Annual Financial Report

RNS Number : 8986V

Ediston Property Inv Comp PLC

06 December 2019

 

Ediston Property Investment Company plc

(the "Company")

LEI: 213800JRL87EGX9TUI28

Annual Report and Results Announcement

Ediston Property Investment Company plc (LSE: EPIC), a UK-listed Real Estate Investment Trust (REIT) investing in commercial property throughout the UK, announces its full year results for the year ended 30 September 2019.

Operational features in the year to 30 September 2019:

• Completed 13 lease transactions securing £2.0 million of rental income for the Company.
   
• Signed eight agreements for lease with new tenants with a contracted rent of £1.1 million.
   
• Fair value independent valuation of the property portfolio as at 30 September 2019 of £319.2 million, a like-for-like decrease of 3.5% on the valuation at 30 September 2018.
   
• NAV per share at 30 September 2019 of 108.7 pence (30 September 2018: 115.3 pence), a decrease of 5.7% after taking into account capital expenditure and transaction costs.
   
• Sold one asset in line with valuation, raising £2.9 million.
   
• Reduced EPRA Vacancy Rate from 5.7% to 2.9%.
   
• Divided cover of 116% as at 30 September 2019.

Financial

	2019	2018	2017
Total assets	£342.2m	£356.6m	203.7m
NAV total return	-0.8%	8.9%	9.3%
EPRA vacancy rate	2.9%	5.7%	0.7%
Weighted average unexpired lease term	6.1 years	6.6 years	6.3 years
EPRA NAV per share	108.7p	115.3p	111.3p
Annualised dividend per share	5.75p	5.75p	5.5p

Key Performance Indicators

	2019	2018	2017
NAV total return	-0.8%	8.9%	9.3%
Annualised dividend per share	5.75p	5.75p	5.5p
Average discount of share price to NAV	-11.6%	1.6%	0.3%
Share price total return	-17.0%	7.7%	8.3%
EPRA vacancy rate	2.9%	5.7%	0.7%
Ongoing charges	1.4%	1.3%	1.5%

William Hill, Chairman of the Company, said:

"Retail is not dying, it is changing. The extent of the letting activity shows that a market clearly exists for the right accommodation which suits retailers with good business propositions. The Board believes the Company is on the right side of the retail change given its assets are largely in convenience led retail warehousing and this will increasingly be evident going forward.

The Board is as positive as it can be on the medium-term outlook.  The Company has a well-covered dividend, leverage comfortably below covenant limits and assets that are well-let and are subject to a proactive management regime."

Calum Bruce, Investment Manager, said:

"A major focus for us is securing and growing the portfolio income.  Over the period we completed new lettings, rent reviews, lease extensions and agreements for lease across nine different assets.  There is still an active occupational market, especially in the retail warehouse sector which is where all our deals have concluded. We have the resources and expertise to execute these transactions which have benefitted the portfolio in a number of ways."

Enquiries:

Ediston Properties Limited (Investment Manager) Danny O'Neill Calum Bruce	0131 225 5599
Investec Bank plc Will Barnett Neil Brierley David Yovichic	0207 597 4000
KL Communications Ben Robinson Stephanie Ross	0203 137 7821 0203 137 7784
Maitland Administration Services (Scotland) Limited (Company Secretary) George Bayer	01245 398 984

Chairman's statement

Challenges and opportunities

Summary

During the year the Company has had its busiest period of asset management since launch, with 21 leasing transactions undertaken and activity on 9 out of 10 of the retail warehouse sites it owns. The outcome has been to increase the contracted retail income from £16.0 million to £16.2 million and to reduce retail vacancy to two units totalling 15,267 sq. ft. (1.2%). There is a further £1.1 million of potential income from agreements for lease (AFLs) signed during the year from units to be constructed.

The NAV total return has been -0.8% with the fall in the value of the portfolio almost matched by the dividend paid.

The irony is that despite the positive and extensive activity, the share price total return to investors over the year has been extremely disappointing, with the discount to NAV increasing from 5.5% to 21.4% at year end. Much of the impact on the share price has been in the last six months. The derating of the shares would appear to reflect market concerns over the retail sector and the Company's 64% exposure to retail warehousing.

INVESTMENT AND SHARE PRICE PERFORMANCE

A year ago, I pointed to the prospect of a bumpier road ahead linked to the outcome of Brexit. Whilst the Brexit saga continued to dominate the news, the greatest impact on property markets was not the failure to get a Brexit resolution but the collapse of investor confidence in the retail sector. Perhaps this is not surprising given the torrent of CVAs and administrations from retailers, increasing vacancy rates, falling rents and rising yields. However, to the detriment of the Company's share price, the market has not been very discerning in how it has looked at the different parts of the sector.

The Company's retail assets are largely in convenience led retail warehousing, a part of the market that has been the most resilient to the structural change in the wider retail market. Arguably, the sector is benefitting from this change as retail is 'evolving not dying'. Following several asset management initiatives, the Company's contracted retail income is up on the year and vacancy is down. However, with retail yields having risen during the year, the Company's retail assets (72% of the portfolio, including a supermarket) on a like for like basis have declined in value by 5.8% over 12 months. In comparison, the retail warehouse sub-sector of the MSCI UK quarterly index has seen capital falls of 13.0% in the 12 months to 30 September 2019. This provides evidence that not all retail warehousing is the same.

The Company's non-retail assets have generally held their value during the year.

Over the period, the NAV per share has therefore declined from 115.3 pence (its peak since launch) to 108.7 pence, a decrease of 5.7%. Taking into account dividends paid in the period, the NAV total return per share over the year was -0.8%.

The Company's share price has declined from 109.0 pence to 85.4 pence per share during the year in what would appear to be a response to the market's negative sentiment to retail. The movement of 21.7% is significantly greater than the decline in NAV per share at the year end, with an average discount to NAV for the year of 11.6% compared to 1.6% last year. The share price total return, taking into account the dividends paid, is -17.0% for the financial year. The shares yielded 6.7% at the year-end at the current dividend level of 5.75 pence, on a closing share price of 85.4 pence.

PORTFOLIO ACTIVITY

21 leasing transactions were completed during the year involving 16 different tenants. Activity was centred on the retail warehouse segment of the portfolio and involved 9 out of the 10 retail sites owned by the Company. These transactions are discussed in more detail in the Investment Manager's review. However, I want to bring out some key points.

·      It is possible to increase rents. Uplifts in passing rents were achieved at Sunderland and Prestatyn.

·      CVAs can be an opportunity. In Barnsley the CVA of Carpetright opened the door to a letting to B&M which increased their unit size on the park by 40%.

·      Tenants are taking space. Iceland (two units), Sue Ryder, JD Sports Gyms, Costa Coffee (three units), Dunelm, Burger King, Aldi, Euro Garages and Home Bargains have all signed new leases or agreements for lease with the Company.

Activity in the office portfolio was more modest and restricted to the completion of the refurbishment of one floor at St Philips Point, Birmingham, which is now available to let.

One property was sold during the year. The leisure asset at Knotty Ash, Liverpool, let to Mecca Bingo Limited until September 2022, was disposed of for £2.9 million, in line with the valuation.

The net effect of the portfolio activity was to increase the contracted retail income from £16.0 million to £16.2 million per annum and to reduce the portfolio's EPRA vacancy rate over the year from 5.7% to 2.9%. The overall contracted income is £21.4 million per annum, down from £21.5 million due to the sale of the asset at Liverpool which contributed £263,300 to income per annum. The potential additional annual income if the AFLs progress to signed leases is £1.1 million, which would produce a return on new capital deployed of approximately 7.8% based on the current budgeted capital expenditure.

The Board remains confident on the quality of the invested portfolio, the income receivable from it and the Investment Manager's initiatives to secure and develop the assets in the portfolio.

INVESTMENT STRATEGY

Despite the retail headwinds, the Board remains supportive of the Investment Manager's strategy and its exposure to the convenience led part of the retail warehouse sector. It is reassured that the properties owned provide the type of accommodation that retailers require in the 'omnichannel retail environment', that rents are largely affordable, and that the current level of pricing provides a very attractive income.

CAPITAL STRUCTURE AND POTENTIAL GROWTH

The Company's total debt is unchanged at £111.1 million at a blended 'all-in' fixed rate of 2.86%. Gearing at 30 September 2019 was 32.5% of total assets, a small increase due to the fall in NAV but well within investment policy limits and covenant. As at 30 September 2019, the Company held £22.8 million of cash on its balance sheet, including £10.8 million drawn under the debt facility. The latter is included within debtors at the period end and is available for investment.

The Company had total assets of £342.2 million and net assets of £229.8 million, as at 30 September 2019. The Company is almost fully invested with identified uses for existing cash. There are sufficient cash resources to fund the construction of Haddington, as well as to undertake a number of asset management initiatives.  

DIVIDENDS

At inception in 2014, the Company indicated an annualised dividend of 5.5 pence per share, paid monthly. This has been achieved, and in 2018 the annualised dividend was increased to 5.75 pence per share. Dividend cover has been good, and with sustainable income, paying a progressive and sustainable monthly dividend remains a key investment objective for the Company.

BOARD

The Board carried out an independent evaluation during the period to assess its effectiveness and the workings of its committees. The overall conclusions from the review were positive and it also helped in the succession planning for the Board.

Robert Dick, current Audit and Risk Committee chairman has indicated that he does not intend to stand for re-election at the AGM in 2021. Robert has been a director since the Company launched and I would like to thank him for his support and wise counsel. He will work with Robin Archibald in the orderly handover of his responsibilities during the forthcoming year. Apart from his experience on the EPIC Board, Mr Archibald is an experienced audit chair elsewhere in the closed-ended sector and will continue to serve as senior independent director of the Company.

As part of the Board's overall succession planning, I am delighted that Imogen Moss, head of global real estate at the law firm Allen & Overy, will join the Board. Ms Moss has over 30 years' experience in the real estate sector advising UK and international institutional investors, private equity funds, sovereign wealth vehicles, real estate companies, public bodies and family offices on all types of complex commercial and residential real estate transactions. Ms Moss's appointment follows a formal external recruitment process and was in accordance with the Board composition policy set out in the Nomination Committee report. In making this new appointment, the Board is diversifying and expanding its skill set, with particular reference to senior legal and property experience, as well as making plans for the future succession of the Board.

There has been no change to Board remuneration during the year, nor any anticipated in the next financial year, other than for any change of roles. All the members of the Board will stand for annual re-election, in accordance with the AIC Code recommendation.

MARKETING COMMITTEE

The overall marketing strategy is to continue to build awareness of the Company's activities and to improve communication with retail investors who remain under-represented on the Company's share register.

The Board believes that continuing to allocate resources to marketing is in the interests of shareholders and an essential part of addressing the recent widening of the discount between the share price and NAV and in expanding the shareholder base of the Company.

Environmental, social and corporate governance (ESG)

The Board and the Investment Manager consider the broader social, ethical and environmental responsibilities of the Company and its activities, as well as providing an open and competent governance structure.

The Company has signed up to the Global Real Estate Sustainability Benchmark (GRESB) which covers $4.1 trillion of real estate assets worldwide. The Company is planning to report against this benchmark in 12 months' time. In the meantime, the Board is satisfied that the Company conducts its affairs with responsibility and good oversight for all its activities, including dealings with its investors.

CORPORATE STRATEGY

The Board continues to believe that expanding the size of the Company and widening the breadth of ownership of the Company's shares is in the long-term interest of all shareholders. The Investment Manager continues to look for potential opportunities that could provide medium-term accretion to income and capital and grow the Company and its equity base. However, the Board accepts that at least in the short term this will be challenging given market conditions and the de-rating of the Company's shares. The Board is focussed on addressing the discount which it believes undervalues the Company.

As a measure of the Board's confidence, the Directors acquired 82,788 shares during the last six months, demonstrating a commitment to the Company and confidence in its long-term prospects.

OUTLOOK

It is a bold and possibly foolish chairman that would make an unequivocal statement about the future direction of markets over the next 12 months. I will resist the temptation to be either. This is especially the case given the prevailing political and economic uncertainty. I am confident that the Company can stand up to the foreseeable challenges in front of us. These may include further falls in NAV as sentiment for retail remains weak. The Company has a well-covered dividend, leverage comfortably below covenant limits and assets that are well-let and are subject to a proactive management regime.

Looking further ahead, the advantages of real estate as an asset class remain compelling both as a source of income and as a diversifier. In addition, pricing does not appear stretched relative to bonds. From an international perspective, yields are competitive against the European markets. Supply levels are in check and development activity subdued. Demand for property investment companies to access the market should rise as the liquidity issues in the daily traded property unit trusts continues to be a concern. This should be a positive for the closed-ended investment company sector and its ability to manage illiquid asset classes.

Notwithstanding the positive medium term 'big picture', the Company's rating has been hit hard in the last six months due to investor concerns about retail. The sector has been changing for a long time in how it is carried out as an activity, and in terms of what consumers want to buy and from where. Investors and retailers on the wrong side of this substantial shift are paying a big price. However, retail is not dying, it is changing. The extent of the letting activity in the Company's retail warehouse portfolio during the last 12 months shows that a market clearly exists for the right accommodation which suits retailers with good business propositions.

The Board believes the Company is on the right side of the retail change given its assets are largely in convenience led retail warehousing, and this will increasingly be evident going forward. The Board is as positive as it can be on the medium-term outlook and our belief that our share rating in the future will reflect better the prospects of the 'retail winners and retail losers'. The Board also has a high degree of confidence in the Investment Manager's ability to manage a portfolio of UK commercial property assets for income and capital growth.

William Hill

Chairman

5 December 2019

Investment Manager's review

An active year

Market commentary

UK commercial real estate investment volumes for 2018 were the second strongest in a decade. On the face of it, this was positive, although the deal volume was heavily influenced by several large transactions over the course of the year. That said, the commercial property market proved to be more resilient than many commentators expected it to be.

However, as predicted in last year's Investment Manager's review, there was a drop in the number of deals completed towards the end of the year as investors were starting to be influenced by the uncertainty around Brexit. 2019 got off to a slow start and this pace has continued throughout the year, with investment volumes significantly down on 2018 levels, especially in the retail sub-sector.

The Company has been unable to avoid contagion from the wider retail market, which has caused property values to fall, and has been the principal factor in the NAV decline. However, we have been able to mitigate the declines through active asset management. During the period, this approach has secured £2.0 million of income per annum, given a pipeline of an additional £1.1 million of income per annum, reduced the EPRA vacancy rate and ensured the dividend remains fully covered.

Outlook

The investment market continues to experience lower transaction volumes, driven by political and economic uncertainties, particularly from Brexit. These have acted as a brake on investment activity as investors seek clarity on the key issues before making investment decisions. This inertia is likely to remain until the political landscape alters, but it is difficult to see a change in the next few months.

However, the investment market is not dead. There are deals happening and there is price discovery across the sub-sectors. There are also several significant investors waiting in the wings to deploy capital into the UK market. We continue to look for the right investment opportunities and will invest if we see a deal which supports our investment objective.

There is still occupier activity, as evidenced in the Company's property portfolio, but it is not widespread across the market. Assets which are well-located, trade well and are let off affordable rents are more desirable and are where the deals are taking place.

Portfolio Valuation

The Company's property portfolio is valued by Knight Frank on a quarterly basis throughout the year. As at 30 September 2019 it was valued at £319.2 million, a like-for-like decrease of 3.5% over the reporting period.

Fully covered dividend

The Company's dividend remains fully covered.

Refreshing the portfolio

In July we sold our leisure asset at Knotty Ash, Liverpool to an owner occupier in an off-market transaction. The property was let to Mecca Bingo Limited until September 2022. The sale price of £2.9 million was in line with the 30 June 2019 valuation. Over the hold period the asset delivered an IRR of 7.6% per annum.

We believe the sale proceeds can be reinvested in a way which is value accretive for investors, either by carrying out asset management on existing properties or by acquiring a new building in line with the preferred lot size of the Company.

A fall in CVAs

During the period, there was only one Compulsory Voluntary Arrangement (CVA) which affected the portfolio, compared with six in the previous reporting period. Fashion retailer Arcadia completed a CVA which was widely reported in the media. The Company has two units let to Arcadia group companies, one in Hull and one in Widnes.

We initially voted against the CVA proposal. However, after further consideration and following some improved terms, we elected to vote in favour. As a result, the Company had to accept a rent reduction of £135,548 per annum across the two properties. This represented 0.6% of the annual rent roll of the Company. Under the terms of the CVA we are entitled to break Arcadia's leases and secure vacant possession of each unit, should we wish to do so.

The CVA process continues to present difficulties to landlords with some concern that it is too one-sided and is being unfairly exploited by retailers. However, with the break clauses in place we are in a stronger position than dealing with an administration, giving us flexibility to aggressively manage the portfolio in the best interest of our shareholders.

Falling vacancy rate

As a result of our active approach to asset management, the EPRA vacancy rate reduced by 49% during the period, falling from 5.7% to 2.9%. The vacancy rate is split between 1.2% in the retail warehouse sector and 1.7% in the office portfolio. We are working on several initiatives to secure and grow the Company's income, and to further reduce the vacancy rate.

Vacancy rate and weighted average unexpired lease term (WAULT) at 30 September

	Vacancy (%)	WAULT (years)
2018	5.7%	6.6 years
2019	2.9%	6.1 years

Compliance with investment restrictions

Restriction	Measure	Limit	Status
'Other commercial' exposure	% of total assets	25%	P
Single asset size	% of total assets	20%	P
Speculative development	% of total assets	10%	P
Development	% of total assets	10%	P
Tenant exposure	% of total rental income	20%	P
Gearing	Debt to total assets	30-35%	P

Tenant covenant profile

Dun and Bradstreet risk of business failure rating. Tenant income as a percentage of the portfolio income

Minimum or lower than average	89%
Higher than average	5%
High	5%
No rating	1%

Property portfolio as at 30 September 2019

Location	Name	Sub-sector	Market value range (£)	Tenure
Office
Birmingham	St Philips Point	Office - Rest of UK	35-40m	Freehold
Newcastle	Citygate II	Office - Rest of UK	20-25m	Leasehold
Edinburgh	145 Morrison Street	Office - Rest of UK	10-15m	Heritable
Bath	Midland Bridge House	Office - Rest of UK	5-10m	Freehold
Retail
Prestatyn	Prestatyn Shopping Park	Retail warehouse (53%) Supermarket (47%)	50m+	Freehold
Widnes	Widnes Shopping Park	Retail warehouse	40-45m	Leasehold
Hull	Kingston Retail Park	Retail warehouse	25-30m	Freehold
Sunderland	Pallion Retail Park	Retail warehouse	20-25m	Freehold
Wrexham	Plas Coch Retail Park	Retail warehouse	20-25m	Freehold
Coatbridge	B&Q	Retail warehouse	15-20m	Heritable
Rhyl	Clwyd Retail Park	Retail warehouse	15-20m	Freehold
Barnsley	Barnsley East Retail Park	Retail warehouse	10-15m	Freehold
Daventry	Abbey Retail Park	Retail warehouse	10-15m	Leasehold
Leisure
Telford	Mecca Bingo	Leisure	0-5m	Freehold
Hartlepool	Mecca Bingo	Leisure	0-5m	Freehold
Development
Haddington	Site	Development	0-5m	Heritable

Portfolio value

£319.2m

Weighted average unexpired lease term

6.1 years

EPRA vacancy rate

2.9%

Park life!

Despite the 'death of the high street', there's plenty of life in retail parks

The internet has transformed our shopping habits. Today, with almost anything deliverable to our doors, convenience is king. But providing that convenience requires much more than a warehouse and a fleet of delivery vans. Increasingly, shoppers are demanding an 'omnichannel' experience. While they want to order from home or from the office, they often prefer to pick up those orders in store, so that, for example, they can try clothes on before taking them home. And they expect the same convenience in returning goods.

The growth of online shopping is predicted to level out by 2022 at around 20%, which means 80% of sales will still involve physical stores. But our changing habits mean that many of those stores will not be located in city centres. Meanwhile, retailers have to consider not only how best to balance their online and offline businesses, but also the costs of storage, distribution and returns. For shoppers and shop-owners alike, out-of-town retail parks provide a solution.

We've all seen the gloomy headlines about high-profile closures on the high street. But it's important to realise that people aren't shopping less in the online era, they're shopping differently. For example, the number of sales made at traditional department stores has been falling fast.

Retail parks offer retailers a number of attractions for owners and tenants alike. Their lease lengths tend to be good, and the flexibility of their units allows for easy upsizing and downsizing as business conditions change. As a result, vacancy rates tend to be low. And retail parks are well placed to benefit from the shift to online shopping.

That's because retail parks can provide the joined-up, omnichannel experience that customers want. Out-of-town locations allow commuters to collect or drop off items on their way home. And attractive retail parks with cafés, restaurants and other diversions offer a full 'experience' for families at the weekend.

From the retailer's perspective, both 'click and collect' and returns bring customers off the internet and into the stores, where they can be tempted to make additional purchases. And out-of-town locations are ideal for 'last-mile' delivery and the storage of goods bought online. So many retailers are taking advantage of retail parks' strategic locations to maximise the efficiency of their deliveries.

It's this combination of online and offline that makes retail parks an attractive investment. 'Bricks' and 'clicks' will work together to deliver the consumer's preferred experience - and retail parks will be pivotal in facilitating this.

Not all retail parks are equal, however. At Ediston, our investment approach is highly selective. We avoid more than 60% of the retail-park subsector because we're only interested in parks that dominate their local area. Nor are we interested in 'over-rented' properties - where rents are too high and will be difficult to sustain when leases expire. Instead, we favour parks with affordable rents and the potential for us to improve returns through intensive asset management. We aim to get under the skin of each property we own so that we can secure and improve the income streams for our investors.

Our conviction in the right retail parks is so strong that we could build one of our own at our site in Haddington, outside Edinburgh. We've had good interest from potential tenants, and most of the units have been pre-let, well before construction starts.

Securing income through active management

A major focus for us is securing and growing the portfolio income to ensure we keep our dividend fully covered and provide scope for its increase. Over the period we exchanged or completed 21 lease transactions which have a contracted rent of £3.1 million per annum. We completed new lettings, rent reviews, lease extensions and agreements for lease across nine different assets.

We completed four lease renewals, where existing tenants committed to our retail parks. This secured £994,000 of income per annum across our assets at Rhyl, Sunderland, Prestatyn and Barnsley. By completing six new lettings we reduced the EPRA vacancy rate to 2.9%, a 49% fall, and secured £747,000 in annual rent.

In the three rent reviews we completed, an uplift of 32% was secured in the annual rent received by the Company. This goes against the common-held belief that all rents are under downward pressure.

At our retail warehouse site in Coatbridge, Glasgow, we signed agreements for lease with Costa Coffee and Burger King who have agreed to lease drive-thru units of 1,800 sq. ft. and 2,750 sq. ft. respectively, which the Company will build for them. On completion of the development Costa will enter a 15-year lease with a break option at year 10 and will pay an annual rent of £77,500. Burger King will enter a 20-year lease at an annual rent of £82,500. Costa will receive nine months rent free and Burger King 12 months rent free once their leases commence.

The Company has secured planning consent for the development of these pods and is targeting a start date on site of Q1 2020, with completion due in Q4 2020.

The remaining transactions were at our development site at Haddington and retail park in Barnsley. In Barnsley Costa Coffee has signed an agreement for lease for a 1,800 sq. ft. drive-thru unit and will enter into a 15-year lease (no break) when the unit is constructed. The annual rent will be £72,500 and is to be reviewed five-yearly to RPI compounded, collared at 1% and capped at 3% per annum. Costa will receive a nine-month rent free period from lease commencement. The transaction is subject to planning. A planning application has been submitted and a determination is expected in Q2 2020.

We have made excellent progress pre-letting our retail warehouse development at Haddington, east of Edinburgh. Agreements for lease have been signed with Aldi, Home Bargains, Costa, Iceland and Euro Garages across 46,396 sq. ft. of accommodation. The annual contracted rent when the development has reached completion will be £834,298. A planning application has been submitted and a decision is anticipated shortly.

Assets which are well-located, trade well and are let off affordable rents will continue to see occupational demand from tenants. The affordability of rents is a key point for retail warehousing. The average rent of the deals we completed in the portfolio during the period is £14.24 per sq. ft.

This provides a solid base from which to build.

New lettings

Leasing vacant space to new tenants

Number of deals

6

Contracted rent per annum

£747,000

Area (sq. ft.)

66,552

Average rent per sq. ft.

£11.22

Number of tenants

6

Lease regears

Extending or renewing leases with existing tenants

Number of deals

4

Contracted rent per annum

£994,000

Area (sq. ft.)

80,481

Average rent per sq. ft.

£12.35

Number of tenants

4

Rent reviews

Upwards only to open-market rental value

Number of deals

3

Contracted rent per annum

£286,500

Area (sq. ft.)

10,482

Average rent per sq. ft.

£27.33

Number of tenants

3

Agreements for lease

Tenants committing to new developments on a subject to planning basis

Number of deals

8

Contracted rent per annum

£1.07m

Area (sq. ft.)

52,746

Average rent per sq. ft.

£18.33

Number of tenants

6

Active in the retail warehouse market

Over the period we have completed 21 transactions with retail warehouse tenants, proving there is an active occupational market for the right parks, in the right locations which are let off affordable rents.

New lettings

Location: Sunderland

Rent secured: £187,193

Tenant: GO Outdoors

Lease length: 10 years with a five-year break

Comment: 20% increase in rent

Location: Barnsley

Rent secured: £120,312

Tenant: B&M

Lease length: 8.5 years

Comment: B&M increased its occupation on the park by 40%

Location: Hull

Rent secured: £177,736

Tenant: Iceland

Lease length: 10 years

Comment: First food retailer on the park

Location: Hull

Rent secured: £63,750

Tenant: Sue Ryder

Lease length: 10 years with a five-year break

Comment: Good diversification for tenant line-up

Location: Wrexham

Rent secured: £63,000

Tenant: Costa

Lease length: 15 years

Comment: Drive-thru pod

Location: Widnes

Rent secured: £135,000

Tenant: JD Sports Gyms

Lease length: 15 years, 10-year break

Comment: Good tenant for lower ground floor space

Lease regears

Location: Rhyl

Rent secured: £508,644

Tenant: B&Q

Lease length: 10 years

Comment: 41,520 sq. ft.

Location: Sunderland

Rent secured: £86,536

Tenant: The Wallpaper Warehouse

Lease length: 10 years with a five-year break

Comment: 7% increase in rent

Location: Barnsley

Rent secured: £213,600

Tenant: Dunelm

Lease length: 10 years

Comment: 25,370 sq. ft.

Due to confidentiality, we are unable to publish the details of the fourth lease regear, which was at Prestatyn.

Rent reviews

Location: Prestatyn

Rent secured: £58,300

Tenant: Costa

Rental increase: 7%

Location: Prestatyn

Rent secured: £183,000

Tenant: Next

Rental increase: 53%

Location: Prestatyn

Rent secured: £45,200

Tenant: Vodafone

Rental increase: 6%

Agreements for lease

Location: Haddington

Rent secured: £283,200

Tenant: Aldi

Lease length: 15 years

Comment: Conditional on planning

Location: Haddington

Rent secured: £217,500

Tenant: Home Bargains

Lease length: 15 years

Comment: Conditional on planning

Location: Haddington

Rent secured: £166,098

Tenant: Iceland

Lease length: 10 years

Comment: Conditional on planning

Location: Haddington

Rent secured: £67,500

Tenant: Costa

Lease length: 15 years, 10-year break option

Comment: Conditional on planning

Location: Haddington

Rent secured: £100,000

Tenant: Euro Garages

Lease length: 25 years

Comment: Conditional on planning

Location: Barnsley

Rent secured: £72,500

Tenant: Costa

Lease length: 15 years

Comment: Conditional on planning

Location: Coatbridge, Glasgow

Rent secured: £82,500

Tenant: Burger King

Lease length: 20 years

Comment: Planning received; detailed design being worked up

Location: Coatbridge, Glasgow

Rent secured: £77,500

Tenant: Costa

Lease length: 15 years, 10-year break option

Comment: Planning received; detailed design being worked up

Calum Bruce

Investment Manager, Ediston Properties Limited

Financial Review

Resilient income

The focus on asset management has secured income despite challenging circumstances.

This report summarises the financial performance for the year and provides a number of statistics, illustrating how the Company is delivering on its objectives.

INCOME STATEMENT

The active asset management and letting activity in the year helped generate rental income of £20.8 million. This increase of £1.4 million on last year was also a result of a full year of rental income following the Stadium acquisition in late 2017. Revenue expenditure in the period was £3.6 million, including £0.4 million of property specific expenditure and £2.2 million related to the Investment Manager's fee. Net interest costs were £3.1 million, all similar to prior year. As a result revenue profit increased to £14.1 million (2018: £12.9 million), a rise of 9.3% from 2018.

The value of our investment properties decreased by £15.8 million in the year, which resulted in the Company reporting a total loss of £1.7 million. A decline in the valuation of the retail warehouse properties, as a result of negative sentiment towards the retail sector, was the principal reason for the valuation decline. An increase in value in the office properties and asset management initiatives over the period (which saw 21 lease transactions complete) helped to minimise the impact on the Company

	2019 (£m)	2018 (£m)
Rental income	20.8	19.4
Property expenditure	(0.4)	(0.4)
Net rental income	20.4	19.0
Administration expenses	(3.2)	(3.1)
Net financing costs	(3.1)	(3.0)
Revenue profit	14.1	12.9
(Loss)/Gain on revaluation of investment properties	(15.8)	7.3
Accounting (loss)/profit before and after tax	(1.7)	20.2
EPRA and diluted EPRA earnings per share	6.66p	6.60p
Dividend per share	5.75p	5.69p
Basic and diluted earnings per share	(0.83p)	10.32p

RENT

Contracted rent was £21.4 million (2018: £21.5 million) per annum at the year end despite being negatively impacted by a small number of Company Voluntary Arrangements ("CVA") and the sale of the Liverpool asset during the period. On a like for like basis contracted income was up by £100,000 per annum. Income was generated in the year through: i) the letting of vacant units prior to expiry of the rental guarantees, ii) agreeing upwards rent reviews, iii) completion of a unit at Wrexham, and iv) re-letting the majority of the CVA affected units in the year. Rent free periods as a percentage of contracted rent at the year end were 5.1%. 94.9% (2018: 87.0%) of rent for the year was collected within seven days with 95.4% of rent collected within 14 days (2018: 91.0%). 89% of tenants have a minimum or lower than average risk of business failure according to Dun and Bradstreet, contributing further to the strength of the portfolio's income. The Company has not had to make any bad debt write-offs.

The portfolio continues to provide long term stability to the Company's income. The EPRA vacancy rate has decreased to 2.9% from 5.7% in 2018. The WAULT at the end of the year was 6.1 years (2018: 6.6 years) and the decrease can be explained by the passing of another year offset with the letting of the vacant units.

The level of rent, the speed of rent collection, the low vacancy levels and the relatively high WAULT demonstrates the security and resilience of the income.

EPRA PERFORMANCE MEASURES

As a member of EPRA, we support EPRA's drive to bring consistency to the comparability and quality of information provided to investors and other key stakeholders of this report. We therefore continue to include a number of performance measures which are based on EPRA methodology. It should be noted that there is no difference between the Company's IFRS and EPRA NAV for our reporting purposes.

	2019	2018
EPRA earnings	£14.1m	£12.9m
EPRA earnings per share	6.66p	6.60p
Diluted EPRA earnings per share	6.66p	6.60p
EPRA NAV per share	108.72p	115.30p
EPRA cost ratio (including direct vacancy costs)	17.7%	18.1%
EPRA cost ratio (excluding direct vacancy costs)	17.3%	17.7%
EPRA net initial yield	6.0%	5.3%
EPRA topped up net initial yield	6.3%	6.0%
EPRA vacancy rate	2.9%	5.7%

NET ASSET VALUE (NAV)

At 30 September 2019 our net assets were £229.8 million, equating to net assets per share of 108.72 pence (2018: 115.30p) a fall of 5.7%. This is primarily due to a decrease in the valuation of the investment properties in the year.

The decrease in net assets to £229.8 million is summarised in the table below:

	£ million	Pence per share
NAV at 30 September 2018	243.7	115.30
Decrease in value of investment properties (net of capital expenditure and transaction costs)	(15.8)	(7.49)
Net earnings in the year	14.1	6.66
Less: dividends paid in the year	(12.2)	(5.75)
NAV at 30 September 2019	229.8	108.72

The NAV is predominantly represented by our investment properties, which have a fair value of £319.2 million at the year end. This is included in the financial statements as Investment Properties at £315.1 million with the difference relating to lease incentives. The remaining £85.3 million of net liabilities is made up of: i) (£109.9 million) of debt; ii) £12.0 million of cash and cash equivalents; and iii) £12.6 million of net current assets.

DEBT

All debt is provided by Aviva through facilities totalling £111.1 million, with £56.9 million maturing in 2025 and £54.2 million in 2027. The facilities have a blended rate of interest of 2.86%. Further details are included within the financial statements.

It continues to be the intention of the Board that gearing will not be greater than 35% of total assets and should ideally be closer to 30% or less. This also represents significant headroom against the loan to value covenants on the property portfolio. Gearing increased at the year end to 32.5% (2018: 31.1%) due to the fall in the value of the property portfolio.

CASH

As at 30 September 2019 the Company had cash and cash equivalents of £12.0 million with a further £10.8 million drawn under the debt facility which will be applied to assist with future asset management or investment opportunities.

DIVIDENDS

Following the Board's decision to increase the dividend in 2017, this was the first full year the Company paid aggregate dividends of 5.75p and the Company has provided a fully covered dividend since early 2016. Dividend cover for the year was 115.8%.

The Board declared a dividend of 0.48 pence per share for the month of September which was paid in October 2019. Taking this last dividend with dividends paid to September 2019 of 5.27 pence, the total dividend for the year is 5.75 pence per share in line with the targeted dividend policy. This equates to a dividend yield of 6.7% based on a share price of 85.40 pence at year end.

TAX

Owing to the Company's REIT status, income and capital gains from our property rental business are exempt from corporation tax, therefore, the tax charge for the year is nil.

We continue to pass all the REIT tests to ensure our REIT status is maintained.

OUTLOOK

The Company has a strong portfolio of assets and good sustainable income. Going forward, it is anticipated that active asset management initiatives will maintain the stability of the Company's income.

Neelum Yousaf

Financial Controller, Ediston Properties Limited

 Principal Risks and Risk Management

The successful management of risk is essential in ensuring that the Company delivers on its strategic priorities and aligns the Company's interests with its shareholders.

The Audit and Risk Committee recognises that there are risks and uncertainties that could have a material effect on the Company's results. Under the UK Corporate Governance Code (the 'UK Code'), directors of listed companies are required to confirm in the annual report that they have performed a robust assessment of the principal risks facing their company, including those that would threaten its business model, future performance, solvency or liquidity.

The Group's risk register is the core element of the risk management process. The register is prepared, in conjunction with the Board, by the Administrator, Company Secretary and Investment Manager.

The Directors review and challenge the register on a quarterly basis, assessing the likelihood of each risk, including emerging risks, the impact on the Group and the strength of controls operating over each risk. An assessment is also made as to whether any changes have occurred in the nature of the risks faced by the Company, or whether any new risks have arisen, to ensure that appropriate mitigating controls are in operation. The Board is also cognisant of emerging risks defined as potential trends, sudden events or changing risks which are characterised by a high degree of uncertainty in terms of probability of occurrence and possible effects on the Company. Once emerging risks become sufficiently clear, they may be treated as specific risks and added to the Company's matrix of significant risks.

The main changes to risks in the period have been to the impact of exposure to a particular sector, namely retail, the impact of share price volatility on shareholder returns, the effects of gearing when returns are negative and the continuing risks of an uncertain economic and political environment in UK. Two new risks have been added: share price volatility and gearing, which was previously regarded only in the context of non-compliance with debt facilities.

Risk	Impact	Controls and mitigation in place	Probability of occurring	Impact if occurred	Change from last year
INVESTMENT STRATEGY & PERFORMANCE
Lack of investment opportunities reducing the ability to acquire properties at the required return. Poor investment decisions, incomplete due diligence and mistimed investment of capital.	An inappropriate use of capital which hinders investors' returns. Reduction in revenue profits impacting on cashflow and dividends.	Thorough due diligence and investment process. Regular review of property performance against acquisition plan. Experienced Investment Manager who sources assets which meet agreed investment criteria. Investment Committee scrutinises and approves all proposed acquisitions. The Board reviews the portfolio performance at each quarterly meeting and, through the Management Engagement Committee, conducts a formal annual review of the performance of the Investment Manager. Comprehensive profit and cash flow forecasting which models the impact of property transactions at Group level.	Low	Medium	No Change All available cash resources are currently identified against asset management and development activities.
Significant exposure to a specific property, tenant, sector, geographic location or to lease expires in a given year.	Downturn in an area to which the Company has significant exposure resulting in a reduction in the capital value of investment properties. Significant tenant failure causing a material reduction in revenue profits, impacting on cash flow and dividends.	Although the Company is not invested in accordance with any property benchmark, the investment policy and its restrictions/limits are set by the Board and reviewed quarterly. The limits are monitored at all times by the Investment Manager. The Board and Investment Manager also review at least quarterly other key metrics, such as principal property sector weightings, to ensure these remain appropriate even where there may be no formal limits on exposure. Board approval memorandums state whether there are any concentration issues. The Company's AIFM and Depositary monitor compliance with the investment policy and will highlight any breaches of concentration limits.	Medium	Medium	Increased The company's portfolio includes 64% investment in retail warehouse assets. The quality of the retail warehouse assets is robust, with good locations, strong covenants, manageable rents levels, low voids and a WAULT of 6.3 years. The Investment Manager is proactive in monitoring closely developments in the retail industry, anticipating issues, and where appropriate replacing struggling tenants with those with stronger covenants. Share price performance has been impacted negatively by market sentiment affecting all retail property, but particularly high street shops and shopping centres to which the company is not exposed.
Ineffective active asset management of properties.	High vacancy levels, low tenant retention, sub-optimal rental levels and break clauses exercised resulting in a deterioration of income earned and a fall in the capital value of investment properties. Reduction in revenue profits impacting on cash flow and dividends.	The Investment Manager is experienced in active asset management. Detailed asset management plans are maintained for all properties and details of asset management activities to be undertaken are presented to the Board on at least a quarterly basis. Asset management activity involving significant capital expenditure requires the approval of the Investment Committee. Proactive approach to key lease events. Third party letting and managing agents are employed.	Low	Medium	No Change The Investment Manager has undertaken various active asset management activities on the portfolio during the year and has others identified for the short and medium term. These initiatives have helped maintain the income stream of the Company.
PREMIUM/DISCOUNT LEVEL
Share price volatility	The Company's share price could be impacted by a range of factors causing it to be higher than (at a premium) or lower than (at a discount) to the underlying net asset value per share. Fluctuations in the share price can cause volatility which may not be reflective of the underlying investment portfolio and depend on supply and demand for the shares, market conditions, general investor sentiment and other factors, including political and economic uncertainties.	The Board monitors closely the market in the Company's shares, including significant purchases and sales. Through the Investment Manager and the Company's stockbroker, the main investors are kept in regular touch with developments in the Company, positive and negative, and the Company announces portfolio and any other significant activity between its quarterly net asset value announcements and publication of its interim and final accounts. The Company has the ability to allot shares, and has done so, where there has been demand in the secondary market and issuance is not dilutive to existing shareholders. The Company also takes the annual authority to buy back shares. However, the Company's intention is to be fully invested and geared, so the use of share buyback would require a change in the strategic direction of the Company, not least in having liquidity in the portfolio. The Board reviews the strategic direction of the Company regularly to ensure that application of the investment policy, the returns generated from it and the objectives of the shareholders are being met.	High	High	New In common with other property investment companies, market sentiment towards the sector has deteriorated resulting in a market deterioration in the share price, irrespective of the NAV and yield remaining resilient. This deterioration has not been helped by political and economic uncertainty. The Board and Investment Manager continue to work with shareholders to reinforce the value approach taken to investing in UK commercial properties and not least the resilience of the income from the portfolio.
FINANCIAL & ECONOMIC
Gearing	Gearing will accentuate returns if the cost of debt is less than the equity returns or the reverse effect if equity returns are less than the cost of debt.	The Board reviews the level of gearing on a regular basis. The borrowing facilities have prescribed covenants. The Investment Manger presents for Board review quarterly cash flow forecasts prepared from the level of detail of individual properties and tenants. The Board intends to maintain gearing at 30% of Company gross assets at drawdown but will not exceed 35%, at the time of drawdown.	Medium	Medium	New The Board will continue to monitor the level of gearing closely. This has recently had a negative drag on performance whereas in the past it was a positive contributor to performance.
Non-Compliance with debt facilities.	A substantial fall in the property asset values or rental income levels could lead to a breach of financial covenants within the Group's debt funding arrangements. This could lead to a cancellation of debt funding leaving the Company without sufficient long-term resources to meet its commitments.	Covenants are reviewed on a regular basis. Compliance certificates and reports for the lender are prepared on a quarterly basis by the Investment Manager then reviewed and signed by a Director.	Low	High	Increased There was a modest increase in the Company's loan to value ratio at year end, as defined for the purpose of debt funding covenants, from 31.1% to 32.5%, compared with the covenant limit of 50%. The increase was due mainly to the fall in the valuation of the portfolio. Going forward further falls in the valuation would have a negative impact on the ratio although the headroom is significant and the covenant is not considered to be at risk. The increased size and diversification of the property portfolio reduces the risk that an asset specific event would significantly impact on the Group's debt covenants.
Weak economic and/or political environment, including the potential impacts of the General Election and Brexit.	Lower occupational demand impacting on income, cash flow, rental growth and capital performance.	To a large extent out of the Company's control. Although the UK appears to be nearer a resolution of Brexit, significant uncertainties remain on form and timing. The General Election currently under way may or may not resolve some of these uncertainties, and may introduce more uncertainties in other areas. Asset management remains a high priority and cash control continues to be strong. Sensitivity analysis of the portfolio is undertaken regularly via a comprehensive cash flow model.	Medium	High	No change As last year, the economic and political environment in the UK remains uncertain. This may result in lower occupational demand and, although partially mitigated by the Company's good-quality assets, low vacancy rate, long WAULT and strong covenants, the continuing uncertainty arising from Brexit and now also the General Election increases the risk to returns from the UK Commercial property market as a whole.
REGULATORY
Non-compliance with laws and regulations.	The Company is required to comply with REIT rules, the Listing Rules, Disclosure Guidance and Transparency Rules, the UK Code, IFRS accounting standards and UK legislation (including the UK Bribery Act, Modern Slavery Act, The Criminal Finances Act 2017, Market Abuse Regulations and GDPR).	The Company uses experienced tax advisers, auditors, Investment Manager, Company Secretary, Administrator and solicitors to provide advice and support throughout the year. Strong compliance culture with regular risk reviews undertaken by the Audit and Risk Committee.	Low	High	No Change No changes in the regulatory environment over the year have had a significant impact on the risk profile of the Company.
OPERATIONAL
Health and Safety.	Serious incident occurring at one of the Company's properties resulting in material financial or reputational damage to the Company and/or criminal prosecution.	The Board receives and reviews a quarterly report from the managing agent detailing any relevant matters. The managing agent ensures all matters raised are dealt with promptly. Appropriate insurance cover is in place. Insurers visit each property at least every two years and undertake a risk assessment.	Low	High	No Change No significant changes have occurred in relation to Health and Safety matters over the year.
Lack or failure of internal controls of the Investment Manager or Administrator.	Inadequate segregation of duties or other internal controls could result in a higher probability of error, or fraud not being prevented, resulting in financial loss to the Company.	Significant segregation of duties within the Investment Manager and Administrator as well as between them both, with oversight from the Depositary.	Low	Medium	No change No significant changes have occurred in the internal control environment over the year.

The Strategic Report has been approved by the Board and is signed on its behalf by:

William Hill

Chairman

5 December 2019

Consolidated Statement of Comprehensive Income (audited)

For the year ended 30 September 2019

		Year ended 30 September 2019			Year ended 30 September 2018
		Revenue	Capital	Total	Revenue	Capital	Total
	Notes	£'000	£'000	£'000	£'000	£'000	£'000
Revenue
Rental income		20,847	-	20,847	19,391	-	19,391
Total revenue		20,847	-	20,847	19,391	-	19,391
Unrealised (loss)/gain on revaluation of investment properties		-	(15,732)	(15,732)	-	7,286	7,286
Loss of sale of investment properties realised		-	(94)	(94)	-	-	-
Total income		20,847	15,826)	5,021	19,391	7,286	26,677
Expenditure
Investment management fee	1	(2,239)	-	(2,239)	(2,112)	-	(2,112)
Other expenses		(1,377)	-	(1,377)	(1,390)	-	(1,390)
Total expenditure		(3,616)	-	(3,616)	(3,502)	-	(3,502)
Profit/(loss) before finance costs and taxation		17,231	(15,826)	1,405	15,889	7,286	23,175
Net finance costs
Interest receivable		101	-	101	23	-	23
Interest payable		(3,263)	-	(3,263)	(3,005)	-	(3,005)
Profit/(loss) before taxation		14,069	(15,826)	(1,757)	12,907	7,286	20,193
Taxation		-	-	-	-	-	-
Profit/(loss) and total comprehensive income for the year		14,069	(15,826)	(1,757)	12,907	7,286	20,193
Basic earnings per share	3	6.66p	(7.49)p	(0.83)p	6.60p	3.72p	10.32p

The total column of this statement represents the Group's Consolidated Statement of Comprehensive Income, prepared in accordance with IFRS.

The supplementary revenue return and capital return columns are prepared under guidance published by the Association of Investment Companies.

All revenue and capital items in the above statement are derived from continuing operations.

No operations were acquired or discontinued in the year.

 

Consolidated Statement of Financial Position (audited)

As at 30 September 2019

		As at 30 September 2019	As at 30 September 2018
	Notes	£'000	£'000
Non-current assets
Investment properties	4	315,143	330,825
		315,143	330,825
Current assets
Trade and other receivables		15,091	14,078
Cash and cash equivalents		11,976	11,735
		27,067	25,813
Total assets		342,210	356,638
Non-current liabilities
Loans	6	(109,946)	(109,780)
		(109,946)	(109,780)
Current liabilities
Trade and other payables		(2,504)	(3,188)
Total liabilities		(112,450)	(112,968)
Net assets		229,760	243,670
Equity and reserves
Called up equity share capital	7	2,113	2,113
Share premium		125,559	125,559
Capital reserve - investments held		2,626	18,149
Capital reserve - investments sold		2,382	2,685
Special distributable reserve		83,639	84,158
Revenue reserve		13,441	11,006
Equity shareholders' funds		229,760	243,670
Net asset value per Ordinary Share	8	108.72p	115.30p

Consolidated Statement of Changes in Equity (audited)

For the year ended 30 September 2019

		Share capital account	Share premium	Capital reserve - investments held	Capital reserve - investments sold	Special distributable reserve	Revenue reserve	Total equity
	Notes	£'000	£'000	£'000	£'000	£'000	£'000	£'000
As at 30 September 2018		2,113	125,559	18,149	2,685	84,158	11,006	243,670
Loss and total comprehensive income  for the year		-	-	(15,732)	(94)	-	14,069	(1,757)
Transfer of prior years' revaluations to realised reserve		-	-	209	(209)	-	-	-
Transactions with owners recognised in equity:
Issue of Ordinary Shares	7	-	-	-	-	-	-	-
Dividends paid	2	-	-	-	-	-	(12,153)	(12,153)
Transfer from special reserve		-	-	-	-	(519)	519	-
As at 30 September 2019		2,113	125,559	2,626	2,382	83,639	13,441	229,760

For the year ended 30 September 2018

		Share capital account	Share premium	Capital reserve - investments held	Capital reserve - investments sold	Special distributable reserve	Revenue reserve	Total equity
	Notes	£'000	£'000	£'000	£'000	£'000	£'000	£'000
As at 30 September 2017		1,310	37,858	10,863	2,685	84,668	8,432	145,816
Profit and total comprehensive income  for the year		-	-	7,286	-	-	12,907	20,193
Transactions with owners recognised in equity:
Issue of Ordinary Shares	7	803	87,701	-	-	-	-	88,504
Dividends paid	2	-	-	-	-	-	(10,843)	(10,843)
Transfer from special reserve		-	-	-	-	(510)	510	-
As at 30 September 2018		2,113	125,559	18,149	2,685	84,158	11,006	243,670

Consolidated Statement of Cash Flow (audited)

For the year ended 30 September 2018                        

		Year ended 30 September 2019	Year ended 30 September 2018
	Notes	£'000	£'000
Cash flows from operating activities
(Loss)/profit before tax		(1,757)	20,193
Adjustments for:
Interest receivable		(101)	(23)
Interest payable		3,263	3,005
Unrealised revaluation loss/(gain) on property portfolio		15,732	(7,286)
Loss on sale of investment property realised		94	-
Operating cash flows before working capital changes		17,231	15,889
Increase in trade and other receivables		(731)	(6,511)
(Decrease)/increase in trade and other payables		(592)	1,266
Net cash inflow from operating activities		15,908	10,644
Cash flows from investing activities
Purchase of investment properties		-	(146,750)
Capital expenditure		(3,413)	(5,264)
Sale of investment properties		2,906	-
Net cash outflow from investing activities		(507)	(152,014)
Cash flows from financing activities
Loans drawn down, net of costs	6	-	53,382
Issue of Ordinary Share capital, net of costs		-	88,504
Dividends paid		(12,147)	(10,809)
Interest received		101	23
Interest paid		(3,114)	(2,646)
Net cash (outflow)/inflow from financing activities		(15,160)	128,454
Net increase/(decrease) in cash and cash equivalents		241	(12,916)
Opening cash and cash equivalents		11,735	24,651
Closing cash and cash equivalents		11,976	11,735

 

Statement of Directors' Responsibilities in Respect of the Annual Financial Report

In accordance with Chapter 4 of the Disclosure Guidance and Transparency Rules, we confirm that to the best of our knowledge:

• The financial statements contained within the Annual Report for the year ended 30 September 2019, of which this statement of results is an extract, have been prepared in accordance with applicable International Financial Reporting Standards, on a going concern basis, and give a true and fair view of the assets, liabilities, financial position and return of the Company;
• The Chairman's Statement, Investment Manager's Review and Financial Review include a fair review of the important events that have occurred during the financial year and their impact on the financial statements;
• 'Principal Risks and Risk Management' includes a description of the Company's principal risks and uncertainties; and
• The Annual Report includes details of related party transactions that have taken place during the financial year.

On behalf of the Board

William Hill

Chairman

5 December 2019

 

Notes to the Audited Consolidated Financial Statements

1. Investment Management Fee

	Year ended 30 September 2019	Year ended 30 September 2018
	£'000	£'000
Investment Manager's fee	2,239	2,112
Total	2,239	2,112

Ediston Investment Services Limited has been appointed as the Company's Alternative Investment Manager (AIFM) and Investment Manager, with the property management arrangements of the Group being delegated to Ediston Properties Limited. The Investment Manager is entitled to a fee calculated as 0.95% per annum of the net assets of the Group up to £250,000,000 and 0.75% per annum of the net assets of the Group over £250,000,000. The management fee on any cash available for investment (being all cash held by the Group except cash required for working capital and capital expenditure) is reduced to 0.475% per annum while such cash remains uninvested.

The Investment Management Agreement may be terminated by either party by giving not less than 12 months' notice. The agreement may be terminated earlier by the Group provided that a payment in lieu of notice, equivalent to the amount the Investment Manager would otherwise have received during the notice period, is made. The Investment Management Agreement may be terminated immediately without compensation if the Investment Manager: is in material breach of the agreement; is guilty of negligence, wilful default or fraud; is the subject of insolvency proceedings; or if there occurs a change of key managers to which the Board has not given its prior consent.

2. Dividends

Dividends paid as distributions to equity shareholders during the year were:

	Year ended 30 September 2019		Year ended 30 September 2018
	Pence per share	£'000	Pence per share	£'000
In respect of the prior year:
Twelfth interim dividend	0.4792	1,012	0.4587	601
In respect of the current year:
First interim dividend	0.4792	1,012	0.4583	600
Second interim dividend	0.4792	1,013	0.4583	600
Third interim dividend	0.4792	1,013	0.4583	964
Fourth interim dividend	0.4792	1,013	0.4792	1,008
Fifth interim dividend	0.4792	1,013	0.4792	1,008
Sixth interim dividend	0.4792	1,012	0.4792	1,008
Seventh interim dividend	0.4792	1,013	0.4792	1,008
Eighth interim dividend	0.4792	1,013	0.4792	1,008
Ninth interim dividend	0.4792	1,013	0.4792	1,012
Tenth interim dividend	0.4792	1,013	0.4792	1,013
Eleventh interim dividend	0.4792	1,013	0.4792	1,013
Total	5.7504	12,153	5.6672	10,843

Dividends paid/ announced subsequent to the year end were:

	Record date	Payment date	Pence per share
Twelfth interim dividend	18 October 2019	31 October 2019	0.4792
In respect of the year ending 30 September 2019:
First interim dividend	8 November 2019	29 November 2019	0.4792
Second interim dividend	13 December 2019	31 December 2019	0.4792

It is the policy of the Directors to declare and pay dividends as interim dividends. The Directors do not therefore recommend a final dividend for the year ended 30 September 2019. A non-binding resolution to approve the Company's dividend policy will be proposed at the Annual General Meeting.

3. Earnings per Share

Basic and diluted earnings per share

	Year ended 30 September 2019		Year ended 30 September 2018
	£'000	Pence per share	£'000	Pence per share
Revenue earnings	14,069	6.66	12,907	6.60
Capital earnings	(15,826)	(7,49)	7,286	3.72
Total earnings	(1,757)	(0.83)	20,193	10.32
Average number of shares in issue	211,333,737		195,592,787

4. Investment Properties

	As at 30 September 2019	As at 30 September 2018
Freehold and leasehold properties	£'000	£'000
Opening book cost	312,676	160,876
Opening unrealised appreciation	18,149	10,863
Opening fair value	330,825	171,739
Movements for the period
Purchases	-	146,750
Sales - proceeds	(2,906)	-
- loss on sales	(303)	-
Capital expenditure	3,050	5,050
Movement in book cost	(159)	151,800
Unrealised losses realised during the year	209	-
Unrealised gains on investment properties	1,400	9,689
Unrealised losses on investment properties	(17,132)	(2,403)
Movement in fair value	(15,682)	159,086
Closing book cost	312,517	312,676
Closing unrealised appreciation	2,626	18,149
Closing fair value	315,143	330,825

The Group received £2,906,000 (2018 £0) from investments sold in the year. The book cost of these investments when they were purchased was £3,080,200 (2018 £0). These investments have been revalued over time and until they were sold any unrealised gains/losses were included in the fair value of the investments.

The fair value of the investment properties reconciled to the appraised value as follows:

	As at 30 September 2019 £'000	As at 30 September 2018 £'000
Closing fair value	315,143	330,825
Lease incentives held as debtors	4,032	3,025
Appraised market value per Knight Frank	319,175	333,850

 

Changes in the valuation of investment properties:

	Year ended 30 September 2019 £'000	Year ended 30 September 2018 £'000
Loss on sale of investment properties	(303)	-
Unrealised loss realised during the year	209	-
Loss on sale of investment properties realised*	(94)	-
Unrealised gains on investment properties	1,400	9,689
Unrealised losses on investment properties	(17,132)	(2,403)
Total (loss)/gain on revaluation of investment properties	(15,826)	7,286

*Represents the difference between the sales proceeds, net of costs, and the property valuation at the end of the prior year.

The (loss)/gain on revaluation of investment properties reconciles to the movement in appraised market value as follows:

	Year ended 30 September 2019 £'000	Year ended 30 September 2018 £'000
Total (loss)/gain on revaluation of investment properties	(15,826)	7,286
Purchases		146,750
Capital expenditure	3,050	5,050
Sales - proceeds	(2,906)	-
Movement in fair value	(15,682)	159,086
Movement in lease incentives held as debtors	1,007	1,354
Movement in appraised market value	(14,675)	160,440

At 30 September 2019, the investment properties were valued at £319,175,000 (2018: £333,850,000 2017:£173,410,000) by Knight Frank LLP (Knight Frank), in their capacity as external valuers. The valuation was undertaken in accordance with the RICS Valuation - Global Standards 2017, incorporating the International Valuation Standards, and RICS Professional Standards UK January 2014 (revised April 2015). Fair value is based on an open market valuation (the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date), provided by Knight Frank on a quarterly basis, using recognised valuation techniques as set out in the Group's accounting policies.

5. Investment in subsidiaries

EPIC (No.1) Limited is a wholly-owned subsidiary of Ediston Property Investment Company plc and is incorporated in England and Wales (Company number: 09106328). EPIC (No.1) Limited was incorporated on 27 June 2014 and began trading on 5 May 2015. On 5 May 2015, the ownership of the property portfolio held by the Company at that date was transferred to EPIC (No.1) Limited. The net asset value of EPIC (No.1) Limited as at 30 September 2019 was £127,100,000 (2018: £130,400,000). The profit of EPIC (No.1) Limited for the year to 30 September 2019 was £3,400,000 (2018: £17,000,000).

EPIC (No.2) Limited is a wholly-owned subsidiary of Ediston Property Investment Company plc and is incorporated in England and Wales (Company number: 10978359). EPIC (No.2) Limited was incorporated on 23 September 2017, having been established to hold the five properties acquired by the Group during the prior year and to enter into the Group's additional loan facility. The net asset value of EPIC (No.2) Limited as at 30 September 2019 was £96,400,000 (2018: £106,500,000). The loss of EPIC (No.2) Limited for the period to 30 September 2019 was £4,600,000 (2018: profit of £3,700,000).

EPIC (No.2) Limited acquired five subsidiaries as part of the prior year acquisition. The properties held by these five subsidiaries were transferred immediately after acquisition and at 30 September 2019 were held directly by EPIC (No.2) Limited. Since this transfer, the five subsidiaries have remained dormant. Four have been liquidated with the fifth expected to be liquidated shortly.

6. Loans

	As at 30 September 2019	As at 30 September 2018
	£'000	£'000
Principal amount outstanding	111,076	111,076
Set-up costs	(1,612)	(1,612)
Amortisation of loan set-up costs	482	316
Total	109,946	109,780

The Group's loan arrangements are with Aviva Commercial Finance Limited.

The Group has loans totalling £56,920,000 which carry a blended fixed interest rate of 2.99% and mature in May 2025. This rate is fixed for the period of the loan as long as the loan-to-value is maintained below 40%, increasing by ten basis points if the loan-to-value is 40% or higher. These loans are secured over EPIC (No.1) Limited's property portfolio.

The Group also has a loan totalling £54,156,000 which carries a fixed interest rate of 2.73% and matures in December 2027. This rate is fixed for the period of the loan as long as the loan-to-value is maintained below 40%, increasing by ten basis points if the loan-to-value is 40% or higher. This loan is secured over EPIC (No.2) Limited's property portfolio.

The Group's weighted average cost of borrowings was 2.86% at 30 September 2019 (2018: 2.86%).

Under the financial covenants relating to the loans the Group has to ensure that for each of EPIC (No.1) Limited and EPIC (No.2) Limited:

-         the Historic Interest Cover and Projected Interest Cover, each being the passing rental income as a percentage of finance costs and generally calculated over a period of 12 months to/from the calculation date, is at least 300%; and

-         the Loan-to-Value Ratio, being the adjusted value of the loan as a percentage of the aggregate market value of the relevant properties, must not exceed 50%.

Breach of the financial covenants, subject to various cure rights, may lead to the loans falling due for repayment earlier than the final maturity dates stated above. The Group has complied with all the loan covenants during the year. Under the terms of early repayment relating to the loans, the cost of repaying the loans on 30 September 2019, based on the yield on the Treasury 5% 2025 and Treasury 4.25% 2027 plus a margin of 0.5%, would have been approximately £122,890,000 (2018: £118,860,000), including repayment of the principal of £111,076,000 (2018: £111,076,000).

The fair value of the loans based on a marked-to-market basis, being the yield on the relevant Treasury plus the appropriate margin, was £115,445,000 as at 30 September 2019 (2018: £110,786,000). This includes the principal amount borrowed.

7. Called-up Equity Share Capital

Allotted, called-up and fully paid Ordinary Shares of 1 pence par value	Number of shares	£'000
Opening balance as at 30 September 2018	211,333,737	2,113
Issue of Ordinary Shares	-	-
Closing balance as at 30 September 2019	211,333,737	2,113

During the year to 30 September 2019, the Company did not issue any Ordinary Shares (year ended 30 September 2018: issued 80,339,806 Ordinary Shares, raising net proceeds of £88,504,000). The Company did not buyback or resell from treasury any Ordinary Shares during the year (2018: nil). The Company did not hold any shares in treasury. Under the Company's Articles of Association, the Company may issue an unlimited number of Ordinary Shares.

The consideration received in excess of the par value of the Ordinary Shares issued in the prior year, net of the total expenses of issue of £1,293,000, was been credited to the share premium account.

Ordinary shareholders are entitled to all dividends declared by the Company and to all of the Company's assets after repayment of its borrowings and ordinary creditors. Ordinary shareholders have the right to vote at meetings of the Company. All Ordinary Shares carry equal voting rights.

8. Net Asset Value

The Group's net asset value per Ordinary Share of 108.72 pence (2018: 115.30 pence) is based on equity shareholders' funds of £229,770,000 (2018: £243,670,000) and on 211,333,737 (2018: 211,333,737) Ordinary Shares, being the number of shares in issue at the year end.

The net asset value calculated under IFRS above is the same as the EPRA net asset value at 30 September 2019 and 30 September 2018.

9. Related Party Transactions

The Directors are considered to be related parties. No Director has an interest in any transactions which are, or were, unusual in their nature or significant to the nature of the Group. There are no other key management personnel, as the entity has no employees except for the Directors.

The Directors of the Group received fees for their services. Total fees for the year were £175,500 (2018: £196,000) of which £nil (2018: £nil) remained payable at the year end.

Ediston Properties Limited, being the AIFM and Investment Manager, received £2,239,000 in relation to the year (2018: £2,112,000) of which £547,000 (2018: £580,000) remained payable at the year end. Ediston Properties Limited received development management fees of £92,000 in relation to the year (2018: £nil) of which £nil (2018: £nil) remained payable at the year end.

10. Contingent Assets and Liabilities

The Group acquired the units in a Jersey Property Unit Trust on 7 November 2014. Prior to the sale of the units to the Group, the seller transferred a property to another group entity by way of a distribution in specie for nil consideration. The Group indemnified the seller should any Stamp Duty Land Tax (SDLT) arise as a result of that property transfer. Both the seller's and the Group's tax advice is that there is a low probability of an SDLT liability on the transaction.

11. Financial Instruments

Consistent with its objective, the Group holds UK commercial property investments. In addition, the Group's financial instruments comprise cash and receivables and payables that arise directly from its operations. The Group does not have exposure to any derivative instruments.

The Group is exposed to various types of risk that are associated with financial instruments. The most important types are credit risk, liquidity risk, interest rate risk and market price risk. There is no foreign currency risk as all assets and liabilities of the Group are maintained in pounds sterling.

The Board reviews and agrees policies for managing the Group's risk exposure. These policies are summarised below and have remained unchanged for the period under review. These disclosures include, where appropriate, consideration of the Group's investment properties which, whilst not constituting financial instruments as defined by IFRSs, are considered by the Board to be integral to the Group's overall risk exposure.

Credit Risk

Credit risk is the risk that an issuer or counterparty will be unable or unwilling to meet a commitment that it has entered into with the Group. At the reporting date, the Group's financial assets exposed to credit risk amounted to £23,024,000 (2018: £22,623,000), consisting of cash of £11,976,000 (2018: £11,735,000), the secured balance held with the loan provider of £10,767,000 (2018: £10,721,000) and rent receivable of £281,000 (2018: £167,000).

In the event of default by a tenant if it is in financial difficulty or otherwise unable to meet its obligations under the lease, the Group will suffer a rental shortfall and incur additional expenses until the property is re--let. These expenses could include legal and surveyor's costs in re-letting, maintenance costs, insurances, rates and marketing costs and may have a material adverse impact on the financial condition and performance of the Group and/or the level of dividend cover. The Board receives regular reports on concentrations of risk and any tenants in arrears. The Investment Manager monitors such reports in order to anticipate, and minimise the impact of, defaults by occupational tenants.

Where there are concerns over the recoverability of rental income, the amounts outstanding will be fully provided for. There were no financial assets which were either past due or considered impaired at 30 September 2019 or at 30 September 2018.

At 30 September 2019, the Group held £6,400,000 (2018: £6,200,000) with RBS and £5,550,000 (2018: £5,500,000) with Bank of Scotland plc. Bankruptcy or insolvency of the bank holding cash balances may cause the Group's ability to access cash placed with them to be delayed, limited or lost. Both RBS and Bank of Scotland plc are rated by all the main rating agencies. Should the credit quality or the financial position of the banks currently employed significantly deteriorate, cash holdings would be moved to another bank. As at 30 September 2019, Standard & Poor's credit rating for RBS was A-2 and Moody's was P-2. The equivalent credit ratings for Bank of Scotland plc were A-1 and P-1, respectively. There has been no change in the fair values of cash or receivables as a result of changes in credit risk in the current or prior periods.

Liquidity Risk

Liquidity risk is the risk that the Group will encounter difficulties in realising assets or otherwise raising funds to meet financial commitments. The Group's investments comprise commercial properties.

Property and property-related assets in which the Group invests are not traded in an organised public market and may be illiquid. As a result, the Group may not be able to liquidate quickly its investments in these properties at an amount close to their fair value in order to meet its liquidity requirements.

The Group's liquidity risk is managed on an ongoing basis by the Investment Manager and monitored on a quarterly basis by the Board. In order to mitigate liquidity risk the Group has a comprehensive ten-year cash flow forecast that aims to have sufficient cash balances, taking into account projected receipts for rental income and property sales, to meet its obligations for a period of at least 12 months. At the reporting date, the maturity of the financial assets was:

Interest Rate Risk

Some of the Group's financial instruments will be interest-bearing. They are a mix of both fixed and variable rate instruments with differing maturities. As a consequence, the Group is exposed to interest rate risk due to fluctuations in the prevailing market rate. The Group's exposure to floating interest rates gives cash flow interest rate risk and its exposure to fixed interest rates gives fair value interest rate risk.

When the Group retains cash balances, they will ordinarily be held on interest-bearing deposit accounts. The Group's policy is to hold cash in variable rate or short-term fixed rate bank accounts. Exposure varies throughout the year as a consequence of changes in the composition of the net assets of the Group arising out of the investment and risk management policies.

Market Price Risk

The management of market price risk is part of the investment management process and is typical of a property investment company. The portfolio is managed with an awareness of the effects of adverse valuation movements through detailed and continuing analysis, with an objective of maximising overall returns to shareholders. Investments in property and property-related assets are inherently difficult to value due to the individual nature of each property. As a result, valuations are subject to substantial uncertainty. There is no assurance that the estimates resulting from the valuation process will reflect the actual sales price even where such sales occur shortly after the valuation date. Such risk is minimised through the appointment of external property valuers. The basis of valuation of the property portfolio is set out in detail in the accounting policies.

Any changes in market conditions will directly affect the profit and loss reported through the Statement of Comprehensive Income. Details of the Group's investment property portfolio held at the balance sheet date are disclosed in Note 4. A 10% increase in the value of the investment properties held as at 30 September 2019 would have increased net assets available to shareholders and increased the net income for the year by £31,500,000 (2018: £33,100,000); an equal and opposite movement would have decreased net assets and decreased the net income by an equivalent amount.

The calculations are based on the investment property valuations at the respective balance sheet date and are not representative of the year as a whole, nor reflective of future market conditions.

12. Financial Statements

These are not full statutory accounts.  The report and financial statements for the year to 30 September 2019 will be posted to shareholders and made available on the website: www.ediston-reit.com. Copies may also be obtained from the Company's Administrator, Maitland Administration Services (Scotland) Limited, 22 Forth Street, Edinburgh, EH1 3LH.

 

END

 

 

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