Annual Financial Report
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AEW UK REIT plc (AEWU)
AEW UK REIT PLC
Announcement of Full Year Results for the year ended 31 March 2020
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 2020.
Summary Highlights
Mark Burton, Chairman of AEW UK REIT, commented: "We are pleased with the overall performance of the Company, which, for a second consecutive year, has improved its performance in EPRA EPS, while also achieving a dividend of 8 pence per share. The end of the financial year saw the outbreak of COVID-19 and the focus of the Board and Investment Manager has been on minimising the impact on the Company and stakeholders. We believe the Company's assets are strategically placed to continue to provide investors with robust performance over the medium and long term. The Board is encouraged by the fact that, despite the uncertainty that has been caused by the outbreak of COVID-19, a number of ongoing asset management transactions are currently being negotiated by the Manager whose active management style is a principal feature of the Company's strategy seeking to maximise both income and capital returns to shareholders. With a number of these key discussions ongoing it is hoped that further value can be added."
Financial Highlights
* Net Asset Value ('NAV')* of £147.86 million and of 93.13 pence per share ('pps') as at 31 March 2020 (31 March 2019: £149.46 million and 98.61 pps).
* Operating profit before fair value changes of £14.47 million for the year (year ended 31 March 2019: £13.52 million).
* Profit before tax ('PBT')* of £3.65 million and EPS of 2.40 pps for the year (year ended 31 March 2019: £15.54 million and of 10.26 pps).
* EPRA Earnings Per Share ('EPRA EPS')* for the year of 8.67 pps (year ended 31 March 2019: 8.07 pps).
* Total dividends of 8.00 pps declared for the year (year ended 31 March 2019: 8.00 pps).
* Shareholder Total Return* for the year of -17.89% (year ended 31 March 2019: 5.44%).
* The price of the Company's Ordinary Shares on the Main Market of the London Stock Exchange was 68.20 pps as at 31 March 2020 (31 March 2019: 92.80 pps).
* As at 31 March 2020, the Company had drawn £51.50 million (31 March 2019: £50.00 million) of a £60.00 million (31 March 2019: £60.00 million) term credit facility with the Royal Bank of Scotland International Limited ('RBSi') and was geared to 27.21% of the Gross Asset Value ('GAV')* (31 March 2019: 25.30%) (see note 21 of the Financial Statements below).
* The Company held cash balances totalling £9.87 million as at 31 March 2020 (31 March 2019: £2.13 million) having raised gross proceeds of £7.00 million via a share placing in February 2020. Following the disposal of 2 Geddington Road, Corby, the Company had a cash balance of £27.28 million as at 19 June 2020.
Property Highlights
* As at 31 March 2020, the Company's property portfolio had a valuation of £189.30 million across 35 properties (31 March 2019: £197.61 million across 35 properties) as assessed by the valuer# and a historical cost of £197.12 million (31 March 2019: £196.86 million).
* The Company acquired no properties during the year (year ended 31 March 2019: one property for £6.93 million). The Company made no disposals during the year (year ended 31 March 2019: two full disposals and two part disposals for gross sales proceeds of £6.80 million).
* The portfolio had an EPRA Vacancy Rate** of 3.68% as at 31 March 2020 (31 March 2019: 2.99%).
* Rental income generated in the year under review was £17.42 million (year ended 31 March 2019: £17.18 million). The number of tenants as at 31 March 2020 was 91 (31 March 2019: 95).
* EPRA Net Initial Yield ('NIY')** of 8.26% as at 31 March 2020 (31 March 2019: 7.62%).
* Weighted Average Unexpired Lease Term ('WAULT')* of 4.26 years to break (31 March 2019: 4.87 years) and 5.55 years to expiry (31 March 2019: 6.10 years).
* Post year-end, in May 2020, the Company disposed of 2 Geddington Road, Corby, for gross proceeds of £18.80 million.
* Post year-end, in June 2020, the Company completed a 15 year renewal lease with the Secretary of State for Communities and Local Government at its Solihull office, Sandford House. The agreement documents the increase of rental income from the property by 30%.
* As at the date of this report, 84% of the rent due for the March 2020 quarter has been collected.
* See KPIs below for definition of alternative performance measures. ** See Glossary in the full Annual Report and Financial Statements for definition of alternative performance measures. # The valuation figure is reconciled to the fair value under IFRS in Note 10.
Chairman's Statement
Overview I am pleased to present the audited annual results of AEW UK REIT plc for the year ended 31 March 2020. As at 31 March 2020, the Company owned a diversified portfolio of 35 commercial investment properties throughout the UK with a value of £189.30 million.
The Company has improved its performance in terms of EPRA EPS for a second consecutive year; increasing from 8.07 pence for the prior year to 8.67 pence for the year under review. However, the end of this financial year brought an unprecedented period of uncertainty to the UK and global markets, which is ongoing as at the date of this report, as a result of the outbreak of COVID-19. This has negatively impacted the fair value of the Company's investment properties, which fell by £9.44 million during the year and consequently the Company's NAV per share, which fell by 5.56% for the year. The Company's shares are also trading at a discount to NAV, having briefly traded at a premium to NAV at the start of 2020, prior to the COVID-19 outbreak.
As a result of the pandemic, the primary focus of the Board and Investment Manager has recently been on minimising the impact of COVID-19 on the Company and its stakeholders. Business continuity measures in place are allowing the Board, the Investment Manager and the Company's service providers to continue to operate effectively. Immediately prior to the publication of this report, the Company had collected 84% of the rents due on 25 March 2020, however we are expecting collection rates to fall again for the June quarter, as tenants have been adversely affected by the period of lockdown. Amounts that remain outstanding are being pursued or are the matter of ongoing engagement between the Manager and the tenant. There are some tenants who are experiencing difficulties in the current environment and the Company is sympathetic to their situation. In these cases, the Company has agreed a payment plan where rental amounts can be fully recovered by the Company over coming periods. Unfortunately, there are a few larger tenants who have significant financial resources and the ability to pay who are refusing to do so or enter into dialogue. The Company shall be pursuing these tenants when legally able to do so and charging the full default interest rates per the lease agreements. To date, the Company has not granted any rent free periods to tenants where asset management gains were not also made.
Although the full impact of COVID-19 on the UK economy and real estate market is yet to become clear, the Board considers the Company to be well positioned to withstand this period of uncertainty due to its cash resources and levels of headroom in respect of its loan covenants. The Board also considers that the Company's assets are strategically placed to continue to provide investors with robust performance over medium and long term horizons. This is expected to be the case due to the portfolio's high weighting towards the industrial sector which, despite the recent lockdown period, has maintained its position as one of the most resilient market sectors, both in terms of occupational and investment market sentiment. Furthermore, the Manager's value investment style which focuses on exploiting mispriced investment opportunities that are trading below their long term fundamental value is considered to create a defensive position in respect of capital preservation.
The Board is encouraged by the fact that, despite the uncertainty that has been caused by the outbreak of COVID-19, there are a number of ongoing asset management transactions currently being negotiated by the Manager, as evidenced by the 15 year lease renewal to the Secretary of State for Communities and Local Government that has now completed at the Company's premises in Solihull. The renewal documented a 30% increase in passing rent and is expected to result in significant value increase for the asset when the portfolio is revalued at the end of this month. The successful conclusion of this business plan at the current time, following on from the profitable sale of Corby in May, both highlight the durability of the Company's strategy during more volatile markets. The Board feels that the recent completion of these asset management transactions is a credit to the Investment Manager's active management style which is a principal feature of the Company's strategy. With a number of asset management discussions still ongoing it is hoped that both income and capital returns to shareholders can be maximised further.
Since the year-end the Company has disposed of 2 Geddington Road, Corby, for gross proceeds of £18.80 million. The Board considers that the profitable sale represents a positive outcome to the Manager's business plan for the asset, particularly given wider market conditions at the time. The sale has delivered to the Company an IRR in excess of 30% due in part to the asset's net income yield of 10% against its purchase price produced throughout its hold period. Proceeds from the sale leave the company well placed to take advantage of investment opportunities that may arise over coming weeks and months as a result of the current economic environment.
The Company raised gross capital proceeds of £7.00 million in February 2020 which has contributed to a healthy cash balance of £9.87 million as at 31 March 2020. This has since risen to £27.28 million as at 19 June 2020 following the aforementioned disposal.
AEW UK REIT plc Property Performance vs. Benchmark for 12 months to 31 March 2020 The Company's portfolio has again delivered strong results relative to the MSCI/AREF PFI Balanced Funds Quarterly Property Index ('the Benchmark'), outperforming the Benchmark with a total return of 3.5%. Total return was largely driven by the portfolio's high yielding assets generating a strong income return of 8.2% over the year. While capital growth was negative overall, the portfolio is defensively positioned in terms of geographical diversification and composition by sector. As at 31 March 2020, the portfolio valuation comprised just 12.4% of its value in retail assets and 7.8% in leisure which has helped to limit the potential downside arising from events that are affecting the wider economy and these sectors in particular.
The Company's consistent income returns have enabled it to continue to pay quarterly dividends of 2.00 pence per share throughout the year, meeting its target of 8.00 pence per share per annum. Dividends were fully covered by the Company's EPRA EPS of 8.67 pence.
The Investment Manager's active approach to asset management has resulted in a vacancy rate of just 3.68% which has been maintained below 4% for seven consecutive quarters up to and including the quarter ended 31 March 2020. However, given the problems that tenants are generally experiencing we are expecting vacancy rates to increase in the coming year.
The Company's share price was 68.20 pence per share as at 31 March 2020 (31 March 2019: 92.80 pence per share), representing a 26.77% discount to NAV. This reflects the declines experienced in the equity markets in general and specifically in real estate as a result of the COVID-19 outbreak.
Financial Results Summary
Financing The Company has a £60.00 million loan facility, of which it had drawn a balance of £51.50 million as at 31 March 2020 (31 March 2019: £60.00 million facility; £50.00 million drawn), producing the following measures of gearing.
The unexpired term of the facility was 3.6 years as at 31 March 2020 (31 March 2019: 4.6 years). The loan incurs interest at 3 month LIBOR +1.4%, which equated to an all-in rate of 2.10% as at 31 March 2020 (31 March 2019: 2.32%).
The Company is protected from a significant rise in interest rates and, as at the year end, had interest rate caps in effect with a combined notional value of £36.51 million (31 March 2019: £36.51 million), with £26.51 million capped at 2.50% and £10.00 million capped at 2.00%, resulting in the loan being 71% hedged (31 March 2019: 73%). These interest rate caps are effective until 19 October 2020. The Company has additional interest rate caps covering the remaining period of the loan from 20 October 2020 to 23 October 2023. After the year-end, the Company replaced its existing caps covering this period, which capped the interest rate at 2.0% on a notional value of £49.51 million, with new caps covering the same period capping the interest rate at 1.0% on a notional value of £51.50 million. The Company paid a premium of £62,968.
During October 2019, the Company announced that it had completed an amendment to its loan facility, increasing the 'Loan to NAV' covenant from 45% to 55% (subject to certain conditions). There were no changes to the margin currently charged under the facility. The long term gearing target remains 25% or less of GAV, however the Company can borrow up to 35% of GAV in advance of an expected capital raise or asset disposal. 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.
Subsequent to the year-end, on the 26 May 2020, the Company announced that it had obtained consent from its lender, RBS International, to waive the interest cover tests within its loan agreement for July and October with the next proposed test date being January 2021. The lender also conveyed a willingness to review the position again in December based on circumstances prevailing. The Board considers this to have been prudent action in the current market environment.
Dividends The Company has continued to deliver on its target of paying dividends of 8.00 pence per share 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, which were fully covered by the Company's EPRA EPS of 8.67 pence. It remains the Company's longer-term intention to continue to pay dividends in line with its dividend policy, however the outlook is highly uncertain in the short term given the current outbreak of COVID-19. In determining future dividend payments, regard will be had to the circumstances prevailing at the relevant time, as well as the Company's requirement, as a UK REIT, to distribute at least 90% of its distributable income annually, which will remain a key consideration.
Outlook The Board and Investment Manager are pleased with the strong income returns delivered to shareholders to date. The Company has met its dividend target of 8.00 pps for the year, which was 108.38% covered by EPRA EPS. The outlook for the UK economy and real estate market still faces huge uncertainty and it is likely that the Company will see further reduced levels of rent collection in the near term, as tenants continue to feel the impact of lockdown restrictions on their cash flows. However, the Company is well placed to withstand these circumstances due to its healthy cash position and borrowing covenant headroom, as well as its diversified portfolio and low exposure to retail. It is hoped that the easing of lockdown measures will allow many businesses to resume some level of operations and kick start the economic recovery, eventually providing conditions to enable further growth of the Company. In the meantime, the Board will monitor closely the developing situation in consideration of the Company's strategy and the Investment Manager will be working closely with tenants in order to minimise impact on the Company's income profile.
Finally, I would like to remind investors that the Company will hold a continuation vote at the Annual General Meeting ('AGM') to be held on 9 September 2020. Under the provision of the Company's Articles, the Board will propose an ordinary resolution that the Company continues its business as presently constituted. Together with my fellow Board members, and the Investment Manager, I would like to express my ongoing belief in the Company's Strategy and to express the confidence that we have for its future performance for the various reasons that are discussed herewith. The Board, as set out later within this report, therefore welcomes shareholder attendance at the AGM if it is appropriate to do so in light of current circumstances.
Mark Burton Chairman
22 June 2020
Business Model and Strategy
Introduction 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 the necessary qualifying conditions to conduct its affairs as a UK REIT and the Company intends to continue to do so.
Investment Objective 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.
Investment Policy 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.
Investment Restrictions 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.
Our Strategy As the ramifications of COVID-19 become clearer, it is possible that our strategy might adapt with prevailing market conditions, but for now we continue to follow our successful strategy since inception as below:
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.
Value Investing 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
Driving rental growth Queen Square, Bristol
Maintaining high occupancy levels Diamond Business Park, Wakefield
Lengthening income streams to boost net asset value Brockenhurst Crescent, Walsall
Driving income levels above estimated rental value Knowles Lane, Bradford
Key Performance Indicators
Investment Manager's Report
Economic Outlook The current outlook for the global and UK economy is heavily dependent on ever-changing assumptions made about the COVID-19 pandemic and related government policies. As such it is difficult to forecast with any degree of certainty and the reliance placed on any forecasts should be limited. KPMG forecasts published in May 2020 expect the UK economy to contract by 7.2% in 2020, recovering in 2021 with GDP growth reaching 6.1%. These forecasts predict a W-shaped recession with a relatively fast recovery, with economic activity and property values expected to be approaching normal levels by mid to late 2021. However, some forecasts predict a deeper and more prolonged downside and a weaker recovery. This is highly dependent on developments in containing the spread of the virus, which could include finding a vaccine.
Property Outlook It is expected that UK commercial property investment volumes will fall to levels last seen during the 2008 financial crisis during Q2 and Q3 of 2020. The full impact of the current crisis is yet to become clear; but the recovery in the UK commercial property investment market will likely mirror that of the UK economy. Thereafter we expect certain characteristics of the market to return, potentially more forcefully than before. These include a polarisation of the market between the best and worst performing sectors, with occupier demand being driven by structural forces as much as by the health of the economy in general. A clear example of this has been the growth of online retail at the expense of physical stores, which has seen a divergence in the capital values of the retail and industrial warehousing sectors.
Sector Outlook Industrial The sector has seen continued growth for a number of years thanks to the trend towards online shopping and therefore the increased need for warehousing and logistics units. This shift is expected to continue at an even faster pace than predicted prior to the pandemic as a result of social distancing forcing a change in shoppers' habits. This is being seen particularly in the grocery sector where growth of c 30% is expected in 2020 and has led to most grocery retailers needing to occupy additional warehouse space. Current changes to shopper behaviour are expected to lead to increased take up of online sales, as a percentage of total sales, over the medium to long term in all retail sectors which should lead to an increase in demand for warehousing.
In terms of emerging trends, there is an expectation that the UK will begin to see an increase in localised production as a result of supply chain disruption seen during the pandemic. This could further increase demand for industrial accommodation but, unlike the above, would lead to increased take up outside of the currently favoured logistics sector in favour of more traditional manufacturing accommodation which has seen a decline in total stock over recent years.
The industrial sector represents the portfolio's largest sector holding, with 48.18% of the valuation, which leaves the Company well-placed to benefit from structural changes going forward. Our focus is on assets with low capital values in locations with good accessibility from the national motorway network. Total return for the year from our industrial assets was 4.7%, slightly below benchmark, as the strong income return of 8.1% was offset by negative capital growth.
Office
Our office assets represent the second largest sector holding, with 23.72% of the valuation. The focus has been on strong, regional centres and a preference for town or city centres rather than business park locations with weak surrounding amenity where demand has generally not kept up. This was the second strongest performing sector within the portfolio for the year relative to the benchmark, thanks to key asset management transactions adding significant capital value, achieving outperformance of 7.1%.
Alternatives This is a sector in which AEW UK as Investment Manager have significant expertise and, up until the commencement of the current period of uncertainty, had continued to see compelling opportunities. The Company's alternatives holding comprises assets within the leisure and car parking sectors that have seen selected due to their defensive, value protection characteristics as well as their high income yield. As such, even if some occupation levels are negatively impacted as a result of the current pandemic, as is expected in the leisure sector, the value of assets held in these sectors is expected to be below their long term assessment of worth, particularly when considering their value for alternative uses.
Assets held in alternative sectors comprise 15.74% of the 31 March 2020 valuation, of which 7.8% is within the leisure sector. As a whole, our alternatives assets provided the best return relative to the Benchmark over the year, achieving outperformance of 7.3%, which was driven by an income return of 9.3%.
The retail sector had been facing difficulties before the outbreak of COVID-19, due to the changing habits of consumers, namely the adoption of online shopping in preference to visiting outlets. These changes in shopping habits could well be accelerated by the outbreak and although we might see a surge in footfall once lockdown restrictions are lifted, this is unlikely to halt the long-term structural decline in the sector. Over time we expect to see opportunities for conversion of redundant retail space into alternative uses and consider our retail assets to be well positioned, with the majority located in town and city centres where there is healthy demand for competing uses.
Retail represents the portfolio's smallest sector holding, with just 12.36% of the valuation, which somewhat mitigates the risk associated with the sector at a portfolio level. Our retail assets have performed weakly relative to the Benchmark, as strong Central London retail performance underpins the Benchmark performance to a great extent. The Company's strictly regional holdings have suffered significant valuation losses associated with the negative sentiment in the sector.
The Company completed the following material asset management transactions during the year:
Within the estate, three other lettings were completed during the year producing a total rental income of £41,750 per annum. This includes a February 2020 letting that the Company completed with Texlogistics Ltd at a rent of £33,250 per annum. The lease provides a five year term certain and no rental incentives were granted.
Since purchase in early 2018, occupancy level has increased from 82% to 92%. Passing rent per sq ft has increased by 14%.
Within the same building the Company has been made aware of tenant Sedgwick's intention to vacate the premises in August 2020. Sedgwick currently occupy 21,100 sq ft and pay an annual rent of £284,275 per annum. We are exploring alternative uses for the building including student accommodation and residential.
Financial Results The Company's Net Asset Value as at 31 March 2020 was £147.86 million or 93.13 pps (31 March 2019: £149.46 million or 98.61 pps). This is a decrease of 5.48 pps or 5.56% over the year, with the underlying movement in NAV set out in the table below:
EPRA earnings per share for the year was 8.67 pps which, based on dividends paid of 8.00 pps, reflects a dividend cover of 108.38%.
Financing As at 31 March 2020, the Company had a £60.0 million loan facility with RSBi, in place until October 2023, the details of which are presented below:
On 9 October 2019, the Company announced that it had completed an amendment to its loan facility to increase the hard loan to NAV covenant from 45% to 55% (subject to certain conditions), although the target gearing remains as set out in the Prospectus. The margin charged under the facility will be determined by the Company's Loan to NAV ratio as follows:
* in these circumstances, certain conditions must be met, including the provision of security over a certain value of the Company's assets.
The margin in effect has remained at 1.40% throughout the year.
Financial covenants In April 2020, the Company reported the following in respect of its borrowing covenant tests:
Property Portfolio The Company has not made any acquisitions or disposals during the year. The following tables analyse the portfolio by sector and geographical area:
Summary by Sector as at 31 March 2020
Summary by Geographical Area as at 31 March 2020
* Like-for-like rental growth is the growth in net rental income on properties owned throughout the current and previous periods under review. These properties had a value of £181.95 million as at 31 March 2020, as assessed by Knight Frank.
Properties by Market Value as at 31 March 2020
Sector weighting by passing rent - high industrial weighting and low exposure to retail
Geographical weighting by valuation - highly diversified across the UK
The Company's top 10 properties listed above comprise 49.7% of the total value of the portfolio.
Top 10 Tenants as at 31 March 2020
The Company's top 10 tenants, listed above, represent 41.1% of the total passing rental income of the portfolio.
Approximately £2.94 million of the Company's current contracted income stream is subject to an expiry or break within the 12 month period commencing 1 April 2020. Of this amount, £1.1 million (38%) is already subject to an agreed renewal in principle with a further £1.3 million (44%) where we are currently engaged in active renewal discussions and where tenants are expected to remain in occupation subject to agreeing final lease terms. We expect to engage further tenants in renewal discussion throughout the period. To date, tenants that have served notice to vacate within this period and have made clear that they intend to do so amount to c. £0.49 million (17%), the majority of which is attributed to Sedgwick in Glasgow (as noted in the Asset Management section) where the Company is exploring redevelopment for alternative use.
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.
Leverage 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.
Remuneration The AIFM has adopted a Remuneration Policy which accords with the principles established by AIFMD. 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 firm's remuneration policy, which include
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 for the year ended 31 December 2019.
Fixed remuneration comprises basic salaries and variable remuneration comprises bonuses.
AEW UK Investment Management LLP 22 June 2020
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.
Stakeholder Engagement
s172 Statement
The Directors' overarching duty is to promote the success of the Company for the benefit of its shareholders, having regard to the interests of its stakeholders, as set out in section 172 of the Companies Act 2006 (the 'Act'). The Directors have considered each aspect of this section of the Act and consider that the information set out below is particularly relevant in the context of the Company's business as an externally managed investment company which does not have any employees or suppliers.
We set out in the table below our key stakeholders, the nature of their relationship with the Company and Board, their key interests and how we engage with those stakeholders.
Our relationships with stakeholders are factored into Board discussions and decisions made by the Board will consider the impact on the stakeholders, in accordance with s172 of the Act.
Approval The Strategic Report has been approved and signed on behalf of the Board by:
Mark Burton Chairman 22 June 2020
Extract from the Directors Report
Directors Mark Burton, non-executive Chairman Bimaljit ("Bim") Sandhu, non-executive Director Katrina Hart, non-executive Director
Going Concern The Directors have made an assessment of the Company's ability to continue as a going concern, which takes into consideration the uncertainty surrounding the outbreak of COVID-19, as well as the Company's cash flows, financial position, liquidity and borrowing facilities.
As at 31 March 2020, the Company had a cash balance of £9.87 million and has subsequently disposed of one property, Geddington Road, Corby, for gross proceeds of £18.80 million, providing further liquidity.
The Company had sufficient headroom against its borrowing covenants when last reported in April 2020, which can be found in the Investment Manager's Report above. The Company reported a Loan to NAV of 34.8%, so had room for a £33.4 million fall in NAV before reaching the maximum Loan to NAV of 45% per the covenant. This limit can be increased to 55% when the option is exercised by the Company and certain conditions are met, which would allow for a further £20.8 million fall in NAV i.e. a total fall of £54.2 million. The Company also passed its most recent interest cover ratio ('ICR') test, reporting on the quarter to 31 March 2020. A waiver of the next two tests for the quarters to 30 June and 30 September 2020 has been successfully negotiated with RBSi, as a result of conditions in the wider economic environment. This will be reviewed again in relation to the test covering the quarter to 31 December 2020 and beyond as required.
The Company benefits from a secure, diversified income stream from a tenancy profile which is not overly reliant on any one tenant or sector. As at the date of this report, 84% of the rent due for the March 2020 quarter has been collected..
Taking this into consideration, the Directors have reviewed a number of scenarios over 12 months, including an extreme, but plausible, downside scenario which makes the following assumptions:
* Failure of 25% to 30% of tenants (by passing rent);
* Collection of c.50% of remaining rents on the quarter date, with remaining collection deferred for three quarters;
* No new lettings or renewals, other than those where terms have already been agreed;
* A 25% fall in valuations;
* No new acquisitions or disposals;
* 3-month GBP LIBOR at 0.5%; and
* Passing of the continuation vote in September 2020.
The Company's cash resources available of £27.28 million (as at 19 June 2020) are sufficient to cover any losses incurred in the above scenario over the 12 month assessment period and surplus cash available could be used to manage the Company's gearing, maintaining a Loan to NAV ratio below 40% and therefore the margin at 1.4%. Details of the margin charged under the facility can be found in the Investment Manager's Report above. The Company's cash flow can also be managed through the adjustment of dividend payments and reduction of outflows on capital expenditure and acquisitions.
In the above scenario, the Company is forecast to pass its ICR tests for the quarters to December 2020 and March 2021, albeit with marginal headroom, assuming that a portion of the debt would have to be repaid in order to keep the margin at 1.4%. The Directors are confident that further waivers of the ICR test could be extended throughout the assessment period should economic conditions not improve and have had informal discussions with the lender in this respect. In the unlikely event that the Company were to breach its ICR covenant, it has the ability to 'cure' the breach by placing cash on account with the bank. In the extremely unlikely event that the full balance of the facility was called in, the Company has certain more attractive assets with long leases and good quality tenants which could be realised at, or close to, valuation. The Company could then continue to operate un-geared.
As such, having assessed the worst case plausible scenario for the assessment period, the Directors are not aware of any material uncertainties in relation to the Company's ability to continue in operation for a period of 12 months from the date of approval of these financial statements. Given the Company's substantial cash balance and headroom against its borrowing covenants, the Directors believe that the Company is well placed to manage its financing and business risks, including those associated with COVID-19, and the Board is of the opinion that the going concern basis adopted in the preparation of the Annual Report is appropriate.
Viability Statement The Directors have also 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 2025 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 assess the Company's viability.
Considerations in support of the assessment of the Company's viability over a 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, REIT compliance, liquidity, dividend cover and banking covenant tests over 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 the outbreak of COVID-19, amongst other factors:
Based on the result 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.
Subsidiary Company Details of the Company's subsidiary, AEW UK REIT 2015 Limited, can be found in Note 17 to the Financial Statements.
Financial Risk Management The financial risk management objectives and policies can be found in Note 20 to the Financial Statements.
Share Capital Share Issues 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.
At the AGM held on 12 September 2019, 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 2020 AGM.
On 26 February 2020, the Company successfully raised gross proceeds of £7 million under the Company's Placing Programme which expired on 28 February 2020. 7,216,495 new Ordinary Shares were issued and allotted at a price of 97 pence per Ordinary Share.
As at 31 March 2020, the Company had 158,774,746 Ordinary Shares in issue.
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 2020 can be found in Note 22 to the Financial Statements.
Post Balance Sheet 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:
Mark Burton Chairman 22 June 2020
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
Mark Burton Chairman 22 June 2020
Non-statutory Accounts
The financial information set out below does not constitute the Company's statutory accounts for the year ended 31 March 2020 but is derived from those accounts. Statutory accounts for the year ended 31 March 2020 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.
Financial Statements
Statement of Comprehensive Income for the year ended 31 March 2020
The notes below form an integral part of these financial statements.
Statement of Changes in Equity for the year ended 31 March 2020
* The capital reserve has arisen from the cancellation of part of the Company's share premium account and is a distributable reserve.
The notes below form an integral part of these financial statements.
Statement of Financial Position as at 31 March 2020
The financial statements were approved by the Board on 22 June 2020 and signed on its behalf by:
Mark Burton Chairman 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 2020
Notes to the Financial Statements for the year ended 31 March 2020
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').
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 2019, with the year ended 31 March 2020 being the first year end reported under the standards:
Under IFRS 16, where the Company is lessee, it now recognises the right-to-use asset in the Consolidated Statement of Financial Position at the present value of future lease payments cash flows. In addition, a financial liability is also recognised in the Consolidated Statement of Financial Position which is valued at the present value of future lease payments cash flows.
A reconciliation of the presentation under IFRS 16 versus IAS 17 has not been presented, as there was an immaterial impact on the net assets. There were no new lease liabilities arising during the year. Accordingly, comparative amounts have not been restated.
The following have been considered, but have had no impact on the Company for the reporting period:
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 2020 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.
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, however, there is an estimate that will 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, which takes into consideration the uncertainty surrounding the outbreak of COVID-19, as well as the Company's cash flows, financial position, liquidity and borrowing facilities.
As at 31 March 2020, the Company had a cash balance of £9.87 million and has subsequently disposed of one property, Geddington Road, Corby, for gross proceeds of £18.80 million, providing further liquidity.
The Company had sufficient headroom against its borrowing covenants when last reported in April 2020, which can be found in the Investment Manager's Report above. The Company reported a Loan to NAV of 34.8%, so had room for a £33.4 million fall in NAV before reaching the maximum Loan to NAV of 45% per the covenant. This limit can be increased to 55% when the option is exercised by the Company and certain conditions are met, which would allow for a further £20.8 million fall in NAV i.e. a total fall of £54.2 million. The Company also passed its most recent interest cover ratio ('ICR') test, reporting on the quarter to 31 March 2020. A waiver of the next two tests for the quarters to 30 June and 30 September 2020 has been successfully negotiated with RBSi, as a result of conditions in the wider economic environment. This will be reviewed again in relation to the test covering the quarter to 31 December 2020 and beyond as required.
The Company benefits from a secure, diversified income stream from a tenancy profile which is not overly reliant on any one tenant or sector. As at the date of this report, 84% of the rent due for the March 2020 quarter has been collected.
Taking this into consideration, the Directors have reviewed a number of scenarios over 12 months, including an extreme, but plausible, downside scenario which makes the following assumptions:
* Failure of 25% to 30% of tenants (by passing rent);
* Collection of c.50% of remaining rents on the quarter date, with remaining collection deferred for three quarters;
* No new lettings or renewals, other than those where terms have already been agreed;
* A 25% fall in valuations;
* No new acquisitions or disposals;
* 3-month GBP LIBOR at 0.5%; and
* Passing of the continuation vote in September 2020.
The Company's cash resources available of £27.28 million (as at 19 June 2020) are sufficient to cover any losses incurred in the above scenario over the 12 month assessment period and surplus cash available could be used to manage the Company's gearing, maintaining a Loan to NAV ratio below 40% and therefore the margin at 1.4%. Details of the margin charged under the facility can be found in the Investment Manager's Report above. The Company's cash flow can also be managed through the adjustment of dividend payments and reduction of outflows on capital expenditure and acquisitions.
In the above scenario, the Company is forecast to pass its ICR tests for the quarters to December 2020 and March 2021, albeit with marginal headroom, assuming that a portion of the debt would have to be repaid in order to keep the margin at 1.4%. The Directors are confident that further waivers of the ICR test could be extended throughout the assessment period should economic conditions not improve and have had informal discussions with the lender in this respect. In the unlikely event that the Company were to breach its ICR covenant, it has the ability to 'cure' the breach by placing cash on account with the bank. In the extremely unlikely event that the full balance of the facility was called in, the Company has certain more attractive assets with long leases and good quality tenants which could be realised at, or close to, valuation. The Company could then continue to operate un-geared.
As such, having assessed the worst case plausible scenario for the assessment period, the Directors are not aware of any material uncertainties in relation to the Company's ability to continue in operation for a period of 12 months from the date of approval of these financial statements. Given the Company's substantial cash balance and headroom against its borrowing covenants, the Directors believe that the Company is well placed to manage its financing and business risks, including those associated with COVID-19, and the Board is of the opinion that the going concern basis adopted in the preparation of the Annual Report is appropriate.
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. Rental income is invoiced in advance, except for contingent rental income, which is calculated based off prior turnover and is recognised when it is raised. Any modification to an operating lease is accounted for as a new lease from the effective date of the modification, considering any prepaid or accrued lease payments relating to the original lease as part of the lease payments for the new lease. Any lease incentive existing on a modified lease will then be spread evenly over the new remaining life of the lease.
Rent adjustments based on open market estimated rental values are only recognised once the review has been finalised.
Amounts received from tenants to terminate leases or to compensate for dilapidations are recognised in the Statement of Comprehensive Income when the right to receive them 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 any rental income that has been invoiced to the tenant but relates to future periods, it is reported as a current liability on the Statement of Financial Position.
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 is based upon the income capitalisation approach. This approach involves applying capitalisation yields to current and future rental streams net of income voids arising from vacancies or rent-free periods and associated running costs. These capitalisation yields and estimated rental values are based on comparable property and leasing transactions in the market using the valuer's professional judgement and market observation. Other factors taken into account in the valuations include the tenure of the property, tenancy details, capital values of fixtures and fittings, environment matter and the overall repair and condition of the property.
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 current and previous reporting period. The investment in the subsidiary is stated at cost less impairment and shown in note 17.
The Company has taken advantage of the exemption as permitted by Section 405 of the Companies Act 2006, therefore 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.
j) Receivables 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.
Expected credit losses are assessed based on the Company's historical credit loss experience, adjusted for factors which are specific to the tenant and current and forecast economic conditions in general. If confirmation is received that a trade receivable will not be collected, the carrying value of the asset will be written off against the associated impairment provision.
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.
o) Provisions 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) Leases Leases where the Company is lessee are capitalised at the lease commencement, at present value of the minimum lease payments, and held as both a right-to-use asset and a liability within the Statement of Financial Position.
s) Taxes Corporation tax is recognised in profit or loss except to the extent that it relates to items recognised 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 substantively 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 2020, audited EPS and NAV calculations under EPRA's methodology are included in note 8 and further unaudited measures are included below.
u) Capital and reserves Share capital Share capital is the nominal amount of the Company's ordinary shares in issue.
Share premium Share premium relates to amounts subscribed for share capital in excess of nominal value less associated issue costs of the subscriptions.
Capital reserve The capital reserve represents the cancelled share premium less dividends paid from this reserve. This is a distributable reserve.
Retained earnings Retained earnings represent the profits of the Company less dividends paid from revenue profits to date. Unrealised gains on the revaluation of investment properties contained within this reserve are not distributable until they crystallise on the sale of the investment property. The cumulative unrealised losses contained within this reserve at 31 March 2020 is £10.76m (31 March 2019: £1.32m).
Rent receivable under the terms of the leases is adjusted for the effect of any incentives agreed.
A summary of the Directors' remuneration is set out in the Directors' Remuneration Report in the Full Annual Report and Financial Statements.
There are no other members of key management personnel other than the Directors.
Factors that may affect future tax charges 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 2020, EPRA NNNAV was equal to IFRS NAV and, as such, a reconciliation between the two measures has not been presented.
Dividends paid during the period relate to Ordinary Shares only. * Dividends relating to the period has increased due to the issue of new shares in February 2020, therefore the fourth interim dividend at 2.00pps was increased.
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 is based upon the income capitalisation approach. This approach involves applying capitalisation yields to current and future rental streams net of income voids arising from vacancies or rent-free periods and associated running costs. These capitalisation yields and estimated rental values are based on comparable property and leasing transactions in the market using the valuer's professional judgement and market observation. Other factors taken into account in the valuations include the tenure of the property, tenancy details, capital values of fixtures and fittings, environmental matter and the overall repair and condition of the property.
The report of the valuer on the property valuations as at 31 March 2020 contains the following material valuation uncertainty clause due to COVID-19 and its unknown impact at that point in time.
"The outbreak of COVID-19, declared by the World Health Organisation as a "Global Pandemic" on 11 March 2020, has impacted global financial markets. Travel restrictions have been implemented by many countries. In the UK, market activity is being impacted in all sectors.
As at the valuation date, we consider that we can attach less weight to previous market evidence for comparison purposes, to inform opinions of value. Indeed, the current response to COVID-19 means that we are faced with an unprecedented set of circumstances on which to base a judgement. Our valuations are therefore reported on the basis of 'material valuation uncertainty' per VPGA 10 of the RICS Valuation - Global Standards. Consequently, less certainty - and a higher degree of caution - should be attached to our valuations than would normally be the case.
Given the unknown future impact that COVID-19 might have on the real estate market, we recommend that you keep the valuations under frequent review."
10.b) 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:
1) ERV 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 inputs used in the fair value measurement, categorised within Level 3 of the fair value hierarchy of the portfolio of 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 or 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.
Given the current volatility in the property market, the above levels of sensitivity of unobservable inputs are considered to demonstrate plausible scenarios in the near future and a reasonable resulting range of movement in valuation.
The aged debtor analysis of receivables is as follows:
The Company is protected from a significant rise in interest rates as it currently has interest rate caps in effect with a combined notional value of £36.51 million (31 March 2019: £36.51 million), with £26.51 million capped at 2.50% and £10.00 million capped at 2.00%, resulting in the loan being 71% hedged (31 March 2019: 73%). These interest rate caps are effective until 19 October 2020. The Company has additional interest rate caps covering the remaining period of the loan from 20 October 2020 to 23 October 2023. After the year-end, the Company replaced its existing caps covering this period, which capped the interest rate at 2.0% on a notional value of £49.51 million, with new caps covering the same period capping the interest rate at 1.0% on a notional value of £51.50 million. The Company paid a premium of £62,968.
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 2019: £60.00 million) credit facility with RBSi of which £51.50 million (31 March 2019: £50.00 million) has been utilised as at 31 March 2020.
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 2020, the Company's gearing was 27.21% Loan to GAV (31 March 2019: 25.30%).
Under the terms of the loan facility, the Company can draw up to 35% Loan to NAV at drawdown. As at 31 March 2020, the Company could draw a further £0.25 million up to the maximum 35% (31 March 2019: £2.31 million).
Borrowing costs associated with the credit facility are shown as finance costs in note 6 to these financial statements.
On 9 October 2019, the Company announced that it had completed an amendment to its loan facility to increase the hard loan to NAV covenant from 45% to 55% (subject to certain conditions), although the target gearing remains as set out in the Prospectus. There are no changes to the margin currently charged under the facility. Upcoming LIBOR reforms have been considered and their impact on the Company is expected to be immaterial, so no further disclosures have been added.
Reconciliation to cash flows from financing activities
Leases as lessee are capitalised at the lease's commencement at 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 leases:
16. Guarantees and commitments As at 31 March 2020, there were capital commitments of nil (31 March 2019: £210,588).
Lease commitments - as lessor The Company has entered into commercial property leases on its investment property portfolio. These non-cancelable leases have a remaining term of between zero and 24 years.
Future minimum rentals receivable under non-cancellable operating leases as at 31 March 2020 are as follows:
During the year ended 31 March 2020 there were contingent rents totalling £188,872 (year ended 31 March 2019: £67,591) 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 2020, 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 2019: £0.01). The registered office of AEW UK REIT 2015 Limited is 6th Floor, 65 Gresham Street, London, EC2V 7NQ.
18. Issued share capital
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 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 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 it 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 27.21% (31 March 2019: 25.30%).
Breaches in meeting the financial covenants would permit the bank to immediately call loans and borrowings. During the year under review, the Company did not breach any of its loan covenants, nor did it default on any other of its obligations under its loan agreements.
22. Transactions with related parties As defined by IAS 24 Related Parties Disclosures, parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions.
For the year ended 31 March 2020, the Directors of the Company are considered to be the key management personnel. Details of amounts paid to Directors for their services can be found within note 5, Directors' remuneration and the Director's remuneration report in the Full Annual Report and Financial Statements.
AEW UK Investment Management LLP is the Company's Investment Manager and has been appointed as 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 investment 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).
During the year, the Company incurred £1,308,301 (31 March 2019: £1,302,153) in respect of investment management fees and expenses, of which £311,683 (31 March 2019: £328,323) was outstanding as at 31 March 2020.
23. Segmental information Management has considered the requirements of IFRS 8 'operating segments'. The source of the Company's diversified revenue is from the ownership of investment properties across the UK. Financial information on a portfolio basis is provided to senior management of the Investment Manager and the Directors, which collectively comprise the chief operating decision maker. The properties are managed on a portfolio basis and the chief operating decision maker assesses performance and makes resource allocation decisions at the portfolio level (being the total investment property portfolio held by the company). Therefore, the Company is considered to be engaged in a single segment of business, being property investment and in one geographical area, the United Kingdom.
24. Events after reporting date
Dividend On 20 April 2020, the Board declared its fourth interim dividend of 2.00pps in respect of the period from 1 January 2020 to 31 March 2020. This was paid on 29 May 2020, to shareholders on the register as at 1 May 2020. The ex-dividend date was 30 April 2020.
Property sales On 22 May 2020, the Company disposed of its asset at 2 Geddington Road, Corby, for gross proceeds of £18.80 million, delivering an IRR in excess of 30%.
Interest Rate Caps After the year-end, the Company replaced it existing caps covering the period from October 2020 to October 2023, which capped the interest rate at 2.0% on a notional value of £49.51 million, with new caps covering the same period capping the interest rate at 1.0% on a notional value of £51.50 million. The Company paid a premium of £62,968.
Solihull In June 2020, the Company completed a 15 year renewal lease with the Secretary of State for Communities and Local Government at is Solihull office, Sandford House. The agreement documents the increase of rental income from the property by 30%.
EPRA Unaudited Performance Measures
Detailed below is a summary table showing the EPRA performance measures of the Company All EPRA performance measures have been calculated in line with EPRA Best Practices Recommendations Guidelines which can be found at www.epra.com.
Calculation of EPRA Net Initial Yield ('NIY') and 'topped-up' NIY
EPRA NIY basis of calculation EPRA NIY is calculated as the annualised net rent, divided by the grossed-up value of the completed property portfolio valuation.
The valuation of the grossed-up completed property portfolio is determined by the Company's external valuers as at 31 March 2020, plus an allowance for estimated purchaser's costs. Estimated purchaser's costs are determined by the relevant stamp duty liability, plus an estimate by our valuers of agent and legal fees on notional acquisition. The net rent deduction allowed for property outgoings is based on the Company's valuers' assumptions on future recurring non-recoverable revenue expenditure.
In calculating the EPRA 'topped-up' NIY, the annualised net rent is increased by the total contracted rent from expiry of rent-free periods and future contracted rental uplifts.
Calculation of EPRA Vacancy Rate
Calculation of EPRA Cost Ratios
The Company has not capitalised any overhead or operating expenses in the accounting years disclosed above.
Only costs directly associated with the purchase or construction of properties as well as all subsequent value-enhancing capital expenditure are capitalised.
Company Information Share Register Enquiries The register for the Ordinary Shares is maintained by Computershare Investor Services PLC. In the event of queries regarding your holding, please contact the Registrar on +44 (0)370 707 1341 or email: web.queries@computershare.co.uk.
Changes of name and/or address must be notified in writing to the Registrar, at the address shown below. You can check your shareholding and find practical help on transferring shares or updating your details at www.investorcentre.co.uk. Shareholders eligible to receive dividend payments gross of tax may also download declaration forms from that website.
Share Prices The Company's Ordinary Shares are traded on the premium segment of the Main Market of the London Stock Exchange.
Frequency of NAV publication: The Company's NAV is released to the London Stock Exchange on a quarterly basis and is published on the Company's website.
Annual and Half-Yearly Reports Copies of the Annual and Half-Yearly Reports are available from the Company's website.
Financial Calendar
Dividends The following table summarises the amounts distributed to equity shareholders in respect of the period:
Directors Mark Burton (Non-executive Chairman) Katrina Hart (Non-executive Director) Bimaljit (''Bim'') Sandhu (Non-executive Director)
Registered Office 6th Floor 65 Gresham Street London EC2V 7NQ
Investment Manager and AIFM AEW UK Investment Management LLP 33 Jermyn Street London SW1Y 6DN
Tel: 020 7016 4880 Website: www.aewuk.co.uk
Property Manager Mapp 180 Great Portland Street London W1W 5QZ
Corporate Broker Liberum Ropemaker Place 25 Ropemaker Street London EC2Y 9LY
Legal Adviser Gowling WLG (UK) LLP 4 More London Riverside London SE1 2AU
Depositary Langham Hall UK LLP 8th Floor 1 Fleet Place London EC4M 7RA
Administrator Link Alternative Fund Administrators Limited Beaufort House 51 New North Road Exeter EX4 4EP
Company Secretary Link Company Matters Limited 6th Floor 65 Gresham Street London EC2V 7NQ
Registrar Computershare Investor Services PLC The Pavilions Bridgwater Road Bristol BS13 8AE
Auditor KPMG LLP 15 Canada Square Canary Wharf London E14 5GL
Valuer Knight Frank LLP 55 Baker Street London W1U 8AN
Copies of the Annual Report and Financial Statements and the Notice of AGM Printed copies of the Annual Report will be sent to shareholders shortly and will be available on the Company's website.
National Storage Mechanism A copy of the Annual Report and Financial Statements will be submitted shortly to the National Storage Mechanism ('NSM') and will be available for inspection at https://www.fca.org.uk/markets/primary-markets/regulatory-disclosures/national-storage-mechanism.
LEI: 21380073LDXHV2LP5K50
END |
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| ISIN: | GB00BWD24154 |
| Category Code: | ACS |
| TIDM: | AEWU |
| LEI Code: | 21380073LDXHV2LP5K50 |
| OAM Categories: | 1.1. Annual financial and audit reports |
| Sequence No.: | 71268 |
| EQS News ID: | 1075547 |
| End of Announcement | EQS News Service |
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