1 74.4
-------------------------------- --------- ------------ --------- ------------
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 2021.
Nick Leslau
Chairman, Prestbury Investment Partners Limited
8 September 2021
Principal Risks and Uncertainties
The Board's responsibilities for risk management include assessing the principal risks faced by the Group and how they may be mitigated, including considering matters that may threaten the performance of the Group, its business model or its viability.
The Audit Committee and the Board review the Group's risk register at least annually and more often as necessary. Given the elevated risks following the onset of the Covid-19 pandemic, the risk register, which was most recently reviewed in March 2021 in connection with the publication of the 2020 annual report, has been reviewed again in conjunction with the approval of this interim report.
Material changes to the Group risk register
Pandemic disruption was added to the overarching risks (which comprised Brexit risk and Climate risk) at the first review after the pandemic was declared, and the risk rating of each of the principal risks was increased at that time because all are impacted by the consequences of the pandemic and the response of governments and public health bodies to it. This remains the case in the current schedule of risks. While the risk appears to be easing materially with high vaccination rates and full permission for UK businesses to reopen from July 2021, risks and uncertainties arising from the pandemic, while lower than six months ago, are still elevated.
Consultation on further developments in environmental regulations for landlords has been launched since the risk register was last reviewed. While the consultation remains open and the ultimate outcome is therefore uncertain, we consider that this risk is elevated and have raised its rating. We have also elevated the refinancing risk, not because debt market conditions have worsened - if anything they are better than at the time of the previous review - but because the date of the next debt maturity in October 2022 is now within some 13 months of the date of issue of this report. The risk assessments are otherwise unchanged.
Overarching risks
There are overarching risks which the Board considers to be relevant to most of the individual risk areas identified in the Group risk register. These are not classified as separate risks in their own right but as general risks affecting many of the specific risk factors faced by the Group, which are kept under review.
i) Global economic and social disruption including pandemic risk
The Board and Management Team of the Company and those of the Group's major tenants have operated through a number of 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 and other pandemic related restrictions has been felt by our tenants in the Leisure and Budget Hotels sectors, this has been mitigated from the Company's perspective through its significant weighting in healthcare assets which account for 33% of the Group's passing rents before Covid-related concessions and through flexibility in the capital structure which allowed the Company to provide support in the way of rent concessions to assist the tenants in managing the impact of the pandemic. The Company's Uncommitted Cash balance remains available to deploy in response to further threats arising. While the path of the virus, of consumer and government or regulatory responses in the face of it and of any further economic impacts cannot be known, the experience of the Board and Management Team members is being brought to bear on every aspect of the risks faced by the Company as a result of the current pandemic. The Covid-19 experience also serves to remind us that pandemic risk is not limited to this one virus so despite the easing of the impact of Covid-19 at the time of
this report, this risk remains one of our overarching risks.
ii) Climate risk, including the risks and costs of decarbonisation
We assess the overarching climate risk as a distinct risk from the regulatory risks posed by specific environmental standards applicable to the Company, dealt with separately in the risk register. The Company is externally managed with no offices run by it and so has no directly produced emissions to report. The general risk of disruption from climate change is not one where the Company can take steps to make a material impact on its own behalf. However, in assessing the strength of the credit quality of our tenants and of potential tenants, we take climate risk into account. Climate risk assessments also form an integral part of the way that we consider how any assets being assessed for acquisition meet the criteria set out in the Company's business model and the Board has committed to sign up to the UN Principles of Responsible Investment to guide this process. We report on our own policies and those of our major tenants in the ESG section of the Strategic Review in our annual report and in the ESG Centre on the Company's website.
iii) Brexit risk
Towards the end of 2020 a trade deal was agreed with the EU, just prior to the end of the Brexit transition period, reducing Brexit risk by removing the risk of a disorderly exit on World Trade Organisation terms. As a result, Brexit risk was removed from the overarching risk list presented in the 2020 annual report. However, as we noted at the time, the change in trading conditions is relatively recent and continues to evolve, therefore the Board continues to monitor Brexit risk to ensure that the assessment remains appropriate, particularly as it may impact on our tenants, and it remains on our "watchlist".
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 33% (31 December 2020: 32%)
and the prior year, obligations by a of passing rent before concessions
the Group derived material tenant and at the balance sheet date
its income from ten its guarantor (if is contractually backed
tenant groups, two any) would have an by large listed companies
of which have the impact on the Group's and a further 35% (31 December
benefit of guarantees revenue, earnings 2020: 35%) by global businesses
from substantial parent and cash flows and with multi billion pound
companies. The three could have an impact valuations, all with capital
largest tenant groups on debt covenant structures considered by
account for 88% of compliance. The specialised the Board to have been strong
passing rent before use of the properties and with impressive long
concessions as at may mean that, in term earnings growth and
the balance sheet the event of an unexpected (where relevant) share price
date (31 December vacancy, re-letting track records up until the
2020: 88%). takes time. start of the pandemic. The
balance of the income is
Although the Board Investment property payable by substantial businesses
considers the tenant valuations reflect also considered by the Board
and guarantor groups an independent external to be sufficiently financially
to be financially valuer's assessment strong in the context of
strong in ordinary of the future security their lease obligations.
circumstances, certain of income. A loss
tenants experienced of income would therefore The properties are Key Operating
liquidity stresses impact net asset Assets, which should have
during the pandemic value as well as the effect of enhancing
and there can be no earnings. It could rental income security.
guarantee that they also lead to a breach
will remain able to of interest cover The Board reviews the financial
comply with their or debt service cover position of the tenants
obligations throughout covenants, resulting and guarantors at least
the term of the relevant in increased interest every quarter and more often
leases. rate margins payable when relevant, based on
to lenders, restricted publicly available financial
The severe impact cash flows out of information and any other
of Covid-19 on the secured debt groups trading information which
Group's Leisure and or ultimately default may be obtained either under
Budget Hotels tenants, under secured debt the terms of the leases
which suffered an agreements. The availability or informally. The Group's
abrupt and almost of distributable key performance indicators
complete closure of reserves could also include the levels of covenant
their operations as be restricted. headroom and of Uncommitted
a result of the pandemic, Cash, both of which are
created heightened relevant to monitoring and
tenant risk in 2020. if necessary mitigating
The reopening of their this risk.
businesses over the
course of 2021 has The Board reserves unsecured
brought some easing and Uncommitted Cash outside
of risk and this trend ring-fenced debt structures
is expected to continue. which would be available
The risk remains elevated to be used to cure certain
while the pandemic covenant defaults to the
continues and there extent of the cash available.
is still the possibility
of a reintroduction
of restrictions in
the UK, and for as
long as the UK Government
moratorium on the
enforcement of rent
collection remains
in place.
------------------------------- -------------------------------- --------------------------------------
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 Management Team and,
fair value at each have a significant separately, the Audit Committee
balance sheet date. impact on EPRA NTA, before being considered
The Company is therefore with any effect of by the Board in the context
exposed to movements the valuation changes of the financial statements
in property valuations, on net assets magnified as a whole.
which are subjective by the impact of
and may vary as a borrowings. The Board seeks to structure
result of a number the Group's capital such
of factors, many of Falls in the value that the level of borrowing
which are outside of investment properties and the protections available
the control of the could lead to a breach to cure a covenant default
Board. These factors of financial covenants are appropriate having regard
include (but are not in secured debt facilities, to market conditions and
limited to) economic resulting in increased financial covenant levels.
conditions, specific interest margins
property sub-market payable to lenders, The Group's key performance
conditions and potentially restricted cash flows indicators include the levels
climate risk. out of secured debt of covenant headroom and
groups, restrictions Uncommitted Cash, both of
This risk increased of distributable which are relevant to monitoring
in 2020 because of reserves available and if necessary mitigating
a relative lack of for dividend payments this risk.
liquidity in the Leisure or default under
and Budget Hotels secured debt agreements. The Board reserves Uncommitted
sectors which was Cash outside ring-fenced
reflected in a 'material debt structures which would
valuation uncertainty' be available to cure certain
in the independent covenant breaches.
external valuations
of those properties
as at 30 June and
31 December 2020.
The risk has reduced
in 2021 as those valuations
are no longer subject
to material uncertainty.
------------------------------- -------------------------------- --------------------------------------
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
to lenders in the covenant, the Group subgroups with no cross-guarantees
form of mortgages may be required to between them and no recourse
over each of the Group's pay higher interest to other assets outside
investment properties costs or increase each secured subgroup. A
and fixed and floating debt amortisation, financial covenant issue
charges over other affecting Group earnings in one portfolio should
assets. and cash flows. If therefore be limited to
a financial covenant that portfolio, save for
The Group had the breach is the result tenant related events (such
support of its lenders of the financial as a tenant insolvency)
in agreeing those weakness of a tenant where the two healthcare
consents or waivers or a guarantor, the subgroups would both be
that were required property valuations affected by any issue relating
to accommodate the and therefore net to Ramsay and the two Budget
support provided to asset value may also Hotels facilities would
its tenants throughout be adversely affected. be affected by any issue
the pandemic and holds In certain circumstances relating to Travelodge.
a significant Uncommitted the Company's ability
Cash balance which to make cash distributions Five of the facilities have
is intended to give to shareholders may LTV default covenants (the
it the ability to be reduced. Merlin Leisure facility
cure breaches of financial has no LTV default covenant)
covenants should they Where a loan repayment and all facilities have
occur. cannot be made the interest cover or debt service
Group may be forced cover covenants. The Board
The risk has reduced to sell assets to reviews compliance with
in 2021 as covenant repay part or all all financial covenants
headroom is returning of the Group's debt. at least every quarter,
to pre-pandemic levels, It may be necessary including forward-looking
but for as long as to sell assets at tests for at least twelve
tenant risk is elevated, below book value, months, and considers whether
borrowing risk is which would adversely there is sufficient headroom
also considered to impact net assets on relevant loan covenants
be elevated. and future earnings. to withstand stress test
Early debt repayments and reverse stress test
would in most cases scenarios.
crystallise repayment
penalties, which The Board seeks to structure
would also adversely the Group's capital such
impact cash balances that gearing is appropriate
and net assets and having regard to market
reduce distributable conditions and financial
reserves. covenant levels, with appropriate
cure rights within debt
facilities.
The Board reserves Uncommitted
Cash outside ring-fenced
debt structures which would
be available to cure certain
covenant breaches.
The Group's key performance
indicators include the levels
of Net Loan to Value, covenant
headroom and Uncommitted
Cash, all of which are relevant
to monitoring and if necessary
mitigating this risk.
------------------------------- -------------------------------- --------------------------------------
Refinancing
One of the Group's Debt finance might The financing market for
debt facilities, with not be available alternative assets such
principal outstanding on acceptable terms as this leisure portfolio
of GBP375.6 million or might not be available is considered to have deepened
at 30 June 2021, is to the full extent since the current facility
due for repayment of the amounts due was entered into in 2015
in October 2022. The for repayment. An and, generally speaking,
refinancing of that inability to repay the cost of funds and market
debt will depend on the debt in full financing rates have reduced
the Group's access could mean a reduction over that time.
to financing prior in the value of shareholders'
to maturity, and on equity through a At the current independent
conditions at that forced sale of assets, portfolio valuation, there
time both in the debt a reduction in the is significant LTV headroom
market and, in order Group's balance of over loan principal and
to support valuations, Uncommitted Cash, the Group also holds, at
in the investment or could result in 30 June 2021, very significant
property market. default interest Uncommitted Cash which could
rates being applied, be applied in part repayment
This risk ranking increasing the cost of the facility.
has been raised in of debt service to
2021 as the maturity the Group. The Board has commenced
date of the existing work on the process of refinancing
loan approaches. Debt finance might this facility and has a
only be available reasonable expectation of
at a higher interest concluding those negotiations
cost than the current before the maturity date.
rate, adversely,
impacting Adjusted
EPRA EPS and reducing
distributable reserves,
or on more restrictive
terms which might
reduce free cash
flow available for
dividends.
------------------------------- -------------------------------- --------------------------------------
Environmental regulations
The Group is subject Regulations could The vast majority of the
to environmental laws be onerous to comply Group's assets are let on
and regulations relating with, or could adversely long FRI leases where the
to its properties. affect the Group's tenants are responsible
ability to sell, for compliance with statutory
Although our environmental lease, finance or requirements, including
strategy continues redevelop its property environmental laws and regulations.
to be actively developed assets. Violations As such any costs associated
, this risk ranking could result in reputational with environmental compliance
has increased, given damage and/or regulatory are borne by the tenant.
that there is currently compliance penalties. Ultimately, therefore, this
a Government consultation risk is currently a tenant
on proposed new environmental credit risk.
requirements relating
to properties. While The Board is assessing the
the allocation of potential impact that the
risk between landlords emerging regulations, currently
and tenants requires under consultation, would
greater clarity, it have. Proposals to address
is possible that the any such risks arising form
consultation could part of the ESG policy that
result in obligations has been adopted by the
on landlords. Company and which will be
further developed with input
from specialist external
advisers. We note that this
is an area of evolving regulation
and practice so the Board
keeps an active watch on
developments, including
through the ESG Committee
which has been established
for this purpose.
------------------------------- -------------------------------- --------------------------------------
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 2021 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 UK adopted International Accounting Standards ("UK IFRS"). 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 UK.
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.
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 2021 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
8 September 2021
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
2021 2020 2020
Notes GBPm GBPm GBPm
-------------------------------- ----- ----------- ------------ -----------
Revenue 3 , 4 60.5 121.7 60.9
Property outgoings 5 (0.3) (1.5) (1.1)
-------------------------------- ----- ----------- ------------ -----------
Gross profit 60.2 120.2 59.8
Administrative expenses 6 (7.5) (17.0) (8.1)
Investment property revaluation 10 36.4 (166.7) (142.0)
Operating profit / (loss) 89.1 (63.5) (90.3)
Finance income - 0.4 0.4
Finance costs 7 (24.6) (50.3) (25.0)
-------------------------------- ----- ----------- ------------ -----------
Profit / (loss) before tax 64.5 (113.4) (114.9)
Tax charge 8 (0.9) (0.3) (0.1)
-------------------------------- ----- ----------- ------------ -----------
Profit / (loss) for the period 9 63.6 (113.7) (115.0)
-------------------------------- ----- ----------- ------------ -----------
Pence per Pence per Pence per
share share share
-------------------------------- ----- ----------- ------------ -----------
Earnings per share
Basic and diluted 9 19.6 (35.1) (35.5)
-------------------------------- ----- ----------- ------------ -----------
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
2021 2020 2020
Notes GBPm GBPm GBPm
----------------------------------- ----- ----------- ------------ -----------
Profit / (loss) for the period 63.6 (113.7) (115.0)
Items that may subsequently
be reclassified to profit
or loss:
Currency translation movements (1.8) 2.1 2.5
Fair value movements in interest
rate derivatives 7 0.6 (0.6) (0.8)
Other comprehensive (loss)
/ income (1.2) 1.5 1.7
Total comprehensive income
/ (loss) 62.4 (112.2) (113.3)
----------------------------------- ----- ----------- ------------ -----------
The notes form part of this interim report.
Group Statement of Changes in Equity
Share
Share premium Other Retained Total
capital reserve reserves earnings equity
GBPm GBPm GBPm GBPm GBPm
-------------------------------- -------- -------- --------- --------- -------
Six months to 30 June 2021 (unaudited)
At 1 January 2021 32.4 523.2 3.7 662.2 1,221.5
-------------------------------- -------- -------- --------- --------- -------
Profit for the period - - - 63.6 63.6
Other comprehensive loss - - (1.2) - (1.2)
Total comprehensive income - - (1.2) 63.6 62.4
Interim dividends of 7.3 pence
per share - - - (23.7) (23.7)
-------------------------------- -------- -------- --------- --------- -------
At 30 June 2021 32.4 523.2 2.5 702.1 1,260.2
-------------------------------- -------- -------- --------- --------- -------
Year to 31 December 2020 (audited)
At 1 January 2020 32.3 518.4 7.1 826.7 1,384.5
-------------------------------- -------- -------- --------- --------- -------
Loss for the year - - - (113.7) (113.7)
Other comprehensive income - - 1.5 - 1.5
Total comprehensive loss - - 1.5 (113.7) (112.2)
Issue of shares 0.1 4.8 (4.9) - -
Interim dividends of 15.7 pence
per share - - - (50.8) (50.8)
-------------------------------- -------- -------- --------- --------- -------
At 31 December 2020 32.4 523.2 3.7 662.2 1,221.5
-------------------------------- -------- -------- --------- --------- -------
Six months to 30 June 2020 (unaudited)
At 1 January 2020 32.3 518.4 7.1 826.7 1,384.5
-------------------------------- -------- -------- --------- --------- -------
Loss for the period - - - (115.0) (115.0)
Other comprehensive income - - 1.7 - 1.7
Total comprehensive loss - - 1.7 (115.0) (113.3)
Issue of shares 0.1 4.8 (4.9) - -
Interim dividends of 8.4 pence
per share - - - (27.1) (27.1)
-------------------------------- -------- -------- --------- --------- -------
At 30 June 2020 32.4 523.2 3.9 684.6 1,244.1
-------------------------------- -------- -------- --------- --------- -------
The notes form part of this interim report.
Group Balance Sheet
Unaudited Audited Unaudited
30 June 31 December 30 June
2021 2020 2020
Notes GBPm GBPm GBPm
------------------------------ ------ --------- ------------ ---------
Non-current assets
Investment properties 3 , 10 2,014.3 1,975.6 1, 986 .8
Headlease rent deposits 2.8 2.8 2.8
Property, plant and equipment 0.2 0.2 0.2
2,017.3 1,978.6 1,989.8
------------------------------ ------ --------- ------------ ---------
Current assets
Cash and cash equivalents 0 214.5 219.7 241.1
Trade and other receivables 12 20.0 20.0 10.0
234.5 239.7 251.1
Total assets 2,251.8 2,218.3 2,240.9
------------------------------ ------ --------- ------------ ---------
Current liabilities
Trade and other payables 13 (33.6) (32.9) (31.1)
Secured debt 14 (5.0) (5.0) (4.1)
Interest rate derivatives 15 (0.5) (0.5) (0.5)
Current tax liability (0.1) (0.1) (0.1)
------------------------------ ------ --------- ------------ ---------
(39.2) (38.5) (35.8)
------------------------------ ------ --------- ------------ ---------
Non-current liabilities
Secured debt 14 (911.2) (916.6) (919.6)
Head rent obligations under
finance leases 10 (28.6) (28.7) (28.1)
Deferred tax liability 16 (12.0) (11.9) (11.9)
Interest rate derivatives 15 (0.6) (1.1) (1.4)
(952.4) (958.3) (961.0)
Total liabilities (991.6) (996.8) (996.8)
------------------------------ ------ --------- ------------ ---------
Net assets 1,260.2 1,221.5 1,244.1
------------------------------ ------ --------- ------------ ---------
Share capital 17 32.4 32.4 32.4
Share premium reserve 18 523.2 523.2 523.2
Other reserves 18 2.5 3.7 3.9
Retained earnings 18 702.1 662.2 684.6
Total equity 1,260.2 1,221.5 1,244.1
------------------------------ ------ --------- ------------ ---------
Pence per Pence per Pence per
share share share
------------------------------ ------ --------- ------------ ---------
Basic and diluted NAV per
share 19 388.9 377.0 383.9
EPRA NTA per share 19 391.1 379.3 386.4
------------------------------ ------ --------- ------------ ---------
The notes form part of this interim report.
Group Cash Flow Statement
Unaudited Unaudited
Six months Audited Six months
to Year to to
30 June 31 December 30 June
2021 2020 2020
Notes GBPm GBPm GBPm
---------------------------------- ----- ----------- ------------ -----------
Operating activities
Profit / (loss) before tax 64.5 (113.4) (115.0)
Investment property revaluation 10 (44.3) 142.5 132.0
Finance income - (0.4) (0.4)
Finance costs 7 24.6 50.3 25.1
---------------------------------- ----- ----------- ------------ -----------
Cash flows from operating
activities before changes
in working capital 44.8 79.0 41.7
Changes in working capital:
Trade and other receivables 0.1 (18.8) (8.7)
Trade and other payables 1.0 (5.5) (7.2)
Cash generated from operations 45.9 54.7 25.8
Tax paid (0.2) (0.4) (0.3)
---------------------------------- ----- ----------- ------------ -----------
Cash flows from operating
activities 45.7 54.3 25.5
---------------------------------- ----- ----------- ------------ -----------
Investing activities
Disposal of investment properties 0.1 2.6 2.6
Interest received - 0.4 0.4
Acquisition of property,
plant and equipment - (0.2) (0.2)
Cash flows from investing
activities 0.1 2.8 2.8 ---------------------------------- ----- ----------- ------------ ----------- Financing activities Dividends paid (23.7) (50.8) (27.2) Interest and finance costs paid (23.6) (47.9) (24.0) Scheduled repayments of secured debt (3.6) (4.4) (1.7) Repayment of secured debt from proceeds of disposal of investment properties - (1.5) (1.5) Cash flows from financing activities (50.9) (104.6) (54.4) ---------------------------------- ----- ----------- ------------ ----------- Decrease in cash and cash equivalents (5.1) (47.5) (26.1) Cash and cash equivalents at the beginning of the period 219.7 267.1 267.1 Currency translation movements (0.1) 0.1 0.1 ---------------------------------- ----- ----------- ------------ ----------- Cash and cash equivalents at the end of the period 0 214.5 219.7 241.1 ---------------------------------- ----- ----------- ------------ -----------
The notes form part of this interim report.
Notes to the Interim Report
1. General information about the Group
The financial information set out in this report covers the six months to 30 June 2021, with comparative figures relating to the year to 31 December 2020 and the six months to 30 June 2020. It 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 and listed on the AIM Market of the London Stock Exchange. The address of the registered office and principal place of business is Cavendish House, 18 Cavendish Square, London W1G 0PJ.
Further information about the Group can be found on its website, www.SecureIncomeREIT.co.uk. Contact details for the Company and key advisors are included in the Company Information at the end of this report.
2. Basis of preparation and accounting policies
On 31 December 2020, IFRS as adopted by the European Union at that date was brought into UK law and became UK-adopted International Accounting Standards, with future changes being subject to endorsement by the UK Endorsement Board. The Group transitioned to UK-adopted International Accounting Standards in its consolidated financial statements on 1 January 2021. There was no impact on or change in accounting policies from the transition.
At the time of approving the condensed financial statements, the Directors have a reasonable expectation that the Company and Group have adequate resources to continue in operational existence for the foreseeable future, being a period of at least twelve months from the date of approval of the condensed financial statements, and therefore continue to adopt the going concern basis of accounting. In conducting their review of the appropriateness of the going concern basis, the Directors had regard to a range of realistic base case and stress tested scenarios for the Group's cash flows for the period under review and the principal risks and uncertainties identified in their review of the Group's risk register, together with their assessments of the prospects of significant tenants, the headroom available on debt covenants and the liquidity available to the Group to deal with income or valuation debt covenant issues.
The financial information contained in this report has been prepared in accordance with IAS 34 "Interim Financial Reporting" as adopted by the UK. The accounting policies adopted in this report are consistent with those applied in the Group's statutory accounts for the year to 31 December 2020 and are expected to be consistently applied in the financial statements for the year to 31 December 2021.
No new or revised standard as at the date of this report is expected to be relevant to the Group for the year ending 31 December 2021 or to have a material effect the Group's financial statements in the 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 2020: EUR1:GBP0.89; six months to 30 June 2020: EUR1:GBP0.87) and period end balances converted to Sterling at the 30 June 2021 exchange rate of EUR1:GBP0.86 (31 December 2020: EUR1:GBP0.90; 30 June 2020: EUR1:GBP0.91).
The condensed financial statements for the period are unaudited and the financial information for the year to 31 December 2020 contained therein does not constitute statutory accounts for the purposes of the Companies Act 2006. The annual report and financial statements for 2020 have been filed at Companies House. The Independent Auditor's report on the annual report and financial statements for 2020 was unqualified, and did not contain a statement under sections 498 (2) or 498 (3) of the Companies Act 2006. It included an emphasis of matter in relation to a material valuation uncertainty over the independent valuation of certain of the Group's investment properties as at 31 December 2020 (as explained in note 10 to the annual report). No such material valuation uncertainty applies to the independent valuation of any of the Group's investment properties as at 30 June 2021.
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 at each reporting date using recognised valuation techniques and the principles of IFRS 13 "Fair Value Measurement".
The principal areas of judgement are revenue recognition and the assessment of any incentive fee likely to be payable for the year.
-- Consistent with the prior year, 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 has been considered. The review is under arbitration and the nature of the assets mean that there is little comparative information on which to base an assessment. The Directors consider that it is not possible at present to make a reasonably certain estimate of any uplift that might result, and the financial statements therefore do not reflect any additional revenue arising as a result of this rent review. This position has not changed from that disclosed in the 2020 financial statements.
-- The Board has assessed whether it is appropriate to make a 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 using methodology 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 Company's chief operating decision maker is its Board.
At 30 June 2021, the Group owned 160 properties (31 December 2020 and 30 June 2020: 161), originally acquired in five separate portfolios. Although certain information about these properties 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 and the other key performance indicators, all of which are reported on a Group basis. The Board has therefore concluded that the Group has operated in, and was managed as, one operating 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
2021 2020 2020
GBPm GBPm GBPm
----------------------- ------------ ------------- ------------
Revenue
UK 56.4 113.2 56.7
Germany 4.1 8.5 4.2
----------------------- ------------ ------------- ------------
60.5 121.7 60.9
----------------------- ------------ ------------- ------------
Investment properties
UK 1,900.6 1,860.3 1,870.3
Germany 113.7 115.3 116.5
----------------------- ------------ ------------- ------------
2,014.3 1,975.6 1,986.8
----------------------- ------------ ------------- ------------
Unaudited
Unaudited Audited Six months
Six months Year to to
to 30 June 31 December 30 June
Revenue including Rent Smoothing 2021 2020 2020
Adjustments GBPm GBPm GBPm
------------------------------------ ------------ ------------- ------------
Ramsay Healthcare UK Operations
Limited, guaranteed by Ramsay
Health Care Limited 18.5 37.2 18.5
Travelodge Hotels Limited 14.6 29.4 14.9
Merlin Attractions Operations
Limited, guaranteed by Merlin
Entertainments Limited 14.2 28.3 14.0
Other tenants (each less than
10% of revenue) 13.2 26.8 13.5
------------------------------------ ------------ ------------- ------------
Reported revenue (note 4 ) 60.5 121.7 60.9
------------------------------------ ------------ ------------- ------------
Revenue excluding Rent Smoothing
Adjustments
------------------------------------ ------------ ------------- ------------
Ramsay Healthcare UK Operations
Limited, guaranteed by Ramsay
Health Care Limited 17.3 34.1 17.0
Merlin Attractions Operations
Limited, guaranteed by Merlin
Entertainments Limited 14.2 14.0 13.4
Travelodge Hotels Limited 10.0 14.1 10.3
Other tenants (each less than
10% of revenue) 9.6 16.1 8.7
------------------------------------ ------------ ------------- ------------
Revenue on Adjusted EPRA Earnings
basis 51.1 78.3 49.4
------------------------------------ ------------ ------------- ------------
4. Revenue
Unaudited
Unaudited Audited Six months
Six months Year to to
to 30 June 31 December 30 June
2021 2020 2020
GBPm GBPm GBPm
----------------------------------------- ------------ ------------- ------------
Rent receivable 52.1 96.4 50.2
Rent Smoothing Adjustments:
Smoothing of original contractual
uplifts 4.0 8.9 4.7
Smoothing of Covid-19 rent concessions 3.6 14.8 5.1
Recovery of head rent and service
charge costs from occupational
tenants (note 5 ) 0.8 1.6 0.9
----------------------------------------- ------------ ------------- ------------
60.5 121.7 60.9
----------------------------------------- ------------ ------------- ------------
The Rent Smoothing Adjustments arise through the Group's accounting policy in respect of leases, which requires the recognition of rental income on a straight line basis over the lease term, including rent uplifts throughout the term in certain circumstances. Uplifts that must be smoothed over the lease term are those for the 41% of contracted rent as at 30 June 2021 (31 December 2020: 41%; 30 June 2020: 42%) that increases by a fixed percentage at each review date and the 6% of contracted rent as at 30 June 2021 (31 December 2020 and 30 June 2020: 6%) that is subject to minimum RPI-linked uplifts.
The temporary rent reductions agreed to assist tenants as a result of the Covid-19 pandemic also impact on this calculation, with 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. In addition, GBP0.8 million of rent on the Leisure and Budget Hotels portfolio has been excluded from revenue in the period on an Adjusted EPRA earnings because, although it had been recognised in the income statement, it had not yet been received in cash as it has been deferred to fall due in instalments commencing in September 2021. In the prior year, GBP17.7 million of rent on the Leisure portfolio was also treated in this way, as receipt of the cash was deferred from June and September 2020 to September 2021.
Further detail on the Rent Smoothing Adjustments is provided in note 10 and the Supplementary Information which follows the condensed financial statements.
Revenue on an Adjusted EPRA earnings basis also excludes back rent received in 2018 from a rent review on the healthcare portfolio, which is being recognised in revenue over the remaining lease term, and the amounts recovered from occupational tenants for head rent and service charge costs, which are reclassified against the equivalent costs in property outgoings. As a result of these adjustments, revenue reconciles between the IFRS basis and Adjusted EPRA Earnings basis as follows:
Unaudited
Unaudited Audited Six months
Six months Year to to
to 30 June 31 December 30 June
2021 2020 2020
GBPm GBPm GBPm
---------------------------------------- ------------ ------------- ------------
IFRS revenue 60.5 121.7 60.9
Rent Smoothing Adjustments:
Relating to original contractual
uplifts (4.0) (8.9) (4.7)
Relating to Covid-19 rent concessions (3.6) (14.8) (5.1)
Rent deferrals (0.8) (17.7) (0.6)
Recovery of head rent and service
charge costs reclassified to
property outgoings (note 5 ) (0.8) (1.6) (0.9)
Adjustment for back rent (0.2) (0.4) (0.2)
---------------------------------------- ------------ ------------- ------------
Revenue on Adjusted EPRA Earnings
basis 51.1 78.3 49.4
---------------------------------------- ------------ ------------- ------------
5. Property outgoings
Unaudited
Unaudited Audited Six months
Six months Year to to
to 30 June 31 December 30 June
2021 2020 2020
Property outgoings GBPm GBPm GBPm
------------------------------------ ------------ ------------- ------------
Property outgoings in the income
statement 0.3 1.5 1.1
Financing element of head rent
included in finance costs (note
7 ) 0.8 1.7 0.8
Movement in headlease liabilities
included in property revaluations
(note 10 ) 0.1 0.1 0.1
------------------------------------ ------------ ------------- ------------
Total property outgoings 1.2 3.3 2.0
Recovery of head rents and other
costs from occupational tenants,
included in revenue (note 4
) (0.8) (1.6) (0.9)
Net property outgoings 0.4 1.7 1.1
------------------------------------ ------------ ------------- ------------
Unaudited
Unaudited Audited Six months
Six months Year to to
to 30 June 31 December 30 June
Property outgoings net of tenant 2021 2020 2020
recoveries GBPm GBPm GBPm
-------------------------------------- ------------ ------------- ------------
Head rents net of amounts recovered
from occupational tenants 0.2 0.6 0.3
Irrecoverable property costs 0.1 0.3 0.2
Managing agent costs and other
net property outgoings 0.1 0.2 0.1
Cost of documenting rent concessions - 0.6 0.5
0.4 1.7 1.1
-------------------------------------- ------------ ------------- ------------
Amounts shown above include any irrecoverable VAT.
6. Administrative expenses
Unaudited
Unaudited Audited Six months
Six months Year to to
to 30 June 31 December 30 June
2021 2020 2020
GBPm GBPm GBPm
------------------------------- ------------ ------------- ------------
Advisory fee (note 20 ) 6.4 13.7 7.1
Other administrative expenses 0.9 2.8 0.7
Corporate costs 0.2 0.5 0.3
7.5 17.0 8.1
------------------------------- ------------ ------------- ------------
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
2021 2020 2020
GBPm GBPm GBPm
------------------------------------- ------------ ------------- ------------
Cash costs:
Interest on secured debt 22.1 45.6 22.7
Interest charge on headlease
liabilities (note 5 ) 0.8 1.7 0.8
Loan agency fees and other lender
costs 0.1 0.3 0.3
Non-cash movements:
Amortisation of loan arrangement
costs 1.1 2.3 1.1
Amortisation of interest rate
derivatives, transferred from
other reserves 0.5 0.3 0.1
Fair value adjustment of interest
rate derivatives - 0.1 -
Finance costs recognised in
the income statement 24.6 50.3 25.0
------------------------------------- ------------ ------------- ------------
Fair value adjustment of interest
rate derivatives (0.1) 0.9 0.9
Amortisation of interest rate
derivatives, transferred to
the income statement (0.5) (0.3) (0.1)
Finance (income) / costs recognised
in other comprehensive (loss)
/ income (0.6) 0.6 0.8
------------------------------------- ------------ ------------- ------------
8. Tax
Unaudited
Unaudited Audited Six months
Six months Year to to
to 30 June 31 December 30 June
2021 2020 2020
Tax charge in the period GBPm GBPm GBPm
---------------------------------- ------------ ------------- ------------
Current tax - Germany
Corporation tax charge 0.2 0.4 0.2
Adjustments in respect of prior
periods - (0.1) (0.1)
Deferred tax - Germany
Deferred tax charge / (credit) 0.7 - (0.1)
---------------------------------- ------------ ------------- ------------
0.9 0.3 -
---------------------------------- ------------ ------------- ------------
The tax assessed for the period varies from the standard rate of corporation tax in the UK applied to the profit / (loss) before tax. The differences are explained below:
Unaudited
Unaudited Audited Six months
Six months Year to to
to 30 June 31 December 30 June
2021 2020 2020
GBPm GBPm GBPm
------------------------------------- ------------ ------------- ------------
Profit / (loss) before tax 64.5 (113.3) (115.0)
------------------------------------- ------------ ------------- ------------
Tax charge / (credit) at the
standard rate of corporation
tax in the UK of 19% 12.3 (21.5) (21.8)
Effects of :
Investment property revaluation
not taxable (7.0) 29.9 26.0
Qualifying property rental business
not taxable under UK REIT rules (4.9) (8.9) (5.4)
Unutilised losses carried forward 0.2 0.2 0.8
German current tax charge 0.2 0.4 0.2
Finance costs disallowed under
corporate interest restriction
rules 0.1 0.3 0.2
Adjustments in respect of prior
periods - (0.1) -
Tax charge for the period 0.9 0.3 -
------------------------------------- ------------ ------------- ------------
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, a number of conditions must be met in respect of the Company, the Group's qualifying activity and the Group's balance of business. Since entering the UK REIT regime the Group has met all applicable conditions.
The Group is subject to German corporation tax on its German property rental business at an effective rate of 13% (year to 31 December 2020 and six months to 30 June 2020: 11%), resulting in a tax charge of GBP0.2 million (year to 31 December 2020: GBP0.3 million; six months to 30 June 2020: GBP0.2 million). A deferred tax liability of GBP12.0 million (31 December 2020 and 30 June 2020: GBP11.9 million) is recognised for the German capital gains tax that would potentially be payable on the sale of the relevant investment properties.
The subsidiary company which conducts the Group's German operations is periodically subject to routine tax audits. Such an audit is underway for the years from 2014 to 2018 but the Board does not consider that this will result in any material additional tax liability arising.
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.
Unaudited
Unaudited Audited Six months
Six months Year to to
to 30 June 31 December 30 June
2021 2020 2020
GBPm GBPm GBPm
---------------------------------- ------------ ------------- ------------
Profit / (loss) for the period 63.6 (113.6) (115.0)
---------------------------------- ------------ ------------- ------------
Number Number Number
---------------------------------- ------------ ------------- ------------
Weighted average shares in issue 324,035,146 324,035,146 324,035,146
---------------------------------- ------------ ------------- ------------
Pence Pence Pence
per share per share per share
---------------------------------- ------------ ------------- ------------
Basic EPS 19.6 (35.1) (35.5)
---------------------------------- ------------ ------------- ------------
In calculating the weighted average number of shares in issue for basic EPS:
-- 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 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. Since no incentive fee has been recognised for either the current period or the prior year, there are no shares to be issued and diluted EPS is therefore the same as basic EPS.
EPRA EPS and Adjusted EPRA EPS
EPRA, the European Public Real Estate Association, publishes guidelines for calculating adjusted earnings designed to represent core operational activities. EPRA EPS is calculated in accordance with the EPRA Guidance currently in force.
An Adjusted EPRA earnings calculation has also been presented. This adjusted measure was designed to reflect the fact that, as a Group with unusually long leases and a high proportion of fixed or minimum rental increases to spread over the lease terms, the Company's Dividend Cover would be artificially high if calculated on the basis of EPRA EPS. Adjusted EPRA EPS removes the effect of the Rent Smoothing Adjustments, including the impact of Covid-19 rent concessions. It also excludes any non-recurring costs or income which do not relate to the Group's routine operations, such as costs incurred for share placings, though there have been no such costs since 2016. 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, which are excluded from EPRA EPS.
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
2021 2020 2020
GBPm GBPm GBPm
----------------------------------- ------------ ------------- ------------
Profit / (loss) for the period
in IFRS earnings 63.6 (113.6) (115.0)
EPRA adjustments :
Investment property revaluation
(note 10 ) (36.5) 166.5 142.0
Deferred tax on German investment
property revaluations (note
8 ) 0.7 - (0.1)
EPRA earnings 27.8 52.9 26.9
Other adjustments :
Rent Smoothing Adjustments (note
10 ) (7.6) (23.7) (9.8)
Rent deferrals (0.8) (17.7) (0.6)
Adjusted EPRA earnings 19.4 11.5 16.5
----------------------------------- ------------ ------------- ------------
In calculating Adjusted EPRA EPS, the weighted average number of shares is calculated using the actual date on which any shares are issued during the year so as not to create a mismatch between the basis of calculation of Adjusted EPRA EPS and the dividends per share paid in the year. 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
2021 2020 2020
Number Number Number
------------------------------------- ------------ ------------- ------------
Shares in issue throughout the
period 324,035,146 322,850,595 322,850,595
Pro rata adjustment for shares
issued in March 2020 in settlement
of 2019 incentive fee - 925,633 663,869
Adjusted EPRA EPS: weighted
average shares in issue 324,035,146 323,776,228 323,514,464
------------------------------------- ------------ ------------- ------------
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
2021 2020 2020
Pence Pence Pence
per share per share per share
------------------- ------------ ------------- ------------
EPRA EPS 8.6 16.3 8.3
Adjusted EPRA EPS 6.1 3.5 5.1
------------------- ------------ ------------- ------------
10. Investment properties
Unaudited
Unaudited Audited Six months
Six months Year to to
to 30 June 31 December 30 June
2021 2020 2020
GBPm GBPm GBPm
----------------------------------- ------------ ------------- ------------
Freehold investment properties
At the start of the period 1,705.8 1,802.4 1,802.4
Revaluation movement 40.7 (102.9) (97.4)
Currency translation movement (5.4) 6.3 7.6
Disposals (0.1) - -
At the end of the period 1,741.0 1,705.8 1,712.6
----------------------------------- ------------ ------------- ------------
Leasehold investment properties
At the start of the period 269.8 308.9 308.9
Revaluation movement 3.5 (39.6) (34.6)
Revaluation movement in headlease
liabilities (0.1) (0.1) (0.1)
Increase in headlease liabilities - 0.6 -
At the end of the period 273.2 269.8 274.2
----------------------------------- ------------ ------------- ------------
Total investment properties
At the start of the period 1,975.6 2,111.3 2,111.3
Revaluation movement 44.3 (142.5) (132.0)
Currency translation movement (5.4) 6.3 7.6
Revaluation movement in headlease
liabilities (0.1) (0.1) (0.1)
Disposals (0.1) - -
Increase in headlease liabilities - 0.6 -
At the end of the period 2,014.3 1,975.6 1,986.8
----------------------------------- ------------ ------------- ------------
The properties were valued as at 30 June 2021 at GBP1,985.7 million (31 December 2020: GBP1,946.9 million; 30 June 2020: GBP1,958.7 million) by CBRE Limited or Christie & Co in their capacity as independent external valuers. Of the total fair value, GBP113.7 million (31 December 2020: GBP115.3 million; 30 June 2020: GBP116.5 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 31 December 2020 and 30 June 2020. While the Royal Institution of Chartered Surveyors mandated that valuations in certain sectors should be subject to "material valuation uncertainty" as at 31 December 2020 and 30 June 2020, this proviso was applied on a sector basis. The 31 December 2020 and 30 June 2020 valuations of the healthcare assets, which accounted for 39% of the Group's property assets by value at those dates, did not carry such a proviso. None of the 30 June 2021 valuations in any sector were subject to material valuation uncertainty.
The historic cost of the Group's investment properties, translated at historic foreign exchange rates, as at 30 June 2021 was GBP1,479.2 million (31 December 2020 and 30 June 2020: GBP1,479.6 million).
All of the investment properties are held within six (31 December 2020 and 30 June 2020: 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 IFRS, the carrying value of leasehold properties 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
2021 2020 2020
GBPm GBPm GBPm
----------------------------------- ---------- ------------- ----------
Carrying value 2,014.3 1,975.6 1,986.8
Gross-up of headlease liabilities (28.6) (28.7) (28.1)
----------------------------------- ---------- ------------- ----------
Independent external valuation 1,985.7 1,946.9 1,958.7
----------------------------------- ---------- ------------- ----------
Included within the carrying value of investment properties at 30 June 2021 is GBP187.1 million (31 December 2020: GBP181.4 million; 30 June 2020: GBP167.8 million) in respect of Rent Smoothing Adjustments (described in note 4 and in the Supplementary Information following these condensed financial statements), representing the amount of the net mismatch between rent included in the income statement and cash rents actually receivable. This net receivable increases over broadly the first half of each lease term in the case of fixed or minimum uplifts, or over the period of the temporary rent reductions agreed with tenants in light of Covid-19. The balance 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 rent review on the healthcare portfolio, which is recognised in revenue over the remaining lease term despite the cash having been received in 2018, together with movements on the headlease liabilities.
Unaudited
Unaudited Audited Six months
Six months Year to to
to 30 June 31 December 30 June
2021 2020 2020
GBPm GBPm GBPm
----------------------------------- ------------ ------------- ------------
Revaluation movement 44.3 (142.5) (132.0)
Rent Smoothing Adjustments (note
4 ) (7.6) (23.7) (9.8)
Adjustment for back rent received (0.2) (0.4) (0.1)
Movement in headlease liabilities (0.1) (0.1) (0.1)
Revaluation movement in the
income statement 36.4 (166.7) (142.0)
----------------------------------- ------------ ------------- ------------
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 and conditions 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' assessments 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 assesses the valuation process, including meetings with the independent external valuers and evaluating their expertise and independence, and reports the results of these assessments to the Board.
The fair value of the investment property portfolio has been determined using an income capitalisation technique whereby contracted and market rental values are capitalised with a market capitalisation rate. This technique is consistent with the principles in IFRS 13 and uses significant unobservable inputs, such that the fair value measurement of each property within the portfolio has been classified as level 3 in the fair value hierarchy as defined in IFRS 13. There have been no transfers to or from other levels of the fair value hierarchy during the year.
The key inputs for the level 3 valuations were as follows:
Fair value Inputs
----------------------------
Portfolio GBPm Key unobservable input Range Blended yield
---------------------- ---------- ------------------------- ------------- -------------
At 30 June 2021:
Healthcare 790.4 Net Initial Yield 3.9% - 4.5% 4.5%
Running Yield by January
2022 3.9% - 4.5% 4.5%
Leisure - UK 703.2 Net Initial Yield 4.8% - 7.0% 5.5%
Running Yield by January
2022 4.8% - 7.7% 5.7%
Future RPI assumption
per annum 2.5%
Topped Up Net Initial
Budget Hotels 407.0 Yield 5.3% - 15.2% 7.0%
Running Yield by January
2022 5.8% - 17.0% 7.2%
Future RPI assumption
per annum 2.5%
Topped Up Net Initial
Leisure - Germany 113.7 Yield 5.6% 5.6%
Running Yield by January
2022 5.8% 5.8%
---------------------- ---------- ------------------------- ------------- -------------
Total at 30 June
2021 2,014.3
---------------------- ---------- ------------------------- ------------- -------------
At 31 December
2020:
Healthcare 769.1 Net Initial Yield 3.9% - 4.5% 4.5%
Running Yield by January
2022 4.0% - 4.6% 4.6%
Leisure - UK 687.7 Net Initial Yield 4.8% - 7.3% 5.5%
Running Yield by January
2022 4.8% - 7.4% 5.7%
Future RPI assumption
per annum 2.5%
Topped Up Net Initial
Budget Hotels 403.5 Yield 5.3% - 13.9% 7.1%
Running Yield by January
2022 5.8% - 15.5% 7.2%
Future RPI assumption
per annum 2.5%
Leisure - Germany 115.3 Net Initial Yield 5.8% 5.8%
Running Yield by January
2022 5.9% 5.9%
---------------------- ---------- ------------------------- ------------- -------------
Total at 31 December
2020 1,975.6
---------------------- ---------- ------------------------- ------------- -------------
At 30 June 2020:
Healthcare 769.1 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 697.7 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 403.5 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%
Leisure - Germany 116.5 Net Initial Yield 5.6% 5.6%
Running Yield by January
2022 5.9% 5.9%
Total at 30 June
2020 1,986.8
---------------------- ---------- ------------------------- ------------- -------------
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 commitments at any balance sheet date. With the exception of a property where a negligible proportion of the Group's income arises from an operating agreement, all property liabilities including repairs and maintenance are tenant liabilities, except at Manchester Arena where such costs relating to the structure and common areas are liabilities of the Group in the first instance. These costs total GBP1.2 million per annum as at 30 June 2021, of which 89% is currently recoverable from tenants leaving a negligible net cost of GBP0.1 million per annum to be borne by the Group.
11. Cash and cash equivalents
Unaudited Audited Unaudited
30 June 31 December 30 June
2021 2020 2020
GBPm GBPm GBPm
-------------------------------- ---------- ------------- ----------
Free cash and cash equivalents 189.1 196.6 226.4
Secured cash 25.4 23.1 14.7
214.5 219.7 241.1
-------------------------------- ---------- ------------- ----------
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.
12. Trade and other receivables
Unaudited Audited Unaudited
30 June 31 December 30 June
2021 2020 2020
GBPm GBPm GBPm
--------------------------------- ---------- ------------- ----------
Trade receivables 0.1 0.6 0.2
Accrued income - deferred rents 19.1 18.4 8.9
Prepayments 0.6 0.6 0.8
Other receivables 0.2 0.4 -
20.0 20.0 9.9
--------------------------------- ---------- ------------- ----------
Having been reviewed for any expected credit losses, no material impairment was considered necessary for trade receivables, accrued income or other receivables.
13. Trade and other payables
Unaudited Audited Unaudited
30 June 31 December 30 June
2021 2020 2020
GBPm GBPm GBPm
------------------------------ ---------- ------------- ----------
Trade payables 0.2 1.0 1.1
Rent received in advance and
other deferred income 20.2 19.6 20.1
Interest payable 7.8 8.0 7.9
Tax and social security 3.9 2.0 0.5
Accruals and other payables 1.5 2.3 1.5
33.6 32.9 31.1
------------------------------ ---------- ------------- ----------
14. Secured debt
Unaudited Audited Unaudited
30 June 31 December 30 June
Amounts falling due within one 2021 2020 2020
year GBPm GBPm GBPm
-------------------------------- ---------- ------------- ----------
Fixed rate secured debt 7.3 7.3 6.4
Unamortised finance costs (2.3) (2.3) (2.3)
-------------------------------- ---------- ------------- ----------
5.0 5.0 4.1
-------------------------------- ---------- ------------- ----------
Amounts falling due in more
than one year
-------------------------------- ---------- ------------- ----------
Fixed rate secured debt 841.2 847.7 852.0
Floating rate secured debt 73.3 73.3 73.3
Unamortised finance costs (3.3) (4.4) (5.7)
-------------------------------- ---------- ------------- ----------
911.2 916.6 919.6
-------------------------------- ---------- ------------- ----------
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. During the period and the prior year, certain financial covenants were amended or waived to accommodate the temporary Covid-19 rent concessions on the Leisure and Budget Hotels portfolios described in the Investment Adviser's Report. There were no defaults or breaches of any loan covenants during the current period or any prior year.
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 2021 the fair value of the Group's secured debt was GBP948.6 million (31 December 2020: GBP969.2 million; 30 June 2020: GBP976.8 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 each balance sheet date by Chatham Financial Europe 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 period or prior year.
15. Interest rate derivatives
The notional amounts of the Group's interest rate derivatives comprise:
Unaudited Audited Unaudited
30 June 31 December 30 June
2021 2020 2020
GBPm GBPm GBPm
--------------------------------- ---------- ------------- ----------
Interest rate swaps (weighted
average rate 1.3%) 50.0 50.0 50.0
Interest rate caps (weighted
average rate 1.5%):
In effective hedges 23.3 23.3 23.3
Classified as held for trading 3.2 3.2 3.2
--------------------------------- ---------- ------------- ----------
76.5 76.5 76.5
--------------------------------- ---------- ------------- ----------
The fair value of those interest rate derivatives and the movement in fair value during the period was as follows:
Unaudited Audited Unaudited
30 June 31 December 30 June
2021 2020 2020
GBPm GBPm GBPm
------------------------------- ---------- ------------- ----------
Interest rate swaps:
Falling due within one year (0.5) (0.6) (0.5)
Falling due in more than one
year (0.6) (1.1) (1.4)
------------------------------- ---------- ------------- ----------
(1.1) (1.7) (1.9)
Interest rate caps:
Falling due in more than one
year - - -
------------------------------- ---------- ------------- ----------
(1.1) (1.7) (1.9)
------------------------------- ---------- ------------- ----------
Unaudited
Unaudited Audited Six months
Six months Year to to
to 30 June 31 December 30 June
2021 2020 2020
GBPm GBPm GBPm
------------------------------------------ ------------ ------------- ------------
At the start of the period (1.7) (1.0) (1.0)
Charge to the income statement
(note 7 ) - (0.1) -
Credit / (charge) to other comprehensive
income (note 7 ) 0.6 (0.6) (0.9)
At the end of the period (1.1) (1.7) (1.9)
------------------------------------------ ------------ ------------- ------------
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 floating 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. 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 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 of the floating rate loans described in note 14 . Following a rebalancing of the hedging arrangements on GBP3.2 million 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 GBP6,000 (31 December 2020: GBP6,000; 30 June 2020: GBP7,000), are expected to be 100% effective throughout their lives. The remaining interest rate caps, which have a fair value of GBP1,000 (31 December 2020: GBP1,000; 30 June 2020: GBP2,000), have been classified as held for trading.
The floating rate loans and interest rate derivatives are contractually linked to LIBOR, a market rate which is expected to become unavailable from the end of 2021. The Investment Adviser is working with the Group's lenders and derivative counterparties to transition to an alternative benchmark rate, currently expected to be Sterling Overnight Index Average ("SONIA"). The transition is not expected to have a material impact on the results or financial position of the Group.
16. Deferred tax
The deferred tax liability relates 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
2021 2020 2020
GBPm GBPm GBPm
------------------------------------------ ------------ ------------- ------------
At the start of the period 11.9 11.3 11.3
Charge / (credit) to the income
statement (note 8 ) 0.7 - (0.1)
(Credit) / charge to other comprehensive
income (0.6) 0.6 0.7
At the end of the period 12.0 11.9 11.9
------------------------------------------ ------------ ------------- ------------
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
2021 2020 2020
Number Number Number
------------------------------- ------------ ------------- ------------
At the start of the period 324,035,146 322,850,595 322,850,595
Issue of ordinary shares in
settlement of 2019 incentive
fee - 1,184,551 1,184,551
At the end of the period 324,035,146 324,035,146 324,035,146
------------------------------- ------------ ------------- ------------
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 aggregate of:
-- 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:
Cash flow
Shares to
Currency hedging be
translation instruments issued Total
GBPm GBPm GBPm GBPm
-------------------------------- ----------- ----------- --------- -----
Period to 30 June 2021
(unaudited)
At the start of the period 5.4 (1.7) - 3.7
-------------------------------- ----------- ----------- --------- -----
Currency translation movements (1.8) - - (1.8)
Movement in fair value
of derivatives - 0.6 - 0.6
-------------------------------- ----------- ----------- --------- -----
Other comprehensive loss (1.8) 0.6 - (1.2)
At the end of the period 3.6 (1.1) - 2.5
-------------------------------- ----------- ----------- --------- -----
Year to 31 December 2020
(audited)
At the start of the year 3.3 (1.1) 4.9 7.1
-------------------------------- --- ----- ----- -----
Currency translation movements 2.1 - - 2.1
Movement in fair value
of derivatives - (0.6) - (0.6)
-------------------------------- --- ----- ----- -----
Other comprehensive income 2.1 (0.6) - 1.5
Shares issued in the year - - (4.9) (4.9)
At the end of the year 5.4 (1.7) - 3.7
-------------------------------- --- ----- ----- -----
Period to 30 June 2020
(unaudited)
At the start of the period 3.3 (1.1) 4.9 7.1
-------------------------------- --- ----- ----- -----
Currency translation movements 2.5 - - 2.5
Movement in fair value
of derivatives - (0.8) - (0.8)
-------------------------------- --- ----- ----- -----
Other comprehensive income 2.5 (0.8) - 1.7
Shares issued in the period - - (4.9) (4.9)
At the end of the period 5.8 (1.9) - 3.9
-------------------------------- --- ----- ----- -----
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.
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 most meaningful measure of long term performance, which is the measure adopted by the majority of UK REITs establishing it as the industry standard benchmark. 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.
Unaudited Audited Unaudited
30 June 2021 31 December 2020 30 June 2020
------------------ ------------------- ------------------
Basic NAV and EPRA Pence per Pence per Pence per
NTA GBPm share GBPm share GBPm share
------- --------- -------- --------- ------- ---------
Basic and diluted
NAV 1,260.2 388.9 1,221.5 377.0 1,244.1 383.9
EPRA adjustments:
Adjustment for deferred
tax on German investment
property revaluations 6.0 1.9 6.0 1.8 6.0 1.8
Fair value of interest
rate derivatives 1.1 0.3 1.7 0.5 1.9 0.7
EPRA NTA 1,267.3 391.1 1,229.2 379.3 1,252.0 386.4
--------------------------- ------- --------- -------- --------- ------- ---------
20. Related party transactions and balances
a) Interests in shares
In aggregate, the Management Team and entities related to them are beneficially interested in 40,164,756 shares in the capital of the Company as at 30 June 2021, which amounts to a 12.4% interest.
The direct and indirect beneficial interests of the Directors and their families in the share capital of the Company are as follows:
Unaudited Audited Unaudited
30 June 2021 31 December 2020 30 June 2020
-------------------------- -------------------------- --------------------------
Percentage Number Percentage Number Percentage
Number 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 5.66% 18,342,009 5.66%
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% 127,226 0.04% 127,226 0.04%
Ian Marcus 95,871 0.03% 95,871 0.03% 95,871 0.03%
Jonathan Lane 57,471 0.02% 57,471 0.02% 57,471 0.02%
Leslie Ferrar 26,286 0.01% 26,286 0.01% 26,286 0.01%
--------------- ---------- -------------- ---------- -------------- ---------- --------------
* comprising 16,850,300 shares held by an entity in which he has a 95% indirect interest and 1,491,709 shares held in a company which he wholly owns.
Prestbury Incentives Limited and Prestbury Investment Partners Limited are owned and controlled by the Management Team, as Nick Leslau, Mike Brown and Sandy Gumm are shareholders and directors of both Prestbury Investment Partners Limited and the parent undertaking of Prestbury Incentives Limited. In addition to the personal holdings disclosed above, those companies hold shares in the Company as follows:
Unaudited Audited Unaudited
30 June 2021 31 December 2020 30 June 2020
-------------------------- -------------------------- --------------------------
Percentage Number Percentage Number Percentage
Number of of issued of of issued of of issued
shares share capital shares share capital shares share capital
---------------------- ---------- -------------- ---------- -------------- ---------- --------------
Prestbury Incentives
Limited 19,262,042 5.94% 19,262,042 5.94% 19,262,042 5.94%
Prestbury Investment
Partners Limited 1,184,551 0.37% 1,184,551 0.37% 1,184,551 0.37%
---------------------- ---------- -------------- ---------- -------------- ---------- --------------
20,446,593 6.31% 20,446,593 6.31% 20,446,593 6.31%
---------------------- ---------- -------------- ---------- -------------- ---------- --------------
b) 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
2021 2020 2020
GBPm GBPm GBPm
------------------------------- ------------ ------------- ------------
Prestbury Incentives Limited 1.4 3.0 1.6
Nick Leslau * 1.3 2.9 1.5
Mike Brown 0.1 0.2 0.1
Prestbury Investment Partners
Limited 0.1 0.1 0.1
Other directors - 0.1 -
2.9 6.3 3.3
------------------------------- ------------ ------------- ------------
Nick Leslau, Mike Brown and Sandy Gumm are shareholders and directors of both Prestbury Investment Partners Limited and the parent undertaking of Prestbury Incentives Limited, together with the other members of the Management Team, Tim Evans and Ben Walford. Other senior members of the Prestbury team also have equity interests in those companies.
* 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.
c) Directors' fees
Fees totalling GBP200,000 per annum are 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 payable in the period (year to 31 December 2020: GBP200,000; six months to 30 June 2020: GBP100,000). No fees were outstanding at any balance sheet date.
d) Advisory fees payable - relationship between Company and Investment Advisor
The Investment Advisory Agreement sets out the terms of the relationship between the Company and the Investment Adviser, including services to be provided and the calculation of the advisory fee and any 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 Company or 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. Nick Leslau, Mike Brown and Sandy Gumm, who are Directors of the Company, are also directors and shareholders in the Investment Adviser.
e) Advisory fees payable - basis of calculation of fees
EPRA introduced new methods of calculation of EPRA net asset value with effect from 1 January 2020. In considering that change, the Remuneration Committee concluded that, in order for the calculation of the advisory and incentive fees to remain consistent with the way that those fees had been calculated since the Company's listing and as set out in the Investment Advisory Agreement, the fees would continue to be calculated on the basis of the EPRA NAV methodology in place at the time of the agreement. That basis is set out in the EPRA Guidance previously issued in 2016, referred to in these financial statements as "2016 basis EPRA NAV".
In addition, following a proposal made by the Investment Adviser, with effect from 1 April 2020 the advisory fee was reduced to the extent that the Group's net assets include surplus cash realised on the disposal of a portfolio of hospitals in August 2019 and that surplus cash remains available for deployment. The balance of the surplus cash at 1 April 2020 was GBP158.3 million and at 30 June 2021 was GBP109.9 million. The 2016 basis EPRA NAV used for the fee calculations reconciles to EPRA NTA as follows:
Unaudited Audited Unaudited
30 June 2021 31 December 2020 30 June 2020
------------------------------- ------------------ ------------------- ------------------
Pence per Pence per Pence per
GBPm share GBPm share GBPm share
------------------------------- ------- --------- -------- --------- ------- ---------
EPRA NTA 1,267.3 391.1 1,229.2 379.3 1,252.0 386.4
Adjustment to deferred
tax on German investment
property revaluations 6.0 1.8 6.0 1.9 6.0 1.8
------------------------------- ------- --------- -------- --------- ------- ---------
NAV for purposes
of incentive fee
calculation (2016
basis EPRA NAV) 1,273.3 392.9 1,235.2 381.2 1,258.0 388.2
Adjustment for surplus
cash (109.9) (33.9) (114.0) (35.2) (149.4) (46.1)
NAV for purposes
of advisory fee calculations 1,163.4 359.0 1,121.2 346.0 1,108.6 342.1
------------------------------- ------- --------- -------- --------- ------- ---------
Advisory fees payable to the Investment Adviser are calculated as:
-- 1.25% per annum on NAV for the purposes of fee calculations up to GBP500 million, plus
-- 1.0% per annum on NAV for the purposes of fee calculations between GBP500 million and GBP1 billion, plus
-- 0.75% per annum on NAV for the purposes of fee calculations between GBP1 billion and GBP1.5 billion, plus
-- 0.5% per annum on NAV for the purposes of fee calculations over GBP1.5 billion.
During the period, advisory fees of GBP6.0 million (year to 31 December 2020: GBP12.8 million; six months to 30 June 2020: GBP6.7 million) plus VAT were payable in cash, of which GBPnil (31 December 2020: GBPnil; 30 June 2020; GBP0.1 million) was outstanding as at the balance sheet date and included in trade and other payables. The impact of adopting 2016 basis EPRA NAV is that fees payable in the period were GBP22,000 (year to 31 December 2020: GBP44,000; six months to 30 June 2020: GBP22,000) higher than they would have been under EPRA NTA.
f) 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 year.
The fee entitlement is calculated annually on the basis of the Group's audited financial statements, with any fee payable settled in shares in the Company (subject to certain limited exceptions none of which have yet applied). 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 the 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 2016 basis EPRA NAV plus 10% per annum. In this way, the incentive fee is never rebased upwards as a result of a year of low or negative growth, maintaining strong alignment of management and shareholder interests. 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 is subject to a cap of 5% of 2016 basis EPRA NAV, save for a fee payable in the event of a change of control of the Company which is uncapped.
A high water mark of 431.1 pence per share was established at 31 December 2019 when a fee was last earned. The 2016 basis EPRA NAV was 381.2 pence per share at the start of the year, therefore TAR will have to exceed 124.4 pence per share for the year ending 31 December 2021 for a fee to be earned; given the Board's current expectations of dividends to be declared over the remainder of 2021, that means 2016 basis EPRA NAV will have to exceed 491.1 pence per share (GBP1,591.4 million) at 31 December 2021 before any incentive fee becomes payable. This compares with 2016 basis EPRA NAV of 392.9 pence per share (GBP1,273.3 million) as at 30 June 2021.
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 2021, assuming that:
-- there are no acquisitions, disposals or lease variations in the second half of 2021; -- there is no change to the investment property valuations as at 30 June 2021;
-- 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 2021 independent investment property valuations; and
-- distributions over the remainder of the year are paid in line with the Board's current expectations, with the special assumption that there are no further widespread lockdowns or other pandemic related events that vary the Board's assessment of the likelihood of declaring a dividend for the fourth quarter.
This estimate does not constitute a forecast, but 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 would be payable for the 2021 year and as a result no fee is accrued at 30 June 2021 (30 June 2020: GBPnil).
21. Events after the balance sheet date
On 22 July 2021, the Company declared a distribution of GBP12.8 million as an interim dividend of 3.95 pence per share, which was paid on 3 September 2021.
Supplementary Information
Shareholder Return - TAR and TSR
Shareholder return is one of the Group's principal measures of performance. Total Shareholder Return ("TSR") is measured as the movement in the Company's share price over a period, plus dividends paid in the period. Total Accounting Return ("TAR") is a shareholder return measure calculated as the movement in EPRA NTA over a period plus dividends per share paid in the period.
TAR - EPRA NTA performance
Six months Six months
to Year to to
30 June 31 December 30 June
2021 2020 2020
Pence Pence Pence
----------------------------------- ---------- ------------ ----------
EPRA NTA per share:
at the start of the period 379.3 429.4 429.4
at the end of the period 391.1 379.3 386.4
Increase / (decrease) in EPRA NTA
per share 11.8 (50.1) (43.0)
Dividends per share 7.3 15.7 8.4
------------------------------------ ---------- ------------ ----------
Increase / (decrease) in EPRA NTA
plus dividends per share 19.1 (34.4) (34.6)
------------------------------------ ---------- ------------ ----------
TAR 5.0% (8.0)% (8.1)%
------------------------------------ ---------- ------------ ----------
TSR - share price performance
Six months Six months
to Year to to
30 June 31 December 30 June
2021 2020 2020
Pence Pence Pence
-------------------------------------- ---------- ------------ ----------
Mid-market closing share price:
at the start of the period 300.0 434.0 434.0
at the end of the period 380.0 300.0 270.0
Increase / (decrease) in share price 80.0 (134.0) (164.0)
Dividends per share 7.3 15.7 8.4
--------------------------------------- ---------- ------------ ----------
Increase / (decrease) in share price
plus dividends per share 87.3 (118.3) (155.6)
--------------------------------------- ---------- ------------ ----------
TSR 29.1% (27.3)% (35.9)%
--------------------------------------- ---------- ------------ ----------
EPRA measures
30 June 31 December 30 June
2021 2020 2020
EPRA Net Tangible Assets ("EPRA
NTA") per share 391.1 379.3p 386.4p
EPRA Net Reinstatement Value per
share 434.3 421.7p 429.0p
EPRA Net Disposal Value per share 380.6 364.3p 370.0p
EPRA Net Initial Yield 4.95% 4.44% 4.28%
EPRA Topped Up Net Initial Yield 5.36% 5.40% 5.31%
EPRA Vacancy Rate 0% 0% 0%
------------------------------------ ------- ----------- -------
Six months Six months
to Year to to
30 June 31 December 30 June
2021 2020 2020
EPRA EPS 8.6p 16.3p 8.3p
EPRA Capital Expenditure GBP0.1m GBP0.5m GBP0.2m
EPRA Cost Ratio excluding direct
vacancy costs 12.6% 14.8% 14.6%
EPRA Cost Ratio including direct
vacancy costs 12.9% 15.1% 14.8%
----------------------------------- ---------- ------------ ----------
Adjusted EPRA measures
Six months Six months
to Year to to
30 June 31 December 30 June
2021 2020 2020
------------------------------------ ---------- ------------ ----------
Adjusted EPRA EPS * 6.1p 3.5p 5.1p
Adjusted EPRA Cost Ratio excluding
direct vacancy costs 14.4% 18.4% 17.5%
Adjusted EPRA Cost Ratio including
direct vacancy costs 14.8% 18.7% 17.6%
------------------------------------- ---------- ------------ ----------
* calculation explained in note 9 to the financial statements
EPRA NTA
30 June 2021 31 December 2020 30 June 2020
------------------ ------------------ ------------------
Pence per Pence per Pence per
GBPm share GBPm share GBPm share
------- --------- ------- --------- ------- ---------
Basic NAV 1,260.2 388.9 1,221.5 377.0 1,244.1 383.9
EPRA adjustments :
Adjustment for deferred
tax on investment property
revaluations * 6.0 1.9 6.0 1.8 6.0 1.8
Fair value of derivatives 1.1 0.3 1.7 0.5 1.9 0.7
EPRA NTA 1,267.3 391.1 1,229.2 379.3 1,252.0 386.4
----------------------------- ------- --------- ------- --------- ------- ---------
* in accordance with the EPRA Guidance, half of the deferred tax is adjusted for in the EPRA NTA calculation
EPRA Net Reinstatement Value
The EPRA Net Reinstatement Value is calculated on the assumption that the Group never sells assets and is intended to represent the value that would be required to rebuild the portfolio.
30 June 2021 31 December 2020 30 June 2020
------------------ ------------------ ------------------
Pence per Pence per Pence per
GBPm share GBPm share GBPm share
------- --------- ------- --------- ------- ---------
Basic NAV 1,260.2 388.9 1,221.5 377.0 1,244.1 383.9
EPRA adjustments:
Adjustment for real
estate transfer taxes 134.0 41.4 131.5 40.5 132.3 40.8
Deferred tax on investment
property revaluations 12.0 3.7 11.9 3.7 11.9 3.6
Fair value of interest
rate derivatives 1.1 0.3 1.7 0.5 1.9 0.7
EPRA Net Reinstatement
Value 1,407.3 434.3 1,336.6 421.7 1,390.2 429.0
---------------------------- ------- --------- ------- --------- ------- ---------
EPRA Net Disposal Value per share
The EPRA Net Disposal Value Represents the Group's value under a disposal scenario, with the fair values of financial instruments, including fixed rate debt, shown to the full extent of their liability, calculated as follows:
30 June 2021 31 December 2020 30 June 2020
------------------ ------------------ ------------------
Pence per Pence per Pence per
GBPm share GBPm share GBPm share
------- --------- ------- --------- ------- ---------
Basic NAV 1,260.2 388.9 1,221.5 377.0 1,244.1 383.9
EPRA adjustments:
Fair value of fixed
rate debt (26.8) (8.3) (40.9) (12.7) (45.2) (13.9)
EPRA Net Disposal
Value 1,233.4 380.6 1,180.6 364.3 1,198.9 370.0
--------------------- ------- --------- ------- --------- ------- ---------
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
2021 2020 2020
GBPm GBPm GBPm
----------------------------------------- ------- ----------- -------
Investment property, all of which
is completed and wholly owned,
at external valuation 1,985.7 1,946.9 1,958.7
Allowance for estimated purchasers'
costs 134.0 131.5 132.2
------------------------------------------ ------- ----------- -------
Grossed up completed property portfolio
valuation 2,119.7 2,078.4 2,090.9
------------------------------------------ ------- ----------- -------
Annualised cash passing rental
income 105.9 98.3 90.4
Annualised non-recoverable property
outgoings (1.0) (1.0) (0.9)
------------------------------------------ ------- ----------- -------
Annualised net rents 104.9 97.3 89.5
Notional rent increase on expiry
of rent concessions, rent free
periods and other lease incentives 8.8 15.0 21.5
------------------------------------------ ------- ----------- -------
Topped-up annualised net rents 113.7 112.3 111.0
------------------------------------------ ------- ----------- -------
EPRA Net Initial Yield 4.95% 4.68% 4.28%
EPRA Topped Up Net Initial Yield 5.36% 5.40% 5.31%
------------------------------------------ ------- ----------- -------
The EPRA Net Initial Yields reflect 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
2021 2020 2020
GBP000 GBP000 GBP000
--------------------- ------- ----------- -------
ERV of vacant space 40 40 40
ERV of portfolio 114,770 111,536 113,281
EPRA Vacancy Rate 0% 0% 0%
---------------------- ------- ----------- -------
EPRA and Adjusted EPRA EPS
Six months Six months
to Year to to
30 June 31 December 30 June
2021 2020 2020
GBPm GBPm GBPm
--------------------------------- ---------- ------------ ----------
Basic earnings attributable
to shareholders 63.6 (113.6) (115.0)
EPRA adjustments :
Investment property revaluation (36.5) 166.5 142.0
Deferred tax charge / (credit) 0.7 - (0.1)
EPRA earnings 27.8 52.9 26.9
Non-EPRA adjustments :
Rent Smoothing Adjustments (7.6) (23.7) (9.8)
Rent deferrals (0.8) (17.7) (0.6)
Adjusted EPRA earnings 19.4 11.5 16.5
--------------------------------- ---------- ------------ ----------
Six months Six months
to Year to to
30 June 31 December 30 June
Weighted average number of shares 2021 2020 2020
in issue Number Number Number
----------------------------------- ----------- ------------ -----------
EPRA EPS 324,035,146 324,035,146 324,035,146
Adjustment for weighting of
shares issued during the period
* - (258,918) (520,682)
----------------------------------- ----------- ------------ -----------
Adjusted EPRA EPS 324,035,146 323,776,228 323,514,464
----------------------------------- ----------- ------------ -----------
* EPRA EPS is calculated on the assumption that shares issued in settlement of any incentive fee were in issue throughout the period. Adjusted EPRA EPS is calculated using a weighted average number of shares reflecting the actual date on which those shares are issued.
Six months Six months
to Year to to
30 June 31 December 30 June
2021 2020 2020
Pence Pence Pence
per share per share per share
------------------- ---------- ------------ ----------
EPRA EPS 8.6 16.3 8.3
Adjusted EPRA EPS 6.1 3.5 5.1
------------------- ---------- ------------ ----------
EPRA Capital Expenditure
Six months Six months
to Year to to
30 June 31 December 30 June
2021 2020 2020
Wholly owned property GBPm GBPm GBPm
------------------------------------ ---------- ------------ ----------
Acquisitions - - -
Development - - -
Expenditure on completed investment
property held throughout the
year: -
Creation of additional lettable
area - - -
Enhancing existing space - - -
Other 0.1 0.5 0.2
------------------------------------ ---------- ------------ ----------
EPRA Capital Expenditure 0.1 0.5 0.2
------------------------------------ ---------- ------------ ----------
The Group does not have any joint ventures or other partial interests in investment property so any EPRA capital expenditure relates to wholly owned properties. 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 in the first instance. The EPRA Capital Expenditure in the current period represents GBP0.1 million (year to 31 December 2020: GBP0.2 million; six months to 30 June 2020: GBP0.2 million) for capital works at Manchester Arena within the service charge that is not recoverable from tenants. The remaining expenditure in the prior year comprises GBP0.3 million for the acquisition of car park equipment.
EPRA Cost Ratios
Six months Six months
to Year to to
30 June 31 December 30 June
2021 2020 2020
GBPm GBPm GBPm
---------------------------------------- ---------- ------------ ----------
Revenue (note 4 ) 60.5 121.7 60.9
Tenant contributions to property
outgoings (note 4 ) (0.8) (1.7) (0.9)
---------------------------------------- ---------- ------------ ----------
EPRA gross rental income 59.7 120.0 60.0
Non-recoverable property operating
expenses (note 5 ) * 0.4 1.7 1.1
Less headlease costs included
in non-recoverable property operating
expenses (note 5 ) (0.2) (0.6) (0.3)
Administrative expenses (note
6 ) 7.5 17.0 8.1
---------------------------------------- ---------- ------------ ----------
EPRA costs including direct vacancy
costs 7.7 18.1 8.9
Direct vacancy costs (0.2) (0.3) (0.1)
---------------------------------------- ---------- ------------ ----------
EPRA costs excluding direct vacancy
costs 7.5 17.8 8.8
---------------------------------------- ---------- ------------ ----------
EPRA Cost Ratio including direct
vacancy costs 12.9% 15.1% 14.8%
EPRA Cost Ratio excluding direct
vacancy costs 12.6% 14.8% 14.6%
---------------------------------------- ---------- ------------ ----------
* included within GBP1.2 million (year to 31 December 2020: GBP3.3 million; six months to 30 June 2020 GBP2.0 million) of property costs payable by the Group are GBP0.8 million (31 December 2020: GBP1.7 million; 30 June 2020 GBP0.9 million) of headlease and other costs that are recoverable from the tenants.
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 GBPnil (year to 31 December 2020: GBP54,000; six months to 30 June 2020 GBP53,000) were capitalised, and GBP3,000 (year to 31 December 2020: GBP4,000; six months to 30 June 2020: GBP2,000) was released from capitalised costs and charged to the income statement. Costs of GBP16,000 (year to 31 December 2020: GBP568,000; six months to 30 June 2020 GBP534,000) for negotiating and documenting Covid-19 rent concessions, and rent review and other letting costs of GBP19,000 (year to 31 December 2020 and six months to 30 June 2020: GBP35,000) are included in non-recoverable property operating expenses. A further GBP3,000 (year to 31 December 2020 and six months to 30 June 2020: GBP106,000) relating to the amendment of loan facilities as a result the Covid-19 rent concessions is included in finance costs. The Group otherwise has no capitalised overheads or other operating expenses and does not capitalise interest.
Adjusted EPRA Cost Ratios
The Group also calculates an Adjusted EPRA Cost Ratio excluding revenue recognised ahead of cash receipt as a result of Rent Smoothing Adjustments (described in note 4 ) to present what the Board considers to be a measure of cost efficiency more directly relevant to its business model.
Six months Six months
to Year to to
30 June 31 December 30 June
2021 2020 2020
GBPm GBPm GBPm
------------------------------------- ---------- ------------ ----------
EPRA gross rental income 59.7 120.0 60.0
Rent Smoothing Adjustments (7.6) (23.6) (9.8)
------------------------------------- ---------- ------------ ----------
Adjusted EPRA gross rental income
excluding
non-cash items 52.1 96.4 50.2
EPRA costs including direct vacancy
costs 7.7 18.1 8.9
Direct vacancy costs (0.2) (0.3) (0.1)
EPRA costs excluding direct vacancy
costs 7.5 17.8 8.8
------------------------------------- ---------- ------------ ---------- Adjusted EPRA Cost Ratio including direct vacancy costs 14.8% 18.7% 17.6% Adjusted EPRA Cost Ratio excluding direct vacancy costs 14.4% 18.4% 17.5% ------------------------------------- ---------- ------------ ----------
Like for like rental growth by portfolio
Leisure Healthcare Budget Hotels Total
Passing rent GBPm GBPm GBPm GBPm
------- ---------- ------------- -------
At 1 January 2021 47.5 36.6 29.2 113.3
Movement in Euro exchange
rate (0.3) - - (0.3)
----------------------------- ------- ---------- ------------- -------
Like for like passing
rent 47.2 36.6 29.2 113.0
Rental uplifts 0.7 1.0 - 1.7
At 30 June 2021 47.9 37.6 29.2 114.7
----------------------------- ------- ---------- ------------- -------
Increase in like for like
passing rent 1.6% 2.8% - 1.5%
Portfolio valuation at
30 June 2021 806.9 790.4 388.4 1,985.7
----------------------------- ------- ---------- ------------- -------
Leisure Healthcare Budget Hotels Total
Passing rent GBPm GBPm GBPm GBPm
------- ---------- ------------- -------
At 1 January 2020 46.8 35.6 28.3 110.7
Movement in Euro exchange
rate 0.4 - - 0.4
----------------------------- ------- ---------- ------------- -------
Like for like passing
rent 47.2 35.6 28.3 111.1
Rental uplifts 0.3 1.0 0.9 2.2
At 31 December 2020 47.5 36.6 29.2 113.3
----------------------------- ------- ---------- ------------- -------
Increase in like for like
passing rent 0.8% 2.8% 2.9% 2.0%
Portfolio valuation at
31 December 2020 793.0 769.1 384.8 1,946.9
----------------------------- ------- ---------- ------------- -------
Leisure Healthcare Budget Hotels Total
Passing rent GBPm GBPm GBPm GBPm
------- ---------- ------------- -------
At 1 January 2020 46.8 35.6 28.3 110.7
Movement in Euro exchange
rate 0.4 - - 0.4
----------------------------- ------- ---------- ------------- -------
Like for like passing
rent 47.2 35.6 28.3 111.1
Rental uplifts (0.3) 1.0 - 0.7
At 30 June 2020 46.9 36.6 28.3 111.8
----------------------------- ------- ---------- ------------- -------
Increase in like for like
passing rent (0.8)% 2.8% - 1.0%
Portfolio valuation at
30 June 2020 804.8 769.1 384.8 1,958.7
----------------------------- ------- ---------- ------------- -------
Like for like figures exclude foreign currency translation movements and any properties not held throughout the period.
Like for like rental growth by country
Total
UK Germany portfolio
Passing rent GBPm GBPm GBPm
------- ------- ----------
At 1 January 2021 106.2 7.1 113.3
Movement in Euro exchange
rate - (0.3) (0.3)
------------------------------ ------- ------- ----------
Like for like passing
rent 106.2 6.8 113.0
Rental uplifts 1.7 - 1.7
At 30 June 2021 107.9 6.8 114.7
------------------------------ ------- ------- ----------
Increase in like for like
passing rent 1.6% - 1.5%
Portfolio valuation at
30 June 2021 1,872.0 113.7 1,985.7
------------------------------ ------- ------- ----------
Total
UK Germany portfolio
Passing rent GBPm GBPm GBPm
------- ------- ----------
At 1 January 2020 104.2 6.5 110.7
Movement in Euro exchange
rate - 0.4 0.4
------------------------------ ------- ------- ----------
Like for like passing
rent 104.2 6.9 111.1
Rental uplifts 2.0 0.2 2.2
At 31 December 2020 106.2 7.1 113.3
------------------------------ ------- ------- ----------
Increase in like for like
passing rent 1.9% 3.3% 2.0%
Portfolio valuation at
31 December 2020 1,831.6 115.3 1,946.9
------------------------------ ------- ------- ----------
Total
UK Germany portfolio
Passing rent GBPm GBPm GBPm
------- ------- ----------
At 1 January 2020 104.2 6.5 110.7
Movement in Euro exchange
rate - 0.4 0.4
------------------------------ ------- ------- ----------
Like for like passing
rent 104.2 6.9 111.1
Rental uplifts 0.7 - 0.7
At 30 June 2020 104.9 6.9 111.8
------------------------------ ------- ------- ----------
Increase in like for like
passing rent 1.0% - 1.0%
Portfolio valuation at
30 June 2020 1,842.2 116.5 1,958.7
------------------------------ ------- ------- ----------
Like for like figures exclude foreign currency translation movements and any properties not held throughout the period.
Rent Smoothing Adjustments
The Group's revenue recognition 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 relate to the 41% of contracted portfolio rents (before rent concessions) that are subject to fixed uplifts, the 6% of contracted portfolio rents with minimum uplifts on RPI-linked reviews, and the temporary Covid-19 rent concessions agreed with the tenants of the Budget Hotels and Pubs portfolios in 2020 which represent lease modifications under IFRS 16.
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 date or the date of acquisition, 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. Since this adjustment initially 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 2021 is as follows:
Receivable
at 30 June
2021 Maximum receivable Date of maximum
GBPm GBPm receivable
------------------------------------ ------------- -------------------- -----------------
Fixed/minimum uplifts recognised
ahead of cash receipt:
Healthcare - Ramsay hospitals 110.1 111.8 March 2023
German leisure * 36.8 40.3 June 2026
Healthcare - Lisson Grove hospital 12.8 20.6 March 2035
The Brewery 5.0 23.5 June 2041
Manchester Arena 3.4 8.9 June 2032
Pubs 0.6 2.0 March 2030
------------------------------------ ------------- -------------------- -----------------
168.7 207.1
Covid-19 related rent concessions:
Budget Hotels 17.3 21.1 Dec 2021
Pubs 1.1 1.1 Sept 2020
------------------------------------ ------------- -------------------- -----------------
187.1 229.3
------------------------------------ ------------- -------------------- -----------------
* at the period end Euro conversion rate of EUR1:GBP 0.86.
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 change in rental income that was recognised in the current period and is expected for each of the next three financial years (with the German adjustment translated at the 2021 average Euro conversion rate of EUR1:GBP 0.87) is as follows:
Fixed or minimum
RPI-linked Covid-19 rent Six months
uplifts concessions to 30 June
GBPm GBPm GBPm
------ ------------------ --------------- -------------
2021 7.3 7.3 14.6
2022 5.7 (1.2) 4.5
2023 4.3 (1.2) 3.1
2024 2.9 (1.2) 1.7
------- ------------------ --------------- -------------
Important notes
Forward looking information
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 8 September 2021.
Rounding of financial statements
The condensed financial statements, including comparative amounts, and certain other figures in this document are presented in millions of pounds, rounded to one decimal place. Accordingly, figures shown in the same category presented in different tables may vary slightly and figures shown as totals in certain tables may not be an arithmetic aggregation of the figures that precede them as a result of rounding.
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 Company Voluntary Arrangement, 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 Cost Ratio An EPRA measure of operating costs as a percentage
of revenue, intended to facilitate comparison
of the operating efficiency of property companies
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
or loss for the period after tax attributable
to shareholders of the Company divided by the
weighted average number of shares in issue in
the period
ERV Estimated Rental Value: the independent valuers'
opinion of the open market rent which, on the
date of valuation, could reasonably be expected
to be obtained on a new letting or rent review
of a property
IFRS International Financial Reporting Standards
Investment Adviser Prestbury Investment Partners Limited
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 condensed 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 the value of property on which
it is secured
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 adjustments required to recognise any mismatch
between rent received in the income statement
and cash rent received
Running Yield The anticipated Net Initial Yield at a future
date, taking account of any rent reviews or other
changes in rent 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 reflect the contracted
Yield rent for those properties which are subject to
a temporary rent concession at the valuation
date
Total Accounting The movement in EPRA NTA over a period plus dividends
Return paid in the period, expressed as a percentage
of the EPRA NTA 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, also referred
to as WAULT
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
St Martin's Court, 10 Paternoster Row, London EC4M
7HP
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 Group
10(th) Floor, Central Square, 29 Wellington Street,
Leeds LS1 4DL
Registrar's helpline: 0371 664 0300
Calls are charged at the standard geographic rate
and will vary by provider. 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
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