For release 21
May 2019
Schroder Real
Estate Investment Trust Limited
(“SREIT”/ the
“Company” / “Group”)
FULL YEAR RESULTS
FOR THE YEAR ENDED 31 MARCH 2019
INCREASED
WEIGHTING TO HIGHER GROWTH SECTORS AND WINNING CITIES UNDERPINS
NAV, EARNINGS AND DIVIDEND GROWTH
Schroder Real Estate Investment Trust, the actively managed UK
focussed REIT, today announces its audited full year results for
the 12 months ended 31 March
2019.
Financial highlights for the 12 months
ended 31 March 2019
· 5% dividend increase delivered
during the financial year
· Net Asset Value (‘NAV’) of
£356.4 million or 68.7 pps, representing an increase of 0.7%
· NAV Total Return of 4.5%
(31 March 2018: 10.5%), reflecting
the impact of one-off refinancing and acquisition costs
· Adjusted EPRA earnings of £15.2
million (31 March 2018: £14.1
million) which results in dividend cover of 114% (31 March 2018: 109%)
· Profit for the year of £15.9
million (31 March 2018: £33.8
million)
· Extended the term of the loan
facility with Canada Life at a lower rate and increased the
capacity of the Royal Bank of Scotland revolving credit facility to maximise
operational flexibility
· Loan to Value (‘LTV’), net of
all cash, reduced to 22.1% (30 September
2018: 29.2%)
Operational highlights
· Sustained outperformance of the
real estate portfolio with a total return of 7.2% versus the
IPD/MSCI Benchmark Index of 5.2% resulting in annualised
outperformance of 2.0% over the past 12 months, 2.5% per annum over
the past three years and 1.4% per annum since IPO in July 2004
· Portfolio supported by strong
fundamentals with 93% of the portfolio located in Winning
Cities
· 68% of the portfolio weighted to
the office and industrial sectors (31 March
2018: 63.5%), with no City of
London or Shopping Centres
· Three acquisitions during the
year of regional offices in Edinburgh and Nottingham, and an adjoining industrial
ownership in Milton Keynes
totalling £21.85 million, equating to a yield based on contracted
rental income of 7%
· Improved rental profile with
reversionary income yield of 7.1% compared with the MSCI/IPD
Benchmark Index of 5.4%
· £50 million of disposals
contracted during the year and post year end at a blended initial
income yield of 2.9%, crystallising profits from asset
management
· Pipeline of asset management
opportunities to capture future rental growth and improve the
defensive characteristics across the portfolio
· Undrawn loan facilities and cash provides
important operational flexibility
Commenting, Lorraine Baldry, Chairman of the Board,
said:
“A combination of cash and undrawn revolving credit facilities
provides an opportunity to reinvest following a market correction
at higher yields. This places the Company in a strong
situation and successful execution of this strategy combined with
delivering asset management initiatives should provide support for
future income, valuation and dividend growth.”
Duncan
Owen, Global Head of Schroder Real Estate, added:
“Successful execution of our strategy over the year has
supported a dividend increase in contrast to the real estate market
slowdown. It has also further enhanced our flexibility and balance
sheet strength against the backdrop of a more uncertain market
environment.
Recent disposals have realised profits at the same time as the
market is experiencing wider price falls. Reinvestment will target
higher income returns than the sales and this will increase net
operating income. In the meantime, the Company is positioned to
explore alternative refinancing strategies which may further
increase net operating income. For this reason we believe the
Company is well placed to deliver on its long term objectives and
to pursue a progressive dividend policy.”
For further information:
Schroder Real Estate
Investment Management
Duncan Owen / Nick Montgomery / Frank Sanderson |
020 7658 6000 |
Northern Trust
James Machon / Sean Walsh |
01481 745212 |
FTI
Consulting
Dido Laurimore / Richard Gotla / Meth Tanyanyiwa |
020 3727 1000 |
A presentation for analysts and investors will be held at
8.45 am today at the offices of
Schroders plc, 1 London Wall Place, London, EC2Y 5AU. If you would like to attend,
please contact Richard Gotla at FTI
on +44 (0)20 3727 1000 or schroderrealestate@fticonsulting.com
Alternatively, the dial-in details
are as follows: |
+44 (0)330 336 9105 |
Participant
passcode: |
9872520 |
|
Schroder Real Estate
Investment Trust Limited |
Annual
Report and Consolidated Financial Statements
for the year ended 31 March 2019 |
Contents
Overview.. 3
Company Summary. 3
Key Points 4
Portfolio Overview – At a glance. 5
Investment Philosophy. 7
Our Strategic Objectives 8
Performance Summary. 9
Strategic Report 11
Chairman’s Statement 11
Investment Manager’s review.. 13
Sustainability Report 22
Business Model 27
Risk and Uncertainties 30
Governance Report 33
Board of Directors 33
Report of the Directors 35
Corporate Governance. 42
Remuneration Report 45
Report of the Audit Committee. 47
Independent Auditor’s report 50
Financial Statements 54
Consolidated Statement of Comprehensive Income. 54
Consolidated Statement of Financial Position. 55
Consolidated Statement of Changes in Equity. 56
Consolidated Statement of Cash Flows 57
Notes to the Financial Statements 58
Other information. 78
EPRA Performance Measures (unaudited) 78
EPRA Sustainability Reporting Performance Measures (unaudited)
82
Report of the Depositary to the Shareholders 93
Glossary 94
Notice of Annual General Meeting. 95
Corporate Information. 98
Overview
Schroder Real Estate Investment Trust
Limited aims to provide shareholders with an attractive level of
income together with the potential for income and capital growth
through investing in UK commercial property.
Company Summary
Schroder Real Estate Investment Trust Limited (the ‘Company’ and
together with its subsidiaries the ‘Group’) is a real estate
investment company with a premium listing on the Official List of
the UK Listing Authority and whose shares are traded on the Main
Market of the London Stock Exchange (ticker: SREI).
The Company is a real estate investment trust (‘REIT’) and
benefits from the various tax advantages offered by the UK REIT
regime. The Company continues to be declared as an authorised
closed-ended investment scheme by the Guernsey Financial Services
Commission under section 8 of the Protection of Investors
(Bailiwick of Guernsey) Law, 1987,
as amended and the Authorised Closed-ended Collective Investment
Schemes Rules 2008.
Objective
The Company aims to provide shareholders with an attractive
level of income together with the potential for income and capital
growth from owning and actively managing a diversified portfolio of
real estate.
The Company’s dividend policy is to pay a sustainable level of
quarterly dividends to shareholders. It is intended that successful
execution of the Company’s strategy will enable a progressive
dividend policy to be adopted.
The portfolio is principally invested in the three main UK
commercial real estate sectors of office, industrial and retail,
and may also invest in other sectors including, but not limited to,
residential, leisure, healthcare and student accommodation.
Over the property market cycle the portfolio aims to generate an
above average income return with a diverse spread of lease
expiries.
Relatively low level gearing is used to enhance income and total
returns for shareholders with the level dependent on the real
estate cycle and the outlook for future returns.
Investment strategy
The current investment strategy is to grow income and enhance
shareholder returns through selective acquisitions, proactive asset
management and selling lower yielding properties on completion of
asset business plans. The issuance of new shares will also be
considered if it is consistent with the strategy.
Our objective is to own a portfolio of larger properties in
Winning Cities and Regions with high growth, diversified local
economies, sustainable occupational demand and favourable supply
and demand characteristics. These properties should offer
good long-term fundamentals in terms of location and specification
and be let at affordable rents, with the potential for income and
capital growth due to good stock selection and asset
management.
Key Points
· 5% dividend increase delivered
during the financial year, with dividend cover of
114%1
· Sustained real estate
outperformance of 2.0% versus the IPD/MSCI Benchmark Index over the
past 12 months, 2.5% p.a. over the past 3 years and 1.4% p.a. since
IPO in July 20042
· Net asset value (‘NAV’) total
return of 4.5% for the year to March
2019
· 93% of the portfolio located in
Winning Cities3
· 68% of the portfolio weighted to
the office and industrial sectors, with no City of London or Shopping Centres
· Loan to Value (‘LTV’), net of all
cash, reduced to 22.1%
Supporting Information:
· Portfolio by value located in
higher growth regions 93% (2018: 93%)3
· Net asset value (‘NAV’) total
return 4.5% (2018: 10.5%)
· Underlying Property portfolio
total return of 7.2% (2018: 11.8%)
· Dividend cover 114% (2018:
109%)1
· Portfolio total
return2
o 1 year : 7.2% SREIT vs 5.2% MSCI/IPD Benchmark
o 3 years: 9.1% per annum SREIT vs 6.5% per annum MSCI/IPD
Benchmark
· Portfolio income
return2
o 1 year: 5.2% SREIT vs 4.6% MSCI/IPD Benchmark
o 3 years: 6.0% per annum SREIT vs 4.8% per annum MSCI/IPD
Benchmark
· Value of property assets and
joint ventures £460.6 million (2018: £477.5 million)
· Net asset value of £356.4
million (2018: £353.6 million)
· Underlying earnings of £15.2
million (2018: £14.1 million) 4
· Loan to value, net of all cash
of 22.1% (2018: 25.3%)
1. Dividend cover excluding one-off refinancing costs in 2019,
and one-off abortive transaction costs in 2019.
2. Source: MSCI property level returns gross of fees on a
like-for-like basis including direct and indirect property
investments. Past performance is not a guide to future performance
and may not be repeated.
3. Winning Cities defined as higher growth locations; Source:
Oxford Economics/Schroders.
4. Adjusted EPRA earnings.
Portfolio Overview – At a glance
The investment policy of the Company
is to own a diversified portfolio of UK real estate with good
fundamental characteristics. The Group invests principally in the
office, retail and industrial commercial real estate sectors and
will also consider other sectors including mixed use, residential,
hotels, healthcare and leisure.
Sector weightings
Offices – The Company is overweight in offices compared
with the MSCI/IPD Benchmark. The focus is on buildings with good
fundamentals in those Winning Cities and regions that are
attractive to a diverse occupier base. The Company has no exposure
to the City of London, which is
expected to be most affected by a UK departure from the European
Union.
Industrial – The Company owns a range of industrial
assets, the most significant being multi-let estates including
Milton Keynes and Leeds, which are positively impacted by
structural trends and where there are significant asset management
opportunities to capture rental growth.
Retail – The retail assets in the portfolio are
predominantly well-managed retail warehouses and convenience
retail, let at sustainable rents and which benefit from trends
including ‘click and collect’. The Company does not own any
shopping centres.
Other – Other sectors include mixed use, residential
hotels, healthcare and leisure properties. At present, hotels at
City Tower, Manchester and
Headingley Central, Leeds and a
leisure scheme in Luton represent
the other weighting in the portfolio.
Sector weightings
Sector weightings
by value |
2019
(%) |
2018
(%) |
Offices |
36.1 |
36.6 |
Industrial |
31.8 |
26.9 |
Retail |
25.3 |
30.1 |
Other |
6.8 |
6.4 |
Top ten properties
The top ten properties set out below comprise 59% of the
portfolio value:
Top ten
properties |
Value
(£m) |
(% of
portfolio) |
1 |
Manchester, City Tower
(25% share) |
42.7 |
9.3 |
2 |
Milton Keynes, Stacey
Bushes Industrial Estate |
37.5 |
8.1 |
3 |
London, Store Street,
Bloomsbury (50% share) |
36.5 |
7.9 |
4 |
Leeds, Millshaw
Industrial Estate |
31.6 |
6.9 |
5 |
Bedford, St John's
Retail Park |
30.0 |
6.5 |
6 |
Leeds, Headingley
Central |
29.0 |
6.3 |
7 |
Uxbridge, 106 Oxford
Road |
18.4 |
4.0 |
8 |
Norwich, Union Park
Industrial Estate |
17.9 |
3.9 |
9 |
London, Allied Way
Industrial Estate |
17.2 |
3.7 |
10 |
Salisbury, Churchill
Way West |
13.0 |
2.8 |
|
Total as at 31
March 2019 |
273.5 |
59.4 |
44 properties – valued at £460.6
million
This includes the share of joint venture properties at City
Tower in Manchester and Store
Street in
Bloomsbury, London.
93% of the portfolio by value located
in higher growth locations
|
SREIT1 |
% of UK
GDP |
Fastest growing centres |
69% |
56% |
Second quartile |
24% |
22% |
Third quartile |
5% |
14% |
Slowest growing centres |
2% |
8% |
1Source: Oxford Economics, Schroders March 2019.
Investment Philosophy
A disciplined approach to investment
Schroder Real Estate Investment Trust aims to provide
shareholders with an attractive level of income, with the potential
for income and capital growth, from owning a diversified portfolio
focused on higher growth assets benefiting from structural
change. The portfolio is managed in accordance with an
investment philosophy centred on consistent principles which are to
invest in strong asset fundamentals and to actively manage assets
in order to enhance value.
Mega themes
Long term performance of real estate assets will be driven by
structural changes or ‘mega themes’ arising from demographic,
technological, environmental and other factors that are outside of
the normal real estate market cycle.
High quality research
Research is focussed on cyclical and structural trends in order
to determine market strategy and exploit mis-pricing. In addition,
to better understand real estate fundamentals, our research focuses
on occupational demand at a town and city level and other factors
such as construction starts, infrastructure investment and pricing
relative to other assets.
Business plan led approach
Every asset is managed as a business with a detailed plan that
is the key focal point for identifying and implementing active
management strategies that will maximise
returns.
Responsible and Positive Impact Investment
Sustainability and Environmental Social Governance (‘ESG’) and
Impact Investment considerations are integral to good investment
management and should generate better long term returns, contribute
to our tenants’ business performance and create tangible benefits
to the communities where we are invested. The Company’s work
in this area was recognised by an EPRA Gold award for Best Practice
Reporting in the 2018 year end
accounts.
Winning Cities and Regions
Occupier demand is increasingly concentrated in ‘Winning Cities
and Regions’, those that offer a competitive advantage in terms of
higher levels of GDP, employment and population growth;
differentiated local economies with higher value industries; well
developed infrastructure; and places where people want to live and
work. Winning Cities and Regions will change over time and
investments will be made in other locations where we see higher
rates of future growth that could lead to mispricing
opportunities.
Our Strategic Objectives
Exposure to Winning Cities and Regions experiencing higher
levels of GDP, employment and population growth
93% of the Company’s assets are located in higher growth regions
and the strategy will continue to focus on Winning Cities and
Regions which offer a competitive advantage in terms of higher
levels of GDP, employment and population growth; differentiated
local economies with higher value industries; well developed
infrastructure; and places where people want to live and work.
Increasing net income through transactions and asset
management
Disciplined acquisition strategy focused on investing primarily
in industrial and regional office assets in Winning Cities and
Regions, combined with relentless execution of asset management
initiatives to drive net income growth and dividend cover and
improve the portfolio’s defensive qualities. The intention is to
pursue a progressive dividend policy.
Increasing exposure to assets and sectors with strong
fundamentals
Focus on fundamentals is essential at this stage in the cycle.
Post completion of asset business plans, the Company will seek to
dispose of assets where strong returns have been crystallised and
that are expected to underperform to reinvest in assets with
stronger fundamentals.
Managing portfolio risk in order to enhance the portfolio’s
defensive qualities
The Company has a diversified tenancy base of over 300 occupiers
and average weighted lease term of 6.1 years. Priority is given to
continue efforts to reduce the vacancy, improve covenants and
increase the average lease length through new lettings and lease
regears, alongside prudent management of our balance sheet with a
target leverage ratio of 25% to 35%.
Delivery of our strategy is intended
to increase net income in the near term.
The key strategic steps are:
– Increasing exposure to higher growth
Winning Cities and Regions;
– Owning assets with strong fundamentals
in terms of location and specification;
– Delivering sustainable net income
growth through active asset management and selection;
– Disposals of lower yielding assets to
realise profits; and
– A disciplined approach to leverage,
actively managing both cost and increasing flexibility with an
enlarged revolving credit facility
Performance Summary
Property performance
|
31 March
2019 |
31 March
2018 |
Value of Property Assets and Joint
Ventures (£’000) |
460,613* |
477,495 |
Annualised rental income
(£’000) |
26,983 |
27,100 |
Estimated open market rental value
(£’000) |
32,907 |
33,623 |
Underlying portfolio total
return |
7.2% |
11.8% |
MSCI/IPD Benchmark total
return** |
5.2% |
10.7% |
Underlying portfolio income
return |
5.5% |
6.2% |
MSCI/IPD Benchmark income
return |
4.6% |
4.8% |
* Includes transactions which unconditionally exchanged, but did
not complete prior to year end.
** Source: MSCI Quarterly Version of Balanced Monthly Index
Funds including joint venture investments on a like-for-like basis
as at 31 March 2019.
Financial summary
|
31
March 2019 |
31
March 2018 |
Net Asset Value
(“NAV”) |
£356.4m |
£353.6m |
NAV per Ordinary Share
(pence) |
68.7 |
68.2 |
EPRA1
NAV |
£356.4m |
£353.6m |
Profit for the
year |
£15.9m |
£33.8m |
Adjusted
EPRA1 earnings |
£15.2m |
£14.1m |
Dividend cover |
114% |
109% |
1EPRA calculations are included in the EPRA
Performance measures section on page 78.
Capital values
|
31 March
2019 |
31 March
2018 |
Share price
(pence) |
55.4 |
58.8 |
Share price discount
to NAV |
(19.4%) |
(13.8%) |
NAV total
return1 |
4.5% |
10.5% |
FTSE All Share
Index |
3,978.28 |
3,894.17 |
FTSE EPRA/NAREIT UK
Real Estate Index |
1,710.33 |
1,770.93 |
1Net Asset Value total return calculated by Schroder
Real Estate Investment Management Limited.
Earnings and dividends
|
31 March
2019 |
31 March
2018 |
Earnings (pps) |
3.1 |
6.5 |
Adjusted EPRA earnings
(pps) |
2.9 |
2.7 |
Dividends paid
(pps) |
2.53 |
2.48 |
Annualised dividend
yield on 31 March share price |
4.6% |
4.2% |
Bank borrowings
|
31 March
2019 |
31 March
2018 |
On-balance sheet
borrowings2 |
£158.6m |
£150.1m |
Loan to value ratio
(LTV), net of all cash3 |
22.1% |
25.3% |
2On balance sheet borrowings reflects the loan
facility with Canada Life and RBS, without deduction of finance
costs.
3Cash excludes rent deposits and floats held with
managing agents.
Ongoing charges
|
31 March
2019 |
31 March
2018 |
Ongoing charges
(including fund and property expenses4) |
2.2% |
2.2% |
Ongoing charges
(including fund only expenses4,5) |
1.1% |
1.2% |
4Ongoing charges calculated in accordance with AIC
recommended methodology, as a percentage of average NAV during the
year.
5Fund only expenses excludes all property operating
expenses, valuers’ and professional fees in relation to
properties.
Strategic Report
Chairman’s Statement
Overview
Good progress has been made over the financial year delivering
on the key strategic objectives of growing the dividend and
mitigating against the risk associated with greater market
uncertainty. This resulted in the net asset value (‘NAV’)
increasing by 0.7% to £356.4 million over the 12 months to 31 March
2019. Allowing for the 5% dividend increase during the year,
the NAV total return was 4.5%, with dividends covered by recurring
earnings.
Asset management activity and an above average income return
continues to drive the performance of the underlying portfolio,
which delivered a total return of 7.2% compared with the MSCI
Benchmark of 5.2%. The portfolio has now consistently
outperformed the Benchmark by an average of 1.4% per annum since
the IPO of the Company in 2004.
Weak sentiment towards UK real estate as well as broader
political and economic uncertainty have depressed interest in the
sector. Average UK real estate values are expected to fall
but there will be polarisation between sectors and property types
driven by structural changes such as reduced demand for physical
retail. We note the prevailing discount of the share price to
Net Asset Value. The Company will continue to take strategic steps
to strengthen its position.
Strategy
The Company has a clear and disciplined investment strategy
focused on growing net income, reducing risk and increasing
exposure to Winning Cities and Regions that are expected to
generate higher levels of economic growth. The 5% dividend
increase during the year was enabled by this strategy being
executed, including two debt financings, three acquisitions
totalling £22 million and a high volume of income enhancing asset
management activity. 93% of the portfolio is located in these
higher growth areas.
The Company benefits from having a good quality, diversified
portfolio with an above average weighting to regional offices and
regional industrial estates, sectors that are expected to deliver
higher returns. Conversely, the Company has a below average
weighting to retail. At a time of greater economic
uncertainty the Company should also benefit from its diverse income
profile with over 300 tenants across 44 assets.
The Company has also sold lower yielding assets totalling £50
million in order to realise profits post active management, the
results providing further evidence of our ability to deliver on our
strategy whilst also reducing the Company’s leverage. These
disposals will lead to a temporary reduction in net income, but
create the potential to redeploy proceeds at a more attractive
point in the cycle and therefore enhance returns. Future
acquisitions will be consistent with the strategy to invest in
assets with strong fundamentals in Winning Cities benefiting from
long term structural changes. The Company will also continue
to review its cost of debt.
Environmental, Social and Governance (‘ESG’) issues have become
an increasingly important focus. A wide range of initiatives
have contributed to the Company securing a Global Real Estate
Sustainability Benchmark (“GRESB”) Green Star in recognition of the
portfolio’s suitability performance. The Manager is also
increasingly focused on ensuring that the Company’s activities
deliver a positive social impact.
Debt
The refinancing activity completed during the year included
extending a portion of the Canada Life debt and increasing the
revolving credit facility (‘RCF’) with Royal Bank of Scotland (‘RBS’). These transactions
achieved several objectives during the period. They increased
capacity to complete two higher yielding acquisitions, extended the
average loan maturity to eight years and reduced the Company’s
average interest cost to 3.9% when fully drawn, hedged against any
movement in interest rates. An extension in the RCF capacity
from £20.5 million to £52.5 million, also provides flexibility to
fund capital expenditure and act opportunistically. The NAV
was negatively impacted by refinancing and acquisition costs
totalling £4.5 million.
Adjusting for disposals completed since the year end, the loan
to value ratio, net of cash, was 22%. Our long-term target
leverage range of 25% to 35% remains unchanged.
Regulation
The Board and Manager have been monitoring the FCA’s response to
concerns raised regarding PRIIPs legislation and the use of Key
Information Documents, or KIDs. The Manager made
representations to the FCA observing that the performance scenarios
and risk indicators in the KID are potentially misleading and noted
the discrepancies in how costs are calculated and presented in
KIDs, particularly in relation to transaction costs and finance
charges.
Whilst shareholders may ignore unrealistic performance
scenarios, wealth managers and multi-managers are required to use
the “all-in” costs calculated in the KID when calculating their own
expenses. This potentially puts investment companies at a
disadvantage to open-ended funds and internalised REITs which are
exempt from PRIIPs legislation until 1
January 2022 and do not set out full costs in a
like-for-like format.
More specifically for our Company, whilst the ongoing charges
calculation adopting the AIC methodology stood at 2.2% over the
financial year, the KID cost which includes finance charges is
4.3%. We understand some real estate investment companies are
failing to calculate KID costs correctly and we will continue to
lobby the FCA and other industry groups such as the AIC to ensure
that disclosure on fees and charges is applied consistently across
the market.
Outlook
Following almost a decade of positive growth, UK real estate is
now likely to experience a period of lower than average
returns. Outside of the retail sector, however, we would
expect the extent of any valuation declines to be mitigated by
limited new development, lower debt levels than past cycles and
supportive monetary policy.
The Company’s strategy has addressed late cycle risk by
improving the portfolio’s defensive qualities through sector,
tenant and geographical diversification and selling assets to
realise significant profits and reduce leverage. In a lower
return environment, the above average yield generated by the
underlying portfolio combined with a pipeline of income enhancing
asset management initiatives should support performance.
A combination of cash and undrawn revolving credit facilities
provides an opportunity to reinvest following a market correction
at higher yields. This places the Company in a strong
situation and successful execution of this strategy combined with
delivering asset management initiatives should provide support for
future income, valuation and dividend growth.
Lorraine Baldry
Chairman
Schroder Real Estate Investment Trust Limited
20 May 2019
Investment Manager’s review
Investment Manager’s report
The Company’s Net Asset Value (‘NAV’) as at 31 March 2019 was £356.4 million or 68.7 pence per share (‘pps’) compared with £353.6
million or 68.2 pps as at 31 March
2018. This reflected an increase of 0.5 pps or 0.7%, with
the underlying movement in NAV per share set out in the table
below:
Pence per share (‘pps’) |
NAV as at 31 March
2018 |
68.2 |
Unrealised change in
valuation of direct real estate portfolio and Joint Ventures |
1.3 |
Capital
expenditure |
(0.5) |
Acquisition costs on
purchases |
(0.3) |
Realised gains on
disposal |
0.4 |
Net revenue |
2.9 |
Refinancing costs |
(0.6) |
Dividends paid |
(2.5) |
Others |
(0.2) |
NAV as at 31 March
2019 |
68.7 |
The underlying portfolio, including joint ventures increased in
value by 2.3% excluding capital expenditure. Adjusting for capital
expenditure and transactions, it increased in value by 1.3% over
the 12 months to March 2019. This
compared with the MSCI Benchmark of -0.3% on a like-for-like
basis.
Net revenue for the year totalled 2.9 pps which reflected
dividend cover of 114%, and dividend cover of 100% from recurring
revenues. The NAV total return for the year to March 2019 was 4.5%. This was impacted by one-off
refinancing costs and acquisition costs related to the offices in
Edinburgh and Nottingham and the adjoining industrial
ownership in Milton Keynes which
were acquired for £21.85 million, equating to a yield based on
contracted income of 7%.
Strategy
The strategy over the year has remained focused on the following
key objectives:
– Increasing exposure to higher growth
Winning Cities and Regions;
– Owning assets with strong fundamentals
in terms of location and specification;
– Delivering sustainable net income
growth through active asset management and selection;
– Disposals of lower yielding assets to
realise profits; and
– A disciplined approach to leverage,
actively managing both cost and increasing flexibility with an
enlarged revolving credit facility.
Good progress has been made executing the strategy and a high
level of activity over the year has delivered the following:
– Outperformance of the underlying
portfolio with a total return of 7.2% compared with the MSCI
Benchmark of 5.2%. The underlying portfolio has now outperformed
over one, three, five, ten years and since the Company’s IPO;
– 93% of the portfolio located in higher
growth cities and towns[1];
– Overweight exposure to high quality
regional offices and multi-let industrial estates with no
City of London offices or shopping
centre assets;
– Portfolio level income return of 5.5%
and reversionary income yield of 7.1%[2] compared with 4.8% and
5.4% for the MSCI/IPD Benchmark respectively. The higher reversion
should lead to stronger relative returns against the backdrop of
slowing capital growth;
– An increase in the dividend of 5% with
a full year cover of 100% on recurring earnings following the
increase;
– £50 million of disposals during the
year, at a blended income yield of 2.9%, crystallising gains
significantly above valuation following asset management;
– Extended the term of the loan facility
with Canada Life at a lower rate and increased the capacity of the
revolving credit facility.
– Consolidated net loan to value of 22%
with cash and undrawn debt totalling £80 million providing valuable
operational flexibility.
Looking forward, the key strategic objectives above remain but
they will continue to evolve with an emphasis on the following
areas, given growing market uncertainty:
– Further realisations to crystallise
gains following completion of asset management initiatives;
– Delivery of asset management activity
with a strong pipeline of capital enhancements in the existing
portfolio that increase income and the portfolio’s defensive
qualities;
– Opportunistic reinvestment at higher
income yields assuming a market correction in late 2019 and into
2020; and
– A continued focus on lower costs which
will include a review of debt cost given an ongoing low interest
rate environment.
Market overview
The UK real estate market cycle has remained positive for an
unusually long period since 2009. It is now, however, experiencing
falling values in some sectors especially in City of London office and retail sectors.
There is significant polarisation between the relative performance
of different sectors due to factors including political risk and
long-term structural shifts such as urbanisation and consumer
behaviour impacting occupational demand.
Brexit is a contributor to market uncertainty and this will
persist until there is clarity on the terms of any deal between the
UK and EU. This uncertainty is restricting investment with the
greatest impact in Central London
markets most dependent on financial services’ demand. Brexit
uncertainty has also dampened demand from international investors,
despite Sterling weakness and yields comparing favourably with
other European cities such as Berlin and Paris.
More positively, weaker banking and finance markets contrast
with growth sectors such as technology, fintech and medical
research that are attracted to London by its talent pool. The Company’s asset
in Bloomsbury, located between the infrastructural improvements of
the Crossrail station at Tottenham
Court Road and the tech-led development at Kings Cross, is well
positioned to capitalise on demand from these active growth
sectors.
The UK’s regional office markets have remained more resilient
due to a greater proportion on domestic demand. This is reflected
in higher total returns for the year of 6.8%, compared with
Central London offices which
returned 5%. Within these markets we favour well located multi-let
offices in Winning Cities such as Bristol, Cambridge, Leeds, Manchester and Reading. These locations have low levels of
new building and have lost space to redevelopment for alternative
uses. For example, in 2018 Central
Manchester office take-up was 1.7 million sq ft compared
with a long term average of 1.1 million sq ft per annum.
Occupational demand remains at high levels and is illustrated by
recent lettings at City Tower in Manchester to professional services,
technology and public sector tenants.
The multi-let industrial market continues to enjoy strong levels
of occupational demand from a diverse range of occupiers including
internet related services such as ‘last mile’ delivery, light
industrial business and SMEs. The resultant rental growth and
falling yields due to strong investor demand contributed to a total
return for the year of 15.7% in this sub-sector, exceeding total
returns from single let distribution warehouses at 13.5% due to the
ability to increase rents through asset management. The Company’s
estates in Leeds, Norwich and Milton
Keynes all benefited from these trends. For example,
Milton Keynes delivered a total
return of 30.2% for the year, driven by rental value growth.
In contrast, structural changes benefiting the industrial and
logistics markets are disrupting retailer business models and
leading to significant distress. During the year approximately
2,500 units were affected by retailer administrations or CVAs which
has led to falling rents and a negative average total return for
the year of -3.2%. Although some retail assets are functionally
obsolete and values will fall across the sector, parts will
stabilise and recover. We favour convenient retail locations let at
affordable rents, with good transport infrastructure and serving
robust local economies or Winning Cities in densely populated
areas. Examples of this include the Company’s investment in
Headingley Central in Leeds and
St. John’s Retail Park in Bedford,
where units have illustrated good levels of demand from occupiers
despite the headwinds in this sector.
We expect some niche sectors to offer attractive risk-adjusted
returns where demand is less tied to the economy and more to
demographic trends and structural changes. These sectors satisfy
increasing demand for real estate types and strategies delivering a
positive social impact as well as attractive risk-adjusted total
returns. The Company has a relatively low weighting to alternatives
and this may increase in the future.
Real estate portfolio
As at 31 March 2019 the portfolio
comprised 44 properties valued at £460.6 million. This includes the
share of joint venture properties at City Tower in Manchester and Store Street in Bloomsbury,
London.
Following the disposal of Victory House in Brighton the portfolio produces a rental
income of £26.9 million per annum, reflecting a net initial income
yield of 5.5% which compares with the MSCI Benchmark (the
‘Benchmark’) at 4.8%. The portfolio also benefits from fixed
contractual annual rental uplifts of £2.1 million in the next 24
months. The independent valuers’ estimate that the current rental
value of the portfolio is £32.9 million per annum, reflecting a
reversionary income yield of 7.1%, which compares favourably with
the Benchmark at 5.4%.
During the year four properties were sold to crystallise gains
and also to further reduce retail exposure. These included
Victory House in Brighton
(office), a Wickes Retail Warehouse in Basingstoke (retail), Commercial Road in
Portsmouth (retail) and Middle
Street in Yeovil (retail). The
disposals generated total gross proceeds of £50 million, which
reflected a low average net initial yield of 2.9%. The data tables
below summarises the portfolio information as at 31 March 2019.
|
Weighting (% of portfolio) |
Sector weightings
by value |
SREIT |
Benchmark |
City |
0.0 |
3.2 |
Mid-town and West
End |
7.9 |
6.4 |
Rest South East |
6.8 |
12.4 |
Office Rest of UK |
21.3 |
6.8 |
Offices
sub-total |
36.0 |
28.8 |
South Eastern |
12.5 |
18.5 |
Industrial Rest of
UK |
19.2 |
10.2 |
Industrial
sub-total |
31.7 |
28.7 |
South East |
1.1 |
5.8 |
Rest of UK |
11.8 |
5.3 |
Shopping centres |
0.0 |
4.6 |
Retail warehouse |
12.5 |
15.7 |
Retail
sub-total |
25.4 |
31.4 |
Others |
6.8 |
11.3 |
Other
sub-total |
6.8 |
11.3 |
|
Weighting (% of portfolio) |
Regional weightings
by value |
SREIT |
Benchmark |
Central London[3] |
7.9 |
12.6 |
South East excluding
Central London |
22.2 |
40.4 |
Rest of South |
7.3 |
16.3 |
Midlands and
Wales |
29.7 |
13.7 |
North and
Scotland |
32.9 |
17.1 |
The top ten properties comprise 59% of the portfolio value:
Top ten
properties |
Value
(£m) |
(% of
portfolio) |
1 |
Manchester, City Tower
(25% share) |
42.7 |
9.3 |
2 |
Milton Keynes, Stacey
Bushes Industrial Estate |
37.5 |
8.1 |
3 |
London, Store Street,
Bloomsbury (50% share) |
36.5 |
7.9 |
4 |
Leeds, Millshaw
Industrial Estate |
31.6 |
6.9 |
5 |
Bedford, St. John’s
Retail Park |
30.0 |
6.5 |
6 |
Leeds, Arndale
Centre |
29.0 |
6.3 |
7 |
Uxbridge, 106 Oxford
Road |
18.4 |
4.0 |
8 |
Norwich, Union Park
Industrial Estate |
17.9 |
3.9 |
9 |
Acton, Allied Way
Industrial Estate |
17.2 |
3.7 |
10 |
Salisbury, Churchill
Way West |
13.0 |
2.8 |
|
Total as at 31
March 2019 |
273.5 |
59.4 |
The top ten tenants represent 27% of the portfolio as a
percentage of annual rent:
Top ten
tenants |
Rent
p.a. (£000) |
(% of
portfolio) |
1 |
University of Law
Limited |
1,583 |
5.7 |
2 |
Buckinghamshire New
University |
1,152 |
4.2 |
3 |
Recticel Limited |
731 |
2.6 |
4 |
Sportsdirect.com
Retail Limited |
722 |
2.6 |
5 |
The Secretary of
State |
715 |
2.5 |
6 |
Booker Limited |
700 |
2.5 |
7 |
Matalan Retail
Limited |
676 |
2.4 |
8 |
TJX UK Limited T/A
Homesense |
505 |
1.8 |
9 |
Cine UK Limited |
501 |
1.8 |
10 |
Jupiter Hotels Limited
T/A Mercure |
461 |
1.7 |
|
Total as at 31
March 2019 |
7,746 |
27.9 |
Portfolio performance
A high level of asset management has led to continued
outperformance of the underlying property portfolio compared with
the MSCI Benchmark. The table below shows the performance to
31 March 2019 with the portfolio
ranked on the 9th percentile of the Benchmark since IPO
in 2004:
|
SREIT total return p.a. (%) |
MSCI/IPD Benchmark total return p.a. (%) |
Relative p.a. (%) |
Period |
One
year |
Three
years |
Since
IPO[4] |
One
year |
Three
years |
Since
IPO4 |
One
year |
Three
years |
Since
IPO4 |
Retail |
-4.3 |
2.5 |
5.2 |
-3.2 |
1.6 |
4.1 |
-1.1 |
0.9 |
1.1 |
Office |
8.7 |
8.9 |
8.4 |
6.2 |
5.3 |
6.9 |
2.4 |
3.4 |
1.4 |
Industrial |
18.3 |
18.1 |
9.6 |
13.9 |
14.3 |
8.6 |
3.9 |
3.3 |
0.9 |
Other |
2.3 |
3.9 |
3.4 |
7.5 |
9.2 |
7.5 |
-4.8 |
-4.8 |
-3.8 |
All sectors |
7.2 |
9.1 |
7.7 |
5.2 |
6.5 |
6.2 |
2.0 |
2.5 |
1.4 |
Transactions and asset management
Milton Keynes, Stacey Bushes
Industrial Estate
Asset strategy
The strategy over the year was to consolidate the higher rental
tone and grow net income, acquire an adjoining ownership and secure
planning consent for a vacant development site.
Asset overview and performance
317,000 sq ft multi-let industrial estate comprising 42 units in
a good location west of Milton
Keynes. As at 31 March 2019
the asset was valued at £37.5 million, reflecting a net initial
income yield of 5.1% and a reversionary yield of 5.4%. During the
year to 31 March 2019 the property
delivered a 30.2% total return.
Key activity
– Estate now fully let with recent
lettings at £9 per sq ft leading to rental growth of 9% over the
year.
– Acquisition of a vacant adjoining
ownership for £776,000. This was subsequently let at £80,000
per annum to generate a 10% return on cost.
– Planning in place for a new
development of 14,800 sq ft across six units. The works have been
tendered and are due to start on site shortly at quoting rents of
£10 per sq ft.
Leeds, Millshaw Industrial
Estate
Asset strategy
The strategy over the year was to refurbish units to drive
rental income higher and progress planning for higher value
alternative uses given the prominent site frontage to the
Leeds ring road.
Asset overview and performance
463,400 sq ft multi-let industrial estate comprising 27 units
strategically located south of Leeds city centre close to the M62 and M621
motorways. As at 31 March 2019 the
asset was valued at £31.6 million reflecting a net initial income
yield of 4.4% and a reversionary yield of 6.6%. During the year to
31 March 2019 the property delivered
an 8.4% total return.
Key activity
– Agreement for lease exchanged with JD
Sport Gyms, with planning received for change of use. Works on site
with an expected completion date in early July.
– Refurbished various units and achieved
a new record rent of £7.25 per sq ft.
– Opportunity to grow rents further due
to limited supply of units in Leeds, particularly units above 20,000 sq
ft.
Brighton, Victory House
Asset strategy
The strategy over the year was to extend the occupational leases
and capitalise on strong rental growth for prime Brighton offices. Once completed this provided
the opportunity to sell the asset at a significant profit which
exceeded future returns if it has been held in the portfolio.
Asset overview and performance
Victory House is a 84,523 sq ft office building located in an
established location next to Brighton railway station. In June 2018 the lease to the largest tenant, BUPA
Insurance, was extended to ten years at a new rent of £1.09
million, reflecting an uplift of 14%. BUPA received a 15 month
rental incentive and the new lease included a minimum fixed uplift
at year five equating to 2% per annum. The asset management added
significant value and the potential to extract the premium price
through a disposal.
Key activity
– In March contracts were exchanged to
sell the asset for £36.1 million which reflected a net initial
yield, on expiry of the rent free period in September 2019, of 4.9%. The disposal completed
on 30 April.
– The asset was a prime and low risk
asset which generated an ungeared total return of 10.3% per annum
since acquisition in 2005, compared with the MSCI Benchmark for the
same period of 5.9% per annum.
Bedford, St. John’s Retail
Park
Asset strategy
The strategy over the year was to improve retailer mix and to
negotiate new longer leases in order to preserve the rental income
and manage void risk.
Asset overview and performance
St. John's Retail Park comprises a 130,000 sq ft retail
warehouse park 1.5 miles from the town centre. As at 31 March 2019 the asset was valued at £30.0
million reflecting a net initial income yield of 4.0% and a
reversionary yield of 6.3%. During the year to 31 March 2019, the property delivered an -10.9%
total return. This was a result of weak sentiment towards the
sector and Homebase leaving the park.
Key activity
– Homebase vacated a 36,214 sq ft unit
as part of their CVA in December
2018. Homebase were paying £353,000 per annum.
– Homebase’s failure was anticipated and
in late 2018 a conditional agreement for lease was exchanged with
Lidl for a supermarket totalling 21,630 sq ft. Lidl has agreed a 15
year lease at £335,000 per annum. Planning has been secured and
works to refurbish and extend the former Homebase will commence
shortly at a cost of approximately £3.7 million.
– A conditional agreement for lease has
also been exchanged with Home Bargains for a new 14,500 sq ft store
on a 15 year lease at £190,000. This is subject to a separate
planning application that is ongoing.
– When completed, this will remove the
largest void in the portfolio equating to 2.1% of portfolio ERV.
Furthermore, Lidl should attract additional tenant demand to the
park.
Responsible and Positive Impact
Investment
Corporate social responsibility is key to long-term future
business success. A successful sustainable investment programme
should deliver enhanced returns to investors, improved business
performance to tenants and deliver tangible positive impacts to
local communities, the environment and wider society. In 2018, the
Company’s work has been recognised in the annual Global Real Estate
Sustainability Benchmark (“GRESB”) survey achieving a Green Star,
and in the EPRA Best Practise Reporting achieving a Gold Award for
the year end accounts.
Schroder Real Estate is evolving its investment philosophy to
incorporate “positive impact” investing at the heart of its
management activities with improvements to its portfolios and
reduction of fuel consumption. This is proactively taking action to
improve social and environmental outcomes. We are still learning
how to best improve the sustainability of many of the Company’s
assets but have already mapped the key impacts to the UN
Sustainable Development Goals and are using these to design and
implement a sustainability programmes across the Company’s
activities and asset base. We will report on its progress
with this impact programme in next year’s Annual Report. This has
been a step change and we expect real benefits in the future,
positively impacting the type of work and jobs across the
portfolio, improvements to the surrounding built environment and a
reduction in our carbon footprint. More detail on this matter can
be found in our Sustainability section on page 22 of this
report.
Finance
The balance sheet has been actively managed during the year to
capitalise on low interest rates and therefore increase net income.
At the same time, loan terms have been renegotiated to extend the
overall duration of debt facilities and increase operational
flexibility. There may be further emphasis in this area during the
next financial year.
The refinancing of the £25.9 million portion of the Canada Life
term loan, previously due to expire in April
2023, was extended at current market rates to be coterminous
with the balance of the existing loan. This reduced the total
interest cost by £435,000 per annum and resulted in a blended
interest rate on the facility of 4.43%. The refinancing incurred a
negotiated break cost of £2.63 million.
In addition, the total capacity of the Royal Bank of
Scotland (‘RBS’) revolving credit
facility (‘RCF’) increased from £20.5 million to £52.5 million and
the loan term to July 2023. The RCF
is an efficient and flexible funding source due to a margin of 1.6%
and the ability to be repaid and redrawn as often as required.
This activity reduced the overall cost of debt from 4.4% to
3.9%, assuming the RCF is fully drawn, and increased the average
weighted debt term. The net loan to value at the year end was 22%.
The tables below show the position at the year end.
Lender |
Loan
(£m) |
Maturity |
Interest rate (%) |
Loan to Value (‘LTV’) ratio[5] (%) |
LTV
ratio covenant (%)5 |
Interest cover ratio (%)[6] |
ICR
ratio covenant (%)6 |
Forward looking ICR ratio (%)[7] |
Forward looking ICR ratio covenant (%)7 |
Canada Life |
129.6 |
15/04/2028 |
4.43[8] |
36.7 |
65 |
380 |
185 |
314 |
185 |
RBS |
29.0[9] |
03/07/2023 |
2.42[10] |
27.4 |
65[11] |
512 |
185 |
808 |
250 |
|
|
|
|
|
|
|
|
|
|
|
Outlook
The economy and real estate markets have entered a phase of
slowing growth and consolidation. Successful execution of our
strategy over the year has supported a dividend increase in
contrast to the real estate market slowdown. It has also further
enhanced our flexibility and balance sheet strength against the
backdrop of a more uncertain market environment.
Recent disposals have realised profits at the same time as the
market is experiencing wider price falls. Whilst these sales will
lead to a period of reduced rental income, the increased cash
levels and undrawn debt facility provides the capacity and
operational flexibility to fully fund dividends. This also
places the Company in a strong and sustainable position to take
advantage to reinvest opportunistically following a market
correction.
Reinvestment will target higher income returns than the sales
and this will increase net operating income. In the meantime, the
Company is positioned to explore alternative refinancing strategies
which may further increase net operating income. For this reason we
believe the Company is well placed to deliver on its long-term
objectives and to pursue a progressive dividend policy.
Duncan Owen
Schroder Real Estate Investment Management Limited
20 May 2019
Sustainability Report
The Board and the Investment Manager believe that corporate
social responsibility is key to long term future business success
and that a successful, sustainable investment programme should
deliver enhanced returns to investors, improved business
performance to tenants and tangible positive impacts to local
communities, the environment and wider society.
The importance of environmental and social changes are
investment factors that the Board and Investment Manager must
understand to protect Company assets from depreciation and optimise
the portfolio’s value potential.
Offering occupiers resource-efficient and flexible space is
critical to ensure our investments are fit for purpose and sustain
their value over the long term. As a landlord, we have the
opportunity to help reduce running costs for our occupiers,
increase employee productivity and wellbeing, and contribute to the
prosperity of a location through building design and public
realm. Ignoring these issues when considering asset
management and investments would risk the erosion of income and
value as well as missing opportunities to enhance investment
returns.
Through its construction, use and demolition, the built
environment accounts for more than one-third of global energy use
and is the single largest source of greenhouse gas emissions in
many countries.
The industry’s potential to cost-efficiently reduce emissions
and the consumption of depleting resources, combined with the
political imperative to tackle issues such as climate change, means
the property sector will remain a prime target for policy
action. This presents new challenges and opportunities for
the real estate industry with profound implications for both owners
and occupiers.
The Investment Manager is evolving its investment philosophy to
incorporate “positive impact” investing, this aims to proactively
take action to improve social and environment outcomes. The
Investment Manager has mapped key impacts to the UN Sustainable
Development Goals and uses these to focus sustainability programmes
for funds and assets. The Investment Manager will report on its
progress with this impact programme in next year’s Annual
Report.
A good investment strategy must incorporate environmental,
social and governance factors alongside traditional economic
considerations. The Board and the Investment Manager believe
a complete approach should be rewarded by improved investment
decisions and performance.
Further information on Schroder Real Estate’s Sustainable
Investment approach and its 2019 Sustainability Policy can be found
at
https://www.schroders.com/en/uk/realestate/products--services/sustainability/.
Environmental Management System
Schroder Real Estate, led by its Head of Sustainability and
Impact Investment, and supported by sustainability and energy
management consultancy Evora Global, operates an Environmental
Management System (“EMS”). The EMS is aligned with the
internationally recognised standard ISO 14001. The EMS provides the
framework for how sustainability principles (environmental and
social) are managed throughout all stages of its investment process
including acquisition due diligence, asset management, property
management provided by third parties, refurbishments and
developments. Schroder Real Estate reviews its Sustainability
Policy annually which is approved by the Investment
Committee. Key aspects of the Policy, performance against
2018’s objectives and targets, as well as objectives and targets
for the year ahead, are set out below.
Property Manager Sustainability
Requirements
Property managers play an integral role in supporting the
sustainability program. Schroder Real Estate has established a set
of Sustainability Requirements for Property Managers to adhere to
in the course of delivering their property management
services. This includes a set of key performance indicators
to help improve the property managers sustainability related
services to the Company and which are assessed on a six-monthly and
annual basis. Schroder Real Estate is pleased to report that MJ
Mapp, its principal property manager, performed well against the
targets set for both the six-monthly and annual indicators.
Objectives and Targets
Energy and Greenhouse Gas
Emissions
Active management of energy consumption and greenhouse gas
emissions is a key component of responsible asset and building
management. Improving energy efficiency and reducing energy
consumption will benefit tenants’ occupational costs and may
support tenant retention and attraction, in addition to mitigating
environmental impacts and helping to futureproof the portfolio
against future legislation. Therefore, where the landlord retains
operational control responsibilities, Schroder Real Estate
monitors the Company’s energy usage and efficiency on a
quarterly basis.
In the first quarter of 2016, Schroder Real Estate introduced an
energy reduction target of 6% across all UK managed assets over a
two-year period to March 2018 from a
baseline of 2015/16. The programme period concluded in March 2018 achieving an 8.1% reduction, which
equates to a 3.8 million kWh saving, 930 tonnes CO2-equivalent
avoided and a cost saving of over £300,000. The target related to
the like for like portfolio only (i.e. excluding assets purchased,
sold or under refurbishment during the two years reported) and
energy consumption data was adjusted for the impacts of weather and
occupancy using recognised techniques. SREIT assets made up c.7% of
Schroder Real Estate’s UK portfolio energy consumption for this
programme and contributed c.0.5% of the savings achieved.
Schroder Real Estate continues to focus on energy and greenhouse
gas emissions performance and the target has been extended to
achieve a 18% reduction in landlord-controlled energy consumption
by 2020/21 (2015/16 baseline). This is accompanied by a target of
32% reduction in landlord-controlled greenhouse gas emissions by
2020/21 (2015/16 baseline); this target is inclusive of
decarbonisation of the UK electricity grid over recent years.
In support of achieving these targets and improving the
efficiency of the portfolio, Schroder Real Estate has continued to
work with sustainability consultants Evora Global and property
manager MJ Mapp to identify and deliver energy and greenhouse gas
emissions reductions on a cost-effective basis. The programme has
involved reviewing all managed assets within the Company and
identifying and implementing improvement initiatives, where
viable.
Schroder Real Estate can report for the 2018 calendar year, for
the managed assets held within the Company, an energy reduction for
landlord procured energy of 1% on a like-for-like basis.
Energy improvement initiatives as well as a milder winter
contributed to this result. For detailed energy performance data
covering the reporting period and the prior year, please see the
EPRA Sustainability Reporting Performance Measures.
Energy Performance Certificates (“EPCs”) for the portfolio are
regularly reviewed for alignment with the 2015 Minimum Energy
Efficiency Standards (England and
Wales) legislation. Schroder Real
Estate is actively managing the potential risk of this legislation
to the portfolio. This legislation brought in a minimum EPC
standard of “E” for new leases and renewals for non-domestic
buildings from 1 April 2018; this
minimum standard applies to all leases from 1 April 2023. The
EPC profile for the portfolio is set out within the EPRA
Sustainability Reporting Performance Measures.
Water
Fresh water is a finite resource of increasing importance for
the environment and society and reductions in consumption can
deliver operational cost efficiencies. Schroder Real Estate
monitors water consumption where the landlord has supply
responsibilities and encourages active management of asset-level
consumption. Where the Company had such responsibilities, a 7%
reduction in like for like water consumption is reported for the
calendar year 2018 compared to calendar year 2017. This reduction
is due to a number of factors across the sectors as explained in
the EPRA Sustainability Reporting Performance Measures.
Waste
Effective waste management decreases pollution and resource
consumption, as well as improving operational efficiency and
associated costs. To this end, waste should be minimised and
disposal should be as sustainable as possible. Schroder Real Estate
therefore has set an objective to send zero waste direct to
landfill and to achieve optimal recycling. During 2018 Schroder
Real Estate sent zero waste direct to landfill.
Refurbishments and Green Building
Certifications
Schroder Real Estate seeks to deliver developments and
refurbishments to sustainable standards and deliver good
performance against building certifications, including EPCs and
BREEAM (the Building Research Establishment Environmental
Assessment Methodology: an environmental assessment method and
rating system for buildings). Standards required are set for
each project in context for the asset and Schroder Real Estate’s
guiding principles for projects of minimum D rated EPCs and BREEAM
Very Good.
Health Wellbeing and Productivity
The real estate industry is beginning to gain a new perspective
on the importance of the built environment on human health,
wellbeing and productivity. A number of schemes have emerged
which seek to identify the impacts of spaces and places on people
and provide new ways of certifying buildings. Case studies
demonstrate the benefit of reflecting wellbeing in good
design. Schroder Real Estate is working to embed this aspect
into its investment process, especially in relation to
refurbishments and developments.
Stakeholder Engagement and
Community
Schroder Real Estate seeks active engagement with tenants to
ensure a good occupational experience to help retain and attract
tenants. As the day-to-day relationship is with the property
manager, the Property Manager Sustainability Requirements include a
key performance indicator on tenant engagement.
Schroder Real Estate believes in the importance of understanding
a building’s relationship with the community and its contribution
to the well-being of society. Positively impacting on local
communities helps create successful places that foster community
relationships, contribute to local prosperity, attract building
users and ultimately, lead to better, more resilient
investments. Schroder Real Estate looks to understand and
develop the community relationship to ensure investments provide
sustainable social solutions for the long term.
Compliance with Legislation
Carbon Reduction Commitment
The Company’s portfolio did not require registration for Phase
II of the CRC Scheme and the purchase of allowances. It was
announced in the March 2016 Budget
that the CRC Scheme will not continue beyond Phase II.
Energy Savings Opportunity Scheme
The Company did not qualify for participation in the 2015 Phase
1 of the Energy Savings Opportunity Scheme.
Mandatory Greenhouse Gas Emissions
Reporting
The Company is not incorporated in the UK and therefore does not
fall within the requirements for mandatory reporting of greenhouse
gas emissions for UK quoted companies, which came into effect from
1 October 2013. However, greenhouse gas emissions are reviewed
annually, and the Company includes a report on a voluntary basis
(as recommended by DEFRA guidance) within this financial year
report. The Company’s report on greenhouse gas emissions can
be found in the EPRA Sustainability Reporting Performance Measures
report.
The Board and its advisors will continue to monitor requirements
and guidance in relation to managing and reporting environmental
matters and developments in legislation.
Industry Initiatives
EPRA Sustainability Reporting
Performance Measures
The Company Report includes environmental performance indicator
data for the portfolio. The disclosures are aligned with EPRA Best
Practices Recommendations on Sustainability Reporting 2017 and are
included in the Company EPRA Performance Measures report.
Global Real Estate Sustainability
Benchmark
The Company participated in the annual Global Real Estate
Sustainability Benchmark (“GRESB”) survey in 2018 achieving a Green
Star. GRESB is the dominant global standard for assessing
Environmental, Social and Governance performance for real estate
funds and companies.
Schroder Real Estate intends to participate in the survey for
the Company in 2019 again with the objective of achieving a Green
Star rating; this rating is achieved where scores for the two
dimensions of Management and Policy and Implementation and
Measurement are at least 50 out of 100 points.
Industry Participation
Schroder Real Estate is a member of a number of industry bodies
including the European Public Real Estate Association (EPRA), INREV
(European Association for Investors in Non-Listed Real Estate
Vehicles), British Council for Offices and the British Property
Federation. It was a founding member of the UK Green Building
Council in 2007 and in 2017 became a member of the Better Buildings
Partnership and a Fund Manager Member of GRESB.
Employee Policies and Corporate
Responsibility
Employees
The Company is an externally managed real estate investment
trust and has no direct employees. Schroder Real Estate is
part of Schroders PLC which has responsibility for the employees
that support the Company. Schroders believes diversity of
thought and an inclusive workplace are key to creating a positive
environment for their people. Schroder Real Estate’s real estate
team has a sustainability objective within its annual
objectives.
Further information on Schroders’ principles in relation to
people including diversity, gender pay gap, values, employee
satisfaction survey, wellbeing and retention can be found from page
69 of Schroders Annual Report and Accounts 2018.
https://www.schroders.com/en/sysglobalassets/digital/global/annual-report/documents/annual-report-full.pdf.
Corporate Responsibility
Schroders’ commitment to corporate responsibility is to ensure
that its commitment to act responsibly, support clients, deliver
value to shareholders and make a wider contribution to society is
embedded across its business in all that it does.
Full information on Schroders Corporate Responsibility approach
including its economic contribution, environmental impacts and
community involvement, can be found at
http://www.schroders.com/en/about-us/corporate-responsibility/.
Slavery and Human Trafficking Statement
The Company is not required to produce a statement on slavery
and human trafficking pursuant to the Modern Slavery Act 2015 as it
does not satisfy all the relevant triggers under that Act that
required such a statement.
Schroder Real Estate, the Investment Manager to the Company, is
part of Schroders PLC and whose statement on Slavery and Human
Trafficking has been published in accordance with the Modern
Slavery Act 2015 (the 'Act'). It sets out the steps that Schroders
PLC and other relevant group companies ('Schroders' or the 'Group')
have taken during 2018 and will be taking in 2019 to prevent
slavery and human trafficking from taking place in its supply
chains or any part of its business. Schroder Real Estate is part of
the Schroders Group.
Schroders’ statement can be found at
http://www.schroders.com/en/about-us/corporate-responsibility/slavery-and-human-trafficking-statement/
Business Model
Company’s business
The Company is a real estate investment company with a premium
listing on the Official List of the UK Listing Authority and is
traded on the London Stock Exchange's main market for listed
securities. On 1 May 2015, the
Company converted to a Real Estate Investment Trust (‘REIT’) which
means that it is able to benefit from exemptions from UK tax on
profits and gains in respect of certain qualifying property rental
business activities. The Company continues to be an
authorised closed-ended investment scheme registered in
Guernsey.
The Board
The Board of Directors is responsible for the overall
stewardship of the Company, including investment and dividend
policies, corporate strategy, gearing, corporate governance and
risk management.
The Company has no executive Directors or employees.
Investment objective
The investment objective of the Company is to provide
shareholders with an attractive level of income together with the
potential for income and capital growth from owning and actively
managing a diversified portfolio of real estate.
The portfolio is principally invested in the three main UK
commercial real estate sectors of office, industrial and retail,
and may also invest in other sectors including, but not limited to,
residential, leisure, healthcare and student accommodation. Over
the real estate market cycle the portfolio aims to generate an
above average income return with a diverse spread of lease
expiries.
Relatively low levels of debt are used to enhance returns for
shareholders with the level of debt dependent on the real estate
cycle and the outlook for future returns.
Investment strategy
The current investment strategy is to grow income and enhance
shareholder returns through selective acquisitions, pro-active
asset management and selling lower yielding properties on
completion of the asset business plan. The issuance of new
shares will also be considered if this is consistent with the
strategy.
Our objective is to own a portfolio of larger properties in
Winning Cities and Regions with high growth diversified local
economies, sustainable occupational demand and favourable supply
and demand characteristics. These properties should offer
good long-term fundamentals in terms of location and specification
and be let at affordable rents with the potential for income and
capital growth from good stock selection and asset management.
The Board has delegated investment management and accounting
services to the Investment Manager with the aim of helping the
Company to achieve its investment objective and strategy. Details
of the Investment Manager’s investment approach, along with other
factors that have affected performance during the year, are set out
in the Investment Manager’s Report.
Diversification and asset allocation
The Board believes that in order to maximise the stability of
the Group's income, the optimal strategy for the Group is to invest
in a portfolio of assets diversified by location, sector, asset
size and tenant exposure with low vacancy rates and creditworthy
tenants. The value of any individual asset at the date of its
acquisition may not exceed 15% of gross assets and the proportion
of rental income deriving from a single tenant may not exceed
10%. From time to time the Board may also impose limits on
sector, location and tenant types together with other activity such
as development.
The Company's portfolio will be invested and managed in
accordance with the Listing Rules of the Financial Conduct
Authority (‘Listing Rules’ and ‘FCA’ respectively) taking into
account the Company's investment objectives, policies and
restrictions.
Borrowings
The Board has established a gearing guideline for the Investment
Manager, which seeks to limit on-balance-sheet debt, net of cash,
to 35% of on-balance-sheet assets while recognising that this may
be exceeded in the short term from time to time. It should be noted
that the Company’s Articles limit borrowings to 65% of the Group’s
gross assets, calculated as at the time of borrowing. The
Board keeps this guideline under review and the Directors may
require the Investment Manager to manage the Group’s assets with
the objective of bringing borrowings within the appropriate limit
while taking due account of the interests of shareholders.
Accordingly, corrective measures may not have to be taken
immediately if this would be detrimental to shareholder
interests.
Interest rate exposure
It is the Board’s policy to minimise interest rate risk, either
by ensuring that borrowings are on a fixed rate basis, or through
the use of interest rate swaps/derivatives used solely for hedging
purposes.
Investment restrictions
As the Company is a closed-ended investment fund for the
purposes of the Listing Rules, the Group will adhere to the Listing
Rules applicable to closed-ended investment funds. The
Company and, where relevant, its subsidiaries will observe the
following restrictions applicable to closed-ended investment funds
in compliance with the current Listing Rules:
– Neither the Company nor any subsidiary
will conduct a trading activity which is significant in the context
of the Group as a whole and the Group will not invest in other
listed investment companies; and
– Where amendments are made to the
Listing Rules, the restrictions applying to the Company will be
amended so as to reflect the new Listing Rules
In addition, the Company will ensure compliance with the UK REIT
regime requirements.
Performance
The Board uses principal financial Key Performance Indicators
(‘KPIs’) to monitor and assess the performance of the Company being
the net asset value (‘NAV’) total return, the performance of the
Company’s underlying property portfolio relative to its MSCI/IPD
Benchmark Index and the share price:
1. NAV total
return
For the year to 31 March 2019 the
Company delivered a NAV total return of 4.5% (10.5% for the year to
31 March 2018).
2. Underlying
property portfolio performance relative to peer group Benchmark
The performance of the Company’s property portfolio is measured
against a specific Benchmark defined as the MSCI (formerly
Investment Property Databank) Quarterly Version of Balanced Monthly
Index Funds (the ‘Benchmark’). As at 31
March 2019 the Benchmark Index comprised 42 member
funds.
Property portfolio performance
Total return for 12
months to 31 March 2019 |
Total return for 12
months to 31 March 2018 |
SREIT (%) |
MSCI/IPD Benchmark
(%) |
SREIT (%) |
MSCI/IPD Benchmark
(%) |
7.2 |
5.2 |
11.8 |
10.7 |
The analysis above prepared by MSCI and takes account of all
direct property related transaction costs.
3. Share price
performance
The Board monitors the level of the share price compared to the
NAV. As at 31 March 2019, the share
price was at a 19.4% discount to NAV of 68.7 pps. Where appropriate
on investment grounds, the Company may from time to time repurchase
its own shares, but the Board recognises that movements in the
share price premium or discount are driven by numerous factors,
including investment performance, gearing and market sentiment.
Accordingly we focus our efforts principally on addressing sources
of risk and return as the most effective way of producing long term
value for shareholders.
Risk and Uncertainties
The Board is responsible for the Company’s system of risk
management and internal control and for reviewing its
effectiveness. The Board has carried out a robust assessment of the
principal risks facing the Company including those that would
threaten its business model, future performance, solvency or
liquidity. A framework of internal controls has been designed and
established to monitor and manage those risks. This internal
control framework provides a system to enable the Directors to
mitigate these risks as far as possible, which assists in
determining the nature and extent of the significant risks the
Board is willing to take in achieving its strategic objectives.
Although the Board believes that it has a robust framework of
internal controls in place this can provide only reasonable, and
not absolute, assurance against material financial misstatement or
loss and is designed to manage, not eliminate, risk.
A summary of the principal risks and uncertainties faced by the
Company, which have remained unchanged throughout the year ended
31 March 2019, and actions taken by
the Board to manage and mitigate these risks and uncertainties, are
set out below.
Key risks |
Mitigation of risk |
Investment policy and strategy |
An inappropriate
investment strategy, or failure to implement the strategy, could
lead to underperformance and the share price being at a larger
discount, or smaller premium, to NAV than the property market
generally. This under performance could be caused by incorrect
sector and geographic weightings or a loss of income through tenant
failure, both of which could lead to a fall in the value of the
underlying portfolio. This fall in values would be amplified
by the Company’s external borrowings. |
The
Board seeks to mitigate these risks by:
– Diversification of its property portfolio through its
investment restrictions and guidelines which are monitored and
reported on by the Investment Manager.
– Determining borrowing policy and the Investment Manager
operates within borrowing restrictions and guidelines.
– Receiving from the Investment Manager timely and accurate
management information including performance data, attribution
analysis, property level business plans and financial
projections.
– Monitoring the implementation and results of the investment
process with the Investment Manager with a separate meeting devoted
to strategy each year. |
Investment
management |
|
The
Investment Manager’s investment strategy, if inappropriate, may
result in the Company underperforming the market and/or peer group
companies, leading to the Company and its objectives becoming
unattractive to investors. |
Review of the
Investment Manager’s compliance with the agreed investment
restrictions, investment performance and risk against investment
objectives and strategy; relative performance; the portfolio’s risk
profile; and appropriate strategies employed to mitigate any
negative impact of substantial changes in markets, including any
potential disruption to capital markets. |
Economic and
property market risk |
|
The performance of the
Company could be affected by economic and property market
risk. In the wider economy this could include inflation or
deflation, economic recessions, movements in interest rates, Brexit
impact or other external shocks. The performance of the underlying
property portfolio could also be affected by structural or cyclical
factors impacting particular sectors or regions of the property
market. |
The Board considers
economic conditions and the uncertainty around political events
when making investment decisions. The Board mitigates property
market risk through the review of the Group’s strategy on a regular
basis and discussions are held to ensure the strategy is still
appropriate or if needs updating. |
Gearing and
leverage |
|
The Company utilises
credit facilities. These arrangements increase the funds available
for investment through borrowing. While this has the potential to
enhance investment returns in rising markets, in falling markets
the impact could be detrimental to performance. |
Gearing is monitored
and strict restrictions on borrowings imposed. |
Accounting, legal
and regulatory |
|
The risk that the NAV
and financial statements could be inaccurate. |
The
Investment Manager has robust processes in place to ensure that
accurate accounting records are maintained and that evidence to
support the financial statements is available to the Board and the
auditors. The Investment Manager operates established property
accounting systems and has procedures in place to ensure that the
quarterly NAV and Gross Asset Value are calculated accurately. The
Board has appointed the Investment Manager as Alternative
Investment Fund Manager (AIFM) in accordance with the Alternative
Investment Fund Managers Directive (AIFMD).
The quarterly and annual NAV has numerous levels of reviews
including by the Board. Additional support is produced by the fund
accountants to ensure financial data is complete and accurate.
An internal controls review is performed by EY in accordance with
ISAE 3402 annually to provide assurance on Schroders’ service
organisations’ control procedures and an external audit is
completed to provide an opinion on the financial statements which
have been reviewed by the board of directors.
The Administrator monitors legal requirements to ensure that
adequate procedures and reminders are in place to meet the
Company’s legal requirements and obligations. The Investment
Manager undertakes full legal due diligence with advisors when
transacting and managing the Company’s assets. All contracts
entered into by the Company are reviewed by the Company’s legal and
other advisors.
Processes are in place to ensure that the Company complies with the
conditions applicable to property investment companies set out in
the Listing Rules. The Administrator attends all Board meetings to
be aware of all announcements that need to be made and the
Company’s advisors are aware of their obligations to advise the
Administrator and, where relevant, the Board of any notifiable
events. Finally, the Board is satisfied that the Investment Manager
and Administrator have adequate procedures in place to ensure
continued compliance with the regulatory requirements of the FCA
and the Guernsey Financial Services Commission.
|
Valuation
risk |
|
Property valuations
are inherently subjective and uncertain. |
External
valuers provide independent valuation of
all assets.
Members of the Audit Committee meet with the external valuers to
discuss the basis of their valuations and their quality control
processes. |
Tax risk |
|
The Group
is exposed to changes in the tax regime affecting the cost of
corporate tax, VAT, Stamp Duty and Stamp Duty Land Tax.
The UK’s future exit from the EU creates uncertainty over the
future UK tax and regulatory environment.
The Group is exposed to potential tax penalties or loss of its REIT
status by failing to comply with the REIT legislation. |
We
regularly monitor proposed and actual changes in tax legislation
with the help of Deloitte and through direct liaison with HMRC, to
understand and, if possible, mitigate or benefit from their impact.
This includes considering the impact of new UK legislation in
relation to the taxation of non-resident companies investing in UK
real estate that is effective from 5 April 2019.
HMRC has designated the Group as having a low-risk tax status, and
we hold regular meetings with them. We carry out detailed planning
ahead of any future regulatory and tax changes using Deloitte as
our tax advisors.
The Group has internal monitoring procedures in place to ensure
that the appropriate REIT rules and legislation are complied with.
To date, all REIT regulations have been complied with, including
projected tests. |
Service
provider |
|
The Company has no
employees and has delegated certain functions to a number of
service providers. Failure of controls and poor performance of any
service provider could lead to disruption, reputational damage or
loss. |
Service
providers appointed subject to regular reviews and with clearly
documented contractual arrangements detailing service
expectations.
Regular reporting by key service providers and monitoring of the
quality of services provided.
Review of internal controls reports from key service providers,
including confirmation of business continuity and cyber security
arrangements. |
Governance Report
Board of Directors
Lorraine
Baldry (Chairman)
Status: Independent Non Executive Director
Date of appointment: 13 January
2014
Aged 69, is Chair of Sellafield Ltd and Inventa Partners Ltd.
Until recently Lorraine was Chair of London & Continental Railways, a Governor
at The University of the Arts London
and a Director of Thames Water Utilities Limited. She was
Chief Executive of Chesterton International plc and prior to that
held various senior positions at Prudential Corporation, Morgan
Stanley and Regus. She is also an Honorary Member of the Royal
Institution of Chartered Surveyors and a Past President of the
British Property Federation.
Current remuneration: £50,000 per annum
Material interests in any contract which is significant to
the Company’s business: None
Graham
Basham
Status: Independent Non Executive Director
Date of appointment: 11 September
2015
Aged 61, is a director of a number of Investment and Fiduciary
regulated companies in Guernsey. He also sits on the boards
of the SREIT subsidiaries, a position he has held for the last nine
years. He has 40 years’ experience in fiduciary and fund
work, most of these spent in several offshore locations. He
is Group partner and Head of Guernsey for the Active Group Ltd, holds a
Trustee Diploma as an Associate of Chartered Institute of Banks and
is a member of the Society of Trust & Estate Practitioners and
Institute of Directors.
Current remuneration: £30,000 per annum
Material interests in any contract which is significant to
the Company’s business: Director of Computershare Services
(Guernsey) Ltd who act as
Registrar to the Fund
Stephen
Bligh (Chairman of the Audit Committee)
Status: Independent Non Executive Director
Date of appointment: 28 April
2015
Aged 62, Stephen was previously with KPMG for 34 years,
specialising in the audit of FTSE 350 companies in property and
construction. He is a fellow of the Institute of Chartered
Accountants in England &
Wales and was previously a
non-executive Board Member of the Department of Business,
Innovation & Skills.
Current remuneration: £35,000 per annum
Material interests in any contract which is significant to
the Company’s business: None
Alastair
Hughes (Senior Independent Director)
Status: Independent Non Executive Director
Date of appointment: 26 April
2017
Aged 53, Alastair Hughes has over
25 years of experience in real estate markets, is a non-executive
director of British Land PLC and Tritax Big Box. He was
previously the Managing Director of Jones
Lang LaSalle (JLL) in the UK before becoming the CEO for
Europe, Middle East and Africa and then most recently becoming the CEO
for Asia Pacific. Alastair is a Chartered Surveyor and sat on
the Global Executive Board of JLL.
Current remuneration: £35,000 per annum
Material interests in any contract which is significant to
the Company’s business: None
No Director has any entitlement to pensions and the company has
not awarded any share options or long-term performance incentives
to any of them. No element of Directors’ remuneration is
performance-related. There were no payments to Directors for loss
of office.
No Director has a service contract with the Company; however,
each of the Directors has a letter of appointment with the Company.
The Directors’ letter of appointment, which set out the terms of
their appointment, are available for inspection at the Company’s
registered office address during normal business hours and will be
available for inspection at the AGM.
Report of the Directors
The Directors of the Company and its subsidiaries (together, the
‘Group’) present their report and the audited financial statements
of the Group for the year ended 31 March
2019. The Company is incorporated in Guernsey, Channel
Islands under The Companies (Guernsey) Law, 2008 ('Companies Law').
Results and dividends
The results for the year under review are set out in the
attached financial statements.
During the year the Company has declared and paid the following
interim dividends to its ordinary shareholders in accordance with
the solvency test (contained in the Companies Law):
Dividend For quarter |
Date Paid |
Rate |
31 March 2018 |
31 May 2018 |
0.62 pence per share |
30 June 2018 |
31 August 2018 |
0.62 pence per share |
30 September 2018 |
5 December 2018 |
0.6355 pence per share |
31 December 2018 |
15 March 2019 |
0.65 pence per share |
Subject to the solvency test provided for in the Companies Law
being satisfied, all dividends are declared and paid as interim
dividends. The Directors do not therefore recommend a final
dividend. A dividend for the quarter ended 31 March 2019 of 0.65
pence per share (‘pps’) was declared on 10 May 2019 and will be paid on
7 June 2019.
The split of dividend paid between Property Income Distribution
(PID) and Ordinary dividend for the year ending 31 March 2019 is 1.4 pps and 1.1255 pps
respectively.
Share capital
As at 31 March 2019 and the date
of this Report, the Company has 565,664,749 (2018: 565,664,749)
Ordinary Shares in issue of which 47,151,340 Ordinary Shares
(representing 8.3% of the Company’s total issued share capital) are
held in treasury (2018: 47,151,340). The total number of
voting rights of the Company is 518,513,409 (2018: 518,513,409) and
this figure may be used by shareholders as the denominator for the
calculations by which they will determine if they are required to
notify their interest in, or a change in their interest in the
Company, under the Disclosure Guidance and Transparency Rules.
Key services providers
The Board has adopted an outsourced business model and has
appointed the following key service providers:
Investment Manager
The Board reviews the Investment Manager’s performance at its
quarterly Board meetings. In addition, the Board made its
annual visit to the Investment Manager in May 2019 to review portfolio strategy and the
Investment Manager’s capabilities in more depth. Subsequently, the
Directors formally discussed the performance of the Investment
Manager at a private session.
On the basis of this review, and the extensive selection process
undertaken prior to appointing the Investment Manager, the Board
remains satisfied that the Investment Manager has the appropriate
capabilities required to support the Company, and believes that the
continuing appointment of the Investment Manager under the terms of
the current investment management agreement, further details are
set out below, is in the interest of shareholders.
The Investment Manager receives a fee of 1.1% per annum of the
Company’s NAV for providing investment management and accounting
services. The fee is payable monthly in arrears. There
is no performance fee. The investment management agreement can be
terminated by either party on not less than nine months' written
notice or on immediate notice in the event of certain breaches of
its terms or the insolvency of
either party.
The Company has appointed the Investment Manager as the AIFM
under the AIFMD. There is no additional fee paid to the Investment
Manager for this service.
Administration
The Board appointed Northern Trust International Fund
Administration Services (Guernsey)
Limited as the administrator to the Company (the ‘Administrator’).
The Administrator is entitled to an annual fee equal
to £120,000.
Northern Trust (Guernsey)
Limited has been appointed by the Board to provide depositary
services, as required under the AIFMD at an annual fee of
£40,000.
Going concern and viability
Going concern
The Directors have examined significant areas of possible
financial risk and have reviewed cash flow forecasts and compliance
with the debt covenants, in particular the loan to value covenant
and interest cover ratio. They have not identified any
material uncertainties which would cast significant doubt on the
Group’s ability to continue as a going concern for a period of not
less than twelve months from the date of the approval of the
financial statements. The Directors have satisfied themselves that
the Group has adequate resources to continue in operational
existence for the foreseeable future.
After due consideration, the Board believes it is appropriate to
adopt the going concern basis in preparing the financial
statements.
Brexit
The Company’s properties were independently valued as at
31 March 2019 and Brexit is only one
of a number of market factors which the independent valuers will
have taken into consideration in determining their valuations.
The valuations are not qualified with regard to Brexit.
The Company has over 300 tenants with varying degrees of
exposure to Brexit. The Board has considered reasonable
sensitivities, including potential falls in property valuations
arising from, inter alia, Brexit, in concluding that it will remain
a going concern for a period of not less than twelve months from
the date of the approval of the financial statements.
Viability statement
The 2016 UK Corporate Governance Code requires the Board to make
a Viability Statement which considers
the Company’s current position and principal risks and
uncertainties together with an assessment of
future prospects.
The Board conducted this review over a five year time horizon
which is selected to match the period over which the Board monitors
and reviews its financial performance and forecasting. The
Investment Manager prepares five year total return forecasts for
the UK commercial real estate market. The Investment Manager uses
these forecasts as part of analysing acquisition opportunities as
well as for its annual asset level business planning process.
At the annual Manager Visit the Board receives an overview of the
asset level business plans which the Investment Manager uses to
assess the performance of the underlying portfolio and therefore
make investment decisions such as disposals and investing capital
expenditure. The Company’s principal borrowings are for a weighted
duration of eight years and the average unexpired lease term,
assuming all tenants vacate at the earliest opportunity, is eight
years.
The Board’s assessment of viability considers the principal
risks and uncertainties faced by the Company, as detailed on pages
30 to 32 of the Strategic Report, which could negatively impact its
ability to deliver the investment objective, strategy, liquidity
and solvency of the Company. This includes considering a cash
flow model prepared by the Manager that analyses the sustainability
of the Company’s cash flows, dividend cover, compliance with bank
covenants, REIT compliance and general liquidity requirements for a
five year period. These metrics are subject to a sensitivity
analysis which involves flexing a number of the main assumptions
including macro economic scenarios, delivery of specific asset
management initiatives, rental growth and void/reletting
assumptions. The Board also reviews assumptions regarding
capital recycling and the Company’s ability to refinance or extend
financing facilities.
Based on the assessment, the Board has a reasonable expectation
that the Company will be able to continue in operation and meet its
liabilities as they fall due over the five year period of its
assessment.
Anti-bribery policy
The Company continues to be committed to carrying out its
business fairly, honestly and openly. To this end, it has
undertaken a risk assessment of its internal procedures and the
policies of the Company’s main service providers which aim to
prevent bribery being committed by Directors and persons associated
with the Company on the Company’s behalf and to ensure compliance
with the Bribery Act.
Directors
The Directors of the Company together with their beneficial
interest in the Company’s ordinary share capital as at the date of
this report are given below:
Director |
Number of ordinary
shares |
Percentage
(%) |
Lorraine Baldry |
- |
- |
Graham Basham |
- |
- |
Stephen Bligh |
64,000 |
Less than 0.1 |
Alastair Hughes |
100,000 |
Less than 0.1 |
Substantial shareholdings
As at 31 March 2019 the Directors
were aware that the following shareholders each owned 3% or more of
the issued Ordinary Shares of the Company.
|
Number of ordinary
shares |
Percentage
(%) |
Investec Wealth & Investment
(UK) |
86,735,642 |
16.7 |
Schroders Investment Management
Limited |
86,591,878 |
16.7 |
Premier Fund Managers Ltd (UK) |
40,977,139 |
7.9 |
Alliance Trust Savings Limited |
31,800,387 |
6.1 |
BlackRock Inc |
24,164,759 |
4.7 |
Brooks Macdonald Asset
Management |
21,161,675 |
4.1 |
The Vanguard Group Inc |
20,297,217 |
3.9 |
Independent auditors
KPMG Channel Islands Limited (‘KPMG’) have expressed their
willingness to continue as auditors to the Company (the ‘Auditors’)
and resolutions proposing their reappointment and authorising the
Directors to determine their remuneration for the coming year will
be put to shareholders at the annual general meeting (‘AGM’) of the
Company.
The Audit Committee’s evaluation of the Auditors is described in
the Report of the Audit Committee on page 47.
Disclosure of information to auditors
The Directors who held office at the date of approval of this
Directors’ Report confirm that, so far as they are each aware,
there is no relevant audit information of which the Company’s
Auditors are unaware and each Director has taken all the steps that
he/she ought to have taken as a Director to make himself/herself
aware of any relevant audit information and to establish that the
Company’s Auditors are aware of that information.
Status for taxation
The Director of Income Tax in Guernsey has granted the Company exemption
from Guernsey income tax under the
Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989 and the income of
the Company may be distributed or accumulated without deduction of
Guernsey Income Tax. Exemption under the above mentioned Ordinance
entails the payment by the Company of an annual fee of £1,200.
The Group’s tax charge remains low because it has tax exempt
status in the UK as a UK Real Estate Investment Trust (REIT). The
Group has been a UK REIT since 2015 and the Group’s property income
and gains are exempt from UK corporate taxes provided a number of
conditions in relation to the Group’s activities are met including,
but not limited to, distributing at least 90% of the Group’s UK tax
exempt profit as property income distributions (PIDs). The residual
business in the UK is subject to UK tax as normal.
Shareholders who are in any doubt
concerning the taxation implications of a REIT should consult their
own tax advisors.
Key information document
A Key Information Document (“KID”) for the Company was published
in January 2018, in accordance with
the Packaged Retail and Insurance-Based Investment Products
Regulations (“PRIIPS”). The calculation of figures and performance
scenarios contained in the KID are prescribed by PRIIPS and have
neither been set nor endorsed by the Board. In fact, the Board is
of the opinion that PRIIPS is inconsistently applied by market
participants and hence creates confusion amongst investors.
AIFMD remuneration disclosures for Schroder Real Estate
Investment Management Limited (‘SREIM’) for the year to
31 December 2018.
Quantitative remuneration disclosures to be made in this Annual
Report in accordance with FCA Handbook rule FUND3.3.5 are published
on the following website
http://www.schroders.com/en/investor-relations/shareholders-and-governance/disclosures/remuneration-disclosures/
Statement of Directors’ Responsibilities
The Directors are responsible for preparing the Directors’
Report and the financial statements in accordance with applicable
law and regulations.
Company law requires the Directors to prepare financial
statements for each financial year. Under that law they have
elected to prepare the financial statements in accordance with
International Financial Reporting Standards and applicable
law.
The financial statements are required by law to give a true and
fair view of the state of affairs of the Company and of the profit
or loss of the Company for that period.
In preparing these financial statements, the Directors are
required to:
– Select suitable accounting policies
and then apply them consistently;
– Make judgements and estimates that are
reasonable and prudent;
– State whether applicable accounting
standards have been followed, subject to any material departures
disclosed and explained in the financial statements;
– Assess the Company’s ability to
continue as a going concern, disclosing as applicable matters
relating to going concern; and
– Use the going concern basis of
preparation unless they intend to either liquidate the Company or
cease operations or have no realistic alternative to do so.
The Directors are responsible for keeping proper accounting
records which disclose with reasonable accuracy at any time the
financial position of the Company and enable them to ensure that
the financial statements comply with the Companies Law. They
have general responsibility for taking such steps as are reasonably
open to them to safeguard the assets of the Company and to prevent
and detect fraud and other irregularities.
Responsibility Statement of the Directors in respect of the
Annual Report
We confirm to the best of our knowledge:
– The financial statements, prepared in
accordance with International Financial Reporting Standards, give a
true and fair view of the assets, liabilities, financial position
and profit of the Group and the undertakings included in the
consolidation taken as a whole and comply with the Companies
Law;
– The Strategic Report on pages 11 to 32
and Governance Report on pages 33 to 38 include a fair review of
the development and performance of the business and the position of
the Group and the undertakings included in the consolidation taken
as a whole, together with a description of the principal risks and
uncertainties it faces: and
– The Annual Report and Consolidated
Financial Statements, taken as a whole, is fair, balanced and
understandable and provides the information necessary for
shareholders to assess the Company’s position and performance,
business model and strategy
Responsibility for electronic publication
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
Company’s website, and for the preparation and dissemination of
financial statements. Legislation in Guernsey governing the preparation and
dissemination of financial statements may differ from legislation
in other jurisdictions.
Resolutions at 2019 Annual General Meeting
THIS SECTION IS IMPORTANT AND REQUIRES
YOUR IMMEDIATE ATTENTION.
If you are in any doubt about the
contents of this section of the document or the action you should
take, you are recommended to seek immediately your own personal
financial advice from an appropriately qualified independent
advisor authorised pursuant to the Financial Services and Markets
Act 2000.
If you have sold or otherwise transferred all your shares in the
Company, please send this document (including the Notice of AGM)
and the accompanying documents at once to the purchaser,
transferee, or to the stockbroker, bank or other person through
whom the sale or transfer was effected for onward transmission to
the purchaser or transferee. However, such documents should not be
distributed, forwarded or transmitted in or into the United States, Canada, Australia or Japan or into any other jurisdiction if to do
so would constitute a violation of applicable laws and regulations
in such other jurisdiction.
The Notice of the Annual General Meeting of Shareholders is set
out on pages 95 to 97. The following paragraphs explain the
resolutions to be put to the AGM.
Ordinary resolutions 1–8
Ordinary Resolutions 1-8 are being proposed to approve the
ordinary business of the Company to: (i) consider and approve the
consolidated Annual Report and the remuneration report of the
Company for the year ended 31 March
2019; (ii) re-elect the Directors; and (iii) re-appoint the
Auditors and to authorise the Directors to determine the Auditor’s
remuneration.
Ordinary Resolution 9 Approval of the company's dividend
policy
The Company’s dividend policy is to pay a sustainable level of
quarterly dividends to shareholders (in arrears). It is intended
that successful execution of the Company’s strategy will enable a
progressive dividend policy.
The Company’s objective and strategy, outlined in the Chairman’s
Statement and Investment Manager’s Report, is to deliver
sustainable net income growth in due course through active
management of the underlying portfolio. Any future decision to
increase the dividend will be determined by factors including
whether it is sustainable over the long term, current and
anticipated future market conditions, rental values and the
potential impact of any future debt refinancing.
As the Company is a REIT, the Board must also ensure that
dividends are paid in accordance with the requirements of the UK
REIT regime (pursuant to part 12 of the UK Corporation Tax Act
2010) in order to maintain the Company's REIT status. Shareholders
should note that the dividend policy is not a profit forecast and
dividends will only be paid to the extent permitted in accordance
with the Companies Law and the UK
REIT regime.
The Board acknowledges that the dividend policy is fundamental
to shareholders’ income requirements as well as the Company’s
investment and financial planning. Therefore, in accordance with
the principles of good corporate governance and best practice
relating to the payment of interim dividends without the approval
of a final dividend by a company's shareholders, a resolution to
approve the Company’s dividend policy will be proposed annually for
approval.
Special Resolution 1 Authority to repurchase shares
The Company did not buy back any ordinary shares during the year
ended 31 March 2019. The Directors
currently have authority to repurchase up to 14.99% of the
Company’s ordinary shares and will seek annual renewal of this
authority from shareholders at the AGM. The Board monitors the
level of the ordinary share price compared to the NAV per ordinary
share. Where appropriate on investment grounds, the Company may
from time to time repurchase its ordinary shares, but the Board
recognises that movements in the ordinary share price, premium or
discount, are driven by numerous factors, including investment
performance, gearing and market sentiment. Accordingly, it focuses
its efforts principally on addressing sources of risk and return as
the most effective way of producing long term value for
Shareholders. Any repurchase of ordinary shares will be made
subject to Guernsey law and within
any guidelines established from time to time by the Board. The
making and timing of any repurchases will be at the absolute
discretion of the Board, although the Board will have regard to the
effects of any such repurchase on long-term shareholders in
exercising its discretion.
Purchases of ordinary shares will only be made through the
market for cash at prices below the prevailing NAV of the ordinary
shares (as last calculated) where the Directors believe such
purchases will enhance shareholder value. Such purchases will also
only be made in accordance with the Listing Rules and the
Disclosure Guidance and Transparency Rules which provide that the
maximum price to be paid for each ordinary share must not be more
than the higher of: (i) 5 per cent above the average mid-market
value of the ordinary shares for the five business days before the
purchase is made; and (ii) that stipulated by the regulatory
technical standards adopted by the European Union pursuant to the
Market Abuse Regulation from time to time. Any ordinary shares
purchased under this authority may be cancelled or held in
treasury.
This authority will expire at the conclusion of the annual
general meeting of the Company to be held in 2020 unless varied,
revoked or renewed prior to such date by ordinary resolution of the
Company.
Special Resolution 2 Authority to disapply pre-emption
rights
The Directors require specific authority from shareholders
before allotting new ordinary shares for cash (or selling shares
out of treasury for cash) without first offering them to existing
shareholders in proportion to their holdings. Special Resolution 2
empowers the Directors to allot new ordinary shares for cash or to
sell ordinary shares held by the Company in treasury for cash,
otherwise than to existing shareholders on a pro-rata basis, up to
such number of ordinary shares as is equal to 10% of the ordinary
shares in issue (including treasury shares) on the date the
resolution is passed. No ordinary shares will be issued without
pre-emption rights for cash (or sold out of treasury for cash) at a
price less than the prevailing net asset value per ordinary share
at the time of issue or sale from treasury.
The Directors do not intend to allot or sell ordinary shares
other than to take advantage of opportunities in the market as they
arise and will only do so if they believe it to be advantageous to
the Company's existing shareholders and when it would not result in
any dilution of the net asset value per ordinary share (owing to
the fact that no ordinary shares will be issued or sold out of
treasury for a price less than the prevailing net asset value per
ordinary share).
This authority will expire on the earlier of the conclusion of
the annual general meeting of the Company to be held in 2020 or on
the expiry of 15 months from the passing of this Special Resolution
2.
The Board considers that the resolutions to be proposed at the
AGM are in the best interests of the Company’s shareholders as a
whole. The Board therefore recommends unanimously to shareholders
that they vote in favour of each of the resolutions, as they intend
to do in respect of their own beneficial holdings.
Lorraine Baldry,
Chairman
20 May 2019
Stephen Bligh,
Director
20 May 2019
Corporate Governance
The Directors are committed to maintaining high standards of
corporate governance. Insofar as the Directors believe it to be
appropriate and relevant to the Company, it is their intention that
the Company should comply with best practice standards for the
business carried on by the Company.
The Guernsey Financial Services Commission (the ‘GFSC’)
states in the Finance Sector Code of Corporate Governance (the
‘Code’) that companies which report against the UK Corporate
Governance Code or the Association of Investment Companies Code of
Corporate Governance (the ‘AIC Code’) are deemed to meet the Code,
and need take no further action.
The Board has considered the principles and recommendations of
the AIC Code. The AIC Code, addresses all the principles set out in
the UK Corporate Governance Code, as well as setting out additional
principles and recommendations on issues that are of specific
relevance.
The Board considers that reporting against the principles and
recommendations of the AIC Code, which has been endorsed by the
Financial Reporting Council (‘FRC’), will provide better
information to shareholders.
It is the Board’s intention to continue to comply with the AIC
Code.
In July 2018, the FRC published a
new version of the UK Corporate Governance Code (the “2018 UK
Code”), prompting the AIC to publish a new version of the AIC code
in 2019 (the “2019 AIC Code”). Both the 2018 UK Code and the
2019 AIC Code apply to accounting periods beginning on or after
1 January 2019, at which point they
will supersede the previous versions of these documents.
A copy of the AIC Code can be found at www.theaic.co.uk.
Statement of compliance
The Company has complied with the recommendations of the AIC
Code and the relevant provisions of the UK Corporate Governance
Code, except as set out below.
The UK Corporate Governance Code includes provisions relating
to:
– The role of the chief executive;
– Executive directors’ remuneration;
and
– Internal audit function.
For the reasons set out above the Board considers that these
provisions are not relevant to the Company, being an externally
managed investment company. The provision in relation to the
internal audit function is referred to in the Audit Committee
report. The Company has therefore not reported further in respect
of
these provisions.
Role of the Board
The Board has determined that its role is to consider and
determine the following principal matters which it considers are of
strategic importance to the Company:
– The overall objectives of the Company,
as described under the paragraph above headed ‘Investment Policy
and Strategy’ and the strategy for fulfilling those objectives
within an appropriate risk framework in light of market conditions
prevailing from time to time.
– The capital structure of the Company,
including consideration of an appropriate policy for the use of
borrowings both for the Company and in any joint ventures in which
the Company may invest from time to time.
– The appointment of the Investment
Manager, Administrator and other appropriately skilled service
providers and to monitor their effectiveness through regular
reports and meetings; and
– The key elements of the Company’s
performance including NAV growth and the payment of dividends.
Board decisions
The Board makes decisions on, among other things, the principal
matters set out under the paragraph above headed ‘Role of the
Board’. Issues associated with implementing the Company’s strategy
are generally considered by the Board to be non-strategic in nature
and are delegated either to the Investment Manager or the
Administrator, unless the Board considers there will be
implementation matters significant enough to be of strategic
importance to the Company and should be reserved to the Board.
Generally these are defined as:
– Large property decisions affecting 10%
or more of the Company’s assets;
– Large property decisions affecting 5%
or more of the Company’s rental income; and
– Decisions affecting the Company’s
financial borrowings.
Board performance evaluation
As in prior years, the Board has undertaken a review of its
performance. The review concluded that the Board was operating
effectively and that the Directors had the breadth of skills
required to fulfil their roles.
Non-Executive Directors, rotation of Directors and Directors’
tenure
The UK Corporate Governance Code recommends that Directors
should be appointed for a specified period. The Board has resolved
in this instance that Directors’ appointments need not comply with
this requirement as all Directors are non-executive and their
respective appointments can be terminated at any time without
penalty. The Board has approved a policy that all Directors will
stand for re-election annually.
The Board considers that independence is not compromised by
length of tenure and that it has the appropriate balance of skills,
experience and length of service.
The Board has determined that all the Directors are independent
of the Investment Manager. Alastair
Hughes is the Senior Independent Director.
The appointment and replacement of Directors is governed by the
Company’s Articles, the Companies Law, related legislations and the
Listing Rules. The Articles may only be amended by a special
resolution of
the shareholders.
Board composition, changes and diversity
The Board currently consists of four non-executive Directors.
The Chairman is Lorraine Baldry. The
biography of each of these Directors is set out on page 33 of the
report. The Board considers each of the Directors to be
independent.
The independence of each Director is considered on a continuing
basis. The Board is satisfied that it is of sufficient size with an
appropriate balance of skills and experience, independence and
knowledge of both the Company and the wider investment company
sector, to enable it to discharge its respective duties and
responsibilities effectively and that no individual or group of
individuals is, or has been, in a position to dominate decision
making. Accordingly the Board approves the nomination for
re-election of each of the Directors at the forthcoming annual
general meeting.
When a vacancy arises the board selects the best candidate
taking into account the skills and experience required, while
taking into consideration board diversity as part of a good
corporate governance culture.
Board committees
The Board has delegated certain of its responsibilities to its
Audit and Nomination Committees. Each of these committees has
formal terms of reference established by the Board, which are
available on the
Company's website.
Audit committee
Details of the Audit Committee are set out in the Report of the
Audit Committee.
Nomination committee
The role of the Nomination Committee, chaired by Lorraine Baldry, is to consider and make
recommendations to the Board on its composition and makes
recommendations to the Board with regards any adjustment that may
be appropriate, including in connection with the renewable and
re-election of the Board, so as to maintain an appropriate balance
of skills, experience and diversity, including gender, and to
ensure progressive refreshing of the Board. On individual
appointments, the Nomination Committee leads the process and makes
recommendations to the Board.
Before the appointment of a new director, the Nomination
Committee prepares a description of the role and capabilities
required for a particular appointment. While the Nomination
Committee is dedicated to selecting the best person for the role,
it aims to promote diversification and the Board recognises the
importance of diversity. The Board agrees that its members should
possess a range of experience, knowledge, professional skills and
personal qualities as well as the independence necessary to provide
effective oversight of the affairs of the Company.
Remuneration committee
As all the Directors are non-executives, the Board has resolved
that it is not necessary to have a Remuneration Committee.
Board meetings and attendance
The Board meets at least four times each year. Additional
meetings are also arranged as required and regular contact between
Directors, the Investment Manager and the Administrator is
maintained throughout the year. Representatives of the Investment
Manager and Company Secretary attend each Board meeting and other
advisors also attend when requested to do so by the Board. At least
once a year the Board carries out a site visit to properties owned
by the Company.
Attendance records for the four quarterly Board meetings and two
six-monthly Audit Committee meetings during the year under review
are set out in the table below.
|
Board |
Audit
committee |
Lorraine Baldry (Chairman) |
4/4 |
2/2 |
Alastair Hughes |
4/4 |
1/2 |
Graham Basham |
4/4 |
1/2 |
Stephen Bligh |
4/4 |
2/2 |
No. of meetings during the year |
4 |
2 |
In addition to its regular quarterly meetings, the Board met on
six other occasions during the year, attended by all or the
majority of Directors.
Information flows
All Directors receive, in a timely manner, relevant management,
regulatory and financial information and are provided, on a regular
basis, with key information on the Company’s policies, regulatory
requirements and internal controls. The Board receives and
considers reports regularly from the Investment Manager and other
key advisors and ad hoc reports and information are supplied to the
Board as required.
Data protection and security
The Board has reviewed its systems and controls in light of the
implementation of the General Data Protection Regulation (EU
Regulation 2016/679) (the "GDPR") to ensure that the Company is
compliant with the requirements of the GDPR. As part of this
process the Board has taken steps to update its contracts and
policies accordingly and is comfortable that it meets its
obligations as a controller of personal data. The Board also
requires its Investment Manager and Administrator to have robust
information security and data protection environment in place. This
is reviewed with the Investment Manager at the annual Manager visit
day. All Board communication of a confidential nature is managed
via a secure Board application. The Company’s privacy notice is
available on its webpage.
Directors’ and Officers’ Liability Insurance
During the year, the Company has maintained insurance cover for
its Directors under a liability insurance policy.
Relations with shareholders
The Board believes that the maintenance of good relations with
both institutional and retail shareholders is important for the
long-term prospects of the Company. The Board receives feedback on
the views of shareholders from its corporate broker, the Investment
Manager and from the Chairman. Through this process the Board seeks
to monitor the views of shareholders and to ensure an effective
communication programme.
The Board believes that the Annual General Meeting provides an
appropriate forum for investors to communicate with the Board, and
encourages participation. The Notice of Annual General Meeting on
page 95 sets out the business of the Annual General Meeting to be
held on 18 September 2019.
Remuneration Report
The Company’s Articles currently limit the aggregate fees
payable to the Board of Directors to a total of £250,000 per annum.
Subject to this overall limit, it is the Board’s policy to
determine the level of Directors’ fees having regard to the fees
payable to non-executive directors in the industry generally, the
role that individual Directors fulfil in respect of Board and
Committee responsibilities, and time committed to the Company’s
affairs.
Directors receive a base fee of £30,000 per annum, and the
Chairman receives £50,000 per annum. The Chairman of the Audit
Committee and the Senior Independent Director receive an additional
fee of £5,000 respectively. The fees were reviewed by an external
consultant during 2015, which led to the recommendation adopted and
current level of fees taking effect from 1
October 2015.
No Director past or present has any entitlement to pensions, and
the Company has not awarded any share options or long-term
performance incentives to any of them. No element of Directors’
remuneration is performance-related. There were no payments to
former directors for loss of office.
The Board believes that the principles of Section D of the UK
Corporate Governance Code relating to remuneration do not apply to
the Company, except as outlined above, as the Company has no
executive Directors.
No Director has a service contract with the Company, however,
each of the Directors has a letter of appointment with the Company.
The Directors’ letters of appointment, which set out the terms of
their appointment, are available for inspection at the Company’s
registered office address during normal business hours and will be
available for inspection at the AGM.
All Directors are appointed for an initial term covering the
period from the date of their appointment until the first AGM
thereafter, at which they are required to stand for re-election in
accordance with the Articles. When recommending whether an
individual Director should seek re-election, the Board will take
into account the provisions of the UK Corporate Governance Code,
including the merits of refreshing the Board and its
Committees.
The Board has approved a policy that all Directors will stand
for re-election annually.
Performance
The performance of the Company is described on page 27 in the
Business Model Report.
The following amounts were paid by the Company for services as
non-executive Directors:
Director |
31
March 2019 |
31
March 2018 |
Lorraine Baldry
(Chairman) |
50,000 |
50,000 |
Keith Goulborn* |
- |
35,000 |
John Frederiksen* |
- |
2,500 |
Stephen
Bligh# |
35,000 |
35,000 |
Graham
Basham## |
30,000 |
30,000 |
Alastair Hughes |
35,000 |
27,910 |
Total |
150,000 |
180,410 |
* John
Frederiksen retired on 25 April
2017. Keith Goulborn retired
on 31 March 2018.
Senior Independent Director
# Chairman of the Audit Committee.
## Graham Basham was a
director on a majority of the subsidiary companies, for which an
additional £21,000 was paid to his employer, Active Group, during
the year for his service. Mr Basham owns 15% of Active Group.
Information to be disclosed in accordance with Listing Rule
9.8.4R
Listing Rule 9.8.4C requires the Company to include certain
information in a single identifiable section of this annual report
or a cross reference table indicating where the information
required under Listing Rule 9.8.4 R is set out.
The Directors confirm that there are no disclosures to be made
in this regard.
Lorraine Baldry,
Chairman
20 May 2019
Stephen Bligh,
Director
20 May 2019
Report of the Audit Committee
Composition
The Audit Committee is chaired by Stephen Bligh with Lorraine Baldry, Graham
Basham and Alastair Hughes as
members. During the year, Lorraine
Baldry stepped down from the Audit Committee based on
guidance from the Financial Reporting Council’s (‘FRC’) UK
Corporate Governance Code. The Board considers that Stephen
Bligh’s professional experience makes him suitably qualified to
chair the Audit Committee.
Responsibilities
The Audit Committee ensures that the Company maintains the
highest standards of integrity in financial reporting and internal
control. This includes responsibility for reviewing the half-year
and annual financial statements before their submission to the
Board. In addition, the Audit Committee is specifically charged
under its terms of reference to advise the Board, inter alia, on
the terms and scope of the appointment of the Auditors, including
their remuneration, independence, objectivity and reviewing with
the Auditors the results and effectiveness of the audit and the
interim review.
Work of the Audit Committee
The Audit Committee meets no less than twice a year and, if
required, meetings are also attended by the Investment Manager, the
Administrator and the Auditor. During the year under review, the
Audit Committee met on two occasions to consider:
– The contents of the interim and annual
financial statements and to consider whether, taken as a whole,
they were fair, balanced and understandable and provided the
information necessary for shareholders to assess the Company’s
performance, business model and strategy;
– The effectiveness of the Company’s
system of internal control;
– The external Auditor’s terms of
appointment, audit plan, half year review findings and year-end
report;
– The management representation letter
to the Auditors;
– The effectiveness of the audit
process;
– The independence, effectiveness and
objectivity of the external Auditor;
– The risk assessment of the Company;
and
– Compliance with the UK REIT
regime.
Significant matters considered by the
Audit Committee in relation to the financial statements
Matter |
Action |
Property
valuation
Property valuation is central to the business and is a significant
area of judgement which is inherently subjective, although the
valuations are performed by independent firms of valuers: Knight
Frank LLP and BNP Paribas Real Estate UK for the joint
ventures.
Errors in valuation could have a material impact on the Company’s
net asset value. |
The Audit Committee reviewed the outcomes of the valuation process
throughout the year and discussed the detail of each quarterly
valuation with the Investment Manager at the Board meetings.
Members of the Audit Committee met with Knight Frank LLP and BNP
Paribas Real Estate UK outside the formal meeting to discuss the
process, assumptions, independence and communication with the
Investment Manager and their valuations.
Furthermore, as this is the main area of audit focus, the Auditors
contact the valuers directly and independently of the Investment
Manager. The Audit Committee receives detailed verbal and written
reports from KPMG on this matter as part of their interim and year
end reporting to the Audit Committee.
On the basis of the above, the Audit Committee concluded that the
valuations were suitable for inclusion in the financial
statements. |
Internal control
The UK Corporate Governance Code requires the Board to conduct,
at least annually, a review of the adequacy of the Company’s
systems of internal control, and to report to shareholders that it
has done so. The Audit Committee, on behalf of the Board, also
regularly reviews a detailed 'Risk Map' identifying significant
strategic, investment-related, operational and service provider
related risks and ensures that risk management and all aspects of
internal control are reviewed at least annually.
The Company’s system of internal controls is substantially
reliant on the Investment Manager’s and the Administrator’s own
internal controls and internal audit processes due to the
relationships in place.
Although the Board believes that it has a robust framework of
internal controls in place, this can provide only reasonable and
not absolute assurance against material financial misstatement or
loss and is designed to manage, not eliminate, risk. No significant
issues were identified from the internal controls review.
Internal audit
The Audit Committee considered the need for an internal audit
function and concluded that this function is provided by Schroder’s
Group Internal Audit reviews, which cover the functions provided by
the Investment Manager, Schroder Real Estate Investment Management
Limited.
In addition, the Investment Manager prepares an ISAE 3402/AAF
01/06 Internal Controls Report which includes the Company within
the scope of the review. This report is reviewed by Ernst &
Young LLP (EY) which issued an unqualified opinion for the year
ended December 2018. The Audit
Committee has considered both the Investment Manager’s internal
controls report and the review by EY.
External Auditor remuneration, independence and
effectiveness
Annually, the Audit Committee considers the remuneration and
independence of the external auditor. The Committee recommends the
remuneration of the external auditor to the Board and keeps under
review the ratio of audit to non-audit fees to ensure that the
independence and objectivity of the external auditor are
safeguarded.
Effectiveness of the independent audit process
The Audit Committee evaluated the effectiveness of the
independent audit firm and process prior to making a recommendation
on its re-appointment at the forthcoming Annual General Meeting. As
part of the evaluation, the Committee considered feedback from the
Investment Manager on the audit process and the half year and year
end report from the Auditor, which details the auditor’s compliance
with regulatory requirements, on safeguards that have been
established and their own internal quality control procedures. The
Audit Committee had discussions with the audit partner, on audit
planning, accounting policies and audit findings, and met the audit
partner both with and without representatives of the Investment
Manager present. The Chairman of the Audit Committee also had
informal discussions with the audit partner during the course of
the year. The Committee is satisfied with the effectiveness of the
audit.
Review of auditor appointment
KPMG has been the Group’s Auditor since inception in 2004.
In order to benchmark KPMG’s service quality, effectiveness and
value for money, together with adopting the UK Corporate Governance
code on audit tendering and rotation, the Audit Committee conducted
a formal tender process during May/June
2014. Three firms, including KPMG, were asked to participate
in this process. Following this, a recommendation was made to the
Audit Committee to retain KPMG as the Group’s auditor.
The Audit Committee’s current intention is for the next audit
tender to take place within three years, at the end of the current
audit partner’s tenure, when the audit firm will be changed.
Non-audit services
In order to help safeguard the independence and objectivity of
the auditor, the Audit Committee maintains a policy on the
engagement of the external auditor to provide non-audit services.
The Audit Committee’s policy for the use of the external auditor
for non-audit services recognises that there are certain
circumstances where, due to KPMG’s expertise and knowledge of the
Company, it will often be in the best position to perform non audit
services. Under the policy, the use of the external auditor for
non-audit services is subject to pre-clearance by the Audit
Committee. Clearance will not be granted if it is believed it would
impair the external auditor’s independence or where provision of
such services by the Company’s auditor is prohibited. Prior to
undertaking any non-audit service, KPMG also completes its own
independence confirmation processes which are approved by the audit
partner.
During the year, the non-audit services fees paid to KPMG were
£13,250. (2018: £13,000) in relation to the interim review.
Stephen Bligh,
Director
20 May 2019
Independent Auditor’s report
Our opinion is unmodified
We have audited the consolidated financial statements (the
“Financial Statements”) of Schroder Real Estate Investment Trust
Limited (the “Company”) and its subsidiaries (together, the
“Group”), which comprise the consolidated statement of financial
position as at 31 March 2019, the
consolidated statements of comprehensive income, changes in equity
and cash flows for the year then ended, and notes, comprising
significant accounting policies and other explanatory
information.
In our opinion, the accompanying Financial Statements:
— give a true and fair view of the financial position of
the Group as at 31 March 2019, and of
the Group’s financial performance and cash flows for the year then
ended;
— are prepared in accordance with International Financial
Reporting Standards (IFRS); and
— comply with the Companies (Guernsey) Law, 2008.
Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our
responsibilities are described below. We have fulfilled our ethical
responsibilities under, and are independent of the Company and
Group in accordance with, UK ethical requirements including FRC
Ethical Standards as applied to listed entities. We believe
that the audit evidence we have obtained is a sufficient and
appropriate basis for our opinion.
Key audit matters: our assessment of the risks of material
misstatement
Key audit matters are those matters that, in our professional
judgment, were of most significance in the audit of the Financial
Statements and include the most significant assessed risks of
material misstatement (whether or not due to fraud) identified by
us, including those which had the greatest effect on: the overall
audit strategy; the allocation of resources in the audit; and
directing the efforts of the engagement team. These matters
were addressed in the context of our audit of the Financial
Statements as a whole, and in forming our opinion thereon, and we
do not provide a separate opinion on these matters. In
arriving at our audit opinion above, the key audit matter was as
follows (unchanged from 2018):
|
The risk |
Our
response |
Valuation of investment
property held directly and indirectly through investment in joint
ventures
Investment property £371.1 million;
(2018: £389.0 million)
Investment in joint ventures £80.2 million; (2018: 77.7
million)
Refer to page 47 of the Report of the Audit Committee, significant
accounting policies note and disclosure notes 11,12 and 19 |
Basis:
Directly held investment property accounted for 71.1% of the
Group’s total assets at 31 March 2019 (2018: 76.2%) and the
investment in joint ventures accounted for a further 15.4% of
Group’s total assets (2018: 15.2%). The fair value of the
directly and indirectly held investment property at 31 March 2019
was assessed by the Board of Directors based on independent
valuations prepared by the Company’s and the joint ventures’
external property valuers (together, the “External Valuers”).
Risk:
As highlighted in the Report of the Audit Committee, the valuation
of investment property is a significant area of judgment and
requires subjective assumptions to be made.
Determination of the fair value of directly and indirectly held
investment property is considered a significant audit risk due to
the magnitude of the balances and that such valuations require the
use of significant judgments and subjective assumptions. |
Our audit procedures
included:
Internal Controls:
We assessed the design and implementation of the review control
over the valuations prepared by the External Valuers.
Evaluating experts engaged by management:
We assessed the competence, capabilities and objectivity of the
External Valuers. We also assessed their independence by
considering the scope of their work and the terms of their
engagement.
Evaluating assumptions and inputs used in the valuation:
With the assistance of our own real estate specialist we critically
assessed the valuations prepared by the External Valuers by
evaluating the appropriateness of the valuation methodologies and
assumptions used, including undertaking discussions on key findings
with the External Valuers and challenging the assumptions used
based on market information.
We compared a sample of key inputs to the valuations such as
yields, occupancy and tenancy contracts for consistency with other
audit findings and observable market evidence.
Assessing disclosures:
We assessed the directly held investment property and investment in
joint ventures fair value disclosures in the financial statements
for compliance with IFRS requirements. |
Our application of materiality and an overview of the scope of
our audit
Materiality for the Financial Statements as a whole was set at
£3.7 million, determined with reference to a benchmark of Group
total assets of £522.0 million, of which it represents 0.7% (2018:
0.7%).
We reported to the Audit Committee any corrected or uncorrected
identified misstatements exceeding £185,000, in addition to other
identified misstatements that warranted reporting on qualitative
grounds.
Our audit of the Group was undertaken to the materiality level
specified above, which has informed our identification of
significant risks of material misstatement and the associated audit
procedures performed in those areas as detailed above.
The Group team performed the audit of the Group as if it was a
single aggregated set of financial information. The audit was
performed using the materiality level set out above and covered
100% of total Group revenue, total Group profit before taxation,
and total Group assets and liabilities.
We have nothing to report on going concern
We are required to report to you if we have anything material to
add or draw attention to in relation to the directors’ statement in
note 1 to the Financial Statements on the use of the going concern
basis of accounting with no material uncertainties that may cast
significant doubt over the Group’s use of that basis for a period
of at least twelve months from the date of approval of the
Financial Statements. We have nothing to report in this
respect.
We have nothing to report on the other information in the Annual
Report
The directors are responsible for the other information
presented in the Annual Report together with the Financial
Statements. Our opinion on the Financial Statements does not cover
the other information and we do not express an audit opinion or any
form of assurance conclusion thereon.
Our responsibility is to read the other information and, in
doing so, consider whether, based on our Financial Statements audit
work, the information therein is materially misstated or
inconsistent with the Financial Statements or our audit knowledge.
Based solely on that work we have not identified material
misstatements in the other information.
Disclosures of principal risks and longer-term viability
Based on the knowledge we acquired during our financial
statements audit, we have nothing material to add or draw attention
to in relation to:
· the directors’ confirmation within the
Viability Statement on pages 36 and 37 that they have carried out a
robust assessment of the principal risks facing the Group,
including those that would threaten its business model, future
performance, solvency or liquidity;
· the Principal Risks and Uncertainties
disclosures describing these risks and explaining how they are
being managed or mitigated;
· the directors’ explanation in the
Viability Statement on pages 36 and 37 as to how they have assessed
the prospects of the Group, over what period they have done so and
why they consider that period to be appropriate, and their
statement as to whether they have a reasonable expectation that the
Group will be able to continue in operation and meet its
liabilities as they fall due over the period of their assessment,
including any related disclosures drawing attention to any
necessary qualifications or assumptions.
Corporate governance disclosures
We are required to report to you if:
· we have identified material
inconsistencies between the knowledge we acquired during our
financial statements audit and the directors’ statement that they
consider that the Annual Report and Financial Statements taken as a
whole is fair, balanced and understandable and provides the
information necessary for shareholders to assess the Group’s
position and performance, business model and strategy; or
· the section of the Annual Report
describing the work of the Audit Committee does not appropriately
address matters communicated by us to the Audit Committee.
We are required to report to you if the Corporate Governance
Statement does not properly disclose a departure from the eleven
provisions of the 2016 UK Corporate Governance Code specified by
the Listing Rules for our review.
We have nothing to report to you in these respects.
We have nothing to report on other matters on which we are
required to report by exception
We have nothing to report in respect of the following matters
where the Companies (Guernsey)
Law, 2008 requires us to report to you if, in our opinion:
· the Company has not kept proper
accounting records; or
· the Financial Statements are not in
agreement with the accounting records; or
· we have not received all the
information and explanations, which to the best of our knowledge
and belief are necessary for the purpose of our audit.
Respective responsibilities
Directors’ responsibilities
As explained more fully in their statement set out on page 39,
the Directors are responsible for: the preparation of the Financial
Statements including being satisfied that they give a true and fair
view; such internal control as they determine is necessary to
enable the preparation of financial statements that are free from
material misstatement, whether due to fraud or error; assessing the
Group’s ability to continue as a going concern, disclosing, as
applicable, matters related to going concern; and using the going
concern basis of accounting unless they either intend to liquidate
the Group or to cease operations, or have no realistic alternative
but to do so.
Auditor’s responsibilities
Our objectives are to obtain reasonable assurance about whether
the Financial Statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue our
opinion in an auditor’s report. Reasonable assurance is a
high level of assurance, but does not guarantee that an audit
conducted in accordance with ISAs (UK) will always detect a
material misstatement when it exists. Misstatements can arise
from fraud or error and are considered material if, individually or
in aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of the Financial
Statements.
A fuller description of our responsibilities is provided on the
FRC’s website at www.frc.org.uk/auditorsresponsibilities.
The purpose of this report and restrictions on its use by
persons other than the Company’s members as a body
This report is made solely to the Company’s members, as a body,
in accordance with section 262 of the Companies (Guernsey) Law, 2008. Our audit work has
been undertaken so that we might state to the Company’s members
those matters we are required to state to them in an auditor’s
report and for no other purpose. To the fullest extent permitted by
law, we do not accept or assume responsibility to anyone other than
the Company and the Company’s members, as a body, for our audit
work, for this report, or for the opinions we have formed.
Lee Clark
For and on behalf of KPMG Channel Islands Limited
Chartered Accountants and Recognised Auditors
Glategny Court
Glategny Esplanade
St Peter Port
Guernsey
GY1 1WR
20 May 2019
Financial Statements
Consolidated Statement of Comprehensive Income
|
|
31/03/2019 |
31/03/2018 |
|
Notes |
£000 |
£000 |
|
|
|
|
Rental income |
|
25,278 |
24,041 |
Other income |
4 |
1,339 |
1,545 |
Property operating
expenses |
5 |
(2,375) |
(1,734) |
Net rental and
related income, excluding joint ventures |
|
24,242 |
23,852 |
Share
of net rental income in joint ventures
Net rental and related income, including joint ventures |
|
3,311
27,553 |
2,754
26,606 |
|
|
|
|
Profit on disposal
of investment property |
11 |
2,156 |
594 |
Net unrealised
valuation gain on investment property |
11 |
1,556 |
20,195 |
|
|
|
|
Expenses |
|
|
|
Investment management
fee |
3 |
(3,363) |
(3,531) |
Valuers’ and other
professional fees |
|
(1,633) |
(1,549) |
Administrators’
fee |
3 |
(120) |
(120) |
Auditor’s
remuneration |
6 |
(128) |
(128) |
Directors’ fees |
7 |
(150) |
(180) |
Abortive transaction
costs |
7 |
- |
(1,507) |
Other expenses |
7 |
(202) |
(223) |
Total
expenses |
|
(5,596) |
(7,238) |
|
|
|
|
Net operating
profit before net finance costs |
|
22,358 |
37,403 |
|
|
|
|
Refinancing costs |
7 |
(3,128) |
- |
Finance costs |
|
(6,807) |
(6,819) |
Net finance
costs |
|
(9,935) |
(6,819) |
Share of net rental
income in joint ventures |
12 |
3,311 |
2,754 |
Share of valuation
gain in joint ventures |
12 |
167 |
498 |
Profit before
taxation |
|
15,901 |
33,836 |
Taxation |
8 |
- |
- |
Profit and total
comprehensive income for the year attributable to the equity
holders of the parent |
|
15,901 |
33,836 |
Basic and diluted
earnings per share |
9 |
3.1p |
6.5p |
All items in the above statement are derived from continuing
operations. The accompanying notes 1 to 24 form an integral part of
the financial statements.
Consolidated Statement of Financial Position
|
|
31/03/2019 |
31/03/2018 |
|
Notes |
£000 |
£000 |
Investment
property |
11 |
371,097 |
388,976 |
Investment in joint
ventures |
12 |
80,165 |
77,748 |
Non-current
assets |
|
451,262 |
466,724 |
|
|
|
|
Trade and other
receivables |
13 |
49,689 |
14,415 |
Cash and cash
equivalents |
14 |
21,042 |
29,218 |
Current
assets |
|
70,731 |
43,633 |
Total
assets |
|
521,993 |
510,357 |
|
|
|
|
Issued capital and
reserves |
15 |
382,828 |
380,022 |
Treasury shares |
15 |
(26,452) |
(26,452) |
Equity |
|
356,376 |
353,570 |
|
|
|
|
Interest-bearing loans
and borrowings |
16 |
156,230 |
148,505 |
Non-current
liabilities |
|
156,230 |
148,505 |
|
|
|
|
Trade and other
payables |
17 |
9,387 |
8,282 |
Current
liabilities |
|
9,387 |
8,282 |
|
|
|
|
Total
liabilities |
|
165,617 |
156,787 |
|
|
|
|
Total equity and
liabilities |
|
521,993 |
510,357 |
Net Asset Value per Ordinary Share |
18 |
68.7p |
68.2p |
The financial statements on pages 54 to 77 were approved at a
meeting of the Board of Directors held on 20
May 2019 and signed on its behalf by:
Lorraine Baldry,
Chairman
Stephen Bligh,
Director
The accompanying notes 1 to 24 form an integral part of the
financial statements.
Consolidated Statement of Changes in Equity
|
Notes |
Share
premium |
Treasury share reserve |
Revenue reserve |
Total |
|
|
£000 |
£000 |
£000 |
£000 |
Balance as at 31
March 2017 |
|
219,090 |
(26,452) |
139,952 |
332,590 |
Profit for the
year |
|
- |
- |
33,836 |
33,836 |
Dividends paid |
10 |
- |
- |
(12,856) |
(12,856) |
Balance as at 31
March 2018 |
|
219,090 |
(26,452) |
160,932 |
353,570 |
Profit for the
year |
|
- |
- |
15,901 |
15,901 |
Dividends paid |
10 |
- |
- |
(13,095) |
(13,095) |
Balance as at 31
March 2019 |
|
219,090 |
(26,452) |
163,738 |
356,376 |
The accompanying notes 1 to 24 form an integral part of the
financial statements.
Consolidated Statement of Cash Flows
|
|
31/03/2019 |
31/03/2018 |
|
|
£000 |
£000 |
Operating
activities |
|
|
|
Profit for the
year |
|
15,901 |
33,836 |
Adjustments for: |
|
|
|
Profit on disposal of
investment property |
|
(2,156) |
(594) |
Net valuation gain on
investment property |
|
(1,556) |
(20,195) |
Share of profit of
joint ventures |
|
(3,478) |
(3,252) |
Net finance cost |
|
9,935 |
6,819 |
Operating cash generated before changes in working
capital |
18,646 |
16,641 |
(Increase)/decrease in
trade and other receivables |
|
(179) |
12,087 |
Increase/(decrease) in
trade and other payables |
|
1,105 |
(613) |
Cash generated from
operations |
|
19,572 |
28,088 |
|
|
|
|
Finance costs
paid |
|
(6,541) |
(6,585) |
Tax
paid |
- |
- |
Cash flows from
operating activities |
|
13,031 |
21,503 |
|
|
|
|
Investing
activities |
|
|
|
Proceeds from sale of
investment property |
|
12,447 |
6,544 |
Acquisition of
investment property |
|
(23,191) |
- |
Additions to
investment property |
|
(2,761) |
(8,504) |
Addition to joint
ventures |
|
(2,250) |
(350) |
Net income distributed
from joint ventures |
|
3,311 |
2,754 |
Cash flows from
investing activities |
|
(12,444) |
444 |
|
|
|
|
Financing
activities |
|
|
|
Additions
to debt
Refinancing fees paid
Dividends paid |
|
8,500
(4,168)
(13,095) |
-
-
(12,856) |
Cash flows used in
financing activities |
|
(8,763) |
(12,856) |
|
|
|
|
Net
(decrease)/increase in cash and cash equivalents for the
year |
|
(8,176) |
9,091 |
Opening cash and
cash
equivalents |
|
29,218 |
20,127 |
Closing cash and
cash equivalents |
|
21,042 |
29,218 |
The accompanying notes 1 to 24 form an integral part of the
financial statements.
Notes to the Financial Statements
1. Significant accounting policies
Schroder Real Estate Investment Trust Limited (“the Company”) is
a closed-ended investment company registered in Guernsey. The consolidated financial
statements of the Company for the year ended 31 March 2019 comprise the Company and its
subsidiaries (together referred to as the “Group”).
Statement of compliance
The financial statements have been prepared in accordance with
International Financial Reporting Standards (“IFRS”) issued by the
International Accounting Standards Board (the ”IASB”), and
interpretations issued by the International Financial Reporting
Interpretations Committee.
The financial statements give a true and fair view and are in
compliance with The Companies (Guernsey) Law, 2008, applicable legal and
regulatory requirements and the Listing Rules of the UK Listing
Authority.
Basis of preparation
The financial statements are presented in sterling, which is the
Company’s functional currency, rounded to the nearest thousand.
They are prepared on the historical cost basis except that
investment property and derivative financial instruments are stated
at their fair value.
The accounting policies have been consistently applied to the
results, assets, liabilities and cash flows of the entities
included in the consolidated financial statements and are
consistent with those of the previous year.
Going concern
The Directors have examined significant areas of possible
financial risk including cash and cash requirements and the debt
covenants, in particular the loan to value covenants and interest
cover ratios on the loans with Canada Life and Royal Bank of
Scotland. In July 2018, the
Group completed a refinancing activity which included extending a
portion of the Canada Life debt and increasing the revolving credit
facility (‘RCF’) with Royal Bank of Scotland (‘RBS’). 100% of the Canada Life loan
now matures on 15 April 2028 and The
Royal Bank of Scotland loan
matures in July 2023.
Additionally in January
2019 the RCF was further increased providing additional
undrawn capacity of £20 million. The RCF is an efficient and
flexible source of funding due to the margin of 1.6% and the
ability to be repaid and redrawn as often as required. The
additional loan amount matures in July
2023 and is co-terminus with the existing facilities.
The Directors have not identified any material uncertainties
which would cast significant doubt on the Group’s ability to
continue as a going concern for a period of not less than twelve
months from the date of the approval of the financial statements.
The Directors have satisfied themselves that the Group has adequate
resources to continue in operational existence for the foreseeable
future.
After due consideration, the Board believes it is appropriate to
adopt the going concern basis in preparing the consolidated
financial statements.
Use of estimates and judgements
The preparation of financial statements in conformity with IFRS
requires management to make judgements, estimates and assumptions
that affect the application of policies and the reported amounts of
assets and liabilities, income and expenses. These estimates and
associated assumptions are based on historical experience and
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis of making
judgements about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may
differ from these estimates. The estimates and underlying
assumptions are reviewed on an ongoing basis. Revisions to
accounting estimates are recognised in the period in which the
estimates are revised and in any future periods affected.
The most significant estimates made in preparing these financial
statements relate to the carrying value of investment properties,
including those within joint ventures, which are stated at fair
value. The Group uses external professional valuers to determine
the relevant amounts. Judgements made by management in the
application of IFRS that have a significant effect on the financial
statements and estimates with a significant risk of material
adjustment in the next year are disclosed in note 19.
Basis of consolidation
Subsidiaries
The consolidated financial statements comprise the financial
statements of the Company and all of its subsidiaries drawn up to
31 March each year. Subsidiaries are those entities, including
special purpose entities, controlled by the Company. Control exists
when the Company has the power, directly or indirectly, to govern
the financial and operating policies of an entity so as to obtain
benefits from its activities. In assessing control, potential
voting rights that presently are exercisable are taken into
account. The financial statements of subsidiaries are included in
the consolidated financial statements from the date that control
commences until the date that control ceases. Where properties are
acquired by the Group through corporate acquisitions but the
acquisition does not meet the definition of a business combination,
the acquisition has been treated as an asset acquisition.
Joint ventures
Joint ventures are those entities over whose activities the
Group has joint control, established by contractual agreement. The
consolidated financial statements include the Group's share of
profit or loss of jointly controlled entities on an equity
accounted basis. When the Group’s share of losses exceeds its
interest in an entity, the Group’s carrying amount is reduced to
nil and recognition of further losses is discontinued except to the
extent that the Group has incurred legal or constructive
obligations or is making payments on behalf of an entity.
Transactions eliminated on consolidation
Intra-group balances and any gains and losses arising from
intra-group transactions are eliminated in preparing the
consolidated financial statements. Gains arising from transactions
with joint ventures are eliminated to the extent of the Group’s
interest in the entity. Losses are eliminated in the same way as
gains but only to the extent that there is no evidence of
impairment.
Investment property
Investment property is land and buildings held to earn rental
income together with the potential for capital growth.
Acquisitions and disposals are recognised on the unconditional
exchange of contracts. Acquisitions are initially recognised
at cost, being the fair value of the consideration given, including
transaction costs associated with the investment property.
After initial recognition, investment properties are measured at
fair value, with unrealised gains and losses recognised in profit
and loss. Realised gains and losses on the disposal of properties
are recognised in profit and loss in relation to carrying value.
Fair value is based on the market valuations of the properties as
provided by a firm of independent chartered surveyors at the
reporting date. Market valuations are carried out on a quarterly
basis.
As disclosed in note 20, the Group leases out all owned
properties on operating leases. A property held under an operating
lease is classified and accounted for as an investment property
where the Group holds it to earn rentals, capital appreciation, or
both. Any such property leased under an operating lease is
classified as an investment property and carried at fair
value.
Financial instruments
Non-derivative financial instruments
Financial assets
Non-derivative financial instruments comprise trade and other
receivables and cash and cash equivalents. These are recognised
initially at fair value plus any directly attributable transaction
costs. Subsequent to initial recognition they are measured at
amortised cost using the effective interest rate method less any
impairment losses.
Cash and cash equivalents
Cash at bank and short-term deposits that are held to maturity
are carried at cost. Cash and cash equivalents are defined as cash
in hand, demand deposits and short-term, highly liquid investments
readily convertible to known amounts of cash and subject to
insignificant risk of changes in value. For the purposes of the
Consolidated Statement of Cash Flows, cash and cash equivalents
consist of cash in hand and short-term deposits at banks with a
term of no more than three months.
Financial liabilities
Non-derivative financial instruments comprise loans and
borrowings and trade and other payables.
Loans and borrowings
Borrowings are recognised initially at fair value of the
consideration received, less attributable transaction costs.
Subsequent to initial recognition, interest bearing borrowings are
stated at amortised cost with any difference between cost and
redemption value being recognised in the profit and loss over the
period of the borrowings on an effective interest basis.
Trade and other payables
Trade and other payables are stated at amortised cost.
Share capital
Ordinary shares including treasury shares are classified as
equity.
Dividends
Dividends are recognised in the period in which they are
paid.
Impairment
Financial assets
A financial asset, other than those at fair value through profit
and loss, is assessed at each reporting date to determine whether
there is any objective evidence that it is impaired. A financial
asset is considered to be impaired if objective evidence indicates
that one or more events have had a negative effect on the estimated
future cash flows of that asset.
The Group's significant financial assets that are subject to
IFRS 9’s new expected credit loss model are trade receivables from
the leasing of investment properties. The credit risk
associated with unpaid rent is deemed to be low. The Group was
required to revise its impairment methodology under IFRS 9. This
did not result in a material change in the loss allowance
recognised under IFRS 9 compared to the previous impairment
provision held under IAS 39. Note 19 provides further details on
the measurement of the loss allowance and amount recognised at
31 March 2019.
Non-financial assets
The carrying amounts of the Group’s non-financial assets, other
than investment property but including joint ventures, are reviewed
at each reporting date to determine whether there is any indication
of impairment. If any such indication exists, then the asset’s
recoverable amount is estimated.
The recoverable amount of an asset or cash-generating unit is
the greater of its value in use and its fair value less costs to
sell. In assessing value in use, the estimated future cash flows
are discounted to their present value using a pre-tax discount rate
that reflects current market assessments of the time value of money
and the risks specific to that asset.
For the purpose of impairment testing, assets are grouped
together into the smallest group of assets that generates cash
inflows from continuing use that are largely independent of the
cash inflows of other assets or groups of assets (the
“cash-generating unit”).
An impairment loss is recognised if the carrying amount of an
asset or its cash-generating unit exceeds its estimated recoverable
amount. Impairment losses are recognised in the profit and
loss.
Provisions
A provision is recognised in the Consolidated Statement of
Financial Position when the Group has a legal or constructive
obligation as a result of a past event and it is probable that an
outflow of economic benefits will be required to settle the
obligation.
Rental income
Rental income from investment properties is recognised on a
straight-line basis over the term of ongoing leases and is shown
gross of any UK income tax. Lease incentives are spread evenly over
the lease term.
Surrender premiums and dilapidations are recognised in line with
individual lease agreements when cash inflows are
certain.
Finance costs
Finance costs comprise interest expense on borrowings that are
recognised in profit and loss. Attributable transaction costs
incurred in establishing the Group’s credit facilities are deducted
from the fair value of borrowings on initial recognition and are
amortised over the lifetime of the facilities through profit and
loss. Finance costs are accounted for on an effective interest
basis.
Expenses
All expenses are accounted for on an accruals basis. The costs
recharged to occupiers of the properties are presented net of the
service charge income as management consider that the property
agent acts as principal in this respect.
Taxation
SREIT elected to be treated as a UK REIT with effect from
1 May 2015. The UK REIT rules exempt
the profits of the Group’s UK property rental business from UK
corporation and income tax. Gains on UK properties are also exempt
from tax, provided they are not held for trading. The Group is
otherwise subject to UK corporation tax.
As a REIT, the Company is required to pay Property Income
Distributions equal to at least 90% of the Group’s exempted net
income. To remain a UK REIT there are a number of conditions to be
met in respect of the principal company of the Group, the Group’s
qualifying activity and its balance of business. The Group
continues to meet these conditions.
Segmental reporting
The Directors are of the opinion that the Group is engaged in a
single segment of business, being property investment and in one
geographical area, the United Kingdom. There is no one tenant
that represents more than 10% of group revenues. SREIM acts as
advisor to the Board, who then make management decisions following
their recommendations. As such the Board of Directors are
considered to be the chief operating decision maker. A set of
consolidated IFRS information is provided on a quarterly basis.
2. New standards and interpretations
Standards, interpretations and
amendments to published standards that are effective for the first
time
The following standards, amendments and interpretations
endorsed by the EU were effective for the first time for the
Group’s 31 March 2019 year end and had no material impact on
the financial statements;
· IFRS 2 (amended) – Share Based
Payments;
· IFRS 4 (amended) – Insurance
Contracts;
· IAS 40 (amended) – Investment
Property;
· IFRIC 22 – Foreign Currency
Transactions and Advance Consideration; Annual Improvements to
IFRSs (2014 – 2016 cycle).
· IFRS 9 Financial Instruments
(effective from 1 January 2018). This standard applies to
classification and measurement of financial assets and financial
liabilities, impairment provisioning and hedge accounting. The
Group’s assessment of IFRS 9 determined that the main area of
potential impact was impairment provisioning on trade receivables,
given the requirement to use a forward-looking expected credit loss
model. The Directors have completed its assessment of IFRS 9 and
conclude that its adoption has no material impact on the financial
statements.
· IFRS 15, ‘Revenue from contracts
with customers’ is a converged standard from the IASB on revenue
recognition. The standard will improve the financial
reporting of revenue and improve comparability of the top line in
financial statements globally. It is more prescriptive in
terms of what should be included within revenue than IAS 18
‘Revenue’. The standard is applicable to service charge
income, facilities management income, investment property disposals
and trading property disposals, but excludes rent receivable, which
is within the scope of IFRS 16. The Directors have completed its
assessment of IFRS 15 and conclude that its adoption has no
material impact on the financial statements.
Standards, interpretations and
amendments to published standards that have been issued but are not
yet effective
The following standards, amendments and interpretations were
in issue at the date of approval of these financial statements
but were not yet effective for the current accounting year and have
not been adopted early. Based on the Group’s current circumstances,
the Directors do not anticipate that their adoption in future
periods will have a material impact on the financial statements of
the Group.
IFRS 16 Leases (effective 1 January
2019) specifies how an IFRS reporter will recognise,
measure, present and disclose leases. The standard provides a
single lessee accounting model, requiring lessees to recognise
assets and liabilities for all leases unless the lease term is 12
months or less or the underlying asset has a low value. Lessors
continue to classify leases as operating or finance, with IFRS 16’s
approach to lessor accounting substantially unchanged from its
predecessor, IAS 17. As the Group does not hold any material
operating leases as lessee, the impact of the standard is
not expected to be material to the financial statements.
3. Material agreements
Schroder Real Estate Investment Management Limited is the
Investment Manager to the Company. The Investment Manager is
entitled to a fee together with reasonable expenses incurred in the
performance of its duties. The fee is payable monthly in arrears
and shall be an amount equal to one twelfth of the aggregate of
1.1% of the NAV of the Company. The Investment Management Agreement
can be terminated by either party on not less than nine months
written notice or on immediate notice in the event of certain
breaches of its terms or the insolvency of either party. The total
charge to profit and loss during the year was £3,363,000 (2018:
£3,531,000). At the year end £287,000 (2018: £556,000) was
outstanding.
Northern Trust International Fund Administration Services
(Guernsey) Limited is the
Administrator to the Company. The Administrator is entitled to an
annual fee equal to £120,000 (2018: £120,000) of which £30,000
(2018: £30,000) was outstanding at the year end. In addition to
this £40,000 (2018: £40,000) was paid for depository fees of which
£3,334 (2018: £3,334) was outstanding at year end.
4. Other income
|
|
31/03/2019 |
31/03/2018 |
|
|
£000 |
£000 |
Dilapidations |
|
915 |
265 |
Surrender premium |
|
414 |
610 |
Miscellaneous
income |
|
10 |
670 |
|
|
1,339 |
1,545 |
5. Property operating expenses
|
|
31/03/2019 |
31/03/2018 |
|
|
£000 |
£000 |
Agents' fees |
|
56 |
78 |
Repairs and
maintenance |
|
149 |
43 |
Advertising |
|
33 |
55 |
Rates – vacant* |
|
821 |
376 |
Security |
|
19 |
14 |
Service charge,
insurance and utilities on vacant units |
|
986 |
503 |
Ground rent |
|
124 |
141 |
Bad debts |
|
156 |
489 |
Other |
|
31 |
35 |
|
|
2,375 |
1,734 |
*Previous period includes a rates refund totalling £587,000.
6. Auditor’s remuneration
The total expected audit fees for the year are £117,170 (2018:
£115,000) and £13,250 (2018: £13,000) for the half year review of
the financial statements. There were no additional fees paid to the
auditors during the year.
7. Other expenses
|
|
31/03/2019 |
31/03/2018 |
|
|
£000 |
£000 |
Directors' and
officers' insurance premium |
|
9 |
9 |
Regulatory costs |
|
21 |
21 |
Professional fees |
|
135 |
109 |
Other expenses |
|
37 |
84 |
|
|
202 |
223 |
Directors’ fees
Directors are the only officers of the Company and there are no
other key personnel.
The Directors’ annual remuneration for services to the Group was
£150,000 (2018: £180,000), as set out in the Remuneration Report on
page 45.
One off transaction costs
One-off costs of £3,128,000 relating to refinancing were
incurred in the current year.
In 2018 One-off abortive transaction costs of £1,507,000
relating to the attempted acquisition of a major portfolio were
incurred in the prior year. There were no similar costs in
this period.
8. Taxation
|
|
31/03/2019 |
31/03/2018 |
|
|
£000 |
£000 |
|
|
|
|
Tax expense in year |
|
- |
- |
|
|
|
|
Reconciliation of
effective tax rate |
|
|
|
Profit before tax |
|
15,901 |
33,836 |
Effect of: |
|
|
|
Tax using UK
corporation tax rate of 19% |
|
3,021 |
6,429 |
Revaluation gain not
taxable |
|
(296) |
(3,837) |
Share of profit of
associates and joint ventures not taxable |
|
(661) |
(618) |
Profit on disposal of
investment property not taxable |
|
(410) |
(113) |
UK REIT exemption |
|
(1,654) |
(1,861) |
Current tax expense
in the year |
|
- |
- |
SREIT and its Guernsey
registered subsidiaries have obtained exempt Company status in
Guernsey under the terms of the
Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989 so that they are
exempt from Guernsey taxation on
income arising outside Guernsey
and on bank interest receivable in Guernsey. Each Company is, therefore, only
liable for a fixed fee of £1,200 per annum. The Directors intend to
conduct the Group’s affairs such that they continue to remain
eligible for exemption.
SREIT is a real estate investment trust (‘REIT’) and benefits
from the various tax advantages offered by the UK REIT
regime.
9. Basic and diluted earnings per share
Earnings per share
The basic and diluted earnings per share for the Group is based
on the net profit for the year of £15,901,000 (2018: £33,836,000)
and the weighted average number of Ordinary Shares in issue during
the year of 518,513,409 (2018: 518,513,409).
1.
10. Dividends paid
In respect
of |
Ordinary |
Rate |
31/03/2019 |
|
shares |
(pence) |
£000 |
Quarter 31 March 2018
dividend paid 31 May 2018 |
518.51
million |
0.62 |
3,215 |
Quarter 30 June 2018
dividend paid 31 August 2018 |
518.51
million |
0.62 |
3,215 |
Quarter 30 September
2018 dividend paid 5 December 2018 |
518.51
million |
0.64 |
3,295 |
Quarter 31 December
2018 dividend paid 15 March 2019 |
518.51
million |
0.65 |
3,370 |
|
|
2.53 |
13,095 |
|
|
|
|
In respect
of |
Ordinary |
Rate |
31/03/2018 |
|
shares |
(pence) |
£000 |
Quarter 31 March 2017
dividend paid 31 May 2017 |
518.51
million |
0.62 |
3,214 |
Quarter 30 June 2017
dividend paid 31 August 2017 |
518.51
million |
0.62 |
3,214 |
Quarter 30 September
2017 dividend paid 6 December 2017 |
518.51
million |
0.62 |
3,214 |
Quarter 31 December
2017 dividend paid 7 March 2018 |
518.51
million |
0.62 |
3,214 |
|
|
2.48 |
12,856 |
A dividend for the quarter ended 31 March
2019 of 0.65 pence (£3.4
million) was declared on 10 May 2019
and will be paid on 7 June 2019.
11. Investment property
|
Leasehold |
Freehold |
Total |
£000 |
£000 |
£000 |
Fair value as at 31
March 2017 |
37,403 |
328,824 |
366,227 |
Additions |
721 |
7,783 |
8,504 |
Gross proceeds on
disposals |
(35) |
(6,509) |
(6,544) |
Realised gain on
disposals |
35 |
559 |
594 |
Net unrealised
valuation (loss)/gain on investment property |
(944) |
21,139 |
20,195 |
Fair value as at 31
March 2018 |
37,180 |
351,796 |
388,976 |
Reclassification
between freehold and leasehold |
5,600 |
(5,600) |
- |
Additions |
88 |
25,864 |
25,952 |
Gross proceeds on
disposals |
- |
(47,543) |
(47,543) |
Realised gain on
disposals |
- |
2,156 |
2,156 |
Net unrealised
valuation (loss)/gain on investment property |
(3,046) |
4,602 |
1,556 |
Fair value as at 31
March 2019 |
39,822 |
331,275 |
371,097 |
The balance above includes;
|
Leasehold |
Freehold |
Total |
£000 |
£000 |
£000 |
Investment
property |
39,822 |
312,364 |
352,186 |
Investment property
held for sale |
- |
18,911 |
18,911 |
Fair value as at 31
March 2019 |
39,822 |
331,275 |
371,097 |
Two of the investment properties have been determined to meet
the criteria of a held for sale asset at the period end at a value
of £18,911,000 (31 March 2018:
£nil). Of these properties Allied Industrial Estate, Acton
exchanged unconditional contracts 16 May 2019. Details of
this disposal can be seen in note 24.
The fair value of investment properties as determined by the
valuer totals £417,550,000 (2018: £399,725,000). Of this amount
£36,100,000 is in relation to the unconditional exchange of
contracts for Victory House in Brighton (2018: £nil). In addition to this,
£10,352,000 (2018: £10,749,000) relating to lease incentives is
included within trade and other receivables.
The unrealised net valuation gain on investment property
consists of unrealised gains of £2,057,000 (2018: £24,924,000) net
of unrealised losses of £501,000 (2018: £4,729,000).
The fair value of investment property has been determined by
Knight Frank LLP, a firm of independent chartered surveyors, who
are registered independent appraisers. The valuation has been
undertaken in accordance with the RICS Valuation – Professional
Standards global January 2017, issued
by the Royal Institution of Chartered Surveyors (the “Red Book”)
including the International Valuation Standards.
The properties have been valued on the basis of “Fair Value” in
accordance with the RICS Valuation - Professional Standards
VPS4(7.1) Fair Value and VPGA1 Valuations for Inclusion in
Financial Statements which adopt the definition of Fair Value used
by the International Accounting Standards Board.
The valuation has been undertaken using appropriate valuation
methodology and the Valuer’s professional judgement. Consistent
with prior year, the Valuer’s opinion of Fair Value was primarily
derived using recent comparable market transactions on arm’s length
terms, where available, and appropriate valuation techniques
(The Investment Method).
The properties have been valued individually and not as part of
a portfolio.
All investment properties are categorised as Level 3 fair values
as they use significant unobservable inputs. There have not been
any transfers between Levels during the year. Investment properties
have been classed according to their real estate sector.
Information on these significant unobservable inputs per class of
investment property is disclosed below:
Quantitative information about fair value measurement using
unobservable inputs (Level 3) as at
31 March 2019
31 March
2019 |
|
Industrial (1) |
Retail
(incl. retail warehouse) |
Office |
Other |
Total |
Fair value (£000) |
|
146,350 |
111,450 |
139,500 |
20,250 |
417,550 |
Area (‘000 sq ft) |
|
1,737 |
553 |
634 |
177 |
3,101 |
Net passing rent per sq ft per
annum |
Range
Weighted average |
£0 - £10.84 £4.58 |
£0 - £38.50 £12.63 |
£0 - £25.72 £11.50 |
£0 - £13.00
£7.92 |
£0 - £38.50 £7.62 |
Gross ERV per sq ft
per annum |
Range
Weighted average |
£3.75 -
£12.77
£5.58 |
£7.40 -
£38.50 £14.73 |
£9.50 -
£27.50 £16.46 |
£8.18
-£13.00
£9.07 |
£3.75 -
£38.50 £9.64 |
Net initial yield
(1) |
Range
Weighted average |
0% - 6.75% 5.09% |
0% -9.54% 5.87% |
0% - 8.98% 4.89% |
4.73% -7.68%
6.49% |
0% - 8.98% 5.30% |
Equivalent yield |
Range
Weighted average |
4.44% - 8.05%
5.95% |
5.35%-10.09% 6.38% |
5.15%-10.53% 6.75% |
4.73% -7.83%
6.59% |
4.44%-10.53%
6.36% |
Notes:
(1) Yields based on rents receivable after
deduction of head rents but gross of non-recoverables
Quantitative information about fair value measurement using
unobservable inputs (Level 3) as at
31 March 2018
31
March 2018 |
|
Industrial (1) |
Retail
(incl. retail warehouse) |
Office |
Other
(2) |
Total |
Fair value (£000) |
|
128,450 |
138,825 |
111,700 |
20,750 |
399,725 |
Area (‘000 sq ft) |
|
1,716 |
599 |
547 |
177 |
3,039 |
Net passing rent per sq ft per
annum |
Range weighted average |
£0 – £10.83 £4.13 |
£0 – £38.50 £13.89 |
£0 – £25.81 £13.56 |
£0 – £6.15
£4.52 |
£0 – £38.50 £7.77 |
Gross ERV per sq ft per annum |
Range weighted average |
£3.75 – £11.50
£5.36 |
£7.40 – £38.50
£15.23 |
£9.50 – £27.50
£15.70 |
£8.23 – £13.00
£9.11 |
£3.75 – £38.50
£9.38 |
Net initial yield
(1) |
Range weighted average |
0% – 6.81% 5.17% |
0% – 8.25% 5.61% |
0% – 17.41% 6.22% |
0% – 5.80%
3.62% |
0% – 17.41% 5.53% |
Equivalent yield |
Range weighted average |
4.84% – 8.91%
6.40% |
4.75% – 8.68%
6.00% |
5.60% – 10.41%
7.01% |
4.75% – 7.83%
6.61% |
4.75% – 10.41%
6.44% |
Notes:
(1) Yields based on rents receivable after deduction of head
rents but gross of non-recoverables.
(1)
Sensitivity of measurement to variations in the significant
unobservable inputs
The significant unobservable inputs used in the fair value
measurement categorised within Level 3 of the fair value hierarchy
of the Group’s property portfolio, together with the impact of
significant movements in these inputs on the fair value
measurement, are shown below:
Unobservable input |
Impact on fair value measurement
of significant increase in input |
Impact on fair value measurement
of significant decrease in input |
Passing rent |
Increase |
Decrease |
Gross ERV |
Increase |
Decrease |
Net initial yield |
Decrease |
Increase |
Equivalent yield |
Decrease |
Increase |
There are interrelationships between the yields and rental values
as they are partially determined by market rate conditions.
The sensitivity of the valuation to changes in the most
significant inputs per class of investment property are shown
below:
Estimated movement
in fair value of investment properties at 31 March 2019 |
Industrial
£’000 |
Retail
£’000 |
Office
£’000 |
Other
£’000 |
All sectors
£’000 |
Increase in ERV by 5% |
7,147 |
5,236 |
6,003 |
549 |
18,935 |
Decrease in ERV by 5% |
(6,860) |
(4,490) |
(5,846) |
(526) |
(17,722) |
Increase in net initial yield by
0.25% |
(6,846) |
(4,550) |
(6,781) |
(750) |
(18,799) |
Decrease in net initial yield by
0.25% |
7,552 |
4,955 |
7,512 |
811 |
20,659 |
Estimated movement in fair value
of investment properties at 31 March 2018 |
Industrial
£’000 |
Retail
£’000 |
Office
£’000 |
Other
£’000 |
All sectors
£’000 |
Increase in ERV by 5% |
6,559 |
6,057 |
4,837 |
731 |
18,184 |
Decrease in ERV by 5% |
(5,460) |
(5,405) |
(4,792) |
(737) |
(16,394) |
Increase in net initial yield
by 0.25% |
(5,929) |
(5,920) |
(4,318) |
(1,341) |
(17,277) |
Decrease in net initial yield
by 0.25% |
6,532 |
6,473 |
4,680 |
1,540 |
18,911 |
12. Investment in joint ventures
|
£000 |
Closing
balance as at 31 March 2017 |
76,900 |
Purchase of interest in
City Tower Unit Trust |
350 |
Share of profit for the
year |
3,252 |
Distribution
received |
(2,754) |
Closing balance as at 31
March 2018 |
77,748 |
Purchase of interest in
City Tower Unit Trust |
2,250 |
Share of profit for the
year |
3,478 |
Distribution
received |
(3,311) |
Closing balance as at 31
March 2019 |
80,165 |
Summarised joint
venture financial information not adjusted for the Group’s
share |
|
31/03/2019
£000 |
31/03/2018
£000 |
|
|
|
|
Total assets |
|
250,170 |
240,090 |
Total
liabilities1 |
|
3,118 |
2,129 |
Revenues for year |
|
8,969 |
8,056 |
Total comprehensive
income |
|
20,918 |
20,827 |
Net asset value
attributable to Group |
|
80,165 |
77,748 |
Total comprehensive
income attributable to the Group |
|
3,478 |
3,252 |
1Liabilities that are non-recourse to the Group.
13. Trade and other receivables
|
|
31/03/2019
£000 |
31/03/2018
£000 |
Rent receivable |
|
866 |
974 |
Other debtors and
prepayments |
|
12,604 |
13,441 |
Receivable relating to
disposals |
|
36,219 |
- |
|
|
49,689 |
14,415 |
Other debtors and prepayments includes £10,352,000 (2018:
£10,749,000) in respect of lease incentives.
14. Cash and cash equivalents
As at 31 March 2019, the Group had
£21.0 million (2018: £29.2 million) in cash. £1.2 million (2018:
£1.0 million) is held in respect of rental deposits (see note
17).
15. Issued capital and reserves
Share capital
The share capital of the Company is represented by an unlimited
number of Ordinary Shares of no par value. As at the date of this
Report, the Company has 565,664,749 ordinary shares in issue (2018:
565,664,749) of which 47,151,340 ordinary shares are held in
treasury (2018: 47,151,340). The total number of voting rights of
the Company is 518,513,409 (2018: 518,513,409).
Treasury capital
47,151,340 (2018: 47,151,340) Ordinary Shares which represent
8.3% (2018: 8.3%) of the Company’s total issued share capital are
held in treasury.
Revenue reserve
This reserve represents an accumulated amount of the Group's
prior earnings, net of dividends.
16. Interest-bearing loans and borrowings
This note provides information about the contractual terms of
the Group’s interest-bearing loans and borrowings. For more
information about the Group’s exposure to interest rate risk, see
note 19.
|
|
31/03/2019 |
31/03/2018 |
|
|
£000 |
£000 |
£000 |
£000 |
Non-current
liabilities |
|
|
|
|
|
Loan facility |
|
|
158,585 |
|
150,085 |
Less: Finance costs
incurred |
|
(2,621) |
|
(1,814) |
|
Add: Amortised finance
costs |
|
266 |
(2,355) |
234 |
(1,580) |
|
|
|
156,230 |
|
148,505 |
The Group entered into a £129.6 million loan facility with
Canada Life on 16 April 2013 that has
20% of the loan maturing on 15 April
2023 and with the balance of 80% maturing on 15 April 2028, with a fixed interest rate
of 4.77%. On the 2 July 2018,
the 20% of the Canada Life loan maturing on 15 April 2023 was refinanced extending the
maturity date, increasing the length of the loan to that of the
80%, maturing on the 15 April 2028
making it coterminous with the 80% balance. The interest rate for
this element of the loan was amended to 3.00% from 4.77%.
On 2 July 2018, the Company
refinanced its existing £20.5 million revolving credit facility
(‘RCF’) with Royal Bank of Scotland. The RCF limit was increased from
£20.5 million to £32.5 million and the maturity date extended from
July 2019 to July 2023. The interest rate is based on the loan
to value ratio as below:
– LIBOR + 1.60% if loan to value is less
than or equal to 60%
– LIBOR + 1.85% if loan to value is
greater than 60%
During both the current and prior year the loan to value has
remained less than 60%. Since this loan has variable interest, an
interest rate cap for 100% of the loan was entered into, which
comes into effect if GBP 3 month
LIBOR reaches 1.5%. As at the reporting date GBP 3 month LIBOR has not reached 1.5%.
On 9 August 2018 an additional
amount of £10 million was drawn down on the available RCF to assist
in the acquisition of new assets The Tun and The Arc.
In January 2019 the RCF limit was
increased from £32.5 million to £52.5 million providing additional
undrawn capacity of £20 million.
On the 4 March 2019 following the
sale of Commercial Road an amount of £1.5 million was repaid.
As at 31 March 2019 the total drawn
amount on the RCF is £29 million.
As at 31 March 2019 the Group has
a loan balance of £158.6 million and £2.4 million of unamortised
arrangement fees. (31 March 2018:
£150.1 million and £1.6 million of unamortised arrangement
fees). During the year additional costs relating to the
refinancing were incurred. Break costs of £2.6 million and
other fees totalling £0.5 million have been written off to the
income statement in the year. Additionally costs totalling
£1.1 million have been capitalised and are being charged to the
income statement in line with the Group’s amortisation
policy.
The Canada Life facility has a first charge security over all
the property assets in the ring-fenced Security Pool (the ‘Security
Pool’) which at 31 March 2019
contained properties valued at £318.2 million (2018: £356.5
million). Various restraints apply during the term of the loan
although the facility has been designed to provide significant
operational flexibility. The RBS facility has a first charge
security over all the property assets held in SREIT No.2 Limited,
which at 31 March 2019 contained
properties valued at £105.9million (2018: £43.3 million).
The principal covenants for Canada Life and RBS are that the
loan should not comprise more than 65% of the value of the assets
in the Security Pool nor should estimated rental and other income
arising from assets in the Security Pool, calculated on any
interest payment date and one year projected from any interest
payment date, comprise less than 185% of the interest payments. For
the RBS facility, the forward looking interest cover covenant is
250%.
As at the Interest Payment Date, the Canada Life interest cover
calculated in accordance with the ICR covenant was 333% (2018:
352%) and the forward looking interest cover was 314% (2018: 329%),
with the Loan to value ratio of 36.7% (22.1% net of all cash)
(2018: 36.4%, 28.2% net of all cash). The RBS interest cover
calculated in accordance with the ICR covenant was 495% (2018:
513%) with the loan to value ratio of 27.4% (2018: 47.4%).
17. Trade and other payables
|
|
31/03/2019
£000 |
31/03/2018
£000 |
Rent received in
advance |
|
4,532 |
4,782 |
Rental deposits |
|
1,193 |
963 |
Interest payable |
|
1,391 |
1,391 |
Other trade payables
and accruals |
|
2,271 |
1,146 |
|
|
9,387 |
8,282 |
18. NAV per Ordinary Share
The NAV per Ordinary Share is based on the net assets of
£356,376,000 (2018: £353,570,000) and 518,513,409 (2018:
518,513,409) Ordinary Shares in issue at the reporting date.
19. Financial instruments, properties and associated
risks
Financial risk factors
The Group holds cash and liquid resources as well as having
debtors and creditors that arise directly from its operations. The
Group uses interest rate contracts when required to limit exposure
to interest rate risks, but does not have any other derivative
instruments.
The main risks arising from the Group’s financial instruments
and properties are market price risk, credit risk, liquidity risk
and interest rate risk. The Group has no exposure to foreign
currency exchange risk. The Board regularly reviews and agrees
policies for managing each of these risks and these are summarised
below:
Market price risk
Rental income and the market value for properties are generally
affected by overall conditions in the economy, such as changes in
gross domestic product, employment trends, inflation and changes in
interest rates. Changes in gross domestic product may also impact
employment levels, which in turn may impact the demand for
premises. Furthermore, movements in interest rates may also affect
the cost of financing for real estate companies. Both rental income
and property values may also be affected by other factors specific
to the real estate market, such as competition from other property
owners, the perceptions of prospective tenants of the
attractiveness, convenience and safety of properties, the inability
to collect rents because of bankruptcy or the insolvency of
tenants, the periodic need to renovate, repair and release space
and the costs thereof, the costs of maintenance and insurance, and
increased operating costs.
The Directors monitor the market value of investment properties
by having independent valuations carried out quarterly by a firm of
independent chartered surveyors. Note 11 sets out the sensitivity
analysis on the market price risk. Concentration risk based on
industry and geography, is set out in the tables on page 5.
Included in market price risk is interest rate risk which is
discussed further below.
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 an occupational tenant,
the Group will suffer a rental income shortfall and incur
additional costs, including legal expenses, in maintaining,
insuring and re-letting the property. The Investment Manager
reviews reports prepared by Dun & Bradstreet, or other sources
to assess the credit quality of the Group’s tenants and aims to
ensure there is no excessive concentration of risk and that the
impact of any default by a tenant is minimised.
In respect of credit risk arising from other financial assets,
which comprise cash and cash equivalents, exposure to credit risk
arises from default of the counterparty with a maximum exposure
equal to the carrying amounts of these instruments. In order to
mitigate such risks, cash is maintained with major international
financial institutions with high quality credit ratings. During the
year and at the reporting date the Group maintained relationships
with branches and subsidiaries of HSBC. HSBC Credit Rating is AA
negative (provided by Standard and Poor).
The maximum exposure to credit risk for rent receivables at the
reporting date by type of sector was:
|
31
March 2019
Carrying amount
£000 |
31 March
2018
Carrying amount
£000 |
Office |
3 |
148 |
Industrial |
599 |
742 |
Retail |
264 |
84 |
|
866 |
974 |
Rent receivables which are past their due date, but which were
not impaired at the reporting date were:
|
31
March 2019
Carrying amount
£000 |
31 March
2018
Carrying amount
£000 |
0-30 days |
775 |
640 |
31-60 days |
21 |
3 |
61-90 days |
34 |
85 |
91 days plus |
36 |
246 |
|
866* |
974* |
*Net of bad debt provisions of £156k (2018: £489k).
Liquidity risk
Liquidity risk is the risk that the Group will encounter
difficulties in meeting obligations associated with its financial
obligations.
The Group’s investments comprise UK commercial property.
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. Investments in property are
relatively illiquid; however the Group has tried to mitigate this
risk by investing in properties that it considers to be good
quality.
In certain circumstances, the terms of the Group’s debt
facilities entitle the lender to require early repayment and in
such circumstances the Group’s ability to maintain dividend levels
and the net asset value could be adversely affected. The Investment
Manager prepares cash flows on a rolling basis to ensure the Group
can meet future liabilities as and when they fall due.
The following table indicates the maturity analysis of the
financial liabilities.
As at 31 March 2019 |
Carrying
amount
£000 |
Expected
cash flows
£000 |
6
mths
or less
£000 |
6 mths –
2 years
£000 |
2–5 years
£000 |
More
than 5 years
£000 |
Financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing loans and
borrowings and interest |
157,621 |
220,463 |
3,117 |
9,350 |
47,505 |
160,491 |
Trade and other payables |
3,464 |
3,464 |
2,271 |
- |
- |
1,193 |
Total financial
liabilities |
161,085 |
223,927 |
5,388 |
9,350 |
47,505 |
161,684 |
|
|
|
|
|
|
|
As at 31 March 2018 |
Carrying
amount
£000 |
Expected
cash flows
£000 |
6 mths
or less
£000 |
6 mths
–
2 years
£000 |
2–5 years
£000 |
More
than 5 years
£000 |
Financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing loans and
borrowings and interest |
149,896 |
212,213 |
3,217 |
9,651 |
38,854 |
160,491 |
Trade and other payables |
2,109 |
2,109 |
1,146 |
- |
- |
963 |
Total financial liabilities |
152,005 |
214,322 |
4,363 |
9,651 |
38,854 |
161,454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate risk
Exposure to market risk for changes in interest rates relates
primarily to the Group’s long-term debt obligations and to interest
earned on cash balances. As interest on the Group’s long-term
debt obligations is payable on a fixed-rate basis the Group is not
exposed to interest rate risk, but is exposed to changes in fair
value of long-term debt obligations driven by interest rate
movements. As at 31 March 2019
the fair value of the Group’s £129.6 million loan with Canada Life
was £140.3 million (2018: £140.3 million). The RBS revolving credit
facility is a low margin flexible source of funding with a margin
of 1.6% above 3 month LIBOR and it is considered by management that
the carrying value is equal to fair value.
A 1% increase or decrease in short-term interest rates would
increase or decrease the annual income and equity by £104,000 based
on the cash balance as at 31 March
2019.
Fair values
The fair values of financial assets and liabilities are not
materially different from their carrying values, unless disclosed
below, in the financial statements.
The fair value hierarchy levels are as follows:
– Level 1 – quoted prices (unadjusted)
in active markets for identical assets and liabilities
– Level 2 – inputs other than quoted
prices included within level 1 that are observable for the asset or
liability, either directly (i.e. as prices) or indirectly (i.e.
derived from prices); and
– Level 3 – inputs for the assets or
liability that are not based on observable market data
(unobservable inputs).
There have been no transfers between Levels 1, 2 and 3 during
the year (2018: none).
The following summarises the main
methods and assumptions used in estimating the fair values of
financial instruments and investment property.
Investment property – level 3
Fair value is based on valuations provided by an independent
firm of chartered surveyors and registered appraisers. These values
were determined after having taken into consideration recent market
transactions for similar properties in similar locations to the
investment properties held by the Group. The fair value hierarchy
of investment property is level 3. See Note 11 for further
details.
Interest bearing loans and borrowings – level 2
Fair values are based on the present value of future cash flows
discounted at a market rate of interest. Issue costs are amortised
over the period of the borrowings. As at 31 March 2019 the fair value of the Group’s
£129.6 million loan with Canada Life was £140.3 million (2018:
£140.3 million).
Trade and other receivables/payables – level 2
All receivables and payables are deemed to be due within one
year and as such the notional amount is considered to reflect the
fair value.
Capital management
The Board’s policy is to maintain a strong capital base to
maintain investor, creditor and market confidence and to sustain
future development of the business. The objective is to ensure that
it will continue as a going concern and to maximise the return to
its equity shareholders through an appropriate level of gearing.
The Company's capital management process ensures it meets its
financial covenants in its borrowing arrangements. Breaches in
meeting the financial covenants could permit the lenders to
immediately accelerate the repayment of loans and borrowings. The
Company monitors as part of its quarterly board meetings that it
will adhere to specific leverage, interest cover and rental cover
ratios. There have been no breaches in the financial covenants of
any loans and borrowings during the financial year
The Company’s debt and capital structure comprises the
following:
|
|
31/03/2019
£000 |
31/03/2018
£000 |
Debt |
|
|
|
Fixed rate loan
facility |
|
129,585 |
129,585 |
Floating rate loan
facility* |
|
29,000 |
20,500 |
Equity |
|
|
|
Called-up share
capital |
|
192,638 |
192,638 |
Reserves |
|
163,738 |
160,932 |
|
|
356,376 |
353,570 |
Total debt and
equity |
|
514,961 |
503,655 |
There were no changes in the Group’s approach to capital management
during the year.
*Please note that this amount refers to the amount drawn.
The total facility limit as at 31
March 2019 was £52.5m.
20. Operating leases
The Group leases out its investment property under operating
leases. At 31 March 2019 the future
minimum lease receipts under non-cancellable leases are as
follows:
|
31/03/2019
£000 |
31/03/2018
£000 |
Less than one
year |
25,138 |
24,573 |
Between one and five
years |
76,120 |
80,004 |
More than five
years |
75,679 |
73,026 |
|
176,937 |
177,603 |
The total above comprises the total contracted rent receivable as
at 31 March 2019.
The Group has entered into leases on its property portfolio. The
commercial property leases typically have lease terms between 5 and
15 years and include clauses to enable periodic upward revision of
the rental charge according to prevailing market conditions. Some
leases contain options to break before the end of the lease
term.
21. List of Subsidiary and Joint Venture Undertakings
The companies listed below are those which were part of the
Group at 31 March 2019 and
31 March 2018:
Undertaking |
Category |
Country of incorporation |
Ultimate ownership |
SREIT No.2 Ltd |
Subsidiary |
Guernsey |
100% |
SREIT Holdings No.2
Ltd |
Subsidiary |
Guernsey |
100% |
SREIT Holdings
Ltd |
Subsidiary |
Guernsey |
100% |
SREIT Property
Ltd |
Subsidiary |
Guernsey |
100% |
SREIT (Portergate)
Ltd |
Subsidiary |
Guernsey |
100% |
SREIT (Victory)
Ltd |
Subsidiary |
Guernsey |
100% |
SREIT (Uxbridge)
Ltd |
Subsidiary |
Guernsey |
100% |
SREIT (City Tower)
Ltd |
Subsidiary |
Guernsey |
100% |
SREIT (Store) Ltd |
Subsidiary |
Guernsey |
100% |
SREIT Holdings No.3
Ltd |
Subsidiary |
Guernsey |
100% |
SREIT No.3 Finance
Ltd |
Subsidiary |
Guernsey |
100% |
SREIT (Bedford)
Ltd |
Subsidiary |
Guernsey |
100% |
City Tower Unit
Trust |
Joint Venture |
Jersey |
25% |
Store Unit Trust |
Joint Venture |
Jersey |
50% |
The company listed below was liquidated during the year ended
31 March 2019:
Undertaking |
Category |
Country of incorporation |
Ultimate ownership |
St John’s Centre
(Bedford) Ltd |
Subsidiary |
UK |
100% |
22. Related party transactions
Material agreements are disclosed in note 3. Transactions with
Directors and the Investment Manager are disclosed in note 7.
Transactions with joint ventures are disclosed in note 12.
23. Capital commitments
As at 31 March 2019 the Group had
capital commitments of £9.4 million (2018: £1.2 million).
24. Post balance sheet events
On 16 May 2019 unconditional
contracts were exchanged to sell Allied Industrial Estate, Acton
for £18.875 million. The buyer has paid a non-refundable
deposit of £1.89 million and completion is due in November 2019.
Other information (unaudited)
EPRA Performance Measures (unaudited)
As recommended by EPRA (European Public Real Estate
Association), EPRA performance measures are disclosed in the
section below.
EPRA performance measures: summary table
|
|
31/03/2019 |
31/03/2018 |
|
|
Total
£000 |
Total
£000 |
EPRA earnings |
|
12,022 |
12,549 |
Adjusted EPRA
earnings* |
|
15,150 |
14,056 |
EPRA earnings per
share |
|
2.3 |
2.4 |
Adjusted EPRA
earnings per share* |
|
2.9 |
2.7 |
EPRA NAV |
|
356,376 |
353,568 |
EPRA NAV per
share |
|
68.7 |
68.2 |
|
|
|
|
EPRA NNNAV |
|
343,322 |
332,590 |
EPRA NNNAV per
share |
|
66.2 |
64.1 |
|
|
|
|
EPRA Net Initial
Yield |
|
5.0% |
5.0% |
EPRA topped-up Net
Initial Yield |
|
5.3% |
5.5% |
|
|
|
|
EPRA Vacancy
Rate |
|
8.5% |
7.2% |
EPRA Cost Ratios -
including direct vacancy costs |
|
27.6% |
33.1% |
Adjusted EPRA Cost
Ratios - including direct vacancy costs* |
|
21.2% |
27.5% |
EPRA Cost Ratios -
excluding direct vacancy costs |
|
27.6% |
29.8% |
Adjusted EPRA Cost
Ratios - excluding direct vacancy costs* |
|
21.2% |
24.2% |
*Adjusted for one off company transactions in the prior
year.
a. EPRA earnings and EPS
Total comprehensive income excluding realised and unrealised
gains/ losses on investment property, share of profit on joint
venture investments and changes in fair value of financial
instruments, divided by the weighted average number of shares.
|
|
31/03/2019 |
31/03/2018 |
|
|
£000 |
£000 |
IFRS profit after
tax |
|
15,901 |
33,836 |
Adjustments to
calculate EPRA Earnings: |
|
|
|
Profit on disposal of
investment property |
|
(2,156) |
(594) |
Net valuation gain on
investment property |
|
(1,556) |
(20,195) |
Share of valuation
(loss)/gain in associates and joint ventures |
|
(167) |
(498) |
EPRA
earnings |
|
12,022 |
12,549 |
|
|
|
|
Company
adjustments1 |
|
3,128 |
1,507 |
Adjusted EPRA
earnings |
|
15,150 |
14,056 |
Weighted average
number of Ordinary shares |
|
518,513,409 |
518,513,409 |
IFRS earnings per
share (pence) |
|
3.1 |
6.5 |
EPRA earnings per
share (pence) |
|
2.3 |
2.4 |
Adjusted EPRA
earnings per share (pence) |
|
2.9 |
2.7 |
1 The Company adjustments relate to one–off costs
b. EPRA NAV per share
The net asset value adjusted to exclude assets or liabilities
not expected to crystallise in a long-term investment property
model, divided by the number of shares in issue.
|
|
31/03/2019 |
31/03/2018 |
|
|
£000 |
£000 |
IFRS NAV per financial
statements |
|
356,376 |
353,570 |
EPRA NAV |
|
356,376 |
353,570 |
|
|
|
|
Shares in issue at end
of year |
|
518,513,409 |
518,513,409 |
IFRS NAV per share
(pence) |
|
68.7 |
68.2 |
EPRA NAV per share
(pence) |
|
68.7 |
68.2 |
c. EPRA
NNNAV per share
The EPRA NAV adjusted to include the fair value of debt, divided
by the number of shares in issue.
|
|
31/03/2019 |
31/03/2018 |
|
|
£000 |
£000 |
EPRA NAV |
|
356,376 |
353,568 |
Adjustments to
calculate EPRA NNNAV: |
|
|
|
Fair value of debt |
|
(13,054) |
(12,279) |
EPRA NNNAV |
|
343,322 |
341,289 |
|
|
|
|
EPRA NNNAV per share
(pence) |
|
66.2 |
65.8 |
d. EPRA Net Initial Yield
Annualised rental income based on the cash rents passing at the
balance sheet date, less non-recoverable property operating
expenses, divided by the grossed up market value of the complete
property portfolio. The EPRA “topped up” NIY is the EPRA NIY
adjusted for unexpired lease incentives.
|
|
31/03/2019 |
31/03/2018 |
|
|
£000 |
£000 |
Investment property –
wholly owned |
|
381,450 |
399,725 |
Investment property –
share of joint ventures and funds |
|
79,163 |
77,770 |
Complete property
portfolio |
|
460,613 |
477,495 |
Allowance for
estimated purchasers’ costs |
|
26,716 |
27,695 |
Gross up completed
property portfolio valuation |
|
487,329 |
505,190 |
|
|
|
|
Annualised cash
passing rental income |
|
26,983 |
27,054 |
Property
outgoings |
|
(2,375) |
(1,734) |
Annualised net
rents |
|
24,608 |
25,320 |
Notional rent
expiration of rent free periods(1) |
|
1,029 |
2,566 |
Topped-up net
annualised rent |
|
25,637 |
27,886 |
|
|
|
|
EPRA NIY |
|
5.0% |
5.0% |
EPRA “topped-up”
NIY |
|
5.3% |
5.5% |
(1) The period over which rent free periods expire is 2 years
(2018: 2 years).
e. EPRA cost
ratios
Administrative and operating costs as a percentage of gross rental
income calculated including and excluding direct vacancy costs.
|
|
31/03/2019 |
31/03/2018 |
|
|
£000 |
£000 |
Administrative/property operating
expense line per IFRS income statement |
|
7,970 |
8,972 |
Ground rent costs |
|
(124) |
(141) |
EPRA Costs (including direct
vacancy costs) |
|
7,846 |
8,831 |
Direct vacancy costs |
|
(1,769) |
(879) |
EPRA Costs (excluding direct
vacancy costs) |
|
6,077 |
7,952 |
Company adjustments |
|
- |
(1,507) |
Adjusted EPRA Costs (including
company adjustment costs) |
|
7,846 |
7,324 |
Direct vacancy costs |
|
(1,769) |
(879) |
Adjusted EPRA Costs (excluding
direct vacancy costs) |
|
6,077 |
6,445 |
|
|
|
|
Gross Rental Income less ground rent
costs |
|
25,154 |
23,900 |
Share of Joint Ventures income less
ground rent costs |
|
3,311 |
2,754 |
Gross Rental Income |
|
28,465 |
26,654 |
|
|
|
|
EPRA Cost Ratio (including direct
vacancy costs) |
|
27.6% |
33.1% |
EPRA Cost Ratio (excluding direct
vacancy costs) |
|
21.2% |
29.8% |
EPRA Vacancy Rate |
|
8.5% |
7.2% |
Adjusted EPRA Cost Ratio (including
company adjustment costs) |
|
27.6% |
27.5% |
Adjusted EPRA Cost Ratio (excluding
direct vacancy costs) |
|
21.2% |
24.2% |
Sustainability Performance Measures (Environmental)
(unaudited)
SREIT reports sustainability information in accordance with EPRA
Best Practice Recommendations on Sustainability Reporting (sBPR)
2017, 3rd Edition for the 12 months, 1st January 2018 – 31st
December 2018, presented with comparison against 2017. As
permitted by the EPRA Sustainability Reporting Guidelines,
environmental data has been developed and presented in line with
the Global Real Estate Sustainability Benchmark (GRESB).
The reporting boundary has been scoped to where SREIT has
operational control: managed properties where SREIT is responsible
for payment of utility invoices and / or arrangement of waste
disposal contracts. ‘Operational control’ has been selected as the
reporting boundary (as opposed to ‘financial control’ or ‘equity
share’) as this reflects the portion of the portfolio where the
Company can influence operational procedures and, ultimately,
sustainability performance. The operational control approach is the
most commonly applied within the industry.
In 2017 there were 21 such managed assets within the portfolio.
In 2018, this increased to 23 managed assets, reflecting the
purchase of two new assets (The Arc in Nottingham and The Tun in Edinburgh). All managed assets are included
within the below data for 2018.
Where data coverage is less than 100%, a supporting explanation
is provided within the data notes immediately below the relevant
table. Energy and water consumption data is reported according to
automatic meter reads, manual meter reads or invoice estimates.
Where required, missing consumption data has been estimated by
pro-rating data from other periods using recognised techniques. The
proportion of data that is estimated is presented in the footnotes
to the data tables. Historic consumption data has been restated
where more complete and/or accurate records have become
available.
SREIT does not contain any managed assets that consume energy
from district heating or cooling sources. Therefore, the EPRA sBPR
DH&C-Abs and DH&C-LfL indicators are not applicable and not
presented in this report. Furthermore, the Company does not have
any direct employees; it is served by the employees of the
Investment Manager (Schroder Real Estate Investment Management
Limited). Accordingly, the EPRA Overarching Recommendation for
companies to report on the environmental impact of their own
offices is not relevant/material and not presented in this
report.
This report has been prepared by EVORA Global, retained
sustainability and energy management consultants to Schroder Real
Estate Investment Management.
Total energy consumption (Elec-Abs; Fuels-Abs)
The table below sets out total landlord obtained energy
consumption from the Company’s managed portfolio by sector.
|
Total electricity consumption
(kWh) |
Total fuel consumption
(kWh) |
Sector |
2017 |
2018 |
2017 |
2018 |
|
Office |
3,225,386 |
3,290,220 |
1,969,103 |
2,214,422 |
|
Coverage |
10/10 |
11/11 |
9/9 |
12/12 |
|
Retail |
186,638 |
126,882 |
1,599 |
2,155 |
|
Coverage |
2/2 |
2/2 |
1/1 |
1/1 |
|
Mixed Use[12] |
2,573,373 |
2,609,116 |
- |
- |
|
Coverage |
1/1 |
1/1 |
- |
- |
|
Industrial,
Distribution Warehouse |
161,585 |
111,971 |
376 |
1,705 |
|
Coverage |
5/5 |
5/5 |
2/2 |
2/2 |
|
Retail, Warehouse |
22,415 |
22,888 |
- |
- |
|
Coverage |
1/1 |
1/1 |
- |
- |
|
Leisure |
286,216 |
271,648 |
222,289 |
163,545 |
|
Coverage |
1/1 |
1/1 |
1/1 |
1/1 |
|
Total |
6,455,613 |
6,432,725 |
2,193,367 |
2,381,827 |
|
Coverage |
20/20 |
21/21 |
13/13 |
16/16 |
|
Total electricity
and fuel |
8,648,979 |
8,814,551 |
- |
- |
|
Coverage |
20/20 |
22/22 |
- |
- |
|
Renewable
electricity |
97% |
98% |
- |
- |
|
Coverage |
20/20 |
21/21 |
- |
- |
|
– Consumption data relates
to the managed portfolio only:
– Offices: Common areas,
shared services and/or whole building
– Mixed-Use: Whole
building
– Retail: Common areas
and tenant voids
– Retail Warehouse: Exterior
areas only
– Industrial, Distribution
Warehouse: Exterior areas and tenant voids
– Leisure: Common areas and
external areas
– Energy procured directly
by tenants is not reported.
– Estimation: 0.1% of
Electricity and 1% of Gas data have been estimated through
pro-rating.
– Where appropriate (for
relevant assets), consumption data has been adjusted to reflect the
Company’s share of asset ownership.
– Coverage relates to the
number of managed assets for which data is reported.
– Renewable electricity (%)
is calculated according to the attributes of energy supply
contracts as at 31st December
2018 and only reflects renewable electricity procured under
a 100% ‘green tariff’ (i.e. where generation is from 100% renewable
sources). The renewables percentage of standard (non ‘green
tariff’) energy supplies are not currently known and therefore has
not been included within this number. As far as we know, no
renewable fuel was consumed during the reporting period and
therefore a percentage renewable fuel figure is not presented
here.
– All energy was procured
from a third-party supplier. No ‘self-generated’ renewable energy
was consumed during the reporting period and is therefore not
presented here.
Like for like energy consumption (Elec-LfL; Fuels-LfL;
Energy-Int)
The table below sets out the like for like landlord obtained
energy consumption from the Company’s managed portfolio by
sector.
|
Total electricity
(kWh) |
Total fuels
(kWh) |
Energy Intensity (kWh/m2) |
Sector |
2017 |
2018 |
Change |
2017 |
2018 |
Change |
2017 |
2018 |
Office |
3,225,386 |
3,180,842 |
-1% |
1,969,103 |
2,008,722 |
2% |
144 |
143 |
Coverage |
10/10 |
9/9 |
10/10 |
Retail |
17,521 |
14,683 |
-16% |
|
|
|
13 |
11 |
Coverage |
1/1 |
|
1/1 |
Mixed
Use[13] |
2,573,373 |
2,609,116 |
1% |
|
|
|
178 |
181 |
Coverage |
1/1 |
|
|
|
1/1 |
Industrial, Distribution Warehouse |
3,596 |
786 |
-78%[14] |
|
|
|
0.2 |
0.1 |
Coverage |
1/1 |
|
|
|
1/1 |
Retail,
Warehouse |
22,415 |
22,888 |
2% |
|
|
|
1.8 |
1.9 |
Coverage |
1/1 |
|
|
|
1/1 |
Leisure |
286,216 |
271,648 |
-5% |
222,289 |
163,545 |
-26% |
184 |
157 |
Coverage |
1/1 |
1/1 |
1/1 |
Total |
6,128,507 |
6,099,963 |
-0.5% |
2,191,392 |
2,172,267 |
-1% |
|
|
Coverage |
15/15 |
10/10 |
15/15 |
Total
electricity and fuel |
8,319,899 |
8,272,229 |
-1% |
|
|
|
|
|
Coverage |
15/15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
– Like for like excludes
assets that were purchased, sold or under refurbishment during the
two years reported.
– Consumption data relates
to the managed portfolio only:
– Offices: Common areas,
shared services and/or whole building
– Mixed-Use: Whole
building
– Retail: Common areas and
tenant voids
– Retail, Warehouse:
Exterior areas only
– Industrial, Distribution
Warehouse: Exterior areas only
– Leisure: Common areas and
external areas
– Energy procured directly
by tenants is not reported.
– Estimation: 0.1% of
Electricity and 1% of Gas data have been estimated through
pro-rating.
– Where appropriate (for
relevant assets), consumption data has been adjusted to reflect the
Company’s share of ownership.
– Coverage relates to the
number of managed assets for which data is reported.
– Intensity: An energy
intensity kWh/m2 is reported for assets within the like for like
portfolio. The numerator is landlord-managed energy consumption and
the denominator is net lettable floor area (m2). For Leisure /
Retail, common parts energy consumption is divided by common parts
area (m2). As common parts area is not typically measured and
therefore known, where required we have taken the known net
lettable area and applied an internal benchmark: 25% common part
area for unenclosed centres and 35% for enclosed centres.
Greenhouse gas emissions (GHG-Dir-Abs; GHG-Indir-Abs;
GHG-Int)
The table below sets out the Company’s greenhouse gas emissions
by sector.
|
Absolute emissions
(tCO²e) |
Like for like emissions
(tCO²e) |
Intensity
(kg CO2e/m2) |
Sector |
2017 |
2018 |
2017 |
2018 |
Change |
2017 |
2018 |
Office |
|
|
|
|
|
|
|
Scope 1 |
362 |
407 |
362 |
370 |
2% |
41 |
35 |
Scope 2 |
1,134 |
931 |
1,134 |
900 |
-21% |
Coverage |
10/10 |
12/12 |
10/10 |
Retail |
|
|
|
|
|
|
|
Scope 1 |
|
|
|
|
|
3 |
2 |
Scope 2 |
66 |
36 |
6 |
4 |
-33% |
Coverage |
2/2 |
2/2 |
1/1 |
Mixed
Use[15] |
|
|
|
|
|
|
|
Scope 1 |
0 |
0 |
|
|
|
63 |
51 |
Scope 2 |
905 |
739 |
905 |
739 |
-18% |
Coverage |
1/1 |
1/1 |
1/1 |
Industrial,
Distribution Warehouse |
|
|
|
|
|
|
|
Scope 1 |
0.1 |
0.3 |
0 |
0 |
|
0.09 |
0.02 |
Scope 2 |
57 |
32 |
1.26 |
0.22 |
-83% |
|
|
Coverage |
5/5 |
5/5 |
1/1 |
|
|
|
|
Retail,
Warehouse |
|
|
|
|
|
|
|
Scope 1 |
0 |
0 |
0 |
0 |
|
0.6 |
0.5 |
Scope 2 |
8 |
6 |
8 |
6 |
-25% |
|
|
Coverage |
1/1 |
1/1 |
1/1 |
Leisure |
|
|
|
|
|
|
|
Scope 1 |
41 |
30 |
41 |
30 |
-27% |
41 |
31 |
Scope 2 |
101 |
77 |
101 |
77 |
-24% |
Coverage |
1/1 |
1/1 |
1/1 |
Total |
Scope 1 |
403 |
438 |
403 |
400 |
-1% |
|
|
Scope 2 |
2,270 |
1,821 |
2,155 |
1,727 |
-20% |
|
|
Scope 1 & 2 |
2,673 |
2,259 |
2,558 |
2,126 |
-17% |
|
|
Coverage |
20/20 |
22/22 |
15/15 |
– Like for like excludes
assets that were purchased, sold or under refurbishment during the
two years reported.
– The Company’s greenhouse
gas (GHG) inventory has been developed as follows:
– Fuels/electricity GHG
emissions factors taken from UK government’s Greenhouse Gas
Reporting Factors for Company Reporting (2017 and 2018).
– GHG emissions from
electricity (Scope 2) are reported according to the
‘location-based’ approach.
– GHG emissions are
presented as tonnes of carbon dioxide equivalent
(tCO²e). GHG intensity is presented as kilograms of
carbon dioxide equivalent (kgCO2e), where possible.
– Emissions data relates to
the managed portfolio only;
– Offices: Common areas,
shared services and/or whole building
– Mixed-Use: Whole
building
– Retail: Common areas and
tenant voids
– Retail, Warehouse:
Exterior areas only
– Industrial, Distribution
Warehouse: Exterior areas and tenant voids
– Leisure: Common areas and
external areas
– Emissions associated with
energy procured directly by tenants is not reported.
– Estimation: 0.1% of
Electricity and 1% of Gas data have been estimated through
pro-rating.
– Where appropriate (for
relevant assets), emissions data has been adjusted to reflect the
Company’s share of asset ownership.
– Coverage relates to the
number of managed assets for which data is reported.
– Intensity: An intensity
kgCO2e/m2 is reported for assets within the like for
like portfolio. The numerator is landlord-managed GHG emissions
from energy consumption and the denominator is net lettable floor
area (m2). For Leisure / Retail, common parts GHG
emissions is divided by common parts area (m2). As
common parts area is not typically measured and therefore known,
where required we have taken the known net lettable area and
applied an internal benchmark: 25% common part area for unenclosed
centres and 35% for enclosed centres.
Water (Water-Abs; Water-LfL; Water-Int)
The table below sets out water consumption for assets managed by
the Company.
|
Absolute water consumption (m³) |
Like for like
water consumption (m³) |
Intensity
(m³/m²) |
Sector |
2017 |
2018 |
2017 |
2018 |
Change |
2017 |
2018 |
Office |
9,855 |
7,898 |
9,855 |
7,898 |
-20%[16] |
0.33 |
0.26 |
Coverage |
8/8 |
8/8 |
8/8 |
Retail |
1,816 |
2,392 |
1,654 |
2,313 |
40%[17] |
0.7 |
1.0 |
Coverage |
2/2 |
2/2 |
1/1 |
Mixed Use[18] |
5,512 |
5,564 |
5,512 |
5,564 |
1% |
0.38 |
0.39 |
Coverage |
1/1 |
1/1 |
1/1 |
Leisure |
277 |
242 |
277 |
242 |
-13% |
0.08 |
0.07 |
Coverage |
1/1 |
1/1 |
1/1 |
Total |
17,460 |
16,096 |
17,298 |
16,017 |
-8% |
|
|
Coverage |
12/12 |
12/12 |
11/11 |
|
|
|
|
|
|
|
|
|
– Like for like excludes
assets that were purchased, sold or under refurbishment during the
two years reported.
– All consumption data
relates to the managed portfolio only:
– Offices and Mixed use:
Whole building
– Retail and Leisure: Common
parts
– There is no landlord
responsibly for water in Retail, Warehouses and Industrial,
Distribution Warehouse
– Water procured directly by
tenants is not reported.
– Estimation: 3% of water
data has been estimated through pro-rating.
– Where appropriate (for
relevant assets), consumption data has been adjusted to reflect the
Company’s share of ownership.
– Coverage relates to the
number of managed assets for which data is reported.
– Intensity: An intensity
m3/m2 is reported for assets within the like
for like portfolio. The numerator is landlord-managed water
consumption and the denominator is net lettable floor area
(m2). For Leisure / Retail, common parts water
consumption is divided by common parts area (m2). As
common parts area is not typically measured and therefore known,
where required we have taken the known net lettable area and
applied an internal benchmark: 25% common part area for unenclosed
centres and 35% for enclosed centres.
– All water was procured
from a municipal supply. As far as we are aware, no surface, ground
or rainwater was consumed during the reporting period and therefore
is not presented here.
Waste (Waste-Abs; Waste-LfL)
The table below sets out waste managed by the Company by
disposal route and sector.
|
Absolute tonnes |
Like for like tonnes |
2017 |
2018 |
2017 |
2018 |
% change |
Tonnes |
% |
Tonnes |
% |
Tonnes |
% |
Tonnes |
% |
Office |
Recycled |
85 |
39% |
112 |
50% |
85 |
39% |
107 |
49% |
26% |
Incineration with energy recovery |
131 |
60% |
114 |
50% |
131 |
61% |
112 |
51% |
-15% |
Direct
to landfill |
0 |
0% |
0
0% |
0 |
0% |
0 |
0% |
0% |
Total |
217 |
227 |
217 |
219 |
1% |
Coverage |
9/9 |
10/10 |
9/9 |
Retail |
Recycled |
68 |
62% |
98 |
69% |
|
|
|
|
|
Incineration with energy recovery |
42 |
38% |
44 |
31% |
|
|
|
|
|
Direct
to landfill |
0 |
0% |
0 |
0% |
|
|
Total |
111 |
142 |
|
|
|
Coverage |
3/3 |
3/3 |
|
|
|
Mixed
Use[19] |
Recycled |
115 |
71% |
94 |
59% |
115 |
71% |
94 |
59% |
-19% |
Incineration with energy recovery |
48 |
29% |
64 |
41% |
48 |
29% |
64 |
41% |
35% |
Direct
to landfill |
0 |
0% |
0 |
0 |
0 |
0% |
0 |
0% |
0% |
Total |
162 |
158 |
162 |
158 |
-3% |
Coverage |
1/1 |
1/1 |
1/1 |
Leisure |
Recycled |
127 |
44% |
166 |
50% |
127 |
44% |
166 |
50% |
30% |
Incineration with energy recovery |
164 |
56% |
165 |
50% |
164 |
56% |
165 |
50% |
1% |
Direct
to landfill |
0 |
0% |
0 |
0% |
0 |
0% |
0 |
0% |
0% |
Total |
291 |
331 |
291 |
331 |
|
14% |
Coverage |
1/1 |
1/1 |
1/1 |
|
|
Total |
Recycled |
396 |
51% |
470 |
55% |
327 |
49% |
367 |
52% |
12% |
Incineration with energy recovery |
385 |
49% |
388 |
45% |
343 |
51% |
342 |
48% |
0% |
Direct
to landfill |
0 |
0% |
0 |
0% |
0 |
0% |
0 |
0% |
0% |
Total |
781 |
|
858 |
|
670 |
|
708 |
|
6% |
Coverage |
14/14 |
|
15/15 |
|
11/11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
– Whilst zero waste is sent
direct to landfill, a residual component of the ‘recycled’ and
‘incineration with energy recovery’ waste streams may end up in
landfill.
– Like for like excludes
assets that were purchased, sold or under refurbishment during the
two years reported.
– Waste data relates to the
managed portfolio only.
– Waste management procured
directly by tenants is not reported.
– The Company has no waste
management responsibilities for Retail, Warehouse and Industrial,
Distribution Warehouse.
– Where appropriate (for
relevant assets), waste data has been adjusted to reflect the
Company’s share of asset ownership.
– Coverage relates to the
number of managed assets for which data is reported.
– Reported data relates to
non-hazardous waste only. Hazardous waste is not reported as due to
the low volumes produced it is not considered material.
Furthermore, robust tonnage data on the small quantities that are
produced is not available.
Sustainability certification (Cert-Tot): Green building
certificates
Rating |
Portfolio by floor area (%) |
Offices (BREEAM In
Use) |
1.3% |
Mixed Use[20] (BREEAM
Fit Out/ Refurbishment) |
0.1% |
All other sectors |
0% |
Coverage |
100% |
– Green building certificate
records for the Fund are provided as at 31st
March 2019 by portfolio floor
area.
– Data provided includes
managed and non-managed assets (i.e. the whole portfolio).
– Where appropriate (for
relevant assets), floor area coverage data has been adjusted to
reflect the Fund’s share of ownership.
Sustainability certification (Cert-Tot): Energy performance
certificates
Energy performance
certificate rating |
Portfolio by floor area (%) |
A |
0.03% |
B |
3.3% |
C |
29.1% |
D |
26.9% |
E |
13.5% |
F |
1.5% |
G |
2.2% |
Exempt |
1.6% |
No EPC |
21.9% |
Coverage |
100% |
– Energy Performance
Certificate (EPC) records for the Company are provided as at
31st December 2018 by
portfolio floor area.
– Data provided includes
managed and non-managed assets (i.e. the whole portfolio).
– Where appropriate (for
relevant assets), floor area coverage data has been adjusted to
reflect the Company’s share of asset ownership, including 25% of
the net lettable area of City Tower, Manchester (reflecting the Company’s 25%
ownership share) and 50% of Store Street, London (reflecting the Company’s 50% ownership
share)
– The information on EPCs is
continuously reviewed and updated.
– EPCs are known for 78% of
the portfolio by floor area. In general terms, since the
introduction of the EPC Regulations in 2008, EPCs are required for
the letting of units or buildings or the sale of buildings. In
addition, the UK Minimum Energy Efficiency Standards regulations
(‘MEES’) came into force for commercial buildings on 1st
April 2018 and require a minimum EPC
rating of E for new lettings; the rules apply to all leases from
1 April 2023. The EPCs for the
portfolio will be managed to ensure compliance with the MEES
regulations. The F&G EPCs relate to ten units in six
assets.
Sustainability Performance Measures (Social)
EPRA’s Sustainability Best Practices Recommendations Guidelines
2017 (“EPRA’s Guidelines”) include Social and Governance reporting
measures to be disclosed for the entity i.e. the Company. The
Company is an externally managed real estate investment trust and
has no direct employees. A number of these Social Performance
measures relate to entity employees and therefore these measures
are not relevant for reporting at the entity level. The
Investment Manager to the Company, Schroder Real Estate Investment
Management Limited, is part of Schroders PLC which has
responsibility for the employees that support the Company. The
Company aims to comply with EPRA’s Guidelines and therefore has
included Social and Governance Performance Measure disclosures in
this report. However, these are presented as appropriate for the
activities and responsibilities of the Schroder Real Estate
Investment Trust Limited (the “Company”), Schroders PLC or the
Investment Manager, Schroder Real Estate Investment Management
Limited.
The Schroders PLC Annual Report and Accounts for the 12 months
to 31 March 2019 supports the
performance measures in relation to the Investment Manager as set
out below. Schroders PLC’s principles in relation to people
including diversity, gender pay gap, values, employee satisfaction
survey, wellbeing and retention can be found at:
·
https://www.schroders.com/en/sysglobalassets/digital/global/annual-report/documents/annual-report-full.pdf;
and,
·
https://www.schroders.com/en/people/diversity-and-inclusion/gender-equality-at-schroders/
Employee gender diversity (iversity-Emp)
As at 31 March 2019 the Company
Board comprised four members: 1 (25% female); 3 (75% male).
For further information on Schroders PLC employee gender
diversity, covering more employee categories, please refer to
Schroders 2018 Annual Report and Accounts (page 32):
https://www.schroders.com/en/sysglobalassets/digital/global/annual-report/documents/annual-report-full.pdf.
Gender pay ratio (Diversity-Pay)
The remuneration of the Company Board is set out on page 45 of
this Report and Accounts document.
Schroders PLC female representation and gender pay report can be
found in Schroders 2018 Annual Report and Accounts (page 78):
https://www.schroders.com/en/sysglobalassets/digital/global/annual-report/documents/annual-report-full.pdf;
Information on Diversity and Inclusion at Schroders can be found
at:
https://www.schroders.com/en/people/diversity-and-inclusion
The following are reported for Schroders in relation to the
Investment Management of the Company:
Training and development (Emp-Training)
Schroders requires employees to complete mandatory internal
training. Schroders encourages all staff with professional
qualifications to maintain the training requirements of their
respective professional body.
Employee performance appraisals (Emp-Dev)
Schroders performance management process requires annual
performance objective setting and annual performance reviews for
all staff. The Investment Manager confirms that performance
appraisals were completed for 100% of investment staff relevant to
the Company in 2018.
The following are reported for Schroders PLC:
Employee turnover and retention (Emp-Turnover)
For Schroders PLC turnover and retention rates please refer to
Schroders Annual Report and Accounts (page 33):
https://www.schroders.com/en/sysglobalassets/digital/global/annual-report/documents/annual-report-full.pdf
Employee health and safety (H&S-Emp)
Schroders PLC does not include employee health and safety
performance measures in its Annual Report and Accounts.
The following are reported in relation to the assets held in the
Company’s portfolio over the reporting period to 31 December 2018:
Asset health and safety assessments (H&S-Asset)
Health and safety impacts were assessed or reviewed for
compliance or improvement for 100% of managed assets held in the
Company portfolio during the reporting period.
Asset health and safety compliance (H&S-Comp)
No incidents of non-compliance with regulations/and or voluntary
codes were identified during the reporting period.
Community engagement, impact assessments and development
programmes (Comty-Eng)
Local community engagement, impact assessments and/or
development programmes were completed for 4% (2 of 46) assets
during the reporting period.
|
Portfolio by number assets
(%) |
Mixed Use |
2% |
Industrial, Distribution
Warehouse |
2% |
Total |
4% |
Sustainability Performance Measures (Governance)
Composition of the highest governance body (Gov-Board)
The Board of the Company comprised 4 non-executive independent
directors (0 executive board members) for the 12 months to
31 March 2019.
· The average tenure of the four
directors to 31 March is three years and eight months
· The number of directors with
competencies relating to environmental and social topics is three
and their experience can be seen in their biographies.
Nominating and selecting the highest governance body
(Gov-Select)
The role of the Nomination Committee, chaired by Lorraine Baldry is to consider and make
recommendations to the Board on its composition so as to maintain
an appropriate balance of skills, experience and diversity,
including gender, and to ensure progressive refreshing of the
Board. On individual appointments, the Nomination Committee leads
the process and makes recommendations to the Board.
Before the appointment of a new director, the Nomination
Committee prepares a description of the role and capabilities
required for a particular appointment. While the Nomination
Committee is dedicated to selecting the best person for the role,
it aims to promote diversification and the Board recognises the
importance of diversity. The Board agrees that its members should
possess a range of experience, knowledge, professional skills and
personal qualities as well as the independence necessary to provide
effective oversight of the affairs of the Company.
Process for managing conflicts of interest (Gov-Col)
The Company’s Conflicts of Interest Policy sets out the policy
and procedures of the Board and the Company Secretary for the
management of conflicts of interest.
Report of the Depositary to the Shareholders
Northern Trust (Guernsey)
Limited has been appointed as Depositary to Schroder Real Estate
Investment Trust Limited (the “Company”) in accordance with the
requirements of Article 36 and Articles 21(7), (8) and (9) of the
Directive 2011/61/EU of the European Parliament and of the Council
of 8 June 2011 on Alternative
Investment Fund Managers and amending Directives 2003/41/EC and
2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010
(the “AIFM Directive”).
We have enquired into the conduct of Schroder Real Estate
Investment Management Limited (the “AIFM”) for the year ended
31 March 2019, in our capacity as
Depositary to the Company.
This report including the review provided below has been
prepared for and solely for the Shareholders in the Company. We do
not, in giving this report, accept or assume responsibility for any
other purpose or to any other person to whom this report is
shown.
Our obligations as Depositary are stipulated in the relevant
provisions of the AIFM Directive and the relevant sections of
Commission Delegated Regulation (EU) No 231/2013 (collectively the
“AIFMD legislation”).
Amongst these obligations is the requirement to enquire into the
conduct of the AIFM and the Company and their delegates in each
annual accounting period.
Our report shall state whether, in our view, the Company has
been managed in that period in accordance with the AIFMD
legislation. It is the overall responsibility of the AIFM to comply
with these provisions. If the AIFM or their delegates have not so
complied, we as the Depositary will state why this is the case and
outline the steps which we have taken to rectify the situation.
The Depositary and its affiliates is or may be involved in other
financial and professional activities which may on occasion cause a
conflict of interest with its roles with respect to the Company.
The Depositary will take reasonable care to ensure that the
performance of its duties will not be impaired by any such
involvement and that any conflicts which may arise will be resolved
fairly and any transactions between the Depositary and its
affiliates and the Company shall be carried out as if effected on
normal commercial terms negotiated at arm's length and in the best
interests of Shareholders.
Basis of depositary review
The Depositary conducts such reviews as it, in its reasonable
discretion, considers necessary in order to comply with its
obligations and to ensure that, in all material respects, the
Company has been managed (i) in accordance with the limitations
imposed on its investment and borrowing powers by the provisions of
its constitutional documentation and the appropriate regulations
and (ii) otherwise in accordance with the constitutional
documentation and the appropriate regulations. Such reviews vary
based on the type of Company, the assets in which a Company invests
and the processes used, or experts required, in order to value such
assets.
Review
In our view, the Company has been managed during the year, in
all material respects:
i. In accordance with the
limitations imposed on the investment and borrowing powers of the
Company by the constitutional document; and by the AIFMD
legislation; and
ii. Otherwise in accordance with the
provisions of the constitutional document; and the AIFMD
legislation.
For and on behalf of
Northern Trust (Guernsey)
Limited
Glossary
Articles |
means the Company's articles of
incorporation, as amended from time to time. |
Companies Law |
means The Companies (Guernsey) Law,
2008. |
Company |
is Schroder Real Estate Investment
Trust Limited. |
Directors |
means the directors of the Company
as at the date of this document whose names are set out on page 33
of this document and “Director” means any one of them. |
Disclosure Guidance and
Transparency Rules |
means the disclosure guidance and
transparency rules contained within the FCA's Handbook of Rules and
Guidance. |
Earnings per share
(“EPS”) |
is the profit after taxation divided
by the weighted average number of shares in issue during the
period. Diluted and Adjusted EPS per share are derived as set out
under NAV. |
Estimated rental value
(“ERV”) |
is the Group’s external valuers’
reasonable opinion as to the open market rent which, on the date of
valuation, could reasonably be expected to be obtained on a new
letting or rent review of a property. |
EPRA |
is European Public Real Estate
Association. |
EPRA NNNAV |
is EPRA Triple Net Asset Value,
being the NAV calculated under IFRS adjusted to reflect the fair
value of financial instruments, debt and deferred taxation. . |
FCA |
is the UK Financial Conduct
Authority. |
Gearing |
is the Group’s net debt as a
percentage of adjusted net assets. |
Group |
is the Company and its
subsidiaries. |
Initial yield |
is the annualised net rents
generated by the portfolio expressed as a percentage of the
portfolio valuation. |
Interest cover |
is the number of times Group net
interest payable is covered by Group net rental income. |
Listing Rules |
means the listing rules made by the
FCA under Part VII of the UK Financial Services and Markets Act
2000, as amended. |
Market Abuse Regulation |
means regulation (EU) No.596/2014 of
the European Parliament and of the Council of 16 April 2014 on
market abuse. |
MSCI |
(formerly Investment Property
Databank or ‘IPD’) is a Company that produces an independent
benchmark of property returns. |
Net Asset Value or NAV |
is shareholders’ funds divided by
the number of shares in issue at the period end. |
NAV total return |
is calculated taking into account
both capital returns and income returns in the form of dividends
paid to shareholders. |
Net rental income |
is the rental income receivable in
the period after payment of ground rents and net property
outgoings. |
REIT |
is Real Estate Investment
Trust. |
Reversionary yield |
is the anticipated yield, which the
initial yield will rise to once the rent reaches the estimated
rental value. |
Notice of Annual General Meeting
Notice is hereby given that the Annual General Meeting of the
Company will be held at 1 London Wall Place, EC2Y 5AU on
18 September 2019 at 11a.m.
|
|
Resolution on
Form of Proxy |
Agenda
1. To elect a Chairman of the Meeting. |
|
To consider and, if thought
fit, pass the following Ordinary
Resolutions: |
Ordinary Resolution 1 |
2. To
receive, consider and approve the Consolidated Annual Report and
Financial Statements of the Company for the year ended 31 March
2019. |
Ordinary Resolution 2 |
3. To
approve the Remuneration Report for the year ended 31 March
2019. |
Ordinary Resolution 3 |
4. To
re-elect Ms Lorraine Baldry as a Director of the Company. |
Ordinary Resolution 4 |
5. To
re-elect Mr Stephen Bligh as a Director of the Company. |
Ordinary Resolution 5 |
6. To
re-elect Mr Alastair Hughes as a Director of the Company. |
Ordinary Resolution 6 |
7. To
re-elect Mr Graham Basham as a Director of the Company. |
Ordinary Resolution 7 |
8. To
re-appoint KPMG Channel Islands Limited as Auditor of the Company
until the conclusion of the next Annual General Meeting. |
Ordinary Resolution 8 |
9. To
authorise the Board of Directors to determine the Auditor's
remuneration. |
Ordinary Resolution 9 |
10. To receive and
approve the Company's Dividend Policy which appears on page 40 of
the Annual Report. |
|
To consider and, if thought
fit, pass the following Special Resolutions: |
Special Resolution 1 |
11. That the
Company be authorised, in accordance with section 315 of The
Companies (Guernsey) Law, 2008, as amended (the "Companies Law"),
to make market acquisitions (within the meaning of section 316 of
the Companies Law) of ordinary shares in the capital of the Company
("Ordinary Shares"), provided that: |
|
a. the maximum
number of ordinary shares hereby authorised to be purchased shall
be 14.99% of the issued ordinary shares on the date on which this
resolution is passed; |
|
b. the minimum price
which may be paid for an ordinary share shall be £0.01; |
|
c. the maximum price
(exclusive of expenses) which may be paid for an ordinary share
shall be the higher of (i) 105% of the average of the mid-market
value of the ordinary shares for the five business days immediately
preceding the date of the purchase; and (ii) that stipulated by the
regulatory technical standards adopted by the European Union
pursuant to the Market Abuse Regulation; |
|
d. such authority shall
expire at the conclusion of the annual general meeting of the
Company to be held in 2020 unless such authority is varied, revoked
or renewed prior to such date by ordinary resolution of the Company
in general meeting; and |
|
e. the Company may make
a contract to purchase ordinary shares under such authority prior
to its expiry which will or may be executed wholly or partly after
its expiration and the Company may make a purchase of ordinary
shares pursuant to any such contract. |
Special Resolution 2 |
12. That the
Directors of the Company be and are hereby empowered to allot
ordinary shares of the Company for cash as if the pre-emption
provisions contained under Article 13 of the Articles of
Incorporation did not apply to any such allotments and to sell
ordinary shares which are held by the Company in treasury for cash
on a non-pre-emptive basis provided that this power shall be
limited to the allotment and sales of ordinary shares: |
|
a. up to
such number of ordinary shares as is equal to 10% of the
ordinary
shares in issue (including treasury shares) on the date on which
this resolution is passed; |
|
b at a price of
not less than the net asset value per share as close as practicable
to the allotment or sale; |
|
provided that such power shall
expire on the earlier of the conclusion of the annual general
meeting of the Company to be held in 2020 or on the expiry of 15
months from the passing of this Special Resolution, except that the
Company may before such expiry make offers or agreements which
would or might require ordinary shares to be allotted or sold after
such expiry and notwithstanding such expiry the Directors may allot
or sell ordinary shares in pursuance of such offers or agreements
as if the power conferred hereby had not expired. |
|
Close of Meeting. |
By Order of the Board
For and on behalf of
Northern Trust International Fund Administration Services
(Guernsey) Limited
Secretary
20 May 2019
Notes
1. To be passed, an ordinary resolution
requires a simple majority of the votes cast by those shareholders
voting in person or by proxy at the AGM (excluding any votes which
are withheld) to be voted in favour of the resolution.
2. To be passed, a special resolution
requires a majority of at least 75% of the votes cast by those
shareholders voting in person or by proxy at the AGM (excluding any
votes which are withheld) to be voted in favour of the
resolution.
3. A member who is entitled to attend
and vote at the meeting is entitled to appoint one or more proxies
to exercise all or any of their rights to attend and, on a poll,
speak or vote instead of him or her. A proxy need not be a member
of the Company. More than one proxy may be appointed provided that
each proxy is appointed to exercise the rights attached to
different shares held by the member.
4. A form of proxy is enclosed for use
at the meeting. The form of proxy should be completed and sent,
together with the power of attorney or other authority (if any)
under which it is signed, or a notarially certified copy of such
power or authority, so as to reach the Company’s Registrars,
Computershare Investor Services (Guernsey) Limited, at The Pavilions,
Bridgwater Road, Bristol, BS99 6ZY
at least 48 hours before the time of the AGM (excluding any part of
a day that is not a working day).
5. Completing and returning a form of
proxy will not prevent a member from attending in person at the
meeting and voting should he or she so wish.
6. To have the right to attend and vote
at the meeting (and also for the purpose of calculating how many
votes a member may cast on a poll) a member must have his or her
name entered on the register of members not later than 48 hours
before the time of the AGM.
7. Pursuant to Article 41 of the
Uncertificated Securities (Guernsey) Regulations 2009, entitlement to
attend and vote at the meeting and the number of votes which may be
cast thereat will be determined by reference to the register of
members of the Company at close of business on 16 September
2019. Changes to entries in the register of members of the
Company after that time shall be disregarded in determining the
rights of any member to attend and vote at such meeting.
Corporate Information
Registered Address
PO Box 255
Trafalgar Court
Les Banques
St. Peter Port
Guernsey GY1 3QL
Directors (all Non-executive)
Lorraine Baldry (Chairman)
Stephen Bligh
Alastair Hughes
Graham Basham
(All Non – Executive directors)
Investment Manager and Accounting Agent
Schroder Real Estate Investment Management Limited
1 London Wall Place
London
EC2Y 5AU |
Independent Auditor
KPMG Channel Islands Limited
Glategny Court
Glategny Esplanade
St. Peter Port
Guernsey GY1 1WR
Property Valuer
Knight Frank LLP
55 Baker Street
London
W1U 8AN
Joint Sponsor and Brokers
J.P. Morgan Securities plc
25 Bank Street
Canary Wharf
London E14 5JP
Numis Securities Limited
10 Paternoster Square
London EC4M 7LT |
Secretary and Administrator
Northern Trust International Fund Administration Services
(Guernsey) Limited
PO Box 255
Trafalgar Court
Les Banques
St Peter Port
Guernsey GY1 3QL
Depository
Northern Trust (Guernsey) Limited
PO Box 255
Trafalgar Court
Les Banques
St Peter Port
Guernsey GY1 3QL |
Tax Advisors
Deloitte LLP
2 New Street Square
London EC4A 3BZ
Receiving Agent and UK Transfer/Paying Agent
Computershare Investor Services (Guernsey) Limited
Queensway House
Hilgrove Street
St Helier
Jersey
JE1 1ES |
Solicitors to the Company
as to English Law:
Stephenson Harwood LLP
1 Finsbury Circus
London EC2M 7SH
FATCA GIIN
5BM7YG.99999.SL.831 |
as to Guernsey Law:
Mourant Ozannes
Royal Chambers
St Julian’s Avenue
St. Peter Port
Guernsey GY1 4HP
|
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[1]Source: Oxford Economics/Schroders.
2Like-for-like with MSCI i.e. ignoring standard
acquisition costs.
[3] Note Central London is defined by MSCI as City, Mid-Town,
West End and Inner London.
[4] The Company listed in July
2004.
[5] Loan balance divided by property value as at 31 March 2019.
[6] For the quarter preceding the Interest Payment Date (‘IPD’),
((rental income received – void rates, void service charge and void
insurance)/interest paid).
[7] For the four quarters following the IPD, ((rental income to
be received – void rates, void service charge and void
insurance)/interest paid).
[8] Fixed total interest rate for the loan term.
[9] Facility drawn at 31 March
2019 from a total facility of £52.5 million.
[10] Total interest rate as at 31 March
2019 comprising 3 months LIBOR of 0.82% and the margin of
1.6% at an LTV below 60% and a margin of 1.90% above 60% LTV.
[11] This covenant drops to 60% after year three of the
five-year term.
[12] Mixed Use presents 25% of energy consumption at City Tower,
Manchester (reflecting the
Company’s 25% ownership share).
[13] Mixed Use presents 25% of energy consumption at City Tower,
Manchester (reflecting the
Company’s 25% ownership share).
[14] Consumption relates to external lighting only for a single
industrial, distribution warehouse, which underwent an extensive
LED lighting upgrade during the reporting period.
[15] Mixed Use presents 25% of energy consumption at City Tower,
Manchester (reflecting the
Company’s 25% ownership share).
[16] This reduction is due to a number of factors, including
water leaks that were reported to have taken place in 2017 and
occupancy changes between the reported periods.
[17] This increase is due to a cleaning contractor using a jet
washer, which was not previously used.
[18] Mixed Use presents 25% of energy consumption at City Tower,
Manchester (reflecting the
Company’s 25% ownership share).
[19] Mixed Use presents 25% of energy consumption at City Tower,
Manchester (reflecting the
Company’s 25% ownership share).
[20] Mixed Use presents 25% of energy consumption at City Tower,
Manchester (reflecting the
Company’s 25% ownership share).