Final Results

RNS Number : 6312R

Ediston Property Inv Comp PLC

13 December 2016

 

13 December 2016

Ediston Property Investment Company plc 

( the "Company")

Report and Results Announcement

Ediston Property Investment Company plc (LSE: EPIC) announces its full year results for the year ended 30 September 2016.

Highlights:

·      EPRA NAV per share: 107.07 pence

·      Fully covered dividend

·      EPRA vacancy rate down to 4.7%

·      EPRA NAV total return: 6.1%

·      Debt facility increased by £12.4 million to £52.4 million.  Blended fixed interest rate of 3.06%

·      Weighted average unexpired lease term: 7.9 years

Progress during the year:

·    Property portfolio increased to £181.4 million (30 September 2015: £136.4 million)

·    Acquired two properties for £41.4 million

·    Contracted rent increased to £12.1 million (30 September 2015: £8.6 million)

·    Revenue profit increased to £7.6 million (2015: £4.0 million)

·    EPRA earnings per share increased to 5.90 pence (2015: 4.15 pence)

·    Company now fully invested

William Hill, Chairman of the Company, said: "Following the completion of the investment programme the Company has a clear strategy, a well-covered and attractive dividend, long term debt funding in place and a portfolio with opportunities to add value, managed by a well-resourced and creative asset management team."

Calum Bruce, Investment Manager, said: "Our approach to portfolio construction and the asset management activity has provided solid foundations off which the Company can grow. The Company's portfolio has many defensive qualities including a robust income stream, but with a number of value-accretive asset management angles to exploit."

Chairman's Statement

INTRODUCTION
The Company has continued to make good progress. The net asset value of the portfolio has increased during the year despite challenging market conditions. The dividend is now fully covered from increased net earnings and the Company is fully invested. It was particularly encouraging to have the Company's asset values hold up after the market uncertainties following the Brexit vote earlier in the summer.

It remains a leading objective of the Board to grow the Company's equity base. This will enable it to diversify the portfolio further, to increase liquidity in the Company's shares and, importantly, to capitalise on investment opportunities that play to the Investment Manager's investment style.

The disappointment has been that the share price has not been at a premium for long enough to enable new shares to be issued to continue the growth of the asset base. However, since the year end and post the September NAV announcement, the share price rating has improved allowing the Company to issue 500,000 new shares at 109.0 pence under its tap authority.

INVESTMENT PERFORMANCE

At the start of the latest reporting period the Company's EPRA net asset value (NAV) was recorded as £136.6 million and 106.49 pence per share. At 30 September this had risen to £137.3 million and 107.07 pence per share, generating a NAV total return of 6.1% for the year, taking into account the dividends paid. The return was delivered despite bearing the costs of two purchases in the first half of the year.

During the year the share price mostly traded in a relatively tight band around the stated NAV.
At the start of the year it was at a 2.3% premium and at the year end a discount of 3.4%. After the referendum result, as the market tried to adjust to what the vote meant for property values, the share price moved to a discount to the published NAV (based on pre-Brexit pricing). The crisis in the daily-dealt open-ended real estate vehicles did not help market sentiment. Accordingly, the share price total return was minus 0.54% based on the share price at 30 September 2016. However, the market appeared to be unaware of the resilience of the Company's portfolio which was reflected in the NAV reported on 19 October 2016.  At that point the share price responded positively between the end of September and the end of October.

Performance was enhanced by the Investment Manager adding value from several asset management initiatives. The most significant of these was the repositioning of the retail space at St Philips Point, Birmingham and the subsequent letting to David's Bridal. This contributed to the EPRA vacancy rate falling from 7.4% to 4.7% during the year. Asset management of the portfolio is shown in more detail within the Investment Manager's report.

INVESTMENT PURCHASES

The Company completed its investment programme with two purchases in the first half of the year. It acquired a retail park in Wrexham and an office property in Newcastle for £41.4 million.

DEBT AND CASH

The Board believes that it remains appropriate for the Company to have a capital structure with borrowings at 30% of gross asset value. The use of debt to supplement the investment of equity in the two acquisitions detailed above was therefore approved. The Board concluded that the extension of the existing debt facility with Aviva by £12.4 million was the most attractive means of achieving this. The blended cost of the £52.4 million aggregate debt held by the Company is 3.06%, which is fixed until the loan matures in 2025.

At the year end the Company had cash on the balance sheet of £10.0 million which will be retained for working capital and potential investment into asset management opportunities. Based on the gross asset value of the property portfolio at 30 September 2016 the loan-to-value ratio was 28.9%.

INVESTMENT PURCHASES AND STRATEGY

The investment strategy has been to acquire properties with an average yield in excess of 6.5%, with potential for income growth and/or value-add opportunities that could play to the management team's active asset management strengths.

The post-Brexit market is currently placing a premium on assets that are let to good covenants on long leases. Conversely investors are shying away from assets that might be exposed to letting risk over the next few years and in some situations over-discounting the risk. It is here that the knowledge advantage of the Investment Manager can bear fruit as positive asset management can convert some of these situations into more valuable cash flows, giving both an income and capital uplift for shareholders.

The increase in stamp duty makes switching assets expensive. However, the Board is encouraging the Investment Manager to look at potential sales of mature assets to fund new opportunities of the type described above if the return enhancement is sufficiently attractive. These types of situations would be especially attractive in the event that new capital was sourced.

DIVIDENDS
The Board is committed to continuing with monthly dividend payments. Total dividends for the year were 5.50 pence per share, including the dividend of 0.46 pence paid in October 2016. Payments were in line with that stated in the Prospectus, namely paying an annual running yield of 5.5%, based on the launch price of 100 pence per share. Based on the share price of 103.38 pence at 30 September the dividend yield was 5.3%.

As anticipated, the completion of the investment programme together with additional rental income generated in the portfolio resulted in the dividend being fully covered at the year end. For the financial year the dividend was 107.3% covered. The EPRA earnings per share were 5.90 pence.

GOVERNANCE
The Board has spent considerable time, with the Investment Manager, Secretary and Administrator, in constructing a strong review and compliance structure to support the current activities of the Company and to provide the support for growth. Part of this was the appointment of Ediston Investment Services Limited as AIFM, which was envisaged at the time of launch on the proviso they received regulatory approval. The approach taken to governance is detailed in the governance section of the report and accounts.

OUTLOOK
I am nervous about looking too far ahead given the recent unpredictability of events. However, I can say with confidence that property still looks attractive relative to bonds, especially in the context of an environment where interest rates are expected to remain low. It should therefore continue to be an important asset class for investors.

How investors choose to access property might be changing. The crisis with the open-ended daily-traded property funds in the aftermath of the Brexit vote emphasises the advantages that a closed-ended company has over these vehicles. In addition to the ability to trade out of a position without being gated, three return enhancing benefits are the ability to pay bigger dividends as cash is not required for liquidity, not paying a premium for stock that has to be realised on notice, and being able to gear. The increase in small investors on the share register suggests that these advantages are being noticed and this is an area we would like to encourage more interest from.

Given that 'known-knowns' can no longer be assumed as knowns, the unpredictability of events I referred to above is likely to lead to more short-term volatility in yields than normal. This may create some buying opportunities which we would like to exploit. However, timing a capital raise to take advantage of this will not be easy. The Board is therefore focussed on investing capital into the market over a period of time with the emphasis on getting stock selection right rather than trying to play a perfect market timing game. It is worth remembering that over the long term the greatest contribution to return is from income. In this context the Board believes that the Company should remain focussed on income generation and its policy of distributing that income as dividends.

Following the completion of the investment programme the Company has a clear strategy, a well-covered and attractive dividend, long term debt funding in place and a portfolio with opportunities to add value, managed by a well-resourced and creative asset management team. These are very solid foundations on which to build the Company.

William Hill

Chairman

12 December 2016

Enquiries:

Ediston Properties Limited (Investment Manager) Danny O'Neill Calum Bruce	0131 225 5599
Canaccord Genuity Limited                     Will Barnett                   Neil Brierley                   Dominic Waters             David Yovichic	020 7523 8000
Tavistock                                                                                     Jeremy Carey ([e-mail]) James Whitmore ([e-mail])	020 7920 3150
R&H Fund Services Limited (Company Secretary) Mike Woodward	0131 550 3761

 

Investment Manager's Review

During the period the Company has had to withstand both political and economic headwinds. However, the portfolio has proved to be resilient in the face of these challenges. The implications of Brexit have been highlighted below, but the Company also had to absorb the valuation adjustment brought about by the increase in Stamp Duty Land Tax (SDLT) in March. In his March Budget statement, the Chancellor of the Exchequer unexpectedly increased the top rate of SDLT from 4% to 5%. This affected all properties in England, Wales and Northern Ireland (not Scotland). Property valuations were therefore adjusted downwards to reflect the higher acquisition costs to the buyer.

Despite these setbacks the Company's assets have increased in value by 2.2% on a like-for-like basis over the year, and the portfolio has fared well in relative terms. It benefits from the majority of assets being in prime locations, coupled with good secure and above-average lease lengths. Some assets have very long leases to strong covenants giving very defensive qualities, resulting in valuation resilience in turbulent markets.

The portfolio has been assembled over the last two years with several assets having opportunities to add value. Our well-resourced asset management team has identified, implemented and successfully executed asset management opportunities, which have strengthened the income stream and pushed forward capital values at a time when the market was in decline.

Our approach to portfolio construction and the asset management activity has provided solid foundations off which the Company can grow.

OCCUPATIONAL MARKET

The occupational market has been relatively robust, albeit it is too early to tell what the full impact of Brexit might be. Rental growth has slowed over the course of 2016 and this is likely to continue during 2017. As a result, most commentators are revising down their rental growth forecasts. Firms could put hiring and investment intentions on hold, but not everyone has been deterred as we have seen many occupiers commit to new space. However, any changes which occur will not be universal but will be fragmented by geography and by sectors, with central London, where we are not currently invested, predicted to bear the brunt of Brexit. As a result of this, and with investors being more risk averse, new construction is likely to be muted. This will help maintain low vacancy rates in many markets.

Tenant Covenant Profile: D&B risk ratings of tenant income as a percentage of the portfolio income
D&B Rating	%
5A1	73.8
5A2	3.2
4A1	6.1
3A1	9.4
Other	7.5

Tenant exposure - at 30 September 2016

Region	%
B&Q plc	15
Capita Business Services Ltd	14
Ernst & Young LLP	7
AXA Insurance UK plc	6
Weightmans LLP	5
Tenants less than 5%	53

Void rate and weighted average unexpired lease term (WAULT) at 30 September 2016

Year	Void (%)	WAULT (Years)
2014	25	5.9
2015	7.4	8.6
2016	4.7	7.9

PORTFOLIO VALUATION

The Company's property portfolio is valued by Knight Frank on a quarterly basis throughout the year. As at 30 September 2016 it was valued at £181.4 million, compared to £136.4 million at end September 2015. This is an increase of 2.2% over the period, adjusting for new acquisitions. This is a positive result given the widespread market volatility witnessed following the Brexit vote.

In a further positive step, Knight Frank has removed its valuation caveat put in place post the Brexit vote. Market conditions have become clearer from a pricing visibility perspective which has prompted the removal of the caveat.

Property Portfolio as at 30 September 2016
Location	Name	Sub-sector	Market Value Range (£)	Tenure
Birmingham	St Philips Point	Office - Rest of UK	25-30m	Freehold
Reading	Phoenix	Office - Rest of South East	20-25m	Freehold
Sheffield	Cutlers Gate	Office - Rest of UK	15-20m	Freehold
Newcastle	Citygate 2	Office - Rest of UK	15-20m	Leasehold
Edinburgh	145 Morrison Street	Office - Rest of UK	10-15m	Heritable
Bath	Midland Bridge House	Office - Rest of UK	0-5m	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
Daventry	Abbey Retail Park	Retail Warehouse	10-15m	Leasehold
Telford	Mecca Bingo	Leisure	0-5m	Freehold
Liverpool	Mecca Bingo	Leisure	0-5m	Freehold
Hartlepool	Mecca Bingo	Leisure	0-5m	Freehold

Regional Exposure - at 30 September 2016

Region	%
North East	12
North West	2
West Midlands	18
South West	3
Scotland	15
South East	12
Yorkshire	10
East Midlands	7
Wales	21

Sector Exposure - at 30 September 2016

Lease Expiry	%
Leisure	6
Office	57
Retail warehouse	37

FULLY COVERED DIVIDEND

We have worked hard over the period to ensure that our dividend is fully covered and aim to ensure it is fully covered going forward.

SUMMARY OF PURCHASES IN THE PERIOD

During the period two acquisitions were made for £41.4 million. The assets offer a solid income stream with the potential to add value.

RISKS AND OUTLOOK

Whilst the market has stabilised to an extent and the economy appears to have weathered the initial negative sentiment surrounding the 'leave' vote, the economic environment is still uncertain and is likely to continue to impact on the real estate market.

A useful indication of the risks associated with real estate is the yield gap between UK gilts and property. Whilst UK gilt yields have increased, the gap between 10-year gilts and 'all-property' yields remains large and it looks unlikely that this will change in the short term. This provides support for current levels of property pricing. As discussed below, a post-referendum property market has emerged and so far average values have held up reasonably well. This resilience is partly as a result of the global capital which still has an appetite for UK real estate and infrastructure. This demand has been fuelled by the depreciation of sterling post-referendum which, when coupled with the 'safe-haven' status of the UK and the yields on offer, makes property, but specifically the UK property market, an attractive place to invest.

Calum Bruce

Investment Manager

BREXIT: How the market reacted

In the run-up to the EU referendum, everything was pointing to a 'remain' result. Financial markets rallied, most significantly sterling and equities, as the polls and bookmakers suggested a 'remain' result was going to occur.

On Friday 24 June 2016, the day the referendum result was confirmed, everything changed. Sterling suffered a record one-day fall against the dollar. A flight to safety saw the price of gold and other safe-haven assets, such as government bonds, rally. The yield on 10-year gilts fell below 1% for the first time and equity values slumped. Over $2 trillion was wiped off global equity markets on Friday 24 June, a bigger one-day loss than that which occurred following the collapse of Lehman Brothers in 2008.

In the immediate aftermath of the EU referendum result, the property sector experienced a period of volatility as the market reacted to the uncertainties of Brexit. This was exacerbated by the liquidity problems faced by the daily-dealt open-ended real estate vehicles, many of which were forced to close to manage redemptions and sell assets to increase cash levels. The lack of transactional evidence post-referendum resulted in property valuers adding a caveat to their reports as they could not fully gauge the effect of the Brexit decision by reference to transactions in the marketplace.

Property values were under downward pressure after the outcome of the vote, with commentators speculating on a 10% post-referendum adjustment. Encouragingly, a post-referendum market has now been established with transactions providing sufficient evidence for the Company's valuer
to remove its post-referendum qualifications. It would also appear that over the quarter to 30 September, valuations have on average fallen less than was first feared. However, there has been a shift in investor behaviour to risk-off. As a consequence some low risk assets have increased in value and those with short leases, credit risk and voids have seen some significant mark downs.

What has become apparent following the referendum result is that there is still demand for UK real estate from a global investor base, and the real estate market is in an interesting phase. The volatility that will occur as the Brexit process proceeds will ensure attractive buying opportunities will continue to appear. A re-priced market in a sector which offers a good income return compared to other asset classes, combined with the Ediston style of asset management, make a compelling investment case.

Financial Review

"It has been another active and successful year with the Company now delivering a fully covered attractive level of income, together with the prospect of income and capital growth for shareholders."

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 AND EARNINGS PER SHARE

The Company has had another year of strong financial results, both in terms of rental levels on properties acquired, but also on letting activity, helping to achieve a revenue profit before tax of £7.6 million. Rental income generated in the year was £11.3 million, inclusive of rent drawn under the rental guarantee agreement. Expenditure in the period was £2.2 million, including £0.2 million of property specific expenditure and £1.3 million related to the Investment Manager's fee. Net interest costs were £1.5 million.

The positive movement in the value of our investment properties was £0.2 million, which enabled the Company to report a total profit of £7.8 million.

	2016 £m	2015 £m
Rental income	11.3	5.9
Property expenditure	(0.2)	(0.0)
Net rental income	11.1	5.9
Administration expenses	(2.0)	(1.5)
Net financing costs	(1.5)	(0.4)
Revenue profit	7.6	4.0
Gain on revaluation of investment properties	0.2	8.9
Accounting profit after tax	7.8	12.9
EPRA Earnings per share	5.90p	4.15p
Basic total earnings per share	6.08p	13.43p

RENT
Contracted rent was £12.1 million (2015: £8.6 million) per annum at the year end, with 12.4% of tenants currently enjoying a rent-free incentive. Rent-free periods as a percentage of contracted rent at the year end falls below 4.1% by June 2017. 87.3% (2015: 86.5%) of rent for the year was collected within seven days and 95.0% within 14 days.

As a result of a year passing, two acquisitions and letting activity, the WAULT has decreased to 7.9 years from 8.6 years in 2015. In addition the EPRA vacancy rate has reduced at the year end to 4.7%, from 7.4% in 2015. The portfolio continues to provide relatively long term stability to the Company's income. We continued to benefit this year from the rental guarantee agreement we received on acquiring the seed portfolio in 2014, but going forward this benefit has ended.

NET ASSET VALUE (NAV)

At 30 September 2016 our net assets were £137.3 million, equating to net assets per share of 107.07 pence compared to 106.49 pence in September 2015, resulting in positive year-on-year growth in the NAV of 0.54%.  This is particularly pleasing given that there have been investment transaction costs, stamp duty land tax increased, and of course the general market turbulence from the Brexit vote.

The increase in net assets to £137.3 million can be summarised as follows:

NAV at 30 September 2015	£136.6m
Increase in value of investment properties (net of capital expenditure and transaction costs)	£0.2m
Net earnings in the year	£7.6m
Less dividends paid	(£7.1m)
NAV at 30 September 2016	£137.3m

The NAV is primarily represented by our investment properties, which have a fair value of £181.4 million at the year end. This is included in the financial statements as Investment Properties at £177.5 million, with the remainder relating to the incentive payment at Sheffield and included within the financial statements as trade and other receivables. The remaining £44.1 million of net liabilities is made up of: i) (£52.4 million) of debt; ii) £10.0 million of cash and cash equivalents; and iii) (£1.7 million) of net current liabilities.

DEBT
In January 2016 the existing debt facility was increased by £12.4 million to £52.4 million, by way of an amendment and restatement of the original facility. This debt supported the acquisition of two properties in the year. The blended cost of the £52.4 million of debt is now 3.06% which is fixed until the loan matures in 2025. Further details are included within Note 6 of the financial statements. At the year end the Loan to Value (LTV) was 28.9%, based on debt of £52.4 million and the fair value of investment properties of £181.4 million. The Board intends that gearing should be no greater than 30% at the time of drawdown of borrowings, to a maximum of 35%. This represents significant headroom against the relevant debt covenants.

EPRA PERFORMANCE MEASURES

As an EPRA member, we support EPRA's drive to bring parity to the comparability and quality of information provided to investors and other key stakeholders of this report. We have therefore included a number of performance measures below which are based on EPRA methodology. It should be noted that there is no difference between the Company's IFRS and EPRA NAV in this year's accounts.

Most of the ratios have improved this year as we continue to strengthen our portfolio, through acquisitions and asset management initiatives.

	2016	2015
EPRA earnings	£7.6m	£4.0m
EPRA earnings per share	5.90p	4.15p
EPRA NAV per share	107.07p	106.49p
EPRA cost ratio (including direct vacancy costs)	20.0%	24.7%
EPRA cost ratio (excluding direct vacancy costs)	19.2%	24.6%
EPRA net initial yield	5.3%	6.2%
EPRA topped up net initial yield	6.2%	6.3%
EPRA vacancy rate	4.7%	7.4%

CASH
As at 30 September 2016 the Company had cash and cash equivalents of £10.0 million.

DIVIDENDS
Two further assets have been acquired in the year that are accretive to delivering the initial target level of dividend of 5.50 pence per share per annum, with dividend cover for the year of 107.3%.

The Company is committed to monthly dividend payments. The Board has declared a final dividend of 0.46 pence per share for the month of September which was paid in October 2016. Taking this last dividend with dividends paid to September 2016 of 5.04 pence, the total dividend for the year is 5.50 pence per share, calculated on the weighted average number of shares in issue during the year, in line with the targeted dividend policy set out in the prospectus. Taking the current level of monthly
dividend, this equates to a dividend yield of 5.5%, based on the launch price in October 2014 of 100.0 pence, or 5.3% on the share price at the 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
Now that the current capital is fully invested, we project that dividends will be fully covered for the
foreseeable future.

With our strengths in identifying properties with asset management potential, coupled with the long term security of our income, we are confident that we will continue to generate attractive returns for our shareholders, underpinned by rental growth and the skill of our Investment Manager in exploiting
capital and income opportunities.

Rankin Laing

Finance Director, Ediston Properties Limited

Principal Risks

Risks: How we manage risk

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

The Audit and Risk Committee recognises that there are risks and uncertainties that could have a material effect on our results. The principal risks facing the business, with their likelihood and impact and how the Company mitigates these, are:

Risk	Impact		Controls and mitigation in place			Probability of occurring		Impact if occurred
INVESTMENT MANAGEMENT
Lack of investment opportunities reducing the ability to acquire properties at the required return. Poor investment decisions, incomplete due diligence and mis-timed investment of capital.		An inappropriate use of capital which hinders investor returns. Reduction in revenue profits impacting on cash flow and dividends.			Thorough due diligence and investment process with regular reviews 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. Comprehensive profit and cash flow forecasting which  models the impact of property transactions at Company level.		Low	Medium
Over-exposure to a specific property, tenant, sector, geographic location or to lease expiries in a given year.		Reduced liquidity resulting in a reduction in the capital value of investment properties. Tenant failure causing a material reduction in revenue profits impacting on cash flow and dividends.			Concentration limits are set by the Board and reviewed quarterly. The limits are monitored at all times by the Investment Manager. Board approval memorandums state whether there are any concentration issues.		Low	Medium
Ineffective active asset management of properties.		High vacancy levels, low tenant retention, sub-optimal rental levels and break clauses exercised. Reduction in revenue profits impacting on cash flow and dividends.		Investment Manager is experienced in active asset management. Pro-active approach to key lease events. Letting and managing agents are also employed.			Low	Medium
FINANCIAL
Non-Compliance with debt facilities.	A substantial fall in property asset values or rental income levels could lead to a breach of financial covenants within the debt funding arrangements. This could lead to a cancellation of debt funding which could leave the Company without sufficient long term resources to meet its commitments.		Covenants are reviewed on a regular basis. Compliance certificates and reports are prepared on a quarterly basis by the Investment Manager then reviewed and signed by a Director. The Board intends to maintain gearing at 30% but will not exceed 35% of Company gross assets at drawdown.				Low	High
ECONOMY/TAXATION/REGULATORY
Weak economic and/or political environment.	Lower occupational demand impacting on income, rental growth and capital performance.		To a large extent outwith our control. Although we know Brexit will happen, we do not yet understand how it will happen and the resulting impact. However, sensitivity analysis of the portfolio is undertaken via a comprehensive cash flow model.				Low	High
Non-compliance with laws and regulations.	The Company is required to comply with REIT rules, the Listing Rules, Disclosure Guidance and Transparency Rules, IFRS accounting standards, AIC SORP and UK legislation.		Use experienced tax advisers, auditors, Investment Manager, Administrator and solicitors. Strong compliance culture with regular risk reviews undertaken by the Audit and Risk Committee.				Low	High
OPERATIONAL
Health and Safety.	Health and safety processes could fail leading to serious financial or reputational damage to the Company.		Insurance cover in place and insurers visit each property and undertake a risk assessment. The managing agent ensures all matters raised are dealt with promptly.				Low	High
Lack or failure of internal controls of the Investment Manager or Administrator.	The possibility of self review, human error and even fraud can occur.		Significant segregation of duties within the Investment Manager and Administrator as well as between them both, with oversight from the Depositary.				Low	High

After due consideration, the Board has concluded that there has been no change compared to last year to the probability or impact of any specific risk, albeit it is recognised there have been some changes to the controls and mitigation in the year.

Consolidated Statement of Comprehensive Income (audited)

For the year ended 30 September 2016                                                                                                          

		Year ended 30 September 2016			Year ended 30 September 2015
		Revenue	Capital	Total	Revenue	Capital	Total
	Notes	£'000	£'000	£'000	£'000	£'000	£'000
Revenue
Rental income		11,323	-	11,323	5,901	-	5,901
Total revenue		11,323	-	11,323	5,901	-	5,901
Unrealised gain on revaluation of investment properties		-	231	231	-	8,907	8,907
Total income		11,323	231	11,554	5,901	8,907	14,808
Expenditure
Investment Manager fee	1	(1,309)	-	(1,309)	(942)	-	(942)
Other expenses		(958)	-	(958)	(520)	-	(520)
Total expenditure		(2,267)	-	(2,267)	(1,462)	-	(1,462)
Profit before finance costs and taxation		9,056	231	9,287	4,439	8,907	13,346
Net finance costs
Interest receivable		65	-	65	64	-	64
Interest payable		(1,553)	-	(1,553)	(517)	-	(517)
Profit before taxation		7,568	231	7,799	3,986	8,907	12,893
Taxation		-	-	-	-	-	-
Profit and total comprehensive income for the year		7,568	231	7,799	3,986	8,907	12,893
Basic earnings per share	3	5.90p	0.18p	6.08p	4.15p	9.28p	13.43p

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 period. The Group commenced business on 27 October 2014.

Consolidated Statement of Financial Position (audited)

As at 30 September 2016

		As at 30 September 2016	As at 30 September 2015
	Notes	£'000	£'000
Non-current assets
Investment properties	4	177,534	133,033
		177,534	133,033
Current assets
Trade and other receivables		3,940	3,584
Cash and cash equivalents		9,967	40,985
		13,907	44,569
Total assets		191,441	177,602
Non-current liabilities
Loan	6	(51,783)	(39,458)
		(51,783)	(39,458)
Current liabilities
Trade and other payables		(2,327)	(1,558)
Total liabilities		(54,110)	(41,016)
Net assets		137,331	136,586
Equity and reserves
Called up equity share capital	7	1,283	1,283
Share premium		34,898	34,898
Capital reserve - investments held		9,138	8,907
Capital reserve - investments sold		-	-
Special distributable reserve		85,115	89,035
Revenue reserve		6,897	2,463
Equity shareholders' funds		137,331	136,586
Net asset value per Ordinary Share	8	107.07p	106.49p

Consolidated Statement of Changes in Equity (audited)

For the year ended 30 September 2016                                                                                              

		Share capital account	Share premium	Capital reserve - investments held	Special distributable reserve	Revenue reserve	Total equity
	Notes	£'000	£'000	£'000	£'000	£'000	£'000
As at 30 September 2015		1,283	34,898	8,907	89,035	2,463	136,586
Profit and total comprehensive income  for the year		-	-	231	-	7,568	7,799
Transactions with owners recognised in equity:
Dividends paid	2	-	-	-	(755)	(6,299)	(7,054)
Transfer from special reserve		-	-	-	(3,165)	3,165	-
As at 30 September 2016		1,283	34,898	9,138	85,115	6,897	137,331

For the year ended 30 September 2015

		Share capital account	Share premium	Capital reserve - investments held	Special distributable reserve	Revenue reserve	Total equity
	Notes	£'000	£'000	£'000	£'000	£'000	£'000
As at 30 September 2014		1	49	-	-	-	50
Profit and total comprehensive income  for the year		-	-	8,907	-	3,986	12,893
Transactions with owners recognised in equity:
Issue of Ordinary Share capital	7	1,282	129,593	-	-	-	130,875
Issue costs		-	(2,523)	-	-	-	(2,523)
Cancellation of share premium		-	(92,221)	-	92,221	-	-
Dividends paid	2	-	-	-	(838)	(3,871)	(4,709)
Transfer from special reserve		-	-	-	(2,348)	2,348	-
As at 30 September 2015		1,283	34,898	8,907	89,035	2,463	136,586

Consolidated Statement of Cash Flow (audited)

For the year ended 30 September 2016                                  

		Year ended 30 September 2016	Year to 30 September 2015
	Notes	£'000	£'000
Cash flows from operating activities
Profit before tax		7,799	12,893
Adjustments for:
Interest receivable		(65)	(64)
Interest payable		1,553	517
Unrealised revaluation gains on property portfolio		(231)	(8,907)
Operating cash flows before working capital changes		9,056	4,439
Increase in trade and other receivables		(356)	(3,584)
Increase in trade and other payables		539	1,558
Net cash inflow from operating activities		9,239	2,413
Cash flows from investing activities
Purchase of investment properties		(41,353)	(119,658)
Capital expenditure		(2,781)	(4,468)
Net cash outflow from investing activities		(44,134)	(124,126)
Cash flows from financing activities
Loan drawn down, net of costs	6	12,257	39,439
Issue of Ordinary Share capital		-	130,925
Issue costs of Ordinary Share capital		-	(2,523)
Dividends paid		(7,011)	(4,709)
Interest received		65	64
Interest paid		(1,434)	(498)
Net cash inflow from financing activities		3,877	162,698
Net (decrease)/increase in cash and cash equivalents		(31,018)	40,985
Opening cash and cash equivalents		40,985	-
Closing cash and cash equivalents		9,967	40,985

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 2016, 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' 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

12 December 2016

Notes to the Audited Consolidated Financial Statements

1. Investment Manager's Fee

	Year ended 30 September 2016	Year ended 30 September 2015
	£'000	£'000
Investment Manager's fee	1,309	942
Total	1,309	942

With effect from 24 February 2016, and as envisaged at the time of the launch of the Group, Ediston Investment Services Limited was appointed as the Company's Alternative Investment Fund Manager (AIFM) and Investment Manager, with the property management arrangements of the Company continuing to be 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 million and 0.75% per annum of the net assets of the Group over £250 million.

Prior to 24 February 2016, R&H Fund Services (Jersey) Limited had been the Company's AIFM and Investment Manager, with the property management arrangements of the Company having been delegated to Ediston Properties Limited. The commercial terms of the Investment Management Agreement were unchanged from those set out above.

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 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 2016		Year ended 30 September 2015
	Pence per share	£'000	Pence per share	£'000
In respect of the prior year:
Tenth interim dividend	0.4583	588	-	-
In respect of the current year:
First interim dividend	0.4583	588	0.9685	923
Second interim dividend	0.4583	588	0.4583	435
Third interim dividend	0.4583	588	0.4583	435
Fourth interim dividend	0.4583	588	0.4583	435
Fifth interim dividend	0.4583	588	0.4583	435
Sixth interim dividend	0.4583	588	0.4583	435
Seventh interim dividend	0.4583	588	0.4583	435
Eighth interim dividend	0.4583	588	0.4583	588
Ninth interim dividend	0.4583	588	0.4583	588
Tenth interim dividend	0.4583	587	-	-
Eleventh interim dividend	0.4583	587	-	-
Total	5.4996	7,054	4.6349	4,709

A twelfth interim dividend for the year to 30 September 2016, of 0.4587 pence per share, was paid on 31 October 2016 to shareholders on the register on 21 October 2016. It is the policy of the Directors to declare and pay dividends as interim dividends. The Directors do not therefore recommend a final dividend.

A first interim dividend for the year to 30 September 2017, of 0.4583 pence per share, was paid on 30 November 2016 to shareholders on the register on 11 November 2016. A second interim dividend for the year to 30 September 2017 of 0.4583 pence per share will be paid on 30 December 2016 to shareholders on the register on 9 December 2016.

3. Earnings per Share

	Year ended 30 September 2016		Year ended 30 September 2015
	£'000	Pence per share	£'000	Pence per share
Revenue earnings	7,568	5.90	3,986	4.15
Capital earnings	231	0.18	8,907	9.28
Total earnings	7,799	6.08	12,893	13.43
Average number of shares in issue	128,263,931		95,982,833

4. Investment Properties

	As at 30 September 2016	As at 30 September 2015
Freehold and leasehold properties	£'000	£'000
Opening book cost	124,126	-
Opening unrealised appreciation	8,907	-
Opening fair value	133,033	-
Purchases	41,353	119,658
Capitalised costs	2,917	4,468
Unrealised gains on investment properties	3,749	10,524
Unrealised losses on investment properties	(3,518)	(1,617)
Closing book cost	168,396	124,126
Closing unrealised appreciation	9,138	8,907
Closing fair value	177,534	133,033

Changes in the valuation of investment properties:

	Year ended 30 September 2016 £'000	Year ended 30 September 2015 £'000
Unrealised gains on investment properties	3,749	10,524
Unrealised losses on investment properties	(3,518)	(1,617)
Total unrealised gain on revaluation of investment properties	231	8,907

At 30 September 2016, the properties were valued at £181,410,000 (2015: £136,400,000) by Knight Frank LLP (Knight Frank), in their capacity as external valuers. The valuation was undertaken in accordance with the RICS Valuation - Professional  Standards VPS4 (1.5) Fair Value and VPGA1 Valuations for Inclusion in Financial Statements, which adopt the definition of Fair Value adopted by the International Accounting Standards Board. 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.

The difference between the Knight Frank valuation of £181,410,000 (2015: £136,400,000) and the closing fair value of investment properties disclosed above of £177,534,000 (2015: £133,033,000) consists of lease incentives granted to tenants totalling £3,876,000 (2015: £3,367,000), which are separately recorded in the accounts as current assets within 'trade and other receivables'.

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 2016 was £135.1 million (2015: £97.9 million) and the book cost was £123.7 million (2015: £91.2 million). The profit of EPIC (No.1) Limited for the year to 30 September 2016 was £8.2 million (2015: £6.7 million).

6. Loan

	As at 30 September 2016	As at 30 September 2015
	£'000	£'000
Principal amount outstanding	52,420	40,000
Set-up costs	(723)	(561)
Amortisation of loan set-up costs	86	19
Total	51,783	39,458

In May 2015, the Group entered into a £40 million secured 10-year term loan arrangement with Aviva Commercial Finance Limited. In February 2016, the Group borrowed an additional £12.42 million, also from Aviva Commercial Finance Limited. The final maturity date of both loans is May 2025. The interest rate on the original £40 million loan is fixed at 3.09% for the period of the loan as long as the loan-to-value ratio is maintained below 40%, increasing to 3.19% if the loan-to-value ratio is 40% or higher. The interest rate on the second tranche of borrowings of £12.42 million is fixed at 2.95%, increasing to 3.05% if the loan-to-value is 40% or higher. The Company's weighted average cost of borrowings was therefore 3.06% at 30 September 2016 (2015: 3.09%). The loans are secured over EPIC (No.1) Limited's current property portfolio.

Under the financial covenants relating to the loan the Group has to ensure that for EPIC (No.1) 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%.

·      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 date stated above. The Group has complied with all the loan covenants during the year.

The fair value of the loans based on a marked-to-market basis, being the yield on the Treasury 5% 2025 plus the appropriate margin, was £57,500,000 as at 30 September 2016 (2015: £40,817,000).

Under the terms of early repayment relating to the loans, the cost of repaying the loans on 30 September 2016 would have been approximately £60,839,000, including repayment of the principal (2015: £42,561,000).

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 2015	128,263,931	1,283
Closing balance as at 30 September 2016	128,263,931	1,283

The Company did not issue, buyback or resell any Ordinary Shares during the year (2015: the Company issued 128,213,931 Ordinary Shares raising gross proceeds of £130,875,000). 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.

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.

Capital management

The Group's capital is represented by the Ordinary Shares, share premium, capital reserves, revenue reserve and special distributable reserve. The Group is not subject to any externally-imposed capital requirements.

The capital of the Group is managed in accordance with its investment policy, in pursuit of its investment objective. Capital management activities may include the allotment of new shares, the buyback or re-issuance of shares from treasury, the management of the Group's discount to net asset value and consideration of the Group's net gearing level.

There have been no changes in the capital management objectives and policies or the nature of the capital managed during the year.

8. Net Asset Value

The Group's net asset value per Ordinary Share of 107.07 pence (2015: 106.49 pence) is based on equity shareholders' funds of £137,331,000 (2015: £136,586,000) and on 128,263,931 (2015: 128,263,931) 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 2016 and 30 September 2015.

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 £108,000 (2015: £134,000) of which £nil (2015: £23,000) remained payable at the year end.

Ediston Properties Limited, being the AIFM and Investment Manager, received £1,309,000 in relation to the year (2015: £942,000) of which £327,000 (2015: £314,000) remained payable at the year end.

R&H Fund Services (Jersey) Limited, being the AIFM and Investment Manager to 24 February 2016 (see Note 1), received £5,000 in relation to the year (2015: £15,000) of which £nil (2015: £15,000) 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 has 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.

Apart from the Aviva loans as disclosed in Note 6, the fair value of financial assets and liabilities is not materially different from their carrying value in the financial statements.

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.

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 was a provision of £10,000 at 30 September 2016 (2015: nil). There were no other financial assets which were either past due or considered impaired at 30 September 2016 or at 30 September 2015.

All of the Group's cash was placed with The Royal Bank of Scotland plc ('RBS') as at 30 September 2016 and 30 September 2015. 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. RBS is rated by all the main rating agencies. Should the credit quality or the financial position of the bank currently employed significantly deteriorate, cash holdings would be moved to another bank. As at 30 September 2016, Standard & Poor's credit rating for RBS was A-2 and Moody's was P-2. 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 10-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.

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 in the Annual Report.

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.

12. Post-Balance Sheet Events

Subsequent to the year end, the Company has issued a further 500,000 Ordinary Shares raising gross proceeds of £545,000.

13. Financial Statements

These are not full statutory accounts.  The report and financial statements for the year to 30 September 2016 will be posted to shareholders and made available on the website: www.ediston-reit.com . Copies may also be obtained from the Company Secretary, R&H Fund Services Limited, 20 Forth Street, Edinburgh, EH1 3LH.

 

END

 

 

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