THE INFORMATION CONTAINED IN THIS ANNOUNCEMENT IS RESTRICTED AND IS NOT FOR PUBLICATION, RELEASE OR DISTRIBUTION IN THE UNITED STATES OF AMERICA, ANY MEMBER STATE OF THE EUROPEAN ECONOMIC AREA, CANADA, AUSTRALIA, JAPAN OR THE REPUBLIC OF SOUTH AFRICA.

 

30 September 2021

ALTERNATIVE INCOME REIT PLC

(the "Company" or the "Group")

Annual Report and Financial Statements for the year ended 30 June 2021

The Board of Directors of Alternative Income REIT plc (ticker: AIRE), the owner of a diversified portfolio of UK commercial property assets predominantly let on long leases, is pleased to announce its annual report and financial statements for the year ended 30 June 2021.

 

Financial Highlights

·    Net Asset Value ('NAV') of £68.89 million, and of 85.58 pence per share ('pps') as at 30 June 2021 (30 June 2020: £67.29 million and 83.58 pps).

·   Operating profit of £6.31 million (before fair value changes) for the year (year ended 30 June 2020: £5.80 million).

·    Profit before tax of £5.57 million, profit per share of 6.92 pps for the year (year ended 30 June 2020: loss before tax of £5.05 million, loss per share of 6.27 pps, primarily due to write-downs of property valuations).

·      EPRA Earnings per share¹ ('EPS') for the year were 5.55 pps (year ended 30 June 2020: 5.42 pps).

·    Adjusted EPS¹ for the year, which reflect cash earnings, were 5.07 pps with dividend cover of 99% (year ended 30 June 2020: 4.25 pence per share; dividend cover of 85%).

·    Total dividends of 5.14 pps declared in respect of the year (year ended 30 June 2020: 5.0 pps), underlining the Company's strong rent collection and cash flows. The Board has reaffirmed its target annual dividend of 5.5 pence per share, with full dividend cover expected, all else being equal, by September 2022.

·    The price of the Company's Ordinary Shares on the Main Market of the London Stock Exchange was 71.00 pps as at 30 June 2021 (30 June 2020: 53.50 pps).

·     As at 30 June 2021, the Group had a £41.0 million loan facility with Canada Life Investments and was geared to 36.3% of the Gross Asset Value ('GAV') (30 June 2020: £41.0 million, gearing of 37.0%).

·    For the year ended 30 June 2021, non-property operating expenses were £0.88 million (30 June 2020: £1.49 million), representing a 41% reduction, or 35% reduction after allowing for the period during which M7 did not charge an investment advisory fee and as a result of the Board taking a disciplined approach to cost management.

·      Ongoing charges of 1.27% as at 30 June 2021 (30 June 2020: 2.22%).

 

Operational Review

·     To date, the Group has collected 97.8% of all rent demanded since the beginning of the COVID-19 pandemic, with the remaining 2.2% to be collected through payment plans throughout 2021 and 2022; further information can be found in the Investment Adviser's Report.

·      As at 30 June 2021, the Group's property portfolio had a fair value of £109.23 million across 19 properties (30 June 2020: £104.76 million, 19 properties including the Wet 'n' Wild Water Park held for sale). As at 30 June 2021, when looking at the core 18 assets that have been held over the last 12 months, the property portfolio had a fair value of £104.08 million (30 June 2020: £101.91 million). 

·    Weighted average unexpired lease term ('WAULT') of 17.8 years to the earlier of break and expiry (30 June 2020: 19.5 years) and 19.8 years to expiry (30 June 2020: 21.6 years).

·    Rent recognised during the year was £7.21 million (30 June 2020: £7.35 million), of which, £0.49 million was accrued debtors for the combination of minimum uplifts and rent-free period (30 June 2020: accrued debtors of £1.28 million). The number of tenants as at 30 June 2021 was 22 (30 June 2020: 21).

·      87.0% of the Group's income is inflation linked to Retail Price Index ('RPI') or Consumer Price Index ('CPI').

·   As at 30 June 2021, the portfolio had gross passing rental income of £6.97 million (30 June 2020: £6.79 million).

·     As at 30 June 2021, the asset valuations and rental income of the 17 properties secured to Canada Life would have needed to fall by 18% and 24% respectively before breaching the Loan to Value and Income Cover Cash Trap covenants respectively.

·      EPRA Net Initial Yield ('NIY') of 5.94% as at 30 June 2021 (30 June 2020: 5.72%)².

 

Post balance sheet events

On 2 August 2021, the Board declared an interim dividend of 1.64 pence per share in respect of the period from 1 April 2021 to 30 June 2021. This was paid on 31 August 2021 to shareholders on the register as at 13 August 2021. The ex-dividend date was 12 August 2021.

 

All references to page numbers are in reference to the Annual Report which will be available in due course at: https://www.alternativeincomereit.com/investors/documents/2021 

Alan Sippetts, Non-Executive Chairman of Alternative Income REIT plc, comments:

"The fundamentals of certain property sectors in the UK appear robust and the Group's portfolio has proved resilient throughout the challenges of the COVID-19 pandemic, underpinned by robust rent collection and over 87% of our leases with inflation linked upwards only rent reviews. Furthermore, the Company's share price has substantially increased by 32.7% to 71 pence as at 30 June 2021 (as at 30 June 2020: 53.5 pence per share) narrowing the discount to our NAV.

 

We are pleased therefore that we were able to declare an increased dividend to shareholders, which is testament to the Board's confidence in the long-term value we can deliver to our shareholders and underlines the continuing strength of the Group's collection of rent from our 100% let portfolio. Taken together with our robust balance sheet, much reduced overhead and with 87% of our portfolio's leases with inflation linked upwards only rent reviews, the Board remains confident that the Group will provide attractive total returns to our shareholders principally in the form of fully covered dividends but also through other opportunistic initiatives, supported by our Investment Adviser."

 

Notes

1.   See Note 8 of the Consolidated Financial Statements, glossary on pages 91 to 92 of the Annual Report (AR) for definitions and abbreviations and page 8 for Key Performance Indicators and their definitions.

2.    EPRA Net Initial Yield is the annualised rental income based on the cash rents passing at the balance sheet date, less non-recoverable property operating expenses, divided by the market value of the property, increased with purchasers' costs estimated by the Group's External Valuers. A reconciliation can be found on page 89 of the AR.

 

ENQUIRIES

Alternative Income REIT PLC Alan Sippetts - Chairman	via Maitland/AMO below
M7 Real Estate Ltd Richard Croft	+44 (0)20 3657 5500
Panmure Gordon (UK) Limited	+44 (0)20 7886 2500
Alex Collins
Tom Scrivens
Chloe Ponsonby
Maitland/AMO (Communications Adviser)	+44(0) 7747 113 930
James Benjamin	[email protected]

 

The Company's LEI is 213800MPBIJS12Q88F71.

 

Further information on Alternative Income REIT plc is available at www.alternativeincomereit.com¹

 

NOTES

Alternative Income REIT PLC aims to generate a sustainable, secure and attractive income return for shareholders from a diversified portfolio of UK property investments, predominately in alternative and specialist sectors. The majority of the assets in the Group's portfolio are let on long leases which contain inflation linked rent review provisions.

 

The Company's investment adviser is M7 Real Estate Limited ("M7"). M7 is a leading specialist in the pan-European, regional, multi-tenanted real estate market. Majority owned by its senior managers, it has over 200 employees in 14 countries across Europe. The team manages over 835 properties with a value of circa €5.1 billion.

1   Neither the content of the Company's website, nor the content on any website accessible from hyperlinks on its website or any other website, is incorporated into, or forms part of, this announcement nor, unless previously published on a Regulatory Information Service, should any such content be relied upon in reaching a decision as to whether or not to acquire, continue to hold, or dispose of, securities in the Company.

 

CHAIRMAN'S STATEMENT

Overview

I am pleased to present the annual audited results of Alternative Income REIT plc (the 'Company') together with its subsidiaries (the 'Group') for the financial year ended 30 June 2021, my first as Chairman.

 

In March 2021, when it was announced that I would assume the role of Chairman, it appeared that the UK vaccination programme had begun to turn the tide on the challenges of the COVID-19 pandemic. The Group's portfolio has proved resilient throughout the challenges of the COVID-19 pandemic. We are pleased therefore that we were able to declare an increased dividend to shareholders, underlining the continuing strength of the Group's collection of rent from our 100% let portfolio. Taken together with our robust balance sheet, much reduced overhead and with 87% of our portfolio's leases with inflation linked upwards only rent reviews, the Board remains confident that the Group will provide attractive total returns to our shareholders principally in the form of fully covered dividends.

 

I would like to take the opportunity to thank my predecessor Steve Smith for his significant contribution to the Company since its IPO in June 2017. He left the business and portfolio well positioned for the better times that we expect to lie ahead, and he departed with our best wishes. At the same time as my own appointment as Chairman, we also welcomed Adam C Smith to the Board as a Non-Executive Director. Adam's appointment followed a request from the Company's largest shareholder, Glenstone Property plc, for representation on the Board. Adam has extensive property and investment experience and I welcome the constructive contribution Adam has made. It also followed open and transparent engagement with shareholders following the failure to carry the resolution to adopt the proposed changes to the Investment Policy at the 2020 AGM.

 

The Board has delivered on the commitments it made following our earlier engagement with shareholders, focusing on reducing the Group's operating cost base, pursuing other initiatives within the Group's current portfolio of assets, while seeking to maximise rent collection, income distribution and total returns to shareholders.

 

Further, as announced on 29 September 2021, following a comprehensive and thorough recruitment process supported by external consultants, we have also welcomed Stephanie Eastment to the Board as a Non-Executive Director and Audit Chair with effect from 1 October 2021. As part of a planned succession process, Jim Prower will resign as a Non-Executive Director and Audit Chair on 1 October 2021. I would like to express my sincere thanks to Jim for his significant and invaluable contribution, insights and unwavering commitment since IPO, and he leaves with the Board's very best wishes for the future. 

 

During the year, we completed the disposal of the Wet 'n' Wild Water Park, North Shields ("Wet 'n' Wild"). The disposal was at a significant premium to cost and book value, and subsequently we redeployed the proceeds through the acquisition of the Droitwich Spa Retail Park, at a yield of 7.95% which was materially higher than both the 6.0% exit yield on Wet 'n' Wild and the Group's 5.76% portfolio valuation yield at the time. Also, importantly, it provided the potential to deliver excellent long term returns for shareholders. Following that acquisition, the Group has been fully invested and holds a diverse portfolio of UK commercial property assets with a weighted average unexpired lease term of 17.8 years (30 June 2020: 19.5 years) to the earlier of break and expiry and 19.8 years (30 June 2020: 21.6 years) to expiry.

 

That acquisition was the first introduced by our Investment Adviser, M7 Real Estate Limited ("M7"). Since their initial appointment in May 2020, the Board has been pleased with the performance of M7 and on 1 April 2021 extended the Investment Advisory Agreement under which M7 provide the Group with investment advice, fund accounting and administration services. The agreement has provided the Group with certainty and stability of high quality services and advice in a cost-effective manner. M7 and our Property Manager, Mason Owen, also undertook several asset management initiatives during the year that underlined the Group's supplemental strategy of value enhancement led by active management. Further information can be found below. 

 

A year ago, we said that we would substantially reduce costs and these results demonstrate the delivery of these actions. Year on year, all non-property operating expenses, together with auditor fees were reduced by £616,000 a reduction of 41%. This overall reduction included a period during which M7 did not charge an investment advisory fee, which when added back would produce a like-for-like reduction of 35%.  Despite the environment caused by the COVID-19 pandemic and the negative impact upon rent collection seen across the industry, in aggregate dividends of 5.14 pence per share have been paid as Property Income Distribution in respect of the year ended 30 June 2021, representing an increase of 2.8% against the prior financial year. For the year ended 30 June 2021, adjusted cash earnings were 5.07 pence per share with dividend cover of 99% (year ended 30 June 2020: 4.25 pence per share; dividend cover of 85%). Our focus remains on generating a progressive cash covered dividend from the Group's fully invested portfolio. Our recent dividend increase is testament to the Board's confidence in the long-term value we can deliver to our shareholders. 

 

The actions undertaken in the past year reaffirm the Board's confidence that the Group is well positioned for the opportunities ahead. Our continued strong rent collection from our 100% let portfolio, robust balance sheet, well controlled overheads and with 87% of our portfolio's leases with inflation linked upwards only rent reviews give us confidence that the Group can provide attractive total returns to our shareholders.

 

Portfolio Performance

The near full deployment of the Group's funds for the whole year resulted in headline rent of circa £7.21 million during the year (30 June 2020: £7.35 million), of which, £0.49 million was accrued debtors for the combination of minimum contracted uplifts and rent-free periods (30 June 2020: accrued debtors of £1.28 million).

 

As at 30 June 2021, the Group's property portfolio had a fair value of £109.23 million (30 June 2020: £104.76 million). The portfolio had a net initial yield of 5.93% (30 June 2020: 5.77%), a WAULT to the first break of 17.8 years (19.8 years to expiry).

 

Financial Results

	Year ended	Year ended
	30 June 2021	30 June 2020
Operating profit before fair value changes [£'000]	6,311	5,803
Operating profit/(loss) [£'000]	6,993	(3,608)
Profit/(loss) before tax [£'000]	5,572	(5,050)
Profit/(loss) per share - basic and diluted [pence]	6.92	(6.27)
EPRA EPS - basic and diluted [pence]	5.55	5.42
Adjusted EPS [pence]	5.07	4.25
Net Asset Value per share [pence]	85.58	83.58
EPRA Net Asset Value per share [pence]	85.58	83.58

 

The Group's operating profit before fair value changes for the financial year was £6.31 million (30 June 2020: £5.80 million).

 

Basic profit per share for the financial year was 6.92 pence (30 June 2020: loss per share: 6.27 pence).  Adjusted EPS, as calculated in Note 8, for the financial year were 5.07 pence (30 June 2020: 4.25 pence).

 

Under European Public Real Estate Association ('EPRA') methodology, EPS for the financial year was  5.55 pence (30 June 2020: 5.42 pence). A full list of EPRA performance figures can be found below.

 

The audited NAV per share as at 30 June 2021 was 85.58 pence (30 June 2020: 83.58 pence).

 

The Group has ongoing charges of 1.27% (30 June 2020: 2.22%) for the financial year, being a measure of annualised fund level operating costs for the year as a percentage of NAV. The EPRA cost ratio for the financial year was 18.4% (30 June 2020: 21.1%).

 

Financing

As at 30 June 2021, the Group had fully utilised its £41.0 million loan facility with Canada Life Investments (30 June 2020: fully utilised). The weighted average interest cost of the Group's facility is 3.19% and the loan is repayable on 20 October 2025.  If repayment is made prior to this date, and the corresponding Gilt rate is lower than the contracted rate of interest, then the loan terms provide for a significant early redemption fee¹.

 

Dividends

The Group declared two interim dividends of 1.25 pps each, one interim dividend of 1.00 pps and a fourth interim dividend of 1.64 pps in respect of the financial year, totalling 5.14 pps (year ended 30 June 2020: four dividends totalling 5.00 pps), representing an increase of 2.8% against the prior financial year and ahead of inflation for the period. This underlines the Company's strong rent collection and cash flows. The Board has reaffirmed its target annual dividend of 5.5 pence per share, with full dividend cover expected, all else being equal, by September 2022.

 

In light of the circumstances affecting global economies and markets and the Group's rental collection levels the Board considered it prudent to reduce the dividend for the first three quarter rent payments of the year.  For the quarter ended 30 June 2021, the Board declared an increased dividend on the previous three quarters of 1.64 pps, underlining the continuing strength of the Group's collection of rent from our 100% let portfolio.

 

Outlook

The fundamentals of certain property sectors in the UK appear robust and the Group's portfolio has proved resilient throughout the challenges of the COVID-19 pandemic, underpinned by robust rent collection and over 87% of our leases with inflation linked upwards only rent reviews. Furthermore, the Company's share price has substantially increased by 32.7% to 71 pence as at 30 June 2021 (as at 30 June 2020: 53.5 pence per share) narrowing the discount to our NAV.

 

As we look ahead, the Board remains confident that the Group will provide attractive total returns to our shareholders. This will principally take the form of fully covered dividends but also through other opportunistic initiatives, supported by our Investment Adviser.

 

I would like to thank my fellow shareholders, Directors, the Investment Adviser and our other advisers and service providers who have provided professional support and services to the Group.

 

Alan Sippetts

Chairman

29 September 2021

 

Note

1.     As at 30 June 2021, the redemption fee would have been £3,467,127 (30 June 2020: £5,261,651).

 

Business Model and Strategy

Introduction

Alternative Income REIT plc is a real estate investment trust listed on the premium segment of the Official List of the Financial Conduct Authority ('FCA') and traded on the Main Market of the London Stock Exchange. As part of its business model and strategy, the Group has maintained and intends to maintain its UK REIT status.

 

Investment Objective

The investment objective of the Group is to generate a secure and predictable income return, sustainable in real terms, whilst at least maintaining capital values, in real terms, through investment in a diversified portfolio of UK properties, in alternative and specialist sectors.

 

Investment Policy

In order to achieve the investment objective, the Group invests in freehold and long leasehold properties across the whole spectrum of the UK property sector, but with a focus on alternative and specialist real estate sectors. Examples of alternative and specialist real estate sectors include, but are not limited to, leisure, hotels, healthcare, education, logistics, automotive, supported living and student accommodation.

 

In the event of a breach of the investment policy or the investment restrictions set out below, the AIFM, as advised by the Investment Adviser, shall inform the Board upon becoming aware of the same and, if the Board considers the breach to be material, notification will be made to a Regulatory Information Service and the AIFM, as advised by the Investment Adviser, will look to resolve the breach.

 

Any material change to the investment policy or investment restrictions of the Group may only be made with the prior approval of shareholders.

 

Investment Strategy

The Group focuses on properties which can deliver a secure income and preserve capital value, with an attractive entry yield. The Group has an emphasis on alternative and specialist property sectors to access the attractive value and capital preservation qualities which such sectors currently offer.

 

The Group will supplement this core strategy with active asset management initiatives for certain properties.

 

Subject at all times to the AIFM's (as advised by the Investment Adviser) assessment of their appeal and specific asset investment opportunities, permitted sectors include, but are not limited to the following: Healthcare; Leisure; Hotels and serviced apartments; Education; Automotive; Car parks; Residential; Supported living; Student accommodation; Logistics; Storage; Communications; Supermarkets; and, subject to the limitations on traditional sector exposures below, Offices; Shopping centres; Retail and retail warehouses; and Industrial.

 

The Group is not permitted to invest in land assets, including development land which does not have a development agreement attached, agriculture or timber.

 

The focus will be to invest in properties to construct a portfolio with the following minimum targets:

·      a WAULT, at the time of investment, in excess of 18 years;

·     at least 85% of the gross passing rent will have leases with rent reviews linked to inflation (RPI or CPI) at the time of investment;

·    investment in properties which typically have a value, at the time of investment, of between £2 million and £30 million;

·      at least 70% of the properties will be in non-traditional sectors;

·      less than 30% of the properties will be in the traditional sectors of Retail, Industrial and Offices; and

·      over 90% of properties will be freehold or very long leasehold (over 100 years).

 

Once GAV is £250 million or greater, future investments will be made to target a portfolio with at least 80% of the properties in non-traditional sectors and less than 20% of the properties in traditional sectors.

 

Whilst each acquisition will be made on a case-by-case basis, it is expected that properties will typically offer the following characteristics:

·      existing tenants with strong business fundamentals and profitable operations in those locations;

·      depth of tenant/operator demand;

·      alternative use value;

·      current passing rent close to or below rental value; and

·      long-term demand drivers, including demographics, use of technology or built-for-purpose real estate.

 

The Group may invest in commercial properties or portfolios of commercial property assets which, in addition, include ancillary or secondary utilisations.

 

The Group does not intend to spend any more than 5% of the NAV in any rolling 12-month period on (a) the refurbishment of previously occupied space within the existing Portfolio, or (b) the refurbishment of new properties acquired with vacant units.

 

The Group may invest in corporate and other entities that hold property and the Group may also invest in conjunction with third party investors.

 

Investment Restrictions

GAV of less than £250 million	GAV of £250 million or greater
Investment in a single property limited to 15% of GAV (measured at the time of investment).	Investment in a single property limited to 10% of GAV (measured at the time of investment).
The value of assets in any sub-sector in one geographical region, at the time of investment, shall not exceed 15% of GAV.	Investments will be made with a view to reducing the maximum exposure to any sub-sector in one geographical region to 10% of GAV.
The value of assets in any one sector and sub-sector, at the time of investment, shall not exceed 50% of GAV and 25% of GAV respectively.
Exposure to a single tenant covenant will be limited to 15% of GAV.
The Group may commit up to a maximum of 10% of its GAV (measured at the commencement of the project) in development activities.
Investment in unoccupied and non-income producing assets will, at the time of investment, not exceed 5% of Estimated Rental Value ('ERV').
The Group will not invest in other closed-ended investment companies.
If the Group invests in derivatives for the purposes of efficient portfolio and cash management, the total notional value of the derivatives at the time of investment will not exceed, in aggregate, 20% of GAV.

The Group will invest and manage its assets with the objective of spreading risk through the above investment restrictions.

 

When the measure of GAV is used to calculate the restrictions relating to (i) the value of a single property and (ii) the value of assets in any sub-sector in one geographical region, it will reflect an assumption that the Group has drawdown borrowings such that these borrowings are equal to 30% of GAV.

 

Borrowings

The Group has utilised borrowings to enhance returns over the medium term. Borrowings have been utilised on a limited recourse basis for each investment on all or part of the total Portfolio and will not exceed 40% of GAV (measured at drawdown) of each relevant investment or of the portfolio.

 

Key Performance Indicators

KPI AND DEFINITION	RELEVANCE TO STRATEGY	PERFORMANCE
1. Net Initial Yield ('NIY')		5.93%
Annualised rental income based on the cash rents passing at the balance sheet date, less non-recoverable property operating expenses, divided by the market value of the property, increased with purchasers' costs estimated by the Group's External Valuers.	The NIY is an indicator of the ability of the Company to meet its target dividend after adjusting for the impacts of leverage and deducting operating costs.	At 30 June 2021 (30 June 2020: 5.77%)
2. Weighted Average Unexpired Lease Term ('WAULT') to break and expiry		17.8 years to break and 19.8 years to expiry
The average lease term remaining to expiry across the portfolio, weighted by contracted rent.	The WAULT is a key measure of the quality of the portfolio. Long leases underpin the security of our future income.	At 30 June 2021 (30 June 2020: 19.5 years to break and 21.6 years to expiry)
3. Net Asset Value ('NAV')		£68.89 million (85.58 pence per share ('pps'))
NAV is the value of an entity's assets minus the value of its liabilities.	Provides stakeholders with the most relevant information on the fair value of the assets and liabilities of the Group.	At 30 June 2021 (30 June 2020: £67.29 million, 83.58 pps)
4. Dividend		5.14 pps
Dividends declared in relation to the period are in line with the stated dividend target as set out in the Prospectus at IPO. The Company targets a dividend of 5.50 pence per Ordinary Share per annum once fully invested and leveraged.	The Company seeks to deliver a sustainable income stream from its portfolio, which it distributes as dividends.	For the year ended 30 June 2021 (30 June 2020: 5.00 pps)
5. Adjusted EPS		5.07 pps
Adjusted EPS from core operational activities, as adjusted for non-cash items. A key measure of a company's underlying operating results from its property rental business and an indication of the extent to which current dividend payments are supported by earnings. See Note 8 to the Consolidated Financial Statements.	This reflects the Company's ability to generate earnings from the portfolio which underpins dividends.	For the year ended 30 June 2021 (30 June 2020: 4.25 pps)
6. Leverage (Loan-to-GAV)		36.30%
The proportion of the Group's property that is funded by borrowings.	The Group utilises borrowings to enhance returns over the medium term. Borrowings will not exceed 40% of GAV (measured at drawdown).	At 30 June 2021 (30 June 2020: 37.0%)

 

EPRA Unaudited Performance Measures

Detailed below is a summary table showing the EPRA performance measures in the Group.

 

MEASURE AND DEFINITION	PURPOSE	PERFORMANCE
EPRA NIY		5.94 %
Annualised rental income based on the cash rents passing at the balance sheet date, less non-recoverable property operating expenses, divided by the market value of the property, increased with (estimated) purchasers' costs.	A comparable measure for portfolio valuations. This measure should make it easier for investors to judge themselves, how the valuation of two portfolios compare.	At 30 June 2021 (30 June 2020: 5.72%)
EPRA 'Topped-up' NIY		6.95 %
This measure incorporates an adjustment to the EPRA NIY in respect of the expiration of rent-free periods (or other unexpired lease incentives such as discounted rent periods and step rents).	A comparable measure for portfolio valuations. This measure should make it easier for investors to judge themselves, how the valuation of two portfolios compare.	At 30 June 2021 (30 June 2020: 6.97%)
EPRA NAV		£68.89 million/85.58 pps
Net asset value adjusted to include properties and other investment interests at fair value and to exclude certain items not expected to crystallise in a long-term investment property business.	Makes adjustments to IFRS NAV to provide stakeholders with the most relevant information on the fair value of the assets and liabilities within a real estate investment company with a long-term investment strategy.	At 30 June 2021 (30 June 2020: £67.29 million/83.58pps)
EPRA Earnings/EPS		£4.47 million/5.55 pps
Earnings from operational activities.	A key measure of a company's underlying operating results and an indication of the extent to which current dividend payments are supported by earnings.	EPRA earnings for the year ended 30 June 2021 (30 June 2020: £4.36 million/ 5.42pps)
EPRA Vacancy		0.00 %
Estimated Rental Value ('ERV') of vacant space divided by ERV of the whole portfolio.	A 'pure' percentage measure of investment property space that is vacant, based on ERV.	EPRA Vacancy as at 30 June 2021 (30 June 2020: 0.00%)
EPRA Cost Ratio		18.4 %
Administrative and operating costs (including and excluding costs of direct vacancy) divided by gross rental income.	A key measure to enable meaningful measurement of the changes in a company's operating costs.	EPRA Cost Ratio for the year ended 30 June 2021 (30 June 2020: 21.1%)
EPRA Net Reinstatement Value		£72.53 million/90.09pps
The EPRA NRV adds back the purchasers' costs deducted from the EPRA NAV and deducts the break cost of bank borrowings.	A measure that highlights the value of net assets on a long-term basis.	EPRA NRV for the year ended 30 June 2021 (30 June 2020: £69.88million/86.81pps)
EPRA Net Tangible Assets		£65.43 million/81.27pps
The EPRA NTA deducts the break cost of bank borrowings from the EPRA NAV.	A measure that assumes entities buy and sell assets, thereby crystallising certain levels of deferred tax liability. The Group has UK REIT status and as such no deferred tax is required to be recognised in the accounts.	EPRA NTA for the year ended 30 June 2021 (30 June 2020: £62.02 million/77.05pps)
EPRA Net Disposal Value		£65.43 million/81.27pps
The EPRA NDV deducts the break cost of bank borrowings from the EPRA NAV.	A measure that shows the shareholder value if assets and liabilities are not held until maturity.	EPRA NDV for the year ended 30 June 2021 (30 June 2020: 62.02 million/77.05pps)

 

EPRA NNNAV is equal to EPRA NAV as there are no adjusting items. As such this measure has not been presented.

 

Investment Adviser's Report

Introduction

 

The previous Investment Adviser's Report spoke in detail about changing the Group's investment principles, and whilst these remain closely monitored, the 12 months to June 2021 presented other obstacles, primarily COVID-19.

 

The current 19 assets, following the sale of Wet 'n' Wild on 31 July 2020 and the acquisition of Droitwich Spa Retail Park on 2 December 2020, continue to provide investors with long high yielding income, on average of c.18 years of which c.87% is linked to inflationary growth, adding 1.64% to income profile this year. The portfolio also provides investors with exposure to a diverse range of alternative investment sectors.

 

Through continued asset management and engagement with tenants, the portfolio has shown resilience to the impact of the COVID-19 pandemic and national lockdowns experienced by others. As at the June 2021 quarter day, 20% of the tenants are contractually invoiced monthly, whilst the remaining 80% are invoiced quarterly. Since the beginning of the COVID-19 pandemic, which for the purposes of this report is assumed to be 25 March 2020 (quarter day), the Group has collected 97.8% of all rent demanded, with the remaining 2.2% to be collected through payment plans over the next 12 months as outlined below.

 

During the year the Group completed the disposal of Wet 'n' Wild, North Shields at a significant premium to book value, and subsequently the proceeds were reinvested with the acquisition of Droitwich Spa Retail Park, at a yield which was materially higher than both the 6.0% exit yield on Wet 'n' Wild and the Group's 5.76% portfolio valuation yield at the time. This acquisition was the first introduced by M7 since appointment in May 2020. Following the performance by M7 in the delivery of services to the Company, the Board made the decision on 1 April 2021 to extend the Investment Advisory Agreement under which M7 will continue to provide the Company with investment advice, fund accounting and administration services.

 

The portfolio's resilience over the past year and its improving returns gives M7 optimism as to future performance.

 

Market Outlook

 

UK Economic Outlook

 

The beginning of 2021 has seen the UK agree a deal for parting ways with EU and work its way through its third national lockdown. Moreover, with the significant achievements of the vaccination programme, the UK is gradually following the government's steps for reopening the economy. Recent data shows improvement in retail spending and there are now renewed expectations for a medium-term recovery.

 

In early Q2 2021, it was reported that GDP growth figures supported a faster than expected return to normality due to large parts of the economy reopening and a successful vaccination programme. Economic growth is forecast to continue an upward trend and was projected to result in an 8.0% year-on-year expansion in GDP in 2021. However, the rapid economic recovery from this year's COVID-19 restrictions hit the buffers in July as GDP rose by 0.1% month on month (m/m). That was weaker than the 1.0% m/m increase in June and was smaller than the consensus forecast of a 0.7% m/m gain.  

 

Government stimulus, particularly through the furlough scheme, has been successful in softening the economic blow, with unemployment and the reduction in UK household income both less severe than expected. A substantial number of people have also left the labour force in the last year, which has made the impact appear less acute. As of June 2021, unemployment stands at 4.7%, it is likely that this will increase as the furlough scheme approaches its September 2021 end date. Nevertheless, employment is set to recover quicker than it has previously following other recessions since the economy's potential has not been permanently damaged.

 

The latest inflation data reported a jump in CPI from 2.1% in May to 2.5% in June 2021. The level of increase since Q1 2021 exceeded economists' expectations. However, they did project potential spikes as the economy reopened and as energy related effects took place. Inflation is expected to peak at 4.0% by the end of the year but will not stabilise to pre-pandemic levels until 2023, when inflation is set to be supported by a robust economic recovery. We have seen a strong monetary stimulus with interest rates decreasing to 0.1% and high levels of QE set to take place until the end of 2021. Capital Economics does not anticipate that the BoE will shift from the current interest rates at least until the end of 2022.¹

 

UK Real Estate Outlook

 

The collection of commercial property rents, as calculated seven days after the June 2021 Quarter due date, reached the highest level achieved for any quarter during the pandemic so far at 66.5%². This compares to a figure of 50.7% for the same period in 2020 and 60.5% for the March 2021 quarter.

 

Overall, the alternative and long-income space has fared better than expected during the global pandemic. Whilst this is in part due to various fiscal support measures implemented by the UK government, it does also stand testament to the secure and stable income streams that investment in long income and alternatives sectors offer.

 

Despite the headwinds witnessed during the last 18 months, occupancy and rent collection in the living sector have been largely resilient. Whereas, the student housing, hospitality and leisure sectors have been more severely affected, resulting from lockdown measures and restrictions on international travel. There is, however, a renewed sense of optimism surrounding these sectors, driven largely by increasing vaccination rates; however, progress is mixed.

 

The latest investment volume data for 2021 demonstrates a stable recovery, with the monthly figure now within 10.0% of the five-year average. This is particularly encouraging given that the year end volume for 2020 (£42.7bn) was 15.0% below the 2019 figure and the lowest annual volume since 2012. The investment volume for 2020 was largely buoyed by the fourth quarter, which contributed £19.4bn, a 6.0% increase compared Q4 2019.³

 

The 'All Property Yield' as of May 2021 is ca. 5.2% compared to ca. 5.3% at the same time last year. This has largely been driven by e-commerce which continues to strengthen, propelling demand for multi-let industrial, distribution warehouses and retail warehouses. This in turn has resulted in hardening of transaction yields and growth in investment volumes. Specifically, multi-let industrial has seen 100bps compression compared with the pre-lockdown prime yield, now standing at 3.5% (in line with west end offices). Office and hospitality property transactions remain scarce but reportedly there are signs of recovery with prime yields at 5.0% and 5.3% for provincial offices and regional pubs respectively. Shopping centres, however, remain under pressure having seen yields move out by 150bps year on year to 6.8%.⁴

 

It is expected that investment activity will recuperate in the second half of 2021, following the easing of lockdown restrictions. Additionally, according to RICS commercial survey (Q1 2021) most surveyors reported a rise in investment enquiries. However, factors such as debt availability will likely weigh on investors as lenders will become more cautious.⁵

 

The outlook for 2021 investment volumes stands just above £50.0bn, which is a ca. 20.0% increase from 2020. It is expected that upcoming investment themes will include the rebalancing of portfolios away from underperforming sectors such as retail and secondary offices. In return, investors are increasingly targeting the alternative sectors, such as life sciences and data centres. These specialised sectors have proved to be resilient throughout the COVID-19 pandemic. Globally, investors see the UK as a leader in life sciences and thus, they are increasingly keen to deploy capital. Data centres are also receiving increased attention, underpinned by demand for flexible work patterns and cloud computing. Lastly, there is also a growing interest from investors in operational assets and the living sector.⁶

 

A global pandemic, Brexit transition and ongoing economic slowdown has seen central banks keep interest rates low. Despite economic uncertainty, the UK property market continues to deliver healthy spreads over government bond yields, both in absolute terms and relative to other markets. This, coupled with post-pandemic inflationary pressure is further securing the appeal of index-linked income, as well as growth sectors linked to social infrastructure such as distribution, last-mile logistics, supermarkets, and the living sector.

 

Portfolio Activity during the Year

 

The following asset management initiatives were undertaken during the year:

·    Rent Reviews: A total of nine rent reviews took place during the period with a combined uplift of £106,372 representing a 1.64% increase in contracted rent across the portfolio.

·      Droitwich: Droitwich Spa Retail Park was acquired for £4.75 million on 2 December 2020.

·   Dudley: Licence to Alter is imminent in respect of a major investment by Meridian Steel in their Dudley operation. They are spending circa £3.5m on new machinery and cranes.

·    Huddersfield: Network Rail are proposing electrification of the adjacent rail track. Part of the property, adjacent to the road, is identified for compulsory purchase.

·    Pocket Nook Estate, St Helens: Discussions are ongoing with Boulting Group for a lease extension of 3/5 years on expiry of their lease in April 2022 at an increased rent. Terms have also been agreed for Boulting Group to take occupation of part of Mr Tox's yard, following his part surrender. Ayrshire Metals have closed their operation in St Helens. They have limited alienation provisions so a joint disposal together with a split of the marriage value is being negotiated.  

·    Travelodge, Swindon: Travelodge Hotels Limited filed for a CVA and creditor and shareholder meetings were held on 19 June 2020 with landlords voting in favour of the proposal. Under the CVA, Travelodge Swindon is a Category B hotel and as such 25% of the Q2, Q3 and Q4 2020 rent and 70% of the 2021 rent will be payable. As part of the CVA the landlord has been able to extend the lease by 36 months. 100% rent becomes due from 1 January 2022. Work started in September 2020 to replace the combustible cladding elements uncovered on the external walls of the top floors and rear lift core of the Travelodge Hotel, with non-combustible replacements and to remediate the fire/smoke stopping. The work completed in December 2020 at a cost (including professional fees) of c.£1.1 million. The cladding was installed when the property was extended in 2007 and both the architect and cladding sub-contractor involved are being pursued for reimbursement of the costs.

·      North Shields, Wet 'n' Wild was sold for £3 million on 31 July 2020.

 

Financial Results

 

Net rental income earned from the portfolio for the year was £7.21 million excluding service charge and direct recharge (30 June 2020: £7.35 million), contributing to an operating profit before fair value changes of £6.31 million (30 June 2020: £5.80 million).

 

The portfolio has seen a gain of £0.68 million in fair value of investment property during the year (30 June 2020: loss of £9.41 million).⁷

 

Administrative and property operations expenses, which include the Investment Manager's fee and other costs attributable to the running of the Group, were £1.32 million for the year excluding service and direct recharges (30 June 2020: £1.55 million).  Ongoing charges as a percentage of net asset value for the year were 1.27% (30 June 2020: 2.22%).

 

The Group incurred finance costs of £1.42 million during the year (30 June 2020: £1.44 million).

 

The total profit before tax for the year of £5.57 million (30 June 2020: loss before tax of £5.05 million) equates to a basic profit per share of 6.92 pence (30 June 2020: loss of 6.27 pence).

 

EPRA EPS for the year was 5.55 pence which, based on dividends declared of 5.14 pence, reflects a dividend cover of 108.0% (30 June 2020: EPRA earnings of 5.42 pence, dividends declared of 5.00 pence and dividend cover of 108.4%).

 

Adjusted EPRA EPS for the year which equates to cash generated from operations (and therefore excludes movements in accrued minimum contracted uplifts, the amortisation of loan arrangement fees and movements in the provision for impairment of trade receivables) were 5.07 pence which, based on dividends declared of 5.14 pence, reflect a dividend cover of 98.6% (30 June 2020: Adjusted earnings per share of 4.25 pence, dividends declared of 5.00 pence and dividend cover of 85.0%).

 

The Group's NAV as at 30 June 2021 was £68.89 million or 85.58 pps (30 June 2020: £67.29 million or 83.58 pps). This is an increase of 2.00 pps or 2.4 % over the year, with the underlying movement in NAV set out in the table below:

 

	Year ended		Year ended
	30 June 2021		30 June 2020
	Pence per share	£ million	Pence per share	£ million
NAV as at beginning of year	83.58	67.29	94.81	76.32
Gain on disposal of investment property	0.53	0.42	-	-
Change in fair value of investment property	0.85	0.68	(11.69)	(9.41)
Income earned for the year	9.20	7.41	9.70	7.81
Finance costs for the year	(1.77)	(1.42)	(1.79)	(1.44)
Other expenses for the year	(1.89)	(1.52)	(2.50)	(2.01)
Dividends paid during the year	(4.92)	(3.97)	(4.95)	(3.98)
NAV as at the end of the year	85.58	68.89	83.58	67.29

 

Improvement in valuation

 

There has been an overall 4.3% increase in the portfolio valuation since 30 June 2020. When removing Droitwich Spa Retail Park, Droitwich and analysing the core 18 assets that were held over the period, this figure becomes 2.1%. There have been valuation improvements across the portfolio's industrial assets, as this is an asset class that has continued to perform well during the COVID-19 pandemic. Additionally, there has been a £1.7 million increase in value at Travelodge, Swindon predominantly driven by the completion of the cladding rectification works.

Dividends

 

Refer to Note 9 of the Consolidated Financial Statements for details.

 

Financing

 

As at 30 June 2021, the Group had fully utilised its £41 million loan facility with Canada Life Investments (30 June 2020: £41 million facility fully utilised). This term facility, which is repayable on 20 October 2025, allows up to 35% loan to property value at drawdown and is provided on a portfolio basis and has a loan to value covenant of 60%.

 

The weighted average interest cost of the Group's £41 million facility is 3.19% (30 June 2020: 3.19%).

 

Notes

1.     Capital Economics - UK Economic Outlook 15^th April 2021.

2.     REMark Report July 2021, Remit Consulting

3.     JLL - UK Capital Markets Review & Outlook 2020/2021

4.     Savills - UK Commercial, Market in Minutes - May 2021

5.     Capital Economics - UK Commercial Property 30 April 2021

6.     JLL - UK Capital Markets Review & Outlook 2020/2021

7.     The fair value decrease includes accounting adjustments relating to rent smoothing of (£0.60m) and movement in finance lease obligation of £0.05m.