Birmingham Wolverhampton Warwick Leicester West Bromwich Leamington Dudley Walsall Coventry Coventry Walsall Dudley Leamington Bromwich West Leicester Warwick Wolverhampton Birmingham Tunstall Green Acocks Bearwood Bromsgrove Rugeley Heath Kings Redditch Worcester Derby Oldbury Warwick Wolverhampton Birmingham Nuneaton Crewe Nottingham Telford Wythall Kingswinford ch Reddit Worcester Derby Oldbury Coventry Walsall Dudley Leamington Bromwich West Leicester Telford Wythall Kingswinford Tunstall Green Acocks Bearwood Bromsgrove Rugeley Heath Kings Bromwich West Leicester Warwick Wolverhampton Birmingham Nuneaton Crewe Nottingham Rugeley Heath Kings Redditch Worcester Derby Oldbury Coventry Walsall Dudley Leamington Crewe Nottingham Telford Wythall Kingswinford Tunstall Green Acocks Bearwood Bromsgrove Walsall Dudley Leamington Bromwich West Leicester Warwick Wolverhampton Birmingham Nuneaton Acocks Bearwood Bromsgrove Rugeley Heath Kings Redditch Worcester Derby Oldbury Wolverhampton Coventry Birmingham Nuneaton Crewe Nottingham Telford Wythall Kingswinford Tunstall Green Worcester Derby Oldbury Coventry Walsall Dudley Leamington Bromwich West Leicester Warwick Wythall Kingswinford Tunstall Green Acocks Bearwood Bromsgrove Rugeley Heath Kings Bromwich Redditch West Leicester Warwick Wolverhampton Birmingham Nuneaton Crewe Nottingham Telford Bromsgrove Rugeley Heath Kings Redditch Worcester Derby Oldbury Coventry Walsall Dudley Leamington Birmingham Nuneaton Crewe Nottingham Telford Wythall Kingswinford Tunstall Green Acocks Bearwood Oldbury Coventry Walsall Dudley Leamington Bromwich West Leicester Warwick Wolverhampton Kingswinford Tunstall Green Acocks Bearwood Bromsgrove Rugeley Heath Kings Redditch Worcester West Derby Leicester Warwick Wolverhampton Birmingham Nuneaton Crewe Nottingham Telford Wythall Heath Kings ch Reddit Worcester Derby Oldbury Coventry Walsall Dudley Leamington Bromwich Crewe Nottingham Telford Wythall Kingswinford Tunstall Green Acocks Bearwood Bromsgrove Rugeley Walsall Dudley Leamington Bromwich West Leicester Warwick Wolverhampton Nuneaton Birmingham Annual Report and Accounts 2018 Accounts and Report Annual INVESTOR Birmingham Wolverhampton Warwick Leicester West Bromwich Leamington Dudley Walsall Coventry Coventry Walsall Dudley Leamington Bromwich West Leicester Warwick Wolverhampton Birmingham Tunstall Green Acocks Bearwood Bromsgrove Rugeley Heath Kings Redditch Worcester Derby Oldbury Warwick Wolverhampton Birmingham Nuneaton Crewe Nottingham Telford Wythall Kingswinford ch Reddit Worcester Derby Oldbury Coventry Walsall Dudley Leamington Bromwich West Leicester Telford Wythall Kingswinford Tunstall Green Acocks Bearwood Bromsgrove Rugeley Heath Kings Bromwich West Leicester Warwick Wolverhampton Birmingham Nuneaton Crewe Nottingham Rugeley Heath Kings Redditch Worcester Derby Oldbury Coventry Walsall Dudley Leamington Crewe Nottingham Telford Wythall Kingswinford Tunstall Green Acocks Bearwood Bromsgrove Walsall Dudley Leamington Bromwich West Leicester Warwick Wolverhampton Birmingham Nuneaton Acocks Bearwood Bromsgrove Rugeley Heath Kings Redditch Worcester Derby Oldbury Wolverhampton Coventry Birmingham Nuneaton Crewe Nottingham Telford Wythall Kingswinford Tunstall Green Worcester Derby Oldbury Coventry Walsall Dudley Leamington Bromwich West Leicester Warwick Wythall Kingswinford Tunstall Green Acocks Bearwood Bromsgrove Rugeley Heath Kings Bromwich Redditch West Leicester Warwick Wolverhampton Birmingham Nuneaton Crewe Nottingham Telford Bromsgrove Rugeley Heath Kings Redditch Worcester Derby Oldbury Coventry Walsall Dudley Leamington Nuneaton Crewe Nottingham Telford Wythall Kingswinford Tunstall Green Coventry Acocks Bearwood Walsall Dudley Leamington Bromwich West Leicester Warwick Wolverhampton Birmingham Tunstall Green Acocks Bearwood Bromsgrove Rugeley Heath Kings Redditch Worcester Derby Oldbury Warwick Wolverhampton Birmingham Nuneaton Crewe Nottingham Telford Wythall Kingswinford ch Coventry Walsall Dudley Oldbury Reddit Derby Leamington Worcester Bromwich West Leicester Telford Wythall Kingswinford Tunstall Green Acocks Bearwood Bromsgrove Rugeley Heath Kings BirmNuneaton inghamWolverhampton WarwickCrewe LeicesterBromwich West Nottingham MIDLANDS THE Birmingham Wolverhampton Warwick Leicester West Bromwich Leamington Dudley Walsall Coventry Coventry Walsall Dudley Leamington Bromwich West Leicester Warwick Wolverhampton Birmingham Tunstall Green Acocks Bearwood Bromsgrove Rugeley Heath Kings Redditch Worcester Derby Oldbury Warwick Wolverhampton Birmingham Nuneaton Crewe Nottingham Telford Wythall Kingswinford ch Reddit Worcester Derby Oldbury Coventry Walsall Dudley Leamington Bromwich West Leicester Telford Wythall Kingswinford Tunstall Green Acocks Bearwood Bromsgrove Rugeley Heath Kings Bromwich West Leicester Warwick Wolverhampton Birmingham Nuneaton Crewe Nottingham Rugeley Heath Kings Redditch Worcester Derby Oldbury Coventry Walsall Dudley Leamington Crewe Nottingham Telford Wythall Kingswinford Tunstall Green Acocks Bearwood Bromsgrove Walsall Dudley Leamington Bromwich West Leicester Warwick Wolverhampton Birmingham Nuneaton Acocks Bearwood Bromsgrove Rugeley Heath Kings Redditch Worcester Derby Oldbury Wolverhampton Coventry Birmingham Nuneaton Crewe Nottingham Telford Wythall Kingswinford Tunstall Green Worcester Derby Oldbury Coventry Walsall Dudley Leamington Bromwich West Leicester Warwick Wythall Kingswinford Tunstall Green Acocks Bearwood Bromsgrove Rugeley Heath Kings Bromwich Redditch West Leicester Warwick Wolverhampton Birmingham Nuneaton Crewe Nottingham Telford Bromsgrove Rugeley Heath Kings Redditch Worcester Derby Oldbury Coventry Walsall Dudley Leamington Nuneaton Crewe Nottingham Telford Wythall Kingswinford Tunstall Green Coventry Acocks Bearwood Walsall Dudley Leamington Bromwich West Leicester Warwick Wolverhampton Birmingham Tunstall Green Acocks Bearwood Bromsgrove Rugeley Heath Kings Redditch Worcester Derby Oldbury Warwick Wolverhampton Birmingham Nuneaton Crewe Nottingham Telford Wythall Kingswinford ch Reddit Worcester Derby Oldbury Coventry Walsall Dudley Leamington Bromwich West Leicester Telford Wythall Kingswinford Tunstall Green Acocks Bearwood Bromsgrove Rugeley Heath Kings Wo Bromwich West Leicester Warwick Birmingham lverhampton Crewe Nuneaton Nottingham
Real Estate Investors Plc Annual Report and Accounts 2018 Real Estate Investors Plc (‘REI’) is the UK’s only Midlands-focused, Birmingham-based REIT. Internally The Company operates a robust managed by a team with over 100 years business model. With prudent of combined experience, the Company’s leverage, excellent banking proven track record, together with its relationships and access to debt, network and knowledge of the region REI has the ability to execute it operates in, have positioned it on deals quickly as a cash buyer as the premier property investor and secure criteria compliant in the Midlands. acquisitions, delivering capital enhancement across the portfolio. With recycled capital from disposals 6 YEARS OF and a growing income stream, REI aims to continue to deliver on its CONSECUTIVE progressive dividend policy, with 6 DIVIDEND years of YOY growth now recorded. GROWTH
£224.8 MILLION PORTFOLIO VALUE 96.1% OCCUPANCY With a portfolio valued at over £220 million and no material reliance on any sector, asset or occupier, REI generates value via active asset management initiatives such as rent reviews, lease renewals, lettings, change of use and refurbishment.
REI is uniquely positioned in a vibrant regional economy that is rapidly expanding and, with its market reputation as a preferred buyer, is able to capitalise on opportunities as they reveal themselves. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS 11 1 2 3 4 6 30 32 35 37 38 42 43 43 44 45 46 47 48 67 10 11 12 14 16 22 26 28 AnnualAnnual Report Report and and Accounts Accounts 2018 2018
CC LL s P P s s rr Strategic Report Highlights Governance Board of Directors and Management Corporate Governance Report Directors’ Remuneration Report Directors’ Report Financial Statements Report to the Independent Auditor’s Members of Real Estate Investors Plc Consolidated Statement of Comprehensive Income Consolidated Statement of Changes in Equity Company Statement of Changes in Equity Consolidated Statement of Financial Position Company Statement of Financial Position Consolidated Statement of Cash Flows Company Statement of Cash Flows Notes to the Financial Statements Our Advisers Contents At a Glance Our Dividend Report and Chief Executive’s Chairman’s Our Region Our Business Model Simplified Debt Structure Create Value How We Q&A Chief Executive’s Our Portfolio Property Report Report Finance Director’s Principal Risks and Uncertainties state Investo Investo state state Real E E Real Real
p m m p Underlying excludes PBT profit/loss on revaluation, sale of properties and interest rate swaps EPRA = European Public Real Estate Association = Weighted Average UnexpiredWAULT Lease Term 15.6 17.0 at 1.95% above LIBOR at 1.95% portfolio for like Like valuation £209.2 – up 0.9% million) £207.4 (2017: million Total ownership 1.55 million sq ft million 1.55 ownership Total sq ft) million – up 3.3% 1.5 (2017: Renewed million £20 bank facility with for 5 years Lloyds December in 2018 new facility secured million RBS with £10 Revenue £ +5.1% Contracted rental income rental Contracted £ +4.9% Dividend per share 3.562 +14.0% EPRA EPS** 3.9 +16.3% * ** *** • • • •
m As a Real Estate Investment Trust since 2015, we generate rental rental generate we 2015, since Trust Investment Estate As a Real
p %
m
Acquisitions of compliant criteria Acquisitions of (net million properties £15.4 totalling yield of at a net initial costs), acquisition and reversionary yield of 9.20% 8.88% Property disposal proceeds totalling £5.7 million, as REI recycles as REI into capital million, £5.7 criteria compliant assets Active asset management new 25 with lettings and 6 lease renewals Overall occupancy increased to 96.1% – up 3.3% 92.8%) (2017: years to break and 6.24 4.24 WAULT*** years to 4.53 years to lease expiry (2017: years to lease expiry) break and 6.52
7. 2 224.8
OFPROGRESS ANOTHER YEAR ANOTHER • • Operational highlights +3.3% • • • Occupancy 96.1 +0.6% EPRA NAV per share** NAV EPRA 69.3 £ +5.5% Gross propertyGross assets £ +16.1% Underlying profit before tax* before profit Underlying Our objective: Our Financial highlights dividend a progressive of delivering the aim with growth capital and income shareholders. our for growth payment capital and HIGHLIGHTS AT A GLANCE
Underlying profit before tax £7. 2 m EPRA EPS 3.9p PROVEN 2018 £7.2m 2018 3.9p 2017 £6.2m 2017 3.3p
2016 £5.2m 2016 2.8p TRACK 2015 £1.4m 2015 0.8p RECORD 2014 £0.3m 2014 0.3p Gross property assets £224.8m Contracted rental income £17.0 m
“Our main objectives for 2018 £224.8m 2018 £17.0m the year were to continue to 2017 £213.1m 2017 £16.2m 2016 £201.9m 2016 £14.9m
increase shareholder value, 2015 £157.5m 2015 £11.9m refinance unencumbered 2014 £104.4m 2014 £7.7m properties and deploy the funds generated in criteria Profit before tax £8.4m Dividend per share 3.562p compliant investment 2018 £8.4m 2018 3.562p
properties, continue our 2017 £11.3m 2017 3.125p progressive dividend policy, 2016 £8.2m 2016 2.625p and increase our underlying 2015 £12.2m 2015 2.0p 2014 £6.0m 2014 1.5p profit before tax, EPRA earnings per share and net assets per share. EPRA NAV 69.3p Revenue £15.6m
All of these objectives 2018 69.3p 2018 £15.6m have been achieved.” 2017 68.9p 2017 £14.9m 2016 66.2p 2016 £13.5m
Marcus Daly, FCA 2015 64.5p 2015 £8.4m
Finance Director 2014 61.3p 2014 £8.0m
Occupancy 96.1% Number of tenants 269
2018 96.1% 2018 269
2017 94.0% 2017 258
2016 93.0% 2016 232
2015 89.0% 2015 211
2014 84.6% 2014 175
2 Real Estate Investors PLC Annual Report and Accounts 2018 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS 33 AnnualAnnual Report Report and and Accounts Accounts 2018 2018 Aim to grow dividend in line line dividend in to grow Aim earnings with Dividend fully is covered by EPRA earnings
EPRA EARNINGS GROW DIVIDEND CC LL s P P s s rr
2018
£15.6m ” state Investo Investo state state 2017 £14.9m Real E E Real Real 2016 £13.5m 2015 £8.4m
An important factor in our our in factor important An Paul Bassi CEO “ a to convert to decision RealEstate Investment Trust our support to was (REIT) progressivedividend policy. a on paid are Dividends for and basis quarterly 6consecutive years we a enjoyed now have growingdividend. We anticipatefurther growth along 2019, in come to withcapital and income streamenhancement. 2014 £8.0m 2013 £6.7m 0.937p 0.875p 0.875p 0.875p FY 2018 14% 2012 £6.1m 0.75p 0.75p 0.75p 0.875p FY 2017 19% 2011 £4.9m 0.75p 0.625p 0.625p 0.625p FY 2016 31% 1p 1p 2010 £4.0m FY 2015 33% 2009 £3.2m 0.75p 0.75p
FY 2014
50%
1p 2008 £3.0m Final Interim FY 2013
10 YEARS OF REVENUE GROWTH GROWTH REVENUE OF YEARS 10 GROWTH
6 YEARS OF CONSECUTIVE DIVIDEND GROWTH DIVIDEND CONSECUTIVE OF YEARS 6 CONSISTENT Increasing shareholder distribution year on year on year distribution shareholder Increasing OUR DIVIDEND OUR Revenue CHAIRMAN’S AND CHIEF EXECUTIVE’S REPORT
BUILDING A SUSTAINABLE PORTFOLIO The existing portfolio has further value creation and income enhancing opportunities via additional lettings, rent reviews, change of use and, in particular, through ‘permitted development’ opportunities where we have already identified approximately 250,000 sq ft of potential residential conversions within the portfolio. The first of such residential conversion value creation opportunities was the sale of offices at City Gate House, Leicester, sold with permitted development rights for £2.6 million and is due to complete in June 2019, representing a 40% uplift to our December 2017 book value.
We have secured long-term bank facilities and have Overview significantly reduced the average cost of debt to 3.7% Secure, stable and opportunistic with record (2017: 4.2%). We have built up £25 million of cash occupancy of 96.1% and agreed bank facilities to provide the resources to Despite the economic and political uncertainty during be able to quickly take advantage of opportunities as 2018, we added value to our portfolio through our they arise. intensive asset management activities generating underlying profits of £7.2 million, up 16.1%, whilst Financial results growing the portfolio to £224.8 million, up 5.5%, and Continued growth in underlying profits, up 16.1% achieving record occupancy levels of 96.1%, up from Revenue for the period under review is up 5.1% and 92.8%. A pleasing performance. contracted rental income is at a record £17.0 million p.a., up 4.9%, with underlying profits up 16.1% to £7.2 million. Our portfolio is stable, secure and diversified across many sectors, with no material reliance on any single asset or Our like for like rental income has declined by occupier. The office element of our portfolio represents £300,000 (-1.9%) predominantly due to securing 37.9% and, due to the lack of new build over the last vacant possession of Metro Court for resale to a decade and some existing office stock being converted to residential developer. residential under permitted development rights, we are noting a significant undersupply of office space and Further acquisitions and asset management initiatives experiencing rental growth across our office ownership, in will enhance our asset base and income whilst particular in our non-city centre stock across the Midlands. supporting our Net Asset Value growth, together 2018 witnessed the highest level of out-of-town activity with delivering on our commitment of a progressive since 2015 with 358,115 sq ft leased. With available dividend policy. space in out-of-town markets at an all-time-low (452,929 sq ft), vacancy levels are also at their lowest due to this Our portfolio value has grown to £224.8 million, up decreased supply, at 5.4%, down from 8.3% in 2017. 5.5%, and we anticipate that this will remain at this Our traditional retail assets, which account for 19.6% of level or above (subject to any disposals) and that the portfolio, continue to perform extremely well and due contracted rental income will also rise during 2019. to current anti-retail sentiment, we believe are undervalued. Our retail exposure remains focused on convenience, Pre-tax profits of £8.4 million allow for £800,000 of value and neighbourhood outlets. acquisition costs and £1.8 million of growth in our like for like valuations, demonstrating our ability to extract We have continued to grow the portfolio, completing value from existing assets, during a period when most £15.4 million of investment property acquisitions (net of asset values remain flat or in decline and allows for acquisition costs) and £5.7 million of strategic sales. a reduction in our retail assets. Underlying profits of Overall, the Midlands property market is positive with £7.2 million have helped support the growth of our pockets where it is buoyant. Currently demand is dividend for 2018 of 3.562p, up 14%, over the period, especially strong for out of town areas such as Solihull representing a 6th year of consecutive growth. and the M42 corridor, for which the vacancy rates have reached a 10-year low. These conditions suit REI as they require local knowledge with which to flourish.
4 Real Estate Investors PLC Annual Report and Accounts 2018 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS 55 Avon House, Bromsgrove AnnualAnnual Report Report and and Accounts Accounts 2018 2018
CC LL s P P s s rr m state Investo Investo state state Real E E Real Real OPPORTUNITIES IDENTIFIED OPPORTUNITIES £224.8 PORTFOLIO VALUE 6YEARS OFYOY DIVIDEND GROWTH FT SQ 250,000 PERMITTED DEVELOPMENT
26 April 2019 26 28 March 2019 28 29 March29 2019 Paul Bassi CBE D.Univ Chief Executive March 2019 18 pportunities ahead ix years of consecutive growth and potential Chairman March 2019 18 John Crabtree OBE D.Univ Many see the and as present challenging environment As do a management not. troublesome. We team we have operated uncertain the in 1990s times before, the Scottish the crisis, recession, 2008 and financial and each have we European time referendums, capitalised on opportunities that have become available alert thoseduring are periods. to the We uncertain our given political and economic However, backdrop. combined our with position, unparalleled financial strong Midlands property network mover market and first about significant optimistic uncovering are we intelligence, further value amongst our chosen markets 2019. in Outlook O Ex-dividend date: Dividend timetable timetable Dividend Record date: Dividend payment date: The proposed timetable will which for the dividend, final be a Property as follows: is Income (‘PID’), Distribution We have paid the first 3 quarterly dividends of 0.875p have paid 3 quarterly the first We dividends of 0.875p Dividend and propose to pay dividend a final of 0.937p. payments continue to be will the with paid quarterly, first and the dividend final for at 0.937p, 3 payments for 2019 the fourth quarter to be confirmed. One of our objectives principal has been to deliver level dividend higher returns andattractive, sustainable, pleased are we to have increased our covered dividend on 2017. uplift an of 14.0% to 3.562p, for 2018 Dividend Dividend S to further grow In December 2018, REI renewed its existing £20 million million £20 renewed existing its REI In December 2018, facility Lloyds with for 5 years and additionally has cash to million and agreed £25 to provide bank facilities opportunities compliant on criteria any capitalise that the uncertain economic and political backdrop may reveal. Our bank facilities were successfully were Our bank facilities restructured during through facilities ofthe our debt, year 67% fixing secured 7 banks with and average cost of debt down 11.9%. 4.2%), (2017: to 3.7% reducing We remain conservatively geared at 39.8% LTV (net of (net LTV conservatively remain We geared at 39.8% reduced and havecash) significantly the cost of our debt the over last our years few and intend to maintain gearing levels. at the existing Finance and banking and Finance Reduced of debt cost our longstandingWith banking and access relationships continue to secure will we additional bankto debt, when to support appropriate, facilities future growth and a policy maintain of being will We profitability. improve multi-banked across a number of established lenders. OUR REGION
INVESTING IN OUR REGION & OUR CITY
Overview Young professionals are migrating here search of culture The West Midlands is emerging as a UK economic and life in a vibrant region that offers outstanding careers, powerhouse, outperforming its peers and gaining exceptional education, a thriving social and entertainment the title as ‘the fastest growing economy outside of scene and affordable yet desirable housing. At the start London and the South East’. In fact, according to of 2018, Birmingham was named as the number one EY’s Regional Economic Forecast 2019, the region destination within England for those migrating from is expected to grow by 1.7% GVA until 2021. To put London, a trend that is expected to continue for a region this into context, the West Midlands experienced that is soon to be boosted further by HS2, the ground- economic growth of 1.6% during 2018 compared to breaking £56 billion transport initiative that will see the UK average of 1.3%. journey times from Birmingham to London reduced to only 49 minutes, further enhancing the appeal of the Relocation & population migration region and widening the commuting prospects of millions As a £217 billion export-driven economy, the Midlands of workers. is boosted by the weak pound and global economic growth. According to KPMG’s recent Midlands A new era of infrastructure and transport improvements are Manufacturing Outlook report, the region has retained not only closing the gap for those within the region wishing the title of the ‘UK’s capital of Manufacturing’ and to commute to the capital, but are driving regeneration in is described as the ‘engine room’ of our economy. the region’s inner-city areas. Suburbs surrounding HS2 As the home of giants such as JLR and JCB, the region stations are preparing for the influx of visitors that HS2 and is attracting major businesses from all sectors that are other major wins across the region such as the Coventry relocating their staff and operations to the Midlands. City of Culture 2021 and the hosting of the Commonwealth Major confidence votes and commitments for the Games 2022 will no doubt bring. 2018 brought record Midlands region were seen in 2018 as large corporates levels of visitors to the region along with the highest ever that relocated to the region or increased their existing passenger numbers through Birmingham Airport and this is operations included the Royal Institution of Chartered only set to increase with the Commonwealth Games alone Surveyors, HSBC, HMRC, Hogan Lovells, and PwC. promising to boost the region’s economy by £1.5 billion.
6 Real Estate Investors PLC Annual Report and Accounts 2018 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS 77
AnnualAnnual Report Report and and Accounts Accounts 2018 2018
CC LL s P P s s rr ” state Investo Investo state state Real E E Real Real bn It’s good to see another impressive set of results results of set impressive another see to good It’s Andy Street Midlands Mayor of the West “ performance recent the reflects this Naturally REI. from the and economy fundamentals Midlands ofthe West strong, been has Growth sector. property the of number the and resilient, been has investment inward Moreover, steadily. risen has region the in jobs of the prospects continue to be good with major major with begood to continue prospects the rail, of forms all road, across projects infrastructure anddigital being confirmed.Similarly, housing And most to gather pace. continues development increasing is workforce our in level skill the critically, of number the is evidence best the Perhaps well. They are here. to relocate choosing Londoners young bettingon our future! 4.29 Low levelsLow ofunemployment, coupled above with national average wages cementing the are region’s place as the number one destination for people to Midlands the West recorded and work. Inlive 2018, the biggest growth employment in of UK all regions, jobs, growth and the creation of 52,000 2.2% with the region’s onlycoming second 2021, to London. By employment growth expected is to exceed the UK rate In terms of wage growth, p.a. and reach 0.6% of 0.5% been has likely this by the improved of arrival large corporates such as HSBC expected and is to continue years. the over next 10 by 36% to grow schemesNumerous leisure and major shopping complexes such as Grand and Central The Bullring foodand a thriving and beverage industry more with Michelin starred than restaurants other any region outside London create of a hub social activity an in are universities The region’s already region. vibrant tech 50 centres universities, second 13 with to none, of excellence and the of rate retention students highest who choose once here they to continue living have graduated education. higher from £ investment volumes in the Midlands during 2018 Living thoseFor that choose they can and workto live here, expect more than to the find just heartbeat of UK itself as a reinventing Themanufacturing. is region logistical and creative, technological digital, financial, not to mention thehub, home of aerospace and science has and more recently the Monster.co.uk public sector. as therecently number Birmingham ranked one UK its in and have we more creative Ranking Cities Digital businesses than other any region. From a population perspective, 40% of Birmingham’s a populationFrom perspective, of 40% Birmingham’s population making it million below is the age of 25, 1.1 the The youngest population European city. forecast is further adding pressure by 2020, million to 1.3 to grow to the demand already the increasing in region. OUR REGION CONTINUED
Activity construction levels in Birmingham surpassed the 1.4 million sq ft level Under the proactive leadership of The Mayor of the West Midlands, for the third consecutive year. Of the pipeline developments due to Andy Street (formerly of John Lewis Partnership), and a healthy injection complete in 2019, 22% is already pre-let. of £250 million of government funding, the region is fast emerging as one to watch. With the local economy having grown by 18% over the last In terms of office take-up, the annual city centre Birmingham take-up 5 years, the Midlands Engine isn’t slowing down, in fact it’s speeding up, figures have been published and 2018 exceeded the 10-year annual at a rate ahead of the UK growth rate. average take-up, with Q4 alone seeing 277,790 sq ft leased across 33 deals. 2018 also saw the highest level of out-of-town activity since Residential 2015 with 358,115 sq ft leased. With demand outstripping supply, as those migrating or relocating to the region search for homes, and the appeal of inner city living and ‘walking Office spaces that focus on a work/life balance appear to be taking to work’ gains momentum and popularity, a record level of development is a precedent and are driving new developments, with the ‘space as a in the pipeline or already complete. The number of cranes on the skyline service’ model on the increase. demonstrates the level of activity in Birmingham City centre and the region’s other towns and cities. City centre residential development reached With the region somewhat sheltered from the volatility of the London an all-time high with over 5,000 units under construction in 2018 and market, investors are realising the value that can be achieved as they student accommodation surged to its highest ever level with 2,667 units shift their attention from the capital to the regions. In 2018, £400 million under construction. in investments was transacted in Birmingham, 10% higher than the 10-year average. With house prices lower than London but rising at a rate faster than the capital, the region offers homeowners an affordable alternative to London. Summary To give an idea of the rate of growth, the West Midlands is seeing a Underpinned by demand created by the ground-breaking infrastructure 6% per year increase in house prices, compared to the 0.7% decline in projects, regeneration schemes, transport improvements, company London housing values. relocations, population migration, tourism levels and quality of life and affordability, the region is thriving and expanding at an unprecedented Offices pace. With a wealth of knowledge and expertise in this region, and Widespread activity is driving demand with occupier and investment based right in the heart of it, REI is perfectly positioned to benefit from demand from private, regional, overseas and institutional investors the opportunities, capital and income growth and value that this activity remaining strong. Low stock availability is driving rental rises and office generates.
Birmingham offices
12m
12m 10m
10m 8m
8m 6m
6m 4m
4m 2m
2m 0m 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 0m +14% 2008 2009 2010 2011 2012 2013 2014 Take-up2015 2016Grade2017 A supply2018 0.937 +14% Take-up Grade A supply 0.937 +19% 0.875 Office rents (£ per sq ft) +19% 40m 0.875 +31% 40m 0.75 0.875 +31% 30m 0.75 0.875 0.75 30m +33% 1 0.75 20m +33% 0.625 1 0.875 20m 0.625 +50% 0.75 0.75 0.875 10m +50% 0.75 0.625 0.75 10m 1 1 0.625 0m 0.875 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 1 1 0.75 0m 0.75 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 0.625 0.875 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 0.75 0.75 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 0.625 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 Source: Knight Frank Research FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018
8 Real Estate Investors PLC Annual Report and Accounts 2018 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS 99 % East +2% -0.3% South East +1.7% London 6.05 East Midlands +6% AnnualAnnual Report Report and and Accounts Accounts 2018 2018 Midlands Average +
CC North East +3.5% LL s P P s s rr Yorkshire & The Humber +2.6% Yorkshire 0.937 0.937 0.875 0.875 0.875 0.875 0.875 0.875 FY 2018 FY 2018 +14% +14% Scotland +5.8% 0.75 0.75 0.75 0.75 0.75 0.75 state Investo Investo state state 0.875 0.875 FY 2017 FY 2017 Real E E Real Real +19% +19% 0.75 0.75 0.625 0.625 0.625 0.625 0.625 0.625 FY 2016 FY 2016 +31% +31% 1 1 1 1 FY 2015 FY 2015 +33% +33% 0.75 0.75 0.75 0.75 FY 2014 FY 2014 +50% +50% 1 1 FY 2013 FY 2013 Wales +5.8% Wales North West +3.3% North West West Midlands +6.1% West
%
South West +4.3% South West
3.5
Average + UK Northern Ireland +4.8% Source: OfficeSource: for National Statistics
IN HOUSE PRICES (%) PRICES HOUSE IN 2018 ANNUAL CHANGE ANNUAL 2018 Q4 Q4 2018 2018 2018 2018 Q4 Q4 2017 2017 2017 2017 Grade A supply Grade A supply Q4 Q4 2016 2016 2016 2016 Q4 Q4 2015 2015 2015 2015 Take-up Take-up Q4 Q4 2014 2014 2014 2014 Q4 Q4 2013 2013 2013 2013 Q4 Q4 2012 2012 2012 2012 Q4 Q4 2011 2011 2011 2011 Q4 Q4 2010 2010 2010 2010 Q4 Q4 2009 2009 2009 2009 Q4 Q4 2008 2008 2008 2008 12m 12m 10m 10m 8m 8m 6m 6m 4m 4m 2m 2m 0m 0m 0m 0m 10m 10m 40m 40m 30m 30m 20m 20m OUR BUSINESS MODEL
ROBUST BUSINESS MODEL As the UK’s only Midlands-focused and Birmingham-based REIT, £224.8m Portfolio Value REI benefits from its privileged network and market insight, excellent reputation among market participants and its knowledge of the Midlands, a region that is enjoying a transformational era of rebirth, regeneration and reform and is emerging as an economic powerhouse. REI is at the heart £17. 0 m of this region and is uniquely positioned to capitalise on opportunities Contracted Rents that reveal themselves.
Strong platform • Internally managed with a proven track record and scalable property management platform • Specialist asset management and investment team with 100+ years of combined experience • Equity alignment/6.6% management shareholding 3.562p Dividend per share Active asset management • Strict acquisition criteria with compliant acquisitions purchased at high initial yields • Value creation through reviews, lease renewals, lettings, change of use and refurbishment • Multi-sector diversification with limited exposure to any sector, asset or occupier • Disposals at/above book value post asset management • Capital from disposals recycled into criteria compliant opportunities 96.1% Prudent finance Occupancy • Prudent leverage providing certainty and security – current net LTV 39.8% • Can execute quickly with cash/strong market reputation and access to debt • 67% of debt now fixed, with low average cost of debt of 3.7% • Portfolio growth requiring only marginal increases in overheads Attractive returns 269 • Aim to deliver capital growth and income enhancement through active asset management Tenants • Fully covered progressive dividend paid quarterly • 6 years of consecutive double-digit dividend growth
Generating value through asset management Buys REI market expertise Sells/holds
Institutional sales VALUE ADD Institutional quality assets Offices 12 – 24 months of Asset Management Value & convenience retail Lease renewals HNW/investors/pension funds – Leisure/food Rent reviews buyers now active in this segment Vacant property Small-scale refurbishment Opportunistic Income maximisation High quality earnings to support dividend Short leases Planning revision
20% Unparalleled market insight via external relationships 6% e.g. Bond Wolfe, Knight Frank, Savills, GVA, CBRE & JLL
10 Real Estate Investors PLC Annual Report and Accounts 2018 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS x 1111 % % % m m 67 10 2.9 20 3.7 £ £ 39.8 AnnualAnnual Report Report and and Accounts Accounts 2018 2018
CC LL s P P s s rr New facility with RBS at 1.95% 1.95% at RBS with facility New above LIBOR Interest cover 2.8x) (FY 2017: Average cost of debt lowered to to lowered debt of cost Average December 2018 31 at 3.7% 4.2%) 2017: (FY Property LTV net 40%) below LTV keep to aim (We 38.3%) 2017: (FY fixed Of is debt in Lloyds with facility Renewed 5 years for December 2018 state Investo Investo state state Real E E Real Real £m (4.3) 2017 80.3 84.6 31Dec £m
2018 88.0 98.8 (10.8) 31Dec 45 30 Fixed 33 67 9 8 6
1
Floating et debt (£m) 2027 2030 2031 2020 2021 2023 Cash
DEBT MANAGED Borrowings N SIMPLIFIED DEBT STRUCTURE DEBT SIMPLIFIED Debt structure at 31 December 2018 (%) December 2018 31 at structure Debt Debt maturity at 31 December 2018 (£m) December 2018 31 at maturity Debt Castlegate House, Dudley House, Castlegate HOW WE CREATE VALUE
“Our portfolio is diversified by sector and tenant, providing attractive returns to our shareholders whilst mitigating A DIVERSE sector-specific risk.” Paul Bassi PORTFOLIO CEO
In line with our business model we have adopted a strict acquisition criteria structure:
Our acquisition criteria: • Prime and good secondary assets • Properties acquired in locations expected to benefit from a continued upswing • Scope for value enhancement through active asset management • Properties with strong prospects of generating income to support the Company’s dividend policy • Properties that have been undermanaged and undercapitalised
Our niche areas of activity include: • Non-core ‘orphan’ disposals by institutions • Assets not easily acquired by private or smaller investors • Distressed and deadline purchases
Financial & political uncertainty We anticipate seeing off-market opportunities on the back of the current financial and political volatility and we welcome these periods of uncertainty, as they often bring mis-priced assets to the market which, with our local expertise and available cash and banking resources, we can move quickly to capitalise on.
We therefore remain confident that 2019 will provide further opportunities for the Company to acquire properties that meet our strict investment requirements and enhance the portfolio mix.
Occupiers We have a wide range of occupiers from major national and regional multiple retailers to government and corporate office occupiers. We do not have a material reliance on any single occupier or building and we therefore have a very limited exposure to any downside risk.
It is our intention to treat all our occupiers as long-term clients of REI and to provide them with their growing and often changing requirements and, at all times, offer the services of a professional, dedicated and experienced landlord.
Convenience & neighbourhood retail thriving Negative sentiment surrounding the high street is significant. However, it is our opinion that certain quality retail assets in proven locations are now undervalued, particularly set against other sectors (industrial/offices) and are likely to attract yield-seeking investors over the coming year, leading to valuation uplifts and a positive impact on our portfolio.
Our traditional retail assets, which account for 19.6% of the portfolio, continue to perform extremely well and due to current anti-retail sentiment, we believe are undervalued.
Our retail exposure remains focused on convenience, value and neighbourhood outlets.
12 Real Estate Investors PLC Annual Report and Accounts 2018 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS 1313 3.16% 6.12% 5.94% 0.10% 0.34% 4.62% 2.50% 6.69% 3.00% 3 7. 8 6 % 19.60% 10.07% 100.00% 31 Dec 2018 Dec 2018 31 % by Income% by Rent £ 5 7, 0 9 4 16,400 424,613 5 3 7, 5 9 6 511,000 785,502 1,011,150 1,13 7, 5 4 0 1,041,802 3,333,828 1,713,440 6,440,322 17, 010, 2 87 AnnualAnnual Report Report and and Accounts Accounts 2018 2018
CC LL s P P s s rr % 10 No asset to represent more than 10% of Group portfolio value state Investo Investo state state Real E E Real Real Jasper, Tunstall Jasper, Bromwich West Plaza, West Bearwood, Birmingham Titan House, Telford House, Titan Kingswinford Westgate House, Warwick & Kingston House, West Bromwich Warwick & Kingston House, West House, Westgate Molineux Wolverhampton House, & City Gate Leicester House, Acocks City Green & Birmingham Centre Property Birch House, Oldbury House, Birch Crewe Shopping Centre, Acocks Shopping Green Centre, Crewe Heath & Kings TOTAL Car Park Industrial Assured Shorthold Tenancies Financial/Licences/Agency Hotel Leisure Food Store Pharmaceutical and Medical Restaurant/Bar/Coffee Sector Office Traditional Retail Discount Retail % 5 No tenant to represent more than 5% of Group contracted rent Discount Retail Hotel Food Stores Office Food Stores Office Office Medicaland Pharmaceutical Sector Office Discount Retail % 1.76 1.82 1.70 1.70 1.55 2.83 1.66 3.36 3.04 2.65 % 22.07 38% 310 518 481 282 289 263 572 450 290 300 3,755 Rent £000 Rent 22.07 10 tenants Top represent only 22.07% of REI’s contracted income 20% 0.10% % 3 % Image courtesy of Birmingham City Council 0.34% 3 % 3 Tenant % 5 10% % 6% 6 7% 5 6 7 8 9 1 4 3 2 10 Rank Top 10 tenants by income – no material reliance material – no income by tenants 10 Top Portfolio –mix multi-sector diversification CHIEF EXECUTIVE’S Q&A
QUESTIONS & ANSWERS WITH PAUL BASSI
Paul Bassi CBE Chief Executive
Q Q
What’s your exposure to retail? Are the management committed?
A We have a diverse portfolio with no material A Management are significantly invested with reliance on any single occupier or asset. 6.6% shareholdings across the Board. None of Traditional retail accounts for less than 20% of the Board have ever sold any shares and remain our portfolio and our focus is aimed at value, totally committed to delivering value to the neighbourhood and convenience retail, which is Company’s shareholders and building a diverse performing very well with strong occupancy and portfolio with ongoing income and capital value demand. We have no exposure to the troubled enhancement opportunities. department store sector. Q Q
What happens if interest rates go up? Do you expect further dividend growth?
A If they do, it’s business as usual for REI. A Amongst our peers, our rate of dividend We have fixed 67% of our debt and lowered growth has been higher than most, having our overall cost of debt to 3.7% (2017: 4.2%). enjoyed 6 years of consecutive dividend growth We remain conservatively geared at 39.8%. and up 14% this year. Management remain Our business model is robust and our covenants committed to continuing with our progressive are strong. The business is in very good shape. dividend policy and will additionally focus on The Company has a proven track record of growing our net asset value through asset sales benefiting during uncertain times and with above book value and enhanced capital values access to debt and the ability to transact quickly through valuation gains as a result of our active as a cash buyer, interest rate rises reveal asset management. distressed and orphaned assets that otherwise would not be available and REI will be ready to capitalise on these.
14 Real Estate Investors PLC Annual Report and Accounts 2018 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS 15 15 AnnualAnnual Report Report and and Accounts Accounts 2018 2018
CC LL s P P s s rr state Investo Investo state state Real E E Real Real Value and income our continue is focus to and Value will we uniquely is positioned REI the in heart of the Midlands By adding value adding through asset By management, sales and have numerous value add We opportunities to grow Q have million £25 to spend,You what are you going to buy? A Q How the is regional economy across the Midlands? A Q How will the business achieve portfolio growth? A Q What opportunities are there within the existing portfolio? A be risk adverse with diverse income streams. We havebe a adverse risk income We diverse with streams. strict process toidentify opportunities compliant criteria loyal the to our in and commitment remain to invest Midlands where believe we region value can be achieved and where our knowledge and expertise us crucial give often us to identify allowing market insight, opportunities before the of wider them. aware market is city Our is region Birmingham centre. in region, experiencing unprecedented an period Billions of change. of pounds have been Birmingham transforming invested in Investment infrastructure, and areas. the in surrounding ground-breaking and projects events such as such as HS2 combined the with the Commonwealth Games 2022, in numerous relocations and of the major organisations of young professionalsmigration search to the of in region homescareers, and schools have contributed all to the rise development activity, in the and in improvements vast local well placedeconomy is REI that witnessing. to are we activity on this capitalise and the demand and opportunities that it. from arise acquisitions. Our focus will remain on and the Our remain vibrant focus will acquisitions. Midlands whereemerging plenty region of opportunities assets only will themselves. acquire that revealing We are andcompliant criteria offerare scope gains for capital enhancement. income and lease renewals andcapital income reviews, through rent particularand in change of use, through to residential permitted development have already We rights. identified sq ft250,000 of potential residential conversion opportunities the portfolio within and of the these first has now been sold permitted with development at a rights valuation. uplift40% to the December 2017 OUR PORTFOLIO
BROMSGROVE TOPAZ BUSINESS PARK
£4m acquisition price
“With prudent leverage, excellent banking relationships and access to debt, REI has the ability to execute quickly as a cash buyer and secure criteria compliant acquisitions, delivering capital enhancement across the portfolio.” Paul Bassi CEO
16 Real Estate Investors PLC Annual Report and Accounts 2018 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS 1717 AnnualAnnual Report Report and and Accounts Accounts 2018 2018
CC LL s P P s s rr 071 , state Investo Investo state state Real E E Real Real A prominent high-qualityA prominent office business park self-containedincorporating office 10 buildings, located close to Junction 1 of and the M42 sq ft of high a total ofcomprising 45,071 specification office accommodation. JuneThe in 2018 asset million for £4 was acquired income rental of a current with costs) (excluding yield of 6.90%. and a net initial p.a. £293,994 The property multi-let is tenants with QS including Handelsbanken, Fuelsoft, Toshiba Kelly, MV Finance, of and a WAULT Instinctive with Technologies years to expiry. years to break and 1.47 1.10 per sq ft. The total represents current rental £16.72 per sq ft have recently been Levels of £19.00 with theachieved in line property, in is which other local market acquisition, transactions. Since havewe re-geared a number of the leases at levels. these The property includes additional land an with low-densityoverall offering prospects site, for future development. 45 square feet Well positioned Well • • • • •
DEVELOPMENT PROSPECTS FORFUTURE OUR PORTFOLIO CONTINUED
LEICESTER PERMITTED CITY GATE DEVELOPMENT HOUSE
Sold for £2.6 million with permitted development rights • The property occupies a prominent position on a main route to Leicester City Centre and comprises a self-contained, 4 storey office building with parking • The asset was acquired from receivers for £1.8 million in 2014 (excluding costs) • The property has a total net office space of 18,070 sq ft and is let entirely to the Secretary of State until August 2024, with a tenant break in April 2021. The rental income is £157,500 p.a • Contracts were exchanged in late 2018 at £2.6 million to sell the property to a residential developer with permitted development rights and is due to complete in June 2019. The sale represents a 40% uplift on the December 2017 valuation of £1.855 million. £2.6m sale price
“Residential conversion opportunities have been identified across the portfolio. This sale represents a 40% uplift on our December 2017 book valuation and the proceeds will be recycled into criteria compliant acquisitions to further support our progressive dividend policy.” Andrew Osborne Investment
18 Real Estate Investors PLC Annual Report and Accounts 2018 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS 1919
AnnualAnnual Report Report and and Accounts Accounts 2018 2018
CC LL s P P s s rr state Investo Investo state state Real E E Real Real PLANNING GAINS
Land purchased in 2016 for £1.15 million and million for £1.15 Land purchased 2016 in zoned residential The land the with was acquired to securing view planning gain planning a with sold subsequently, and approval An application was submitted refused and initially engagedREI advisers with appeal an to submit have we year successfully end, Post secured residential Coseley in units consentplanning for approximately 100 have also securedWe repayment matter of costs this in to therelating application and appeal expected is This to be sold developer to a residential for book more than our existing significantly value homes secured Planning consent secured consent Planning • • • • • • •
100 BIRMINGHAM COSELEY BOURNE STREET, STREET, BOURNE LANDAT OUR PORTFOLIO CONTINUED
WYTHALL VALUE ADD BOUNDARY OPPORTUNITIES HOUSE
Actively managed • The property was purchased in 2016 for £2.45 million with a WAULT of 5 years • Based on REI’s knowledge of how the tenant occupies the space and their desire to remain, a twin approach was taken at the rent review in January 2018 and, in addition to the rent review, an increased opportunity to re-gear the lease was raised • Following lengthy negotiations, a new lease until January 2028 was agreed at a rent of £260,000 • This added 6 years to the WAULT and increased the valuation to £3.33 million in December 2018, over a December 2017 figure of £2.65 million £2.45m purchase price
“Our strategy is to invest in well located, real estate assets in the established and proven markets of the Midlands, with income and capital growth potential, realisable through active portfolio management, refurbishment, change of use and lettings. The portfolio has no material reliance on a single asset or occupier.” Ian Clark Asset Management
20 Real Estate Investors PLC Annual Report and Accounts 2018 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS 2121 AnnualAnnual Report Report and and Accounts Accounts 2018 2018
CC LL s P P s s rr state Investo Investo state state Real E E Real Real ADEDICATED LANDLORD
m ”
3.75
The property was purchased in June 2015 for £3.75 for £3.75 The property was purchased June in 2015 million the serviceFollowing of a Break Notice by a tenant, was identifiedit that the Notice had been served incorrectly agreed a surrender REI premium of thatIn light error, to the allow tenant to vacateof £200,000 the issued Dilapidations claim In addition to this, by was settledREI at £125,000 Some of the additional used monies were to create a new space for another that tenant the in building deal a wanted that to expand a merger, following was secured due to the knowledge and relationship hadthat the with REI tenant A new 10-year lease was agreed the with tenant at The property was valued December in 2018 million £4.275 We are not a passive investor and and investor passive a not are We
SQUARE 40 ST PAUL’S PAUL’S ST 40 Jack Sears Asset Management continue to identify asset management management asset identify to continue across initiatives the portfolio, existing of a level good ongoing generating capital and rental growth. Further value through berealised can creation and reviews rent lettings, additional changeof use. “ £ purchase price City location Centre • • • • • • • BIRMINGHAM PROPERTY REPORT
ACTIVE ASSET MANAGEMENT
Investment market Demand for UK property investment continued throughout 2018, highlighting the resilience of UK real estate, regardless of the political upheaval around Brexit.
We have seen an increase in transactional activity from a broad spectrum of investors, including major UK institutions, listed property companies and local authorities, with a growing number of international investors who see value in the price of UK sterling.
With more competition from a variety of investors, Maypole, Birmingham property yields are lower than 5- and 10-year averages The REI portfolio and in view of this, we have been careful not to chase the market. We continue to operate in an economically vibrant region. Lambert Smith Hampton, in its recent 2018 Outside of the mainstream, we have access to regional Transactions Bulletin, showed investment volume in the activity which some of the other investors are not able to regions outside London (excluding portfolio sales) access, enabling us to uncover off-market opportunities. amounting to £5.6 billion in Q4, up 8% on the previous As an established and recognised investor with a quarter and 13% above average. This brought the strong track record, we continue to find and transact annual total for 2018 to £21.3 billion, its best year opportunities that fit our criteria, as demonstrated by the since 2006. LSH reported a healthy picture across the investment of £15.4 million (net of acquisition costs) in regions, all of which recorded above average volume selective stock at an average net initial yield of 8.88% in 2018 with investment volumes in the Midlands with reversionary potential to 9.20%. reaching £4.29 billion. (Source: LSH Research Property Data Property Archive). Negative sentiment surrounding the High Street is significant. However, it is our opinion that certain, Property overview quality retail assets in proven locations are now The portfolio is valued at £224.8 million (2017: £213.1 undervalued, particularly set against other sectors million), an increase of 5.5% and contracted rental (industrial/offices) and are likely to attract yield-seeking income has grown to £17.0 million p.a. (2017: £16.2 investors over the coming year and leading to valuation million p.a.), up 4.9%. The Company’s property uplifts and a positive impact on our portfolio. portfolio comprised 52 assets with 269 tenants and a net initial yield of 7.26%. We believe that economic uncertainty from the ongoing Brexit negotiations could provide further opportunities Our portfolio is strategically well positioned across the for acquisitions, and remain confident that we can Midlands region and, despite a highly competitive continue to acquire properties that meet the Company’s investment market, we have acquired a variety of high investment requirements and improve the portfolio mix. yielding, quality investment assets during the period. Occupational market We have enjoyed an excellent period of transactional The Birmingham office market continues to hit new activity throughout 2018, completing £15.4 million of heights as it drives forward into an era of re-development investment property acquisitions (net of acquisition costs) and re-purposing. Yet again, the city is witnessing and £5.7 million of strategic sales. The acquisitions record levels of construction with both developer and provide good scope for short- to medium-term asset investor confidence high as preparation for HS2 gets management opportunities to drive rental growth and in underway and the 2022 Commonwealth Games turn capital values. draws ever closer. The portfolio is growing, with an increasing spread of Supply of new and secondary office space has been locations and covenants and we continue to identify restricted, with a lack of new developments together asset management initiatives, generating a good with a trend for conversion of secondary offices to ongoing level of capital and rental growth. residential (through permitted development) which is driving an upward pressure on rents across the board.
22 Real Estate Investors PLC Annual Report and Accounts 2018 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS 2323 AnnualAnnual Report Report and and Accounts Accounts 2018 2018
CC LL s P P s s rr – Purchased on 22 June 2018 (Office, June – Purchased 2018 on 22 treet, Redditch – Purchased on opaz Way, Bromsgrove – Purchased on opaz Way, lcester S state Investo Investo state state treet, Kings Heath, Birmingham – Purchased on Real E E Real Real he Quadrant, A opaz Business Park, T T 15 June 2018 (Office Business Park, £4,000,000, excluding excluding (Office £4,000,000, Business Park, June 2018 15 off-market an in Acquired transaction costs). a private from acquisition a reversionarywith yield of yield of 6.9% at a net initial investor, The investment comprises high-quality a prominent office 8.14%. self-containedbusiness park office of The 10 property buildings. is Handelsbanken, Kelly, MV multi-let tenants with Finance, QS including believes that REI and office Instinctive Technologies. Fuelsoft, Toshiba the in rents asset below are local market levels and therefore acquisition, Since and growth. capital positive rental anticipate new lettings have been agreed at increased There is levels. rent also additional land that offers prospects for further development. High S 120–138 costs). acquisition excluding £4,800,000, (Retail, 5 September 2018 a prime acquired neighbourhoodWe scheme retail a pension from p.a., rent and £445,860 producing yieldfund of 8.7%, at a net initial years to expiry years to a potential and 4.00 of 4.25 a WAULT with break. The property fully is let good with national tenant covenants Burton, Lloyds Scrivens Opticians, Pharmacy, Retail, Wilko including Specsavers, Greggs and Bon Marche. Wolverhampton Molineux, A city centre office costs). is which acquisition excluding £3,582,000, let to the Secretary Department of State, and local for Communities government onrecently a re-geared 10-year and fully repairing lease Theinsuring a tenant with investment break at the year. 5th providing p.a. of £324,370 rent a current with was acquired The property yield of 8.50%. a net initial provides excellent an yield together a government-backed with covenant and has potential strong should conversion for residential the asset become ever vacant. T acquisition excluding £2,989,000, (Retail/Leisure December 2018 21 A mixed-use blockcosts). affluent an in Midlands town in comprises The building pitch. a well located and established A3/A4 car park. a 143-space with sq ft of retail/leisure/gym/office 39,065 p.a. The investment produces a net annual income of £389,640 years to break). years to expiry of (2.77 5.5 a WAULT with It incorporates JD Wetherspoon 8 tenancies plc, including; Fitness (UK) Prime Ltd. D P Realty Charitable Trust, Swanswell Ltd, assetThis prospects with has considerable upside, capital for developmentresidential and the ability to break up to generate further sales value capital values. through individual to premium Acquisitions toPositioned advantage take All of our property and compliant criteria one of remain our acquisitions that is requirements can we addkey value and income acquisition. to any strategyThis valuation also to pressure downward provides as resistance has been at a valuations increasing demonstrated for like our with like million, upliftcapital a of £1.8 whentime up 0.9%, the static, market is despite some valuation our sentiment downward retail. towards made were costs) of acquisition (net million of £15.4 acquisitions Total p.a., million theduring period, a combined with income of £1.454 reversionary yield. yield and 9.20% net initial reflectswhich 8.88% include: New acquisitions • • • • of assets 2019, million a further during acquiring anticipate We £25 a balanced our portfolioto grow and maintaining whilst and income, sector asset, diversified and occupier our base. established With network of contacts regional and our well-established reputation for efficient transactions continue to good target will we income low with gearing in portfolio regional a diversified and continue to focus stable on delivering long-term returns for shareholders. 3.16% 6.12% 5.94% 0.10% 0.34% 4.62% 2.50% 6.69% 3.00% 3 7. 8 6 % 19.60% 10.07% 100.00% 31 Dec 2018 31 % by% Income Rent£ 5 7, 0 9 4 16,400 424,613 5 3 7, 5 9 6 511,000 785,502 1,011,150 1,13 7, 5 4 0 1,041,802 17, 010, 2 87 6,440,322 3,333,828 1,713,440 ector TOTAL Industrial Assured Shorthold Tenancies Car Park Restaurant/Bar/Coffee Financial/Licences/Agency Hotel Leisure Food Stores Pharmaceutical and Medical S Office Traditional Retail Discount Retail Portfolio mix: Portfolio mix Diverse with and demand high risk low and no material reliance million has portfolio a diverse REI of £224.8 strategy This asset for allows continuedon one any sector, or occupier. growth opportunistic via of prime and secondary acquisitions assets that, activewith asset continue to enhance management, will thevalue capital and income of the portfolio. REI is well positioned is REI advantage to take of increased market activity. across the portfolio, have occupancy achieved a current We of 96.1% and expect we to see continued growth rental and low vacancy rates supporting investment objectives our strategy the and maintain Company’s furtherof delivering growth of our fully covered dividend payments. We punctualcontinue to enjoy payments rental across the portfolio, we which believe effective reflect, property a robust liaison, management/tenant property portfolio and a stable local economy. From a wider market perspective,From the larger funds are and institutions offer fact, in potential stock,under prospects which, valuing at to acquire as evidenced and levels, discount Redditch in by our recent acquisitions bought Heath,Kings were which London-based from funds. Meanwhile, negative sentiment relating to High Street Retail is resulting in in negative resulting is Meanwhile, Street sentiment to High Retail relating valuation downgrades despite some of these assets having income strong streams and good leading is us to believe This that covenants. the wider market has overly an taken downbeat on view the Street High thereby thecreating potential to selectively assets retail at levels. discount acquire do not department own any We etc) stores (House of Fraser/Debenhams Homebase, Maplins, and have Threshers R Us, had no exposure to Toys Our only arrangement. insolvencyor other CVA profile any high experience was Poundworld 2 vacant with one shops, of was let which immediately and to the Poundstretcher other on the is open market to let. Office leasing activity for 2018 in the central Birmingham office the in central Birmingham market Office leasing activity for 2018 compiled to figures according deals, by the sq ft 113 in totalled 754,129 outcome The Office 2018 Birmingham BOMF). Market (Source: Forum officeexceeds the 10-year JLL’s average take-up central Birmingham. in agency team recently reported that office encouraging remain enquiries across a number of sectors. JLL office predicting is 2019 into moving exceed will the longer-term averages leasing activity 2019 levels in sq ft)and expect record sq10-year ft, – 730,002 (5-year – 827,170 be psf will achieved for the central prime headlines of £35.00 rent officeBirmingham 2019. market in PROPERTY REPORT CONTINUED
“With a privileged network Sales Achieved book value or above and unrivalled market knowledge, Capitalising on investor confidence and appetite we have disposed of £5,750,000 (excluding sale costs) of assets which provided a combined coupled with excellent banking income of £494,094 p.a., reflecting a comparative initial yield of 8.07%. relationships and access to debt, The Company will use these proceeds to fund acquisitions that are better aligned to our investment strategy. We completed the following sales REI is well positioned to execute on during 2018, at or above cost: • 24 Bennetts Hill, Birmingham – Sold for £4,000,000 (excluding sale criteria compliant opportunities quickly. costs) on 10 January 2018, representing a net initial yield of 5.9%. The property was acquired in December 2014 for £2.06 million and we REI will consider an asset for sale had renewed/re-geared a number of the tenancies prior to sale which once it has matured and all value was openly marketed. add initiatives have been completed, • 294-310 High Street, West Bromwich – Sold for £1,040,000 (excluding sale costs) on 11 May 2018. The property was formerly with sale proceeds recycled into occupied by Allied Carpets. During our ownership we sub-divided further capital and income the property into 5 smaller retail units, which were fully let at the point of sale. enhancing opportunities.” • The Marlowes, Hemel Hempstead – Sold for £710,000 (excluding Anna Durnford sales costs) on 14 August 2018. Occupied by Auto Mobility Concepts Investor Relations on the ground floor and Novo UK Recruitment on the upper floor offices, we re-geared with both tenancies and subsequently sold the freehold, via a national property auction to a private London-based investor.
During the period we have unconditionally exchanged contracts on the sales of Metro Court, West Bromwich which completed in January 2019 and City Gate House, Leicester which completes in June 2019. In view of the low interest rate environment and limited supply, we expect demand for stock to continue this year, with potential to achieve premium value for sales.
Topaz Business Park, Bromsgrove
24 Real Estate Investors PLC Annual Report and Accounts 2018 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS 2525 – % 100% 96.10% 91.44% 90.33% 95.50% 99.44% Occupancy – % EQY 7. 75 % 7.9 0 % 7. 2 2 % 5.97% 8.06% 7. 49 %* – % RY 7. 3 8 % 9.83% 8.75% 8.37% 6.08% 8.02%* AnnualAnnual Report Report and and Accounts Accounts 2018 2018
CC LL s P P s s rr – % – Using local – Using market knowledge, REI – Purchased in 2016 for £2.45 million million for £2.45 – Purchased 2016 in NIY 7. 3 3 % 9.47% 8.38% 6.90% 4.84% 7.26%* state Investo Investo state state £ – treet, Walsall treet, ERV Real E E Real Real 310,326
1,9 7 7, 5 8 8 2,854,131 7, 4 2 0 ,9 3 3 6,238,933 £18,801,911 – Purchased for £1.150 million in in million Midlands West – Purchased for £1.150 and at Coseley, Boundary Wythall House, at a Net Initial Yield of 9.59% with 5 years WAULT. Based on REI’s Based on REI’s 5 years with WAULT. of 9.59% Yield at a Net Initial knowledge of how the tenant occupies the space to and their desire a twin approach January in remain, was at the taken review rent 2018 and opportunity an to re-gear the a new lease As a result, was raised. This lease was agreed January of until £260,000. at a rent 2028 and increasedadded the valuation to £3.33 6 years to the WAULT of £2.65 figure a December over 2017 December in million 2018, million. identified a number REI of Brandon Court, Coventry – During 2018, asset management opportunities across the scheme.tenant A had a new facilitated REI previously to vacate indicateda desire unit. its deal that saw the the then monies tenant dilapidations were vacate; A new 5-year the for a newre-invested tenant. suite refurbishing into lease was was agreed important This at enhanced an tactically, rent. createdas it Notice the on to evidence serve to REI allow a S.25 passing another tenant for a new 10-year lease of £60,285; at a rent was settled review A rent the taking on another unit, p.a. £50,000 rent the evidence using again p.a., to £39,500 p.a. £33,000 from rent the hasfrom sq also ft letting. obtained REI for 8,000 outline planning of additional office space on some the is land scheme. This within million, book value £5.45 currently December being marketed; 2017 million. £6.0 December 2018 S Park 59/75 appointed a local agent who identified and delivered 20-year a lease have where been retailers environment an in occupier, to a retail demonstrated this a good Again, struggling. knowledge of the local market and a well-connected network had of held advisers. REI at firm despite temporarythe required, rent deals being offered, to maximise the value enhancement. L the and land zoned the with was acquired to view residential, 2016 andsecuring subsequently approval planning sold a planning with year end have we Post secured consent planning residential for gain. expectedis This Coseley. in to be units soldapproximately to 100 a developerresidential book more than our for existing significantly value. £ – • • • • actively lease all REI reviews events a period over the of into time future. combined approach, This the with advice right where necessary and an knowledgeintimate of the once markets has, again, and occupiers, resulted a number in of matters being dealt a proactive in with manner that have not only protected values economic a challenging in and political but demonstratedclimate, values increase an in that have allowed the portfolio to value. increasein 298,996 5,973,019 1,574,84 4 2,669,032 6,494,395 ContractedRent £17, 010, 2 87
– sqft Area 28,779 109,721 193,462 673,568 544,460 1,549,990 £ Value 3,035,000 3,738,000 83,115,000 68,140,000 36,295,000 30,555,000 £224,878,000 – Further of the to REI a review lease, – Purchased in May 2014 for eicester – Purchased May in 2014 quare, Birmingham the service – Following of a t Paul’s S t Paul’s Our land holdings excluded are from the yield calculations 40 S break notice by a tenant, it was identified it break that notice by the a tenant, notice had been incorrectly agreed a surrender REI served. of that In light error, to the allow tenant In addition to to vacate. of £200,000 premium the issued claim was dilapidations settled by REI this, at £125,000. Some of the additional used monies were to create a new space for another who tenant the wanted in building to expand following The deal came abouta merger. because of the knowledge and had that A new the with 10-yearREI relationship tenant. lease was agreed. City Gate House, L was let the on building of 8.0%, Yield at a Net Initial million £1.85 lease FRI an to the Secretary of the a review Following of State. portfolio and based knowledge on REI's of the local market/deals, was identifiedthe as having building longer-term permitted development It potential. was to taken the market and unconditional million, for a sale of £2.6 contracts exchanged October were in 2018 valuation. uplift a 40% representing on December 2017 Due to complete June in 2019. Westgate House, Warwick instigated a strategic plan a lease to achieve re-gear the with NHS. notice seeking a new lease at increased an A S.25 was served rent alongside a Schedule position, of Dilapidationsto protect REI’s Discussions on a new leaseclaim. the with NHS close are to resolving a new 5-year term. million. for £8 Acocks Green, Birmingham – Purchased 2015 in the value of current the salePost of the office block for £825,000, During the has year let REI million. the scheme has increased to £9.5 the car park to a new operator on a 10-year lease and undertaken othervarious lettings and lease re-gears, of have all which increased also There a longer-term is that gain has planning been the WAULT. identified the with local ongoing. and are council discussions otal Land T * Other Locations Other Midlands Other Birmingham MidlandsWest Central Birmingham Key assetKey management undertaken initiatives the during period include: • New tenants portfolio to our existing Summer USA Camp, include: UK, SubwayNewstead Realty, Services, Tec Clark Financial Toshiba and Metaswitch Naismiths Networks. Parsons, Patrick Asset management management Asset activity Intensive strategyOur assets acquisition of acquiring value with add potential has proved to be successful. a flat Even in market place some andin cases, valuations value sectors, increase by declining have we for like seen like not a primarily are due to asset We management initiatives. 0.86%, passive and investor seek to continuously our ability review to add value and income to our portfolio. • • • (table belowThe are geographic excludes current weightings property disposals completed which 2019): in FINANCE DIRECTOR’S REPORT
CONSISTENT PERFORMANCE
Overview Our main objectives for the year were to continue to increase shareholder value, refinance unencumbered properties and deploy the funds generated in criteria compliant investment properties, continue our progressive dividend policy, and increase our underlying profit before tax, EPRA earnings per share and net assets per share. All of these objectives have been achieved.
31 December 2018 31 December 2017 Change Gross Property Assets £224.8 million £213.1 million +5.5% Underlying profit before tax £7.2 million £6.2 million +16.1% EPRA EPS 3.9p 3.3p +16.3% EPRA NAV per share 69.3p 68.9p +0.6% EPRA NNNAV per share 67.9 p 6 7.1p +1.2% Net Assets £128.7 million £127.1 million +1.3% Loan to value 44.7% 40.4% -10.6% Loan to value net of cash 39.8% 38.3% -3.9% Average cost of debt 3.7% 4.2% +11.9 % Dividend per share 3.56p 3.12p +14.0% Like for like rental income £15.5 million £15.8 million -1.9% Like for like capital value per sq ft £147 sq ft £146 sq ft +0.9% Like for like valuation £209.2 million £207.4 million +0.9%
Results for the year Our underlying profit before tax rose to £7.2 million (2017: £6.2 million). Profit before tax (IFRS) totalled £8.4 million (2017: £11.3 million), including a loss on sale of investment properties of £42,000 (2017: surplus £176,000) and a surplus on revaluation of investment properties of £578,000 (2017: £4.2 million), together with a surplus on the market value of our interest rate hedging instruments of £706,000 (2017: £725,000).
Acquisitions of investment properties totalled £15.4 million (net of acquisition costs) during the year. Rental income for the year was up 5% to £15.6 million (2017: £14.9 million) but the full benefit of these purchases will be realised in 2019. The investment properties are revalued externally at 31 December and generated a surplus on revaluation of 578,000, despite the pessimistic view on retail, which resulted in a write down of £1.25 million on our retail centre in Crewe, and absorbing costs of £804,000 on property acquisition.
The decision to dispose of certain properties during the year resulted from properties reaching maturity, receiving an offer that could not be refused and continuing to dispose of the ‘legacy’ portfolio which we inherited and is out of area.
We continue to review our overhead base and administrative expenses which were stable at £3.3 million (2017: £3.5 million) after charging a bonus provision (plus employers’ National Insurance) of £940,000 (2017: £876,000) and a provision for costs of the Long-Term Investment Plan of £Nil (2017: £350,000).
26 Real Estate Investors PLC Annual Report and Accounts 2018 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS 2727 % % % 0.6 3.9p AnnualAnnual Report Report and and Accounts Accounts 2018 2018 69.3p 68.9p £7.2m
16.1 CC 66.2p + LL 64.5p 16.3 + 61.3p 3.3p s P P s s + £6.2m rr 2.8p £5.2m state Investo Investo state state Real E E Real Real 0.8p £0.3m £1.4m 0.3p 2017 2016 2015 2014 2018 2017 2016 2015 2014 2018 2017 2016 2015 2014 2018 Key performanceKey indicators (‘KPIs’) The KPIs some following are of the tools used by management to monitor the performance of the Group of sustainable the long-term creating against aim returns for shareholders and have movedall favourably year. this per share NAV EPRA per share earnings EPRA tax before profit Underlying
Marcus Daly Finance Director March 2019 18 Dividend Under the status at least to REIT distribute the required Group is 90% of income eachrental year taxable by financial way arising profits of a Property commenced REI Income paying Distribution. quarterly dividends per July, paid in were share dividends Interim of 0.75p 2016. in October and January and the Board proposes dividend a final of as a Property Income per payable share April 2019 in 0.9375p an 3.125p) for the year (2017: making a totalDistribution of 3.5625p The allocation of dividend paymentsincrease of 14%. between PID and non continue to PID vary. will The Group converted to a Real Estate Investment Trust (‘REIT’) on The Group converted (‘REIT’) to Estate a Real Investment Trust Under status REIT the Group does not pay tax on its 1 January 2015. incomerental or profits the from on gains sale of investment properties. The tax for the charge respect year in is of bank received interest and the movement on the deferred tax asset respect in is of the financial instruments. The Group continues to meet of all the requirements REIT status. REIT to maintain Taxation Long Term Incentive (‘LTIP’) Plan Long Term designed is The to promote LTIP and retention to the incentivise Executive theDirectors value to grow of the Group and returns. to maximise £350,000) has beenA provision made the in accounts (2017: of £Nil Based on the results and particularly respectin of the the LTIP. share to vest. likely are none of the options awarded for 2016 price for 2018, Finance and banking and Finance million was £99 December 2018 drawn debt at 31 Total the Group agreed a new In August 2018 million). £85 (2017: LIBOR over Bank facility of Royal with Scotland million at 1.95% £10 facility Lloyds with million £20 the Group’s Decemberand in 2018 Banking Group was renewed During the for 5 years. year the Company settled one hedge facility Lloyds with Banking Group at a cost of hedge million facility place. As in a result, leaving one £10 £153,000, 4.2%) the weighted average cost of debt has decreased (2017: to 3.7% 4 years), and the weighted average debt maturity years (2017: was 4.5 The at loan variable. of to debt value (‘LTV’) 67% with fixed and 33% and the net of LTV cash 40.4%) was 44.7% (2017: 2018 December 31 38.3%). (2017: was 39.8% Basic NAV: 69.0p (2017: 68.2p) (2017: 69.0p Basic NAV: 68.9p) (2017: 69.3p EPRA NAV: 67.1p) (2017: 67.9p EPRA NNNAV: Shareholders’ funds increased to £128.7 million at 31 December 2018 December 2018 at 31 million fundsShareholders’ increased to £128.7 per and increased: the share NAV million) £127.1 (2017: Earnings per were: share Earnings 6.0p) (2017: 4.5p Basic: 5.9p) (2017: 4.4p Diluted: 3.3p) (2017: EPRA: 3.9p Interest costs for the year rose to £3.7 million (2017: £3.5 million) but million) £3.5 (2017: million Interest costs for the year to rose £3.7 as a result 4.2%) the weighted average (2017: cost of debt fell to 3.7% of new debt at variable rates and the settlement of a hedge facility with Lloyds Banking Group. PRINCIPAL RISKS AND UNCERTAINTIES
Review of business Real Estate Investors PLC is a commercial property investment company specialising in the established and proven markets of the greater Midlands area. The Group’s business model is based on generating rental and capital growth from an active approach to the management and development of a portfolio of quality buildings, predominantly within the office and retail sectors.
Recurring rental income from the portfolio underpins profits, which are supplemented by gains from the sale of investment properties. Disposal proceeds are recycled into new acquisitions with better growth prospects, whilst maintaining compliance with the terms of flexible secured bank finance.
The Group has built up a portfolio of good quality assets concentrated in these resilient established markets, without reliance on one sector or location (see pages 4 to 27 for the review of the business which forms part of this Strategic Report).
Principal risks and uncertainties The Directors consider the principal risks of the Group and the strategy to mitigate these risks, as follows:
Risk area Mitigation
Investment portfolio • Tenant default • Not reliant on one single tenant or business sector • Change in demand for space • Focused on established business locations for investment • Market pricing affecting value • Monitor asset concentration • Portfolio diversification between office and retail properties • Building specifications not tailored to one user • Continual focus on current vacancies and expected changes
Financial • Reduced availability or increased cost of debt • Low gearing policy • Interest rate sensitivity • Fixed rate debt and hedging in place • Existing facilities sufficient for spending commitments • Ongoing monitoring and management of the forecast cash position • Internal procedures in place to track compliance with bank covenants
People • Retention/recruitment • Remuneration structure reviewed • Regular assessment of performance • Long-term incentive plan
Corporate • Reputational risk • External investor and public relations consultancy • Health & safety • Management system and support from specialist external advisers • IT/Cyber • IT systems and anti-virus software and firewalls
This strategic report was approved by the Board and signed on its behalf by
MHP Daly Secretary 18 March 2019
28 Real Estate Investors PLC Annual Report and Accounts 2018 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS 2929 AnnualAnnual Report Report and and Accounts Accounts 2018 2018
CC LL s P P s s rr state Investo Investo state state Real E E Real Real 75-77 Colmore Row, Birmingham Colmore Row, 75-77 BOARD OF DIRECTORS AND MANAGEMENT
JOHN CRABTREE OBE D.UNIV WILLIAM WYATT PETER LONDON NON EXECUTIVE CHAIRMAN NON EXECUTIVE DIRECTOR NON EXECUTIVE DIRECTOR
Until 2003, John was senior partner of Wragge William joined Caledonia in 1997 from Peter is an Independent Financial Adviser with & Co – the leading national firm of solicitors. He Close Brothers Group Plc. He was appointed Ascot Lloyd. He has a lifetime’s experience in is Chairman of Glenn Howells Architects, Staffline a Director in 2005 and Chief Executive in providing Independent Financial Advice to high Group plc, White & Black Limited and Brandauer 2010. As well as Caledonia and REI, he is net worth individuals and sold his IFA Company Holdings. John is former President of Birmingham a Director of Cobehold S.A., Chairman of to a Swiss Bank in 2007. Peter is also a Non- Chamber of Commerce, previous High Sheriff Newmarket Racecourses and a Trustee of The Executive Chairman of a number of property- of the West Midlands and is Her Majesty’s Rank Foundation. related companies. Lord-Lieutenant of the West Midlands. In 2014, Government Secretary Eric Pickles named John as Chairman of the Birmingham Improvement Panel, charged with supporting the council as it pursues reforms. The Prime Minister has appointed John as Chair of the Birmingham Organising Committee for the 2022 Commonwealth Games.
PAUL BASSI CBE DL D.UNIV DSC MARCUS DALY FCA CHIEF EXECUTIVE FINANCE DIRECTOR
Paul is also Chairman of Likewise Group Plc, listed Marcus is a Chartered Accountant with 30 on the International Stock Exchange, Non-Executive years’ experience in advising clients on strategic Chairman of Bond Wolfe and formerly Non- matters and corporate planning, particularly Executive Chairman of CP Bigwood Chartered in the property sector. He has responsibility for Surveyors. Paul was formerly the Regional all financial and Group accounting matters, Chairman & Strategy Adviser to Coutts Bank (West together with corporate finance matters. Marcus Midlands), former Director of the Birmingham is also formerly Non-Executive Chairman of Hippodrome and past President of the Birmingham the Tipton & Coseley Building Society, and Chamber of Commerce. Paul was appointed former Non-Executive Director of CP Bigwood High Sheriff for the County of West Midlands for Chartered Surveyors. 2009 and Deputy Lieutenant. Paul has received Honorary Doctorates from both Birmingham City and Aston University, and was awarded a CBE in the 2010 New Year’s Honours List.
30 Real Estate Investors PLC Annual Report and Accounts 2018 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS 3131 BSC (HONS) AnnualAnnual Report Report and and Accounts Accounts 2018 2018
CC LL s P P s s rr INVESTMENT DONNA MOONEY RECEPTIONIST/ ADMINISTRATOR Donna has had a long and varied career as a Personal Assistant within Insurance, Advertising most recently supporting and Accountancy, members of the UK&I Leadership team within LLP. at Ernst & Young Corporate Finance and Tax Donna joined REI to take up position as Front of and to provide additional House/Administrator support to the Executive team. ANDREW OSBORNE Andrew specialises in investment acquisition and disposals of commercial properties having worked in commercial property since 1994, qualifying as a Chartered Surveyor in 1997. Prior to joining REI in June 2014, he worked for a property associated subsidiary of Goldman He began his Sachs as an asset manager. before working career as an investment surveyor, in the commercial markets team at CBRE and as a Property Fund Manager at Canada Life and a Regional Director of Highcross in Birmingham. state Investo Investo state state Real E E Real Real BSC (HONS) MRICS CATHERINE GEE CATHERINE SPECIAL PROJECTS/ MANAGEMENT PROPERTY Catherine joined REI in February 2015 having spent 8 years with Northwood Investors (formally ‘Highcross Strategic Advisers’), where she was involved in the day to day administration and management of properties across all sectors. Her skills and experience bring a broad range of property-related support in areas of Health and Property/ System Training and Safety, Asset Management. Catherine oversees capital project works, client office refurbishments and various facilities management functions. IAN CLARK Ian is a qualified chartered surveyor with over 22 years’ experience in the property market and is responsible for coordinating asset management strategy across the portfolio. After qualifying with a niche practice, Ian joined GVA landlords. Prior to acting for institutional Grimley, joining REI, for 10 years, Ian worked for Argent Estates Limited as Asset Manager and was responsible for the Asset Management of the 1.5 million sq ft Brindleyplace Estate. ASSET MANAGEMENT BSC (HONS) MRICS ASSET MANAGEMENT Jack joined REI in July 2016 following a short time at BNP Paribas Real Estate where he assisted corporate clients with the management of their residual properties when they became surplus to their day to day business requirements. Prior to this Jack spent 5 years at Bilfinger GVA where, after qualifying in 2013, he began working in the Occupational Management team on behalf of a major national bank, focusing on their northern retail and office portfolio. JACK SEARS Anna has 20 years’ experience within the legal, Anna has 20 years’ experience within the legal, financial, accountancy and property sectors. Anna started her career in financial services, to the as PA before joining Ernst & Young managing partner in Birmingham. Anna joined REI in 2007 to provide executive support to the Board and now oversees operations within the business, to include regulatory announcements and investor relations. ANNA DURNFORD INVESTOR RELATIONS CORPORATE GOVERNANCE REPORT
STATEMENT OF COMPLIANCE WITH THE QCA With effect from 1 January 2015 the Group converted to Real Estate CORPORATE GOVERNANCE CODE Investment Trust (‘REIT') status under which the Group is not liable to corporation tax on its rental income or capital gains from qualifying activities. Introduction One of the Company’s principal objectives is to deliver on a commitment On 28 September 2018, the Board of REI decided to apply The QCA to a progressive dividend policy, which is underpinned by the Company’s Corporate Governance Code (2018 edition) (the ‘QCA Code’). The choice REIT status. of code to adopt was important to us. We wanted to be sure that we would proactively embrace whatever code we opted for and not end up with a Principle 2: Seek to understand and meet shareholder needs code that could stifle us and result, on a comply or explain basis, with us describing why certain requirements were not appropriate. We believe that and expectations the QCA Code provides us with the right governance framework: a flexible The Company remains committed to listening and communicating openly but rigorous outcome-orientated environment in which we can continue to with its shareholders to ensure that its strategy, business model and develop our governance model to support our business. performance are clearly understood. Understanding what analysts and investors think about us, and in turn, helping these audiences understand Corporate governance principles applicable to our business, is a key part of driving our business forward and we actively seek dialogue with the market. We do so via investor roadshows, REI attending investor conferences and our regular reporting. As a result of deciding to apply the QCA Code, the corporate governance principles which now apply to us are those contained in the The AGM is the main forum for dialogue with retail shareholders and the QCA Code. These are: Board. The Notice of Meeting is sent to shareholders at least 21 days before the meeting. The chairs of the Board and all committees, together with all Corporate governance principles other Directors, routinely attend the AGM and are available to answer • Establish a strategy and business model which promote long-term questions raised by shareholders. For each vote, the number of proxy votes value for shareholders received for, against and withheld is announced at the meeting. The results of • Seek to understand and meet shareholder needs and expectations the AGM are subsequently published on the Company’s corporate website. • Take into account wider stakeholder and social responsibilities and their implications for long-term success Institutional shareholders • Embed effective risk management, considering both opportunities and The Directors actively seek to build a relationship with institutional threats, throughout the organisation shareholders. Shareholder relations are managed primarily by the Chief • Maintain the Board as a well-functioning, balanced team led by the chair Executive Officer supported by the Finance Director. The Chief Executive • Ensure that between them the Directors have the necessary up-to-date Officer and Finance Director make presentations to institutional experience, skills and capabilities shareholders and analysts each year immediately following the release of • Evaluate Board performance based on clear and relevant objectives, the full-year and half-year results. seeking continuous improvement • Promote a corporate culture that is based on ethical values and The Board as a whole is kept informed of the views and concerns of behaviours major shareholders by briefings from the Chief Executive Officer and • Maintain governance structures and processes that are fit for purpose Finance Director. Any significant investment reports from analysts are also and support good decision-making by the Board circulated to the Board. The Non-Executive Chairman is available to meet • Communicate how the Company is governed and is performing by with major shareholders if required to discuss issues of importance to maintaining a dialogue with shareholders and other relevant stakeholders them.
Application of the QCA Code and required Principle 3: Take into account wider stakeholder and social disclosures in our Annual Report or on responsibilities and their implications for long-term success our website The Company’s business model has been in place for many years. As The correct application of the QCA Code requires us to apply the such, any of the key resources and relationships needed by the Group principles set out above and also to publish certain related disclosures; have now been in place for quite some time. these can appear in our Annual Report, be included on our website or we can adopt a combination of the 2 approaches. The Group’s stakeholders include shareholders, members of staff, customers, suppliers, regulators, industry bodies and creditors (including Principle 1: Establish a strategy and business model which the Group’s lending banks). The principal ways in which their feedback promote long-term value for shareholders on the Group is gathered are via meetings and conversations. Following this feedback, the Group has continued its clearly defined, customer- The Company is a commercial property investment Company specialising focused and people-led strategy and accompanying conservative in the established and proven markets of the greater Midlands area. The approach to acquisitions and financing. Group’s business model is based on generating rental and capital growth from an active approach to the management and development of a Engaging with our stakeholders strengthens our relationships and helps us portfolio of quality buildings, predominantly within the office and retail make better business decisions to deliver on our commitments. The Board sector. Recurring rental income from the portfolio underpins profits, which is regularly updated on wider stakeholder engagement feedback to stay are supplemented by gains from the sale of investment properties. abreast of stakeholder insights into the issues that matter most to them and Disposal proceeds are recycled into new acquisitions with better growth our business, and to enable the Board to understand and consider these prospects, whist maintaining compliance with the terms of flexible secured issues in decision-making. bank finance.
32 Real Estate Investors PLC Annual Report and Accounts 2018 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS 3333 AnnualAnnual Report Report and and Accounts Accounts 2018 2018
CC LL s P P s s rr state Investo Investo state state Real E E Real Real nsure thatnsure between them the Directors have the Input the into Group corporate plan. Continued open an dialogue the with investment community. Considered and non-financial our financial policies. Discussed strategic priorities. structure capital strategy, and financial Discussed the Group’s shareholder investments, capital including returns and the dividend policy. Discussed internal governance processes. feedbackReviewed shareholders from post full- and half-year results. Key BoardKey activities year this included: • • • • • • • Appointment, removal and re-election of Directors The Board the appointment makes regarding decisions of and removal and rigorous transparent procedure and for a formal, there is Directors, Articlesappointments. The Company’s of Association that require one-third of the Directors stand must for re-election by shareholders that Directors stand all must for re-electionannually rotation; in at least once every and that new Directors three any appointed years; the during year stand must for election at the immediately AGM their following appointment. advice Independent ableAll Directors independent are to take professional advice the in furtherance expense. necessary, In if of their duties, at the Company’s the Directors have accessaddition, direct to the advice and services of the Finance Director. Directors’ conflict of interest of conflict Directors’ The Company has effective procedures place in to monitor and deal with Theconflicts Board of the aware of is interest. other commitments and and changesinterests of Directors, its to these commitments and interests reportedare agreed where appropriate, the with of to rest the and, Board. E Principle 6: necessary up-to-date experience, and skills capabilities The Board between satisfied is that, has effective it an the Directors, and appropriate balance of and experience. skills All Directors regular receive operational and financial and timely information on the Group’s performance. to the circulated information is Relevant Directors in advance of The meetings. business reports quarterly on headline its performance agreed its against and budget, the Board the reviews quarterly update on performance variances are significant and any at eachreviewed Contracts meeting. available for inspection are at the office registered and at theCompany’s Annual General Meeting (‘AGM'). The Company does for the Directors at present not formal provide training the Directors understandbut may their duties do However, the so in future. as Directors of a Company quoted on AIM. The Directors have access to and other solicitors advisers auditors, Nominated Adviser, the Company’s Theseas and when advisers required. to the may formal provide training at the The alsoBoard Company’s Directors able, are to time time. from to adviceexpense, obtain external from advisers required. if at by regular rotation intervalsAll Directors accordance retire in the with ArticlesCompany’s of Association. mbed effective management, risk considering The Board is responsible for reviewing and approving overall The overall Board and approving responsible is for reviewing and budgets capital revenue approving andCompany plans, strategy, structure theand for determining financial of the Company including tax andtreasury, dividend policy. The Committee Audit duties its assists the Board discharging in statements, the accounting policies financial andregarding the maintenance of proper internal and operational business, and financial controls. comprehensive proceduresThere are for for budgeting and planning, and reportingmonitoring to the Board business performance against those budgets and and expected for forecasting plans, performance theover remainder of period. the These financial cash cover profits, expenditure capital and balanceflows, sheets. Quarterly results are reported budget against and and compared the with prior year, forecasts of regularly year for the are light financial current revised in performance. actual The Company has system a consistent of prior for appraisal overseen Executiveinvestments, Director by the and Chief Finance defined with controlsOfficer, and procedures. financial Close management of the day-to-day activities of the Group by the Executive Directors. An structure organisational which defined with levels of responsibility, promotes entrepreneurial decision-making implementation and rapid while minimising risks. A comprehensive annual budgeting process a detailed producing integrated and is loss, balance profit which sheet and cash flow, approved by the Board. Detailed quarterly reporting of performance budget against areas such controlCentral key expenditure over as capital authorisation and banking facilities. Audit CommitteeAudit Meetings took place members – all attended such Committee Remuneration meetings. meetings took place members – all attended such meetings. The Board satisfied is that has it a suitable balance between independence on the and oneknowledge hand, of the Company on the to enable effectively. duties All its to and discharge responsibilities it other, encouragedDirectors are to use their independent judgement and to four challenge matters, all whether strategic or operational. During 2017 Board meetings took place Board – all members attended such all meetings. The Board comprises the Non-Executive two Executive Chairman, Directors and two Non-Executive The Directors. Board after considers, that both the Non-Executivecareful review, independent. Directors are Principle 5: Maintaining thePrinciple 5: Board a well-functioning, as balanced team led the by Chair both opportunities and threats,throughout the organisation control internal and risk Audit, The Company has established an framework of controls, internal financial the effectiveness regularly of is which by the reviewed Executive Management, the Committee Audit and the of ongoing an Board light in assessment the risks facing Company. of significant • • • • system of internal The Board has ultimate responsibility for the Group’s effectiveness. its such any systemcontrol and for reviewing of However, internal control only canprovide reasonable, but not assurance absolute, materialagainst misstatement or loss. The Board considers that the internal place complexity controls in appropriate are for the size, and risk internal control The ofprofile the elements principal Group. of the Group’s system include: • • • • • Principle 4: E Principle 4: CORPORATE GOVERNANCE REPORT CONTINUED
Principle 7: Evaluate Board performance based on clear and All Directors receive regular and timely information on the Group’s relevant objectives, seeking continuous improvement operational and financial performance. Relevant information is circulated John Crabtree, as Chairman, has been assessing the individual to the Directors in advance of meetings. The business reports quarterly on contributions of each of the members of the team to ensure that: its headline performance against its agreed budget, and the Board • Their contribution is relevant and effective. reviews the quarterly update on performance and any significant • That they are committed. variances are reviewed at each meeting. Senior executives below Board • Where relevant, they have maintained their independence. level attend Board meetings where appropriate to present business updates. The above assessment is in progress and any results will be disclosed on the website in due course. Executive team The Executive Team consists of Paul Bassi and Marcus Daly with input Succession planning is an ongoing process that identifies necessary from the management team. They are responsible for formulation of the competencies, and then works to assess what would be required to proposed strategic focus for submission to the Board, the day-to-day ensure a continuity of leadership for all critical positions. management of the Group’s businesses and its overall trading, operational and financial performance in fulfilment of that strategy, as Over the next 12 months we intend to review the performance of the well as plans and budgets approved by the Board of Directors. It also team as a unit to ensure that the members of the Board collectively manages and oversees key risks, management development and function in an efficient and productive manner. corporate responsibility programmes. The Chief Executive Officer reports to the Board on issues, progress and recommendations for change. The Principle 8: Promote a culture that is based on ethical values controls applied by the Executive Team to financial and non-financial and behaviours matters are set out earlier in this document, and the effectiveness of these The Board aims to lead by example and to do what is best in the interests controls is regularly reported to the Audit Committee and the Board. of the Company, its stakeholders and employees and it is the Board’s responsibility to ensure that good standards of corporate governance are Board Committees embraced within the Group. The Board sets clear standards concerning The Board is supported by the Audit and Remuneration Committees. Each the Group’s culture, values and behaviours. The management team have committee has access to such resources, information and advice as it regular meetings and updates with the Executive Directors, who firmly deems necessary, at the cost of the Company, to enable the Committee believe that encouraging the right way of thinking and behaving to discharge its duties. The terms of reference of each Committee are reinforces our corporate governance culture. available at www.reiplc.com.
Principle 9: Maintain governance structures and processes that Audit Committee are fit for purpose and support good decision-making by the Its primary focus is on corporate reporting (from an external perspective) Board and on monitoring the Company’s internal control and risk management Board programme systems (from an internal perspective). The Board meets at least 4 times each year in accordance with its scheduled meeting calendar. The Board sets direction for the Company Remuneration Committee through a formal schedule of matters reserved for its decision. Prior to the Its primary function is to determine, on behalf of the Board, the start of each financial year, a schedule of dates for that year’s Board remuneration packages of the Executive Directors. meetings is compiled to align as far as reasonably practicable with the Company’s financial calendar. The Board and its Committees receive Principle 10: Communicate how the Company is governed and appropriate and timely information prior to each meeting; a formal is performing by maintaining a dialogue with shareholders agenda is produced for each meeting, and Board and Committee and other relevant stakeholders papers are distributed several days before meetings take place. Any The Company communicates with shareholders through the Annual Report Director may challenge Company proposals and decisions are taken and Accounts, full-year and half-year announcements, the Annual General democratically after discussion. Any Director who feels that any concern Meeting (‘AGM') and one-to-one meetings with large existing or potential remains unresolved after discussion may ask for that concern to be noted new shareholders. A range of corporate information (including all in the minutes of the meeting, which are then circulated to all Directors. Company announcements and presentations) is also available to Any specific actions arising from such meetings are agreed by the Board shareholders, investors and the public on the Company’s corporate or relevant Committee and then followed up by the Company’s website, www.reiplc.com. management. The Board receives regular updates on the views of shareholders through Roles of the Board, Chairman and Chief Executive Officer briefings and reports from the Chief Executive Officer, Finance Director The Board is responsible for the long-term success of the Company. There and the Company’s brokers. The Company communicates with is a formal schedule of matters reserved to the Board. It is responsible for institutional investors frequently through briefings with management. In overall Group strategy; approval of major investments; approval of the addition, analysts’ notes and brokers’ briefings are reviewed to achieve a annual and interim results; annual budgets; dividend policy; and Board wide understanding of investors’ views. structure. It monitors the exposure to key business risks and reviews the strategic direction of the Group. There is a clear division of responsibility at the head of the Company. The Chairman is responsible for running the business of the Board and for ensuring appropriate strategic focus and direction. The Chief Executive Officer is responsible for proposing the strategic focus to the Board, implementing it once it has been approved and overseeing the management of the Company through the Executive Team.
34 Real Estate Investors PLC Annual Report and Accounts 2018 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS – – – 3535 ‘000 2017 728 455 1,183 Number Share options options Share – – – ‘000 514 2018 822 1,336 Number Share options options Share 38 35 40 Total 749 2017 £000 2,062 1,200 AnnualAnnual Report Report and and Accounts Accounts 2018 2018
CC LL s P P s s rr 42 38 44 Total 747 2018 £000 2,073 1,202 – – 4 state Investo Investo state state 81 215 130 £000 national national insurance insurance Real E E Real Real Employers’ Employers’ contributions 38 38 44 Total £000 666 1,072 1,858 – – – 82 47 £000 129 expense payment Share-based – – – 715 275 Bonus £000 440 – – – 82 38 44 Fees £000 – – – 69 110 179 £000 of benefits of Salaryin lieu – – 38 753 275 £000 440 Salary During the year PPS Bassi and MHP Daly exercised options on 146,737 (2017: Nil) shares and 83,850 (2017: Nil) shares respectively. Nil) (2017: shares and 83,850 Nil) (2017: During the year Bassi PPS and MHP Daly options on exercised 146,737 No post-employment received pension by the are benefits, including contributions, Directors. Salary of benefits lieu in of recognition the paid in is fact that the Directors do benefits not any receive kind. in P London P W WyattW Policy on Non-Executive Directors’ remuneration The of remuneration the Non-Executive determined Directors is by the Board and based upon independent surveys of fees paid to Non-Executive companies. The Non-ExecutiveDirectors of similar Directors do benefits not any receive apart their salary from and fees paid directly are to which the individual involved. PPS Bassi Directors’ remuneration part of (forming the financial statements subject and to audit) was as follows: DecemberThe of remuneration Directors for the 2018 year ended 31 The performance management of the Executive Directors and the determination of package their annual remuneration undertaken is by the Committee.Remuneration No Director plays a part Annual bonuses about decision own any remuneration. in be his will paid at of the the discretion CommitteeRemuneration performance and as incentive to an reward year the during pursuant financial to specific performance In exercising criteria. management growth, rental dividend growth, performance growth, the Committee discretion its account NAV into other (among take will things) and performance. financial overall The Committee Remuneration believes that compensation incentive should recognise the growth and profitability of the business. Policy on Directors’ remuneration packages remuneration The designed Executive needed are to Directors’ attract, Directors motivate of calibre the and retain high to help the Group to pay policies are successfully Executive Directors a salary compete marketplace. its at in market The levels for comparable Group’s the jobs in sector The of the the Executive size relative Group. recognising Directors dowhilst benefits not any receive apart their basic from bonuses salaries, and LTIP awards. Service agreements No Director has a service months. agreementnotice a with period that exceeds 12 The Committee Remuneration made is up of the 3 Non-Executive The terms of of reference the by invitation. Directors Executive, and the Chief Committee and recommendations make to review are to the the Board terms regarding and conditions of employment of the Executive Directors. Remuneration Committee Remuneration Asa Company on AIM, trading the Company not is obliged Reports Remuneration to comply of the the with Directors’ Regulations. provisions as part of commitment its However, to good corporate governance practice the Company provides the information. following DIRECTORS’ REMUNERATION REPORT REMUNERATION DIRECTORS’ MHP Daly J Crabtree DIRECTORS’ REMUNERATION REPORT CONTINUED
Long-Term Incentive Plan At the Annual General Meeting held in June 2010 a resolution was passed approving the adoption of a new Long-Term Incentive Plan (‘LTIP'). On 8 June 2015, the terms of the LTIP were revised and previous options cancelled. The LTIP is designed to promote retention and incentivise the Executive Directors to grow the value of the Group and to maximise returns:
• The LTIP has a 10-year life from January 2010 to December 2019. • Performance conditions: – 50% of the award subject to absolute NAV growth plus dividends with threshold vesting – 30% of this part of the award – at 8.5% annual growth including dividends and full vesting at 14.0% annual growth. – 50% subject to absolute total shareholder return (share price growth plus dividends) with threshold vesting – 30% of this part of the award – at 8.5% annual growth and full vesting at 14.0%. • Amounts payable will be satisfied in full (save as below) by the issue of Ordinary Shares or the grant of zero/nominal cost options to any participant. The price at which shares will be issued will be the weighted average mid-market closing price for the first 20 business days following announcement of the latest full-year results. On issue, the Ordinary Shares will rank pari passu with the existing issued Ordinary Shares. • The number of Ordinary Shares which can be issued under the LTIP is limited to 10% of the Company’s then issued share capital. Any excess earned above this level will be paid in cash provided that the Remuneration Committee consider it prudent to do so at that stage, otherwise payment will be deferred until the Remuneration Committee deem it prudent. • The Remuneration Committee may from time to time make any alteration to the plan which it thinks fit, including for legal, regulatory or tax reasons, in order to ensure the smooth workings of the plan in line with its objectives. • Conditional awards of shares made each year. • Awards vest after 3 years subject to continued employment and meeting objective performance conditions.
On 8 June 2015, 7 April 2016, 20 March 2017 and 28 March 2018 the Group granted each of PPS Bassi and MHP Daly an option under the scheme which entitles them to subscribe for or acquire Ordinary Shares in the Company at a price of 10p per share (in the case of new Ordinary Shares) or 0p per share (in the case of a transfer of existing shares). The grant and exercise of the options is subject to the rules of the LTIP and cannot be exercised unless the relevant performance criteria are met, as discussed above.
Based on the results and particularly the share price for 2018 no options awarded in 2016 are likely to vest.
Approved by the Board of Directors
P London Chairman, Remuneration Committee 18 March 2019
36 Real Estate Investors PLC Annual Report and Accounts 2018 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS 3737 AnnualAnnual Report Report and and Accounts Accounts 2018 2018
CC LL s P P s s rr state Investo Investo state state Real E E Real Real select suitable accounting policies and then apply them consistently; judgementsmake and accounting estimates that reasonable are and prudent; state whether applicablehave been IFRSs subject followed, to any material departures disclosed and explained the in financial and statements; prepare statements the financial on the concern going basis unless is it inappropriate to presume that the Company continue and Group will in business. information audit no there relevant is so as far each Director aware, is and unaware; auditor is and Group’s of the which Company’s the Directors have the all taken steps that they ought to have as taken orderDirectors themselves to in make audit relevant of any aware information and to establish that the of that aware auditor is information. Annual General Meeting The Annual Colmore Row, General Meeting be will held at 75–77 am. at 11.00 May 2019 2AP B3 on 17 Birmingham, Auditor ThorntonGrant UK LLP offers itself for reappointment as auditor in accordance Section with of the Companies 489 Act 2006. ORDER OF THEBY BOARD MHP Daly Secretary March 2019 18 Company No 5045715 Statement of Directors’ responsibilities The responsible Directors are for preparing the Strategic Report, Directors’ Report and statements the financial accordance in applicable with law and regulations. Company the law statements Directors requires to prepare financial for Under thateach law year. the financial Directors have prepared the Company statements and Group financial accordance in with as adopted by the ReportingInternational StandardsFinancial (‘IFRSs') UnderEuropean company Union. law the Directors not must the approve statementsfinancial unless they satisfied that are they a true give and fair ofview the state of affairs and the or loss profit of the Company and Group for that period. In preparing these statements, the financial Directors are required to: • • • • The responsible Directors are adequate for keeping accounting records andthat Group’s sufficient are to show and explain the Company’s transactions and disclose reasonable with accuracy the time at any position of thefinancial Company and Group and enable them to ensure that statements the financial comply the with Companies Act 2006. They also responsible are for the safeguarding assets of the Company and Group and hence for reasonable taking steps for the and prevention detection of fraud and other irregularities. The Directors confirm that: • • The responsible Directors are for the maintenance and integrity of the corporate information included and website. financial on the Company’s theLegislation in United Kingdom the governing preparation and statementsdissemination of financial may differ legislation from other in jurisdictions. % 8.14 9.93 9.99 6.81 5.51 3.25 4.37 4.26 6.38 5.04 4.67 4.64 Number 7,9 41, 2 5 3 6,050,957 8,140,000 8,705,594 9,40 0,257 8,648,249 15,172,172 11,893,289 12,702,017 18,516,666 10,266,737 18,640,000 Chairman – Non-ExecutiveChairman Director Non-Executive Director Director Non-Executive Chief ExecutiveChief Director Finance
Invesco Perpetual Fund UK Equity Pension Miton Asset Management Majedi Asset Management Investments AberdeenStandard M&G Investment Management Return Fund RufferCF Total Real Estate Investment Trust (‘REIT') EstateReal Trust Investment the Group converted status to REIT effectWith 1 January from 2015, under the which not Group is on liable to Corporation rental its Tax income qualifying from or gains capital activities. Other matter management risk objectivesFinancial included and policies are note in to statements. the financial 15 EFG HarrisEFG Allday Perpetual Income & Growth Investment Trust Substantial shareholdings The Company has been notified of the interests that following represent or more of the3% issued of February capital the share Company at 28 2019: JO Hambro Capital Management Invesco Perpetual UK Strategic Income Fund Ruffer Absolute Return Fund JRA Crabtree WyattW London P PPS Bassi The Directors who served the during year and subsequently as were follows: Directors MHP Daly themselvesJRA and submit and Bassi PPS retire Crabtree for will re-election at the forthcoming Annual General Meeting. PPS Bassi The Directors present their report together the with audited consolidated December statementsfinancial for the 2018. year ended 31 DIRECTORS’ REPORT DIRECTORS’ INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF REAL ESTATE INVESTORS PLC
Opinion
Our opinion on the financial statements is unmodified We have audited the financial statements of Real Estate Investors Plc (the ‘parent company’) and its subsidiaries (the ‘group’) for the year ended 31 December 2018 which comprise the consolidated statement of comprehensive income, consolidated and company statement of changes in equity, consolidated and company statement of financial position, consolidated and company statement of cashflows and notes to the financial statements, including a summary of significant accounting policies. The financial reporting framework that has been applied in the preparation of the group financial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006.
In our opinion: • the financial statements give a true and fair view of the state of the group’s and of the parent company’s affairs as at 31 December 2018 and of the group’s profit for the year then ended; and • the group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; • the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.
Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the ‘Auditor’s responsibilities for the audit of the financial statements’ section of our report. We are independent of the group and the parent company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Conclusions relating to going concern We have nothing to report in respect of the following matters in relation to which the ISAs (UK) require us to report to you where: • the directors’ use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or • the directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the group’s or the parent company’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue.
Overview of our audit approach • Overall materiality: £2.5m, which represents approximately 1% of the Group's total assets; • In addition, we applied a lower materiality of £0.75m, determined with reference to profit before tax for the year, to income statement items above profit from operations excluding surplus on sale of investment property and change in fair value of investment properties; • We identified investment property valuation as a Key Audit Matter; • We performed full scope audit procedures on all group companies.
Key audit matters The graph below depicts the audit risks identified and their relative significance based on the extent of the financial statement impact and the extent of management judgement.
High Investment Valuation of property valuation nancial liabilities
Potential Existence of investment Improper revenue nancial property and inventory recognition statement
impact Management override Existence of of control Low debtors
Low Extent of management judgement High
38 Real Estate Investors PLC Annual Report and Accounts 2018 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS 39 Annual Report and Accounts 2018
C L s P s r state Investo state Real E Real Investment property made valuations were by suitably qualifiedthird party information provided valuers by management using that is information with consistent and obtained our audit; during The judgements and assumptions made, used by the valuers/directors the determining investment propertyin balanced valuations were and supported by the evidence obtained our from testing. obtaining year endobtaining valuations for each property party the from third that ensuring thevaluers, valuation approach for each valuer was book” RICS with appropriate line “red and in by IAS as 40, required and that factual any accurate inputs by comparing were the data rental used a sample calculations in of to the the schedule rental valuers’ management; by prepared assessing objectivity the valuers’ their terms and reading of engagement thewith order Group to in determine whether matters any there were havethat affected might their objectivity or may have imposed scope upon their work; limitations andassessing expertise; qualifications the valuers’ yearanalysing on year with discussion valuation including movements, both management party and the third valuers; benchmarking, for outlier properties identified by the above, analysis valuation-yields comparable against published market data and seeking further corroboration for those that outside fall a pre-determined informedrange by the use of a suitably qualified auditor expert; and evidenceevaluating of the of reliability valuation estimations by comparing the trend of investment historical property sales the with related carrying values. How the matter was addressed in the audit – Group and Parent Key observations Key found that: We • • Our work audit but included, was not restricted to: • • • • • • accounting policy on investment propertyThe group's valuation shown is in note 1 to statements the financial and related included disclosures are in note 9 and note 16. ur application of materiality O define materialityWe as the magnitude of misstatement statements the in financial that probable makes it that the economic of decisions a reasonably knowledgeable person would be and changed extent use of materiality timing work or our influenced. audit the and in We determining nature, in theevaluating results of that work. We therefore identified therefore investment propertyWe risk, valuation as a significant assessed was thewhich most significant risks of material misstatement. The significance of theThe estimates significance and judgements coupledinvolved, with the fact that only a small percentage property difference individual in whenvaluations, aggregated, could a material in misstatement, result area. specific this warrants focus audit in One property was not valued at the year-end party by third valuers due the being in to process it of being sold at the year The end. property was valued by a director instead. In determining a property’s theIn determining valuers consider valuation, property- specific information such as thetenancy current agreements and rental Theyincome. apply assumptions for yields and estimated market rent, market yields influenced and comparable are which by prevailing market to at transactions, arrive the valuation. final The valuations of but all one investment property carried were out by party Thethird engaged valuers were by the valuers.. Directors and performed accordance their work in Institution the with of Royal The – Professional Standard. Chartered Valuation Surveyors (‘RICS’) valuers used by the Group and parent have considerable experience in the the markets which Group and in parent operates. The valuation of the investment property portfolio inherently subjective is among otherdue to, thefactors, nature of individual each property, its location and the expected future for that rentals particular property. Risk Investment propertyvaluation Investment Risk investment propertyThe Group and parent’s portfolio to be required is held The value under Group’s at fair IAS ‘Investment 40 Property’. portfolio between split is and office retail properties across the UK. Key AuditKey Matter – Group and Parent Key audit matters audit Key those of our are statements the audit in matters financial of most our were of professional significance in the judgment, current that, period and assessed include the most significant risks of material misstatement (whether or not due that These to fraud) identified. we matters included those that had the the greatest allocationthe effect of and resources efforts strategy, the directing audit the in audit; overall on: of the engagement Theseteam. matters addressed were the in context of of our statements the audit and thereon, do we our financial opinion forming and as in a whole, not a separate provide on these opinion matters. INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF REAL ESTATE INVESTORS PLC CONTINUED
Materiality was determined as follows:
Materiality Measure Group Parent Financial statements as a whole £2.5m which was determined based on £2.2m which was determined based on approximately 1% of total assets. This benchmark is approximately 1% of total assets. This benchmark is considered the most appropriate because total considered the most appropriate because total assets includes investment properties, the assets includes investment properties, the ownership ownership and valuation of which we consider to and valuation of which we consider to be of critical be of critical importance to the users of the importance to the users of the financial statements financial statements and are a key area of and are a key area of audit focus. audit focus. Materiality for the current year is higher than the Materiality for the current year is higher than the level that we determined for the year ended 31 level that we determined for the year ended 31 December 2017 reflecting the increase in total December 2017 reflecting the increase in total asset value in the parent company in the year. asset value in the group in the year. Performance materiality used to drive the 75% of financial statement materiality. 75% of financial statement materiality. extent of our testing Specific materiality for income statement We applied a lower materiality of £0.75m to all We applied a lower materiality of £0.67m to all items above operating profit excluding income statement items above profit from income statement items above profit from operations gain or loss on sale of investment operations excluding surplus on sale of investment excluding surplus on sale of investment property properties and net gain or loss on property and change in fair value of investment and change in fair value of investment properties revaluation of investment properties. properties determined with reference to the Group’s determined with reference to the Company’s profit profit before tax for the year. before tax for the year.
We believe misstatement of these specific income We believe misstatement of these specific income statement items of a lesser amount than materiality statement items of a lesser amount than materiality for the financial statements as a whole could for the financial statements as a whole could reasonably be expected to influence the Group’s reasonably be expected to influence the members’ assessment of the financial performance Company’s members’ assessment of the financial of the Group. performance of the Company. Specific materiality We also applied a lower level of specific We also applied a lower level of specific materiality for certain areas such as Directors’ materiality for certain areas such as Directors’ remuneration and related party transactions. remuneration and related party transactions. Communication of misstatements to the £125,000 and misstatements below that threshold £112,100 and misstatements below that threshold audit committee that, in our view, warrant reporting on that, in our view, warrant reporting on qualitative grounds. qualitative grounds.
The graph below illustrates how performance materiality interacts with our overall materiality and the tolerance for potential uncorrected misstatements.
Overall materiality - Group Overall materiality - Parent
25% 25%
75% 75%
Tolerance for potential uncorrected misstatements Performance materiality
An overview of the scope of our audit Our audit approach was a risk-based approach founded on a thorough understanding of the group's business, its environment and risk profile and in particular included: • a full scope audit in relation to the parent company and all its subsidiaries; • evaluation of the group’s internal controls environment including its IT systems and controls; There is no change in this scope from that of the prior year.
40 Real Estate Investors PLC Annual Report and Accounts 2018 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS 41 Annual Report and Accounts 2018
C L s P s r state Investo state Real E Real ct 2006 ct 2006 unmodified is the the in information strategic report given report and the for year the directors’ statements the for financial which financial prepared are is and statements; the with consistent financial the strategic report report and the have directors’ been prepared accordance in applicable with legal requirements. ur opinion on other matters prescribed the by Companies A adequate accounting records have not been or returns adequate by kept the parent company, for have our audit not been received branches from or not by us; visited the parent company statements financial agreement not in or are the with accounting records and returns; specified remuneration certain or by law not made; disclosures are of directors’ havewe not received the all information and for our explanations audit. require we ther information uditor’s responsibilities for the audit of theuditor’s financial statements O basedIn our on opinion, the work undertaken the in course of the audit: • • Birmingham 18 March 2019 Rebecca Eagle Senior Statutory Auditor for and on behalf of Thornton Grant UK LLP Statutory Chartered Accountants Auditor, This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of report theThis Companies made Act is accordance Our in 2006. solely audit Chapter with members, 3 of 16 as Part a body, to the company’s work has been undertaken members so state that those to report the might we company’s matters to and state required to them auditor’s an are we in for no other the fullest purpose. extent To permitted do we not accept or assume by law, responsibility to anyone other than the company and the members report, for work, our or for this for audit the have we as formed. a body, opinions company’s Use of ourUse report A further description for the of of our statements the audit responsibilities www.frc. financial at: website located is Reporting onthe Council’s Financial description This report. forms part of our auditor’s org.uk/auditorsresponsibilities. A Our objectives to reasonable obtain are assurance about whether statements the financial as a whole free material whether from are misstatement, due report that and to Reasonable issue includes auditor’s but an not level is a guarantee our of opinion. assurance, assuranceto a high fraud or is error, that conducted audit an accordance in ISAs with (UK) always will detect a material misstatement Misstatements when exists. it fraud from can arise or they the or individually in aggregate, could reasonably considerederror and material are if, be expected to influence the economic of decisions users ontaken the basis of these statements. financial In preparing the financial statements, the directors are responsible for assessing the group’s and the parent company’s ability to continue as a going and the parent company’s In preparing statements, the the responsible financial are directors for assessing the group’s matters as applicable, related disclosing, concern, concern to going the concern going and using basis ofaccounting unless the either directors intend theto or liquidate the group parent company or to cease or alternative operations, have no but realistic to do so. As explained more fully in the directors’ responsibilities statement set out on page 37, the responsible are directors for the preparation of the financial statementAs responsibilities explained set out more fully on page the in directors’ 37, statements and for such internal control and for as being the satisfied determine directors that necessary is they a true view, give and fair to enable the preparation statements of financial that free material whether from are misstatement, due to fraud or error. Responsibilities of directorsResponsibilities for the financial statements We have to report nothing We respect in of the matters following relation the to which in Companies Act our opinion: 2006 in us to report requires to youif, • • • • Matters on which are we required to report exception by Matters on which are we required to report under the Companies A ofIn the the knowledge light and understanding of the and the group parent company obtained the and have environment we its in course of the audit, not identified material misstatements the in strategic report report. or the directors’ We have to report nothing regard. We this in In connection of our with statements, the audit our financial responsibility considerto whether read is the so, doing other in the other information and, materiallyinformation is statements the with inconsistent financial or our knowledge obtained the or in otherwise audit appears to be materially misstated. If identify we such material or inconsistencies apparent to determine material required whether misstatements, are we a material there is misstatement statements the in financial or a material misstatement based of the other If, on the information. work have we performed, conclude we that a materialthere to report is misstatement required are we other of this that information, fact. O The responsible are directors for the other The other information. information comprises the information included thein annual report, other than the report statementsfinancial thereon.on Our statements the and opinion our financial auditor’s doesnot cover the other to except the information and, extent otherwise stated explicitly our report, in do we not express form any of assurance conclusion thereon. CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2018
2018 2017 Note £000 £000 Revenue 15,642 14,880 Cost of sales (1,478) (1,727) Gross profit 14,164 13,153 Administrative expenses (3,322) (3,548) (Loss)/surplus on sale of investment properties (42) 176 Change in fair value of investment properties 9 578 4,212 Profit from operations 11,378 13,993 Finance income 5 31 19 Finance costs 5 (3,713) (3,457) Surplus on financial liabilities at fair value through profit and loss 16 706 725 Profit on ordinary activities before taxation 3 8,402 11,28 0 Income tax charge 6 (113) (145) Net profit after taxation and total comprehensive income 8,289 11,13 5 Total and continuing earnings per Ordinary Share Basic 7 4.45p 5.97p Diluted 7 4.37p 5.88p
The results of the Group for the period related entirely to continuing operations.
The accompanying notes form an integral part of these financial statements.
42 Real Estate Investors PLC Annual Report and Accounts 2018 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS 43 Total Total 350 350 £000 £000 (148) (148) 8,289 8,424 (5,242) (5,242) (6,672) (6,524) (6,672) (6,524) (5,592) (5,592) 11,13 5 11,83 5 117,18 4 121,161 128,671 125,529 12 7, 0 5 4 123,777 – – – – £000 £000 earnings earnings Retained Retained 8,289 8,424 (6,524) (6,524) (6,524) (6,524) (5,592) (5,592) (5,592) (5,592) 11,13 5 5 4,119 57, 2 61 11,83 5 52,219 49,953 45,976 55,496 – – – – – – – – Other Other 350 350 350 350 £000 £000 800 800 (148) (148) (148) (148) Annual Report and Accounts 2018 reserve
reserve 1,150 1,150 1,002 1,002 C L s P s r – – – – – – – – – – – – – – – – 45 45 45 45 45 45 £000 £000 reserve reserve Capital Capital redemption redemption state Investo state – – – – – – – – – – – – – – – – Real E Real Share Share £000 £000 account account premium premium 51,721 51,721 51,721 51,721 51,721 51,721 – – – – – – – – – – – – – – – – Share Share £000 £000 capital capital 18,642 18,642 18,642 18,642 18,642 18,642 t 31 Decembert 31 2018 t 31 Decembert 31 2018 Share-based payment At 1 January 2017 COMPANY STATEMENT OF CHANGES IN EQUITY STATEMENT COMPANY DECEMBER 2018 FOR THE YEAR ENDED 31 Share-based payment At 1 January 2017 CONSOLIDATED STATEMENT OFCHANGES IN EQUITYSTATEMENT CONSOLIDATED DECEMBER 2018 FOR THE YEARENDED 31 Dividends Dividends Transactions with owners with Transactions owners with Transactions Profit for the yearProfit and total comprehensive income December 2017 At 31 Share-based payment Dividends for the yearProfit and total comprehensive income December 2017 At 31 Transactions with owners with Transactions Share-based payment Dividends Transactions with owners with Transactions Profit for the yearProfit and total comprehensive income A Profit for the yearProfit and total comprehensive income A The accompanying notes part form integral an of these statements. financial CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 2018
2018 2017 Note £000 £000 Assets Non-current Intangible assets 8 – – Investment properties 9 221,040 209,421 Property, plant and equipment 10 11 12 Deferred tax 17 405 540 221,456 209,973 Current Inventories 12 3,764 3,708 Trade and other receivables 13 2,277 3,663 Cash and cash equivalents 10,843 4,339 16,884 11, 710 Total assets 238,340 221,683 Liabilities Current Bank loans 15 (364) (20,378) Provision for current taxation (1) (23) Trade and other payables 14 ( 7, 8 8 3 ) (6,146) (8,248) (26,547) Non-current Bank loans 15 (98, 411) (64,213) Financial liabilities 15 (3,010) (3,869) (101,421) (68,082) Total liabilities (109,669) (94,629) Net assets 128,671 12 7, 0 5 4 Equity Share capital 18 18,642 18,642 Share premium account 51,721 51,721 Capital redemption reserve 45 45 Other reserve 1,002 1,150 Retained earnings 57, 2 61 55,496 Total Equity 128,671 12 7, 0 5 4 Net assets per share 69.0p 68.2p
These financial statements were approved and authorised for issue by the Board of Directors on 18 March 2019.
Signed on behalf of the Board of Directors
JRA Crabtree MHP Daly Chairman Finance Director
Company No 5045715
The accompanying notes form an integral part of these financial statements.
44 Real Estate Investors PLC Annual Report and Accounts 2018 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS 45 12 45 (22) 2017 540 £000 1,150 4,241 1,670 5,988 2,380 (3,869) (8,509) 52,219 51,721 18,642 12,609 (93,16 0) (28,834) (20,303) (64,326) (60,457) 216,937 202,10 6 123,777 123,777 204,328 (-) 11 45 2018 405 £000 (319) 1,670 1,002 2,380 4,634 (3,010) 5 4,119 17, 7 9 6 51,721 10,782 18,642 ( 9 7, 67 9 ) (10,225) (10,544) (94,669) 215,956 213,870 125,529 125,529 233,752 (108,223) 9 11 12 13 17 15 15 18 15 14 10 Note Annual Report and Accounts 2018
C L s P s r state Investo state Real E Real MHP Daly Finance Director et assets et current liabilities on-current on-current ssets quity otal Equity otal assets Profit and lossProfit account T Share premium account premium Share redemptionCapital reserve The accompanying notes part form integral an of these statements. financial Chairman Company No 5045715 JRA Crabtree Signed on behalf of the Board of Directors These statements March financial 2019. approved by were the Board of Directors on 18 Total liabilities N E Ordinary Share capital Other reserve £11,835,000). (2017: The Company for the profit year was £8,424,000 Trade and other payablesTrade N N Bank loans Financial liabilities N Investment properties A COMPANY STATEMENT OF FINANCIAL POSITION OF FINANCIAL STATEMENT COMPANY DECEMBER 2018 31 AT T Cash and cash equivalents taxation for current Provision Deferred tax Deferred Property, plant and equipment Investments Liabilities Current Bank loans Current assets Inventories and other receivablesTrade CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2018
2018 2017 £000 £000 Cash flows from operating activities Profit after taxation 8,289 11,13 5 Adjustments for: Depreciation 6 5 Net surplus on valuation of investment property (578) (4,212) Loss/(surplus) on sale of investment property 42 (176) Share-based payment (148) 350 Finance income (31) (19) Finance costs 3,713 3,457 Surplus on financial liabilities at fair value through profit and loss (706) (725) Income tax charge 113 145 Increase in inventories (56) (13) Decrease/(increase) in trade and other receivables 1,386 (738) Increase/(decrease) in trade and other payables 1,504 (87) 13,534 9,122 Cash flows from investing activities Purchase of investment properties (16,744) (20,353) Purchase of property, plant and equipment (5) (3) Proceeds from sale of investment properties 5,661 13,522 Interest received 31 19 (11,057 ) (6,815) Cash flows from financing activities Interest paid (3,713) (3,457) Hedge payment (153) – Equity dividends paid (6,291) (5,359) Proceeds from new bank loans 14,570 – Payment of bank loans (386) (927) 4,027 (9,743) Net increase/(decrease) in cash and cash equivalents 6,504 ( 7, 4 3 6 ) Cash and cash equivalents at beginning of period 4,339 11, 7 75 Cash and cash equivalents at end of period 10,843 4,339
NOTES: Cash and cash equivalents consist of cash in hand and balances with banks only. The accompanying notes form an integral part of these financial statements.
46 Real Estate Investors PLC Annual Report and Accounts 2018 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS 47 – – – 5 (3) 19 (19) 2017 753 145 (176) 702 350 £000 (852) (725) (449) 4,241 3,224 ( 7, 3 8 2 ) (3,224) (9,435) (5,359) (5,050) (9,440) 11, 623 11,83 5 11, 49 3 10,897 (20,353) – – 6 (5) 31 42 (31) 113 2018 £000 (153) (148) (755) (706) (342) 5,661 4,241 6,541 1,354 4,301 1,483 8,424 3,483 (6,291) (3,483) 10,782 14,570 13,265 (11,025) (16,712) Annual Report and Accounts 2018
C L s P s r state Investo state Real E Real Net surplus onvaluation of investment property on sale of investmentproperty Loss/(surplus) Adjustments for: Adjustments Depreciation Cash flows from operating activities afterProfit taxation COMPANY STATEMENT OFCASH FLOWS STATEMENT COMPANY DECEMBER 2018 FOR THE YEARENDED 31 Share-based payment Provision against investments against Provision Finance income costs Finance Surplus on financial liabilities at fair value through profit and value loss through profit at fair Surplus liabilities on financial charge tax Income Increase inventories in trade in and other receivables Decrease/(increase) Increase trade in and other payables Purchase ofPurchase property, plant and equipment Proceeds sale from of investment properties Interest received Cash flows from investing activities ofPurchase investment properties Cash flows from financing activities Interest paid Hedge payment Equity dividends paid Payment of bank loans Proceeds new from bank loans Net cash increase and in cash equivalents Cash and cash equivalents of period at beginning Cash and cash equivalents at end of period NOTES: Cash and cash equivalents of hand cash consist in and balances banks with only. The accompanying notes part form integral an of these statements. financial NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018
1. Accounting policies The financial statements have been prepared under the historical cost convention, except for the revaluation of properties and financial instruments held at fair value through profit and loss, and in accordance with International Financial Reporting Standards (‘IFRS') adopted by the European Union.
The principal accounting policies of the Group are set out below and are consistent with those applied in the 2017 financial statements, except where new standards have been issued and applied retrospectively. Further details of these standards and their application by the Group are set out on page 52.
Going concern The Group has prepared and reviewed forecasts and made appropriate enquiries which indicate that the Group has adequate resources to continue in operational existence for the foreseeable future. These enquiries considered the following: • the significant cash balances the Group holds and the low levels of historic and projected operating cash outflows; • any property purchases will only be completed if cash resources or loans are available to complete those purchases; and • the Group’s bankers have indicated their continuing support for the Group. The Group’s £20 million facility with Lloyds Banking Group was renewed for 5 years in December 2018 and a new 5-year facility of £10 million was agreed in August 2018 with Royal Bank of Scotland.
For these reasons, the Directors continue to adopt the going concern basis in preparing the financial statements.
Business combinations Subsidiaries are all entities over which the Group has control. The Group obtains and exercises control through voting rights. The consolidated financial statements of the Group incorporate the financial statements of the Parent Company as well as those entities controlled by the Group by full consolidation.
Acquired subsidiaries are subject to application of the acquisition method. The consideration transferred by the Group to obtain control of a subsidiary is calculated as the sum of the acquisition-date fair values of the assets transferred, liabilities incurred and the equity interests issued by the Group, which includes the fair value of any asset or liability arising from a contingent consideration arrangement. Acquisition costs are expensed as incurred.
The Group recognises identifiable assets acquired and liabilities assumed in a business combination regardless of whether they have been previously recognised in the acquiree’s financial statements prior to the acquisition. Assets acquired and liabilities assumed are generally measured at their acquisition-date fair values.
Goodwill is stated after separate recognition of identifiable intangible assets. It is calculated as the excess of the sum of the fair value of consideration transferred, the recognised amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any existing equity interest in the acquiree, over the acquisition-date fair values of identifiable net assets. If the fair values of the identifiable net assets exceed the sum calculated above, the excess amount (i.e. gain on a bargain purchase) is recognised in profit or loss immediately.
Intra-Group balances and transactions, and any unrealised gains or losses arising from intra-Group transactions, are eliminated in preparing the consolidated financial statements.
No statement of comprehensive income is presented for the Company as permitted by Section 408 of the Companies Act 2006. The Company's profit for the financial year was £8,424,000 (2017: £11,835,000).
Investments Investments in subsidiary undertakings are recorded at cost less provision for impairment.
Income recognition Revenue is recognised to the extent that it is probable that economic benefits will flow to the Group and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received, excluding discounts, rebates, VAT and other sales taxes or duties. The following criteria must be met before income is recognised:
Rental income Rental income arising from operating leases on properties owned by the Group is accounted for on a straight-line basis over the period commencing on the later of the start of the lease or acquisition of the property by the Group, and ending on the end of the lease, unless it is reasonably certain that the break option will be exercised. Any incentive for lessees to enter into a lease agreement and any costs associated with entering into the lease are spread over the same period.
Sale of properties Income from the sale of properties held as inventory is recognised when the significant risks and rewards of ownership of the properties have passed to the buyer, usually when legally binding contracts which are irrevocable and unconditional are exchanged, which is when legal title passes to the purchaser, on completion.
48 Real Estate Investors PLC Annual Report and Accounts 2018 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS 49 Annual Report and Accounts 2018
C L s P s r state Investo state Real E Real length of lease 5 years – – future. perating leases perating easehold improvements and office equipment office and improvements easehold axation Most changes deferred in tax recognised assets are as a component or liabilities of tax expense the in statement Only of comprehensive income. changes deferred in tax assets that relate to a change or the liabilities in value of assets that charged is directly or to other liabilities comprehensive chargedincome or are credited directly to other comprehensive income. Deferred tax liabilities are provided for in full. Deferred provided full. Deferred for in tax are assets tax recognised liabilities are to the extent probable that is it Deferred that tax they reverse. will at tax rates calculated, that expected withoutassets are are discounting, and liabilities to apply to their respective period provided that of realisation, they enacted are or substantively enacted at the balance sheet date. Deferred income taxes calculated are the liability method using on temporary the involves differences. This comparison of the carrying amounts of the assetsin consolidatedrelevant and statements liabilities financial their respective with accordance in the with tax rules bases. set However, out no deferred of recognition asset an taxes recognised of recognition goodwill, or are or on on liability initial unless the initial the related IAS 12, in transaction a business is combination or affects applies This also to tax temporary or accounting profit. differences associated shares with in of these reversal if subsidiaries temporary differences can be controlled by the probable is Group and it not that occur will the reversal in foreseeable The Group elected for Real Estate Investment Trust (‘REIT') status with effect from 1 January 2015. As a result, providing certain conditions are met, certain met, conditions are providing As a result, The status Group elected effect with (‘REIT') for Estate Real Investment 1 January from Trust 2015. no there income is tax payable on property from profits United from exempt Kingdom investment are corporation for 2018 the Group’s tax.Therefore, property investment transactions for deferred onthe the and no of tax Group’s provision revaluation properties arising or on unused losses, trading substantially of relate all which to property investment. T fiscal authorities comprise to the relating or those current prior from, or claims reporting liabilities obligations to, income taxCurrent assets and/or period, that unpaid at the are year end They calculated date. are to the according tax rates and tax laws enacted and substantively enacted at the year based end date, on the taxable for the profit year. Group Company is the lessor is Company Group Properties leased out to tenants under operating leases included are investment properties in the in statement position when of financial the all risks and of of the ownership propertyrewards by retained the are Group. Leases in which substantially all risks and rewards of ownership are retained by retained anotherLeases are of ownership classified substantially party, which risks and all are rewards in the as operating leases. lessor, Payments, prepayments,including made under operating leases incentives of received any (net the from lessor) charged as are expense an basis on a straight-line theover period of the lease. O the lessee is Company Group Inventories heldInventoriesare at the lower of cost Cost and net includes realisable value. fees all to the relating purchase of the property and improvement expenses. Net realisable based value is on estimated price less selling future costs expected inventories to impair to be Any provisions incurred to sale. below future reversed periods cost in are market conditions subsequently if support value but only fair a higher up to a maximum of cost. the original Dilapidation receipts are heldDilapidation the receipts are in balance sheet and offset subsequent against associated or Any ultimate shortfalls gains expenditure. are orrecognised loss, offset profit in directly any corresponding against value of the movement fair investment property in they to which relate. L Leasehold and improvements office cost equipment carried less are at acquisition subsequent depreciation and impairment losses. Depreciation is charged on the cost of these assets less basis the over value on their residual a straight-line estimated useful economic of each life by equal asset, annual instalments the over periods: following Leasehold improvements Investment properties subsequently are valued externally or by the Directors on open an market basis atthe balance sheet date and recorded at investment properties on revaluing Any surplus or recognised loss is profit valuation. arising or in deficit the in period The they valuations which in arise. exclude prepaid or accrued operating lease because income, recognised is it as a separate liability or asset. Investment properties recognised transaction direct at cost initially including costs. are Office equipment valuesResidual and useful reassessed are lives annually. Investment properties appreciation. for capital properties are held to earn and/or rentals 1. Accounting policies Accounting continued1. properties Investment NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2018
1. Accounting policies continued Financial assets The Group’s financial assets include cash and cash equivalents and trade and other receivables.
All financial assets are initially recognised at fair value plus transaction costs, when the Group becomes party to the contractual provisions of the instrument.
Following adoption of IFRS 9, the Group’s financial assets are all classified as financial assets held at amortised cost. This classification is determined by both the entity’s business model for managing the financial asset and the contractual cash flow characteristics of the financial asset.
Until the adoption of IFRS 9, the Group’s financial assets were all classified as loans and receivables under IAS 39.
Both financial assets held at amortised cost and loans and receivables are measured subsequent to initial recognition at amortised cost using the effective interest method, less provision for impairment.
All income and expenses relating to financial assets that are recognised in profit or loss are presented within finance costs or finance income, except for impairment of trade receivables which is presented within administrative expenses.
A financial asset is derecognised only where the contractual rights to the cash flows from the asset expire or the financial asset is transferred and that transfer qualifies for derecognition.
A financial asset is transferred if the contractual rights to receive the cash flows of the asset have been transferred or the Group retains the contractual rights to receive the cash flows of the asset but assumes a contractual obligation to pay the cash flows to one or more recipients. A financial asset that is transferred qualifies for derecognition if the Group transfers substantially all the risks and rewards of ownership of the asset.
Impairment of financial assets IFRS 9’s impairment requirements use more forward-looking information to recognise expected credit losses – the ‘expected credit loss (“ECL") model’. This replaces IAS 39’s ‘incurred loss model’.
Instruments within the scope of the new requirements include trade and other receivables as well as amounts due from subsidiary undertakings.
Recognition of credit losses is no longer dependent on the Group first identifying a credit loss event. Instead the Group considers a broader range of information when assessing credit risk and measuring expected credit losses, including past events, current conditions, reasonable and supportable forecasts that affect the expected collectability of the future cash flows of the instrument.
In applying this forward-looking approach, a distinction is made between: • financial instruments that have not deteriorated significantly in credit quality since initial recognition or that have low credit risk (‘Stage 1’); and • financial instruments that have deteriorated significantly in credit quality since initial recognition and whose credit risk is not low (‘Stage 2’).
‘Stage 3’ would cover financial assets that have objective evidence of impairment at the reporting date.
‘12-month expected credit losses’ are recognised for the first category while ‘lifetime expected credit losses’ are recognised for the second category.
Measurement of the expected credit losses is determined by a probability-weighted estimate of credit losses over the expected life of the financial instrument.
Under IAS 39 in the prior year, provision for impairment of trade, loan receivables and other receivables was made when objective evidence was received that the Group would not be able to collect all amounts due to it in accordance with the original terms of the receivable. The amount of the impairment was determined as the difference between the assets’ carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. Any change in their value through impairment or reversal of impairment is recognised in profit or loss.
Cash and cash equivalents Cash and cash equivalents include cash at bank and in hand.
Equity • Share capital represents the nominal value of equity shares that have been issued. • Share premium represents the excess over nominal value of the fair value of the consideration received for equity shares, net of expenses of the share issue. • The capital redemption reserve represents the nominal value of shares cancelled on the purchase of own shares in order to maintain the capital base of the Group. • Other reserves represent the cumulative amount of the share-based payment expense. • Retained earnings include all current and prior period results as disclosed in the statement of comprehensive income. • Dividend distributions payable to equity shareholders are included in other liabilities when the dividends have been approved in a general meeting prior to the reporting date.
50 Real Estate Investors PLC Annual Report and Accounts 2018 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS 51 Annual Report and Accounts 2018
C L s P s r state Investo state Real E Real earnings. hare-based payments hare-based hare warrants and share options When the or options warrants share share have vested and then lapsed, the amount previously recognised other in reserves transferred to is retained S IncentiveThe Plan for certain Company of has employees. its a Long-Term Employee services and the are received, corresponding equity, increase in measured value to the of by reference the fair equity the instruments impact excluding at the non-market of any date The of fair grant, conditions. vesting value options of estimated share is valuation to the on model, a binomial the according characteristics date using of based of and the is grant option, on certain assumptions. Those among assumptions expected the others, include, dividend growth and the rate, expected volatility, of the life options. Management then apply value the to the fair number of options expected amortised value is The fair resulting to vest. through the statement of comprehensive income basis the over on period a straight-line vesting a corresponding with to other credit reserves. likely is The reversed it if is charge that non-marketany based not If be will criteria a category met. accounted is options of cancelled, share this is for as acceleration an of and vesting recognised value is full at the in fair date of cancellation. remaining any Upon exercise of share warrants or optionsUpon warrants of share share the proceeds exercise received net of attributable and where transaction costs credited capital, to share are premium. share appropriate All equity-settled share-based payments ultimately are recognised as expense an the in statement of comprehensive income a corresponding with credit reserves. other to All goods and services received exchange share-based of for the any in grant payment measured Where employees values. are at their fair are share-based using rewarded payments, values the of services fair employees’ determined are indirectly value to the of by reference the fair instrument appraised valuegranted to is the date at the fair employee. and grant This excludes the impact of non-market example, conditions (for vesting growthprofitability targets). and sales’ An equity instrument contract any is that evidences the in assets interest a residual of the Group after Dividends and deducting of all liabilities. its to equity relating distributions instruments debited are directly to equity. S A financial liability exists where a contractual there liability exists is A financial obligation to deliver cash or another asset financial to another entity or to exchange financial underassets potentially liabilities or In financial unfavourable addition contracts the conditions. in result entity which a variable number delivering of its such classed obligations are Shares containing own equity liabilities. as financial liabilities. instruments financial are A substantial modification of liability or the a part financial terms of accounted existing an is of it of for as extinguishment an financial the original not is a substantial modification and The modification of theliability and Lloyds the liability. of debt recognition a new December financial in 2018 The doesaccordingly gross carrying derecognition not of in result that liability. amount of financial liability the has been financial recalculated and the modification difference to be and recognised loss profit in not is material. Classification equity as or financial liability and equity liabilities instruments classified to the are according Financial substance of the contractual arrangements entered into. A financial liability is derecognised liability is A financial only when that the when is obligation extinguished, is the obligation discharged or is cancelled or expires. All derivative financial instrumentsAll and valued derivative value loss. financial through profit No are instruments at fair derivative financial have been designated as hedging instruments. disclosed related All interest value are included charges finance costs fair are instrument's an Changes or within in finance income. separately determined the value is in statement to active by reference Fair market of transactions comprehensive income. a valuation technique or using where no active market exists. Trade and other payablesTrade value and subsequently at their fair recognised are initially measured at amortised cost less settlement payments. Bank loans are raised for support of the long-term funding of the Group’s operations. They are recognised initially at fair value, net issue ofBank direct costs loans for support value, raised are at fair operations. They recognised are initially of the long-term of funding the Group’s and subsequently measured at amortised the cost effective using method, interest interest-related with charges recognised as expense an finance in payable premiums costs including the in on charges, statement settlement Finance of comprehensive income. or redemption issue and are direct costs, orrecognised loss profit in on accruals an the effective basis using method interest added and are to the carrying amount of the instrument to the extent that they not settled are the in period they which in arise. Bank for support overdrafts raised are operations. of the short-term of funding the Group’s Financial liabilities are recognised are when the liabilities Group becomesFinancial a partyto the contractual agreement of related the All interest instrument. charges are recognised as expense an the in statement ‘finance in of the costs’ comprehensive income effective using method. interest The Group’s financial liabilities include bank loans liabilities trade and financial overdrafts, and other payables and value loss. through profit at fair and liabilities The Group’s 1. Accounting policies Accounting continued1. Financial liabilities NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2018
1. Accounting policies continued Segmental reporting An operating segment is a distinguishable component of the Group that engages in business activities from which it may earn revenues and incur expenses, whose operating results are regularly reviewed by the Group’s chief operating decision maker to make decisions about the allocation of resources and assessment of performance and about which discrete financial information is available.
As the chief operating decision maker reviews financial information for and makes decisions about the Group’s investment properties and properties held for trading as a portfolio, the Directors have identified a single operating segment, that of investment in and trading of commercial properties.
Application of new and revised IFRS and interpretations thereof issued by the International Financial Reporting Interpretations Committee (’IFRIC’) The Group has adopted the new provisions of the following amended standards: • Annual Improvements to IFRSs 2011–2013 cycle. • IFRS 15 Revenue from Contracts with Customers. • IFRS 9 Financial instruments.
IFRS 15 ‘Revenue from Contracts with Customers’ and the related ‘Clarifications to IFRS 15 Revenue from Contracts with Customers’ replace IAS 18 ‘Revenue’, IAS 11 ‘Construction Contracts’, and several revenue related Interpretations. IFRS 9 replaces IAS 39 ‘Financial Instruments: Recognition and Measurement’. It makes major changes to the previous guidance on the classification and measurement of financial assets and introduces an ‘expected credit loss’ model for the impairment of financial assets.
Standards, amendments and Interpretations to existing Standards that are not yet effective and have not been adopted early by the Group At the date of authorisation of these financial statements, several new, but not yet effective, Standards, amendments to existing Standards, and Interpretations have been published by the IASB. None of these Standards, amendments or Interpretations have been adopted early by the Group.
The Directors anticipate that the adoption of new standards which are in issue but not yet effective and have not been adopted early by the Group will be relevant to the Group but will not result in significant changes to the Group’s accounting policies. These are: • IFRS 16 Leases (Issued on 13 January 2016). • IFRIC Interpretation 23 Uncertainty over Income Tax Treatments. • Annual Improvements to IFRS Standards 2015–2017 Cycle (issued on 12 December 2017). • Amendments to References to the Conceptual Framework in IFRS Standards (issued on 29 March 2018).
The Group has commenced assessment of the impact of the above standards and does not expect that their adoption in future periods will have a material impact on its results of operations and financial position.
Certain other new standards and interpretations have also been issued but are not expected to have a material impact on the Group’s financial statements.
Critical accounting estimates and assumptions The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next accounting year are as follows:
Investment property valuation The Group uses the valuations performed by its independent valuers or the Directors as the fair value of its investment properties. The valuation is based upon assumptions including future rental income, anticipated maintenance costs and on the appropriate discount rate. The valuer and Directors also make reference to market evidence of transaction prices for similar properties. The impact of changes in property yields used to ascertain the valuation of investment properties are considered (see notes 15 and 16).
Critical judgements in applying the Group’s accounting policies The Group makes judgements in applying the accounting policies. The critical judgements that have been made are as follows:
Deferred taxation The Group and Company have a deferred tax asset of £405,000 at 31 December 2018 (2017: £540,000) which relates to financial instruments as detailed in note 16. The Directors monitor the interest rate swap to assess the reversal of the deferred tax asset.
Surrender premiums The Group is required to judge whether amounts due under lease surrenders are sufficiently irrevocable that income can be accrued. Judgement is also required in establishing whether income relates to an exit fee for terminating the leased asset (recognised immediately), or whether it represents accelerated rental income (recognised over the remaining lease term). Surrender premiums received during the year are shown in note 2.
52 Real Estate Investors PLC Annual Report and Accounts 2018 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS 53 5 (5) 18 19 27 181 176 2017 2017 2017 2017 571 250 350 £000 £000 £000 £000 (145) 1,913 4,212 2,513 (1,727) (3,548) (3,457) 13,153 13,993 14,880 14,309 221,683 – 6 (6) properties 31 18 27 (42) 2018 2018 2018 2018 476 183 578 289 (113) £000 £000 £000 £000 2,070 2,359 (1,478) (3,713) (3,322) 11,378 15,166 14,164 15,642 238,340 Investment and in trading of Annual Report and Accounts 2018
C L s P s r state Investo state Real E Real – Surrender premiums – Rental income– Rental – Direct costs– Direct
Wages andWages salaries 4. Directors employees and Staff costs the during period as follows: were Share-based payment charge Social security costs Fees payable auditor for other services to the Company’s of – Audit the accounts of the subsidiaries Depreciation of owned property and equipment Operating lease payments Profit on ordinaryProfit activities before taxation stated is after: Fees annual accounts payable auditor for the of the audit to Company’s the Company’s 3. Profit3. on ordinary activities before taxation Depreciation Finance costs Finance Finance income Segment revenues 2. Segmental information The segmental who the operating provided information is Executive, maker. is decision chief to the Chief Investment entity status entity Investment the Directors have considered the of criteria the International Accounting Standards the of the conversion status 2015, Following Group to REIT during satisfied and and IAS that are 27' the Group does not meet 12 of the IFRS definitions publication – Amendments 'InvestmentBoard's Entities 10, to IFRS investmentan entity appropriate and to as remains such consolidate it of all the subsidiaries. The Group and Company elected for Real Estate Investment Trust (‘REIT') status with effect from 1 January 2015. As a result, providing certain conditions providing As a result, The Group and Company status elected effect with (‘REIT') for Estate Real Investment 1 January from Trust 2015. property from profit the Group and Company's met, are UK from exempt corporation are the investment and gains opinion Group tax. In the Directors' and Company have met these conditions. 1. Accounting policies Accounting continued1. REIT status Cost of sales Income tax charge tax Income external from Revenue customersand non-current assets arises wholly the in United All for the Kingdom. revenue year attributable is to the principal of the total income for rental 3%) the revenue period. theactivities from Revenue of largest the customer Group. represented (2017: 3% (Loss)/surplus on disposal of investment property(Loss)/surplus Surplus on valuation of investment properties assets Segment The segmental information provided Executive to the also Chief includes the following: Administrative expenses Segment operating profit NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2018
4. Directors and employees continued The average number of employees (including Executive Directors) of the Group and the Company during the period was 8 (2017: 8), all of whom were engaged in administration. The Executive and Non-Executive Directors are also the key management personnel of the Group and the Company and details of their remuneration are included within the Directors' Remuneration Report on pages 35 and 36.
5. Finance income/finance costs
2018 2017 £000 £000 Finance income: Interest receivable 31 19 Finance costs: Interest payable on bank loans (3,713) (3,457)
6. Income tax charge 2018 2017 £000 £000 Result for the year before tax 9,342 11,28 0 Tax rate 19% 19.25% Expected tax charge 1,775 2,171 REIT exempt income and gains (1,662) (2,026) Actual tax charge 113 145 Tax charge comprises: Current tax (22) – Deferred tax charge (note 17) 135 145 113 145
7. Earnings per share The calculation of earnings per share is based on the result for the year after tax and on the weighted average number of shares in issue during the year.
Reconciliations of the earnings and the weighted average numbers of shares used in the calculations are set out below.
2018 2017 Average Average Earnings number of Earnings per Earnings number of Earnings £000 shares share £000 shares per share Basic earnings per share 8,289 186,420,598 4.45p 11,13 5 186,420,598 5.97p Diluted earnings per share 8,289 189,552,547 4.37p 11,13 5 189,306,947 5.88p
The European Public Real Estate Association indices below have been included in the financial statements to allow more effective comparisons to be drawn between the Group and other businesses in the real estate sector.
EPRA EPS per share
2018 2017 Earnings Earnings Earnings Shares per share Earnings Shares per share £000 no p £000 no p Basic earnings per share 8,289 186,420,598 4.45 11,13 5 186,420,598 5.97 Net surplus on valuation of investment properties (578) (4,212) Loss/(profit) on disposal of investment properties 42 (176) Change in fair value of derivatives (706) (725) Deferred tax 135 145 EPRA earnings per share 7,18 2 186,420,598 3.85 6,167 186,420,598 3.31
54 Real Estate Investors PLC Annual Report and Accounts 2018 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS 55 p – – – share 171 171 171 887 578 6 7.1 6 7.1 568 £000 £000 68.9 68.2 4,212 valueper (5,703) Goodwill Netasset 16,176 19,466 (13,346) 221,040 209,421 198,202 – – – – no Shares 2017 2,886,349 Annual Report and Accounts 2018 189,306,947 189,306,947 189,306,947 186,420,598
C L – s P s r 540 £000 (540) 3,869 (3,869) Netassets 12 7, 0 5 4 12 7, 0 5 4 12 7, 0 5 4 130,383 state Investo state p Real E Real share 67.9 67.9 69.0 69.3 et asset et N value per value – – – – no hares S 2018 3,131,949 189,552,547 189,552,547 189,552,547 186,420,598 – 405 £000 (405) 3,010 (3,010) et assets et N 131,276 128,671 128,671 128,671 NAV NNNAV per share A NAV A A et book amount at 31 Decemberet book amount at 31 2018 PR PR PR Adjustment to fair value ofAdjustment derivatives to fair tax Deferred Additions – acquisition of new propertiesAdditions – acquisition December 2017 Carrying amount at 31 of new propertiesAdditions – acquisition Additions – subsequent expenditure Disposals value fair in Change Carrying December amount at 31 2018 The carrying amount of investment properties for the periods presented the in consolidated statements financial reconciled is as follows: Carrying amount at 1 January 2017 Group Investment properties those are held to earn and appreciation. for rentals capital 9. Investment properties Investment 9. Accumulated impairment losses At 1 January 2018 for the yearCharge N Additions – subsequent expenditure Disposals value fair in Change Gross carrying amount Cost December 2018 and 31 At 1 January 2018 8. Intangible8. assets Basic E December 2018 31 DecemberNet 2017 book amount at 31 Dilutive impactDilutive options of share and warrants Diluted 7. Earnings per Earnings share continued 7. E Deferred tax Deferred E Adjustment to fair value ofAdjustment derivatives to fair NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2018
9. Investment properties continued The figures stated above for the gross carrying amount include valuations as follows:
2018 2017 £000 £000 At professional valuation 219,040 205,521 At Directors' valuation 2,000 3,900 221,040 209,421
If investment properties had not been revalued they would have been included on the historical cost basis at the following amounts:
2018 2017 £000 £000 Cost and net book amount at 31 December 219,363 206,679
Company £000 Carrying amount at 1 January 2017 18 7, 4 2 4 Additions 20,353 Disposals (10,721) Change in fair value 5,050 Carrying amount at 31 December 2017 202,10 6 Additions 16,712 Disposals (5,703) Change in fair value 755 Carrying amount at 31 December 2018 213,870
The figures stated above for cost or valuation include valuations as follows: Investment properties 2018 2017 £000 £000 At professional valuation 213,870 198,206 At Directors’ valuation – 3,900 213,870 202,10 6
If investment properties had not been revalued they would have been included on the historical cost basis at the following amounts:
Investment properties 2018 2017 £000 £000 Cost and net book amount at 31 December 211,072 198,388
Rental income from investment properties in the year ended 31 December 2018 was £15,642,000 (2017: £14,880,000) and direct operating expenses in relation to those properties were £1,404,000 (2017: £1,554,000). Direct operating expenses in relation to those properties which did not generate rental income in the period were £74,000 (2017: £173,000).
All of the Group and Company’s investment properties are held as either freehold or long leasehold and are held for use in operating leases. The Group and Company uses the fair value model for all of their investment properties.
The valuation at 31 December 2018 has in the main been carried out by Cushman & Wakefield Debenham Tie Leung Limited and Jones Lang Lasalle Limited, independent professional valuers, on certain properties and the Directors on the remaining properties. All professional valuers have recent experience in the location and type of properties held.
56 Real Estate Investors PLC Annual Report and Accounts 2018 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS 57 6 5 11 12 Total 181 175 2017 2017 187 192 £000 £000 £000 (753) 1,670 2,423 2,380 – 5 4 Company 11 10 76 70 80 65 2018 2018 £000 £000 £000 Office 1,670 1,670 2,380 equipment 1 1 1 1 111 111 112 110 2017 £000 £000 Annual Report and Accounts 2018
3,708 C Leasehold L s P s improvements r Group 2018 £000 3,764 state Investo state Country of incorporation Country of England and Wales England England and Wales England England and Wales England England and Wales England Real E Real Principal activity Property investment Property investment Property investment Property trading et book carrying amount t 31 Decembert 31 2018 ame At 31 December 2018 At 31 N A December 2017 At 31 Charge for the yearCharge At 31 December 2018 At 31 Impairment and Depreciation December 2017 At 31 Additions At 31 December 2018 the Company wholly owned the subsidiaries: following December 2018 At 31 Land held for trading 12. Inventories 12. Provision for impairment December At 31 is £nil), All land held included is for trading at the value less lower of being cost their fair and net costs realisable No value, to sell. inventory (2017: pledged as security for bank loans. 3147398 Limited 3147398 N Cost At 1 January 11. Interests in subsidiaries Interests subsidiaries in 11. Gross carrying amount December 2017 At 31 10. Property, plant & equipment Property, 10. Group and Company Metro Court Limited (WB) Southgate Derby Limited Retail Real HomesReal One Limited The provision for impairment is a result of a result the for impairment is The underlying provision property asset the in subsidiary being disposed of and the therefore carrying value of the reducedinvestment is to reflect the underlying net assets. The Group has control each over of these each. by virtue shareholding in subsidiaries of 100% its NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2018
13. Trade and other receivables Group Company 2018 2017 2018 2017 £000 £000 £000 £000 Trade receivables 182 1,007 215 1,049 Amounts owed by subsidiary undertakings – – 2,619 2,571 Other receivables 104 74 4 48 480 Prepayments and accrued income 1,991 1,912 1,752 1,888 2,277 3,663 4,634 5,988
All of the Group’s trade and other receivables have been reviewed for indicators of impairment. Certain trade receivables were found to be impaired and a provision of £93,000 (2017: £93,000) has been recorded accordingly. The movement in the provision for impairment during the year is as follows:
Group and Company 2018 2017 £000 £000 At 1 January 93 53 Increase in provision 42 49 Debts written off (42) (9) At 31 December 93 93
In addition, some of the trade receivables not impaired are past due as at the reporting date. The age of financial assets past due but not impaired is as follows:
Group and Company 2018 2017 £000 £000 Not more than 3 months past due 3 2 More than 3 months but no more than 6 months past due 8 4 11 6
Financial assets by category The categories of financial asset included in the balance sheet and the headings in which they are included are as follows:
Group 2018 2017 Financial Financial assets at Non- assets at Non- amortised financial Balance amortised financial Balance cost assets sheet total cost assets sheet total £000 £000 £000 £000 £000 £000 Trade receivables 182 – 182 1,007 – 1,007 Other receivables 104 – 104 74 4 – 74 4 Prepayments and accrued income – 1,991 1,991 – 1,912 1,912 Cash and cash equivalents 10,843 – 10,843 4,339 – 4,339 11,129 1,991 13,120 6,090 1,912 8,002
Company 2018 2017 Financial Financial assets at Non- assets at Non- amortised financial Balance amortised financial Balance cost assets sheet total cost assets sheet total £000 £000 £000 £000 £000 £000 Trade receivables 215 – 215 1,049 – 1,049 Amounts owed by subsidiary undertakings 2,619 – 2,619 2,571 – 2,571 Other receivables 48 – 48 480 – 480 Prepayments and accrued income – 1,752 1,752 – 1,888 1,888 Cash and cash equivalents 10,782 – 10,782 4,241 – 4,241 13,664 1,752 15,416 8,341 1,888 10,229
58 Real Estate Investors PLC Annual Report and Accounts 2018 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS 59 23 total 2017 123 173 371 632 357 630 £000 £000 1,398 1,398 3,423 2,578 3,869 3,572 8,509 64,213 20,378 94,629 68,082 26,547 Balancesheet – – – – – – – Company 23 2018 746 125 386 £000 632 £000 4,816 1,631 2,521 1,574 liabilities 2,229 2,229 10,225 Non-financial 2017 – – – – 2017 173 173 371 371 632 £000 £000 Annual Report and Accounts 2018
6,146 1,998 1,398 1,398 3,572 C 24,318 L 64,213 64,213 88,531 20,378 liabilitiesat s P s amortisedcost Otherfinancial r Group – – – – – – – – – – 742 2018 155 399 £000 £000 7, 8 8 3 1,631 4,956 3,869 3,869 3,869 Financial valuethrough profitand loss state Investo state liabilitiesat fair 1 Real E Real total 742 155 399 364 £000 3,010 1,631 4,956 8,248 98, 411 101,421 109,669 Balancesheet – – – – – – – 1 742 £000 3,616 3,616 2,873 liabilities on-financial N 2018 – – – cost ther 155 399 364 £000 O 1,631 4,632 2,083 financial 98, 411 98, 411 amortised liabilities at 103,043 – – – – – – – – – £000 3,010 3,010 3,010 and loss and Financial Financial fairvalue liabilities at through profit through on-current Dividend payable taxation for current Provision payables Trade Amounts owed to subsidiary undertakings Other payables Current Bank loans Group Financial liabilities by category by liabilities Financial The included categories the in balance liabilities of financial sheet and the they included headings which in are as follows: are Trade payables Trade 14. Trade and other and payables Trade 14. Social security and taxation Other payables Social security and taxation Accrual and deferred income Accruals and deferred income N Bank loans Dividend payable Financial instruments NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2018
14. Trade and other payables continued Company 2018 2017 Financial Other liabilities at financial Financial fair value liabilities at liabilities at fair Other financial through profit amortised Non-financial Balance sheet value through liabilities at Non-financial Balance sheet and loss cost liabilities total profit and loss amortised cost liabilities total £000 £000 £000 £000 £000 £000 £000 £000 Current Bank loans – 319 319 – 20,303 – 20,303 Provision for current taxation – – – – – – 22 22 Trade payables – 386 – 386 – 357 – 357 Other payables – 2,646 – 2,646 – 2,701 – 2,701 Social security and taxation – – 746 746 – – 630 630 Accruals and deferred income – 2,024 2,792 4,816 – 1,950 1,473 3,423 Dividend payable – 1,631 – 1,631 – 1,398 – 1,398 – 7, 0 0 6 3,538 10,544 – 26,709 2,125 28,834 Non-current Bank loans – 94,669 – 94,669 – 60,457 – 60,457 Financial instruments 3,010 – – 3,010 3,869 – – 3,869 3,010 94,669 – 9 7, 67 9 3,869 60,457 – 64,326 3,010 101,675 3,538 108,223 3,869 8 7,16 6 2,125 93,16 0
15. Financial risk management objectives and policies The Group and Company's financial instruments are bank borrowings, cash, bank deposits, interest rate swap agreements and various items such as short-term receivables and payables that arise from its operations. The main purpose of these financial instruments is to fund the Group and Company's investment strategy and the short-term working capital requirements of the business.
The main risks arising from the Group and Company's financial instruments are credit risk, liquidity risk, interest rate risk and property yield risk. The Board reviews and agrees policies for managing each of these risks and they are summarised below. These policies have remained unchanged throughout the period.
Credit risk The Group and Company's principal financial assets are bank balances and trade and other receivables. The Group and Company's credit risk is primarily attributable to its trade and other receivables. The amounts presented in the balance sheet are net of allowance for doubtful receivables. An allowance for impairment is made where there is objective evidence that the Group or Company will not be able to collect all amounts due according to the original terms of the receivables concerned. The credit risk for liquid funds is considered negligible, since the counterparties are reputable banks with high quality external credit ratings.
The Group and Company’s exposure to credit risk is limited to the carrying amount of financial assets recognised at the balance sheet date, as summarised below:
2018 2017 £000 £000 Cash and cash equivalents 10,843 4,339 Trade and other receivables 286 1,751 11,129 6,090
The Group and Company continuously monitor defaults of tenants and other counterparties, identified either individually or by group, and incorporates this information into its credit risk controls. External credit ratings and/or reports on tenants and other counterparties are obtained and used. The policy is to deal only with creditworthy counterparties.
The Group and Company’s management considers that all the above financial assets that are not impaired for each of the reporting dates under review are of good credit quality, including those that are past due. In respect of trade and other receivables, the Group or Company is not exposed to any significant risk exposure to any single counterparty or any group of counterparties having similar characteristics.
Liquidity risk The Group and Company seek to manage financial risk by ensuring sufficient liquidity is available to meet foreseeable needs and to invest cash assets safely and profitably. The Group and Company do this by taking out loans with banks to build up cash resources to fund property purchases.
60 Real Estate Investors PLC Annual Report and Accounts 2018 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS 61
– – – – 2017 2017 2017 303 (818) £000 £000 £000 (355) (893) liabilities liabilities 3,869 61,275 50,120 64,213 65,10 6 10,389 80,760 20,303 84,629 60,457 Non-current Non-current Non-current
– – Company 319 2018 818 2017 2017 £000 893 £000 £000 (378) (852) (927) Current Current Current 3,010 8,889 liabilities liabilities 9 7,9 9 8 56,170 29,988 94,988 20,412 20,337 20,378 20,303
Group – – Company 2018 2018 2017 £000 £000 473 £000 (355) Annual Report and Accounts 2018
3,869 C liabilities liabilities 98, 411 19,628 19,642 64,213 14,570 14,570 94,669 L 60,457 13,435 84,591 20,378 on-current on-current 50,660 88,460 N N s P s r
Group – – 319 2018 2018 2018 364 364 £000 £000 £000 (378) (342) (386) Current Current 3,010 8,939 liabilities liabilities 33,140 56,710 20,378 98,775 20,303 (19,628) (19,642) 101,785 state Investo state Real E Real Disclosed as financial liabilities at fair value through profit or loss. t 31 December 31 t t 31 December 31 t Financial instruments* Reclassification Proceeds new from bank loans Repayment of bank loans A At 1 January Reclassification At 1 January * activities can be financing from classified as arising follows: liabilities and Company’s The changes the in Group’s In less than 1 year: Bank borrowings costs arrangement Deferred The Group and Company borrowings analysis (all of which are undiscounted) at 31 December 2018 is as follows: is December 2018 The undiscounted) Group and at 31 Companyof are which borrowings (all analysis 15. Financial risk management risk Financial objectives policies and continued15. Bank loans Proceeds new from bank loans Repayment of bank loans A In more than 1 year but less than 2 years: Bank borrowings In more than 2 years but less than 5 years: Bank borrowings In more than 5 years Bank borrowings NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2018
15. Financial risk management objectives and policies continued Maturity of financial liabilities The gross contractual cash flows relating to non-derivative financial liabilities are as follows:
Group Company 2018 2017 2018 2017 £000 £000 £000 £000 In less than 1 year: Trade payables 399 371 386 357 Other payables 155 173 2,646 2,701 Accruals 4,956 3,572 4,816 3,423 Dividend 1,631 1,398 1,631 1,398 Bank borrowings 4,351 23,285 4,073 22,979 11, 492 28,799 13,552 30,858 In more than 1 year but less than 2 years: Bank borrowings 12,921 2,585 12,643 2,279 In more than 2 years but less than 5 years: Bank borrowings 83,618 54,320 82,784 53,402 In more than 5 years Bank borrowings 17, 375 17, 4 9 5 12,463 13,515 125,406 103,19 9 121,442 100,054
The Group and Company has entered into interest rate swap agreements to cover £20 million of its bank borrowings with Lloyds Banking Group. These contracts are considered by management to be part of economic hedge arrangements but have not been formally designated. During the year the Group settled one agreement at a cost of £153,000. The effect of the remaining agreement is to fix the interest payable on a notional £10 million at a rate of 4.95%; unless the actual rate is between 3.65% and 4.95% in which case the actual rate is paid or unless the rate is above 4.95% in which case 3.65% is paid plus a margin of 2.45%. The agreement expires in February 2028. At 31 December 2018 the fair value of this arrangement based on a valuation provided by the Group's bankers was a liability of £3,010,000 (2017: £3,869,000).
Borrowing facilities The Group and Company has undrawn committed borrowing facilities at 31 December 2018 of £Nil (2017: £5,000,000).
Market risk Interest rate risk The Group and Company finance their operations through retained profit, cash balances and the use of medium-term borrowings. When medium-term borrowings are used either fixed rates of interest apply or, where variable rates apply, interest rate swap arrangements are entered into. When the Group or Company places cash balances on deposit, rates used are fixed in the short term and for sufficiently short periods that there is no need to hedge against implied risk.
The interest rate exposure of the financial liabilities of the Group and Company at 31 December 2018 was:
Group Company 2018 2017 2018 2017 Bank loans Interest % Expiry Date £000 £000 £000 £000 Fixed until February 2019 6.60 February 2019 – 10,000 – 10,000 Fixed until February 2021 2.75 February 2021 41,000 38,000 41,000 38,000 Fixed until January 2030 6.04 January 2030 3,787 3,831 – – Fixed until March 2030 6.27 March 2030 672 685 672 685 Fixed until May 2030 5.78 May 2030 1,389 1,412 1,389 1,412 Fixed until March 2031 5.47 M arch 2031 676 694 676 694 Fixed until March 2027 5.16 March 2027 8,859 9,124 8,859 9,124 Cap and collar agreement until January 2028 4.65 cap January 2028 10,000 – 10,000 – Cap and collar agreement until January 2018 4.95 cap January 2018 – 10,000 – 10,000 Variable rate 32,770 11,2 0 0 32,770 11,2 0 0 99,153 84,946 95,366 81,115 Loan arrangement fees (378) (355) (378) (355) 98,775 84,591 94,988 80,670
The Directors consider the fair value of the loans not to be significantly different from their carrying value.
62 Real Estate Investors PLC Annual Report and Accounts 2018 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS 63 56 Total 2017 £000 £000 (153) (725) (706) 3,010 4,594 3,869 – – – – – 2018 164 £000 £000 Level3 £000 (153) (725) (706) Annual Report and Accounts 2018 Level2
3,010 4,594 3,869 C L s P s r – – – – – £000 Level1 state Investo state Real E Real to safeguard the ability so to concern, continue as that a going they continue returns to provide and benefits for shareholders; thatto bank ensure key not covenants breached; are for operating sufficient cash flow facilities needsto maintain and to fund future property purchases; stability and growth; and Company’s to support the Group’s for the capital to provide purpose of the strengthening management risk capability; for the capital to provide purpose of further investment property and acquisitions; adequate an to provide return to shareholders. t 31 Decembert 31 2018 A swap agreements rate interest has been and Company’s determined observable using rates value correspondingThe interest of the fair Group’s to the maturity of the The instrument. effects of non-observable for these not agreements. inputs significant are At 31 December 2017 At 31 Hedge settlement payment Income statement – surplus Interest swap agreements: rate At 1 January 2017 The financial liabilities measured at fair value on a recurring basis in the statement of financial position, which relate to interest rate swaps, are grouped are measured the value relate swaps, rate on which basisto in interest a recurring statement at fair The liabilities position, of financial financial as follows: value the hierarchy into fair The level within which the financial asset the which The financial level or classified within liability is determined is based value on to input the the fair lowest level of significant measurement. Income statement – surplus Fair value measurement value Fair of financial instruments measured the value assets in consolidated at fair liabilities and financial Financial and Company statements grouped position are of financial into The defined 3 levels are basedon the valueobservability 3 levels hierarchy. of a fair inputs to the as follows: measurement, of significant quoted active in markets prices for identical assets (unadjusted) and liabilities. Level 1: inputs other thanLevel quoted 2: prices or as prices) indirectly included level 1 that observable in are either directly (i.e. for the asset or liability, derived prices). from (i.e. inputs for the asset orLevel 3: liability that not based are on observable market data (unobservable inputs). 16. Fair value disclosures value Fair 16. The methods and techniques used forthe purpose unchanged value of are measuring fair compared to the reporting previous period. Capital management risk objectivesThe when Group and are: Company’s capital managing • • • • • • • The Group actively and regularly and manages reviews structure capital its optimal an structure capital to ensure and equity holder into taking returns, projected and projected operating cash flows, consideration the profitability, of prevailing future requirements the capital Group and efficiency, capital projected expenditures capital and projected strategic investment opportunities. Management total regards equity and as capital reserves, for capital purposes. management Property yield risk The valuation of investment properties dependent is the on the impact assumed on the However, net yields. after rental result tax and equity difficult is to estimate interrelates as it other with factors affecting investment property values. Decreaseafter result in tax and equity The change rate interest not above have will a material impact on the valuation of the swap. rate interest 15. Financial risk management risk Financial objectives policies and continued15. The table following illustrates the sensitivity of the net after result tax and equity to a reasonably possible rates change of interest + half in a percentage + half a percentage effect with point) the of from the beginning year: point (2017: NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2018
16. Fair value disclosures continued Measurement of other financial instruments The measurement methods for financial assets and liabilities accounted for at amortised cost are described below:
Trade and other receivables, cash and cash equivalents and trade and other payables The carrying amount is considered a reasonable approximation of fair value due to the short duration of these instruments.
Bank loans and overdrafts Fair values are considered to be equivalent to book value as loans and overdrafts were obtained at market rates.
Fair value measurement of non-financial assets The following table shows the levels within the hierarchy of non-financial assets measured at fair value on a recurring basis at 31 December 2018.
Level 1 Level 2 Level 3 Total £000 £000 £000 £000 Investment property: Group – held to earn rentals and for capital appreciation – – 221,040 221,040 Company – held to earn rentals and for capital appreciation – – 213,870 213,870
The reconciliation of the carrying value of non-financial assets classified within level 3 are as follows:
Investment properties Group Company £000 £000 At 1 January 2018 209,421 202,106 Acquired during the year 16,744 16,712 Disposals during the year (5,703) (5,703) Gains recognised in profit and loss – increase in fair value 578 755 At 31 December 2018 221,040 213,870
Fair value of the Group’s and Company’s property assets is estimated based on appraisals performed by independent, professionally qualified property valuers on certain properties and the Directors on the remaining properties. The significant inputs and assumptions are developed in close consultation with management. The valuation processes and fair value changes are reviewed by the Directors and Audit Committee at each reporting date.
Measurement of fair value of investment property held to earn rentals and for capital appreciation Properties valued by external valuers are valued on an open market basis based on active market prices adjusted for any differences in the nature, location or condition of the specified asset such as plot size, encumbrances and current use. Properties valued by the Directors use the same principles as the external valuers. If this information is not available, alternative valuation methods are used such as recent prices on less active markets, or discounted cash flow projections. The significant unobservable input is the adjustment for factors specific to the properties in question. The extent and direction of this adjustment depends on the number and characteristics of the observable market transactions in similar properties that are used as the starting point for the valuation. Although this input is a subjective judgement, management consider that the overall valuation would not be materially altered by any reasonable alternative assumptions.
The market value of the investment properties has been supported by comparison to that produced under income capitalisation techniques applying a key unobservable input, being yield. The range of yield applied is 7.5% to 11.0%.
The fair value of an investment property reflects, among other things, rental income from current leases and assumptions about future rental lease income based on current market conditions and anticipated plans for the property.
17. Deferred taxation The movement in deferred taxation assets is as follows:
Group and Company 2018 2017 £000 £000 At 1 January 540 685 Income statement (note 6) (135) (145) At 31 December 405 540
64 Real Estate Investors PLC Annual Report and Accounts 2018 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS 65 2017 2017 540 540 £000 £000 18,642 2018 405 405 £000 Group andGroup Company 2017 shares Numberof Annual Report and Accounts 2018 186,420,598
C L s P s r 2018 £000 18,642 state Investo state Real E Real 2018 shares umber of Number 186,420,598 50% of the50% subject award to growth absolute plus dividends NAV threshold with part annual of – 30% this vesting of the – at 8.5% award annual growth. growth dividends andincluding full at 14.0% vesting subject50% to absolutetotal shareholder price growth threshold return with plus (share part dividends) of – 30% this vesting of the – at award annual growth and full at 14.0%. vesting 8.5% – – The LTIP has a 10-year life from January 2010 to December 2019. has January from a 10-yearThe life LTIP 2010 conditions: Performance – – Amounts payable cost options to any be will satisfied full as below) (save in by the issue of Ordinary Shares or of the zero/nominal grant participant. The be price shares will at which issued be will the weighted average mid-market business price closing for 20 the days first following announcement of the latest full-year the On Ordinary issue, results. pari passu rank Shares will issued the with existing Ordinary Shares. The number then Any of excess issued Ordinary of the capital. share Company’s Shares can be which issued to 10% under limited is the LTIP earned be level above cash will this paid provided in that the Committee Remuneration prudent consider it to do so otherwise at that stage, payment be will deferred the Committee until Remuneration deem prudent. it The regulatory for Committee legal, Remuneration including may alteration to the any to make fit, time or time from plan thinks tax it which reasons, order the toin ensure smooth workings of the objectives. its with plan line in Conditional of awards shares made each year vest afterAwards 3 years subject to continued employment and meetingobjective performance conditions Allotted, issued and fully paid: Ordinary Shares of 10p 18. Share capital 18. Financial instrument a resolution was passedAt the the Incentive Annual approving Plan adoption (‘LTIP'). General of Meeting a new Long-Term held June in 2010 the terms revised and options previous were of cancelled. the As LTIP the options previous deemed were to be unlikely exercised, On 8 June 2015, years previous thereas in was no made charge to the and loss profit account on The cancellation. proposed designed is to promote LTIP and retention theincentivise Executive the Directors value to grow of the Group and returns: to maximise • • 17. Deferred taxation continued 17. The deferred tax temporary from asset arising differences can be summarised as follows: Deferred tax has been provided on temporary all differences ultimately as the swap liability will rate regardless interest reverse of movements future in rates. interest to vest. likely are none of the options 2016 granted in Based on the results and the price share for 2018 No temporary ventures qualified as for deferred recognition joint or differences interests in tax subsidiaries investments from assets in resulting or these taxes. See gains Under capital from exempt are entities note thefor 6 fiscal information environment, current on theliabilities. Group’s tax expense. of employee of relates all which expense, remuneration to equity-settled £350,000) share-based payment has transactions, been (2017: £Nil In total, included or loss profit in and credited to earnings. retained The per value model the option of weighted average the binomial pricing fair option, made awards (based a volatility with 59p is on the of 25% expected an weighted average life of rate 1.5%, a risk-free weighted average price share movements a dividend yield the over of 5.5%, last 3 years), The 55p). and (2017: a market value of underlying price of shares at the 0.5p a weighted averageof date exercise 5 years, of of the 53.5p grant As the has award a maximum value the actual number 2,886,349). (2017: number of shares under option at the year end estimated is as 3,131,949 beof will shares issued which when depend the will option exercised is on the market value of the shares at the of time exercise. • • • • • the Group granted certain employees options under the scheme entitles which and 8 June 2015, 7 April 2016 March 2017, 20 March 2018, On 28 them to subscribe Ordinary the for or case acquire per the Shares of new in (in Company Ordinary share or at a price 0p of Shares) 10p per share of the options and The subject exercise is grant to the rules the shares). and case cannot of the be of unless of a transfer (in existing LTIP exercised the performancerelevant as discussed and the capped met, total above, is award are criteria at a maximum value of shares at the of time exercise, not a specific number of shares. NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2018
19. Operating lease commitments Operating lease commitments relating to land and buildings expire within 2 to 5 years and amount to £71,000 (2017: £71,000).
Non-cancellable operating lease commitments receivable:
2018 2017 £000 £000 Within 1 year 1,098 1,161 Later than 1 year but not later than 5 years 24,664 26,673 Later than 5 years 46,946 45,619 72,708 73,453
Rent receivable by the Group under current leases from tenants is from commercial and retail property held.
20. Contingent liabilities There were no contingent liabilities at 31 December 2018 or at 31 December 2017.
21. Capital commitments Capital commitments authorised at 31 December 2018 were £nil (2017: £nil).
22. Pension scheme The Group has signed up to the government auto enrolment pension scheme.
23. Related party transactions The Group's related parties are its key management personnel and certain other companies which are related to certain Directors of the Group. The Company's related parties are its key management personnel, certain other companies which are related to certain Directors of the Group and its subsidiary undertakings.
The Executive and Non-Executive Directors are also the key management personnel and details of their remuneration are included within the Directors' Remuneration Report on pages 35 and 36.
During the period the Company and Group paid agency fees of £84,000 (2017: £148,000) in respect of professional services and rent and service charges of £183,000 (2017: £183,000) to Bond Wolfe, a partnership in which PPS Bassi is a partner. Amounts outstanding owed to Bond Wolfe at the year end were £7,569 (2017: £17,427). It also received rent income of £75,000 (2017: £112,000) from Bond Wolfe during the year. Amounts outstanding from Bond Wolfe at the year end were £22,500 (2017: £67,500).
During the period the Company’s transactions with subsidiary companies related to inter-company dividends and repayment of loans. Details of amounts outstanding at 31 December 2018 are shown in notes 13 and 14.
During the period the Company paid dividends to its Directors in their capacity as shareholders, as follows:
2018 2017 £000 £000 JR Crabtree 8 7 W Wyatt 6 3 P London 4 2 PPS Bassi 359 304 MHP Daly 62 49
66 Real Estate Investors PLC Annual Report and Accounts 2018 STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS 67 Annual Report and Accounts 2018
C L s P s r state Investo state Real E Real
5045715 Colmore Row 75–77 B3 2AP JRA Chairman OBE: Crabtree Wyatt:W Non-Executive Director Director Non-Executive London: P PPS Bassi Executive Chief CBE: MHP Director Daly: Finance MHP Daly LLP UK Thornton Grant Chartered Accountants Registered Auditor Building Colmore The Colmore Circus 20 B4 6AT Gateley Plc Eleven One StreetEdmund B3 2HJ SecuritiesCenkos plc Yard 6 7 8 Tokenhouse EC2R 7AS Liberum Limited Capital Level 12 Ropemaker Place, Street Ropemaker 25 9LY EC2Y Lloyds Banking Group Colmore Row 125 B3 3SF AssetLink Services The Registry Beckenham34 Road BR3 4TU
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68 Real Estate Investors PLC Annual Report and Accounts 2018
Real Estate Investors Plc
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