Final Results

RNS Number : 5979J

Ediston Property Inv Comp PLC

06 December 2018

 

6 December 2018

Ediston Property Investment Company plc 

(the "Company")

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 2018.

Operational Highlights in the year to 30 September 2018:

·      NAV per share at 30 September 2018 of 115.3 pence (30 September 2017: 111.3 pence), an increase of 3.6% after taking into account capital expenditure and transaction costs.

·      Fair value independent valuation of the property portfolio as at 30 September 2018 of £333.9 million, a like-for-like increase of 6.8% on the valuation at 30 September 2017.

·      Dividend increased by 4.5% to 5.75 pence per share (annualised) in February 2018.

·      Acquired four prominent retail parks for £144.0 million and a development site for £2.8 million.

·      Raised approximately £90.0 million of new equity.

·      Dividend cover of 119%.

·      Secured additional debt facility of £54.2 million maturing in 2027. Total debt is now £111.1 million at an 'all-in' fixed rate of 2.86%.

·      Completed 13 lease transactions securing £3.1 million of rental income for the Company.

Financial Highlights

	2018	2017	2016
Total assets	£356.6m	203.7m	£191.4m
NAV total return	8.9%	9.3%	6.1%
EPRA vacancy rate	5.7%	0.7%	4.7%
Weighted average unexpired lease term	6.6 years	6.3 years	7.9 years
EPRA NAV per share	115.3p	111.3p	107.1p
Annualised dividend per share	5.75p	5.5p	5.5p

Key Performance Indicators

	2018	2017	2016
NAV total return	8.9%	9.3%	6.1%
Annualised dividend per share	5.75p	5.5p	5.5p
Average discount of share price to NAV	1.6%	0.3%	2.0%
Share price total return	7.7%	8.3%	(0.5%)
EPRA vacancy rate	5.7%*	0.7%	4.7%
Ongoing charges	1.3%	1.5%	1.5%

* If rental guarantees and agreements for lease are factored in, the vacancy rate is 2.4%.

William Hill, Chairman of the Company, said:

"Real Estate Investment Trusts with attractive and sustainable levels of dividend and modest gearing should remain appropriate places to invest long term capital.

The Company's portfolio has attractive defensive elements with a bedrock of leases let to strong covenants and few imminent lease expiries. The Investment Manager has identified value-add opportunities within the existing portfolio and the Company is not wholly reliant on market movement for NAV progression. The Investment Manager has demonstrated that it has the skills to execute on these opportunities and I expect to be reporting on a number of further successful initiatives during the forthcoming year."

Calum Bruce, Investment Manager, said:

"Investment demand is robust, particularly for good assets which offer strong fundamentals. The market is quick to discount stock which is blighted in any way. We targeted well-located, prominent retail parks and continue to believe that they offer a good value opportunity when compared to other sectors of the property market, such as industrial and logistics assets, where yields have been reduced as a result of stiff pricing competition.

However, care must be taken to select assets with strong fundamentals (well-located, with the right planning consents and let off affordable rents) as these offer prospects of rental growth and will otherwise be susceptible to yields softening."

Enquiries:

Ediston Properties Limited (Investment Manager) Danny O'Neill Calum Bruce	0131 225 5599
Canaccord Genuity Limited                 Will Barnett                   Neil Brierley                   David Yovichic	0207 523 8000
KL Communications Ben Robinson Stephanie Ross	0203 137 7821 0203 137 7784
Maitland Administration Services (Scotland) Limited (Company Secretary) Donald Cameron	0131 550 3765

 

Chairman's statement

SUMMARY

During the financial year the Company has taken another significant step forward in its development. It has enlarged its capital base by 75%, increased the monthly dividend per share by 4.5% and acquired five new assets for £146.8 million. A wide range of asset management initiatives were concluded generating capital value sufficient to absorb both the costs of expansion and the property purchases, whilst also contributing to NAV per share growth of 3.6%. The NAV total return per share was 8.9% for the year.

During the year there was a shift in investment focus with the new capital raised being deployed into the retail warehousing market. The portfolio weighting to this sector increased from 55% to 73% with a consequential reduction in provincial offices. The retail warehouse market is seen as the area offering the most attractive investment opportunities, with the rationale being discussed in more detail in the Investment Manager's review. The Company continues to hold no assets in Central London which is considered the most vulnerable to Brexit risk. It also has no exposure to high street or shopping centre assets.

INVESTMENT AND SHARE PRICE PERFORMANCE

Over the year, the Investment Manager met its strategic investment target of growing and intensively managing the Company's asset base in a way that was both accretive to the net asset value and improved the strength and quantum of the income stream.

The NAV per share has risen from 111.3 pence to 115.3 pence, an increase of 3.6%. Taking into account dividends paid in the period, the NAV total return per share over the year was 8.9% and the share price total return was 7.7%, based on the year-end share price of 109.0 pence per share. The average share price discount to NAV during the year was 1.6%.

The effect of the acquisitions has been to increase the contracted rent from £12.1 million to £21.5 million. Diversification of income has improved with the Company's exposure to its top ten tenants reducing from 62.2% to 47.0%. The weighted average unexpired lease term (WAULT) has increased from 6.3 years to 6.6 years.

PORTFOLIO ACTIVITY

I reported on the £144.0 million retail warehouse portfolio acquired during the year in both the previous Annual Report and Interim Accounts and I will therefore leave any further comment on this substantial acquisition to the Investment Manager's review.

In February, the Company announced the purchase of a development site in Haddington, east of Edinburgh, for £2.8 million. The site comprises seven acres suitable for retail warehousing in an area that is expanding rapidly. A planning application will be submitted for a retail warehouse park of approximately 65,000 sq. ft. It is anticipated that the majority of the park will be pre-let to high quality tenants.

In 2018 the retail sector has come under increasing pressure following a number of tenant administrations and Company Voluntary Arrangements (CVAs). The high street and shopping centre markets have been hit the hardest but there has also been an adverse effect on the retail warehouse sector. However, the Company's portfolio has been relatively resilient as rents are generally affordable, the properties are well-located and, as a consequence, tenants are trading well. The proactive nature and expertise of the Investment Manager has meant that it has often been possible to attract new tenants relatively quickly when voids have occurred.

The Company's office portfolio has benefitted from a number of asset management initiatives that have delivered capital growth. These are covered in more detail in the Investment Manager's review. Overall the vacancy rate in the portfolio is 5.7%, up on the very low figure last year but below market levels of 8.5% (source: IPD), and not giving any cause for concern.

 

CAPITAL STRUCTURE

In order to fund the £144.0 million retail warehouse acquisition, the Company issued £88.7 million of equity and drew £40.2 million of debt, with the remainder coming from existing cash reserves. The Company's gearing at 30 September 2018 was 31.1% of total assets, well within the investment policy limit of 35.0%. The Company has £22.4 million of cash available for investment, however, after retaining normal working capital, this surplus cash has all been earmarked for planned asset management initiatives. The Company has total assets of £356.6 million and net assets of £243.7 million, as at 30 September 2018.

DIVIDENDS

The Company announced on 15 November 2017 a 4.5% increase in the annualised dividend from 5.5 pence per share to 5.75 pence per share. The revised monthly rate was payable from February 2018. Paying a progressive and sustainable monthly dividend remains a key investment objective for the Company. The Board believes with dividend cover of 119.0% that it is in a good position to consider a further increase in the dividend in due course.

GOVERNANCE

The changes in Board responsibilities that I explained last year, following the appointment of Jamie Skinner, are working well. The newly-formed Marketing Committee, under Jamie's leadership, has now met three times and with tangible output as described below. The Board continues to work well together, as evidenced by the number of initiatives and developments which the Company has successfully undertaken since its inception four years ago.

MARKETING COMMITTEE

The Board recognises that consistent demand for the Company's shares and diversification of the Company's share register will have a number of benefits for existing shareholders, including a potential reduction in both the Company's bid offer spread and the volatility of its share price. To this end, the Company has established a Marketing Committee to improve the Company's overall marketing activities and, in particular, to improve communication with retail investors, who remain under-represented on the Company's share register. During the year, the Marketing Committee engaged a specialist consultant who undertook an in-depth review of the Company's activities and produced a formal marketing plan. This plan has been adopted by the Company and included: new appointments for PR, upgrading the website, publishing independent research and clearer messaging for investment platforms and the retail investment community. We remain of the view that a dependable, regular and high yield with the prospect of growth over the medium term in asset value and income should be attractive to both retail and institutional investors who want access to UK commercial property in a well-managed investment vehicle.

CORPORATE STRATEGY

The Board is delighted that it has been able to execute a significant expansion in the Company's equity base. The advantages of spreading management costs over a greater asset base, improving portfolio diversity and enhancing the liquidity of shares are well understood in the development of successful investment companies.

Market conditions are unlikely to be conducive to further equity issues in the short term. However, with the expiry of the placement programme, the Board wishes to ensure the Company is able to access capital via tap issues if circumstances allow and if it is thought appropriate to do so, and is therefore proposing to renew the authority to issue shares, limited to 10% of the shares currently in issue.

OUTLOOK

Real Estate Investment Trusts with attractive and sustainable levels of dividend and modest gearing should remain appropriate places to invest long term capital. With financial markets jittery, The Financial Conduct Authority has recently given investors a timely reminder of the flaws in the daily traded property unit trusts which struggle when under market pressure. My hope is that this latest report will be a catalyst for investors to recognise the significant advantages a listed closed end structure has over these funds for owning illiquid assets.

Although investor demand for real estate from both domestic and international buyers remains strong, we must acknowledge that we are late in the property cycle. Undoubtedly bumpier roads lie ahead. One determinant on how bumpy this will be is the form that Brexit takes and the political and economic stability, or otherwise, that follows. The good news is that it has not been a property cycle where there has been the traditional supply side reaction funded by excess investment and debt capital. Vacancy rates are generally low, meaning the greatest downside risk lies with adverse yield movement responding to short-term events. This volatility should not be an issue for patient capital if the capital structure is secure and underlying income sufficiently robust to ensure that dividends are not at risk. Property yields still look attractive relative to bonds so there may be scope to absorb bad news.

The Company's portfolio has attractive defensive elements with a bedrock of leases let to strong covenants and few imminent lease expiries. The Investment Manager has identified value-add opportunities within the existing portfolio and the Company is not wholly reliant on market movement for NAV progression. The Investment Manager has demonstrated that it has the skills to execute on these opportunities and I expect to be reporting on a number of further successful initiatives during the forthcoming year.

William Hill

Chairman

5 December 2018

 

Investment Manager's review

MARKET COMMENTARY

The UK commercial real estate market performed well in the year ended 30 September 2018. The investment market finished 2017 strongly, with both total returns and investment volumes ahead of the start of year predictions. The rebound in deal volumes, double-digit returns and a recovery in rental growth prospects meant 2017 was unexpectedly strong on multiple fronts.

2018 started well with similar levels of activity as the same period in 2017, with plenty of buyers looking to invest. However, a feature of the market was the relatively low levels of stock available to buy. Whilst more assets did come to the market as the year progressed, the lack of liquidity has caused yields to tighten. This is especially evident in the office and industrial markets. Industrial has performed well, but is now looking overpriced.

The market was dominated by overseas buyers who view the UK as an attractive location in which to invest and regard it as a safe haven due to the lack of volatility, a transparent land registry system and strong rule of law, all of which makes transacting property much easier than in other countries. Local Authorities and UK Institutions were also active, with the latter becoming net investors in quarters two and three.

Investment demand is robust, particularly for good assets which offer strong fundamentals. The market is quick to discount stock which is blighted in any way, be that by sector, location or build quality. There is a definite polarisation between prime and secondary/tertiary stock with the yield gap widening. There is also a flight to quality evident in the market place.

Office and industrial yields are generally stable for the better quality assets, but in the retail sector the picture is more mixed. The high street and shopping centre markets will remain challenging, with all but the best assets likely to decline in value. There are opportunities in the retail warehouse market as yields, relative to other sectors, look more attractive. However, care must be taken to select assets with strong fundamentals (well-located, with the right planning consents and let off affordable rents) as these offer prospects of rental growth and will otherwise be susceptible to yields softening.

OUTLOOK

As 2018 draws to a close, it is likely that investment volumes for the calendar year will be at a similar level to 2017, when £59.8 billion of assets were transacted.

Looking ahead to 2019 we believe that there might be a reduction in activity as investors adopt a 'wait-and-see' position with regards to Brexit. It is the implications of Brexit which remain the biggest unknowns at the moment and, regardless of whether or not it is a 'hard-Brexit', the UK property market will be impacted in some way. There is no consensus view as to what will happen, but it is likely that there will be a pause and more subdued property market activity.

This occurred immediately after the EU referendum in 2016, when investors and tenants alike took time to consider where the market was heading. At the time, the issues were exacerbated by the liquidity problems faced by the daily traded open-ended real estate vehicles, but it must not be forgotten that the recovery was quite quick thereafter. Central London offices remain the most vulnerable, and the Company has no exposure to this market, but it is likely that all sectors will be impacted in some way.

It is clear that with Brexit there will be challenges. With an active Investment Manager and a portfolio that has the right balance of defensive qualities and asset management upside, the Company should be able to deal with headwinds and capitalise on any opportunities that may appear. In an uncertain market where investors adopt different stances on key issues, there will be upside to exploit.

PORTFOLIO VALUATION

The Company's property portfolio is valued by Knight Frank on a quarterly basis throughout the year. As at 30 September 2018 it was valued at £333.9 million, a like-for-like increase of 6.8% over the period.

Property Portfolio as at 30 September 2018
Location	Name	Sector	Market Value Range (£)	Tenure
Birmingham	St Philips Point	Office	30-35m	Freehold
Newcastle	Citygate II	Office	20-25m	Leasehold
Edinburgh	145 Morrison Street	Office	10-15m	Heritable
Bath	Midland Bridge House	Office	5-10m	Freehold
Prestatyn	Prestatyn Shopping Park	Retail	50m+	Freehold
Widnes	Widnes Shopping Park	Retail	45-50m	Leasehold
Hull	Kingston Retail Park	Retail	25-30m	Freehold
Sunderland	Pallion Retail Park	Retail	25-30m	Freehold
Wrexham	Plas Coch Retail Park	Retail	20-25m	Freehold
Coatbridge	B&Q	Retail	15-20m	Heritable
Rhyl	Clwyd Retail Park	Retail	15-20m	Freehold
Barnsley	Barnsley East Retail Park	Retail	10-15m	Freehold
Daventry	Abbey Retail Park	Retail	10-15m	Leasehold
Telford	Mecca Bingo	Leisure	0-5m	Freehold
Liverpool	Mecca Bingo	Leisure	0-5m	Freehold
Hartlepool	Mecca Bingo	Leisure	0-5m	Freehold
Haddington	Site	Development	0-5m	Heritable

FULLY COVERED DIVIDEND

The Company's dividend remains fully covered.

ASSET MANAGEMENT

During the period we completed 13 asset management initiatives across the portfolio in both office and retail warehouse assets. These included rent reviews, lease restructures and new lettings. Some of these are more fully described in pages 14 to 17 of the Annual Report. Not only did these transactions secure £3.1 million of rental income for the Company, they also had a positive impact on the capital value of the portfolio.

Tenant covenant profile: D&B risk ratings of tenant income as a percentage of the portfolio income
D&B rating	%
Minimal	79.2
Lower than average	13.0
Higher than average	0.8
High	7.0

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

Year	Vacancy (%)	WAULT (years)
2017	0.7	6.3
2018	5.7*	6.6

* If rental guarantees and agreements for lease are factored in, the vacancy rate falls to 2.4%.

ACQUISITION ACTIVITY

At the start of the period, with industrial property looking expensive and office yields tightening, a move was made, with conviction, to invest in the retail warehouse sector. Against the backdrop of retail warehouse yields looking attractive we identified a portfolio of four retail parks which we acquired in an off-market transaction for £144.0 million. The assets in Prestatyn, Hull, Barnsley and Widnes have strong fundamentals and provide a good income stream for the Company, as well as having asset management angles to exploit.

The acquisition provided the growth the Company had been looking for. At purchase, it increased total assets by 70.5%, contracted rent by 79.3% and the Company's equity base by 60%. The assets were acquired in an extremely cost-efficient manner, which considerably reduced the negative impact that transaction costs would usually have on the NAV. Property costs of the acquisition were just 0.7% of the purchase price. It is not uncommon for the costs of purchasing property assets to be 6.8% of the purchase price. This represents a saving to the Company of approximately £8.8 million.

The purchase was funded by a combination of an equity raise of £88.7 million including shares issued to the vendor, existing cash resources and additional debt secured from Aviva Commercial Finance Limited.

A seven-acre development site in Haddington, which is 19 miles east of Edinburgh, was also purchased in the period. The site, which was acquired for £2.8 million, occupies a prominent position close to the A1. It has planning permission for a supermarket and petrol filling station. It is our intention to seek a new planning consent to permit a retail warehouse development to satisfy the pent-up demand from retailers for the town. Discussions are ongoing with a number of retailers seeking pre-lets on the development.

If it were possible to raise fresh equity, we are confident of being able to deploy additional capital well, particularly if assets become mis-priced through general market weakness and uncertainty.

Calum Bruce

Investment Manager, Ediston Properties Limited

 

Financial Review

"Secured income boosted by acquisitions"

This has been another year of strong financial performance for the Company with new equity of £89.8 million being raised, acquisitions of £146.8 million and intensive asset management activity. The Company increased its dividend from 5.50 pence per share to 5.75 pence. The WAULT and dividend cover have also increased providing investors with even greater security of income.

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 acquisitions and letting activity in the year helped achieve revenue profit of £12.9 million, an increase of 57.3% from 2017 and generated rental income in the year of £19.4 million. Revenue expenditure in the period was £3.5 million, including £0.4 million of property-specific expenditure and £2.1 million related to the Investment Manager's fee. Net interest costs were £3.0 million.

The positive movement in the value of our investment properties was £7.3 million, which enabled the Company to report a total profit of £20.2 million and an increase in EPRA earnings per share to 6.60 pence.

	2018 £m	2017 £m
Rental income	19.4	12.2
Property expenditure	(0.4)	(0.1)
Net rental income	19.0	12.1
Administration expenses	(3.1)	(2.2)
Net financing costs	(3.0)	(1.7)
Revenue profit	12.9	8.2
Gain on revaluation of investment properties	7.3	4.4
Accounting profit after tax	20.2	12.6
EPRA earnings per share	6.60p	6.34p
Dividend per share	5.69p	5.50p
Basic earnings per share	10.32p	9.75p

RENT

Contracted rent was £21.5 million (2017: £12.1 million) per annum at the year end. The increase was mainly due to the property acquisitions in the period which had contracted rent at the year end of £9.2 million. In addition, asset management delivered a number of new lettings which made a positive contribution to the portfolio. Rent-free periods as a percentage of contracted rent at the year end were 9.5%. 87.0% (2017: 89.1%) of rent for the year was collected within seven days with 91.0% of rent collected within 14 days (2017: 93.0%).

The portfolio continues to provide long-term stability to the Company's income. The EPRA vacancy rate has increased to 5.7% from 0.7%, due largely to the newly-acquired properties having vacant units. If rental guarantees and agreements for lease are factored in the vacancy rate is 2.4%. As a result of acquisitions in the period and various asset management initiatives with tenants, the WAULT has increased to 6.6 years (2017: 6.3 years).

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 have therefore included 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 in this year's accounts.

	2018	2017
EPRA earnings	£12.9m	£8.2m
EPRA earnings per share	6.60p	6.34p
Diluted EPRA earnings per share	6.60p	6.34p
EPRA NAV per share	115.30p	111.32p
EPRA cost ratio (including direct vacancy costs)	18.1%	18.6%
EPRA cost ratio (excluding direct vacancy costs)	17.7%	18.2%
EPRA net initial yield	5.3%	6.0%
EPRA topped up net initial yield	6.0%	6.5%
EPRA vacancy rate	5.7%	0.7%

The acquisitions in the period have contributed to secure income which have in turn strengthened a number of the financial performance statistics above.

NET ASSET VALUE (NAV)

At 30 September 2018 our net assets were £243.7 million, equating to net assets per share of 115.3 pence (2017: 111.3 pence) resulting in an upward year-on-year growth in the NAV per share of 3.6%.

The increase in net assets to £243.7 million is summarised in the table below:

	£ million	Pence per share
NAV at 30 September 2017	145.8	111.32
Increase in value of investment properties (net of capital expenditure and transaction costs)	7.3	3.43
Net earnings in the year	12.9	6.13
Less: dividends paid in the year	(10.8)	(5.13)
Equity raised in the year (net of equity raising costs)	88.5	(0.45)
NAV at 30 September 2018	243.7	115.30

The NAV is primarily represented by our investment properties, which had a fair value of £333.9 million at the year end. This is included in the financial statements as Investment Properties at £330.8 million with the adjustments relating to capital incentives. The remaining £87.2 million of net liabilities is made up of: i) £109.8 million of debt; ii) £11.7 million of cash and cash equivalents; and iii) £10.9 million of net current assets.

DEBT

Following the acquisitions in December 2017, an additional debt facility was agreed with Aviva of £54.2 million at an interest rate of 2.73%. The facility will mature in 2027. The blended rate of interest of both facilities totalling £111.1 million is 2.86%. Further details are included within Note 6. It is the intention of the Board that gearing will not be greater than 35% of total assets and will be closer to 30% or less, which represents significant headroom against the loan to value covenants on the property portfolio. Gearing at the year end was 31.1%.

CASH

As at 30 September 2018 the Company had cash on its Balance Sheet of £11.7 million with a further £10.7 million drawn under the debt facility.

DIVIDENDS

The Board increased the annualised dividend from 5.50 pence per share to 5.75 pence in February 2018. The Company has now provided a fully covered dividend since early 2016. Dividend cover for the year was 119.0%. The Board declared a dividend of 0.48 pence per share for the month of September which was paid in October 2018. Taking this last dividend with dividends paid to September 2018 of 5.21 pence, the total dividend for the year is 5.69 pence per share in line with the targeted dividend policy. This equates to a dividend yield of 5.3% based on the closing share price of 109.0 pence per share as at the period end. The Company remains committed to monthly dividend payments.

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 ensuring our REIT status is maintained.

OUTLOOK

As a result of the continued strong financial performance of the Company, in the absence of unforeseen circumstances, the Board projects that dividends will continue to be fully covered for the medium term.

The Company has a strong Balance Sheet and good sustainable income. Going forward, it is anticipated that the portfolio asset management initiatives will be financed through existing cash resources.

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, 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 principal risks facing the business, with their likelihood and impact and how the Company mitigates these, are set out in the table below.

Risk	Impact	Controls and mitigation in place	Probability of occurring	Impact if occurred	Change from last year
INVESTMENT MANAGEMENT
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 investor 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 Following thorough due diligence, investment process and comprehensive modelling, a £144 million portfolio was acquired in December 2017 and a further development site was acquired in February 2018. All available cash resources are currently identified against asset management activities.
Significant exposure to a specific property, tenant, sector, geographic location or to lease expiries 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.	Concentration 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.	Low	Medium	No Change Following the portfolio acquisition in December 2017, the Group has increased its exposure to the retail warehouse sector whilst improving tenant diversification and the portfolio's overall WAULT. Tenancy risks in the retail sector overall have increased, however the Board believes these are mitigated: firstly by the quality of the assets, which are in the retail warehouse sector rather than the more exposed high street and shopping centres; and secondly by the Investment Manager's proactive approach to replacing struggling tenants with those with stronger covenants.
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.	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 during the year and has others identified.
FINANCIAL
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. The Board intends to maintain gearing at 30% but will not exceed 35% of Company gross assets at drawdown.	Low	Medium	Decreasing The Company's LTV increased to 30.4% following the drawdown of the additional debt facility in December 2017. However, this reduced to 30.1% over the reminder of the financial year. The additional facility reduced the blended fixed interest rate from 3.06% to 2.86% per annum and staggered the dates on which the various debt facilities fall due for renewal. 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.
ECONOMY/TAXATION/REGULATORY
Weak economic and/or political environment, including the potential impact of Brexit.	Lower occupational demand impacting on income, cash flow, rental growth and capital performance.	To a large extent outwith the Company's control. Brexit will happen in the near future but it is not possible at this time for the Company to understand fully how it will happen and the resulting impact. Sensitivity analysis of the portfolio is undertaken regularly via a comprehensive cash flow model.	Medium	High	Increasing 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, longer WAULT and strong covenants, the heightened uncertainty arising from Brexit increases the risk to the returns from the property market as a whole.
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. 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 regularly 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 As the Group has grown in size since its initial launch in 2014, the supporting infrastructure and internal controls within the Investment Manager and Administrator and the segregation of duties between individual members of staff have increased correspondingly.

Consolidated Statement of Comprehensive Income (audited)

For the year ended 30 September 2018                                                                                                          

		Year ended 30 September 2018			Year ended 30 September 2017
		Revenue	Capital	Total	Revenue	Capital	Total
	Notes	£'000	£'000	£'000	£'000	£'000	£'000
Revenue
Rental income		19,391	-	19,391	12,154	-	12,154
Total revenue		19,391	-	19,391	12,154	-	12,154
Unrealised gain on revaluation of investment properties		-	7,286	7,286	-	4,613	4,613
Losses of sale of investment properties realised		-	-	-	-	(203)	(203)
Total income		19,391	7,286	26,677	12,154	4,410	16,564
Expenditure
Investment management fee	1	(2,112)	-	(2,112)	(1,352)	-	(1,352)
Other expenses		(1,390)	-	(1,390)	(902)	-	(902)
Total expenditure		(3,502)	-	(3,502)	(2,254)	-	(2,254)
Profit before finance costs and taxation		15,889	7,286	23,175	9,900	4,410	14,310
Net finance costs
Interest receivable		23	-	23	8	-	8
Interest payable		(3,005)	-	(3,005)	(1,708)	-	(1,708)
Profit before taxation		12,907	7,286	20,193	8,200	4,410	12,610
Taxation		-	-	-	-	-	-
Profit and total comprehensive income for the year		12,907	7,286	20,193	8,200	4,410	12,610
Basic earnings per share	3	6.60p	3.72p	10.32p	6.34p	3.41p	9.75p

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 2018

		As at 30 September 2018	As at 30 September 2017
	Notes	£'000	£'000
Non-current assets
Investment properties	4	330,825	171,739
		330,825	171,739
Current assets
Trade and other receivables		14,078	7,317
Cash and cash equivalents		11,735	24,651
		25,813	31,968
Total assets		356,638	203,707
Non-current liabilities
Loans	6	(109,780)	(56,246)
		(109,780)	(56,246)
Current liabilities
Trade and other payables		(3,188)	(1,645)
Total liabilities		(112,968)	(57,891)
Net assets		243,670	145,816
Equity and reserves
Called up equity share capital	7	2,113	1,310
Share premium		125,559	37,858
Capital reserve - investments held		18,149	10,863
Capital reserve - investments sold		2,685	2,685
Special distributable reserve		84,158	84,668
Revenue reserve		11,006	8,432
Equity shareholders' funds		243,670	145,816
Net asset value per Ordinary Share	8	115.30p	111.32p

Consolidated Statement of Changes in Equity (audited)

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

For the year ended 30 September 2017

		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 2016		1,283	34,898	9,138	-	85,115	6,897	137,331
Profit and total comprehensive income  for the year		-	-	4,613	(203)	-	8,200	12,610
Transfer of prior years' revaluations to realised reserve		-	-	(2,888)	2,888	-	-	-
Transactions with owners recognised in equity:
Issue of Ordinary Shares	7	27	2,960	-	-	-	-	2,987
Dividends paid	2	-	-	-	-	-	(7,112)	(7,112)
Transfer from special reserve		-	-	-	-	(447)	447	-
As at 30 September 2017		1,310	37,858	10,863	2,685	84,668	8,432	145,816

Consolidated Statement of Cash Flow (audited)

For the year ended 30 September 2018                                  

		Year ended 30 September 2018	Year ended 30 September 2017
	Notes	£'000	£'000
Cash flows from operating activities
Profit before tax		20,193	12,610
Adjustments for:
Interest receivable		(23)	(8)
Interest payable		3,005	1,708
Unrealised revaluation gains on property portfolio		(7,286)	(4,410)
Operating cash flows before working capital changes		15,889	9,900
Increase in trade and other receivables		(6,511)	(3,208)
Increase/(decrease) in trade and other payables		1,266	(460)
Net cash inflow from operating activities		10,644	6,232
Cash flows from investing activities
Purchase of investment properties		(146,750)	(26,100)
Capital expenditure		(5,264)	(1,353)
Sale of investment properties		-	37,255
Net cash (outflow)/inflow from investing activities		(152,014)	9,802
Cash flows from financing activities
Loans drawn down, net of costs	6	53,382	4,385
Issue of Ordinary Share capital, net of costs		88,504	2,987
Dividends paid		(10,809)	(7,114)
Interest received		23	8
Interest paid		(2,646)	(1,616)
Net cash inflow/(outflow) from financing activities		128,454	(1,350)
Net (decrease)/increase in cash and cash equivalents		(12,916)	14,684
Opening cash and cash equivalents		24,651	9,967
Closing cash and cash equivalents		11,735	24,651

 

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 2018, 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 2018

 

Notes to the Audited Consolidated Financial Statements

1. Investment Management Fee

	Year ended 30 September 2018	Year ended 30 September 2017
	£'000	£'000
Investment management fee	2,112	1,352
Total	2,112	1,352

Ediston Investment Services Limited has been appointed as the Company's Alternative Investment Fund Manager (AIFM) and Investment Manager, with the property management arrangements of the Company being delegated to Ediston Properties Limited. The Investment Manager was 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. The management fee payable on any cash available for investment 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 2018		Year ended 30 September 2017
	Pence per share	£'000	Pence per share	£'000
In respect of the prior year:
Twelfth interim dividend	0.4587	601	0.4587	588
In respect of the current year:
First interim dividend	0.4583	600	0.4583	588
Second interim dividend	0.4583	600	0.4583	590
Third interim dividend	0.4583	964	0.4583	590
Fourth interim dividend	0.4792	1,008	0.4583	590
Fifth interim dividend	0.4792	1,008	0.4583	590
Sixth interim dividend	0.4792	1,008	0.4583	590
Seventh interim dividend	0.4792	1,008	0.4583	590
Eighth interim dividend	0.4792	1,008	0.4583	594
Ninth interim dividend	0.4792	1,012	0.4583	600
Tenth interim dividend	0.4792	1,013	0.4583	601
Eleventh interim dividend	0.4792	1,013	0.4583	601
Total	5.6672	10,843	5.5000	7,112

Dividends paid/ announced subsequent to the year end were:

	Record date	Payment date	Pence per share
Twelfth interim dividend	19 October 2018	31 October 2018	0.4792
In respect of the year ending 30 September 2019:
First interim dividend	9 November 2018	30 November 2018	0.4792
Second interim dividend	14 December 2018	31 December 2018	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 2018. A non-binding resolution to approve the Company's dividend policy will be proposed at the Annual General Meeting.

3. Earnings per Share

	Year ended 30 September 2018		Year ended 30 September 2017
	£'000	Pence per share	£'000	Pence per share
Revenue earnings	12,907	6.60	8,200	6.34
Capital earnings	7,286	3.72	4,410	3.41
Total earnings	20,193	10.32	12,610	9.75
Average number of shares in issue	195,592,787		129,342,917

4. Investment Properties

	As at 30 September 2018	As at 30 September 2017
Freehold and leasehold properties	£'000	£'000
Opening book cost	160,876	168,396
Opening unrealised appreciation	10,863	9,138
Opening fair value	171,739	177,534
Purchases	146,750	26,100
Sales - proceeds	-	(37,255)
- gain on sales	-	2,685
Capital expenditure	5,050	950
Unrealised gains realised during the year	-	(2,888)
Unrealised gains on investment properties	9,689	4,656
Unrealised losses on investment properties	(2,403)	(43)
Closing book cost	312,676	160,876
Closing unrealised appreciation	18,149	10,863
Closing fair value	330,825	171,739

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

	As at 30 September 2018 £'000	As at 30 September 2017 £'000
Closing fair value	330,825	171,739
Lease incentives held as debtors	3,025	1,671
Appraised market value per Knight Frank	333,850	173,410

Changes in the valuation of investment properties:

	Year ended 30 September 2018 £'000	Year ended 30 September 2017 £'000
Gain on sale of investment properties	-	2,685
Unrealised gains realised during the year	-	(2,888)
Losses on sale of investment properties realised*	-	(203)
Unrealised gains on investment properties	9,689	4,656
Unrealised losses on investment properties	(2,403)	(43)
Total gain on revaluation of investment properties	7,286	4,410

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

At 30 September 2018, the investment properties were valued at £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 2018 was £130.4 million (2017: £141.0 million) and the book cost was £104.2 million (2017: £123.7 million). The profit of EPIC (No.1) Limited for the year to 30 September 2018 was £17.0 million (2017: £13.1 million).

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 year and to enter into the Group's additional loan facility. The net asset value of EPIC (No.2) Limited as at 30 September 2018 was £106.5 million and the book cost was £105.5 million. The profit of EPIC (No.2) Limited for the period to 30 September 2018 was £3.7 million.

EPIC (No.2) Limited acquired five subsidiaries as part of the acquisition in December 2017 (see note 12). The Group considered the acquisition of these companies as representing the acquisition of properties rather than a business combination. The properties held by these five subsidiaries were transferred immediately after acquisition and at 30 September 2018 were held directly by EPIC (No.2) Limited. Since this transfer, the five subsidiaries have remained dormant and are expected to be liquidated shortly.

6. Loans

	As at 30 September 2018	As at 30 September 2017
	£'000	£'000
Principal amount outstanding	111,076	56,920
Set-up costs	(1,612)	(838)
Amortisation of loan set-up costs	316	164
Total	109,780	56,246

In May 2015, the Group entered into a £40.0 million secured 10-year term loan arrangement with Aviva Commercial Finance Limited. In February 2016 and June 2017, the Group borrowed an additional £12.4 million and £4.5 million, respectively, also from Aviva Commercial Finance Limited. The final maturity date of all three loans is May 2025. The annual interest rate is fixed at 3.09% on the original £40.0 million loan, at 2.95% on the loan of £12.4 million and 2.22% on the third loan of £4.5 million. Each of these rates is fixed for the period of the loan as long as the loan-to-value is maintained below 40%, with each increasing by 10 basis points if the loan-to-value is 40% or higher. The loans are secured over EPIC (No.1) Limited's property portfolio.

On 8 December 2017, the Group drew down a new £54.2 million ten-year term loan arranged with Aviva Commercial Finance Limited. The total interest rate payable is fixed at 2.73% for the period of the loan, increasing by 10 basis points if the loan-to-value is 40% or higher. The 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 2018 (2017: 2.99%).

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 2018, based on the yield on the Treasury 5% 2025 and Treasury 4.25% 2027 plus a margin of 0.5%, would have been approximately £118,860,000 (2017: £62,418,000), including repayment of the principal of £111,076,000 (2017: £56,920,000).

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 £110,786,000 as at 30 September 2018 (2017: £59,297,000). 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 2017	130,993,931	1,310
Issue of Ordinary Shares	80,339,806	803
Closing balance as at 30 September 2018	211,333,737	2,113

During the year ended 30 September 2018, the Company issued 80,339,806 (2017: 2,730,000) Ordinary Shares, raising gross proceeds of £89,797,000 (2017: £3,046,000). The Company did not buyback or resell from treasury any Ordinary Shares during the year (2017: 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, net of the total expenses of issue of £1,293,000 (2017: £59,000), has 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 115.30 pence (2017: 111.32 pence) is based on equity shareholders' funds of £243,670,000 (2017: £145,816,000) and on 211,333,737 (2017: 130,993,931) 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 2018 and 30 September 2017.

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 £196,000 (2017: £118,000) of which £nil (2017: £nil) remained payable at the year end.

Ediston Properties Limited, being the AIFM and Investment Manager, received £2,112,000 in relation to the year (2017: £1,352,000) of which £580,000 (2017: £347,000) 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 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 £22,623,000 (2017: £30,237,000), consisting of cash of £11,735,000 (2017: £24,651,000), the secured balance held with the loan provider of £10,721,000 (2017: £5,520,000) and rent receivable of £167,000 (2017: £66,000).

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 relet. 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 2018 or at 30 September 2017.

All of the Group's cash was placed with The Royal Bank of Scotland plc (RBS) as at 30 September 2017. Due to the quantum of the cash balances held during the year ended 30 September 2018 the Group opened an additional deposit account with Bank of Scotland plc which permitted the Group to diversify its credit risk when significant cash balances were held. At 30 September 2018, the Group held £6.2 million with RBS and £5.5 million 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 2018, Standard & Poor's credit rating for RBS was A-2 and Moody's was P-1. 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.

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 2018 would have increased net assets available to shareholders and increased the net income for the year by £33.1 million (2017: £17.2 million); 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. Significant Events

On 15 November 2017, the Company announced that it had entered into a conditional acquisition agreement with the Stadium Group in relation to the acquisition of a new portfolio of four retail warehouse parks with an aggregated market value of approximately £144 million. This acquisition, funded by an equity issue, an additional debt facility and utilising some of the Group's existing cash, was approved by shareholders. The transaction and fund raising was successfully achieved, with the acquisition subsequently completing on 8 December 2017.

In order to finance this acquisition, the Company allotted 79.3 million Ordinary Shares at a price of 111.75 pence per share on 7 December 2017. This included 32.7 million Ordinary Shares which were issued, at the same price, to the vendors. The shares issued to the vendors were covered, from the date of issuance, by a 12-month agreement, subject to customary exceptions, not to dispose of the shares for 12 months from the date of allotment and to only dispose of such shares in the following 12-month period after providing notice to the Company. The Company also fully drew down an additional ten-year debt facility of £54 million at a fixed rate, including the margin, of 2.73% per annum (see Note 6).

The total costs of the transaction, incorporating the entirety of the costs of the share issuance, the acquisition of the property portfolio and the additional debt facility, were £3.1 million which equated to 2.2% of the value of the properties acquired.

13. Financial Statements

These are not full statutory accounts.  The report and financial statements for the year to 30 September 2018 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, 20 Forth Street, Edinburgh, EH1 3LH.

 

END

 

 

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