AEW UK REIT plc (AEWU)
AEW UK REIT PLC
Announcement of Full Year Results for the year ended 31 March 2019
AEW UK REIT PLC (the 'Company') which holds a diversified portfolio of 35 commercial investment properties throughout the UK, is pleased to publish its full year results for the year ended 31 March 2019.
Mark Burton, Chairman of AEW UK REIT, commented: "A key feature of the financial year has been achieving the target income returns of 8.00 pence per share ('pps') from the Company's established portfolio of assets. Such returns demonstrate the success of both the Company's investment strategy and the stock selection process of the Investment Manager when deploying the proceeds of the most recent capital raise, as well as our active asset management. The Board expects this level of return to continue, with further value expected to be gained through asset management initiatives in the short term. Additionally, we continue to see attractive opportunities across our target sectors. The portfolio is defensively positioned for any Brexit outcome, with no exposure to London offices and broad diversification by sector and region. We look forward to raising additional capital to pursue identified opportunities as and when market conditions allow."
* See KPIs below for definition of alternative performance measures.
** See Glossary in the full Annual Report for definition of alternative performance measures.
The current period being reported is for the 12 months from 1 April 2018 to 31 March 2019. The prior period ended 31 March 2018 was an 11-month period from 1 May 2017 to 31 March 2018 and so cannot be used as a direct comparator.
I am pleased to present the audited annual results of the Company for the year ended 31 March 2019. As at 31 March 2019, the Company had a diversified portfolio of 35 commercial investment properties throughout the UK with a value of £197.61 million. On a like-for-like* basis, the portfolio valuation increased by 2.80% over the year.
A key feature of the financial year has been achieving the target income returns of 8.00 pps from the Company's established portfolio of assets. Dividends of 8.00 pps have been declared in relation to the year, equating to a dividend yield of 8.62% based on the share price as at 31 March 2019. Dividends were fully covered by EPRA EPS of 8.07 pps, reflecting the high yielding nature of the portfolio. Over the year, the portfolio achieved total returns of 10.5%, an outperformance of 4.7% relative to the Benchmark (MSCI/AREF UK PFI Balanced Funds Quarterly Property Index) ('the Benmark'). This performance was driven by income returns of 8.1% and the portfolio also achieved capital growth of 2.3%.
Such returns demonstrate the success of both the Company's investment strategy and the stock selection process of the Investment Manager when deploying the proceeds of the most recent capital raise, which occurred in October 2017. From the date of the share issue and up to 31 March 2018, the Company made seven acquisitions totalling £49.72 million, which fully utilised the capital raised, as well as an additional £17.50 million of debt. These acquisitions have played a major part in the Company achieving EPRA EPS ahead of its dividend target for the current year, with the seven assets having a combined NIY equating to 9.10% on the purchase price.
An active approach to asset management has also played a role in maximising returns from the portfolio. The vacancy rate has fallen from 7.10% as at 31 March 2018 to 2.99% as at 31 March 2019, largely as a result of new lettings in the office sector during the year. The most notable of these were the letting of Orion House in Oxford at a contracted rent of £179,410 per annum and the letting of Third Floor East, 255 Bath Street, Glasgow at a contracted rent of £88,608 per annum. Lease renewals have also been completed at 40 Queen Square, Bristol, increasing contracted rent on that accommodation from £66,623 to £94,500 per annum and at Cedar House, Gloucester, increasing contracted rent from £300,000 to £321,000 per annum and securing a 10-year term.
Another contributor to the fall in the vacancy rate has been the Company's divestment of largely vacant premises. The Company disposed of Floors 1-9, Pearl House, Nottingham in April 2018, retaining the fully let ground floor accommodation. 18-36, Chapel Walk, Sheffield was sold in August 2018 with the fully let adjoining units, 11-15 Fargate being retained. These disposals for combined gross proceeds of £4.55 million eliminated over a quarter of the Company's vacant Estimated Rental Value ('ERV')* *as at 31 March 2018.
Further to these disposals, in December 2018, the Company divested Stoneferry Retail Park, Hull, for gross proceeds of £1.80 million. The asset had c.£165,000 of income due to expire in May 2019. Waggon Road, Mossley, was sold at auction, completing in March 2019, for gross proceeds of £450,000. This price was £100,000 ahead of the asset's most recent valuation in December 2018.
The Company reinvested the proceeds from its disposals into an industrial asset, Lockwood Court, Parkside Industrial Estate, Leeds, which was acquired for £6.93 million, net of purchase costs, in February 2019.
The Company's share price was 92.80 pps as at 31 March 2019 (31 March 2018: 95.60 pps), representing a 5.89% discount to NAV. The share price has been trading at a discount to NAV since June 2018. The fall in the share price over the year was offset by total dividend payments of 8.00 pps, generating a Shareholder Total Return of 5.44%, compared with a NAV Total Return of 10.64%. Since the year end, the share price has increased and as at 31 May 2019 was 96.00 pps, representing a 2.65% discount to NAV.
On 1 March 2019, the Company published its prospectus (the "Prospectus") in relation to a share issuance programme (the "Share Issuance Programme") of up to 250 million new Ordinary Shares and up to 250 million convertible redeemable preference shares ("C Shares"). The Share Issuance Programme will close on 28 February 2020 (or on any earlier date on which it is fully subscribed). We continue to see attractive opportunities across our target sectors and look forward to raising additional capital to pursue those opportunities as and when market conditions allow.
There were no drawdowns or repayments of the loan facility during the year and the Company's loan balance remained at £50.00 million as at 31 March 2019 (31 March 2018: £50.00 million), producing gearing of 25.30% of property valuation (31 March 2018: 26.00%). The amount available under the facility was £60.00 million as at 31 March 2019 (31 March 2018: £60.00 million).
On 22 October 2018, the Company extended the term of the facility by three years up to 22 October 2023, to mitigate the financing risk associated with Brexit. The margin remains unchanged, with the loan incurring interest at three month LIBOR +1.4%, which equated to an all-in rate of 2.32% as at 31 March 2019 (31 March 2018: 2.11%). The Company is protected from a significant rise in interest rates as it has interest rate caps (£26.51 million at 2.50% and £10.00 million at 2.00%) with a combined notional value of £36.51 million (31 March 2018: £36.51 million), resulting in the loan being 73.00% hedged (31 March 2018: 73.00%). These interest rate caps are effective until 19 October 2020. The Company has entered into additional interest rate caps on a notional value of £46.51 million at 2.00% covering the extension period of the loan from 20 October 2020 to 19 October 2023.
Under the Prospectus the long-term gearing target remains 25.00% or less, however, the Company can borrow up to 35.00% of GAV in advance of an expected capital raise or asset disposal. Under the terms of the current loan facility, borrowing is restricted to 35.00% of NAV at drawdown. The Board and Investment Manager will continue to monitor the level of gearing and may adjust the target gearing according to the Company's circumstances and perceived risk levels.
The Company has continued to deliver on its target of paying dividends of 8.00 pps per annum. During the year, the Company declared and paid four quarterly dividends of 2.00 pence per Ordinary Share, in line with its target.
On 26 April 2019, the Board declared an interim dividend of 2.00 pence per Ordinary Share in respect of the period from 1 January 2019 to 31 March 2019. This interim dividend was paid on 31 May 2019 to shareholders on the register as at 9 May 2019.
The Directors will declare dividends taking into account the current level of the Company's earnings and the Directors' view on the outlook for sustainable recurring earnings. As such, the level of dividends paid may increase or decrease from the current annual dividend of 8.00 pps. Based on the current profile of the portfolio, the Company expects to pay an annualised dividend of 8.00 pps in respect of the year ending 31 March 2020, subject to market conditions.
The Board and the Investment Manager are pleased with the strong income returns delivered to shareholders to date. Based on annualised dividend payments of 8.00 pps, the Company delivered a dividend yield of 8.62% based on the year-end share price of 92.80 pence.
The Company was fully invested at the start of the year and achieved returns during the year which fully covered its dividend payments. The Board expects this level of returns to continue, based on the projected income from the portfolio which had an EPRA NIY of 7.62% and a Reversionary Yield of 7.75% as at 31 March 2019.
Whilst the EPRA Vacancy Rate has been reduced significantly during the year to 2.99% as at 31 March 2019, there is still further value to be gained through asset management initiatives in the short term. The portfolio has a WAULT of 4.9 years to break and 6.1 years to expiry and those lease events arising in the near future will provide the opportunity to increase and extend income streams from certain assets.
In the wider economic environment, it had been hoped that there would be more political certainty by the end of this financial year, however with the Brexit deadline being extended further to 31 October 2019, we expect investors to remain cautious. We consider the portfolio to be defensively positioned in any outcome, with no exposure to London offices - the sector most likely to be impacted - and broad diversification by sector and region.
Looking forward, our focus remains on continuing to grow the Company with share issues as part of the 12-month Share Issuance Programme, as set out in the Company's Prospectus, subject to market conditions. Subject to future fund raising, the Investment Manager will focus on finding further acquisitions which will deliver an attractive return as part of a well-diversified portfolio.
Annual General Meeting
The Company's Annual General Meeting ('AGM') will be held on Thursday, 12 September 2019 at 12 noon at The Cavendish Hotel, 81 Jermyn Street, St James', London SW1Y 6JF. You will find enclosed with the Annual Report and Notice of AGM a letter asking if you would prefer to receive future annual and half-yearly reports and other communication from the Company in electronic form rather than in printed form. Further details regarding this are set out in the Notice of AGM.
James Hyslop will retire from the Board at the forthcoming AGM. The Board would very much like to express its appreciation for his contribution to the Company which has been greatly valued since the Company was formed.
21 June 2019
* See, Glossary in the full Annual Report for definition of alternative performance measures.
** See KPIs below for definition of alternative performance measures.
Business Model and Strategy
The Company is a real estate investment company listed on the premium segment of the Official List of the FCA and traded on the London Stock Exchange's Main Market. As part of its business model and strategy, the Company has, and intends to maintain, UK REIT status. HM Revenue and Customs has acknowledged that the Company has met, and intends to continue to meet, the necessary qualifying conditions to conduct its affairs as a UK REIT.
The investment objective of the Company is to deliver an attractive total return to shareholders from investing predominantly in a portfolio of smaller commercial properties in the United Kingdom.
In order to achieve its investment objective, the Company invests in freehold and leasehold properties across the whole spectrum of the commercial property sector (office properties, industrial/warehouse properties, retail warehouses and high street retail) to achieve a balanced portfolio with a diversified tenant base.
Within the scope of restrictions set out below (under the heading 'Investment Restrictions') the Company may invest up to 10.00% of its NAV (at the time of investment) in the AEW UK Core Property Fund (the 'Core Fund') and up to 10.00% of its NAV (measured at the commencement of the project) in development opportunities, with the intention of holding any completed development as an investment.
The Company invests and manages its assets with the objective of spreading risk through the following investment restrictions:
The Directors currently intend, at all times, to conduct the affairs of the Company so as to enable the Group to qualify as a REIT for the purposes of Part 12 of the Corporation Tax Act 2010 ('CTA') (and the regulations made thereunder).
The Company will at all times invest and manage its assets in a way that is consistent with its objective of spreading investment risk and in accordance with its published investment policy and will not, at any time, conduct any trading activity which is significant in the context of the business of the Company as a whole.
In the event of a breach of the investment policy and investment restrictions set out above, the Directors upon becoming aware of such breach will consider whether the breach is material, and if it is, notification will be made to a Regulatory Information Service.
Any material change to the investment policy or investment restrictions of the Company may only be made with the prior approval of shareholders.
The Company exploits what it believes to be the compelling relative value opportunities currently offered by pricing inefficiencies in smaller commercial properties let on shorter occupational leases. The Company supplements this core strategy with asset management initiatives to upgrade buildings and thereby improve the quality of income streams. In the current market environment, the focus is to invest in properties which:
The Company's strategy is focused on delivering enhanced returns from the smaller end (up to £15.00 million) of the UK commercial property market. The Company believes that there are currently pricing inefficiencies in smaller commercial properties relative to the long-term pricing resulting in a significant yield advantage, which the Company aims to exploit.
How we add value
An Experienced Team
The investment management team averages 20 years working together, reflecting stability and continuity.
The Investment Manager's investment philosophy is based on the principle of value investing. The Investment Manager looks to acquire assets with an income profile coupled with underlying characteristics that underpin long-term capital preservation. As value managers, the Investment Manager looks for assets where today's pricing may not correspond to long-term fundamentals.
Active Asset Management
The Investment Manager has an in-house team of dedicated asset managers with a strong focus on active asset management to enhance income and add value to commercial properties.
Strategy in Action
Acquiring a stable income stream in a location with strong rental growth
Lockwood Court, Leeds
Active asset management driving value
Eastpoint Business Park, Oxford
Extending existing income streams to maximise value
Mangham Road, Rotherham
Minimising risk through divestment opportunities
Stoneferry Retail Park, Hull
Key Performance Indicators
Investment Manager's Report
UK Economic Outlook
The UK's economy strengthened in the first quarter of 2019, achieving growth of 0.5%. This was due in part to stockpiling by UK manufacturers fearing the impact of a no-deal Brexit. This was an improvement on the Q4 2018 results, which had seen a sharp decline in growth to 0.2% due to Brexit uncertainty. The extension of Article 50 to 31 October 2019, coupled with the arrival of a new Prime Minister in July 2019, will now prolong this uncertainty and could continue to hamper investment. Although investment has remained subdued, private consumption growth has been steady, supported by strong employment figures and real wage growth over the last two quarters.
The Bank of England ("BoE") raised its forecast for GDP growth in 2019 from 1.2% to 1.5% based on a higher level of global GDP growth than had been expected at the start of the year. Despite this improved outlook from the BoE, monetary policy will depend on a number of factors and it is expected that any rises in interest rates will be slow and steady over the next few years.
UK Real Estate Outlook
With Brexit dominating the economic outlook, this is taking its toll on the macro-economic picture, including financial and property markets. Given the market uncertainty, rental growth is expected to be fairly subdued during the remainder of 2019. There could be a period of volatility in values ahead as the uncertainty surrounding Brexit intensifies, although property is still expected to deliver a stable income return.
Property appears fairly priced at the current low levels of interest rates, which are expected to rise over time, but in small stages. The scope for further yield compression appears to be limited and a general upward pressure on property yields could occur, depending on the nature of the Brexit transition.
Standard industrials and distribution are expected to be a major driver of the occupier market with the growth of e-commerce, although it is thought that rental growth in 2019 will not be to the extent seen in 2018, as some rents are reaching a ceiling. Annual transaction activity in the industrial sector reached £7.8 billion in 2018, which is the second-highest figure on record.
The industrial sector represents the largest proportion of our portfolio with 48% of the valuation at 31 March 2019. We generally focus on assets with low capital value in locations with good accessibility from the national motorway network.
Our industrial assets achieved a total return of 16.2% for the year, the highest sector return in the portfolio, outperforming the Benchmark by 1.1%.
We expect office rents outside London to remain stable for the coming years as development in most cities has already peaked. Some rental growth was seen in regional markets in 2018 and rental rates are expected to remain unchanged for the remainder of 2019.
Offices make up the second largest sector holding in the portfolio, representing 22.0% of the portfolio valuation as at 31 March 2019. Our office holding achieved the greatest performance relative to the Benchmark for the year in terms of total return, outperforming the Benchmark Total Return by 8.4%.
This performance was driven by strong capital growth of 8.6% for the year, which was achieved through significant lettings and lease renewals, as noted in the Asset Management section of the Investments Manger's Report.
Growth in household consumption slowed in 2018, despite seeing real wage growth towards the end of the year, as consumers remained cautious with regards to their spending decisions. As such, there is increasing concern around the weakness in the retail market, which is expected to persist during 2019, and headline rents are predicted to continue to fall across all segments except Central London unit shops. In terms of investment, the total number of retail deals in 2018 was at its lowest since 2012.
Retail represented the portfolio's smallest sector holding, with only 15.3% of the valuation as at 31 March 2019, which somewhat mitigates the risk associated with the sector at a portfolio level. Our assets performed poorly in terms of capital return relative to the Benchmark, with a negative 15.4% capital return. However, our income streams have remained largely intact, despite the myriad of company voluntary arrangements ('CVA's) and company failures in the retail market, and delivered income returns of 9.5% for the year.
We think that the Alternatives sector will continue to grow in importance and could begin to outperform other sectors in terms of total returns.
This is a sector in which we have significant expertise and continue to see compelling opportunities. Our alternatives assets, which include leisure and car parking, represent 15.2% of the valuation as at 31 March 2019 and delivered the highest sector income return over the year of 9.3%.
Net rental income for the year was £15.72 million (11 months ended 31 March 2018: £11.22 million), contributing to an operating profit before fair value changes and disposals of £13.52 million (11 months ended 31 March 2018: £9.60 million).
The portfolio saw a gain of £4.18 million on revaluation of investment property over the year (11 months ended 31 March 2018: £1.01 million). This performance was largely driven by valuation gains in the portfolio's office assets resulting from several new lettings and lease renewals during the year. The Company's industrial assets also performed strongly, delivering like-for-like valuation growth. There was a small like-for-like increase in the valuation of the Company's alternative assets and only the Company's retail assets suffered a decrease in valuation, which is in common with the overall market performance of the sector.
The Company reported a loss on disposal of investment properties of £0.48 million (11 months ended 31 March 2018: £0.22 million), having made two part disposals (Floors 1-9, Pearl House, Nottingham and 18-36, Chapel Walk, Sheffield) and two full disposals (Stoneferry Retail Park, Hull and Waggon Road, Mossley) during the year.
Administrative expenses, which include the Investment Manager's fee and other costs attributable to the running of the Company, were £2.20 million (11 months ended 31 March 2018: £1.62 million). Ongoing Charges for the period were 1.40% (11 months ended 31 March 2018: 1.24%) and have increased largely as a result of one-off costs during the year relating to the publication of the Company's Prospectus.
The Company incurred finance costs of £1.68 million (11 months ended 31 March 2018: £0.65 million). This increase compared with the prior period comes as a result of having a higher balance of the loan drawn over the course of the year. The Company also entered into additional interest rate caps on a notional value of £46.51 million during the year, becoming effective in October 2020, which saw a fair value loss of £0.37 million.
The total profit before tax for the year of £15.54 million (11 months ended 31 March 2018: £9.82 million) equates to a basic EPS of 10.26 pence (11 months ended 31 March 2018: 7.17 pence).
EPRA EPS for the year was 8.07 pps which, based on dividends paid of 8.00 pps, reflects a dividend cover of 101% (11 months ended 31 March 2018: EPRA Earnings of 6.56 pps, dividends paid of 7.33 pps and dividend cover of 89.50%
The Company's NAV as at 31 March 2019 was £149.46 million or 98.61 pps (31 March 2018: £146.03 million or 96.36 pps). This is an increase of 2.25 pps or 2.33%, with the underlying movement in NAV set out in the table below:
As at 31 March 2019, the Company had utilised £50.00 million (31 March 2018: £50.00 million) of an available £60.00 million (31 March 2018: £60.00 million) credit facility with RBSi, resulting in gearing of 25.30% loan to property valuation. In October 2018, the Company extended the term of the loan facility by three years to October 2023 to mitigate the financing risk associated with Brexit. The loan incurs interest at three-month LIBOR + 1.4% (2018: LIBOR + 1.4%).
To mitigate the interest rate risk that arises from entering into a variable rate linked loan, as at 31 March 2019, the Company held interest rate caps with a combined notional value of £36.51 million, at strike rates of 2.5% on £26.51 million and 2.0% on £10.00 million (31 March 2018: 2.5% on £26.51 million and 2.0% on £10 million), meaning that the loan is 73% hedged (31 March 2018: 73%). In October 2018, the Company entered into interest rate caps on a national value of £46.51 million, effective from 20 October 2020 to 19 October 2023, capping the interest rate at 2.0% per annum; meaning that the current loan drawn down of £50.00 million will become 93% hedged.
Share Issuance Programme
On 1 March 2019, the Company published its Prospectus in relation to a Share Issuance Programme of up to 250 million new Ordinary shares and up to 250 million C shares. No shares have been issued, to date, under the programme.
The Company's objective is to build a diversified portfolio of commercial properties throughout the UK. New acquisitions are selected to provide a sustainable income return and the potential for growth, whilst also limiting downside risk. The majority of the Company's assets are fully let and as at 31 March 2019, the Company had a vacancy rate of 2.99% (31 March 2018: 7.10%). The following significant investment transactions were made during the year:
- In February 2019, the Company acquired Lockwood Court, Parkside Industrial Estate, Leeds, for a gross purchase price of £6.93 million. The 187,626 sq ft industrial warehouse is fully let to LWS Yorkshire Limited, a logistics and storage provider for Harrogate Spring Water, on a 10-year lease from October 2018. The lease provides a low passing rent of £3.21 per sq ft which, together with tight supply, forms a strong base for future potential rental growth. Located two miles south of Leeds City Centre and close to J25 of the M62 and J40 of the M1, Parkside Industrial Estate is a well-established industrial and commercial area with a history of attracting regional and national occupiers.
- On 14 March 2019, the Company completed the sale of its industrial asset at Waggon Road, Mossley. The asset was sold at auction for £450,000, ahead of its most recent valuation £350,000.
- In December 2018, the Company completed the sale of Stoneferry Retail Park, Hull, for gross proceeds of £1.80 million, reducing the Company's exposure to the retail sector.
- On 6 August 2018, the Company completed the sale of 18-36 Chapel Walk, Sheffield, for gross proceeds of £0.90 million. The units sold were 47.10% vacant by floor area. The Company has retained the fully let adjacent units, 11-15 Fargate, totalling 5,495 sq ft.
- On 5 April 2018, the Company completed the sale of its office accommodation at Pearl House, Nottingham, for gross proceeds of £3.65 million. The sale comprised the first to ninth floors, a ground floor reception and car parking spaces, providing a total area of 41,262 sq ft. The Company retained the ground floor accommodation in the busy city centre location, totalling 28,432 sq ft, let to national retail operators including Costa Coffee, Poundland and Lakeland.
Acquisition during the year
Lockwood Court, Leeds
Summary by Sector as at 31 March 2019
Summary by Geographical Area as at 31 March 2019
Please refer to Appendix 5 'Properties by Market Value', accessible through the link at the end of this announcement.
The Company's top 10 properties listed above comprise 47.7% of the total value of the portfolio.
Top 10 Tenants
The Company's top 10 tenants, listed above, represent 41.6% of the total passing rental income of the portfolio.
We undertake asset management to achieve rental growth, let vacant space and enhance value through initiatives such as refurbishments. During the year, key asset management initiatives included:
- Orion House, Oxford - In August 2018, the Company completed the letting of Orion House, Oxford, to Genesis Cancer Care UK Limited. The lease is for a term of 25 years, at a rent of £179,410 per annum. There are five-yearly, upward-only rent reviews linked to the Retail Price Index ("RPI") measure of inflation and the tenant benefits from a 12-month rent free period, followed by six years at half rent. The valuation of the property increased by 27.8% over the year, thanks largely to this transaction.
- 225 Bath Street, Glasgow - In July 2018, the Company completed the letting of Third Floor East, 225 Bath Street, Glasgow, to International Correspondence Schools Limited. The lease is for a term of five years, with a tenant break option at the end of the third year, at a rent of £88,608 per annum. The tenant benefits from a 10-month rent free period.
- Cedar House, Gloucester - In June 2018, the Company completed a lease renewal to the Secretary of State for Communities and Local Government at its Cedar House office building in Gloucester. The property was acquired in December 2017 with the expectation of achieving a new three-year lease at the passing rent of £300,000 per annum and this was significantly exceeded with a 10-year lease at a rent of £321,000 per annum. No rent free incentive was offered to the tenant.
- 40 Queen Square, Bristol - In June 2018, the Company completed a reversionary lease renewal at 40 Queen Square, Bristol, with tenant Ramboll Whitbybird Ltd. A 10-year lease commenced in November 2018 and the tenant has the option to break at the end of the fifth year. The letting at a rent of £94,500 per annum proved a new high rental tone for unrefurbished space within the building at £23.00 per sq ft, as compared to a passing rent of £16.84 per sq ft.
- Diamond Business Park, Wakefield - During June 2018, a new letting was completed at Diamond Business Park, Wakefield which was acquired by the Company in February 2018. Unit 7, totalling c. 13,700 sq ft, was let to Wow Interiors Yorkshire Ltd for a six year term with tenant break options in years two and four. Stepped rental increases have been agreed so that, if the tenant remains in occupation for the full term, the average rent received equates to £3.30 per sq ft as compared to an ERV of £3.00 per sq ft.
- Sarus Court, Runcorn - In April 2018, the Company documented two rent reviews with CJ Services, its largest tenant at Sarus Court, Runcorn. The rent reviews at Units 1 and 2 date back to January 2017 and result in a combined rate of £5.25 per sq ft net effective. This supports a headline rent of c.£5.75 per sq ft which was £0.25 per sq ft ahead of the property's ERV at the time of the letting.
- Commercial Road, Portsmouth - the Company has completed a 10-year lease renewal with Greggs plc at its retail property located on Commercial Road, Portsmouth. The new rent of £20,500 per annum exceeded the unit's ERV at the time of letting by 11%. Greggs have been in occupation of the unit for 10 years and have the option to break the lease after five years.
Alternative Investment Fund Manager ('AIFM')
AEW UK Investment Management LLP is authorised and regulated by the FCA as a full-scope AIFM and provides its services to the Company.
The Company has appointed Langham Hall UK Depositary LLP ('Langham Hall') to act as the depositary to the Company, responsible for cash monitoring, asset verification and oversight of the Company.
Information Disclosures under the AIFM Directive
Under the AIFM Directive, the Company is required to make disclosures in relation to its leverage under the prescribed methodology of the Directive.
The AIFM Directive prescribes two methods for evaluating leverage, namely the 'Gross Method' and the 'Commitment Method'. The Company's maximum and actual leverage levels are as per below:
In accordance with the AIFM Directive, leverage is expressed as a percentage of the Company's exposure to its NAV and adjusted in line with the prescribed 'Gross' and 'Commitment' methods. The Gross method is representative of the sum of the Company's positions after deducting cash balances and without taking into account any hedging and netting arrangements. The Commitment method is representative of the sum of the Company's positions without deducting cash balances and taking into account any hedging and netting arrangements. For the purposes of evaluating the methods above, the Company's positions primarily reflect its current borrowings and NAV.
The AIFM has adopted a Remuneration Policy which accords with the principles established by the AIFMD Directive.
AIFMD Remuneration Code Staff includes the members of the AIFM's Management Committee, those performing control functions, department heads, risk takers and other members of staff that exert material influence on the AIFM's risk profile or the AIFs it manages.
Staff are remunerated in accordance with the key principles of the AIFM's remuneration policy, which include: (1) promoting sound risk management; (2) supporting sustainable business plans; (3) remuneration being linked to non-financial criteria for control function staff; (4) incentiving staff performance over longer periods of time; (5) awarding guaranteed variable remuneration only in exceptional circumstances; and (6) having an appropriate balance between fixed and variable remuneration.
As required under section 'Fund 3.3.5.R(5)' of the Investment Fund Sourcebook, the following information is provided in respect of remuneration paid by the AIFM to its staff. The information provided below is provided for the year from 1 January 2018 to 31 December 2018, which is in line with the most recent financial reporting period of the AIFM, and relates to the total remuneration of the entire staff of the AIFM.
AEW UK Investment Management LLP
21 June 2019
Principal Risks and Uncertainties
The Company's assets consist primarily of UK commercial property. Its principal risks are therefore related to the commercial property market in general, but also to the particular circumstances of the individual properties and the tenants within the properties.
The Board has overall responsibility for reviewing the effectiveness of the system of risk management and internal control which is operated by the Investment Manager. The Company's ongoing risk management process is designed to identify, evaluate and mitigate the significant risks the Company faces.
Twice each year, the Board undertakes a risk review with the assistance of the Audit Committee, to assess the adequacy and effectiveness of the Investment Manager and other service providers' risk management and internal control processes.
The Board has carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity.
An analysis of the principal risks and uncertainties is set out below. This does not purport to be exhaustive as some risks are not yet known and some risks are currently not deemed material but could turn out to be material in the future.
The Strategic Report has been approved and signed on behalf of the Board by:
21 June 2019
Extract from the Directors Report
Mark Burton, non-executive Chairman
James Hyslop, non-executive non-independent Director
Bimaljit ("Bim") Sandhu, non-executive Director
Katrina Hart, non-executive Director
The Company has considered its cash flows, financial position, liquidity position and borrowing facilities. The Company's cash balance as at 31 March 2019 was £2.13 million. The Company can draw a further £2.31 million (31 March 2018: £1.11 million) of its debt facility up to the maximum 35% loan to NAV at drawdown.
As at 31 March 2019, the Company had sufficient headroom against its borrowing covenants. The Company has the ability to utilise up to 35% of NAV measured at drawdown under the current borrowing facility limits with a Company loan to NAV of 33.5% as at 31 March 2019.
The Company benefits from a secure, diversified income stream from leases which are not overly reliant on any one tenant or sector.
As a result, the Directors believe that the Company is well placed to manage its financing and other business risks. There are currently no material uncertainties in relation to the Company's ability to continue for a period of at least 12 months from the date of approval of these financial statements. The Board is, therefore, of the opinion that the going concern basis adopted in the preparation of the Annual Report is appropriate.
In accordance with the principle 21 of the AIC Code, the Directors have assessed the prospects of the Company over a period longer than the 12 months required by the 'Going Concern' provisions. The Board has considered the nature of the Company's assets, liabilities and associated cash flows, and has determined that five years, up to 31 March 2024, is the maximum timescale over which the performance of the Company can be forecast with a material degree of accuracy and so is an appropriate period over which to consider the Company's viability.
Considerations in support of the Company's viability over this five-year period include:
In assessing the Company's viability, the Board has carried out a thorough review of the Company's business model, including future performance, liquidity, dividend cover and banking covenant tests for a five-year period.
The business model is subject to annual sensitivity analysis, which involves flexing a number of key assumptions underlying the forecasts both individually and in aggregate for normal and stressed conditions. The five year review also considers whether financing facilities will be renewed as required.
The following scenarios were tested, both individually and combined, in an effort to represent a severe but plausible scenario, which might reasonably be expected to arise as a result of a 'No Deal' Brexit outcome, amongst other factors:
Based on the results of this analysis, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the five-year period of their assessment.
Details of the Company's subsidiary, AEW UK REIT 2015 Limited, can be found in Note 17 to the Financial Statements.
AEW UK Investment Management LLP is the Company's Investment Manager and has been appointed as the AIFM. Under the terms of the Investment Management Agreement, the Investment Manager is responsible for the day-to-day discretionary management of the Company's investments subject to the investment objective and policy of the Company and the overall supervision of the Directors. The Investment Manager is entitled to receive a quarterly management fee in respect of its services calculated at the rate of one-quarter of 0.9% of the prevailing NAV (excluding uninvested proceeds from fundraisings). There is no performance fee. Any investment by the Company into the Core Fund is not subject to management fees or performance fees otherwise charged to investors in the Core Fund by the Investment Manager. The Investment Management Agreement may be terminated by the Company or the Investment Manager giving 12 months' notice.
Financial Risk Management
The financial risk management objectives and policies can be found in Note 20 to the Financial Statements.
Social, Community and Employee Responsibility
The Company has no direct social, community or employee responsibilities. It has no employees and, accordingly, no requirement to separately report in this area as the management of the portfolio has been delegated to the Investment Manager and other service providers.
The Investment Manager is an equal opportunities employer who respects and seeks to empower each individual and the diverse cultures, perspectives, skills and experiences within its workforce.
The Company is not within the scope of the Modern Slavery Act 2015 because it has not exceeded the turnover threshold and therefore, no further disclosure is required in this regard.
The Investment Manager acquires and manages properties on behalf of the Company. It is recognised that these activities have both direct and indirect environmental impacts. The Investment Manager has a Sustainable and Responsible Investment ('SRI') policy. This can be found on the Investment Manager's website www.aewuk.co.uk.
The Investment Manager believes environmentally responsible fund management means being active. As part of this process, the Investment Manager submits disclosures to GRESB, the Global Real Estate Sustainability Benchmark. GRESB is an industry driven organisation committed to assessing the sustainability of real estate portfolios (public, private and direct) around the globe. The Investment Manager is in the process of submitting the Company's GRESB assessment for the year from 1 April 2018 to 31 March 2019 and will receive the results of this assessment in September 2019 when it will be made available on the Company's website.
As an investment company, the Company's own direct environmental impact is minimal and greenhouse gas ('GHG') emissions are therefore negligible. Information on the GHG emissions in relation to the Company's property portfolio are disclosed in the Directors' Report above.
At the AGM held on 12 September 2018, the Company was granted the authority to allot Ordinary Shares up to an aggregate nominal amount of £151,558 on a non pre-emptive basis. No Ordinary Shares have been allotted under this authority and the authority will expire at the conclusion of the 2019 AGM.
At a general meeting held on 12 September 2018, the Company was granted authority to allot up to (i) 250 million Ordinary Shares of £0.01 each in the capital of the Company and/or (ii) 250 million convertible redeemable preference shares ('C' shares) of £0.01 each in the capital of the Company pursuant to a potential Share Issuance Programme. The Company published its Prospectus in relation to the Share Issuance Programme on 1 March 2019. No Ordinary Shares have been allotted under this authority which will expire, at the earlier of the close of the Share Issuance Programme and 30 June 2020.
As at 31 March 2019, the Company had 151,558,251 Ordinary Shares in issue
Purchase of Own Shares
At the Company's AGM on 12 September 2018, the Company was granted authority to purchase up to 14.99% of the Company's Ordinary Shares in issue. No shares have been bought back under this authority during the year, which expires at the conclusion of the Company's 2019 AGM. A resolution to renew the Company's authority to purchase (either for cancellation or for placing into Treasury) up to 22,718,581 Ordinary Shares (being 14.99% of the issued Ordinary Share capital as at the date of this report), will be put to shareholders at the 2019 AGM. Any purchase will be made in the market and prices will be in accordance with the terms laid out in the Notice of AGM (enclosed separately and available on the Company's website). The authority will be used where the Directors consider it to be in the best interests of shareholders.
The profits of the Company (including accumulated revenue reserves) available for distribution and resolved to be distributed shall be distributed in proportion to the amount paid upper share by way of interim and, where applicable special or final dividends among the holders of Ordinary Shares.
After meeting the liabilities of the Company on a winding-up, the surplus assets shall be paid to the holders of different classes of members and distributed among such holders rateably according to the amounts paid up or credited as paid up on their shares.
Each Ordinary shareholder is entitled to one vote on a show of hands and, on a poll, to one vote for every Ordinary Share held. The Notice of AGM and Form of Proxy stipulate the deadlines for the valid exercise of voting rights and, other than with regard to Directors not being permitted to vote their Ordinary Shares on matters in which they have an interest, there are no restrictions on the voting rights of Ordinary Shares.
There are no restrictions concerning the transfer of securities in the Company or on voting rights; no special rights with regard to control attached to securities; no agreements between holders of securities regarding restrictions on the transfer of securities or voting rights known to the Company; and no agreements which the Company is party to that might affect its control following a successful takeover bid.
Requirements of the Listing Rules
Listing Rule 9.8.4 requires the Company to include specified information in a single identifiable section of the annual report or a cross reference table indicating where the information is set out. The Directors confirm that there are no disclosures required in relation to Listing Rule 9.8.4.
Related Party Transactions
Related party transactions during the year ended 31 March 2019 can be found in Note 22 to the Financial Statements.
Post Year-End Events
Post balance sheet events can be found in Note 24 to the Financial Statements.
The Directors' Report has been approved by the Board of Directors and signed on its behalf by:
21 June 2019
Statement of Directors' Responsibilities in respect of the Annual Report and Financial Statements
The Directors are responsible for preparing the Annual Report and Financial Statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law, they are required to prepare the financial statements in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS as adopted by the EU) and applicable law.
Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of its profit or loss for that period. In preparing these financial statements, the Directors are required to:
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that comply with that law and those regulations.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
We confirm that to the best of our knowledge:
We consider the Annual Report and the Financial Statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy.
On behalf of the Board
21 June 2019
The financial information set out below does not constitute the Company's statutory accounts for the year ended 31 March 2019 but is derived from those accounts. Statutory accounts for the year ended 31 March 2019 will be delivered to the Registrar of Companies in due course. The Independent Auditor has reported on those accounts; its report was (i) unqualified, (ii) did not include a reference to any matters to which the Independent Auditor drew attention by way of emphasis without qualifying its report and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006. The text of the Independent Auditor's Report can be found in the Company's full Annual Report and Financial Statements on the Company's website.
Statement of Comprehensive Income
for the year ended 31 March 2019
The notes below form an integral part of these financial statements.
Statement of Changes in Equity
for the year ended 31 March 2019
The notes below form an integral part of these financial statements.
Statement of Financial Position
as at 31 March 2019
The financial statements were approved by the Board on 21 June 2019 and signed on its behalf by:
AEW UK REIT plc (Company number: 09522515)
The notes below form an integral part of these financial statements.
Statement of Cash Flows
for the year ended 31 March 2019
Notes to the Financial Statements
for the year ended 31 March 2019
1. Corporate information
AEW UK REIT plc (the 'Company') is a closed ended Real Estate Investment Trust ('REIT') incorporated on 1 April 2015 and domiciled in the UK. The registered office of the Company is 6th Floor, 65 Gresham Street, London, EC2V 7NQ.
The Company's Ordinary Shares were listed on the Official List of the FCA and admitted to trading on the Main Market of the London Stock Exchange on 12 May 2015.
The nature of the Company's operations and its principal activities are set out in the Strategic Report above.
2. Accounting policies
2.1 Basis of preparation
These financial statements are prepared and approved by the Directors in accordance with IFRS and interpretations issued by the International Accounting Standards Board ('IASB') as adopted by the European Union ('EU IFRS').
The current period is for a period of 12 months from 1 April 2018 to 31 March 2019. The comparative
period is for a period of 11 months from 1 May 2017 to 31 March 2018.
These financial statements have been prepared under the historical cost convention, except for
investment property and interest rate derivatives that have been measured at fair value.
The financial statements are presented in Sterling and all values are rounded to the nearest thousand
pounds (£'000), except when otherwise indicated.
The Company is exempt by virtue of Section 402 of the Companies Act 2006 from the requirement to
prepare group financial statements. These financial statements present information solely about the
Company as an individual undertaking.
New standards, amendments and interpretations
The following new standards and amendments to existing standards have been published and approved by the EU. The Company has applied the following standards from 1 April 2018, with the year ended 31 March 2019 being the first year end reported under the standards:
Interest rate derivatives
IFRS 9 requires that all derivative financial instruments are recognised at fair value in the statement of financial position. Changes in fair value are recognised in profit or loss unless the contract is designated in an effective hedging relationship.
Trade and other receivables
Under IFRS 9 there is no change to the classification and measurement of trade and other receivables, however there is a requirement to carry out an ongoing assessment of expected credit losses using a general approach. The Company has made an assessment of expected credit losses at each period end, using the simplified approach where a lifetime expected loss allowance is always recognised over the expected life of the financial instrument. Any adjustment is recognised in profit or loss as an impairment gain or loss. Following the adoption of IFRS 9, there is no material impact on the Company financial statements.
The following new standards and amendments to existing standards have been published and approved by the EU, and are mandatory for the Company's accounting periods beginning after 1 April 2019 or later periods.
The Company does not expect the adoption of new accounting standards issued but not yet effective to have a significant impact on its financial statements. The right of use finance lease asset relating to head leases will be required to be measured at the present value of future cash flows, however, the difference from the IAS 17 carrying value is expected to be insignificant in the context of the Company's financial statements.
2.2 Significant accounting judgements and estimates
The preparation of financial statements in accordance with EU IFRS requires the Directors of the Company to make judgements, estimates and assumptions that affect the reported amounts recognised in the financial statements. However, uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or liability in the future.
There are not considered to be any judgements which have a significant effect on the amounts recognised in the financial statements.
i) Valuation of investment property
The Company's investment property is held at fair value as determined by the independent valuer on
the basis of fair value in accordance with the internationally accepted RICS Appraisal and Valuation Standards.
2.3 Segmental information
In accordance with IFRS 8, the Company is organised into one main operating segment being investment in property in the UK.
2.4 Going concern
The Directors have made an assessment of the Company's ability to continue as a going concern and are satisfied that the Company has the resources to continue in business for at least 12 months from the date of approval of these financial statements. Furthermore, the Directors are not aware of any material uncertainties that may cast significant doubt upon the Company's ability to continue as a going concern. Therefore, the financial statements have been prepared on the going concern basis.
2.5 Summary of significant accounting policies
The principal accounting policies applied in the preparation of these financial statements are set out below.
a) Presentation currency
These financial statements are presented in Sterling, which is the functional and presentational currency of the Company. The functional currency of the Company is principally determined by the primary economic environment in which it operates. The Company did not enter into any transactions in foreign currencies during the year.
b) Revenue recognition
i) Rental income
Rental income receivable under operating leases is recognised on a straight-line basis over the term of the lease, except for contingent rental income, which is recognised when it arises.
Incentives for lessees to enter into lease agreements are spread evenly over the lease term, even if the payments are not made on such a basis. The lease term is the non-cancellable period of the lease together with any further term for which the tenant has the option to continue the lease, where, at the inception of the lease, the Directors are reasonably certain that the tenant will exercise that option.
ii) Deferred income
Deferred income is rental income received in advance during the accounting period.
c) Dividend income
Dividend income is recognised in profit or loss on the date the entity's right to receive a dividend is established.
d) Financing income and expenses
Financing income comprises interest receivable on funds invested. Financing expenses comprise interest and other costs incurred in connection with the borrowing of funds. Interest income and interest payable are recognised in profit or loss as they accrue, using the effective interest method.
e) Investment property
Property is classified as investment property when it is held to earn rentals or for capital appreciation or both. Investment property is measured initially at cost including transaction costs. Transaction costs include transfer taxes and professional fees to bring the property to the condition necessary for it to be capable of operating. The carrying amount also includes the cost of replacing part of an existing investment property at the time that cost is incurred if the recognition criteria are met.
Subsequent to initial recognition, investment property is stated at fair value. Gains or losses arising from changes in the fair values are included in profit or loss.
Investment properties are valued by the independent valuer on the basis of a full valuation with physical inspection at least once a year. Any valuation of an immovable by the independent valuer must be undertaken in accordance with the current issue of RICS Valuation - Professional Standards (the 'Red Book').
The determination of the fair value of investment property requires the use of estimates such as future cash flows from assets (such as lettings, tenants' profiles, future revenue streams, capital values of fixtures and fittings, plant and machinery, any environmental matters and the overall repair and condition of the property) and discount rates applicable to those cash flows.
For the purposes of these financial statements, the assessed fair value is:
Investment property is derecognised when it has been disposed of or permanently withdrawn from use and no future economic benefit is expected after its disposal or withdrawal.
The profit on disposal is determined as the difference between the net sales proceeds and the carrying amount of the asset at the commencement of the accounting period plus capital expenditure in the period.
Any gains or losses on the retirement or disposal of investment property are recognised in the profit or loss in the year of retirement or disposal.
f) Investments in subsidiaries
AEW UK REIT 2015 Limited is the subsidiary of the Company. The subsidiary was dormant during the reporting period. The investment in the subsidiary is stated at cost less impairment and shown in note 17.
As permitted by Section 405 of the Companies Act 2006, the subsidiary is not consolidated as its inclusion is not material for the purposes of giving a true and fair view.
g) Investment property held for sale
Investment property is classified as held for sale when it is being actively marketed at year end and it is highly probable that the carrying amount will be recovered principally through a sale transaction within 12 months.
Investment property classified as held for sale is included within current assets within the Statement of Financial Position and measured at fair value.
h) Derivative financial instruments
Derivative financial instruments, comprising interest rate caps for hedging purposes, are initially recognised at fair value and are subsequently measured at fair value, being the estimated amount that the Company would receive or pay to terminate the agreement at the period end date, taking into account current interest rate expectations and the current credit rating of the Company and its counterparties. Premiums payable under such arrangements are initially capitalised into the Statement of Financial Position.
The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data is available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs significant to the fair value measurement as a whole. Changes in fair value of interest rate derivatives are recognised within finance expenses in profit or loss in the period in which they occur.
i) Cash and cash equivalents
Cash and short-term deposits in the Statement of Financial Position comprise cash at bank and short-term deposits with an original maturity of three months or less.
Rent and other receivables are initially recognised at fair value and subsequently at amortised cost. Impairment provisions are recognised based upon an expected credit loss model. The Company has made an assessment of expected credit losses at each period end, using the simplified approach where a lifetime expected loss allowance is always recognised over the expected life of the financial instrument. Any adjustment is recognised in profit or loss as an impairment gain or loss.
k) Capital prepayments
Capital prepayments are made for the purpose of acquiring future property assets and held as receivables within the Statement of Financial Position. When the asset is acquired, the prepayments are capitalised as a cost of purchase. Where a purchase is not successful, these costs are expensed within profit or loss as abortive costs in the period.
l) Other payables and accrued expenses
Other payables and accrued expenses are initially recognised at fair value and subsequently held at amortised cost.
m) Rent deposits
Rent deposits represent cash received from tenants at inception of a lease and are subsequently transferred to the rent agent to hold on behalf of the Company.
n) Interest bearing loans and borrowings
All loans and borrowings are initially recognised at fair value less directly attributable transaction costs. After initial recognition, interest bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Borrowing costs are amortised over the lifetime of the facilities through profit or loss.
When the lifetime of a floating rate facility is extended, and this is considered to be a non-substantial modification, the effective interest rate is revised to reflect changes in market rates of interest.
A provision is recognised in the Statement of Financial Position when the Company has a present legal or constructive obligation as a result of a past event, that can be reliably measured and is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects risks specific to the liability.
p) Dividend payable to shareholders
Equity dividends are recognised when they become legally payable.
q) Share issue costs
The costs of issuing or reacquiring equity instruments (other than in a business combination) are accounted for as a deduction from equity.
r) Finance leases
Finance leases are capitalised at the lease commencement, at present value of the minimum lease payments, and held as a liability within the Statement of Financial Position.
Corporation tax is recognised in profit or loss except to the extent that it relates to items recognized directly in equity, in which case, it is recognised in equity.
As a REIT, the Company is exempt from corporation tax on the profits and gains from its investments, provided it continues to meet certain conditions as per REIT regulations.
Taxation on the profit or loss for the period not exempt under UK REIT regulations comprises current and deferred tax. Current tax is expected tax payable on any non-REIT taxable income for the period, using tax rates applicable in the period.
Deferred tax is provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax that is provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantially enacted at the period end date.
t) European Public Real Estate Association
The Company has adopted European Public Real Estate Association ('EPRA') best practice recommendations, which it expects to broaden the range of potential institutional investors able to invest in the Company's Ordinary Shares. For the year to 31 March 2019, audited EPS and NAV calculations under EPRA's methodology are included in note 8 and further unaudited measures are included below.
Rent receivable under the terms of the leases is adjusted for the effect of any incentives agreed.
* During the year, costs were incurred in order to update the Prospectus of the Company. As no shares were issued in the year, these costs have been expensed in the year.
* Charged to share premium account in 11 months ended 31 March 2018. Charged to Statement of Comprehensive Income in year ended 31 March 2019.
A summary of the Directors' remuneration is set out in the Directors' Remuneration Report in the full Annual Report and Financial Statements. The Company had no employees in either period.
1Standard rate of corporation tax was 19% to 31 March 2019. The corporation tax rate is to reduce to 17% with effect from 1 April 2020.
Factors that may affect future tax charges
At 31 March 2019, the Company had unrelieved management expenses of £8,405 (31 March 2018: £8,056). It is unlikely that the Company will generate sufficient taxable income in the future to use these expenses to reduce future tax charges and therefore no deferred tax asset has been recognised.
Due to the Company's status as a REIT and the intention to continue meeting the conditions required to obtain approval as a REIT in the foreseeable future, the Company has not provided deferred tax on any capital gains and losses arising on the revaluation or disposal of investments.
Earnings per share (EPS) amounts are calculated by dividing profit for the period attributable to ordinary equity holders of the Company by the weighted average number of Ordinary Shares in issue during the period. As at 31 March 2019, EPRA NNNAV was equal to IFRS NAV and, as such, a reconciliation between the two measures has not been presented.
* The fourth interim dividend declared is not included in the accounts as a liability as at year ended 31 March 2019.
** The fourth interim dividend declared is not included in the accounts as a liability as at period ended 31 March 2018.
10.a) Investment property
* Adjustment in respect of minimum payment under head leases separately included as a liability within the Statement of Financial Position
Valuation of investment property
Valuation of investment property is performed by Knight Frank LLP, an accredited external valuer with recognised and relevant professional qualifications and recent experience of the location and category of the investment property being valued.
The valuation of the Company's investment property at fair value is determined by the external valuer on the basis of market value in accordance with the internationally accepted RICS Valuation - Professional Standards (incorporating the International Valuation Standards).
The determination of the fair value of investment property requires the use of estimates, such as future cash flows from assets (based on lettings, tenants' profiles, future revenue streams, capital values of fixtures and fittings, plant and machinery, any environmental matters and the overall repair and condition of the property) and discount rates applicable to those flows.
Valuation of investment property
Valuation of investment
Investments in collective investment schemes were stated at NAV with any resulting gain or loss recognised in profit or loss. Fair value is assessed by the Directors based on the best available information.
As at 31 March 2019, the Company had no investment in the AEW UK Core Property Fund (31 March 2018: Nil).
10.c) Fair value measurement hierarchy
The following table provides the fair value measurement hierarchy for investments:
Explanation of the fair value hierarchy:
Level 1 - Quoted prices for an identical instrument in active markets;
Level 2 - Prices of recent transactions for identical instruments and valuation techniques using observable market data; and
Level 3 - Valuation techniques using non-observable data.
There have been no transfers between Level 1 and Level 2 during either period, nor have there been any transfers in or out of Level 3.
Sensitivity analysis to significant changes in unobservable inputs within Level 3 of the hierarchy
The significant unobservable inputs used in the fair value measurement categorised within Level 3 of the fair value hierarchy of the entity's portfolio of investment property are:
2) Equivalent yield
Increases/(decreases) in the ERV (per sq ft per annum) in isolation would result in a higher/(lower) fair value measurement. Increases/(decreases) in the discount rate/yield in isolation would result in a lower/(higher) fair value measurement.
The significant unobservable input used in the fair value measurement categorised within Level 3 of the fair value hierarchy of the portfolio investment property are as follows:
*Valuation per Knight Frank LLP.
Where possible, sensitivity of the fair values of Level 3 assets are tested to changes in unobservable inputs against reasonable alternatives.
Gains and losses recorded in profit or loss for recurring fair value measurements categorised within Level 3 of the fair value hierarchy are attributable to changes in unrealised gains or losses relating to investment property held at the end of the reporting period.
With regards to investment property, gains and losses for recurring fair value measurements categorised within Level 3 of the fair value hierarchy, prior to adjustment for rent free debtor and rent guarantee debtor where applicable, are recorded in profit and loss.
The carrying amount of the assets and liabilities, detailed within the Statement of Financial Position, is considered to be the same as their fair value.
The aged debtor analysis of receivables is as follows:
The Company is protected from a significant rise in interest rates as it has interest rate caps with a combined notional value of £36.51 million (31 March 2018: £36.51 million), resulting in the loan being 73% hedged (31 March 2018: 73%). These interest rate caps are effective until 19 October 2020. The Company has entered into additional interest rate caps on a notional value of £46.51 million at 2.00% covering the extension period of the loan from 20 October 2020 to 19 October 2023.
Fair value hierarchy
The following table provides the fair value measurement hierarchy for interest rate derivatives:
The fair value of these contracts are recorded in the Statement of Financial Position as at the year end.
There have been no transfers between level 1 and level 2 during the period, nor have there been any transfers between level 2 and level 3 during the year.
The carrying amount of all assets and liabilities, detailed within the Statement of Financial Position, is
considered to be the same as their fair value.
The Company has a £60.00 million (31 March 2018: £60.00 million) credit facility with RBSi of which £50.00 million (31 March 2018: £50.00 million) has been utilised as at 31 March 2019.
Under the terms of the Prospectus, the Company has a target gearing of 25% Loan to GAV, but can borrow up to 35% Loan to GAV in advance of a capital raise or asset disposal. As at 31 March 2019, the Company's gearing was 25.30% Loan to GAV (31 March 2018: 26.00%).
Under the terms of the loan facility, the Company can draw up to 35% Loan to NAV at drawdown. As at 31 March 2019, the Company could draw a further £2.31 million up to the maximum 35% (31 March 2018: £1.11 million).
Borrowing costs associated with the credit facility are shown as finance costs in note 6 to these financial statements.
On 22 October 2018, the Company extended the term of the facility by three years up to 22 October 2023, to mitigate the financing risk associated with Brexit. The margin remains unchanged, with the loan incurring interest at three month LIBOR +1.4%, which equated to an all-in rate of 2.32% as at 31 March 2019 (31 March 2018: 2.11%).
Reconciliation to cash flows from financing activities
Finance leases are capitalised at the lease's commencement at the lower of the fair value of the property and the present value of the minimum lease payments. The present value of the corresponding rental obligations are included as liabilities.
The following table analyses the minimum lease payments under non-cancellable finance leases:
16. Guarantees and commitments
As at 31 March 2019, there were capital commitments of £210,588 relating to works in Apollo Business Park, Basildon (31 March 2018: £nil).
Operating lease commitments - as lessor
The Company has entered into commercial property leases on its investment property portfolio. These non-cancellable leases have a remaining term of between zero and 24 years.
Future minimum rentals receivable under non-cancellable operating leases as at 31 March 2019 are as follows:
During the year ended 31 March 2019 there were contingent rents totalling £67,591 (11 month period to 31 March 2018: £149,192) recognised as income.
17. Investment in subsidiary
The Company has a wholly-owned subsidiary, AEW UK REIT 2015 Limited:
AEW UK REIT 2015 Limited is a subsidiary of the Company incorporated in the UK on 2 April 2015. At 31 March 2019, the Company held one share, being 100% of the issued share capital. AEW UK REIT 2015 Limited is dormant and the cost of the subsidiary is £0.01 (31 March 2018: £0.01). The registered office of AEW UK REIT 2015 Limited is 6th Floor, 65 Gresham Street, London, EC2V 7NQ.
18. Issued share capital
On 24 October 2017, the Company issued 27,911,001 Ordinary Shares at a price of 100.5 pps, pursuant to the Initial Placing, Initial Offer for Subscription and Intermediaries Offer of the Share Issuance Programme, as described in the prospectus published by the Company on 28 September 2017.
19. Share premium account
20. Financial risk management objectives and policies
20.1 Financial assets and liabilities
The Company's principal financial assets and liabilities are those derived from its operations: receivables and prepayments, cash and cash equivalents and payables and accrued expenses. The Company's other principal financial liabilities are interest bearing loans and borrowings, the main purpose of which is to finance the acquisition and development of the Company's property portfolio.
Set out below is a comparison by class of the carrying amounts and fair value of the Company's financial instruments that are carried in the financial statements.
1 Excludes lease incentive debtor & prepayments
2 Excludes tax, VAT liabilities and deferred income
Interest rate derivatives are the only financial instruments classified as fair value through profit and loss. All other financial assets and financial liabilities are measured at amortised cost. All financial instruments were designated in their current categories upon initial recognition.
Fair value measurement hierarchy has not been applied to those classes of asset and liability stated above which are not measured at fair value in the financial statements. The difference between the fair value and book value of these items is not considered to be material.
20.2 Financing management
The Company's activities expose it to a variety of financial risks: market risk, real estate risk, credit risk and liquidity risk.
The Company's objective in managing risk is the creation and protection of shareholder value. Risk is inherent in the Company's activities but it is managed through a process of ongoing identification, measurement and monitoring, subject to risk limits and other controls.
The principal risks facing the Company in the management of its portfolio are as follows:
Market price risk
Market price risk is the risk that future values of investments in direct property and related property investments will fluctuate due to changes in market prices. To manage market price risk, the Company diversifies its portfolio geographically in the United Kingdom and across property sectors.
The disciplined approach to the purchase, sale and asset management ensures that the value is maintained to its maximum potential. Prior to any property acquisition or sale, detailed research is undertaken to assess expected future cash flow. The Investment Management Committee of the Investment Manager meets twice monthly and reserves the ultimate decision with regards to investment purchases or sales. In order to monitor property valuation fluctuations, the Investment Manager meets with the independent external valuer on a regular basis. The valuer provides a property portfolio valuation quarterly, so any movements in the value can be accounted for in a timely manner and reflected in the NAV every quarter.
Real estate risk
The Company is exposed to the following risks specific to its investment property:
Property investments are illiquid assets and can be difficult to sell, especially if local market conditions are poor. Illiquidity may also result from the absence of an established market for investments, as well as legal or contractual restrictions on resale of such investments. In addition, property valuation is inherently subjective due to the individual characteristics of each property, and thus, coupled with illiquidity in the markets, makes the valuation in the investment property difficult and inexact.
No assurances can be given that the valuations of properties will be reflected in the actual sale prices even where such sales occur shortly after the relevant valuation date.
There can be no certainty regarding the future performance of any of the properties acquired for the Company. The value of any property can go down as well as up. Property and property-related assets are inherently subjective as regards value due to the individual nature of each property. As a result, valuations are subject to uncertainty.
Real property investments are subject to varying degrees of risk. The yields available from investments in real estate depend on the amount of income generated and expenses incurred from such investments.
There are additional risks in vacant, part vacant, redevelopment and refurbishment situations although these are not prospective investments for the Company.
Credit risk is the risk that the counterparty (to a financial instrument) or tenant (of a property) will cause a financial loss to the Company by failing to meet a commitment it has entered into with the Company.
It is the Company's policy to enter into financial instruments with reputable counterparties. All cash deposits are placed with an approved counterparty, The Royal Bank of Scotland International Limited.
In respect of property investments, in the event of a default by a tenant, the Company will suffer a rental shortfall and additional costs concerning re-letting the property. The Investment Manager monitors tenant arrears in order to anticipate and minimise the impact of defaults by occupational tenants.
The table below shows the Company's exposure to credit risk:
Liquidity risk arises from the Company's management of working capital, the finance charges and principal repayments on its borrowings. It is the risk that the Company will encounter difficulty in meeting its financial obligations as they fall due, as the majority of the Company's assets are investment properties and therefore not readily realisable. The Company's objective is to ensure it has sufficient available funds for its operations and to fund its capital expenditure. This is achieved by continuous monitoring of forecast and actual cash flows by management.
The table below summarises the maturity profile of the Company's financial liabilities based on contractual undiscounted payments:
21. Capital management
The primary objectives of the Company's capital management are to ensure that it continues to qualify for UK REIT status and complies with its banking covenants.
To enhance returns over the medium term, the Company utilises borrowings on a limited recourse basis for each investment or all or part of the total portfolio. The Company's policy is to target a borrowing level of 25% loan to GAV and can borrow up to a maximum of 35% loan to GAV in advance of a capital raise or asset disposal. It is currently anticipated that the level of total borrowings will typically be at the level of 25% of GAV (measured at drawdown).
Alongside the Company's borrowing policy, the Directors intend, at all times, to conduct the affairs of the Company so as to enable the Company to qualify as a REIT for the purposes of Part 12 of the CTA 2010 (and the regulations made thereunder). The REIT status compliance requirements include: 90% distribution test, interest cover ratio, 75% assets test and the substantial shareholder rule, all of which the Company remained compliant with in this reporting year.
The monitoring of the Company's level of borrowing is performed primarily using a Loan to GAV ratio, which is calculated as the amount of outstanding debt divided by the total valuation of investment property. The Company Loan to GAV ratio at the year end was 25.30% (31 March 2018: 26.00%).
Breaches in meeting the financial covenants would permit the bank to immediately call loans and borrowings.