29 March 2022

KCR Residential REIT plc

("KCR" or the "Company")

Interim Results

KCR Residential REIT plc, the residential REIT group, is pleased to announce its unaudited consolidated results for the six months to 31 December 2022.

The half year to 31 December 2022 has seen continued growth in the business in an operating environment that has been challenging with continuing interest rate increases, cost of living pressure and supply chain disruption.

Progress continues to be made to transition the business. The strategy, as outlined in last year's annual report, remains unchanged, to:

·    improve the rental revenue from the existing properties;

·    upgrade the overall portfolio quality;

·    explore the development opportunity within the portfolio; and

·    focus on reducing costs.

Revenue growth continues to be driven from the work done on repositioning the portfolio via completion of a holistic refurbishment programme to materially lift the standard of the rental product we are offering and implementation of the Cristal Apartments operating model.

Operational highlights

·  revenue for the half year increased 30% to £789k (2021: £605k), with revenue growth driven predominantly by Coleherne Road and the ongoing conversion of Deanery Court to the Cristal Apartments operating model; and

·  portfolio level occupancy has remained strong over the half year with rental increases continuing to be achieved at renewals / re-letting. As the Cristal Apartments operating model continues to be rolled out we expect more volatility in occupancy levels within the properties operated on this basis, however we envisage overall rental levels will be higher notwithstanding this.

We continue to make progress to create a stable platform that can be successfully scaled up.

This announcement contains inside information for the purposes of the UK Market Abuse Regulation and the Directors of the Company are responsible for the release of this announcement.

Caution regarding forward looking statements

Certain statements in this announcement, are, or may be deemed to be, forward looking statements. Forward looking statements are identified by their use of terms and phrases such as ''believe'', ''could'', "should" ''envisage'', ''estimate'', ''intend'', ''may'', ''plan'', ''potentially'', "expect", ''will'' or the negative of those, variations or comparable expressions, including references to assumptions. These forward-looking statements are not based on historical facts but rather on the Directors' current expectations and assumptions regarding the Company's future growth, results of operations, performance, future capital and other expenditures (including the amount, nature and sources of funding thereof), competitive advantages, business prospects and opportunities. Such forward looking statements reflect the Directors' current beliefs and assumptions and are based on information currently available to the Directors.

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                                                                                CHAIRMAN'S STATEMENT

                                                       FOR THE SIX MONTHS ENDED 31 DECEMBER 2022

KCR Residential REIT Plc ("KCR" or the "Company") and its subsidiaries (together the "Group") operate in the private rented residential investment market. The Company acquires properties that are rented to private tenants and also owns and operates a freehold portfolio of retirement living accommodation where most of the properties have been sold on long leases.

The half year to 31 December 2022 has seen continued growth in the business in an operating environment that has been challenging with continuing interest rate increases, cost of living pressure and supply chain disruption.

Fundamentals for UK residential property remain sound notwithstanding the impact of increasing interest rates. The Group continues to look for acquisitions on a disciplined basis and there are signs emerging that opportunities may arise over the next twelve months to make acquisitions on more attractive metrics than have been available recently. 

The Group's overall objective remains to grow the size of its residential portfolio and optimise the performance from the existing assets whilst controlling costs to achieve the ability to pay dividends.

Progress continues to be made to transition the business. The strategy, as outlined in last year's Annual Report, remains unchanged, to:

· improve the rental revenue from the existing properties;

· upgrade the overall portfolio quality;

· explore the development opportunity within the portfolio; and

· focus on reducing costs.

Revenue growth for the half year has been driven by a combination of the work completed to date on modernising and improving the standard of the property portfolio and the conversion of the Deanery Court property to the Cristal Apartments operating model which commenced during the June 2022 quarter.

Occupancy rates across the portfolio during the period remained strong with rental increases being achieved in most instances at renewal.

Refurbishment works in respect of the two basement flats and all external areas at Coleherne Road are ongoing and are expected to be fully complete by the end of April 2023.

The conversion of the Deanery Court property to the Cristal Apartments operating model is progressing well and early operating results are promising. Full conversion to the Cristal Apartments "walk in walk out" operating model is on track to be completed this financial year.

Increase in administration expenses during the half predominantly relate to:

·  higher operating costs associated with the conversion of Deanery Court to the Cristal Apartments operating model;

·  repairs and maintenance at Ladbroke Grove; and

·  increased depreciation expenses relating to the property, plant equipment, fixtures and fittings associated with operating the properties on a "walk in walk out" basis.

Whilst the majority of the Group debt remains on fixed rates, the Secure Trust facility is floating rate and consequently the comparatively higher finance costs incurred in the period reflect the effect of interest rate rises. In the near term it is likely financing costs for this facility will continue to increase.

Since the end of the period under review, the Group acquired an additional flat within Heathside. This will be refurbished with a target for completion by the end of June 2023. On completion this will deliver incremental revenue growth to the rental income generated from this property.

DIRECTOR'S REPORT

FOR THE SIX MONTHS ENDED 31 DECEMBER 2022

We are pleased to report on the progress of the Group in the six-month period to 31 December 2022.

Revenue growth continues to be driven from the work done on repositioning the portfolio via completion of a holistic refurbishment programme to materially lift the standard of the rental product we are offering and implementation of the Cristal Apartments operating model.

Operational highlights

· revenue for the half year increased 30% to £789k (2021: £605k), with revenue growth driven predominantly by Coleherne Road and the ongoing conversion of Deanery Court to the Cristal Apartments operating model; and

· portfolio level occupancy has remained strong over the half year with rental increases continuing to be achieved at renewals / re-letting. As the Cristal Apartments operating model continues to be rolled out we expect more volatility in occupancy levels within the properties operated on this basis, however we envisage overall rental levels will be higher notwithstanding this.

Full completion of Coleherne Road works and the implementation of the Cristal Apartments operating model at Deanery Court are expected to continue to underpin revenue growth over the next 12 months.

Focus for the half year has been on progressing works at Coleherne Road and the implementation of the conversion of Deanery Court to the Cristal Apartments operating model.

As Deanery Court flats have been taken back they have been lightly refurbished and fully furnished in order to be let on a walk in, walk out basis. Full implementation is on track to be completed by June this year.

We continue to make progress to create a stable platform that can be successfully scaled up.

Property Portfolio

No acquisitions were completed during the half year.

Since the period end, an additional one- bedroom flat within Heathside has been acquired. As with all of the other acquisitions within this property, the flat is very tired and poorly presented. Full refurbishment of this flat is planned to be completed during the June quarter of 2023. Contractor availability and supply chain issues are expected to impact on the timing for completion of refurbishment works, however we believe completion during the June quarter is achievable.

Planning works for Ladbroke Grove continue to be progressed, an objective which is key to improving the operational performance for this asset. As outlined in the full year report, the tired condition of this property is resulting in increasing repairs and maintenance expenditure which is expected to continue, pending a more holistic refurbishment works programme.

KCR is continuing to progress the implementation of two operating lines, clearly identifiable by brand, property quality and letting strategy.

1.    Cristal Apartments. Residential apartments, finished to a high modern specification, fully furnished and let on a Walk in Walk Out (WIWO) basis for a frictionless and flexible letting experience. Rental contracts may be from one week to multi-year; and

2.    Osprey Retirement Living. 4* retirement living property rented on flexible letting packages customised to suit tenant needs. All rentals are on assured shorthold tenancies for a minimum period of six months.

1.    Cristal Apartments (WIWO letting strategy)

The repositioning of the Coleherne Road property into a modern, high quality, well presented product reflects the standard the Cristal brand represents. This product has been well received by the market and has been a core driver of revenue growth since the initial eight flats were completed and let up.

On full completion of all works Cristal branding will be added to the property and we expect let up of the last two flats to contribute to revenue growth during the June quarter of 2023 and the 2024 financial year.

Conversion of the Deanery Court property in Southampton to the Cristal Apartments model is ongoing. Whilst it is still early days, the initial signs are promising and we expect this property to be a key driver of further revenue growth over the next 12 months.

The intention is also to reposition the Ladbroke Grove portfolio as a Cristal branded product once planning outcomes have been finalised. This is expected to result in both improved revenue and a substantive reduction in ongoing repairs and maintenance.

Coleherne Road - this property comprises ten studio and one-bedroom flats. The property has been repositioned to a materially higher standard and works are now fully completed in eight of the ten flats. Works are ongoing to complete refurbishment of the last two flats and all external areas. The completed apartments have produced strong rental uplifts and have operated at close to 100% occupancy levels since letting up during the December 2021 quarter.

Ladbroke Grove - this portfolio comprises 16 one and two bedroom flats in three buildings which remain 100% occupied. The flats have been lightly refurbished as tenants vacate and then re-let in the private rental market. The overall tired condition of the property is reflected in ongoing and increasing repairs and maintenance expenditure. Planning works are being progressed and our intention is to complete a holistic refurbishment programme to reposition this product to the Cristal Apartments operating model.

Deanery Court (Southampton) - this property comprises 27 two bedroom residential apartments and is in the process of being converted to the Cristal Apartments operating model. As the apartments are taken back they are lightly refurbished and fully furnished and then marketed under the Cristal Apartments brand. As at 31 December 2022, 24 of the 27 apartments had been taken back with 21 of these fully converted. Full conversion of this property is on track to occur during the 2023 financial year. We expect rental growth from this property to be a key driver of revenue growth for the Group over the next 12 months.

2.    Osprey retirement living (4* retirement apartments)

The Osprey portfolio consists of 159 flats and 13 houses let on long leases in six locations, together with an estate consisting of 30 freehold cottages in Marlborough where Osprey delivers estate management and sales services.

The key asset in the portfolio is the freehold block at Heathside, Golders Green comprising 37 one and two bedroom apartments with 10 (nine as at 31 December 2022) of the apartments owned by the Group and 27 held on a long leasehold basis. The strategy to selectively acquire long leasehold apartments within the block, refurbish them to a high standard and let them on an assured tenancy basis has been successful and has delivered strong rental returns for the Group.

Financial Performance

The half year to 31 December 2022 reflects the outcome of strong revenue growth driven by Coleherne Road and conversion of the Deanery Court property to the Cristal Apartment operating model which commenced during the June 2022 quarter.

Cost of sales and administration expenses both increased during the half primarily due to higher costs associated with operating Deanery Court under the Cristal Apartment model, higher depreciation charges associated with the investment in plant, equipment, fixtures and fittings and ongoing and increasing repairs and maintenance at Ladbroke Grove.

·  Revenue for the half year increased 30% to £789k (2021: £605k)

·  Gross profit as a percentage of revenue reduced to 84.58% (2021: 96.88%) reflecting the higher costs associated with the Cristal Apartments operating model. In absolute terms overall gross profit increased by 13.8% to £667k (2021: £586k).

·  Operating loss before separately disclosed items of £31k (2021: Profit £136k). Prior year included a positive contribution from revaluations of £145k which primarily accounts for the negative variance for the comparative period. Balance relates to increases in depreciation charges, repairs and maintenance at Ladbroke Grove and higher operational costs associated with implementing the Cristal Apartments model.

·  Operating loss £184k (2021: Profit £102k) after refurbishment costs of £153k primarily relating to the Coleherne Road property.

·  Loss for the period was £451k (2021: £254k) and loss per share was 1.08p (2021: .77p).

The value of KCR's property portfolio was slightly higher than the comparative period at £24.6m (2021: £24.4m), reflecting an additional acquisition completed during the June 2022 half year. The Group's current assets reduced to £2.2m (2021: £2.9m) reflecting reduction in cash used to fund operating losses and support ongoing refurbishment work programmes.  Secured bank borrowings increased marginally to £13.3m (2021: £13.2m) following completion of refinancing during the June 2022 half year.

Total assets reduced to £26.98m (2021: £27.3m) reflecting the reduction in cash used to support Group operating activities. Net assets per share reduced to 31.74p (2021: 33.03p). Following completion of the Coleherne Road works this property will be revalued.

The Group continues to be cashflow negative, however it is continuing to work towards achieving a cash neutral position from improving operating performance from the existing portfolio. Costs continue to be actively managed as we work towards building a stable platform that can be scaled up. At 31 December 2022, the Group had cash balances totalling £1.89m (2021: £2.8m).

Through the period the Company remained a REIT and has complied with REIT rules.  

KCR RESIDENTIAL REIT PLC

                                             CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

                                          FOR THE SIX MONTHS ENDED 31 DECEMBER 2022 (unaudited)