Final Results

10 March 2022

Secure Income REIT Plc

 

Results for the year ended 31 December 2021

 

Secure Income REIT Plc (AIM: SIR) (the "Company" or the "Group"), the specialist long term income UK REIT, today

announces its results for the year ended 31 December 2021.

 

Highlights

 

· 11.8% uplift in EPRA NTA per share to 424.1 pence per share

 

· Investment property valuation up 9.3% over the year and up 7.1% since 30 June 2021:

‐ Net Initial Yield of 5.1%, down from 5.4% at 31 December 2020

‐ Rent reviews in the year on 77% of the portfolio resulted in a like for like rental increase of 3.1% 

‐ Weighted Average Unexpired Lease Term increased by some 50% over the year to 30.0 years following the regearing of the Merlin leases

 

· Merlin leases extended and enhanced in December 2021:

‐ Leases have been extended by 35 years to a 55.5 year term without break

‐ Rent reviews on UK assets Alton Towers, Thorpe Park and Warwick Castle modified to CPI + 0.5% per annum with 1% minimum and 4% maximum uplifts

‐ Rental uplifts on German assets remain at 3.34% per annum throughout the extended term

‐ £33.5 million premium recouped through valuation uplift

‐ Enhancements to leases including formalisation of the existing close working relationship on ESG matters

 

· Merlin leisure facility refinanced in March 2022, post year end

‐ £282.5 million committed credit facility signed with drawdown scheduled for April 2022 subject only to conventional conditions precedent (facility amount stated at 31 December 2021 exchange rate)

‐ Risk management through non-recourse structure, no LTV default provision and low 100% interest cover requirement

‐ Four year term certain with one year extension option

‐ Lower borrowing level through accretive deployment of surplus cash and 15% reduction in cost of debt provides platform for targeted dividend increase from July 2022

 

· 400% increase in Adjusted EPRA EPS to 17.5p per share

‐ Like for like earnings have increased by 10% as rents have returned to their pre-pandemic course following expiry of all temporary rent reductions

 

· Shareholder returns have rebounded:

‐ Total Accounting Return of 15.8% in the year

‐ Total Shareholder Returns:

• 46.7% over the year

• 15.3% p.a. from listing to 8 March 2022

 

· Net LTV reduced to 33.8%, down from 36.4% at 31 December 2020 

 

· EPRA Cost Ratio of 12.6% among the lowest in the UK REIT sector

 

· ESG Committee established and chaired by the Company's Chairman, Martin Moore, to oversee management of this important and developing area

 

· Looking ahead: targeted dividend increase in July 2022 of approximately 15% to 18.2 pence per share annualised. This is driven by the return of rents to their pre-Covid trajectories, together with targeted earnings enhancement arising from the Merlin facility refinancing and current expectations of high inflation which would translate into increased rents in the near term. This increase assumes no change to the portfolio or material change to tenant circumstances.

 

 

 

 

 

 

Balance sheet and portfolio	31 December 2021	31 December 2020
Properties at independent valuation	£2,127.6m	£1,946.9m	Up 9.3%
Net assets	£1,369.8m	£1,221.5m	Up 12.1%
EPRA NTA	£1,374.1m	£1,229.2m	Up 11.8%
EPRA NTA per share	424.1p	379.3p	Up 11.8%
Net Loan To Value ratio	33.8%	36.4%	Down 7.2%
Annualised passing rent (before Covid-19 concessions in 2020)	£116.8m	£113.3m	Up 3.1%
Net Initial Yield (topped up in 2020)	5.11%	5.42%	Down 31bp
Running Yield within 12 months (1)	5.35%	5.58%
Weighted Average Unexpired Lease Term	30.0 years	20.2 years	Up 48.5%

(1) Using independent external valuers' RPI and CPI estimates averaging 6.4% (2020: 2.5%) and 4.6% respectively

 

Earnings and returns	Year to31 December  2021	Year to31 December  2020
Adjusted EPRA EPS:
Like for like rent net of all costs and tax, before rent concessions	15.4p	14.0p	Up 10.0%
Rent deferrals	4.9p	(5.5)p
Temporary rent concessions on a cash basis	(2.8)p	(5.0)p
Adjusted EPRA EPS	17.5p	3.5p	Up 400%
IFRS EPS:
Like for like rent net of costs and tax, before revaluations and rent concessions	17.8p	16.6p
IFRS impact of temporary rent concessions, spread over lease terms	(0.5)p	(0.3)p
IFRS rent net of costs and tax, before revaluations	17.3p	16.3p
Property revaluations net of deferred tax	44.3p	(51.4)p
IFRS EPS	61.6p	(35.1)p
Total Accounting Return	15.8%	(8.0)%
Total Shareholder Return	46.7%	(27.3)%
Dividends per share	15.2p	15.7p
Latest dividend per share annualised: % of EPRA NTA (1)	3.7%	3.8%
Latest dividend per share annualised: % of 31 December share price (1)	3.7%	4.9%
Dividend guidance from July 2022: % of 31 December 2021 EPRA NTA (2)	4.3%
Total Accounting Return over 30 June 2014 EPRA NTA	15.4% pa	15.3% pa
Total Shareholder Return over issue price at 2014 listing	16.3% pa	12.8% pa

(1) This is illustrative and does not constitute a dividend forecast

(2) Potential dividend target and does not represent a dividend forecast

 

Capitalised terms are defined in the glossary at the end of these reports.

 

 

Martin Moore, Non-Executive Chairman of the Company, commented:

"In 2021 we delivered a Total Accounting Return of 15.8%, in line with our long term returns since listing in 2014. Our rents have not only resumed their pre-pandemic path, but future income expectations are now higher due to rising inflation. Following the major regearing of our valuable Merlin leases to 55.5 years without break, the Company's WAULT at 30 years is now the longest amongst the major UK REITs. Since the year end the refinancing of our Merlin debt at a lower loan to value and a lower cost is expected to help boost our targeted dividend by an estimated 15% by the summer. Notwithstanding the uncertainty caused by the awful humanitarian crisis and geo-political events in Ukraine, these elements combine to form a strong platform for the year ahead."

 

 

 

 

 

For further information on the Company, please contact:

 

Secure Income REIT Plc Nick Leslau Mike Brown Sandy Gumm	+44 20 7647 7647 [email protected]
Stifel Nicolaus Europe Limited(Nominated Adviser) Mark Young Stewart Wallace	+44 20 7710 7600 [email protected]
FTI Consulting LLP Dido Laurimore Claire Turvey Eve Kirmatzis	+44 20 3727 1000 [email protected]

 

 

Results Presentation

Nick Leslau, Mike Brown and Sandy Gumm will be holding a presentation of these results for analysts and investors today at 150 Cheapside, London EC2V 6ET at 10:30am. If you would like to attend, please contact FTI Consulting on 020 3727 1000, or email [email protected].

 

The presentation will be on the Company's website www.SecureIncomeREIT.co.uk and a conference call facility will be available. The dial-in details are:

 

Telephone: +44 (0)330 336 9601

Confirmation code: 6873892

 

Webcast link: https://webcasting.brrmedia.co.uk/broadcast/6205421d26d01a4c0553ce6d

 

The presentation will subsequently be uploaded on the Company's website www.SecureIncomeREIT.co.uk

 

 

 

 

About Secure Income REIT Plc

Secure Income REIT Plc is a diversified UK REIT, investing in real estate assets that provide long term rental income with upwards only inflation protection.

 

At 31 December 2021 the Company has £2.1 billion of property assets with very long leases having a weighted average term to expiry without break of 30 years. The Group has £1.4 billion of net assets, a Net Loan To Value Ratio of 33.8%, structurally secure non-recourse debt, and difficult to replicate leases on Key Operating Assets in defensive sectors.

 

Over seven and a half years since listing, the Company has delivered a Total Accounting Return of 15.4% p.a. and a Total Shareholder Return of 16.3% p.a.. Through its portfolio of very long leases with a blend of fixed and inflation-linked rental uplifts, the Company aims to deliver progressively rising dividends and attractive risk adjusted total returns.

 

The Management Team holds a 12.4% interest in the business worth £170 million at 31 December 2021 EPRA NTA and is strongly aligned with shareholders to optimise value for all shareholders.

 

The Company's LEI is 213800M1VI451RU17H40.

 

Further information on Secure Income REIT is available at www.SecureIncomeREIT.co.uk.

 

Forward looking information

This document includes forward looking statements which are subject to risks and uncertainties. You are cautioned that forward looking statements are not guarantees of future performance and that if risks and uncertainties materialise, or if the assumptions underlying any of these statements prove incorrect, the actual results of operations and financial condition of the Group may differ materially from those made in, or suggested by, the forward looking statements. Other than in accordance with its legal or regulatory obligations, the Company undertakes no obligation to review, update or confirm expectations or estimates or to release publicly any revisions to any forward looking statements to reflect events that occur or circumstances that arise after 9 March 2022.

 

Rounding of financial information

The financial information, including comparative amounts, and certain other figures in this document are presented in millions of pounds, rounded to one decimal place. Accordingly, figures shown in the same category presented in different tables may vary slightly and figures shown as totals in certain tables may not be an arithmetic aggregation of the figures that precede them as a result of rounding.

 

 

 

Chairman's Statement

 

 

Dear Shareholder,

 

The encouraging progress that we reported in our results for the six months ended 30 June 2021 has continued into the second half of the year, supported by twin tailwinds of the continued recovery in the growth trajectory of rents and asset values, together with a significant boost to valuations from the regear of the Merlin leases which we completed in December 2021. The outlook for the Company from 2022 is further enhanced by the positive impact of the Merlin debt refinancing after the year end.

 

The lease amendments agreed with Merlin have significantly increased the Company's Weighted Average Unexpired Lease Term to 30.0 years without break from 31 December 2021; have not reduced rents on any asset; and have enhanced the leases to document the co-operation between the Group and Merlin on ESG, including environmental matters in particular. We indicated at the time of announcing the transaction that the uplift in the value of the Merlin assets at 31 December 2021 was expected to be at least double the consideration paid of £33.5 million. While the impact of the lease variations is not separately reported on by the valuers, we are satisfied that this expectation has held true, helping to drive the 9.3% increase in asset values over the year. Further details of this important asset management initiative together with progress on the whole portfolio are given in the Investment Adviser's report.

 

Results and financial position

The Group's net asset value per share at 31 December 2021 reported under IFRS was 422.7 pence, up 12.1% since 31 December 2020. Using the industry standard EPRA measures for better comparison with other quoted real estate businesses, the Group's EPRA NTA per share at 31 December 2021 was 424.1 pence, which is up 11.8% since 31 December 2020. The reconciliation between IFRS and EPRA net assets is shown in note 23 to the financial information.

 

Financial position	IFRS Net Assets		EPRA NTA
	£m	Pence per share	£m	Pence per share
At 1 January 2021	1,221.5	377.0	1,229.2	379.3
Investment property revaluation	140.2	43.3	155.5	48.0
Other retained earnings	57.4	17.6	38.7	12.0
Dividends paid	(49.3)	(15.2)	(49.3)	(15.2)
	148.3	45.7	144.9	44.8
At 31 December 2021	1,369.8	422.7	1,374.1	424.1
Total Accounting Return	197.6	60.9	194.2	60.0
Total Accounting Return %		16.2%		15.8%

 

The share price also continued to recover over the year, resulting in a Total Shareholder Return of 46.7%.

 

The impact of the end of the temporary Covid-19 rent concessions has benefited the reported earnings in the year with both the IFRS and Adjusted EPRA EPS earnings showing a strong recovery. With the last of those rent reductions having come to an end in the first week of January 2022, the rent roll is now restored to its pre-Covid growth trajectory and the annual rental income at 31 December 2021 stands at £116.8 million.

 

Earnings	IFRS EPS		Adjusted EPRA EPS
	2021 Pence per share	2020 Pence per share	2021 Pence per share	2020 Pence per share
Like for like earnings before revaluations and before rent concessions and dividends	17.8	16.6	15.4	14.0
Temporary rent concessions	(0.5)	(0.3)	(2.8)	(5.0)
Rent deferrals	-	-	4.9	(5.5)
Earnings before revaluations	17.3	16.3	17.5	3.5
Property revaluations net of deferred tax	44.3	(51.4)	-	-
Earnings per share	61.6	(35.1)	17.5	3.5

 

The reconciliation between IFRS and EPRA earnings is shown in note 10 to the financial information.

 

 

 

 

In July 2020, while the pandemic raged and without the benefit, at that time, of the hope offered by vaccines and better Covid-19 treatments, the Board carefully reviewed the Company's dividend policy and took the decision to direct part of the Group's substantial Uncommitted Cash balance to support the dividend through the temporary cash flow impact of the Covid rent concessions, and to reduce the total dividends payable temporarily. As a result, the quarterly dividend reduced from 4.2 pence per share declared in each the first two quarters of 2020 to 3.65 pence per share declared in the four quarters from July 2020 to June 2021.

 

As the recovery in rents fed through to the results in 2021 and the pandemic outlook improved after the introduction of the vaccine programme, we were able to increase the dividend in the second half of 2021 by 8.2% to 3.95 pence per share per quarter. We have therefore now updated the dividend policy and expect to return in due course to our original policy of fully distributing Adjusted EPRA EPS. Commencing from the July 2022 quarter, we are targeting an increase in dividends of 15% to an annualised 18.2 pence per share. This is on the basis of the current portfolio, reflecting the reduction in financing costs following the degearing and refinancing of the Merlin debt (assuming that the Merlin debt is drawn as expected in April 2022), the application of current market estimates of RPI and CPI for the 2022 rent reviews and with no further changes to the portfolio or to the financing of the business. This increased dividend equates to a 4.3% yield on 31 December 2021 EPRA NTA on an annualised basis. This dividend target does not represent a profit forecast.

 

Outlook

The trading outlook for our tenants has brightened as the Omicron wave fades and the Government has signalled its clear intent for the country to learn to live with the residual impact of the pandemic without restrictions. This has been welcomed by the leisure and hospitality sector and bodes well for a resumption of the strong bounce back in trading we saw in the late summer and autumn of 2021.

 

The rise in inflation is a genuine concern for many, but our index-linked leases should provide both an element of protection and a stronger rental trajectory than in recent years. Across the real estate sector, the majority of inflation-linked leases contain caps and our portfolio is no exception, albeit 27% of our reviews are uncapped. Whether inflation proves to be transitionary or embedded we do anticipate that inflation rates are likely to average out below our caps over the medium term. After a generation of falling rates the interest rate cycle has finally turned. Interest rates and property yields have historically shown limited correlation and if the current gilt curve is any guide the implied future interest rate rises are modest by historic standards and in our view unlikely to have much, if any, impact on property yields. Availability of debt, in our experience, usually has a bigger impact than its absolute pricing and we take comfort in the current balance sheet strength of the banking system and widening availability of debt from other sources. The Government's proposed reform of Solvency II could unleash billions of pounds of life assurance money, some of which is likely to be funnelled either into providing debt or direct demand for long lease index-linked property.

 

Sadly, geopolitics is back in centre stage with the tragic events unfolding in Ukraine. This may amplify some of the short term inflationary dynamics but also encourage central banks to behave less precipitously in their interest rate moves. It may also lead to greater risk aversion by investors and an increase in demand for safe haven assets. When the outlook is far from clear we find it helpful to focus on those elements upon which we hold the highest conviction. Our rents have not only resumed their pre-pandemic path but the trajectory is now higher than it was due to rising inflation. The refinancing of our Merlin debt at a lower loan to value and lower cost supports our targeted dividend increase of an estimated 15% by the summer. At 30 years our average lease length is the longest it has ever been. These elements combine to form a strong platform for the year ahead.

 

Martin Moore

Chairman

9 March 2022

 

 

Investment Adviser's Report

 

 

Prestbury Investment Partners Limited, investment adviser to Secure Income REIT Plc, presents this report on the operations of the Group for the year ended 31 December 2021.

 

Our Management Team owns 12.4% of the Company, worth £170 million at 31 December 2021 EPRA NTA, representing the largest management holding by value of any UK REIT. Every member of the team holds a personally significant investment in the Company and we believe that this aligns our interests very strongly with those of all shareholders.

 

Secure Income REIT was created to provide attractive long term income and capital returns. The reporting cycle of half year and annual results necessarily focuses on those discrete six-monthly periods. We appreciate the relevance of short term performance for many investors, however the performance of the business over the medium to longer term and its prospects over similar timescales remains the principal focus of the Management Team and the Board.

 

In this report, we aim to explain the fundamentals of the business, the unique characteristics of the property portfolio, including the key terms of the leases, and the important features of the tenant operations that stand behind their lease obligations and therefore underpin both the value of the Company and ultimately shareholder returns.

 

The unaudited supplementary information which follows the financial information includes calculations of the various EPRA and Adjusted EPRA performance measures referred to in this report and capitalised terms within this report are explained in the glossary that follows the financial information.

 

The business model

The Company is a UK REIT specialising in real estate assets that provide long term rental income with inflation protection. The business is financed with non-recourse debt considered by the Board to be appropriate to asset specific and wider market risks, with significant in-built protections intended to enhance returns for shareholders without taking undue borrowing risk. We explain the Company's strategy in the "Strategy" section of the Strategic Review within this annual report.

 

Investment policy The Company invests in long term, secure income streams from real estate investments. A long term income stream is considered to be one with (or a portfolio with) a Weighted Average Unexpired Lease Term in excess of 15 years at the time of acquisition. Security of income is assessed with reference to the extent of rent cover from underlying earnings, the credit strength of tenants and (where relevant) guarantors, and the reversionary potential of the assets.   The portfolio is considered by the Board to offer attractive geared returns from high quality real estate, with tenants which have well established brands in industry sectors with strong defensive characteristics. The Board proposes to build on this strong foundation by seeking to:   · diversify sources of income and enhance prospects for attractive shareholder returns through acquisitions; and · manage the Company's capital structure in order to enhance income returns for investors whilst maintaining discipline over net debt levels and debt terms.

 

The Board exercises strict asset selection and stress testing criteria for acquisitions, with a view to delivering income streams that are not just long, but also secure and predictable. The Board seeks to build on the Company's existing, high quality portfolio by only sourcing assets let on long leases to businesses of appropriate financial strength or where the valuations are backed by residual asset value, and with inflation protected rental streams whether by way of fixed uplifts or inflation-linked reviews. Acquisitions should be accretive to shareholder returns and meet the following criteria:

 

i) the properties should be Key Operating Assets: assets that are essential for the tenant to carry out their business and generate earnings, and which the tenant is therefore significantly more motivated to invest in and to retain in order to continue to generate sustainable earnings, including a high likelihood that tenants will take appropriate action to minimise threats from industry changes, climate threats and transition to de-carbonisation;

ii) the relevant businesses should be in sectors which are likely to be more resilient to disruption from technology, including the internet, to economic downturn or other threats to their sustainability; and

iii) the properties should have high barriers to entry, making them difficult to replace. This may be due to high costs of acquiring and developing the assets in question (for example, the significant investment and planning challenges required to create a theme park or hospital), or of building the networks and brand investments that underpin the operations of a business (for example, the nationwide coverage of the Budget Hotels portfolio and its 83 year old brand) or where assets are held by the Company at a discount to replacement cost.

 

 

 

 

 

By meeting these tests, the Board considers that tenants should be more likely to renew or extend their leases and to continue to invest in the assets (including investing in sustainability initiatives), transferring the burden of obsolescence from the owner to the occupier and thus preserving value for the Company's shareholders. We have seen evidence of this in the 38% of the Group rent roll where lease extensions have been agreed to date.

 

While the investment policy requires that any new investment has a Weighted Average Unexpired Lease Term of 15 years or more at the time of acquisition, income longevity alone is not enough. When the Management Team and the Board consider how sustainable rental income is likely to be, we evaluate three layers of protection:

 

At site level (i) the profitability of a given site, enhancing its attractiveness to the incumbent and alternative operators; or

(ii) high residual value or alternative use value.

 

Tenants (i) their financial strength;

(ii) the sustainability of their business models;

(iii) the strength of any restrictions relating to lease assignability; and

(iv) the spread of tenant operations, whether by segment or geography.

 

Any guarantors their financial strength and geographic spread of operations which add to those at site and tenant level.

 

Financing the assets that meet these criteria with a combination of equity and appropriately structured debt means that returns to shareholders can be enhanced in a way that properly manages risk. To date all credit facilities have been strictly non-recourse secured credit facilities where the equity at risk is limited to the net assets within ring-fenced subgroups. There are currently six such subgroups which are self-contained, with no cross-default provisions between them. This is the case both throughout 2021 and following the refinancing of the Merlin facilities contractually committed in March 2022. In all cases, substantial financial covenant headroom was negotiated into the credit agreements at the outset together with appropriate cure rights where cash can be diverted to a security group to maintain covenant compliance if that becomes necessary. As new investments are acquired or existing facilities refinanced, or if debt market conditions change, the appropriateness of the financing structure is kept under review in order to deliver well priced borrowings while protecting shareholders' equity. We recognise that the additional protections can increase the cost of debt, and that trade-off is evaluated relative to the risks in the specific assets and in the debt structure.

 

Where equity is raised to finance acquisitions, the Board has undertaken that shares will only be issued at or above net asset value in order to protect against dilution of shareholder returns.

 

With the Group's debt costs largely fixed and its running costs predominantly represented by the advisory fee, which is a simple calculation on a reducing scale relative to net asset value (further explained in note 25c to the financial information), the medium to long term prospects for shareholder returns on the basis of a small number of simple assumptions are largely predictable and transparent.

 

The portfolio

The Group held 160 properties at 31 December 2021, down from 161 last year following the sale of one asset with a book value of £0.1 million. Contracted annual passing rent following the expiry of all Covid related concessions was £116.8 million at that date, up from £113.3 million, and the Weighted Average Unexpired Lease Term has increased by 9.8 years since December 2020 to 30.0 years without break. Movements in the independent property valuations and passing rents are set out in the following sections, as are the key terms of the leases, including the important and value accretive variations to the Merlin leases agreed at the end of 2021.

 

Temporary impact of Covid-19 related tenant support

Annualised rents receivable returned to 100% of their pre-Covid growth trajectory a week after the year end, when the last of the Travelodge rent concessions came to an end. No rent reductions have been granted since 31 December 2020 and, largely as a consequence of the relaxation of all Covid-19 restrictions later than originally expected, we have agreed only two further rent deferrals since that date on 1.3% of total Group rents. The support measures granted in 2020 with an impact on the 2021 results are:

 

· June 2020 and September 2020 rents due from Merlin amounting to £17.7 million were deferred to September 2021 and were received when due. The deferred rent was recorded in the income statement for the year to 31 December 2020 but in order to more logically demonstrate the impact on the Group's results in the period over which the concession was granted, these rents were excluded from Adjusted EPRA EPS for the 2020 financial year and included in the 2021 financial year, when the rents were received.

 

 

· The creditors of Travelodge Hotels Limited agreed a temporary rent reduction in 2020 which resulted in £8.9 million of rent foregone by the Company in 2021 (2020: £14.3 million). Rents returned to the levels originally contracted in January 2022. It was also agreed that the receipt of rental uplifts arising in 2020 and 2021 would be deferred until January 2022, so £0.8 million of further cash rents that would otherwise have been receivable in 2020 and 2021 was deferred to January 2022, at which point all deferred amounts were received. Consistent with the treatment of the Merlin rent deferral, the deferred uplifts will be recorded in Adjusted EPRA EPS in the 2022 financial year.

 

Further support provided in the 2021 financial year related to monthly rents totalling £1.8 million originally due between May and October 2021 from the tenant of The Brewery, which were deferred so they are payable in instalments until September 2022. Deferred amounts receivable in the balance sheet at 31 December 2021 amounted to £1.0 million. The deferred rent has been recorded in the income statement for the 2021 financial year but will be recorded in Adjusted EPRA EPS in the period in which it is received.

 

Impact of concessions on rental cash flows and Adjusted EPRA EPS

	Year to 31 December 2021 £m	Year to 31 December 2020 £m
Merlin rent deferral including German rents at year end exchange rate	17.6	(17.7)
Budget Hotels rent reduction	(8.9)	(14.3)
Budget Hotels rent deferral	(0.6)	(0.2)
Brewery rent deferral	(1.0)	-
Impact on rental cash flow and Adjusted EPRA EPS (£m)	7.1	(32.2)
Impact on rental cash flow and Adjusted EPRA EPS (p per share)	2.1	(9.9)

 

The accounting policy for rent concessions is explained in the Financial Review section of this Investment Adviser's Report and in note 2d to the financial information and remains unchanged since the 2020 Annual Report.

 

Rent collections

Over the 2021 financial year, the Group reported only minimal rent arrears in each quarterly collection cycle.

 

Rent collections	8 Jan to 7 April 2021 £m	8 April to 7 July 2021 £m	8 July to 7 Oct 2021 £m	8 Oct 2021 to 14 Jan 2022 £m
Originally contracted rents	28.3	28.7	28.8	32.5
Rent concessions:
Reduced rents	(2.2)	(2.2)	(2.2)	(0.5)
Deferred rents	(0.1)	(0.8)	17.6	1.0
Due in the period	26.0	25.7	44.2	33.0
Collected on or before the due date	(25.9)	(25.4)	(44.2)	(33.0)
Rent arrears at due date	0.1	0.3	-	-
Rent deferral agreed after the due date	-	(0.3)	-	-
Rent arrears at the date of this report	0.1	-	-	-
2021 collected by due date (%)	99.9%	98.7%	100.0%	100.0%
2020 collected by due date (%)	83.1%	89.7%	99.9%	99.7%

 

There were no material impairments of receivables in the year or the prior year.

 

 

 

 

 

 

The portfolio

	Number of properties	Valuation £m	Passing rent £m
At the start of the year	161	1,946.9	113.3
Change at constant currency	-	190.4	4.0
Exchange rate movements	-	(9.6)	(0.5)
Non-core pub disposal	(1)	(0.1)	-
At the end of the year	160	2,127.6	116.8

 

Portfolio valuation and rents by sector

There was a 9.8% increase in the independent external valuation at constant currency over the year, resulting in a net movement of 9.3% after exchange rate movements on the c. 6% of the portfolio represented by German assets, valued in Euros.

 

	Leisure			Healthcare			Budget Hotels			Total
Valuation	£m	Change		£m	Change		£m	Change		£m	Change
31 December 2020	793.0			769.1			384.8			1,946.9
Revaluation	135.9	17.1%		21.3	2.8%		33.2	8.6%		190.4	9.8%
Exchange rate movement	(9.6)	(1.2)%		-	-		-	-		(9.6)	(0.5)%
Disposal	(0.1)			-			-			(0.1)
Total movement in valuations	126.2	15.9%		21.3	2.8%		33.2	8.6%		180.7	9.3%
31 December 2021	919.2			790.4			418.0			2,127.6

 

77% of portfolio rents were reviewed in 2021 and overall achieved a 3.6% increase in like for like passing rent (3.1% after exchange rate movements).

 

.	Leisure			Healthcare			Budget Hotels			Total
Passing rent	£m	Change		£m	Change		£m	Change		£m	Change
31 December 2020	47.5			36.6			29.2			113.3
Uplifts	2.0	4.1%		1.0	2.8%		1.0	3.7%		4.0	3.6%
Exchange rate movement	(0.5)	(1.0)%		-	-		-	-		(0.5)	(0.5)%
Total movement in rents	1.5	3.1%		1.0	2.8%		1.0	3.7%		3.5	3.1%
31 December 2021	49.0			37.6			30.2			116.8

 

The portfolio is valued by qualified independent external valuers every six months. In reaching their assessments of market value, the valuers had all details of agreed rent concessions. The valuations therefore take into account the full effect of those concessions and also recognise that rental income returned to its previously contracted levels in January 2022. While the 31 December 2020 valuations of the Leisure and Budget Hotels assets were required under RICS rules to be expressed as subject to "material valuation uncertainty", there is no such caveat applied to the 31 December 2021 valuations. Further details of valuations are given in note 11 to the financial information. The Company's disclosure of valuation risk is in the summary of Principal Risks and Uncertainties.

 

 

 

 

 

Yields by sector

	Leisure			Healthcare ^			Budget Hotels			Total
Yields	31 Dec 2021	31 Dec 2020		31 Dec 2021	31 Dec 2020		31 Dec 2021	31 Dec 2020		31 Dec 2021	31 Dec 2020
Net Initial Yield *	4.92%	5.54%		4.46%	4.46%		6.78%	7.10%		5.11%	5.42%
Running Yield within 12 months †	5.13%	5.76%		4.58%	4.58%		7.31%	7.21%		5.35%	5.58%

* Net Initial Yield was topped up in 2020 to ignore the impact of temporary rent concessions

† the Leisure and Budget Hotels Running Yields are calculated using the independent external valuers' estimates of RPI and CPI averaging 6.4% (2020: 2.5%) and 4.6% respectively

^ the Healthcare valuations and yields take no account of any uplift from an outstanding May 2018 open market rent review on the Ramsay hospitals; the Ramsay rents account for 94% of the Healthcare rents at 31 December 2021

 

Tenant or guarantor	31 December 2021 £m	31 December 2020 £m
Merlin Entertainments Limited *	36.1	35.6
Ramsay Health Care Limited	35.4	34.4
Travelodge Hotels Limited	30.2	29.2
SMG and SMG Europe Holdings Limited	4.2	4.0
The Brewery on Chiswell Street Limited	3.8	3.4
Orpea SA	2.2	2.2
Stonegate Pub Company Limited	2.2	2.2
Others (each below £1.3 million) †	2.7	2.3
	116.8	113.3

* £6.8 million (2020 £7.1 million) of the Merlin rents are Euro denominated

† including £0.5 million (2020: £0.5 million) and £0.3 million (2020: £nil) of estimated variable net income from the car park and naming rights agreements at Manchester Arena respectively

 

Further information on the principal portfolio tenants and guarantors is given within the portfolio analyses that follow.

 

 

 

 

Basis of rent reviews

	31 December 2021			31 December 2020
Contracted rents	Reviewed annually	Reviewed five-yearly	Total portfolio	Total portfolio
CPI +0.5%, minimum 1% maximum 4%	25%	-	25%	-
Upwards only RPI:
Uncapped	-	27%	27%	52%
Collared (1)	4%	2%	6%	6%
Total upwards only inflation-linked reviews	29%	29%	58%	58%
Fixed uplifts, reviewed:
Annually: weighted average 2.9% p.a.	38%	-	38%	38%
Five-yearly: weighted average 2.5% p.a.	-	3%	3%	3%
Total fixed uplifts	38%	3%	41%	41%
Variable income	-	1%	1%	1%
Total portfolio	67%	33%	100%	100%

1 annual RPI reviews with a 2% minimum and 5% maximum, and five-yearly RPI reviews with minimums between 1% and 1.5% and maximums between 3.5% and 4.0%

 

· 33% of portfolio income is reviewed to upwards only RPI

· 58% of portfolio income has RPI or CPI exposure

· 72% of portfolio income is subject to fixed or minimum uplifts

· 67% of portfolio income is reviewed annually and the balance is subject to five-yearly review

 

As part of the lease regear agreed with Merlin at the end of the year, the basis of annual review on the Merlin UK assets included within the Group's Leisure portfolio changed from upwards only uncapped RPI to CPI plus 0.5% subject to a 1% minimum and a 4% maximum. Fuller details of the lease variations including other beneficial changes are included in the Leisure assets section of this report.

 

Lease lengths

The Group's leases are very long with a Weighted Average Unexpired Lease Term of 30.0 years without break from 31 December 2021, significantly longer than all other major UK REITs.

 

	Leisure			Healthcare			Budget Hotels			Total
	31 Dec 2021	31 Dec 2020		31 Dec 2021	31 Dec 2020		31 Dec 2021	31 Dec 2020		31 Dec 2021	31 Dec 2020
Weighted Average Unexpired Lease Term (years)	46.9	22.1		15.8	16.8		20.4	21.4		30.0	20.2

 

98% of contractual passing rents have an unexpired term without break of more than 15 years.

 

No material vacancies or landlord costs

The portfolio is fully let other than a small restaurant unit at Manchester Arena with a negligible Estimated Rental Value. All occupational leases are on full repairing and insuring terms, meaning that property running costs are low and there is no material landlord's capital expenditure requirement. There are two other income streams that arise from an operating agreement and a naming rights agreement rather than leases, which currently account for less than 1% of the Group's passing rent.

 

 

 

 

 

Leisure assets (43% of portfolio value)

	31 December 2021 £m	31 December 2020 £m
UK assets	42.2	40.4
German assets at constant currency	6.8	6.6
Contracted rents	49.0	47.0
Portfolio valuation at constant currency	919.2	783.4

 

The Company's leisure assets are:

 

· four well established large scale visitor attractions with associated guest accommodation operated by Merlin Entertainments Limited;

· Manchester Arena, the UK's largest indoor arena by capacity;

· The Brewery, one of London's largest catered events venues on Chiswell Street in the City of London; and

· a portfolio of 17 freehold high street pubs located in England and Scotland.

 

Merlin attractions and hotels

The Merlin assets include two of the UK's top three resort theme parks by visitor numbers, Alton Towers and Thorpe Park, as well as Warwick Castle, and all the on-site guest accommodation at the three attractions. The German assets operated by Merlin are Heide Park resort theme park and hotel in Soltau, Saxony, which is the largest in Northern Germany. These assets are all held freehold and are let on a full repairing and insuring basis to subsidiaries of Merlin Entertainments Limited, which owns all of Merlin's operating businesses worldwide and which is the guarantor of all lease obligations for these assets. The guarantor company operates over 130 attractions in 25 countries and has the benefit of all of Merlin's global operations including leading brands such as Sea Life Centres, Legoland Parks and, following an acquisition announced in January 2022, Cadbury World. Measured by the number of visitors, Merlin is Europe's largest and the world's second largest operator of leisure attractions, second only to Disney.

 

Merlin was taken private in 2019 at a price representing some £6 billion of enterprise value. It is owned by a consortium of substantial, established, long term investors: Kirkbi, the owner of the Lego business which has been invested in Merlin since 2005 and which owns 47.5% of Merlin, together with Blackstone Core Equity Partners, a long term fund comprising part of Blackstone's assets under management of c. £654 billion at 31 December 2021, The Canada Pension Plan Investment Board, one of the world's largest pension fund investors with assets under management of c. £467 billion at 31 December 2021, and the Wellcome Trust which had assets under management of c. £38 billion at 31 December 2021. The quoted price of Merlin's publicly traded 5.75% bonds maturing in 2026, which have been in issue since before the onset of the pandemic, is above par with a yield to maturity on 8 March 2022 of 4.8%.

 

Total contracted rents receivable from Merlin were £36.2 million per annum at 31 December 2021, which is an increase of 3.0% on a constant currency basis over £35.1 million at 31 December 2020 and an increase of 1.6% after the impact of currency translation.

 

In December 2021, in return for a premium of £33.5 million payable to Merlin, the leases were regeared including an extension of the lease terms of all the UK and German Merlin assets by 35 years such that the weighted average term to expiry is now 55.5 years without break from 31 December 2021. The tenants have a further right to renew for 35 years at the end of that term. It was also agreed with the tenants of the UK properties (with a passing rent of £29.3 million at 31 December 2021) to change the basis of the annual rental uplift on those leases.  Previously subject to upwards only uncapped RPI, with effect from (and including) the next review in June 2022 the reviews will be calculated as upwards only CPI plus 0.5%, subject to a minimum uplift of 1% and a maximum uplift of 4%. The rental uplifts on the German assets, with a passing rent at 31 December 2021 of £6.8 million (scheduled to increase to £7.1 million in July 2022 at 31 December 2021 exchange rate), remained unaltered with fixed annual uplifts every July of 3.34%.

 

All of the Merlin leases were also updated to formalise the existing close co-operation between the Group and Merlin in relation to ESG, in particular the reporting and management of environmental matters. Clauses were added to formalise the provision of information on tenant trading performance both at a site and guarantor level on an annual basis.

 

 

 

 

 

Manchester Arena and ancillary assets

Manchester Arena is a long leasehold strategic site of eight acres which is located on top of Manchester Victoria Railway and Metrolink station. It comprises a 21,000 seat indoor arena, the UK's largest by capacity, an additional 160,000 sq ft of office and leisure space, a multi-storey car park with approximately 1,000 spaces, and other ancillary income sources.

 

Known as the AO Arena, it is let to SMG and SMG Europe Holdings Limited, part of ASM Global, with 23.5 years unexpired without break from 31 December 2021. The annual rent is £4.1 million before head rent and is reviewed annually every June in line with RPI, collared between 2% and 5%, which in 2021 resulted in a rental increase of 3.3%.

 

ASM Global was created by a merger of AEG Facilities and SMG in October 2019 and is the world's largest venue management company, operating over 300 venues in five continents. The Arena was closed during the initial part of the pandemic period but it was able to reopen in August 2021 and was fully operational from September 2021. Despite not trading as a result of the pandemic restrictions, all Arena rents have been received when due, reflecting the strength of this large and well capitalised global operator as a tenant. The offices and ancillary leisure space at Manchester are let to tenants including Serco, Unison, JCDecaux and go-karting operator TeamSport. The leases on the Manchester site as a whole have an average term to expiry of 15.8 years from 31 December 2021 and produce net passing rent, after head rent, of £6.1 million per annum at that date.

 

The Brewery on Chiswell Street

The Brewery is a predominantly freehold investment let to an established specialist venue operator on a full repairing and insuring lease. The largest catered event space in the City of London, it is located within five minutes' walk of the Moorgate entrance to the new Crossrail station at Liverpool Street. The Brewery was closed during the initial part of the pandemic period but was permitted to reopen in July 2021 and restored full operations from September 2021.

 

The lease term to expiry is 34.5 years without break from 31 December 2021 and the lease provides for five-yearly fixed uplifts of 2.5% per annum compounded. The passing rent increased from £3.4 million per annum to £3.8 million in July 2021 as a result. Four months' rent amounting to £1.2 million was deferred in 2021 and £1.0 million remains repayable in instalments between January and September 2022.

 

Pubs portfolio

As at 31 December 2021 the portfolio of 17 high street pubs produced passing rent of £2.2 million per annum and the leases had an average term to expiry of 23.5 years without break. The pubs all opened for indoor trading, subject to Covid restrictions, by May 2021 and final social distancing restrictions were lifted in July 2021. During the year, one pub with no rent receivable was sold with vacant possession for £150,000, slightly ahead of 31 December 2020 book value.

 

16 of the pubs are let on individual leases either to, or guaranteed by, Stonegate Pub Company Limited, the largest pub group in the UK with over 4,500 pubs following Stonegate's acquisition of Ei Group for £1.3 billion in March 2020. Stonegate's Sterling bonds maturing in 2025, issued in July 2020, were trading above par at a yield to maturity of 7.8% at close on 8 March 2022. The lease of the remaining pub in Palmers Green, London was assigned to another operator during the year and represents 1.5% of the pub rents and a negligible proportion of total Group rents.

 

Rents are subject to five-yearly RPI-linked increases collared between 1% and 4% per annum compounded. The next review, on all of the pubs, falls due in February 2025.

 

 

 

 

Healthcare assets (37% of portfolio value)

	31 December 2021 £m	31 December 2020 £m
Ramsay hospitals	35.4	34.4
London psychiatric hospital	2.2	2.2
Passing rents	37.6	36.6
Portfolio valuation	790.4	769.1

 

The Group's healthcare assets, 11 freehold private acute hospitals and a central London freehold private psychiatric hospital, continued to trade throughout the pandemic with no rent concessions required. The private hospitals are located throughout England and are let to a subsidiary of Ramsay Health Care Limited, the ASX50 listed Australian healthcare company. The psychiatric hospital, the only private facility of its kind in central London, is let to a subsidiary of Orpea SA. Located in Lisson Grove, it trades as The Nightingale Hospital.

 

The Ramsay hospitals are let on full repairing and insuring leases with a term to expiry from 31 December 2021 of 15.3 years without break. The rents increase in May each year by a fixed minimum of 2.75% per annum throughout the lease term and, following the May 2021 fixed uplifts, the rents increased from £34.4 million to £35.4 million per annum. In addition, there is an upwards only open market rent review within each lease as at 3 May 2018, then in May 2022 and every five years thereafter. The May 2018 open market review remains outstanding. As a test case for the portfolio, the review of one hospital was instigated, without prejudicing our ability to proceed with the reviews on the other assets in future. The rent review is currently subject to a formal arbitration process which was put on hold by agreement between the parties during 2020 to allow Ramsay management to fully focus on its pandemic response and because the arbitrator would have been unable to inspect the hospitals during the lockdowns. Counter submissions were made in January 2022. The arbitrator had previously indicated that he would make a decision within four weeks, however his timetable is still awaited. The outcome of the review and how the arbitrator approaches his decision is likely to determine how the Group and Ramsay progress the other May 2018 open market reviews for the remaining hospitals. Given the uncertainty over the time taken to resolve the arbitration and the nature of that process, there is currently no indication of the likely review outcome and this financial information takes no account of any potential increase in rental income that may arise from it.

 

The leases on the Ramsay hospitals are all guaranteed by Ramsay Health Care Limited, one of the top five private hospital operators in the world and the largest operator of private hospitals in Australia, France and Scandinavia. In December 2021, Ramsay announced the acquisition of leading UK acute mental health business Elysium Healthcare for £775 million, further cementing the Group's commitment to the UK. Ramsay is a constituent of the ASX 50 index of Australia's largest companies, with a market capitalisation at 8 March 2022 (and using the exchange rate on that date) of £7.7 billion and has an investment grade credit rating.

 

The Ramsay hospitals, through their contracts with NHS England, provided guaranteed capacity to the NHS during the pandemic to tackle the Covid crisis at cost (including the cost of their rents) for approximately a year from late March 2020. Ramsay reported in February 2021 that they had treated more than 500,000 NHS patients over this period, more than any other provider in the independent sector. The Ramsay balance sheet is strong with low leverage and significant cash flows supporting material capital expenditure in the existing estate and also earmarked for further investment in future. Ramsay's management continue to highlight the opportunities in the UK and elsewhere from the backlog in demand for both public and private healthcare services alongside the existing demographic and other growth drivers for their business.

 

The London psychiatric hospital is let on a full repairing and insuring lease with a term to expiry at 31 December 2021 of 22.6 years without break. The rent increases in May each year by a fixed 3.0% per annum throughout the lease term and increased from £2.17 million to £2.23 million in May 2021. The lease is guaranteed by Orpea SA, a European operator of retirement homes, rehabilitation clinics and psychiatric care, listed on Euronext Paris with a market capitalisation at 8 March 2022 (and using the exchange rate on that date) of £1.8 billion.

 

 

 

 

 

Budget Hotels assets (20% of portfolio value)

	31 December 2021 £m	31 December 2020 £m
Contracted rents	30.2	29.2
Portfolio valuation	418.0	384.8

 

At 31 December 2021 the Group owned 123 Travelodge hotels in England, Wales and Scotland (the same number was held at 31 December 2020), let to Travelodge Hotels Limited which is the main operating company within the Travelodge group trading in the UK, Ireland and Spain. Travelodge is the UK's second largest budget hotel brand, with 592 hotels and c. 45,000 rooms as at 31 December 2021.

 

As a response to liquidity issues created by the sudden forced closure of nearly all of their hotels, Travelodge entered into a Company Voluntary Arrangement (CVA) in June 2020 which came to an end in January 2022. As a consequence of the CVA, £14.3 million of rent was foregone by the Group in the 2020 financial year and the extent of the rent reduction reduced significantly in 2021 to £8.9 million. Rents returned to the levels originally contracted in January 2022 and all rent demanded under the terms of the CVA was received when due. Rent reviews arising during the CVA concession period continued to be calculated and documented but were deferred in line with the terms of the CVA. As a result, £0.8 million of uplifted rent was deferred in total across 2020 and 2021 and was received in full when it fell due in January 2022.

 

Travelodge is a major, established brand with very high levels of brand recognition and a strong pre-pandemic five year performance track record. In addition to the rent reductions secured by Travelodge through their CVA, the company raised £40 million of equity from its shareholders and completed a £65 million private debt placement in December 2020 to further support liquidity. At close on 8 March 2022, Travelodge's publicly traded bonds, which have been in issue throughout the pandemic, were trading at 95% of their pre-pandemic level at the start of 2020, with a yield to maturity of 7.4%.

 

In a trading update issued by Travelodge's parent company on 1 March 2022, they reported revenues for the final quarter of 2021 up c. 2% and revenue per available room up 5.9% against 2019, with a continuation of the group's seven year outperformance of the mid-scale and economy segment. This followed very strong results reported for the third quarter of 2021. While trading performance in the first weeks of 2022 showed some impact from the Omicron wave, improvements have been reported since the lifting of Covid restrictions with revenue returning to 2019 levels by early February and improving throughout the month. £142.8 million of cash was held at 31 December 2021 and a refit capex programme of c. £70 million in 2022 has commenced. Travelodge management reported that "with our large network of hotels, value proposition and focus on domestic travel, we are well positioned to benefit in the expected recovery."

 

The average term to expiry of the Travelodge leases is 20.4 years from 31 December 2021 with no break clauses. The leases are on full repairing and insuring terms and Travelodge is also responsible for the cost of any headlease payments and other amounts owing to the freeholders of the 52 leasehold properties. There are upwards only uncapped RPI-linked rent reviews every five years throughout the term of each lease, with reviews falling due over a staggered pattern across the portfolio. Reviews on 23% of the portfolio by rental value represented by 27 hotels were agreed during 2021 with passing rent on those assets increasing by 16.5% from £6.6 million to £7.7 million. 38% of the passing rent will be reviewed in 2022, 10% in 2023, 5% in 2024 and 24% in 2025.

 

 

 

 

 

Financing

The Group's operations are financed by a combination of cash resources and non-recourse debt finance, where the equity at risk is limited to the net assets within six ring-fenced subgroups. Each subgroup is self-contained, with no cross-default provisions or cross collateralisation between the six of them. In all cases, substantial financial covenant headroom was negotiated into loan terms at their inception, together with appropriate remedial cure rights, where cash can be temporarily injected into a security group in order to maintain covenant compliance if and when necessary.

 

Since the year end, the Merlin credit facilities have been refinanced, the impact of which is summarised at the end of this section.

 

	31 December 2021	31 December 2020
Gross debt at the start of the year	928.3	930.7
Scheduled loan repayments	(7.3)	(4.4)
Repayment from disposal proceeds	-	(1.5)
Foreign currency translation	(4.2)	3.5
Gross debt at the end of the year	916.8	928.3
Secured cash	(29.9)	(23.1)
Free cash	(168.5)	(196.6)
Net debt at the end of the year	718.4	708.6
Net LTV	33.8%	36.4%

 

The principal movements in the cash balance during the year are explained in the cash flow section of this report, with the main reason for the increase in net debt being the deployment of £30.5 million (of a maximum £33.5 million premium payable) from free cash in payment for the Merlin lease variations.

 

The weighted average term to maturity of the Group's debt was 2.1 years at 31 December 2021 compared to 3.1 years at 31 December 2020. This has been extended to a weighted average term of 3.4 years on a pro forma basis following the refinancing of the Merlin facility in March 2022. Save for minor, market standard variations to certain terms to deal with the UK's transition from LIBOR to SONIA as a reference rate on certain of the Sterling loans, the terms of the facilities did not change in the year.

 

	Principal £m	Number of properties securing loan	Maximum annual interest rate	Interest rate protection	Annual cash amortisation	Final repayment date
Merlin leisure *	372.4*	6	5.7%	Fixed	£3.8m†	Oct 2022 *
Budget Hotels 2	65.4	70	3.3%	80% fixed 20% capped	None	Apr 2023
Leisure: Arena, Brewery, Pubs	60.0	19	3.2%	83% fixed 17% capped	None	Jun 2023
Budget Hotels 1	59.0	53	2.7%	Fixed	None	Oct 2023
Healthcare 1	63.5	2	4.3%	Fixed	£0.3m	Set 2025
Healthcare 2	296.5	10	5.3%	Fixed	£3.2m	Oct 2025
Total	916.8	160	4.9%

* £312.8 million of senior and mezzanine Sterling loans and €70.9 million of senior and mezzanine Euro denominated loans translated at the year end exchange rate of €1:£0.84. All loan tranches within the total £372.4 million are cross-collateralised with each other. Since the balance sheet date the Merlin leisure loan has been refinanced with a new loan which has a term certain of four years to March 2026 with a one year extension option subject to suitable hedging being place at that time.

† comprising £3.2 million on the Sterling facility and €0.7 million on the Euro facility.

 

 

 

 

 

The Board manages interest rate risk by either fixing (by way of fixed rates or by entering into interest rate swaps on floating rates) or capping rates over the term of each loan. As at 31 December 2021, 97.5% of the loan principal of the Group's borrowings incurred interest at fixed rates. The weighted average interest payable in the year remained the same as in 2020 at 4.9% per annum.

 

There have been no defaults or potential defaults in any facility during the year or since the balance sheet date. The headroom on financial covenants at the balance sheet date remains substantial and is analysed in the financial review on the following pages.

 

Refinancing of Merlin facilities in March 2022

A new committed credit agreement was entered into in March 2022 to refinance the Merlin leisure facility which matures in October 2022. Subject to satisfaction of certain conditions precedent which are typical for this type of facility, the new loan is expected to be drawn at the end of April 2022 and the existing facilities repaid at that stage.

 

The new facility will be £282.5 million at 31 December 2021 exchange rates and £108.2 million of the Group's Uncommitted Cash will also be applied to meet the prepayment of the existing loans plus refinancing costs. Interest rate caps were purchased when the facility agreement was signed, establishing a maximum interest rate payable of 4.95% per annum, 15% lower than the current rate payable at the maximum capped cost, with potential for further upside to the extent that rates are below the capped level of 1.50%. The new facility is an interest only loan with a term of three years from signing with two one-year extensions. The extensions are subject only to interest rate hedging being in place at an appropriate level and as the caps purchased at the time of signing have a term of four years, the loans have an effective four year term with the option to extend for one further year. Importantly, the new facility is strictly non-recourse to any assets beyond those in the subgroup that owns the Merlin assets, and there is no LTV default covenant. The income cover covenant level is 100% which means that there is very substantial headroom on that covenant from day one, when the actual cover is expected to be in excess of 260%.

 

Pro forma impact of refinancing

	31 December 2021	Refinancing adjustments ^	Pro forma ^
	£m	£m	£m
Portfolio independent valuation	2,127.6	-	2,127.6
Gross debt (non-recourse)	(916.8)	88.9	(827.9)
Uncommitted Cash *	159.9	(108.2)	51.7
Other cash: secured cash and free cash reserved for creditors	38.5	-	38.5
Other net liabilities including rent in advance	(35.1)	11.4	(23.7)
EPRA NTA	1,374.1	(8.0)	1,366.1
Net LTV	33.8%		34.7%
Weighted average term to expiry	2.1 years		3.4 years
Weighted average maximum cost	4.9%		4.6%

* certain of the refinancing costs will not be known until completion therefore certain costs are estimated

^ the adjustments and pro forma figures use the year end exchange rate to translate Euro balances

 

Following the refinancing, 37% of the Group's debt will benefit from rate savings should the actual cost of funds fall below capped rates. Through the combination of fixed, swapped and capped rates, the weighted average maximum rate of 4.6% will not be exceeded.

 

	£m	% of debt portfolio
UK SONIA capped at 1.50%	232.0	28%
EURIBOR capped at 1.50%	50.5	6%
UK SONIA capped at 1.43%	13.3	2%
UK SONIA capped at 1.65%	10.0	1%
Total debt with potential for rate saving	305.8	37%

 

 

 

 

 

Financial review

Key performance indicators (KPIs)

The Board monitors the following key performance indicators, which are further commented on in this report.

 

	Year to 31 December 2021	Year to 31 December 2020
Financial measures:
Total Accounting Return	15.8%	(8.0)%
Total Shareholder Return	46.7%	(27.3)%
Adjusted EPRA EPS	17.5p	3.5p
Net LTV ratio	33.8%	36.4%
Uncommitted Cash	£159.9m	£192.0m
Other measures:
Headroom on debt default covenants before any preventative cash cure or other remedial action:
Valuation headroom before tightest LTV default test would be triggered	35%	32%
Rent headroom before tightest projected interest cover default test would be triggered	31%	29%

 

Dividend policy

The Company's dividend policy established at the time of listing was to distribute Adjusted EPRA earnings by way of a fully covered cash dividend, paid quarterly. This enabled it to distribute increasing dividends in line with the geared increases in net rental income, driven by the combination of annual fixed and inflation-linked rental uplifts together with largely fixed debt costs and stable and predictable administrative expenses.

 

The dividend policy was modified in August 2019 to reflect the impact of the sale of a portfolio of eight Ramsay hospitals, which reduced Adjusted EPRA EPS and significantly increased the surplus cash balance. This resulted in a decision to use the cash surplus in part to top up dividends to a level that would otherwise have been payable had the hospitals not been sold until such time as the surplus cash was invested, used for debt management or otherwise deployed for the benefit of shareholders. By the first quarter of 2020, prior to the pandemic, dividends were payable at a quarterly rate of 4.20 pence per share, being 3.525 pence per share and 'top up' dividends of 0.675 pence per share.

 

The impact of the pandemic on the Group's rental income and on the Board's assessment of risks and uncertainties arising from it resulted in a further review of the dividend policy. With the Company's liquidity surplus directed to supporting tenants and ensuring the robustness of the balance sheet during such uncertain times, the Board concluded that the element of the dividend relating to topping up income on the sold hospitals should be discontinued with effect from the July 2020 dividend. However, the Board also concluded that it would be appropriate to continue to pay dividends at a level that recognised that the Covid-19 rent concessions granted were temporary, and as a result some of the surplus liquidity was used to fund the dividend in excess of the Group's Adjusted EPRA earnings. At that time, the quarterly dividend was reset to 3.65 pence per share.

 

The dividend was maintained at 3.65 pence per share in each of the last two quarters of 2020 and the first two quarters of 2021 and it was increased to 3.95 pence per share as declared in the third and fourth quarters of 2021 and the first quarter of 2022. With the stabilisation of the business following the scaling back of pandemic restrictions and following the de-risking provided by the refinancing of the Merlin debt facility, the dividend policy has been updated and is expected to return in due course to the original policy of distributing Adjusted EPRA EPS. The dividend rate is expected to increase in line with earnings in the third quarter of every year as the majority of the reviews on the current portfolio arise prior to July each year.

 

Therefore, commencing from the July 2022 quarter, we are targeting an increase in dividends of 15% to an annualised 18.2 pence per share. This is on the basis of the current portfolio, reflecting the reduction in financing costs following the degearing and refinancing of the Merlin debt (assuming that the Merlin debt is drawn as expected in April 2022), the application of current market estimates of RPI and CPI for the 2022 rent reviews and with no further changes to the portfolio or to the financing of the business. This increased dividend equates to a 4.3% yield on 31 December 2021 EPRA NTA on an annualised basis (4.55 pence per share quarterly). This dividend target does not represent a profit forecast.

 

 

 

 

Key performance indicator - Total Accounting Return

In measuring progress against the Board's objective to deliver attractive and sustainable shareholder returns, both Total Accounting Return (the movement in EPRA NTA per share plus dividends) and Total Shareholder Return (the share price movement plus dividends) are monitored. The principal focus for the Board is on Total Accounting Return as the Total Shareholder Return, while important, is also subject to wider market fluctuations that are not necessarily related to the Group itself.

	Year to 31 December 2021		Year to 31 December 2020
	£m	Pence per share	£m	Pence per share
NAV at the start of the year	1,221.5	377.0	1,384.5	428.8
Investment property revaluation *	140.2	43.3	(166.6)	(51.4)
Rental income * less administrative expenses, finance costs and tax	59.4	18.3	52.9	16.3
Dividends paid	(49.3)	(15.2)	(50.8)	(15.7)
Currency translation movements and derivative revaluations	(2.0)	(0.7)	1.5	0.5
Dilution from shares issued in settlement of previous year's incentive fee	-	-	-	(1.5)
NAV at the end of the year	1,369.8	422.7	1,221.5	377.0
Change in NAV	148.3	45.7	(163.0)	(51.8)
Dividends paid	49.3	15.2	50.8	15.7
IFRS Total Accounting Return	197.6	60.9	(112.2)	(36.1)
IFRS Total Accounting Return: percentage		16.2%		(8.4)%

* including £15.2 million or 4.7 pence (2020: £23.7 million or 7.3 pence) of Rent Smoothing Adjustments

 

The industry standard EPRA NTA measure takes IFRS Net Asset Value and excludes items that are considered, in accordance with the EPRA Guidance, to have no relevance to the assessment of long term performance. When assessing the extent to which any deferred tax liabilities are included in the calculation of EPRA NTA, the EPRA Guidance requires an assessment of the likelihood of the relevant properties being sold and accordingly, the Group's reported IFRS NAV has been adjusted to exclude 50% of deferred tax on the German property revaluations and all of the fair value movements on derivatives in arriving at EPRA NTA. EPRA NTA and EPRA NTA per share are reconciled to IFRS net asset value in note 23 to the financial information.

 

	Year to 31 December 2021		Year to 31 December 2020
Movements in EPRA NTA	£m	Pence per share	£m	Pence per share
EPRA NTA at the start of the year	1,229.2	379.3	1,391.3	429.4
Investment property revaluation *	155.5	48.0	(142.5)	(44.0)
Rental income * less administrative expenses, finance costs and current tax	42.6	13.1	28.8	8.9
Dividends paid	(49.3)	(15.2)	(50.8)	(15.7)
Currency translation movements	(3.9)	(1.1)	2.4	0.7
EPRA NTA at the end of the year	1,374.1	424.1	1,229.2	379.3
Movement in EPRA NTA	144.9	44.8	(162.1)	(50.1)
Dividends paid	49.3	15.2	50.8	15.7
Total Accounting Return	194.2	60.0	(111.3)	(34.4)
Total Accounting Return - percentage		15.8%		(8.0)%

* adjusted by £15.2 million or 4.7 pence (2020: £23.7 million or 7.3 pence) of Rent Smoothing Adjustments

 

The analysis of the investment property revaluation in the year is presented in the Portfolio section of this report. The other movements in EPRA NTA are explained in the sections of this report on the elements of EPRA Earnings.

 

 

 

 

Key performance indicator - Total Shareholder Return

		Year to 31 December 2021	Year to 31 December 2020
Total shareholder return	Pence per share		Pence per share
Share price at the end of the year	425.0		300.0
Share price at the start of the year	(300.0)		(434.0)
Movement in the year	125.0		(134.0)
Dividends paid	15.2		15.7
Total Shareholder Return	140.2		(118.3)
Total Shareholder Return - percentage	46.7%		(27.3)%

 

Key performance indicator - Adjusted EPRA earnings per share

Basic EPS is calculated on IFRS earnings as reported in the financial information.

 

	Year to 31 December 2021		Year to 31 December 2020
Basic and diluted EPS (IFRS basis)	£m	Pence per share	£m	Pence per share
Rental income net of property outgoings	121.8	37.5	120.2	37.0
Net finance costs	(50.0)	(15.4)	(49.9)	(15.4)
Administrative expenses	(15.2)	(4.7)	(17.0)	(5.2)
Tax charge	(0.4)	(0.1)	(0.3)	(0.1)
Earnings before revaluations	56.2	17.3	53.0	16.3
Investment property revaluations net of deferred tax	143.4	44.3	(166.7)	(51.4)
Basic and diluted earnings per share	199.6	61.6	(113.7)	(35.1)

 

IFRS earnings include unrealised property revaluation movements, gains and losses on any property disposals and certain other elements such as unrealised movements in the fair values of interest rate derivatives, which are considered to distort an assessment of underlying long term performance of real estate companies and which are therefore required to be excluded from EPRA earnings under the EPRA Guidance. The calculation of EPRA earnings and EPRA Earnings Per Share is presented in note 10 to the financial information.

 

There are certain items within EPRA earnings which create a material disconnect between those earnings and the Group's funds from operations available for the payment of dividends: principally the Rent Smoothing Adjustments, including those arising as a result of the Covid-19 related rent concessions, and any incentive fees which are payable in shares. We therefore present a further measure, Adjusted EPRA earnings, both for comparison of the performance of the Group from year to year and with its peer group, and to avoid distortions which in turn would result in unreliable measures of Dividend Cover.

 

Adjusted EPRA EPS is derived from EPRA EPS by:

 

· removing the Rent Smoothing Adjustments from rental income and reflecting the impact of any rent deferrals, to include rents on a basis that is much closer to cash rents receivable;

· excluding the charge for any incentive fee, on the basis that it is a non-cash payment and considered to be linked to revaluation movements, and therefore best treated consistently with revaluations which are excluded from EPRA EPS (last paid in respect of the year to 31 December 2019);

· excluding any significant non-recurring costs or income (there have been no non-recurring income or costs since 2016); and

· calculating the weighted average number of shares so as to reflect the actual dates on which shares were issued.

 

 

 

 

 

 

	Year to 31 December 2021		Year to 31 December 2020
	£m	Pence per share	£m	Pence per share
Rental income net of property outgoings	119.8	36.9	118.2	36.5
Net finance costs	(48.1)	(14.8)	(48.0)	(14.9)
Administrative expenses	(15.2)	(4.7)	(17.0)	(5.2)
Tax charge	(0.4)	(0.1)	(0.3)	(0.1)
EPRA earnings	56.1	17.3	52.9	16.3
Rent Smoothing Adjustments:
Before any Covid related rent concessions	(7.8)	(2.5)	(8.9)	(2.7)
Impact of Covid related rent concessions: difference between IFRS and Adjusted EPRA EPS recognition of concessions	(7.4)	(2.2)	(14.8)	(4.6)
Rent deferrals:
Theme parks	17.6	5.5	(17.7)	(5.5)
Other	(1.8)	(0.6)	-	-
Adjusted EPRA earnings	56.7	17.5	11.5	3.5

 

Adjusted EPRA EPS is reconciled to basic EPS in note 10 to the financial information. The table below shows the analysis of the Adjusted EPRA earnings in the year in order to demonstrate where the adjusting items take effect.

 

	Year to 31 December 2021		Year to 31 December 2020
	£m	Pence per share	£m	Pence per share
Rental income net of property outgoings before rent concessions	113.5	35.0	110.8	34.2
Net finance costs	(48.1)	(14.8)	(48.0)	(14.9)
Administrative expenses	(15.2)	(4.7)	(17.0)	(5.2)
Tax charge	(0.4)	(0.1)	(0.3)	(0.1)
Like for like earnings before rent concessions	49.8	15.4	45.5	14.0
Rent concessions	(8.9)	(2.8)	(16.3)	(5.0)
Rent deferrals	15.8	4.9	(17.7)	(5.5)
Adjusted EPRA earnings	56.7	17.5	11.5	3.5

 

An analysis of the Group's rental income is included in the portfolio review earlier in this report and the other components of earnings are analysed on the following pages.

 

 

 

 

Adjusted EPRA EPS - property outgoings

 

	Year to 31 December 2021		Year to 31 December 2020
Property outgoings	£m	Pence per share	£m	Pence per share
Irrecoverable property costs	0.3	0.1	0.3	0.1
Head rents on leasehold properties	0.2	0.1	0.5	0.1
Managing agents fees and other net property outgoings	0.1	-	0.2	0.1
Costs of negotiating and documenting rent concessions	-	-	0.6	0.2
Property outgoings in IFRS and EPRA earnings	0.6	0.2	1.5	0.5
Financing element of head rent costs reclassified from finance costs and investment property revaluations	1.9	0.6	1.7	0.6
Recovery of head rent and other costs reclassified from revenue	(1.6)	(0.5)	(1.6)	(0.6)
Costs of negotiating and documenting rent concessions reclassified from finance costs	-	-	0.1	-
Property outgoings in Adjusted EPRA earnings	0.9	0.3	1.7	0.5

 

On an EPRA and Adjusted EPRA earnings basis, various items are reclassified in accordance with the EPRA Guidance to more accurately reflect the net cost of the Group's property outgoings. This primarily entails moving elements of the Group's property costs that are required under IFRS to be classified within finance costs, property revaluations or revenue. The adjusted figure is used in the calculation of the industry standard EPRA Cost Ratios shown in the unaudited supplementary information. This includes the recovery of certain head rent and other costs from the occupational tenants. For the year ended 31 December 2021, the EPRA Cost Ratio including direct vacancy costs was 12.8% (down from 15.1% in 2020) and excluding direct vacancy costs it was 12.6% (down from 14.8%) with the declines in the year largely as a result of the expiry of rent concessions and the costs of negotiating the rent concessions all falling within 2020.

 

Adjusted EPRA EPS: administrative expenses

The Group's administrative expenses for the year and prior year are the same under IFRS and the EPRA measures.

 

	Year to 31 December 2021		Year to 31 December 2020
	£m	Pence per share	£m	Pence per share
Advisory fees	13.2	4.1	13.7	4.2
Other administrative expenses	1.5	0.4	2.8	0.8
Corporate costs	0.5	0.2	0.5	0.2
Total administrative expenses	15.2	4.7	17.0	5.2

 

Because VAT cannot be applied to the rents on the Healthcare assets, there is an element of irrecoverable VAT incurred on the Group's running costs which is included within each relevant line item in the table above. The proportion of disallowed VAT on administrative expenses averaged 19% during the year (2020: 30%).

 

As an externally managed business, the majority of the Group's overheads are covered by the advisory fees paid to the Investment Adviser, which meets office running costs, administrative expenses and remuneration for the whole management and support team out of those fees. The cost to the Company of the advisory fee for the year amounted to £12.4 million plus irrecoverable VAT of £0.8 million (2020: £12.8 million plus irrecoverable VAT of £0.9 million).

 

 

 

 

The basis of calculating the advisory fees is explained in note 25b to the financial information. In summary, the fees are calculated on a reducing scale based on the Group's EPRA NAV (as defined under the EPRA recommendations in place at the time of inception of the management contract), at:

 

· 1.25% per annum on EPRA NAV up to £500 million; plus

· 1.0% on EPRA NAV from £500 million to £1 billion; plus

· 0.75% on EPRA NAV from £1 billion to £1.5 billion: plus

· 0.5% thereafter.

 

In this way, the Investment Adviser is directly exposed to any reduction in the Group's EPRA NAV by way of a reduction in its fee income and shareholders benefit from economies of scale through a reducing fee scale as EPRA NAV grows.

 

In February 2020 the Independent Directors approved a proposal made by the Investment Adviser to exclude the surplus cash on the hospitals portfolio disposal in 2019 from EPRA NAV on which the advisory fee is calculated to the extent that those funds have not been:

 

· deployed in topping up dividends or otherwise returned to shareholders;

· invested in acquisitions; or

· used for liability management.

 

This change took effect from the first fee calculation following that review, 1 April 2020. The saving for the 2021 financial year as a result of this amendment was £0.8 million (2020: £0.8 million). The surplus cash realised on the disposal was £164.0 million and the balance remaining at 31 December 2021 was £88.1 million (2020: £113.9 million). Following the drawdown of the new Merlin credit facilities, which is scheduled for April 2022, the surplus cash balance will be fully deployed and this adjustment will no longer be made to the advisory fee calculation.

 

The other recurring administrative expenses are principally professional fees, including the costs of independent external property valuations, external trustee and administration costs, tax compliance fees and the fees of the external auditor, which are largely billed directly to subsidiary undertakings. Fees paid to the auditor are disclosed in note 7 to the financial information.

 

Corporate costs are those costs necessarily incurred as a result of the Company being listed and comprise:

 

· fees payable to the four Independent Directors amounting to £0.2 million in the year (2020: £0.2 million), with the other three Directors being shareholders in the Investment Adviser who receive no directors' fees from the Company; and

· other costs of being listed, such as the fees of the nominated adviser required under the AIM Rules, registrars' fees and AIM fees, which together totalled £0.3 million (2020: £0.3 million) in the year.

 

As explained in note 25d to the financial information, if Total Accounting Return exceeds a benchmark level in any financial year, an incentive fee may be earned. No incentive fee was earned in the current or prior year.

 

 

 

 

Adjusted EPRA EPS: net finance costs

	Year to 31 December 2021		Year to 31 December 2020
	£m	Pence per share	£m	Pence per share
Interest on secured debt facilities	45.3	13.9	45.9	14.2
Amortisation of costs of arranging facilities (non-cash)	2.3	0.7	2.3	0.7
Interest charge on headlease liabilities	1.8	0.6	1.7	0.5
Loan agency fees and other lenders' costs	0.5	0.2	0.3	0.1
Fair value movements on derivatives	0.1	-	0.1	-
Interest income	-	-	(0.4)	(0.1)
Net finance costs for the year(IFRS and EPRA basis)	50.0	15.4	49.9	15.4
Reclassification of interest charge on headlease liabilities against revenue *	(1.8)	(0.6)	(1.7)	(0.5)
Costs of negotiating and documenting rent concessions reclassified to property outgoings	-	-	(0.1)	-
Net finance costs for the year (Adjusted EPRA basis)	48.1	14.8	48.1	14.9

* headlease interest is reclassified against property outgoings in Adjusted EPRA EPS to better reflect the nature of these costs.

 

The nature and principal terms of the Group's loan facilities are explained in the Financing section earlier in this report.

 

Adjusted EPRA EPS: Tax

As the Group is a UK Group REIT, rental operations which make up the majority of the Group's earnings are exempt from UK corporation tax, subject to continuing compliance with the UK REIT rules. The Group is otherwise subject to UK corporation tax on any net income not arising from its rental operations.

 

German corporation tax is payable on the Group's German rental operations at an effective tax rate in the year of 12.5% (2020: 12%), resulting in a current tax charge of £0.4 million (2020: £0.4 million).

 

The balance sheet includes a deferred tax liability of £8.0 million (2020: £11.9 million) relating to unrealised German capital gains tax on the German properties, which would only be crystallised on a sale of those assets. There are no plans at present to sell these assets, so the deferred tax is not currently expected to be crystallised. During the year, a deferred tax credit of £7.7 million has been recognised following a change to take account of refinements made to the calculations to better reflect the actual approach to the calculation of these liabilities under German tax law.

 

On an IFRS basis, there is a current tax charge of £0.4 million (2020: £0.3 million) and a £3.2 million deferred tax credit (2020: £nil), which results in a net tax credit of £2.8 million (2020: charge of £0.3 million). Deferred tax is excluded from EPRA EPS and Adjusted EPRA EPS as shown in note 10 to the financial information.

 

In the EPRA NTA calculation, in accordance with the EPRA Guidance, half of the deferred tax is excluded. This is on the basis that the Company has neither (i) decided never to sell the German assets, as the Board manages its assets in an opportunistic way and would sell the assets if that presented the best option for shareholders; nor (ii) identified a consistent track record of disposal of assets and related capital gains within the strict criteria set out within the EPRA guidance.

 

The German tax assets have been subject to a routine tax audit by the German tax authorities which commenced in January 2021. The maximum tax currently the subject of the enquiry, including interest up to the balance sheet date but excluding any penalties, is estimated at no more than £0.8 million. The Board, having taken advice from the Group's tax advisers including their specialist German tax team, considers that there are strong arguments to counteract those made by the German tax authorities and that the matter should be resolved with an outcome of substantially less tax payable than the potential maximum, if any. No allowance has been made in this financial information for any liability that might arise. 

 

 

 

 

Adjusted EPRA EPS: Currency translation

94% (2020: 94%) by value of the Group's property assets are located in the UK and the financial information is therefore presented in Sterling and 95.0% (2020: 96.1%) of the Group's EPRA NTA is attributable to those assets. The remaining 5.0% (2020: 3.9%) of the Group's EPRA NTA comprises assets and liabilities relating to properties located in Germany, valued in and generating net earnings in Euros. Exposure to currency fluctuations is partially hedged through assets, liabilities, rental income and interest costs being Euro denominated. The Group remains exposed to currency translation differences on the net results and net assets of these unhedged operations. Foreign currency movements are recognised in the statement of other comprehensive income.

 

The German properties are valued at €160.4 million as at 31 December 2021 (2020: €128.2 million) and the Euro denominated secured debt amounts to €70.9 million (2020: €71.6 million). The Euro weakened against Sterling over the year by nearly 7% (2020: strengthened by 6%) and as a result there was a net currency translation loss of £3.6 million (2020: gain of £2.1 million) on an IFRS basis. Half of the deferred tax liability is excluded from EPRA NTA and as a result a further currency translation loss of £0.3 million (2020: £0.3 million) arises in the movement in EPRA NTA in relation to the German operations.

 

Key performance indicator - Net LTV ratio

The Board negotiates the Group's debt facilities with a view to maintaining a capital structure that will enhance shareholder returns while withstanding a range of market conditions.

 

Movements in Net LTV are explained in the Financing section of this report.

 

While Net LTV is one indicator of borrowing risk, it does not present a complete picture of risk facing the Company. The Board considers Net LTV in conjunction with a wider assessment of headroom on financial covenants within debt facilities and, as part of that assessment, the security of portfolio rental income in order to evaluate risks that the Company and the Group may be facing.

 

Key performance indicator - headroom on debt covenants

The Board's management of the Group's capital structure includes assessing the risk of any breach of covenants within secured debt facilities and considering the extent to which these risks can be managed. Covenant calculations are regularly monitored, at least quarterly and more often as required, on various scenarios within a realistic range of outcomes, including stress tested and reverse stress tested scenarios where the key variables are the levels of rent received and property valuation yields. Scenarios are also run to calculate the commercial conditions that would need to occur in order for breaches to arise, so that the likelihood of such a scenario can be evaluated. These scenarios flex the rent and valuation variables to the point where covenant tests would be triggered and then further flexes the variables to assess the extent to which cash reserves could be deployed or other mitigating action taken to avoid or cure the breach.

 

At the inception of new loans, facilities are structured to ring-fence the extent to which the Group's assets are at risk, ensuring that levels of headroom over financial covenants are appropriate. Subsequently, the Board keeps the Group's liquidity needs under review and aims to maintain a level of Uncommitted Cash which could be applied in avoiding or curing debt defaults in the event that such action needs to be taken.

 

When evaluating the appropriateness of the level of secured debt, the Board has regard to the unusual nature of the Group's income streams, specifically that the lease lengths of all portfolios are significantly longer than conventional UK real estate leases and that the Group's rental income can be expected to increase annually as a result of the annual minimum or fixed rental uplifts on 67% of portfolio income, with a further 5% subject to five-yearly minimum or fixed uplifts and the additional prospect of increases from the upwards only inflation-linked reviews on the rest of the portfolio. This structure gives rise to predictable improvements in interest cover across the Group in aggregate on the basis of contractual income flows and a naturally deleveraging debt profile on the assumption of constant valuation yields. The Board also has regard to other factors including tenant credit risks.

 

The headroom on key financial covenants at the first test date following 31 December 2021 (which in all cases fell before the end of January 2022) is summarised below, including the fall in valuation (and related Net Initial Yield) or the fall in rent that would trigger a breach of the relevant covenant, before any preventative or remedial actions are taken. Defensive actions could include utilising any of the Group's Uncommitted Cash which is further explained under the heading 'Key performance indicator - Uncommitted Cash'.

 

 

 

 

 

Key performance indicator - headroom on debt covenants

			Scenarios before any remedial action
	31 Dec 2021	Covenant	Net Initial Yield triggering LTV test	Valuation fall before LTV test triggered	Rent fall before interest cover test triggered
Merlin facility
Property security at independent valuation (£m)	736.0
Gross loan outstanding (£m)	(372.4)
Other subgroup net liabilities (£m)	(9.5)
Ring fenced equity (£m)	354.1
Ring fenced equity (pence per share)	109.3
LTV default test	n/a	none	n/a	n/a
Cash trap LTV test: 1% per annum loan amortisation	51%		7.3%	37%
Cash trap LTV test: full cash sweep	51%		7.7%	40%
Rental fall before interest covered 1:1					31%
The valuation fall that would trigger the LTV cash sweeps has increased since 31 December 2020, from 23% to 37% for 1% amortisation and from 27% to 40% for a full cash sweep. Over the year to 31 December 2021, the Net Initial Yield required to trigger 1% per annum of additional amortisation has increased from 7.0% to 7.3%. The full cash sweep trigger point has increased from 7.4% to 7.7%. Headroom on the 1:1 interest cover requirement has increased from 29% to 31%.

 

			Scenarios before any remedial action
	31 Dec 2021	Covenant	Net Initial Yield triggering LTV test	Valuation fall before LTV test triggered	Rent fall before interest cover test triggered
Healthcare facility 1
Property security at independent valuation (£m)	640.2
Gross loan outstanding (£m)	(296.5)
Other subgroup net liabilities (£m)	(0.4)
Ring fenced equity (£m)	343.3
Ring fenced equity (pence per share)	106.0
Cash trap LTV test: full cash sweep	46%		7.1%	37%
LTV test	46%		7.6%	41%
Cash trap projected interest cover: full cash sweep	200%	>140%			30%
Projected interest cover test	200%	>120%			40%
Headroom on the LTV tests has increased since 31 December 2020, from 35% (at a 6.8% valuation yield) to 37% (at a 7.1% valuation yield) for the LTV cash sweep test and from 39% (at a 7.1% valuation yield) to 41% (at a 7.6% valuation yield) for the LTV default test. Headroom on the interest cover test has improved from 38% to 40% and on the cash sweep interest cover test from 27% to 30%, as a result of a combination of the fixed 2.8% weighted average rental increase in the year and the modest reduction in finance costs because of £3.2 million of scheduled loan amortisation.

 

 

 

 

 

			Scenarios before any remedial action
	31 Dec 2021	Covenant	Net Initial Yield triggering LTV test	Valuation fall before LTV test triggered	Rent fall before interest cover test triggered
Healthcare facility 2
Property security at independent valuation (£m)	150.1
Gross loan outstanding (£m)	(63.5)
Other subgroup net assets (£m)	0.2
Ring fenced equity (£m)	86.8
Ring fenced equity (pence per share)	26.8
LTV test	42%		8.5%	47%
Cash trap projected debt service cover test (full cash sweep if triggered)	232%	>150%			35%
Projected debt service cover test	232%	>125%			46%
Headroom on the LTV test has increased since 31 December 2020, from 45% (at an 8.2% valuation yield) to 47% (at an 8.5% valuation yield). Headroom on the interest cover test has improved from 33% to 35% for the cash sweep test and from 44% to 46% on the default test, largely from the fixed 2.75% rental increase in the year.

 

			Scenarios before any remedial action
	31 Dec 2021	Covenant	Topped Up Net Initial Yield triggering LTV test	Valuation fall before LTV test triggered	Rent fall before interest cover test triggered
Leisure facility: Arena, Brewery, Pubs
Property security at independent valuation (£m)	183.3
Gross loan outstanding (£m)	(60.0)
Other subgroup net assets (£m)	3.5
Ring fenced equity (£m)	126.8
Ring fenced equity (pence per share)	39.1
Partial cash trap LTV cash (50% cash sweep)	33%		7.1%	18%
Cash trap LTV test (full cash sweep if triggered)	33%		8.0%	27%
LTV test	33%		8.9%	35%
Projected interest cover test	338%	>150%			56%
The LTV headroom on this facility has improved from 32% to 35% since 31 December 2020 in line with portfolio valuation increase. The partial cash trap headroom has improved from 15% to 18% and the full cash trap level from 25% to 27%. The extent of a fall in rent that would breach the financial covenant test level is consistent with the level reported at 31 December 2020 which was 57%.

 

 

 

 

 

			Scenarios before any remedial action
	31 Dec 2021	Covenant	Net Initial Yield triggering LTV test	Valuation fall before LTV test triggered	Rent fall before interest cover test triggered
Budget Hotels facility 2
Property security at independent valuation (£m)	213.9
Gross loan outstanding (£m)	(65.4)
Other subgroup net assets (£m)	1.5
Ring fenced equity (£m)	150.0
Ring fenced equity (pence per share)	46.4p
Partial cash trap LTV test (50% of surplus cash swept to lender if triggered)	31%		8.6%	24%
Cash trap LTV test (full cash sweep if triggered)	31%		9.6%	32%
LTV test	31%		10.7%	39%
Cash trap projected interest cover test (full cash sweep if triggered)	678%	>300%			56%
Projected interest cover test	678%	>250%			63%
Budget Hotels facility 1
Property security at independent valuation (£m)	204.0
Gross loan outstanding (£m)	(59.0)
Other subgroup net assets (£m)	3.2
Ring fenced equity (£m)	148.2
Ring fenced equity (pence per share)	45.7p
Partial cash trap LTV test (50% of surplus cash swept to lender if triggered)	29%		9.7%	28%
Cash trap LTV test (full cash sweep if triggered)	29%		10.9%	36%
LTV test	29%		12.1%	42%
Cash trap projected interest cover test (full cash sweep if triggered)	906%	>300%			67%
Projected interest cover test	906%	>250%			72%
The two hotels facilities are ring fenced from one another as while they have the same arranger, they each have a different lender group. However, the comments below relate to both facilities as they are structured in much the same way and as the same tenant underpins the rent and property value in each case, the factors affecting the financial covenants in the year were the same for each facility.
Headroom on the LTV default covenants in the two facilities has improved from 33% to 39% and from 38% to 42% since 31 December 2020 following the valuation increases in each portfolio. Headroom on the projected income default covenants in the two facilities has improved over the same period from 59% to 63% and from 68% to 72% as the temporary Covid related reductions on the rents have come to an end.   Covenant waivers were granted on one of the facilities to accommodate the rent reductions during the period of the temporary rent concessions. These waivers expired in July 2021 as they are no longer required following the end of the rent concessions. All covenant tests have reverted to their previous levels.

 

 

 

 

 

Key performance indicator - Uncommitted Cash

Uncommitted Cash is cash freely available to the Group, after allowing for any amounts payable at the balance sheet date out of free cash.

			31 December 2021	31 December 2020
			£m	£m
Free cash			168.5	196.6
Tax and social security			(3.3)	(1.7)
Leisure lease incentive payable			(3.0)	-
Accruals, trade and other payables and corporation tax			(2.3)	(2.9)
Uncommitted Cash			159.9	192.0

 

The level of Uncommitted Cash retained is assessed regularly in light of property market and wider economic conditions and outlook, together with an assessment of specific covenant headroom levels in individual debt facilities.

 

Movements in Uncommitted Cash	Year to 31 December 2021 £m	Year to 31 December 2020 £m
At the start of the year	192.0	234.2
Leisure lease incentive payable	(33.5)	-
Leisure interest payments funded during period of rent deferral	11.7	(11.8)
Scheduled repayment of secured debt	(7.3)	(4.4)
Dividend support during period of rent concessions	(4.2)	(32.6)
Property disposals net of debt repayments	0.1	1.0
Other	1.1	5.6
At the end of the year	159.9	192.0

 

Since the end of the year, £108.2 million of Uncommitted Cash has been committed to deployment in the refinancing of the Merlin leisure facility, which is expected to be drawn in April 2022. The remaining pro forma balance of £51.7 million is considered by the Board to be an appropriate level given the lower gross loan to value levels within the debt facilities and the lowered tenant risk profiles as their trading recovers after the relaxation of pandemic restrictions.

 

 

Cash flow

The business is structured so that net income flows through efficiently to the payment of quarterly cash dividends. Rents are in the ordinary course predictable, financing costs are fixed or capped and the majority of operating costs are represented by the advisory fees, calculated by applying a simple formula based on a percentage of the Group's net assets.

 

Cash from operations has increased significantly in 2021 following the end of substantially all of the temporary Covid related rent concessions by the end of the financial year and as a result of the positive impact from the receipt of £17.6 million of Merlin rents deferred in 2020. Investment activity in the year was the payment to Merlin of £30.5 million of a maximum £33.5 million payable relating to the value accretive lease extensions and variations, further details of which are given earlier in this report.

 

	Year to 31 December 2021		Year to 31 December 2020
	£m	Pence per share	£m	Pence per share
Cash from operating activities	113.8	35.1	54.7	16.9
Net interest and finance costs paid	(47.7)	(14.7)	(47.4)	(14.5)
Tax paid	(0.3)	(0.1)	(0.4)	(0.1)
	65.8	20.3	6.9	2.3
Dividends paid	(49.3)	(15.2)	(50.8)	(15.7)
	16.5	5.1	(43.9)	(13.4)
Leisure lease regear payment	(30.5)	(9.4)	-	-
Scheduled repayment of secured debt	(7.3)	(2.3)	(4.4)	(1.4)
Property disposals net of debt repayment	0.1	-	1.1	0.3
Acquisition of tangible fixed assets	-	-	(0.3)	(0.1)
Cash flow in the year	(21.2)	(6.6)	(47.5)	(14.6)
Cash at the start of the year	219.7	67.8	267.1	82.7
Currency translation movements	(0.1)	-	0.1	-
Dilution from incentive fee share issues	-	-	-	(0.3)
Cash at the end of the year	198.4	61.2	219.7	67.8

 

The Group's investment properties are in the vast majority of cases let on full repairing and insuring terms, with each tenant obliged to keep their premises in good and substantial repair and condition, including rebuilding, reinstating, renewing or replacing premises where necessary. Consequently, no material unrecovered capital expenditure, property maintenance or insurance costs have been incurred in the year and it is not currently expected that material costs of that nature will be incurred on the portfolio as it stands at 31 December 2021.

 

Risks to future cash flows are summarised in the Principal Risks and Uncertainties section of the Strategic Review.

 

Nick Leslau

Chairman, Prestbury Investment Partners Limited

9 March 2022

 

 

Strategic Review

 

 

Strategy and investment policy

Strategy

One of the key reasons for creating the Company as a specialist long lease REIT in 2014 was that investors had a requirement for a tax efficient investment in well secured, long term, inflation protected income from industries with sustainable prospects against a background of a marked reduction in the average term to the first tenant break or lease expiry in the UK property market. The current inflationary conditions only reinforce this thesis.

 

The Board's intention is for the Group to continue to hold a diversified portfolio of long term, secure income streams from real estate investments across a range of property sectors, enhancing prospects for attractive total returns both from the existing portfolio and, when appropriate, through earnings accretive acquisitions. In this way, the Board believes that the Company is well placed to continue to offer attractive geared returns from high quality real estate, with tenants operating with well established brands in industry sectors with strong defensive characteristics. An important characteristic of the portfolio is that assets acquired are Key Operating Assets, meaning they are business critical from the tenant's perspective. In that way, rental security is more certain as the assets in question form an essential part of the value of the tenants' own businesses, therefore the tenants are strongly motivated to continue to invest in the assets and to retain their leases. This is evident in the 38% of current portfolio income where leases have been extended to date.

 

Through the implementation of the investment policy, set out below, the Board believes that it will be able to deliver total returns-enhancing deals in the interests of all shareholders and, when investment and equity market conditions are right, the Board aims to add to the Group's existing portfolio of Key Operating Assets to further build a substantial diversified portfolio providing secure, growing income and capital returns for shareholders. This could include further acquisition opportunities from a range of sources including operating businesses, non-REITs with latent capital gains fettering sale prospects and opportunities where the Company's shares may be used as currency to unlock value. Acquisitions should be accretive to shareholder returns and will be financed with modest leverage and non-dilutive equity issues.

 

The Company is managed by a team with an exceptionally large 12.4% interest in the Company, worth c. £170 million at 31 December 2021 EPRA NTA, making the team the second largest shareholder in the Company. Consequently, the motivation for the Management Team to deliver on strategy is very strong, with their interests closely aligned with those of all shareholders.

 

Investment policy

The Company invests in long term, secure income streams from real estate investments. A long term income stream is considered to be one with (or a portfolio with) a Weighted Average Unexpired Lease Term in excess of 15 years at the time of acquisition. Security of income is assessed with reference to the extent of rent cover from underlying earnings, the credit strength of tenants and (where relevant) guarantors, and the reversionary potential of the assets.

 

The portfolio is considered by the Board to offer attractive geared returns from high quality real estate, with tenants which have well established brands in industry sectors with strong defensive characteristics. The Board proposes to build on this strong foundation by seeking to:

 

· diversify sources of income and enhance prospects for attractive shareholder returns through acquisitions; and

· manage the Company's capital structure in order to enhance income returns for investors whilst maintaining discipline over net debt levels and terms.

 

The business model is explained in the Investment Adviser's Report.

 

 

 

Potential future changes to strategy and the business model

The Board aims to keep future risks to the business under review with the objective of amending the Company's strategy or business model on a timely basis if necessary. No-one has perfect foresight, but currently the principal areas being actively monitored in this context are climate risk and the risks of global economic or social upheaval including from geo-political events, an extended Covid pandemic or of a new pandemic.

 

The way that climate change is manifesting itself is prompting a range of responses from governments and businesses around the world. These responses in turn feed back into climate change itself and will have an impact on businesses, individuals and economies. Predicting the way that climate change and the responses to it will interact and impact on this business and that of our tenants remains difficult to assess accurately, including the outcomes of the COP26 discussions of November 2021. However, we know that our principal tenants are very much alive to the risks and to their responsibilities and we report on their approaches and progress in the Report of the ESG Committee, which is available on the Company's website. Furthermore, we consider that climate change may well present opportunities as well as challenges. Widespread decarbonisation to meet global emissions goals may well increase costs for our tenants in the short term, but these may yield medium to longer term benefits in both social and economic terms. We will remain close to our tenants to understand their considerable efforts to reduce emissions and meet their climate commitments, and work with them where we can to our mutual benefit. We will continue to report on those efforts in the Company's annual reports and on its website.

 

The scale and suddenness of the onset of the Covid-19 pandemic prompted an early, considered response from the Board and management of the Company, both in terms of support provided for the Group's tenants and the change in working practices. The business and our tenants' businesses have to date weathered the storm due to the robustness of their business operations and brand strength. The pandemic has not prompted any changes to the Company's strategy or business model at this stage save as to the consideration of further diversification of income when appropriate, but not at any cost. While sustainability in its widest sense and the longevity of the businesses operating the assets that the Company owns have always been key considerations, it is fair to say that both the pandemic and the return of political instability in Europe has heightened our awareness of previously unanticipated external threats to those businesses, reminding us of the importance of this particular plank of the Company's strategy.

 

Key performance indicators

In order to oversee the successful delivery of the investment strategy, the Board regularly monitors the following key performance indicators, which are reported on in the Investment Adviser's quarterly reports to the Board and more frequently when appropriate:

 

· Total Accounting Return and Total Shareholder Return

· Adjusted EPRA EPS

· Net LTV Ratio

· Headroom on debt covenants

· Uncommitted Cash

 

Each of these is reported on in the Investment Adviser's Report.

 

Corporate responsibility and ESG

The Board is mindful of its responsibilities to all of its stakeholders, including the wider community, when it makes decisions in setting and implementing the Company's strategy. Alongside its fiduciary, regulatory and legal responsibilities, these responsibilities include those which can be broadly classified under the headings environmental responsibility, social responsibility and governance, widely referred to as "ESG". We will report on various aspects of our responsibilities in the annual report. 

 

 

 

 

Statement on stakeholder relationships made under Section 172(1) of the Companies Act

The Directors consider that, in conducting the business of the Company over the course of the year ended 31 December 2021 and to the date of this report, they have complied with Section 172(1) of the Companies Act 2006 ("the Act").

 

The business is externally managed and the Group has no employees. The Board is of the opinion that its conduct and that of its external Management Team culminated in decisions made in good faith to promote the success of the Company for the benefit of all of its members, having regard to the impact of those decisions on the following matters:

 

· the interests of the workforce, for whom the Chairman of the Remuneration Committee has special responsibility and which is also represented on the Board by the three Prestbury directors;

· business relationships with suppliers, customers and other counterparties, where engagement is managed in the main by the Investment Adviser with a view to fostering good two way communication with respect for all staff and respecting supplier payment terms;

· the community and the environment, where the Board takes overall responsibility and where the ESG Committee has specific focus;

· the reputation of the Company for high standards of business conduct, monitored by the Board with input from advisers including the Company's broker;

· fair treatment as between all members of the Company where the Investment Adviser engages routinely and where the Chairman of the Company and other Independent Directors make themselves available for meetings as appropriate, seeking to respond to any shareholder feedback in a constructive and open way; and

· the likely long term consequences of decisions made by the Board on all stakeholders.

 

The strategy of the Company was initially laid out in the AIM Admission document issued in May 2014 and was approved by the Board at that time. Any material deviation from or amendment of that strategy is subject to Board and, if necessary, shareholder approval. At least annually, the Board considers a business plan and budget for the delivery of its strategic objectives and the Investment Adviser reports at least quarterly against the delivery of the budget and the strategic objectives of the business.

 

Through regular engagement with its stakeholders, the Board aims to gain a rounded and balanced understanding of the impact of its decisions. In the main, that information is gathered in the first instance by the Investment Adviser and communicated to the Board in its regular quarterly meetings and otherwise as required.

 

 

 

The key strategic decisions for the Board are those relating to asset acquisitions, lease variations, financing, disposals, and distributions, including the interaction of these decisions with our ESG Policy. Where these types of transaction, or any other material transaction or decision, is considered, the Board has regard to its obligations under Section 172 of the Act. The principal non-routine decisions made by the Board in 2021 are as follows.

 

· The most material non routine decision in the year was the variation to the Merlin leases. In reaching its decision on the terms of the lease regears, the Board had specific regard to the long term success of the Company, to the sustainability of the Company's and tenant's businesses and, through the enhanced ESG reporting, to the environment.

· The Company maintained appropriate levels of support for the Group's tenants as the Covid-19 pandemic and the responses to it continued to evolve, continuing the open and constructive dialogue which commenced in 2020 and where the long term success of the Company formed the bedrock of decisions made.

· The Board carefully assessed the impact on stakeholders of the return to the pre-Covid, progressive dividend policy and was able to conclude that it was in the best interest of stakeholders to increase the dividend rate by 8.2% from July 2021.

· Considering the Group's responsibilities to the community and to meeting the Company's obligations to comply with all legal and regulatory requirements, the Board decided during the year to escalate its ESG reporting and to enhance its ESG capabilities which culminated in the establishment of an ESG Committee, chaired by the Chairman of the Company, Martin Moore. Expert external advisors were appointed to conduct a materiality review and to work on the further development of the Group's ESG policy and reporting standards.

· The Board, Nomination Committee and Management Team have been working closely together to implement the recruitment process to replace the four Independent Directors prior to the end of their recommended nine year term. Key features of these procedures include:

 

i) an aim to preserve the balance of skills, experience and diversity of thought on the Board to continue the Company's strong long term track record;

ii) to adhere to the Company's Diversity and Inclusion Policy in the recruitment process;

iii) to use suitably qualified external consultants with a brief to search among a diverse candidate pool; and

iv) to complete the process with a balance between allowing for appropriate handover periods without undue additional cost to shareholders. The proposed timetable allows for a period of overlap between the outgoing and incoming directors to ensure adequate training and handover, in particular for the roles of Chairman and Chairman of the Audit Committee, and the Board will be temporarily enlarged as a result.

 

While the Group has no employees, the Board has regard to the interests of the individuals who are responsible for delivery of the management and advisory services to the Company. Three of the seven Directors are representatives of the Investment Adviser and, in their capacity as directors and majority owners of the Investment Adviser, have direct responsibility for the employees of the companies providing services to the business. In addition, the Chairman of the Remuneration Committee has responsibility for workforce engagement so that there is a direct line of communication from the workforce to the Independent Directors. There have been no strategic initiatives or transactions in the year that were considered to have a direct bearing on the employees of the Investment Adviser or its workforce.

 

The Board has been kept informed of any relevant developments in the workforce. The Investment Adviser has confirmed that none of the workforce has been furloughed through the Covid pandemic or made redundant, that all members of the workforce have continued to be paid their salaries in full, and that the Investment Adviser and its associated companies have not drawn on the Government's Job Retention Scheme or any other Covid related support. Steps are taken to protect the physical and mental wellbeing of the workforce, as far as possible. This includes access to a confidential helpline for physical and mental health issues which is provided by the Investment Adviser's private medical insurer.

 

In the Board's annual review of the internal control environment operating in the business, the appropriateness of staffing levels and staff qualifications are kept under review, but it is noted that the Board does not have direct responsibility for any employees.

 

In the main, the Company's suppliers, customers and counterparties are professional firms such as lenders, property agents, accounting and law firms, tenants with which we have longstanding relationships, and transaction counterparties which are generally large and sophisticated businesses or institutions. Where material counterparties are new to the business, checks, including anti money laundering checks, are conducted prior to transacting any business to ensure that no reputational or legal issues would arise from engaging with that counterparty. The Company also reviews the compliance of all material counterparties with relevant laws and regulations such as the Modern Slavery Act 2015. All Group entities have a policy of paying suppliers in accordance with agreed terms as noted in the Supplier Payment Policies within this report.

 

 

 

The interaction of Group entities with the wider community and their impact on the environment is relatively limited as a result of the Group's business operations being entirely related to investment in properties let on very long leases, where the operation of the properties, their upkeep and environmental impact is the responsibility of the occupational tenants.

 

The Board is mindful that the ability of the Company to continue to conduct its investment business and to finance its activities depends in part on the reputation of the Board and Management Team. The risk of falling short of the high standards expected and thereby risking the reputation of the Company is included in the Board's review of the Company's risk register. The Board aims to maintain high standards of conduct and requires the Investment Adviser to do likewise under the terms its appointment.

 

The investor relations programme is designed to promote formal engagement with major investors, generally defined as those holding more than approximately 1% of the shares in the Company. Major investors are offered meetings after each results announcement or other significant announcements. The Board and Management Team also engage with investors and potential investors who request meetings on an ad hoc basis throughout the year. All Company announcements and formal shareholder presentations are made available on the Company's website.

 

Recognising the great importance of engaging with the Company's shareholders, the Board oversees the Management Team's investor relations programme which is supported by the Company's brokers and financial PR advisers. The Board and Management Team aim to be open with shareholders and available to them, subject at all times to compliance with relevant securities laws.

 

Feedback from our shareholders is an important part of the Board's decision making process. We receive such feedback both directly and through intermediaries such as brokers and analysts. The feedback received is a natural part of the open dialogue we aim to have with our investors and, when appropriate and within the rules on sharing company information, the opinions of shareholders are sought in advance of decisions being made. During the financial year there have been fewer matters to discuss with shareholders than in 2020 as the impact of the Covid related rent concessions has abated and the share price discount has closed. Shareholder feedback was sought by the Investment Adviser on the impact of the Merlin lease regears and reported to the Board.

 

The AGMs held in 2020 and 2021 were held in compliance with Covid restrictions in force at the time therefore shareholders were not able to attend. However, levels of proxy voting remained high with approximately three quarters of the issued shares being voted in each year. Where public health regulations do not present any obstacles, the whole Board intends to attend each Annual General Meeting. Where that is not possible, we will continue to keep lines of communication with shareholders open, including the facility for shareholders to submit questions by email or post ahead of the AGM.

 

The Company has a single class of shares in issue with all members of the Company having equal rights therefore balancing the interests of shareholders among themselves is not an issue for the Company.

 

The investment strategy of the Group is focussed on medium to long term returns and as such the long term is firmly within the sights of the Board when all material decisions are made.

 

Supplier payments

Neither the Company nor any of its subsidiary undertakings exceed the thresholds for reporting payment practices and performance. The following voluntary disclosures relate to the Group:

 

· the Group does not have standard or maximum payment terms, but seeks to settle supplier invoices in accordance with agreed terms;

· invoices may be submitted electronically but as the volume of payments is relatively low, the Group does not operate electronic tracking for suppliers;

· the Group does not offer supply chain finance;

· there are no arrangements for participation on supplier lists and no charges for being on such a list;

· the Group is not a member of a payment code of conduct; and

· the average number of days taken to make payments in the year was 19 days (2020: 30 days). The 2020 average was unusually long, due in large part to both of our accounts assistants unfortunately suffering from Covid-19 at the same time at the end of the year.

 

 

Strategic Review - Principal Risks and Uncertainties

 

 

The Board's responsibilities for risk management include assessing the principal risks faced by the Group and how they may be mitigated, including considering matters that may threaten the performance of the Group, its business model or its viability.

 

The Audit Committee and the Board review the Group's risk register at least annually and more often as necessary. The risk register, which was most recently reviewed in September 2021 in connection with the publication of the interim report, has been reviewed again in conjunction with the approval of this annual report.

 

Material changes to the Group risk register

Global economic and social disruption, including pandemic risk, was added to the overarching risks at the first review after the pandemic was declared, and the risk rating of each of the principal risks was increased at that time because all were impacted by the consequences of the pandemic and the response of governments and public health bodies to it. Since the last report to shareholders in September 2021, the impact of high vaccination rates in the UK, better treatments for those suffering from Covid-19 and the reopening of businesses has reduced the impact of this pandemic on the Company. These risks have not abated entirely, and the general easing of the pandemic risk has not changed the Board's assessment of which risks are most material to the business. We note also that risks of global economic and social disruption are currently heightened given the unfolding situation in Ukraine.

 

The Group's largest debt facility, the Merlin leisure facility with a balance of £372.4 million at 31 December 2021, matures in October 2022. With a near term refinancing facing the Company, refinancing risk was elevated in the September 2021 risk report. Having signed committed facilities to refinance that debt in March 2022, the immediate refinancing risk facing the Group has been dealt with. The next two facilities that fall due for repayment total £125.4 million of debt, repayable in April and June 2023, more than 12 months after the date of approval of these accounts. These facilities each represent loan balances of less than one third of the respective security value and the risks to the Group in refinancing these assets is considered lower than the refinancing risk prior to the refinancing of the Merlin facility. Refinancing risk remains on the risk register but with a lower significance than as reported in the 2021 Interim Report.

 

Valuation risk remains a key risk but has lessened since the 2020 Annual Report as none of the Group's portfolios were subject to a "material valuation uncertainty" caveat on their 31 December 2021 independent valuations. Refinancing risk is a new risk that was introduced in the 2021 Interim Report and which is considered to have lessened since then following the committed facility entered into in March 2022, which will be applied together with some of the Group's Uncommitted Cash, to meet the repayment of the debt facility which matures in October 2022 ahead of the maturity date. Another new risk introduced in the 2021 Interim Report is the Environmental Risk which relates in particular to the impact of new laws and regulations on the Group's property assets. The assessment of that risk remains the same as it was in the 2021 Interim Report.

 

The risk assessments are otherwise unchanged since those presented in the 2020 Annual Report.

 

 

 

Overarching risks

There are overarching risks which the Board considers to be relevant to most of the individual risk areas identified in the Group risk register.

 

Global economic and social disruption including pandemic risk

The Board and Management Team of the Company and those of the Group's major tenants have operated through a number of cycles of economic boom and bust, through varying degrees of political stability, and have dealt with deep recessions and periods of great disruption. The global reach, sudden onset and extensive impact of the spread of Covid-19 was in a class of its own in its scale and unpredictability. While the positive impact of the vaccine programme and successful treatments for those suffering from the virus has allowed the UK economy and most economies around the world to reopen, this serves to remind us that pandemic risk is not limited to this one virus so despite the easing of the impact of Covid-19 at the time of this report, this risk remains one of our overarching risks. We also note the economic and social disruption aspect of this overarching risk. The unfolding situation between Russia, the Ukraine and NATO allies indicates a further elevation of this risk factor. At the date of this report it is difficult to conclude with any certainty what the impact of that situation might be on the Company and its tenants, but the Chairman's Statement notes the possibility of higher inflation and less precipitous action on interest rates than might otherwise have been the case.

 

Climate risk, including the risks and costs of transition to decarbonisation

We assess the overarching climate risk as a distinct risk from the regulatory risks posed by specific environmental standards applicable to the Company, dealt with separately in the risk register. The Company is externally managed with no offices run by it and so has no direct exposure to decarbonisation costs. The general risk of disruption from climate change is not one where the Company can take steps to make a material impact on its own behalf. However, in assessing the strength of the credit quality of our tenants, we take climate risk into account. Climate risk assessments also form an integral part of the way that we consider how any assets being considered for acquisition meet the criteria set out in the Company's business model and the Board has committed to sign up to the UN Principles of Responsible Investment to guide this process. We report on our own policies and those of our major tenants in the ESG Centre on the Company's website.

 

Brexit risk

Towards the end of 2020 a trade deal was agreed with the EU, just prior to the end of the Brexit transition period, reducing Brexit risk by removing the risk of a disorderly exit on World Trade Organisation terms. As a result, Brexit risk was removed from the overarching risk list presented in the 2020 Annual Report. However, as we noted at the time, the change in trading conditions is relatively recent and continues to evolve, therefore the Board continues to monitor Brexit risk to ensure that the assessment remains appropriate, particularly as it may impact on our tenants, and it remains on our "watchlist".

 

 

 

 

The Board considers that the principal risks and uncertainties facing the Group over the medium to long term are as follows:

 

Risk and change in assessment since prior year	Strategic importance and impact on the Group	Mitigation
Tenant risk During the year and prior year, the Group derived its income from ten tenant groups, two of which have the benefit of guarantees from or joint tenancies with substantial parent companies. The three largest tenant groups account for 87% of passing rent before concessions as at the balance sheet date (2020: 88%).   Although the Board considers the tenant and guarantor groups to be financially strong in ordinary circumstances, certain tenants experienced liquidity stresses during the pandemic and there can be no guarantee that they will remain able to comply with their obligations throughout the term of the relevant leases.   The severe impact of Covid-19 on the Group's Leisure and Budget Hotels tenants, which suffered an abrupt and almost complete closure of their operations as a result of the pandemic, created heightened tenant risk in 2020. The reopening of their businesses in the UK over the course of 2021 has brought some easing of risk. The risk remains elevated while the pandemic continues and given economic uncertainty as a result of elevated geo-political tensions.	In order to underpin both the rental cash flows that support a progressive dividend policy and the valuation of assets delivering acceptable risk adjusted shareholder returns, the financial strength and sustainability of our tenants is important.   A default of lease obligations by a material tenant and its guarantor (if any) would have an impact on the Group's revenue, earnings and cash flows and could have an impact on debt covenant compliance. The specialised use of the properties may mean that, in the event of an unexpected vacancy, re-letting takes time.   Investment property valuations reflect an independent external valuer's assessment of the future security of income. A loss of income would therefore impact net asset value as well as earnings. It could also lead to a breach of interest cover or debt service cover covenants, resulting in increased interest rate margins payable to lenders, restricted cash flows out of secured debt groups or ultimately default under secured debt agreements. The availability of distributable reserves could also be reduced.	32% (2020: 32%) of passing rent before concessions at the balance sheet date is contractually backed by large listed companies and a further 35% (2020: 35%) by global businesses with multi billion pound valuations, all with capital structures considered by the Board to have been strong and with impressive long term earnings growth and (where relevant) share price track records up until the start of the pandemic. The balance of the income is payable by substantial businesses also considered by the Board to be sufficiently financially strong in the context of their lease obligations.   The properties are Key Operating Assets, which should have the effect of enhancing rental income security given their strategic importance to the tenants.   The Board reviews the financial position of tenants and guarantors at least every quarter and more often when relevant, based on publicly available financial statements and any other trading information which may be obtained either under the terms of the leases or informally.   The Board reserves Uncommitted Cash outside ring-fenced debt structures which would be available to be used to cure certain covenant defaults to the extent of the cash available. The Group's key performance indicators include the levels of covenant headroom and of Uncommitted Cash, both of which are relevant to monitoring and, if necessary, mitigating this risk.

 

 

 

 

 

Risk and change in assessment since prior year	Strategic importance and impact on the Group	Mitigation
Property valuation movements The Group invests in commercial property which is held on the balance sheet at its fair value. The Company is therefore exposed to movements in property valuations, which are subjective and may vary as a result of a number of factors, many of which are outside the control of the Board. These factors include (but are not limited to) economic conditions, specific property sub-market conditions and potentially climate risk.   This risk increased in 2020 because of a relative lack of liquidity in the Leisure and Budget Hotels sectors,which was reflected in "material valuation uncertainty" in the independent external valuations of those properties as at 31 December 2020. The risk has reduced in 2021 as none of the valuations are subject to material valuation uncertainty.	The Company's strategy is to deliver a combination of income and capital returns to shareholders and robust, reliable valuation is a key part of the calculation of the returns.   Investment properties make up the majority of the Group's assets, so material changes in their value will have a significant impact on net asset value and therefore on shareholder returns, with any effect of the valuation changes magnified by the impact of borrowings.   Falls in the value of investment properties beyond a certain point could lead to a breach of financial covenants in secured debt facilities, resulting in increased interest margins payable to lenders, restricted cash flows out of secured debt groups, restrictions of distributable reserves available for dividend payments or default under secured debt agreements.	The Group uses experienced independent external valuers whose work is reviewed by suitably qualified members of the Management Team and, separately, the Audit Committee before being considered by the Board in the context of the financial information as a whole.   The Board seeks to structure the Group's capital such that the level of borrowing and the protections available to cure a covenant default are appropriate having regard to market conditions and financial covenant levels.   The Board reserves Uncommitted Cash outside ring-fenced debt structures which would be available to cure certain covenant breaches The Group's key performance indicators include the levels of covenant headroom and Uncommitted Cash, both of which are relevant to monitoring and if necessary mitigating this risk.

 

 

 

 

 

Risk and change in assessment since prior year	Strategic importance and impact on the Group	Mitigation
Borrowing Certain Group companies have granted security to lenders in the form of mortgages over each of the Group's investment properties and fixed and floating charges over other assets within the ring-fenced security groups.   The Group had the support of its lenders in agreeing those consents or waivers that were required to accommodate the support provided to its tenants throughout the pandemic but these waivers are no longer required following the increases in rental levels in 2021.   The risk has reduced in 2021 as covenant headroom is returning to pre-pandemic levels.	The Company's finance strategy as set out in the explanation of the Business Model, includes building in appropriate safety features to the Group's borrowings in order to minimise the risks related to the use of debt finance to enhance shareholder returns.   In the event of a breach of a debt covenant, the Group may be required to pay higher interest costs or increase debt amortisation, affecting Group earnings and cash flows. If a financial covenant breach is the result of the financial weakness of a tenant or a guarantor, property valuations and therefore net asset value may also be adversely affected. In certain circumstances the Company's ability to make cash distributions to shareholders may be reduced.   Where a loan repayment cannot be made the Group may be forced to sell assets to repay part or all of the Group's debt. It may be necessary to sell assets at below book value, which would adversely impact net assets and future earnings. Early debt repayments would in most cases crystallise repayment penalties, which would also adversely impact cash balances and net assets and reduce distributable reserves.	The Group's borrowing arrangements comprise six ring-fenced subgroups with no cross-guarantees between them and no recourse to other assets outside each secured subgroup. A financial covenant issue in one portfolio should therefore be limited to that portfolio, save for tenant related events (such as a tenant insolvency) where the two Healthcare subgroups would both be affected by any issue relating to Ramsay Health Care Limited and the two Budget Hotels facilities would be affected by any issue relating to Travelodge Hotels Limited.   Five of the facilities have LTV default covenants (the Merlin Leisure facility has no LTV default covenant) and all facilities have interest cover or debt service cover covenants. The Board reviews compliance with all financial covenants at least every quarter, including forward-looking tests for at least twelve months, and considers whether there is sufficient headroom on relevant loan covenants to withstand stress test and reverse stress test scenarios.   The Board seeks to structure the Group's capital such that gearing is appropriate having regard to market conditions and financial covenant levels, with appropriate cure rights within debt facilities.   The Board reserves Uncommitted Cash outside ring-fenced debt structures which would be available to cure certain covenant breaches. The Group's key performance indicators include the levels of Net Loan to Value, covenant headroom and Uncommitted Cash, all of which are relevant to monitoring and if necessary mitigating this risk.

 

 

 

 

 

 

Risk and change in assessment since prior year	Strategic importance and impact on the Group	Mitigation
Refinancing The Group's debt portfolio is comprised of six ring fenced bilateral facilities with terms to maturity as at 31 December 2021 ranging between ten months and nearly four years. To preserve shareholder value, credit facilities must be repaid or refinanced in an orderly way and on terms aligned with the Company's strategy.   One of the Group's debt facilities with principal outstanding of £372.4 million at 31 December 2021 is due for repayment in October 2022. Since the balance sheet date, a committed new facility has been entered into which, subject to the satisfaction of conditions precedent typical for a facility of this nature, will be drawn in April 2022 and applied, with cash from Group resources, in repayment of the £372.4 million facility.   This risk ranking was raised in 2021 as the maturity date of the largest of the existing loans neared and is now considered to have reverted to its previous level of risk, with the next facilities due for refinancing falling due in 2023 being smaller facilities with relatively low Loan To Value ratios, as more fully described in the assessment of viability.	In order to deliver long term sustainable returns, the debt maturity profile of the Group must be sensibly managed.   Debt finance might not be available on acceptable terms or might not be available to the full extent of the amounts due for repayment. An inability to repay the debt in full could mean a reduction in the value of shareholders' equity through a forced sale of assets, a reduction in Uncommitted Cash, or could result in default interest rates being applied, increasing the cost of debt service to the Group.   Debt finance might only be available at a higher interest cost than the current rates, adversely, impacting the outlook for Adjusted EPRA EPS and reducing distributable reserves, or on more restrictive terms which might reduce free cash flow available for dividends.	At the current independent portfolio valuation, there is significant LTV headroom over loan principal within each facility and the Group also holds Uncommitted Cash which could be applied as part of future refinancings.

 

 

 

 

 

Risk and change in assessment since prior year	Strategic importance and impact on the Group	Mitigation
Environmental regulations The Group is subject to environmental laws and regulations relating to its properties.   Although our environmental strategy continues to be actively developed, this risk was increased in 2021, given the ongoing Government consultation on new environmental laws and regulations relating to properties. While the allocation of risk between landlords and tenants requires greater clarity, particularly if they relate to long leases where tenants have a greater opportunity to reap the benefits of any changes to sustainability ratings, it is possible that the consultation could result in obligations on landlords.	As explained in the Company's statement under section 172 of the Companies Act the Board has responsibilities to the environment and the wider community in delivering its strategy and is required to comply with all relevant laws and regulations.   Regulations could be onerous to comply with, or could adversely affect the Group's ability to sell, lease, finance or redevelop its property assets. Violations could result in reputational damage and/or regulatory compliance penalties.	The vast majority of the Group's assets are let on long FRI leases where the tenants are responsible for compliance with statutory requirements, including environmental laws and regulations. As such any costs associated with environmental compliance are borne by the tenant. Ultimately, therefore, this risk is a tenant credit risk.   The Board is assessing the potential impact that the emerging regulations, currently under consultation, would have. Proposals to address any such risks arising form part of the Company's ESG policy and which will be further developed with input from specialist external advisers. We note that this is an area of evolving regulation and practice, so the Board keeps an active watch on developments, including through the ESG Committee which has been established for this purpose.
Tax risk As a UK REIT, a failure to comply with certain conditions resulting in the loss of this status could result in property income being subject to UK corporation tax.   This risk was increased as a result of the pandemic. The pressures on the UK Treasury of providing financial support throughout the pandemic was considered to have increased the risk of changes in the tax regime and as the economic impact of the actions taken to deal with the pandemic is still being felt this risk assessment remains unchanged.	As part of its commitment to the wider community and to recognising its part in society the Company, through the Board, is careful to comply with all relevant laws and regulations and to pay any taxes as and when they are due. Continued compliance with the REIT rules helps to underpin the financial model which is, broadly, a tax transparent one for shareholders.   If subject to UK corporation tax, the Group's current tax charge would increase, impacting cash flows, net asset value and earnings, and reducing cash and reserves available for distributions. Further, any asset sales would also be subject to corporation tax, reducing the net amounts receivable on sale and requiring deferred tax to be provided on inherent capital gains.	The REIT conditions which, if breached, could result in automatic expulsion from the REIT regime are those relating to the Company's share capital (and any loan capital should the Company have any in future), and are therefore (with the exception of a successful hostile takeover of the Company by a non-REIT) within the control of the Group.   The Board reviews compliance with the UK REIT rules at least every quarter.

 

 

 

 

 

Risk and change in assessment since prior year	Strategic importance and impact on the Group	Mitigation
Liquidity risk Working capital must be managed to ensure that both the Group as a whole and all individual entities are able to meet their liabilities as they fall due. With highly predictable income and costs there is limited scope for unexpected liquidity pressures outside those risks described under Tenant risk.   The Group holds Uncommitted Cash providing the benefit of a liquidity buffer. For as long as the risks of further economic disruption including that arising from the pandemic or from geo-political threats remain elevated, the potential for the liquidity buffer to be called on to provide support to tenants and/or to deploy in debt management is also elevated.	In order to continue to deliver long term, sustainable returns to investors and also to continue to comply with its obligations under the REIT rules to pay at least the prescribed minimum level of dividends, as well as its intention to continue as a going concern, the Group must maintain appropriate levels of liquidity.   A breach of a lending covenant, or the insolvency of either the Group as a whole or an individual entity within a secured subgroup could result in a reduction of net asset value and earnings, and reducing cash and reserves available for distributions.   As a result, there could be insufficient cash and/or distributable reserves to meet the Property Income Distribution ("PID") requirement under the UK REIT rules, which could result in UK corporation tax becoming payable on the Group's property rental business. This would in turn reduce free cash flows.	Unless there is a tenant default (the risk of which is explained under Tenant risk) the Group's cash flows are generally highly predictable. The cash position is reported to the Board at least quarterly, projections at least two years ahead are included in the Group budget and are updated for review when the interim and annual reports are approved, and projections for a five year period are reviewed for the viability statement in the annual report.   The Group's key performance indicators include the levels of Uncommitted Cash available to the Group.   The Group has Uncommitted Cash reserves out of which any tax liabilities or increases in required PIDs above the cash flow generated from operations could be met in the short to medium term. A scrip dividend alternative could be offered to meet the PID requirement.

 

 

 

 

 

Going concern and viability

The Board regularly monitors both the Company's and the Group's ability to continue as a going concern and its longer term viability. This is supported by the Audit Committee's work in this area. Summaries of the Company's and the Group's liquidity position, actual and prospective compliance with loan covenants and the financial strength of its tenants and where relevant their guarantors are considered at the scheduled quarterly Board meetings and more often as required. This includes updating the stress tests and reverse stress tests described in the mitigation sections of the tenant and borrowing risks within the Principal Risks and Uncertainties. These include expanded and stress tested assessments consistent in approach with, but more detailed than, those presented in the Investment Adviser's summary of the 'headroom on debt covenants' key performance indicator. The modelling includes (but is not limited to):

 

· the identification of uncertainties facing the Group, including the risks of default of each material tenant and of investment property valuation movements (as outlined in the Principal Risks and Uncertainties section, the resulting impact on Group liquidity, debt covenants and distributable reserves and the remedial action that may be taken, including the extent of the resources available to the Company to cure covenant breaches; and

· stress tests, presented both on the basis of estimated reasonable ranges of outcomes (such as variations in investment property valuation yields, rental cash flows and exposure to any unexpected cash outflows) and reverse stress tests, where scenarios are presented to demonstrate the key inputs (principally rental cash flows and property valuation yields) that would be required to exhaust the Company's liquidity buffer in curing financial covenant breaches.

 

The scenarios reviewed by the Audit Committee and the Board include:

 

· an assessment of the extent to which the valuation yields of each security pool would need to worsen in order to trigger each cash trap, amortisation or default LTV covenant and assessment of the risks of those valuation thresholds being breached;

· modelling the impact of changes in valuation yields, reflecting levels of yield shift experienced during previous downturns in real estate investment markets, including during the 2008 global financial crisis and during the most extreme movements of the 2020 Covid-19 pandemic;

· assessing the level of loss of rents that could be sustained within a security group before each covenant or default level is triggered;

· assessing the loss of rents or valuation that could be sustained before the Group's Uncommitted Cash would be fully utilised in application to cure rights within debt facilities; and

· assessing the impact on Group resources of any or all ring-fenced security groups falling into default.

 

The detailed scenarios are calculated by the Investment Adviser and presented to the Audit Committee for its review, subject to challenge and debate. The projections and scenarios considered throughout 2021 and in connection with the approval of this financial information had particular regard to stresses arising from the Covid-19 pandemic, and in particular the impact on the trading and financial strength of the Group's tenants. The ability of each tenant to navigate its way through the challenges of the pandemic to date, the Group's significant liquidity levels that were available to deal with any issues arising and the brighter medium term outlook as a result of the vaccine rollouts and improved treatments, are considered relevant in the context of the going concern and viability assessments for the Group.

 

The most material assumption affecting these scenarios as tested during 2021 related to the refinancing of the Merlin leisure facility, with a balance of £372.4 million at 31 December 2021 which is due for repayment in October 2022. This refinancing has been materially de-risked since the balance sheet date as a committed credit agreement was signed in March 2022, with drawdown scheduled for April 2022 conditional only on satisfaction of conditions precedent that are typical for a facility of this nature. The Board has carefully reviewed the status of each of the conditions precedent and is satisfied that all conditions should be able to be complied with within the relevant timescales.

 

The Board has weighed up the risks to going concern set out above, together with the ability of the Company to take mitigating action in response to those risks. The Board considers that the combination of their conclusions as to the tenants' prospects, the headroom available on debt covenants and the liquidity available to the Group to deal with reasonable stressed scenarios on income and valuation outlook leads to a conclusion that the Company and the Group are each able to continue in business for the foreseeable future. This assessment includes an analysis of the extent of surplus liquidity and distributable reserves available within the ultimate parent company. They therefore consider it appropriate to adopt the going concern basis in the preparation of this financial information.

 

 

 

Viability statement

The Board has assessed the prospects of the Group over the five years to 31 December 2026, which is the period covered by the Group's longer term financial projections. The Board considers the resilience of projected liquidity, as well as compliance with debt covenants and UK REIT rules, under a range of inflation and property valuation assumptions. These scenarios include stress tests and reverse stress tests consistent with those described in the paragraph preceding the going concern statement and include a consideration of mitigating actions that may be taken to avert or mitigate potential threats to viability.

 

Given the longer period of assessment covered by the viability review, further analysis is conducted in order to test the reasonableness of the key assumptions made and to examine potential alternative outcomes and mitigating actions relating to those risks and assumptions. The most material of these assumptions relate to the debt refinancings during the forecast period, including the existing Merlin leisure facility, the status of which is explained within the going concern review. Facilities falling due in 2023 are relatively low in value and at lower levels of LTV, where the Board's assessment is that it is reasonable to conclude that financing should remain readily available on acceptable terms but that, if not, mitigating actions such as utilisation of some of the Group's Uncommitted Cash or proceeds from asset sales could be applied to satisfy the debt maturity obligations. The Healthcare facilities fall due in September and October 2025 when total debt of £360.0 million falls due with the security value available of £790.4 million in aggregate at 31 December 2021 independent valuation, representing a 45.5% Loan To Value ratio. In March 2026, the new Merlin leisure facilities of £282.5 million (at 31 December 2021 exchange rates) will mature unless the one year extension option in that facility is exercised. The Loan To Value ratio of that facility against the 31 December 2021 independent valuation is 38.4%. The Board has formed the assessment that lending markets are currently available for healthcare and leisure assets of this type and quality should remain reasonably active, and that financing at the levels required should be available at reasonable cost. In extremis, assets could be sold to partly or wholly refinance debt, although that is not the core assumption.

 

The principal risks and the key assumptions that were relevant to this assessment are:

 

	Assumptions
Tenant risk	· Tenants and their guarantors (where relevant) continue to comply with their rental obligations and do not suffer any insolvency events or otherwise cease rental payments over the term of the review or reduce amounts payable to levels that would threaten income cover or debt service cover covenants.
Borrowing risk	· The Group continues to comply with all loan covenants. · The conditions precedent to the drawdown of the new Merlin credit facility will be met. · £184.4 million in two Budget Hotels facilities and one Leisure facility falling due between April and October 2023 are able to be refinanced against secured investment property worth £601.3 million at 31 December 2021 independent valuations. · The Healthcare facilities, totalling £360.0 million against secured investment property of £790.4 million at 31 December 2021 independent valuations, can be refinanced by the final quarter of 2025. · The new Merlin credit facility, totalling £282.5 million and secured against investment property worth £736.0 million at 31 December 2021 independent valuation (both at the 31 December 2021 exchange rate), can be refinanced by the first quarter of 2026.
Liquidity risk	· The Group continues to generate sufficient cash to meet its liabilities as and when they fall due while retaining the ability to make distributions, which includes the Group's continuing compliance with loan covenants.
Management contract renewal or succession	· The Independent Directors will either extend the agreement between the Company and the Investment Adviser, which has a term to December 2025 and no renewal rights in favour of either party, or find a replacement management team before the end of the term without any adverse impact on the cash flows of the Company.

 

Based on the work performed, the Board has a reasonable expectation that the Group will be able to continue in business over the five year period of its assessment.

 

 

 

Group Income Statement

 

 

	Notes	Year to 31 December 2021 £m	Year to 31 December 2020 £m
Revenue	3, 4	122.4	121.7
Property outgoings	5	(0.6)	(1.5)
Gross profit		121.8	120.2
Administrative expenses	6	(15.2)	(17.0)
Investment property revaluation	11	140.2	(166.7)
Operating profit / (loss)	7	246.8	(63.5)
Net finance costs	8	(50.0)	(49.9)
Profit / (loss) before tax		196.8	(113.4)
Tax credit / (charge)	9	2.8	(0.3)
Profit / (loss) for the year		199.6	(113.7)
		Pence per share	Pence per share
Earnings per share
Basic and diluted	10	61.6	(35.1)

 

All amounts relate to continuing activities.

 

The notes form part of this financial information.

 

 

Group Statement of Other Comprehensive Income

 

 

	Notes	Year to 31 December 2021 £m	Year to 31 December 2020 £m
Profit / (loss) for the year		199.6	(113.7)
Items that may subsequently be reclassified to profit or loss:
Currency translation differences	21	(3.6)	2.1
Fair value movements in derivatives	13, 21	1.6	(0.6)
Other comprehensive (loss) / income		(2.0)	1.5
Total comprehensive income / (loss) for the year		197.6	(112.2)

 

The notes form part of this financial information.

 

 

Group Statement of Changes in Equity

 

 

Year to 31 December 2021		Share capital £m	Share premium reserve £m	Other reserves £m	Retained earnings £m	Total £m
At 1 January 2021		32.4	523.2	3.7	662.2	1,221.5
Profit for the year		-	-	-	199.6	199.6
Other comprehensive loss		-	-	(2.0)	-	(2.0)
Total comprehensive income		-	-	(2.0)	199.6	197.6
Interim dividends of 15.2 pence per share		-	-	-	(49.3)	(49.3)
At 31 December 2021		32.4	523.2	1.7	812.5	1,369.8

 

Year to 31 December 2020		Share capital £m	Share premium reserve £m	Other reserves £m	Retained earnings £m	Total £m
At 1 January 2020		32.3	518.4	7.1	826.7	1,384.5
Loss for the year		-	-	-	(113.7)	(113.7)
Other comprehensive income		-	-	1.5	-	1.5
Total comprehensive loss		-	-	1.5	(113.7)	(112.2)
Issue of shares		0.1	4.8	(4.9)	-	-
Interim dividends of 15.7 pence per share		-	-	-	(50.8)	(50.8)
At 31 December 2020		32.4	523.2	3.7	662.2	1,221.5

 

The notes form part of this financial information. 

Group Balance Sheet

 

 

	Notes	31 December 2021 £m	31 December 2020 £m
Non-current assets
Investment properties	3, 11	2,158.2	1,975.6
Headlease rent deposits		2.8	2.8
Property, plant and equipment		0.2	0.2
Interest rate derivatives	13	0.1	-
		2,161.3	1,978.6
Current assets
Cash and cash equivalents	14	198.4	219.7
Trade and other receivables	15	2.8	20.0
		201.2	239.7
Total assets		2,362.5	2,218.3
Current liabilities
Trade and other payables	16	(41.3)	(32.9)
Secured debt	17	(373.8)	(5.0)
Interest rate derivatives	13	(0.2)	(0.5)
Current tax liability		(0.1)	(0.1)
		(415.4)	(38.5)
Non-current liabilities
Secured debt	17	(538.6)	(916.6)
Head rent obligations under finance leases	18	(30.6)	(28.7)
Deferred tax liability	19	(8.0)	(11.9)
Interest rate derivatives	13	(0.1)	(1.1)
		(577.3)	(958.3)
Total liabilities		(992.7)	(996.8)
Net assets		1,369.8	1,221.5
Equity
Share capital	20	32.4	32.4
Share premium reserve	21	523.2	523.2
Other reserves	21	1.7	3.7
Retained earnings	21	812.5	662.2
Total equity		1,369.8	1,221.5
		Pence per share	Pence per share
Basic and diluted NAV per share	23	422.7	377.0
EPRA NTA per share	23	424.1	379.3

 

The notes form part of this financial information.

 

 

 

Group Cash Flow Statement

 

 

	Notes	Year to 31 December 2021 £m	Year to 31 December 2020 £m
Operating activities
Profit / (loss) before tax		196.8	(113.4)
Investment property revaluation	11	(155.5)	142.5
Finance income	8	-	(0.4)
Finance costs	8	50.0	50.3
Cash flows from operating activities before changes in working capital		91.3	79.0
Changes in working capital:
Trade and other receivables		17.0	(18.8)
Trade and other payables		5.5	(5.5)
Cash generated from operations		113.8	54.7
Tax paid		(0.3)	(0.4)
Cash flows from operating activities		113.5	54.3
Investing activities
Leisure lease incentive payments		(30.5)	-
Disposal of investment properties		0.1	2.6
Interest received		-	0.4
Acquisition of property, plant and equipment		-	(0.2)
Cash flows from investing activities		(30.4)	2.8
Financing activities
Dividends paid		(49.3)	(50.8)
Interest and finance costs paid	24	(47.7)	(47.9)
Scheduled repayment of secured debt	24	(7.3)	(4.4)
Repayment of secured debt from proceeds of disposal of investment properties	24	-	(1.5)
Cash flows from financing activities		(104.3)	(104.6)
Decrease in cash and cash equivalents		(21.2)	(47.5)
Cash and cash equivalents at the beginning of the year		219.7	267.1
Currency translation movements		(0.1)	0.1
Cash and cash equivalents at the end of the year	14	198.4	219.7

 

The notes form part of this financial information.

 

 

Notes to the Group Financial Information 

 

 

1. General information about the Group

The financial information set out in this report covers the year to 31 December 2021 with comparative figures relating to the year to 31 December 2020. It includes the results and net assets of the Company and its subsidiaries, together referred to as the Group.

 

The Company is incorporated in the United Kingdom and listed on the AIM market of the London Stock Exchange. The address of the registered office and principal place of business is Cavendish House, 18 Cavendish Square, London W1G 0PJ. The nature and scope of the Group's operations and principal activities are described in the Strategic Report.

 

Further information about the Group can be found on its website, www.SecureIncomeREIT.co.uk. Contact details for the Company and key advisers are included in the Company Information at the end of this report.

 

2. Basis of preparation and material accounting policies

a) Statement of compliance

The consolidated financial information has been prepared in accordance with UK-adopted International Accounting Standards.

 

The financial information contained in this announcement has been prepared on the basis of the accounting policies set out in the financial statements for the year ended 31 December 2021. Whilst the financial information included in this announcement has been computed in accordance with UK-adopted International Accounting Standards, this announcement does not itself contain sufficient information to comply with those standards. The financial information does not constitute the Group's financial statements for the years ended 31 December 2021 or 31 December 2020, but is derived from those financial statements. Those financial statements give a true and fair view of the assets, liabilities, financial position and results of the Group. Financial statements for the year ended 31 December 2020 have been delivered to the Registrar of Companies and those for the year ended 31 December 2021 will be delivered following the Company's AGM. The auditors' reports on both the 31 December 2021 and 31 December 2020 financial statements were unqualified; did not draw attention to any matters by way of emphasis; and did not contain statements under section 498 (2) or (3) of the Companies Act 2006.

 

b) Basis of preparation

The Group financial information is presented in Sterling as this is the currency of the primary economic environment in which the Group operates. Amounts are rounded to the nearest hundred thousand pounds unless otherwise stated.

 

Euro denominated results of the German operations have been converted to Sterling at the average exchange rate for the year of €1:£0.86 (2020: €1:£0.89), which is not considered to produce materially different results from using the actual rates at the date of the transactions. Year end balances have been converted to Sterling at the 31 December 2021 exchange rate of €1:£0.84 (2020: €1:£0.90). The accounting policy for foreign currency translation is in note 2g.

 

The financial information has been prepared on the historical cost basis, except for investment properties and derivatives which are stated at fair value. The accounting policies have been applied consistently in all material respects.

 

Going concern

The Directors have, at the time of approving the financial information, a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future and therefore continue to adopt the going concern basis of accounting in preparing the financial information. Further details are given in the Strategic Review.

 

Judgements in applying accounting policies and key sources of estimation uncertainty

The preparation of financial information requires the Directors to make judgements, estimates and assumptions that may affect the application of accounting policies and reported amounts of assets and liabilities as at each balance sheet date and the reported amounts of revenue and expenses during any financial year. Any estimates and assumptions are based on experience and any other factors that are believed to be relevant under the circumstances and which the Board considers reasonable. Actual outcomes may differ from these estimates.

 

The principal area of estimation uncertainty is the investment property valuation where, as described in note 11, the opinion of independent external valuers has been obtained at each reporting date using recognised valuation techniques and the principles of IFRS 13 "Fair Value Measurement". 

 

 

 

The principal areas of judgement relate to revenue recognition. Consistent with the prior year, one specific area of judgement is the recognition of any additional revenue in the year as a result of an outstanding May 2018 open market rent review on the Ramsay hospitals. The review is under arbitration and the nature of the assets mean that there is little comparative information on which to base an assessment. The Directors consider that it is not possible at present to make a reasonably certain estimate of any uplift that might result, and the financial information therefore does not reflect any additional revenue arising as a result of this rent review. This position has not changed from that disclosed in the 2020 financial statements.

 

The Group's accounting policies for property valuation and revenue recognition are set out in paragraph 2d. Other policies material to the Group are set out in paragraphs 2c and 2e to 2i.

 

Adoption of new and revised standards

On 31 December 2020, IFRS as adopted by the European Union at that date was brought into UK law and became UK-adopted International Accounting Standards, with future changes being subject to endorsement by the UK Endorsement Board. The Group transitioned to UK-adopted International Accounting Standards in its consolidated financial statements on 1 January 2021. There was no impact on or change in accounting policies from the transition.

 

During the year, the Group adopted the amendments to IFRS 16 that extended the period over which the amendments issued in the prior year were applicable, and the amendments to IFRS 9, IAS 39 and IFRS 7 representing phase two of the interest rate benchmark reform transition. There was no material change to the Group's accounting policies and disclosures as a result.

 

There were no other new or amended standards issued by the International Accounting Standards Board ("IASB") during the year, and none of the interpretations issued by the IFRS Interpretations Committee ("IFRIC") have led to any material changes in the Group's accounting policies or disclosures during the year.

 

Standards and interpretations in issue not yet adopted

The IASB and IFRIC have issued or revised IFRS 1, IFRS 3, IFRS 9, IFRS 16, IFRS 17, IAS 1, IAS 8, IAS 12, IAS 16, IAS 37, IAS 41 and IFRS Practice Statement 2. These are not expected to have a material effect on the reported results or financial position of the Group.

 

b) Basis of consolidation

Subsidiaries are those entities controlled directly or indirectly by the Company. The Company has control within the meaning of this policy when it has power over an entity, is exposed to or has rights to variable returns from its involvement with the entity and has the ability to use its power over the entity to affect those returns.

 

The consolidated financial information includes the financial information of the Company's subsidiaries prepared to 31 December under the same accounting policies as the Group as a whole, using the acquisition method. All intra-group balances and transactions are eliminated on consolidation.

 

All Group entities were wholly owned throughout the current year and the prior year.

 

c) Property portfolio

Investment properties

Investment properties are properties ultimately owned by the Company, directly or indirectly, which are held for capital appreciation, rental income or both. They are initially recorded at cost and subsequently valued at each balance sheet date at fair value as determined by professionally qualified independent external valuers.

 

Valuations are calculated, in accordance with RICS Valuation - Global Standards 2020, by applying market capitalisation rates to future rental cash flows with reference to data from comparable market transactions, together with an assessment of the security of income. Gains or losses arising from changes in the fair value of investment properties are recognised in the income statement in the period in which they arise. Depreciation is not charged in respect of investment properties.

 

Occupational leases

The Directors exercise judgement in considering the potential transfer of the risks and rewards of ownership in accordance with IFRS 16 "Leases" for all occupational leases and headleases, to determine whether or not such leases are operating leases. A lease is classified as a finance lease if substantially all of the risks and rewards of ownership transfer to the lessee. In the case of properties where the Group has a leasehold interest, this assessment is made by reference to the Group's right of use asset arising under the headlease rather than by reference to the underlying asset. If the Group substantially retains those risks, a lease is classified as an operating lease. All occupational leases reflected in this financial information are classified as operating leases.

 

 

 Headleases

Where an investment property is held under a leasehold interest, the headlease is initially recognised as an asset at cost plus the present value of minimum ground rent payments. The corresponding rental liability to the head leaseholder is included in the balance sheet as a finance lease obligation. Cash flows arising under headleases are classified under operating activities before changes in working capital in the cash flow statement. Cash deposits held by head leaseholders as guarantees of headlease obligations are held on the balance sheet as non-current assets and any movements in deposits are disclosed as changes in working capital within cash generated from operations in the cash flow statement.

 

Rental income

Revenue comprises rental income exclusive of VAT, recognised in the income statement on an accruals basis. Future anticipated rental income is spread over the term of a lease on a straight line basis, giving rise to a Rent Smoothing Adjustment in cases where future rental variations can be determined with sufficient certainty. Where income has been cumulatively recognised in advance of the contractual right to receive that income, such as from leases with fixed rental uplifts, an adjustment is made to ensure that the carrying value of the relevant investment property including accrued rent does not exceed the fair value of the property as assessed by the independent external valuers. Income arising from contractual rights that are subject to external factors, such as inflation-linked or open market rent reviews, is recognised in the income statement in the period in which it is determinable and reasonably certain.

 

Any lease incentives, including payments made to a tenant, and initial direct costs incurred in obtaining a lease are added to the carrying amount of the underlying asset and recognised as expenses over the lease term on the same basis as the relevant lease income.

 

Where there has been a change in the scope of a lease or the consideration for a lease that was not part of the original terms and conditions of that lease, this is accounted for as a lease modification. Such modifications are accounted for as new leases from the effective date of the modification, which is the date at which both parties agree to the terms of the modification. Any prepaid or accrued lease payments relating to the original lease at the date of modification are treated as part of the lease payments for the new lease. Future anticipated rental income is spread over the term of the lease on a straight line basis, giving rise to a Rent Smoothing Adjustment in the event that rent is reduced for a period.

 

Rent Smoothing Adjustments are not considered to be financial assets as the amounts are not yet contractually due. As such, the requirements of IFRS 9 (including the expected credit loss model) are not applied to those balances.

 

Cash flows from rental income are included in the cash flow statement within cash flows from operating activities.

 

d) Financial assets and liabilities

Cash and cash equivalents

Cash and cash equivalents comprise cash in hand and deposits with maturities of three months or less held with banks or financial institutions. Returns on cash and cash equivalents are included in the cash flow statement under investing activities.

 

Borrowings and finance costs

Secured debt is initially recognised at its fair value, net of any arrangement fees and other transaction costs directly attributable to its issue. Subsequently, secured debt is carried at amortised cost. Finance costs are charged to the income statement over the term of the debt using the effective interest method. Loan issue costs are initially recognised as a reduction in the proceeds of the relevant loan and are amortised as a charge to the income statement over the term of the loan as part of the Group's finance costs. Cash flows relating to borrowings and finance costs are included in the cash flow statement within financing activities.

 

 

 

Interest rate derivatives

The Group has used interest rate derivatives to hedge its exposure to cash flow interest rate risk. Derivatives are initially recognised at fair value on the date on which the derivative contract is entered into and are subsequently measured at fair value.

 

Derivatives are classified either as derivatives in effective hedges or derivatives held at fair value through profit and loss. It is anticipated that any hedging arrangements will generally be "highly effective" within the meaning of IFRS 9 "Financial Instruments" and that the criteria necessary for applying hedge accounting will therefore be met.

 

Hedges are assessed upon inception and on an ongoing basis to identify whether they continue to be effective. The gain or loss on the revaluation of the portion of an instrument that qualifies as an effective hedge of cash flow interest rate risk is recognised directly in other comprehensive income. Amounts accumulated in equity will be reclassified to the income statement in the period when the hedged items affect the income statement. The gain or loss on the revaluation of any derivative that is not an effective hedge is recognised directly in the income statement.

 

The Group ceases to use hedge accounting if a forecast transaction being hedged is no longer expected to occur. In such circumstances, the cumulative amounts in other comprehensive income are reclassified from equity to the income statement.

 

e) Tax

Tax is included in the income statement except to the extent that it relates to income or expense items recognised through reserves, in which case the related tax is recognised either in other comprehensive income or directly in reserves.

 

Current tax is the expected tax payable on taxable income for a reporting period at the blended tax rate for the period, using tax rates enacted or substantively enacted at the balance sheet date, together with any adjustment in respect of previous periods. Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes.

 

The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised.

 

Tax paid is classified under cash flows from operating activities in the cash flow statement.

 

f) Foreign currency translation

The results of Group undertakings with a functional currency other than Sterling are translated into Sterling at the actual exchange rates prevailing at the time of the transaction, unless the average rate for the reporting period is not materially different from the actual rate, in which case that average rate is used.

 

The gains or losses arising on the end of year translation of the net assets of such Group undertakings at closing rates and the difference between translating the results at average rates compared to the closing rates are taken to other reserves. Monetary assets and liabilities denominated in foreign currencies are translated into Sterling at the rates of exchange ruling at the balance sheet date with any gains or losses arising on translation recognised in the income statement.

 

g) Equity dividends

Equity dividends are recognised when they become legally payable: interim dividends when paid and final dividends when approved by shareholders at an annual general meeting.

 

h) Share based payments

The fair value of payments to non-employees that are to be settled by the issue of shares is determined on the basis of an estimate of the value of the services provided over the relevant accounting period. The estimated number of shares to be issued in satisfaction of the services provided is calculated using the average daily closing share price of the Company for that period. 

 

 

 

 

3. Operating segments

IFRS 8 "Operating Segments" requires operating segments to be identified in the financial information on a basis consistent with internal reports about components of the Group that are reviewed by the chief operating decision maker to make decisions about resources to be allocated between segments and assess their performance. The Company's chief operating decision maker is its Board.

 

The Group owned 160 properties at 31 December 2021 (2020: 161), originally acquired in five separate portfolios. Although certain information about these portfolios is described on a portfolio basis within the Investment Adviser's Report or grouped by property type (Healthcare, Leisure and Budget Hotels), when considering resource allocation and performance the Board reviews quarterly management accounts prepared on a basis which aggregates the performance of the portfolios and focuses on the Group's Total Accounting Return. The Board has therefore concluded that the Group has operated in, and was managed as, one reportable segment of property investment in both the current and prior year.

 

The geographical split of revenue and material applicable non-current assets was:

	Year to	Year to
	31 December	31 December
	2021	2020
Revenue	£m	£m
UK	114.2	113.2
Germany	8.2	8.5
	122.4	121.7
	31 December	31 December
	2021	2020
Investment properties	£m	£m
UK	2,023.5	1,860.3
Germany	134.7	115.3
	2,158.2	1,975.6

 

Revenue by tenant comprises:

	Year to	Year to
	31 December	31 December
	2021	2020
Revenue including Rent Smoothing Adjustments	£m	£m
Ramsay Healthcare UK Operations Limited, guaranteed byRamsay Health Care Limited	37.2	37.2
Travelodge Hotels Limited	29.5	29.4
Merlin Attractions Operations Limited, guaranteed byMerlin Entertainments Limited	29.1	28.3
Other tenants (each less than 10% of revenue)	26.6	26.8
Reported revenue	122.4	121.7

 

	Year to	Year to
	31 December	31 December
	2021	2020
Revenue excluding Rent Smoothing Adjustments	£m	£m
Ramsay Healthcare UK Operations Limited, guaranteed byRamsay Health Care Limited	35.0	34.1
Travelodge Hotels Limited	19.7	14.0
Merlin Attractions Operations Limited, guaranteed byMerlin Entertainments Limited	43.1	14.1
Other tenants (each less than 10% of revenue)	23.6	16.1
Revenue on Adjusted EPRA earnings basis	121.4	78.3

 

 

 

 

 

4. Revenue

	Year to	Year to
	31 December	31 December
	2021	2020
	£m	£m
Rent receivable	105.6	96.0
Rent Smoothing Adjustments:
Smoothing of contractual uplifts	7.4	8.9
Smoothing of temporary Covid-19 rent concessions	7.4	14.8
Adjustment for Healthcare back rent	0.4	0.4
Recovery of head rent and service charge costs from occupational tenants (note 5)	1.6	1.6
	122.4	121.7

 

The Rent Smoothing Adjustments arise from the Group's accounting policy in respect of leases, which requires the recognition of rental income on a straight line basis over the lease term, including rental uplifts throughout the term in certain circumstances. Uplifts that must be smoothed over the lease term are those for the 41% of passing rent as at 31 December 2021 (2020: 41%) that increases by a fixed percentage at each review date and the 31% of passing rent at 31 December 2021 (2020: 6%) that is subject to minimum uplifts.

 

These Rent Smoothing Adjustments include the impact of the temporary rent reductions agreed to assist tenants as a result of the Covid-19 pandemic, which in the short term resulted in rental income being recognised in the income statement ahead of cash flows but which, after the end of each relevant concession period, reverse so that rental income recognised in the income statement will be lower than cash rents received on those leases. These are further described in note 11 and in the Unaudited Supplementary Information following this financial information. Rent Smoothing Adjustments also include the back rent received during a prior year from a May 2017 rent review on the Healthcare portfolio, which is being recognised in revenue over the remaining lease term despite the cash having been received in 2017, and in future years will also reverse the reduction in rental income that results from spreading the cost of the Leisure lease incentive payments, which were paid just before the year end, over the extended term of the relevant leases.

 

£17.7 million of rent on the Leisure portfolio, receipt of which was deferred from 2020 to 2021, was excluded from revenue on an Adjusted EPRA earnings in the prior year and included instead in the current year, net of a £0.1 million reduction caused by foreign exchange movements on the Euro element of the balance, because although it was recognised in the income statement in 2020 it had not been received in cash. Receipt of a further £1.8 million of cash rent from the Leisure and Budget Hotels portfolios has been deferred from 2021 to 2022.

 

In calculating Adjusted EPRA earnings, the amounts included in revenue that are recovered from occupational tenants for head rent and service charge costs are reclassified against the equivalent costs in property outgoings. As a result of these adjustments, revenue reconciles between the IFRS basis and Adjusted EPRA earnings basis as follows:

 

	Year to	Year to
	31 December	31 December
	2021	2020
	£m	£m
IFRS revenue	122.4	121.7
Rent Smoothing Adjustments:
Relating to contractual uplifts	(7.4)	(8.9)
Relating to temporary Covid-19 rent concessions	(7.4)	(14.8)
Adjustment for Healthcare back rent	(0.4)	(0.4)
	(15.2)	(24.1)
Rent deferrals:
Leisure portfolio	17.7	(17.7)
Currency translation difference on Leisure rent deferral	(0.1)	-
Other Leisure and Budget Hotels rent deferrals	(1.8)	-
	15.8	(17.7)
Recovery of head rent and service charge costs reclassified to property outgoings	(1.6)	(1.6)
Adjusted EPRA earnings revenue	121.4	78.3

 

The Group's accounting policy for revenue recognition is disclosed in note 2d.

 

 

 

5. Property outgoings

	Year to	Year to
	31 December	31 December
	2021	2020
	£m	£m
Property outgoings in the income statement	0.6	1.5
Finance element of head rent included in finance costs (note 8)	1.8	1.7
Movement in headlease liabilities included in property revaluations (note 11)	0.1	0.1
Property outgoings	2.5	3.3
Recovery of head rents and service charge costs from occupational tenants, included in revenue (note 4)	(1.6)	(1.6)
Net property outgoings	0.9	1.7

 

	Year to	Year to
	31 December	31 December
	2021	2020
Property outgoings net of tenant recoveries	£m	£m
Head rents net of amounts recovered from occupational tenants	0.6	0.6
Irrecoverable property costs	0.2	0.3
Managing agent costs and other net property outgoings	0.1	0.2
Cost of documenting rent concessions	-	0.6
	0.9	1.7

 

Amounts shown above include any irrecoverable VAT.

 

The Group's accounting policy for headleases is disclosed in note 2d.

 

6. Administrative expenses

	Year to	Year to
	31 December	31 December
	2021	2020
	£m	£m
Advisory fees (note 25b)	13.2	13.7
Other administrative expenses	1.5	2.8
Corporate costs	0.5	0.5
	15.2	17.0

 

Amounts shown above include any irrecoverable VAT.

 

 

  

 

7. Operating profit

Audit fees, which are included within administrative expenses, relate to:

 

	Year to	Year to
	31 December	31 December
	2021	2020
	£m	£m
Audit of the Company's consolidated and individual financial statements	0.1	0.1
Audit of subsidiaries, pursuant to legislation	0.2	0.2
Total fees	0.3	0.3

 

Amounts shown above include any irrecoverable VAT. The fees payable to the auditor, excluding VAT, in the year were £0.2 million (2020: £0.3 million), of which £36,500 (2020: £35,000) related to non-audit work comprising the review of the Group's interim financial statements.

 

The Group had no employees in either the current or prior year. The key management personnel of the Company are the Directors, who are appointed under letters of appointment for services. Directors' remuneration, all of which represents fees for services provided and is included within administrative expenses, was as follows:

 

	Year to	Year to
	31 December	31 December
	2021	2020
	£000	£000
Martin Moore (Chairman)	75	75
Leslie Ferrar (Chairman of Audit Committee)	45	45
Jonathan Lane	40	40
Ian Marcus	40	40
	200	200

 

Administrative expenses also include £23,000 (2020: £23,000) of National Insurance contributions paid in connection with the Directors' remuneration above.

 

Mike Brown, Sandy Gumm and Nick Leslau received no Directors' remuneration from the Group in either the current or prior year.

 

 

 

 

8. Finance income and costs

	Year to	Year to
	31 December	31 December
	2021	2020
	£m	£m
Finance income
Interest on cash deposits	-	0.4
Finance costs
Cash costs:
Interest on secured debt	(44.5)	(45.6)
Interest charge on headlease liabilities (note 5)	(1.8)	(1.7)
Cash settlement of interest rate derivatives, transferred from other reserves	(0.8)	(0.3)
Loan agency fees and other lender costs	(0.5)	(0.3)
Non-cash movements:
Amortisation of loan arrangement costs	(2.3)	(2.3)
Fair value adjustment of interest rate derivatives (note 13)	(0.1)	(0.1)
Total finance costs	(50.0)	(50.3)
Net finance costs recognised in the income statement	(50.0)	(49.9)
Fair value adjustment of interest rate derivatives	0.8	(0.9)
Cash settlement of interest rate derivatives, transferred to the income statement	0.8	0.3
Net finance income / (cost) recognised in other comprehensive(loss) / income (note 13)	1.6	(0.6)

 

Net finance costs analysed by the categories of financial asset and liability shown in note 17b are as follows:

 

	Year to	Year to
	31 December	31 December
	2021	2020
	£m	£m
Financial assets at amortised cost	-	0.4
Financial liabilities at amortised cost	(49.1)	(50.2)
Derivatives in effective hedges	(0.9)	(0.1)
Net finance costs recognised in the income statement	(50.0)	(49.9)

 

The Group's sensitivity to changes in interest rates, on the basis of a ten basis point change in Sterling Overnight Interbank Average Rate ("SONIA"), was as follows:

	Year to	Year to
	31 December	31 December
	2021	2020
	£m	£m
Effect on profit / (loss) for the year	0.2	0.2
Effect on other comprehensive (loss) / income and equity	0.1	0.1

 

The Group receives interest on its cash and cash equivalents so an increase in deposit rates would increase finance income. An increase in SONIA up to the maximum capped rate of 1.65% would increase finance costs relating to the £23.3 million (2020: £23.3 million) of the secured debt that is hedged by interest rate caps. A further £50.0 million (2020: £50.0 million) of the secured debt is hedged with interest rate swaps, and movements in SONIA would only have an impact on the fair value of those interest rate swaps, which would be reflected in other comprehensive income. There would be no effect from a change of SONIA on the remaining £843.5 million (2020: £855.0 million) of the secured debt which is at fixed rates, other than on the fair value of that debt which is disclosed in note 17b. The Group's sensitivity to interest rates has not changed significantly in the year.

 

The Group's accounting policy for finance costs is disclosed in note 2e. 

 

 

9. Tax

	Year to	Year to
	31 December	31 December
	2021	2020
	£m	£m
Current tax - Germany
Corporation tax charge	0.4	0.4
Adjustments in respect of prior years	-	(0.1)
Deferred tax - Germany
Deferred tax credit (note 19)	(3.2)	-
	(2.8)	0.3

 

The tax assessed for the year varies from the standard rate of corporation tax in the UK applied to the profit / (loss) before tax. The differences are explained below:

 

	Year to	Year to
	31 December	31 December
	2021	2020
	£m	£m
Profit / (loss) before tax	196.8	(113.3)
Tax charge / (credit) at the standard rate of corporation tax in the UK for the financial year of 19% (2020: 19%)	37.4	(21.5)
Effects of:
Investment property revaluation not (taxable) / allowable	(23.6)	29.9
Qualifying property rental business not taxable under UK REIT rules	(10.3)	(8.9)
Deferred tax credit from revision of assessment	(7.7)	-
Unutilised tax losses carried forward	0.8	0.2
German current tax charge for the year	0.4	0.4
Finance costs disallowed under corporate interest restriction rules	0.2	0.3
Adjustments in respect of prior years	-	(0.1)
Tax (credit) / charge for the year	(2.8)	0.3

 

The Company and its subsidiaries operate as a UK Group REIT. Subject to continuing compliance with certain rules, the UK REIT rules exempt the profits of the Group's UK and German property rental business from UK corporation tax. Capital gains on the Group's UK and German properties are also generally exempt from UK corporation tax, provided they are not held for trading.

 

To remain a UK REIT, a number of conditions must be met in respect of the Company, the Group's qualifying activity and the Group's balance of business. Since entering the UK REIT regime the Group has met all applicable conditions.

 

The Group is subject to German corporation tax on its German property rental business at an effective rate of 12.5% (2020: 12%), resulting in a tax charge of £0.4 million (2020: £0.4 million). A deferred tax liability of £8.0 million (2020: £11.9 million) is recognised for the German capital gains tax that would potentially be payable on the sale of the relevant investment properties. Movements in deferred tax are disclosed in note 19.

 

The German tax assets have been subject to a routine tax audit by the German tax authorities since January 2021. The maximum tax liability that might arise on the areas that are currently the subject of the enquiry, including interest up to the balance sheet date but excluding any penalties, is estimated at no more than £0.8 million. The Board, having taken advice from the Group's tax advisers including their specialist German tax team, considers that there are strong arguments to counteract those made by the German tax authorities and that the matter should be resolved with an outcome of substantially less tax payable than the potential maximum, if any. No allowance has been made in this financial information for any liability that might arise. Should any additional tax become payable, it will be recognised in the year in which the German tax authorities conclude their review.

 

The Group's accounting policy for tax is disclosed in note 2f. 

 

 

 

10. Earnings per share

Basic EPS

Earnings per share ("EPS") is calculated as the profit attributable to ordinary shareholders of the Company for each year divided by the weighted average number of ordinary shares in issue throughout the relevant year. Since no incentive fee has been recognised for either the current year or the prior year, there are no shares to be issued and diluted EPS is therefore the same as basic EPS.

 

	Year to	Year to
	31 December	31 December
	2021	2020
	£m	£m
Profit / (loss) for the year	199.6	(113.7)

 

	Number	Number
Weighted average number of shares in issue	324,035,146	324,035,146

 

	Pence per share	Pence per share
Basic and Diluted EPS	61.6	(35.1)

 

EPRA EPS

The European Public Real Estate Association ("EPRA") publishes guidelines for calculating a measure of earnings designed to represent core operational activities. EPRA EPS is calculated in accordance with the EPRA Guidance currently in force.

 

An Adjusted EPRA earnings calculation has also been presented. This adjusted measure was designed to reflect the fact that, as a Group with unusually long leases and a high proportion of fixed or minimum rental increases to spread over the lease terms, the Company's Dividend Cover would be artificially high if calculated on the basis of EPRA EPS. Adjusted EPRA EPS removes the effect of the Rent Smoothing Adjustments, including the impact of temporary Covid-19 rent concessions, and recognises the cash flow impact of any deferrals of rent. It also excludes any non-recurring costs or income which do not relate to the Group's routine operations, such as costs incurred for share placings, though there have been no such costs since 2016. The adjusted measure also excludes any incentive fees which are paid in shares, as they are considered to be linked to revaluation movements and are therefore best treated consistently with revaluations which are excluded from EPRA EPS, though no incentive fee has been payable since 2019.

 

 

 

 

 

 

EPRA and Adjusted EPRA earnings are calculated as:

 

	Year to	Year to
	31 December	31 December
	2021	2020
	£m	£m
IFRS profit / (loss) for the year	199.6	(113.7)
EPRA adjustments:
Investment property revaluation (note 11)	(140.3)	166.5
Deferred tax on German investment property revaluations (note 9)	(3.2)	-
EPRA earnings	56.1	52.9
Other adjustments:
Rent Smoothing Adjustments (note 4)	(15.2)	(23.7)
Rent deferrals - theme parks	17.6	(17.7)
Rent deferrals - other Leisure and Budget Hotels	(1.8)	-
Adjusted EPRA earnings	56.7	11.5

 

In calculating Adjusted EPRA EPS, the weighted average number of shares is calculated using the actual date on which any shares are issued during the year so as not to create a mismatch between the basis of calculation of Adjusted EPRA EPS and the dividends per share paid in the year. In this way the Group's measure of Dividend Cover is considered to be more meaningful. The weighted average number of shares applied in calculating Adjusted EPRA EPS has been calculated as follows:

 

	Year to	Year to
	31 December	31 December
	2021	2020
	Number	Number
Shares in issue throughout the year	324,035,146	322,850,595
Pro rata adjustment for shares issued in March 2020 in settlement of2019 incentive fee	-	925,633
Adjusted EPRA EPS: weighted average shares in issue	324,035,146	323,776,228

 

As a result of those adjustments, the EPRA EPS and Adjusted EPRA EPS figures are as follows:

 

	Pence per share	Pence per share
EPRA EPS	17.3	16.3
Adjusted EPRA EPS	17.5	3.5

 

 

 

 

11. Investment properties

	Year to	Year to
	31 December	31 December
	2021	2020
	£m	£m
Freehold investment properties
At the start of the year	1,705.8	1,802.4
Leisure lease incentive payments	33.6	-
Revaluation movement	141.7	(102.9)
Currency translation movement	(8.3)	6.3
Disposals	(0.1)	-
At the end of the year	1,872.7	1,705.8

 

Leasehold investment properties
At the start of the year	269.8	308.9
Revaluation movement	13.8	(39.6)
Increase in headlease liabilities	2.0	0.6
Revaluation movement in headlease liabilities	(0.1)	(0.1)
At the end of the year	285.5	269.8

 

Total investment properties
At the start of the year	1,975.6	2,111.3
Leisure lease incentive payments	33.6	-
Revaluation movement	155.5	(142.5)
Currency translation movement	(8.3)	6.3
Increase in headlease liabilities	2.0	0.6
Revaluation movement in headlease liabilities	(0.1)	(0.1)
Disposals	(0.1)	-
At the end of the year	2,158.2	1,975.6

 

As at 31 December 2021 the properties were valued at £2,127.6 million (2020: £1,946.9 million) by CBRE Limited or Christie & Co in their capacity as independent external valuers. Of the total fair value, £134.7 million (2020: £115.3 million) relates to the Group's German investment properties, the valuations of which are translated into Sterling at the year end exchange rate.

 

The valuations were prepared on a fixed fee basis, independent of the portfolio value, and were undertaken in accordance with RICS Valuation - Global Standards 2020 on the basis of fair value, supported by reference to market evidence of transaction prices for similar properties where available.

 

The Royal Institution of Chartered Surveyors mandated that valuations in certain sectors should be subject to "material valuation uncertainty" as at 31 December 2020. This applied to the Group's Leisure and Budget Hotels portfolios, which accounted for 61% of the Group's property assets by value at that date. The 31 December 2020 valuations of the Healthcare assets, (39% of the Group's property assets by value), did not carry such a proviso. None of the 31 December 2021 valuations in any sector were subject to material valuation uncertainty.

 

During the year, the Group agreed to pay £33.5 million (2020: £nil) to certain Leisure tenants as an incentive to enter into lease extensions, £3.0 million (2020: £nil) of which remained outstanding at the balance sheet date and is included in accruals and other payables (note 16). Along with capitalised costs of the transaction totalling £0.1 million (2020: £nil), £33.6 million (2020: £nil) was added to the carrying value of the relevant investment properties as a result.

 

The historic cost of the Group's investment properties as at 31 December 2021 was £1,516.8 million (2020: £1,479.6 million).

 

All of the investment properties are held within six (2020: six) ring-fenced security pools as security under fixed charges in respect of separate secured debt facilities.

 

 

 

 

Under the Group's accounting policy, in line with IFRS, the carrying value of leasehold properties is grossed up by the present value of minimum headlease payments. The corresponding liability to the head leaseholder is included in the balance sheet as a finance lease obligation. The reconciliation between the carrying value of the investment properties and their independent external valuation is as follows:

 

	31 December	31 December
	2021	2020
	£m	£m
Carrying value	2,158.2	1,975.6
Gross-up of headlease liabilities (note 18)	(30.6)	(28.7)
Independent external valuation	2,127.6	1,946.9

 

Included within the carrying value of investment properties at 31 December 2021 is £191.1 million (2020: £181.4 million) in respect of Rent Smoothing Adjustments (described in note 4 and in the Unaudited Supplementary Information following this financial information), representing the amount of the net mismatch between rent included in the income statement and cash rents actually receivable. This net receivable increases over broadly the first half of each lease term, in the case of fixed or minimum uplifts, or the period of the temporary rent reductions agreed with tenants in light of Covid-19. The balance then unwinds, reducing to zero by the end of the lease term. The difference between rents on a straight line basis and rents actually receivable is included within, but does not increase over fair value, the carrying value of investment properties. Also included is the impact of back rent received during a prior year from a rent review on the Healthcare portfolio, which is being recognised in revenue over the remaining lease term despite the cash having been received in 2018, together with movements on the headlease liabilities.

 

	Year to	Year to
	31 December	31 December
	2021	2020
	£m	£m
Revaluation movement	155.5	(142.5)
Rent Smoothing Adjustments (note 4)	(15.2)	(24.1)
Movement in headlease liabilities (note 5)	(0.1)	(0.1)
Revaluation movement in the income statement	140.2	(166.7)

 

All of the Group's revenue reflected in the income statement is derived either from rental income or the recovery of head rent and other costs on investment properties. As shown in note 5, property outgoings arising on investment properties, all of which generated rental income in each year, were £2.5 million (2020: £3.3 million) of which £0.9 million (2020: £1.7 million) was not recoverable from occupational tenants.

 

Other than the future minimum headlease payments disclosed in note 18, the majority of which are recoverable from tenants, the Group did not have any contractual investment property obligations at either balance sheet date. All responsibility for property liabilities including repairs and maintenance resides directly with the tenants, except at Manchester Arena where such costs relating to the structure and common areas are liabilities of the Group in the first instance. However, since the majority of these costs are currently recoverable from tenants the net cost to the Group in the year was £0.3 million (2020: £0.3 million). In addition, the car park at Manchester Arena is run under an operating agreement which means the Group is responsible for the costs of running the car park to the extent that they are not covered by the revenue it generates. The net contribution from the car park in 2021 was £0.2 million (2020: net cost of £0.1 million, as the car park was largely closed as a result of Covid related restrictions).

 

 

 

The Board determines the Group's valuation policies and procedures and is responsible for overseeing the valuations. Valuations performed by the Group's independent external valuers are based on information extracted from the Group's financial and property reporting systems, such as current rents and the terms and conditions of lease agreements, together with assumptions used by the valuers (based on market observation and their professional judgement) in their valuation models. The Audit Committee assesses the valuation process, including meetings with the independent external valuers and evaluating their expertise and independence, and reports the results of these assessments to the Board.

 

At each reporting date, certain directors of the Investment Adviser, who have recognised professional qualifications and are experienced in valuing the types of property owned by the Group, initially analyse the independent external valuers' assessments of movements in the property valuations from the prior reporting date or, if later, the date of acquisition. Positive or negative fair value changes over a certain materiality threshold are considered and are also compared to external sources, such as the MSCI indices and other relevant benchmarks, for reasonableness. Once the Investment Adviser has considered the valuations, the results are discussed with the independent external valuers, focusing on properties with unexpected fair value changes or any with unusual characteristics. The Audit Committee assesses the valuation process, including meetings with the independent external valuers and evaluating their expertise and independence, and reports the results of these assessments to the Board.

 

The fair value of the investment property portfolio has been determined using an income capitalisation technique whereby contracted and market rental values are capitalised with a market capitalisation rate. This technique is consistent with the principles in IFRS 13 and uses significant unobservable inputs, such that the fair value measurement of each property within the portfolio has been classified as level 3 in the fair value hierarchy as defined in IFRS 13. There have been no transfers to or from other levels of the fair value hierarchy during the year.

 

The key inputs for the level 3 valuations were as follows:

 

	Fair value		Inputs
Portfolio	£m	Key unobservable input	Range	Blended yield
At 31 December 2021:
Leisure - UK	794.6	Net Initial Yield	4.3% - 7.0%	5.0%
		Running Yield in 12 months	4.3% - 7.0%	5.2%
Healthcare	790.4	Net Initial Yield	3.9% - 4.5%	4.5%
		Running Yield in 12 months	4.0% - 4.6%	4.6%
Budget Hotels	438.5	Net Initial Yield	5.5% - 16.0%	6.8%
		Running Yield in 12 months	5.8% - 16.0%	7.3%
Leisure - Germany	134.7	Net Initial Yield	4.8%	4.8%
		Running Yield in 12 months	4.9%	4.9%
	2,158.2
At 31 December 2020:
Leisure - UK	687.7	Net Initial Yield	4.8% - 7.3%	5.5%
		Running Yield by January 2022	4.8% - 7.4%	5.7%
Healthcare	769.1	Net Initial Yield	3.9% - 4.5%	4.5%
		Running Yield by January 2022	4.0% - 4.6%	4.6%
Budget Hotels	403.5	Topped Up Net Initial Yield	5.3% - 13.9%	7.1%
		Running Yield by January 2022	5.8% - 15.5%	7.2%
Leisure - Germany	115.3	Net Initial Yield	5.8%	5.8%
		Running Yield by January 2022	5.9%	5.9%
	1,975.6

 

 

 

 

 

As described in note 2b, the Group's investment property valuations are subject to estimation uncertainty. Decreases in Net Initial Yield and increases in inflation expectations will increase the fair value and vice versa. The sensitivities of the Group's investment property valuations to variations in the significant unobservable outputs for Net Initial Yield is as follows:

 

			31 December	31 December
			2021	2020
(Decrease) / increase in fair value			£m	£m
Net Initial Yield + 0.25%			(99.2)	(85.8)
Net Initial Yield - 0.25%			109.3	94.1

 

The Group's accounting policy for investment properties is disclosed in note 2d.

 

12. Subsidiaries

The companies listed below are the subsidiary undertakings of the Company at 31 December 2021, all of which are wholly owned. Save where indicated, all subsidiary undertakings are incorporated in England with their registered office at Cavendish House, 18 Cavendish Square, London W1G 0PJ.

 

	Nature of business
SIR Theme Park Subholdco Limited *	Intermediate parent company and borrower under mezzanine secured debt facility
Charcoal Midco 2 Limited	Intermediate parent company
SIR Theme Parks Limited	Intermediate parent company and borrower under senior secured debt facility
SIR ATH Limited	Property investment - leisure
SIR ATP Limited	Property investment - leisure
SIR HP Limited	Property investment - leisure and borrower under senior secured debt facility (incorporated in England, operating in Germany)
SIR TP Limited	Property investment - leisure
SIR WC Limited	Property investment - leisure
SIR Hospital Holdings Limited *	Intermediate parent company
SIR Umbrella Limited	Intermediate parent company
SIR Hospitals Propco Limited	Intermediate parent company and borrower under secured debt facility
SIR Duchy Limited	Property investment - healthcare
SIR Springfield Limited	Property investment - healthcare
SIR Healthcare 1 Limited	Intermediate parent company
SIR Healthcare 2 Limited	Intermediate parent company and borrower under secured debt facility
SIR Fitzwilliam Limited	Property investment - healthcare
SIR Fulwood Limited	Property investment - healthcare
SIR Lisson Limited	Property investment - healthcare
SIR Midlands Limited	Property investment - healthcare
SIR Oaklands Limited	Property investment - healthcare
SIR Oaks Limited	Property investment - healthcare
SIR Pinehill Limited	Property investment - healthcare
SIR Rivers Limited	Property investment - healthcare
SIR Woodland Limited	Property investment - healthcare
SIR Yorkshire Limited	Property investment - healthcare
Thomas Rivers Limited	Property investment - healthcare
SIR Hotels 1 Limited *	Intermediate parent company
SIR Hotels Jersey Limited †	Intermediate parent company
SIR Unitholder 1 Limited †	Intermediate parent company
SIR Unitholder 2 Limited †	Intermediate parent company

* directly owned by the Company; all other entities are indirectly owned

† incorporated in Jersey with their registered office at 26 New Street, St Helier, Jersey JE2 3RA

 

 

 

 

 

	Nature of business
Grove Property Unit Trust 6 †	Property investment - budget hotels and borrower under secured debt facility
Grove Property Unit Trust 7 †	Property investment - budget hotels and borrower under secured debt facility
Grove Property Unit Trust 9 †	Property investment - budget hotels and borrower under secured debt facility
Grove Property Unit Trust 11 †	Property investment - budget hotels and borrower under secured debt facility
Grove Property Unit Trust 12 †	Property investment - budget hotels and borrower under secured debt facility
Grove Property Unit Trust 16 †	Property investment - budget hotels and borrower under secured debt facility
SIR Hotels 2 Limited *	Intermediate parent company
SIR Hotels Jersey 2 Limited †	Intermediate parent company
SIR Unitholder 3 Limited †	Intermediate parent company
SIR Unitholder 4 Limited †	Intermediate parent company
Grove Property Unit Trust 2 †	Property investment - budget hotels and borrower under secured debt facility
Grove Property Unit Trust 5 †	Property investment - budget hotels and borrower under secured debt facility
Grove Property Unit Trust 13 †	Property investment - budget hotels and borrower under secured debt facility
Grove Property Unit Trust 14 †	Property investment - budget hotels and borrower under secured debt facility
Grove Property Unit Trust 15 †	Property investment - budget hotels and borrower under secured debt facility
SIR Maple 4 Limited	Property investment - budget hotels and borrower under secured debt facility
SIR Maple Holdco Limited *	Intermediate parent company
SIR Maple 1 Limited †	Intermediate parent company
SIR Unitholder 5 Limited †	Intermediate parent company
MIF I Unit Trust ^	Property investment - leisure and borrower under secured debt facility
SIR Maple 2 Limited	Property investment - leisure and borrower under secured debt facility
SIR Maple 3 Limited	Property investment - leisure and borrower under secured debt facility
SIR New Hall Limited *	Dormant
SIR MTL Limited *	Dormant
Charcoal Bidco Limited *	Dormant
SIR Hotels 2 Holdco Limited †	Dormant
SIR Hotels 2 GP Limited †	Dormant
SIR Hotels 2 Nominee Limited †	Dormant
SIR Hotels 2 LP †	Dormant
SIR Newco Limited *	Dormant
SIR Newco 2 Limited *	Dormant

* directly owned by the Company; all other entities are indirectly owned

† incorporated in Jersey with the registered office at 26 New Street, St Helier, Jersey JE2 3RA

^ incorporated in Jersey with the registered office at 44 Esplanade, St Helier, Jersey JE4 9WG

 

The terms of the secured debt facilities may, in the event of a covenant breach, restrict the ability of certain subsidiaries to transfer distributable reserves or assets including cash to the Company, which is itself outside all security groups.

 

The subsidiary undertakings below are taking advantage of the exemption from audit under section 479a of the Companies Act 2006 and as a result Secure Income REIT Plc will provide a statutory guarantee for any outstanding liabilities of these undertakings as at 31 December 2021, all of which have been included in this consolidated financial information:

 

	Registered number
SIR Hospital Holdings Limited	05863307
SIR Healthcare 1 Limited	09736611
SIR Umbrella Limited	09736612
SIR Hotels 1 Limited	10236666
SIR Hotels 2 Limited	11206064

 

 

 

 

 

13. Interest rate derivatives

 

	31 December	31 December
	2021	2020
Notional amounts	£m	£m
Interest rate swaps (weighted average rate 1.3%) in effective hedges	50.0	50.0
Interest rate caps (weighted average rate 1.5%):
In effective hedges	23.3	23.3
Classified as held at fair value through profit and loss	3.2	3.2
	76.5	76.5

 

			31 December	31 December
			2021	2020
Fair value			£m	£m
Interest rate swaps:
Falling due within one year			(0.2)	(0.6)
Falling due in more than one year			(0.1)	(1.1)
			(0.3)	(1.7)
Interest rate caps:
Falling due in more than one year			0.1	-
			(0.2)	(1.7)

 

	Year to	Year to
	31 December	31 December
	2021	2020
Movement in fair value	£m	£m
At the start of the year	(1.7)	(1.0)
Charge to the income statement (note 8)	(0.1)	(0.1)
Credit / (charge) to other comprehensive income (note 8)	1.6	(0.6)
At the end of the year	(0.2)	(1.7)

 

The Group utilises interest rate derivatives in risk management as cash flow hedges to protect against movements in future interest costs on secured loans which bear interest at variable rates. The derivatives have been valued in accordance with IFRS 13 by reference to interbank bid market rates as at the close of business on the last working day prior to each balance sheet date by Chatham Financial Europe Limited. The fair values are calculated using present values of future cash flows based on market forecasts of interest rates and adjusted for any counterparty credit risk that is assessed as material. The amounts and timing of future cash flows are projected on the basis of the contractual terms of the derivatives. All interest rate derivatives are classified as level 2 in the fair value hierarchy as defined in IFRS 13 and there were no transfers to or from other levels of the fair value hierarchy during the year.

 

The entire £50.0 million notional amount of the interest rate swaps and £10.0 million of the notional amount of the interest rate caps are used to hedge cash flow interest rate risk on £60.0 million of the floating rate loans shown in note 17a. The notional amounts of the interest rate derivatives equal the loan principal balance, and their maturity dates also match. £3.3 million of the notional amount of the interest rate caps was not designated for hedge accounting to allow for any future loan prepayments and as a result, although the entire cash flow interest rate is hedged, the hedges as measured for the purposes of IFRS 9 were expected on inception to be 94.5% effective throughout their lives.

 

The remaining £16.5 million notional amount of the interest rate caps is used to hedge cash flow interest rate risk on the remaining £13.3 million (2020: £13.3 million) of the floating rate loans shown in note 17a. Following rebalancing of the hedging arrangements on £3.2 million (2020: £3.2 million) of the notional amount of the interest rate caps in prior years, matching the loan principal that has been repaid from the proceeds of investment property sales, the notional amounts of the interest rate caps designated for hedge accounting equal the loan principal balance and their maturity dates also match. As a result, the interest rate cap hedges, which have a fair value of £26,000 (2020: £6,000), are expected to be 100% effective throughout their terms. The remaining interest rate caps, which have a fair value of £7,000 (2020: £1,000), have been classified as held at fair value through profit and loss.

 

 

 

 

 

The floating rate loans and interest rate derivatives were previously contractually linked to LIBOR, a market rate which became unavailable from the end of 2021. The Investment Adviser worked with the Group's lenders and derivative counterparties to transition to an alternative benchmark rate, Sterling Overnight Index Average, during the year and the transition did not have a material impact on the results or financial position of the Group. There was no change to the effectiveness of the Group's hedges.

 

The Group's accounting policy for interest rate derivatives is disclosed in note 2e.

 

14. Cash and cash equivalents

	31 December	31 December
	2021	2020
	£m	£m
Free cash and cash equivalents	168.5	196.6
Secured cash	29.9	23.1
	198.4	219.7

 

Secured cash is held in accounts over which the providers of secured debt have fixed security. The Group is unable to access this cash unless and until it is released to free cash each quarter, which takes place after quarterly interest and loan repayments have been made as long as the terms of the associated secured facility are complied with.

 

The Group's accounting policy for cash and cash equivalents is disclosed in note 2e.

 

15. Trade and other receivables

	31 December	31 December
	2021	2020
	£m	£m
Trade receivables	0.2	0.6
Accrued income	1.7	18.4
Prepayments	0.7	0.6
Other receivables	0.2	0.4
	2.8	20.0

 

Having been reviewed for expected credit losses, an impairment of £22,500 (2020: £nil) was considered necessary for trade receivables and accrued income at either balance sheet date.

 

16. Trade and other payables

	31 December	31 December
	2021	2020
	£m	£m
Trade payables	0.3	1.0
Rent received in advance and other deferred income	24.6	19.6
Interest payable	7.9	8.0
Accruals and other payables	5.3	2.0
Tax and social security	3.2	2.3
	41.3	32.9

 

 

 

 

 

17. Financial assets and liabilities

a) Borrowings

	31 December	31 December
	2021	2020
	£m	£m
Amounts falling due within one year
Fixed rate secured debt	375.9	7.3
Unamortised finance costs	(2.1)	(2.3)
	373.8	5.0
Amounts falling due in more than one year
Fixed rate secured debt	467.6	847.7
Floating rate secured debt	73.3	73.3
Unamortised finance costs	(2.3)	(4.4)
	538.6	916.6

 

The Group had no undrawn, committed borrowing facilities at either balance sheet date.

 

The debt is secured by charges, within six ring-fenced security groups, over the Group's investment properties and by fixed and floating charges over the other assets of certain Group companies, not including the Company itself save for a limited share charge over the parent company of one of the ring-fenced subgroups.

 

During the year and the prior year, certain financial covenants were amended or waived to accommodate the temporary Covid-19 rent concessions on the Leisure and Budget Hotels portfolios described in the Strategic Report. All covenant amendments and waivers had expired by the balance sheet date. There were no defaults or breaches of any loan covenants during the current or any prior year.

 

As described in note 26, since the balance sheet date £372.4 million of the fixed rate secured debt falling due within one year has been refinanced with loan maturing in March 2026. The remainder of the balance falling due within one year represents the scheduled amortisation on other loans.

 

The analysis of borrowings by currency is as follows:

 

	31 December	31 December
	2021	2020
	£m	£m
Sterling denominated
Secured debt	857.3	863.9
Unamortised finance costs	(4.3)	(6.4)
	853.0	857.5
Euro denominated
Secured debt	59.5	64.4
Unamortised finance costs	(0.1)	(0.3)
	59.4	64.1

 

The Group's accounting policy for borrowings is disclosed in note 2e.

 

 

 

b) Categories of financial instruments

	31 December	31 December
	2021	2020
	£m	£m
Financial assets
Financial assets at amortised cost:
Cash and cash equivalents (note 14)	198.4	219.7
Headlease deposits	2.8	2.8
Accrued income (note 15)	1.7	18.4
Trade receivables (note 15)	0.2	0.6
Other receivables	-	0.2
Derivatives in effective hedges:
Interest rate caps (note 13)	0.1	-
	203.2	241.7
Financial liabilities
Financial liabilities at amortised cost:
Secured debt	(912.4)	(921.6)
Headlease liabilities (note 18)	(30.6)	(28.7)
Interest payable (note 16)	(7.9)	(8.0)
Accruals and other payables (note 16)	(5.3)	(2.0)
Trade payables (note 16)	(0.3)	(0.9)
Derivatives in effective hedges:
Interest rate swaps (note 13)	(0.3)	(1.7)
	(956.8)	(962.9)

 

At each balance sheet date, all financial assets and liabilities other than derivatives in effective hedges and derivatives classified as held at fair value through profit and loss were measured at amortised cost.

 

As at 31 December 2021 the fair value of the Group's secured debt was £928.1 million (2020: £969.2 million) and the fair value of the other financial liabilities was equal to their book value. Fair value is not the same as a liquidation valuation, the amount required to prepay the loans at the balance sheet date, and therefore does not represent an estimate of the cost to the Group of prepaying the debt before the scheduled maturity date, which would be materially higher.

 

The secured debt was valued in accordance with IFRS 13 by reference to interbank bid market rates as at the close of business on the balance sheet date by Chatham Financial Europe Limited. All secured debt was classified as level 2 in the fair value hierarchy as defined in IFRS 13 and its fair value was calculated using the present values of future cash flows, based on market benchmark rates (interest rate swaps) and the estimated credit risk of the Group for similar financings. There were no transfers to or from other levels of the fair value hierarchy during the current or prior year.

 

The Group's accounting policy for material financial assets and liabilities is disclosed in note 2e.

 

 

 

 

 

 

 

 

c) Financial risk management

Through the Group's operations and use of debt financing it is exposed to certain risks. The Group's financial risk management objective is to manage the effect of these risks, for example by using fixed rate debt and interest rate derivatives to manage exposure to fluctuations in interest rates.

 

The exposure to each financial risk considered potentially material to the Group, how it would arise and the policy for managing it is summarised below.

 

Market risk

Market risk in financial assets and liabilities is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. The Group's market risk arises from open positions in interest bearing assets, liabilities and foreign currencies, to the extent that these are exposed to general and specific market movements.

 

(a) Market risk - interest rate risk

The Group's interest bearing financial assets comprise only cash and cash equivalents. Changes in market interest rates therefore affect the Group's finance income. The Group's interest bearing financial liabilities comprise only secured debt. Changes in market interest rates therefore affect the Group's finance costs.

 

The Group's policy is to mitigate interest rate risk on its financial liabilities by entering into interest rate derivatives, which at the balance sheet date included interest rate swaps on £50.0 million (2020: £50.0 million) of floating rate debt and interest rate caps on the remaining £23.3 million (2020: £23.3 million) of floating rate debt. Under the interest rate swaps, the Group agrees to exchange with an institutional counterparty, at specified intervals, the difference between fixed and variable rate interest amounts calculated by reference to an agreed schedule of notional principal amounts. The Group's fixed rate debt and debt where the interest rate risk is hedged by way of interest rate swaps, together totalling £893.5 million (2020: £905.0 million), are therefore not subject to interest rate risk. Under the interest rate caps, the Group agrees a similar exchange if the variable interest rate exceeds the contractual strike rate of the derivative. The Group is therefore exposed to limited cash flow interest rate risk on the £23.3 million (2020: £23.3 million) of floating rate debt where this risk is hedged by way of interest rate caps. Interest on those loans is payable at variable rates up to the maximum established by the cap strike rate, which averaged 1.5% (2020: 1.5%) in the year.

 

The Group's sensitivity to changes in interest rates is disclosed in note 8.

 

Trade and other payables are interest free as long as they are paid in accordance with their terms, and have payment terms of less than one year, so there is considered to be no material interest rate risk associated with these financial liabilities.

 

(b) Market risk - foreign currency exchange risk

The Group prepares its financial information in Sterling. On an IFRS basis, 4.9% (2020: 3.5%) by value of the Group's net assets are Euro denominated and as a result the Group is subject to foreign currency exchange risk. On an EPRA NTA basis, the Euro exposure is 5.0% (2020: 3.9%). This risk is partially hedged because within the Group's German operations, rental income, interest costs and the majority of both assets and liabilities are Euro denominated. An unhedged currency risk remains on the value of the Group's net investment in, and net returns from, its German operations.

 

The Group's sensitivity to changes in foreign currency exchange rates, calculated on the basis of a 10% increase in average and closing Sterling rates against the Euro, was as follows, with a 10% decrease having the opposite effect:

 

	Year to	Year to
	31 December	31 December
	2021	2020
	£m	£m
Investment property revaluation net of deferred tax	2.2	(0.1)
Other income statement movements	0.2	0.2
Increase in profit / (loss) for the year	2.4	0.1
Increase in other comprehensive income and equity	3.9	4.1

 

 

 

 

 

 

Credit risk

Credit risk is the risk of financial loss to the Group if a counterparty fails to meet its contractual obligations. The principal counterparties at each balance sheet date are the Group's tenants (in respect of trade receivables and accrued income arising under operating leases), banks and financial institutions (as holders of the Group's cash deposits and hedging counterparties).

 

The credit risk of trade receivables is considered low because the counterparties to the operating leases are believed by the Board to be capable of discharging their lease obligations and any lease guarantors are also of appropriate financial strength. On the 72% of the portfolio (at 31 December 2021 valuations) that has been owned by Group entities since 2007, over the last 14 years the rent has always been paid by the due date. Rent collection statistics are benchmarked in internal reports to identify any problems at any early stage, and if necessary and where possible (in the absence, for example, of a Government imposed moratorium on the enforcement of rent collection) rigorous credit control procedures are applied to facilitate the recovery of trade receivables.

 

As at 31 December 2021, the Group held financial assets with a carrying value of £22,500 (2020: £0.4 million) which were past due, all of which were trade receivables and had been impaired by £22,500. The Group did not hold any financial assets that were impaired at the prior year balance sheet date.

 

The credit risk on cash deposits is considered to be limited because the counterparties are banks and financial institutions with credit ratings which are acceptable to the Board and which are kept under review at least each quarter and more often if required.

 

Liquidity risk

Liquidity risk arises from the Group's management of working capital and its ability to meet its liabilities as they fall due, principally the finance costs and principal repayments on its secured debt.

 

The Board seeks to manage liquidity risk by ensuring that sufficient cash is available to meet the Group's foreseeable needs. Financing costs and scheduled amortisation have been met during the year, with only limited exceptions during a rent concession period for one tenant, out of rental income which, in all cases, provides headroom over the relevant amounts payable. Before entering into any financing arrangements, the Board assesses the resources that are expected to be available to the Group to meet its liabilities when they fall due, including repayments at loan maturity. These assessments are made on the basis of both base case and stress tested scenarios.

 

Other liquidity needs are relatively modest and are managed principally through the deduction of much of the direct operating costs from rental receipts before any surplus is applied in payment of interest and loan amortisation as permitted by the facility agreements relating to the Group's secured debt.

 

Performance against budgets and working capital forecasts are reviewed by the Board at least quarterly to assess liquidity requirements and compliance with loan covenants. The Board keeps under review the maturity profile of the Group's cash deposits in order to have reasonable assurance that cash will be available for the settlement of liabilities or to deploy in investment opportunities when they fall due.

 

The following maturity analysis has been drawn up based on the undiscounted cash flows of financial liabilities, including future interest payments, with reference to the earliest date on which the Group can be required to pay. During the year, 74% (2020: 73%) of the Group's headlease liabilities were recoverable from tenants and are not included in this analysis to the extent that they are recoverable.

 

 

 

Liquidity risk

	Effective interest rate	Less than one year	One to two  years	Two to five  years	More than five years	Total
31 December 2021		£m	£m	£m	£m	£m
Financial assets
Cash and cash equivalents	0.02%	198.4	-	-	-	198.4
Headlease deposits		-	-	-	2.8	2.8
Accrued income		1.7	-	-	-	1.7
Trade and other receivables		0.2	-	-	-	0.2
Interest rate derivatives		-	0.1	-	-	0.1
		200.3	0.1	-	2.8	203.2
Financial liabilities
Fixed rate secured debt	5.1%	(418.8)	(135.2)	(387.2)	-	(941.2)
Floating rate secured debt	2.0%	(2.1)	(74.7)	-	-	(76.8)
Headlease liabilities		(0.5)	(0.5)	(1.6)	(7.4)	(10.0)
Accrued interest		(7.9)	-	-	-	(7.9)
Trade payables and accruals and other payables		(5.3)	-	-	-	(5.3)
Interest rate derivatives	1.3%	(0.2)	(0.1)	-	-	(0.3)
		(434.8)	(210.5)	(388.8)	(7.4)	(1,041.5)

 

	Effective interest rate	Less than one year	One to two  years	Two to five  years	More than five years	Total
31 December 2020		£m	£m	£m	£m	£m
Financial assets
Cash and cash equivalents	0.2%	219.7	-	-	-	219.7
Accrued income		18.4	-	-	-	18.4
Headlease deposits		-	-	-	2.7	2.7
Trade and other receivables		0.8	-	-	-	0.8
		238.9	-	-	2.7	241.6
Financial liabilities
Fixed rate secured debt	5.1%	(50.8)	(425.3)	(524.3)	-	(1,000.4)
Floating rate secured debt	2.4%	(1.7)	(1.7)	(74.5)	-	(77.9)
Headlease liabilities		(0.5)	(0.5)	(1.6)	(7.3)	(9.9)
Accrued interest		(8.0)	-	-	-	(8.0)
Trade payables and accruals and other payables		(3.0)	-	-	-	(3.0)
Interest rate derivatives	1.3%	(0.6)	(0.7)	(0.4)	-	(1.7)
		(64.6)	(428.2)	(600.8)	(7.3)	(1,100.9)

 

 

 

Inflation risk

Inflation risk arises from the impact of inflation on the Group's income and expenditure. 58% (2020: 58%) of the Group's contractual passing rent before concessions at 31 December 2021 is subject to inflation-linked rent reviews, though those rents are subject to nil or upwards review, never downwards. 41% (2020: 41%) of contractual passing rent before concessions is subject to fixed rental uplifts and is not exposed to fluctuations in the inflation rate, with 1% (2020: 1%) subject to upwards only open market rent reviews. As a result, the Group is not exposed to any fall in rent in deflationary conditions. Given the high proportion of inflation-linked rental income, inflationary conditions present an opportunity in terms of increasing revenues.

 

In November 2020, the UK Government and UK Statistics Authority announced changes to RPI such that it will align with the Consumer Prices Index ("CPIH") from February 2030. The exact impact on the RPI clauses in the Group's leases will depend on precisely how the UK Statistics Agency implements the change. On a downside basis, if rents were to follow CPIH which has been on average 0.9 percentage points lower than RPI over the past ten years and assuming a differential continues, the rent uplifts from 2030 onwards would be lower than they would otherwise have been. However, the Group's lease provisions may provide protection so that there would be no change in some or all cases. In the event that rental uplifts do change from 2030, any valuation impact in such circumstances would be expected to be insignificant as the market tends not to differentiate materially between RPI and CPIH lease structures, with the other property characteristics carrying greater weight in establishing pricing. During the year, 25% of Group rents moved from RPI to CPI-linked reviews, reducing exposure to this change.

 

The Group is exposed to inflation risk on its running costs, which (with the exception of any advisory and incentive fees, the calculation of which is based on EPRA NAV as described in note 25b) could increase in inflationary conditions. These costs totalled £2.0 million (2020: £3.3 million) in the current year (13% (2020: 20%) of total administrative expenses) and therefore the impact of any significant increase in inflation on the financial results or position of the Group would be relatively limited.

 

d) Capital risk management in respect of the financial year

The Board's primary risk management objective when monitoring capital is to preserve the Group's ability to continue as a going concern, while ensuring it remains within its secured debt covenants to safeguard shareholders' equity and avoid financial penalties. Borrowings are secured on each of six (2020: six) property portfolios by way of fixed charges over property assets, over the shares in the parent company of each ring-fenced borrower subgroup, and also by floating charges on the assets of the relevant subsidiary companies within each distinct subgroup. The suitability of the extent of asset cover in the secured facilities forms a key part of debt negotiations and ongoing monitoring.

 

At 31 December 2021 and 31 December 2020, the capital structure of the Group consisted of secured debt (note 17a), cash and cash equivalents (note 14), and equity attributable to the shareholders of the Company (comprising share capital, retained earnings and the other reserves described in notes 20 and 21).

 

In managing the Group's capital structure, the Board considers the Group's cost of capital. In order to maintain or adjust the capital structure, the Board keeps under review the amount of any dividends or other returns to shareholders and monitors the extent to which the issue of new shares, repurchases of share capital or the realisation of assets may be advisable or required.

 

Details of significant accounting policies are disclosed in the accounting policies in note 2. This includes the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial asset, financial liability and equity instrument.

 

 

 

 

 

18. Headlease liabilities

Headlease obligations in respect of amounts payable on leasehold properties are as follows:

 

	31 December	31 December
	2021	2020
Minimum headlease payments	£m	£m
Within one year	2.0	1.8
Between one and five years	7.8	7.3
More than five years	164.6	158.0
	174.4	167.1
Less future finance charges	(143.8)	(138.4)
	30.6	28.7

 

The earliest expiry date of all the headlease obligations is in more than five years. All but £0.5 million (2020: £0.5 million) of the minimum headlease payments due within one year are recoverable from occupational tenants.

 

The Group's accounting policy for headleases is disclosed in note 2d.

 

19. Deferred tax liability

The deferred tax liability relates entirely to unrealised gains on the Group's German investment properties.

 

	Year to	Year to
	31 December	31 December
	2021	2020
	£m	£m
At the start of the year	11.9	11.3
Deferred tax charge from investment property revaluation, net of tax depreciation	4.5	-
Deferred tax credit from revision of assessment	(7.7)	-
Net credit to the income statement (note 9)	(3.2)	-
(Credit) / charge to other comprehensive income	(0.7)	0.6
At the end of the year	8.0	11.9

 

The Group has tax losses of £95.8 million (2020: £93.7 million) available for offset against future profits of the residual business. £12.1 million (2020: £10.6 million) of these tax losses relate to the Company. A deferred tax asset has not been recognised in respect of any of these losses due to the uncertainty of realising future taxable profits in the residual business.

 

The Group's accounting policy for deferred tax is disclosed in note 2f.

 

20. Share capital

Share capital represents the aggregate nominal value of fully paid ordinary shares of 10 pence each in issue.

 

	Year to	Year to
	31 December	31 December
	2021	2020
	Number	Number
At the start of the year	324,035,146	322,850,595
Issue of ordinary shares in settlement of 2019 incentive fee	-	1,184,551
At the end of the year	324,035,146	324,035,146

 

 

 

 

 

21. Reserves

The share premium reserve represents the surplus of the gross proceeds of share issues over the nominal value of the shares, net of the direct costs of those equity issues.

 

Retained earnings represent the cumulative profits and losses recognised in the income statement, together with any amounts transferred or reclassified from the Group's share premium reserve and other reserves, less dividends paid.

 

Other reserves represent:

 

· the cumulative exchange gains and losses on translation of foreign earnings and net assets;

· the cumulative gains or losses on effective cash flow hedging instruments; and

· the impact on equity of any shares to be issued after the balance sheet date, as described in note 25d, under the terms of the incentive fee arrangements.

 

Movements in other reserves comprise:

 

	Currency	Cash flow
	translation	hedging	Shares to be
	differences	instruments	issued	Total
Year to 31 December 2021	£m	£m	£m	£m
At the start of the year	5.4	(1.7)	-	3.7
Currency translation movements	(3.6)	-	-	(3.6)
Fair value of derivatives (note 13)	-	1.6	-	1.6
Other comprehensive (loss) / income	(3.6)	1.6	-	(2.0)
At the end of the year	1.8	(0.1)	-	1.7

 

Year to 31 December 2020
At the start of the year	3.3	(1.1)	4.9	7.1
Currency translation movements	2.1	-	-	2.1
Fair value of derivatives (note 13)	-	(0.6)	-	(0.6)
Other comprehensive income / (loss)	2.1	(0.6)	-	1.5
Shares issued in the year	-	-	(4.9)	(4.9)
At the end of the year	5.4	(1.7)	-	3.7

 

 

 

 

 

22. Operating leases

The majority of the Group's assets are investment properties leased to third parties under non-cancellable operating leases. The weighted average remaining lease term at 31 December 2021 is 30.0 years (2020: 20.2 years), the increase reflecting a number of lease extensions in the Leisure portfolio during the year, and there are no tenant break options. The leases contain either fixed or minimum uplifts, or upwards only inflation-linked uplifts, alongside periodic upwards only open market reviews and variable income on 1% (2020: 1%) of the Group's contractual passing rent.

 

RPI-linked uplifts on 35% (2020: 37%) of the Group's passing rent as at 31 December 2021 resulted in the settlement of £0.8 million (2020: £0.9 million) of contingent rental income that was recognised in the income statement in the year.

 

Future minimum rents receivable are as follows:

 

	31 December	31 December
	2021	2020
	£m	£m
Within one year	117.6	104.9
Between one and two years	118.8	115.5
Between two and three years	120.7	116.9
Between three and four years	121.1	118.5
Between four and five years	122.7	118.5
More than five years	4,407.2	2,045.2
	5,008.1	2,619.5

 

The Group's accounting policy for operating leases is disclosed in note 2d.

 

23. Net asset value per share

Net asset value ("NAV") per share is calculated as the net assets of the Group attributable to shareholders divided by the number of shares in issue at the end of each year.

 

EPRA, the European Public Real Estate Association, publishes guidelines for the calculation of three measures of NAV to enable consistent comparisons of different property companies. The Group uses EPRA Net Tangible Assets ("EPRA NTA") as the most meaningful measure of long term performance, which is the measure adopted by the majority of UK REITs establishing it as the industry standard benchmark. It excludes items that are considered to have no impact in the long term, such as movements in the fair value of derivatives and a portion of the deferred tax on investment properties held for long term benefit.

 

Basic NAV and EPRA NTA	31 December 2021		31 December 2020
	£m	Pence per share	£m	Pence per share
Basic and diluted NAV	1,369.8	422.7	1,221.5	377.0
EPRA adjustments:
Adjustment for deferred tax on German investment property revaluations *	4.0	1.3	6.0	1.8
Fair value of interest rate derivatives	0.3	0.1	1.7	0.5
EPRA NTA	1,374.1	424.1	1,229.2	379.3

* in accordance with the EPRA Guidance, half of the deferred tax is adjusted for in the EPRA NTA calculation

 

 

 

 

 

24. Reconciliation of changes in financial liabilities arising from financing activities

 

Year to	Secured debt due within one year (note 17a)	Secured debt due in more than one year (note 17a)	Headlease liabilities (note 18)	Interest payable (note 16)	Derivatives (note 13)	Total
31 December 2021	£m	£m	£m	£m	£m	£m
At the start of the year	5.0	916.6	28.7	8.0	1.7	960.0
Cash flows:
Interest and finance costs paid	-	-	(1.8)	(45.3)	(0.6)	(47.7)
Scheduled repayment of secured debt	(7.3)	-	-	-	-	(7.3)
Non-cash movements:
Finance costs in the income statement	2.3	-	1.8	45.1	0.8	50.0
Finance costs in other comprehensive income	-	-	-	-	(1.6)	(1.6)
Increase in headlease liabilities	-	-	2.0	-	-	2.0
Revaluation movement in headlease liabilities	-	-	(0.1)	-	-	(0.1)
Currency translation movements	-	(4.2)	-	-	-	(4.2)
Reclassifications	373.8	(373.8)	-	0.1	(0.1)	-
At the end of the year	373.8	538.6	30.6	7.9	0.2	951.1

 

Year to
31 December 2020
At the start of the year	2.1	919.5	28.2	8.0	1.0	958.8
Cash flows:
Interest and finance costs paid	-	-	(1.7)	(45.8)	(0.4)	(47.9)
Scheduled repayment of secured debt	(4.4)	-	-	-	-	(4.4)
Repayment of secured debt from property sales	-	(1.5)	-	-	-	(1.5)
Non-cash movements:
Finance costs in the income statement	2.3	0.1	1.7	45.7	0.5	50.3
Finance costs in other comprehensive income	-	-	-	-	0.6	0.6
Increase in headlease liabilities	-	-	0.6	-	-	0.6
Revaluation movement in headlease liabilities	-	-	(0.1)	-	-	(0.1)
Currency translation movements	-	3.5	-	0.1	-	3.6
Reclassifications	5.0	(5.0)	-	-	-	-
At the end of the year	5.0	916.6	28.7	8.0	1.7	960.0

 

 

 

 

 

25. Related party transactions and balances

a) Relationship between Company and Investment Adviser

The Investment Advisory Agreement sets out the terms of the relationship between the Company and the Investment Adviser, including services to be provided and the calculation of the advisory fee and any incentive fee. The agreement has a termination date in December 2025 and neither party to the agreement has any contractual renewal right. The agreement may be terminated in certain circumstances which are summarised on page 59 of the March 2016 Secondary Placing Disclosure Document which is available in the Investor Centre of the Company's website. It includes a right for the Company to terminate the agreement without compensation in the event of an unremedied breach by the Investment Adviser or a change of control of the Company, and a right for the Investment Adviser to terminate the agreement in the event of a change of control of the Company. The maximum termination fee is four times the previous quarter's advisory fee, with any such termination payment designed to cover the cost of redundancies and wind down costs that may be required following the Investment Adviser's loss of the management of the Group.

 

b) Basis of calculation of fees

EPRA introduced new methods of calculation of EPRA net asset value with effect from 1 January 2020. In considering that change, the Remuneration Committee concluded that, in order for the calculation of the advisory and incentive fees to remain consistent with the way that those fees had been calculated since the Company's listing in 2014 and as set out in the Investment Advisory Agreement, the fees would continue to be calculated on the basis of the EPRA NAV methodology in place at the time of the agreement. That basis is set out in the EPRA Guidance issued in 2016, referred to in this financial information as "2016 basis EPRA NAV".

 

In addition, following a proposal made by the Investment Adviser, with effect from 1 April 2020 the advisory fee was reduced to the extent that the 2016 basis EPRA NAV includes surplus cash realised on the disposal of a portfolio of hospitals in August 2019. The balance of the surplus cash at 1 April 2020 was £158.3 million and as at 31 December 2021 was £88.1 million (31 December 2020: £113.9 million). Since the balance sheet date, the remainder of that surplus cash has been committed to the refinancing of one of the Group's secured debt facilities in April 2022.

 

The fees are calculated every quarter, on the basis of the simple average NAV over the quarter.

 

	31 December 2021		31 December 2020
	£m	Pence per share	£m	Pence per share
EPRA NTA	1,374.1	424.1	1,229.2	379.3
Adjustment to deferred tax on German investment property revaluations	4.0	1.2	5.9	1.9
NAV for purposes of incentive fee calculation (2016 basis EPRA NAV)	1,378.1	425.3	1,235.1	381.2
Adjustment for surplus cash	(88.1)	(27.2)	(113.9)	(35.2)
NAV for purposes of advisory fee calculations	1,290.0	398.1	1,121.2	346.0

 

c) Advisory fees payable

Advisory fees payable to the Investment Adviser are calculated as:

 

· 1.25% per annum on NAV for the purposes of advisory fee calculations up to £500 million, plus

· 1.0% per annum on NAV for the purposes of advisory fee calculations between £500 million and £1 billion, plus

· 0.75% per annum on NAV for the purposes of advisory fee calculations between £1 billion and £1.5 billion, plus

· 0.5% per annum on NAV for the purposes of advisory fee calculations over £1.5 billion.

 

During the year, advisory fees of £12.4 million (2020: £12.8 million) plus VAT were payable in cash, of which £0.1 million was outstanding as at the balance sheet date (2020: £nil). The impact of adopting 2016 basis EPRA NAV is that fees payable in the current year were £42,000 (2020: £44,000) higher than they would have been under EPRA NTA.

 

 

 

 

d) Incentive fee

The Investment Adviser may become entitled to an incentive fee intended to reward growth in Total Accounting Return ("TAR") above an agreed benchmark and to maintain strong alignment of the Investment Adviser's interests with those of shareholders. TAR is measured as growth in 2016 basis EPRA NAV per share plus dividends paid in the year.

 

The fee entitlement is calculated annually on the basis of the Group's audited financial statements, with any fee payable settled in shares in the Company (subject to certain limited exceptions, none of which have yet applied). Sales of these shares are restricted (save for certain limited exceptions), with the restriction lifted on a phased basis over a period from 18 to 42 months from the date of issue. Shares may be released from the sale restriction in the event that shares need to be sold to settle the tax liability on the receipt of those shares, although this exemption has never been requested.

 

The incentive fee is calculated by reference to growth in TAR: if that growth exceeds a hurdle rate of 10% per annum since the last year in which an incentive fee was earned, an incentive fee equal to 20% of this excess is payable in shares to the Investment Adviser. In the event of an incentive fee being payable, a high water mark is established, represented by the 2016 basis EPRA NAV per share at the end of the relevant financial year, after the impact of the incentive fee, which is then the starting point for the cumulative hurdle calculations for future periods. The hurdle is set at the higher of the 2016 basis EPRA NAV at the start of the year plus 10% or the high water mark 2016 basis EPRA NAV plus 10% per annum. In this way, the incentive fee is never rebased as a result of a year of low or negative growth, maintaining strong alignment of management and shareholder interests. Dividends or other distributions paid in any period are treated as payments on account against achievement of the hurdle rate of return. The incentive fee payable in any year is subject to a cap of 5% of 2016 basis EPRA NAV, save for a fee payable in the event of a change of control of the Company which is uncapped.

 

A high water mark 2016 basis EPRA NAV per share of 431.1 pence per share was established at 31 December 2019 when an incentive fee was last earned. At 31 December 2020, 2016 basis EPRA NAV was 381.2 pence per share which meant that TAR had to exceed 124.4 pence per share for the year to 31 December 2021 for a fee to be earned. After dividends of 15.2 pence per share were paid in the year, this equated to a 2016 basis EPRA NAV per share of 491.4 pence per share (£1,592.3 million) at 31 December 2021. Since 2016 basis EPRA NAV is below this level at 425.3 pence per share, no incentive fee is payable for the current year.

 

Assuming no changes in the Company's capital structure, growth in net assets together with dividends paid will have to have reached a 2016 basis EPRA NAV of 540.5 pence per share by 31 December 2022 before an incentive fee is earned for that year.

 

e) Dividends paid to related parties and key management personnel

	Year to	Year to
	31 December	31 December
	2021	2020
	£m	£m
Prestbury Incentives Limited †	2.9	3.0
Nick Leslau *	2.8	2.9
Mike Brown	0.2	0.2
Prestbury Investment Partners Limited †	0.2	0.1
Other Directors (Sandy Gumm, Martin Moore, Ian Marcus, Jonathan Lane and Leslie Ferrar)	0.1	0.1
	6.2	6.3

† Nick Leslau, Mike Brown and Sandy Gumm are shareholders and directors of both Prestbury Investment Partners Limited and the parent undertaking of Prestbury Incentives Limited, together with other key management personnel, Tim Evans and Ben Walford. Other senior members of the Prestbury team also have equity interests in those companies.

* comprising dividends from 16,850,300 ordinary shares held by an entity in which Nick Leslau has a 95% indirect interest and 1,491,709 shares held by a company which he wholly owns.

 

 

 

 

 

26. Events after the balance sheet date

On 3 March 2022, certain Group companies entered into committed credit agreements for £232.0 million and €60.2 million of senior debt, scheduled to be drawn on 29 April 2022, subject to certain conventional conditions precedent. The proceeds of the loans and an estimated £108.2 million of the Group's cash reserves will be applied to prepay secured debt facilities due to mature in October 2022.

 

On 4 March 2022, the Company paid an interim dividend of 3.95 pence per share amounting to £12.8 million.

 

 

 

Unaudited Supplementary Information

Shareholder returns

 

 

Total Shareholder Return

Shareholder return is one of the Group's key performance indicators. Total Shareholder Return ("TSR") is measured as the movement in the Company's share price over a period, plus dividends paid in the period. Total Accounting Return ("TAR") is a shareholder return measure calculated as the movement in EPRA NTA per share plus dividends per share paid over the period.

 

TAR - EPRA NTA performance

		Year to 31 December 2021	Year to 31 December 2020
		Pence per share	Pence per share
EPRA NTA per share:
at the start of the year		379.3	429.4
at the end of the year		424.1	379.3
Movement in EPRA NTA per share		44.8	(50.1)
Dividends per share		15.2	15.7
Movement in EPRA NTA per share plus dividends per share		60.0	(34.4)
TAR		15.8%	(8.0)%

 

		Period from 30 June 2014 to 31 December 2021	Period from 30 June 2014 to 31 December 2020
		Pence per share	Pence per share
EPRA NTA per share:
at the start of the period		183.5	183.5
at the end of the period		424.1	379.3
Movement in EPRA NTA per share		240.6	195.8
Dividends per share		80.5	65.3
Movement in EPRA NTA per share plus dividends per share		321.1	261.1
TAR per annum since 30 June 2014		15.4%	15.3%

 

 

 

 

 

TSR - share price performance

		Year to 31 December 2021	Year to 31 December 2020
		Pence per share	Pence per share
Mid market closing share price:
at the start of the year		300.0	434.0
at the end of the year		425.0	300.0
Movement in share price		125.0	(134.0)
Dividends per share		15.2	15.7
Movement in share price plus dividends per share		140.2	(118.3)
TSR		46.7%	(27.3)%

 

		Period from June 2014 listing to 31 December 2021	Period from June 2014 listing to 31 December 2020
		Pence per share	Pence per share
Listing price		174.0	174.0
Mid market closing share price at the end of the period		425.0	300.0
Movement in share price		251.0	126.0
Dividends per share		80.5	65.3
Movement in share price plus dividends per share		331.5	191.3
TSR per annum since listing		16.3%	12.8%

 

 

 

Unaudited Supplementary Information

EPRA measures

 

 

EPRA measures

		31 December	31 December
		2021	2020
EPRA Net Tangible Assets (EPRA NTA) per share		424.1p	379.3p
EPRA Net Reinstatement Value per share		469.6p	421.7p
EPRA Net Disposal Value per share		419.3p	364.3p
EPRA Net Initial Yield		5.1%	4.7%
EPRA Topped Up Net Initial Yield		5.1%	5.4%
EPRA Vacancy Rate		0%	0%

 

		Year to	Year to
		31 December	31 December
		2021	2020
EPRA EPS		17.3p	16.3p
EPRA Capital Expenditure		£0.2m	£0.5m
EPRA Cost Ratio excluding direct vacancy costs		12.6%	14.8%
EPRA Cost Ratio including direct vacancy costs		12.8%	15.1%

 

Adjusted EPRA measures

		Year to	Year to
		31 December	31 December
		2021	2020
Adjusted EPRA EPS (note 10 to the financial information)		17.5p	3.5p
Adjusted EPRA Cost Ratio excluding direct vacancy costs		14.4%	18.4%
Adjusted EPRA Cost Ratio including direct vacancy costs		14.7%	18.7%

 

 

 

 

 

EPRA Net Tangible Assets

	31 December 2021		31 December 2020
	£m	Pence per share	£m	Pence per share
Basic NAV (note 23)	1,369.8	422.7	1,221.5	377.0
EPRA adjustments:
Adjustment for deferred tax on German investment property revaluations *	4.0	1.3	6.0	1.8
Fair value of derivatives	0.3	0.1	1.7	0.5
EPRA NTA	1,374.1	424.1	1,229.2	379.3

* in accordance with the EPRA Guidance, half of the deferred tax is adjusted for in the EPRA NTA calculation

 

EPRA Net Reinstatement Value

The EPRA Net Reinstatement Value assumes that the Group never sells assets and is intended to represent the value that would be required to rebuild the portfolio.

 

	31 December 2021		31 December 2020
	£m	Pence per share	£m	Pence per share
Basic NAV	1,369.8	422.7	1,221.5	377.0
EPRA adjustments:
Adjustment for real estate transfer taxes	143.6	44.3	131.5	40.5
Deferred tax on investment property revaluations	8.0	2.5	11.9	3.7
Fair value of interest rate derivatives	0.3	0.1	1.7	0.5
EPRA Net Reinstatement Value	1,521.7	469.6	1,366.6	421.7

 

EPRA Net Disposal Value

The EPRA Net Disposal Value represents the Group's value under a disposal scenario, with deferred tax and financial instruments (including fixed rate debt) shown to the full extent of their liability, calculated as follows:

 

	31 December 2021		31 December 2020
	£m	Pence per share	£m	Pence per share
Basic NAV	1,369.8	422.7	1,221.5	377.0
EPRA adjustments:
Fair value of fixed rate debt	(11.3)	(3.4)	(40.9)	(12.7)
EPRA Net Disposal Value	1,358.5	419.3	1,180.6	364.3

 

The fair value of the fixed rate debt is defined by EPRA as a mark to market adjustment measured in accordance with IFRS 9 in respect of all debt not held at fair value in the balance sheet, as disclosed in note 17b to the financial information. The fair value of debt is not the same as a liquidation valuation, so the fair value adjustment above does not reflect the liability that would crystallise if the debt was prepaid on the balance sheet date, which would be materially higher.

 

 

 

 

 

EPRA Net Initial Yield and EPRA Topped Up Net Initial Yield

	31 December	31 December
	2021	2020
	£m	£m
Investment property, all of which is completed and wholly owned, at independent external valuation (note 11)	2,127.6	1,946.9
Allowance for estimated purchasers' costs	143.6	131.5
Grossed up completed property portfolio valuation	2,271.2	2,078.4
Annualised cash passing rental income	116.8	98.3
Annualised non-recoverable property outgoings	(1.1)	(1.0)
Annualised net rents for EPRA Net Initial Yield	115.7	97.3
Notional rent increase on expiry of rent concessions, rent free periods and other lease incentives	0.1	15.0
Annualised net rents for Topped Up EPRA Net Initial Yield	115.8	112.3
EPRA Net Initial Yield	5.1%	4.7%
EPRA Topped Up Net Initial Yield	5.1%	5.4%

 

The EPRA Net Initial Yield in the prior year reflected temporary rent concessions on the Budget Hotels portfolio arising as a result of the Covid-19 pandemic.

 

EPRA Vacancy Rate

	31 December	31 December
	2021	2020
	£m	£m
ERV of vacant space	0.1	0.1
ERV of portfolio	116.9	111.5
EPRA Vacancy Rate	0.03%	0.04%

 

The only vacant space is a restaurant unit at Manchester Arena, part of the ancillary office and leisure space at Manchester Arena which in total comprises approximately 2% of Group ERV. Other than this ancillary office and leisure space, the Group's portfolio is entirely let on long leases with no expiries before 2037, so there is not expected to be any significant change in the EPRA Vacancy Rate until that date.

 

 

 

 

EPRA EPS

	Year to	Year to
	31 December	31 December
	2021	2020
	£m	£m
Basic earnings attributable to shareholders	199.6	(113.7)
EPRA adjustments:
Investment property revaluation (note 11)	(140.3)	166.5
Deferred tax credit (note 9)	(3.2)	-
EPRA earnings	56.1	52.9
Non-EPRA adjustments:
Rent Smoothing Adjustments (note 4)	(15.2)	(23.7)
Rent deferrals	15.8	(17.7)
Adjusted EPRA earnings	56.7	11.5

 

Weighted average number of shares in issue	Number	Number
EPRA EPS	324,035,146	324,035,146
Adjustment for weighting of shares issued during the year *	-	(258,918)
Adjusted EPRA EPS	324,035,146	323,776,228

* EPRA EPS is calculated on the assumption that shares issued in settlement of any incentive fee were in issue throughout the period. Adjusted EPRA EPS is calculated using a weighted average number of shares reflecting the actual date on which those shares are issued.

 

	Pence per	Pence per
	share	share
EPRA EPS	17.3	16.3
Adjusted EPRA EPS	17.5	3.5

 

 

 

 

 

 

EPRA Capital Expenditure

	Year to	Year to
	31 December	31 December
	2021	2020
Wholly owned property	£m	£m
Acquisitions	-	-
Development	-	-
Expenditure on completed investment property held throughout the year:
Creation of additional lettable area	-	-
Enhancing existing space	-	-
Other	0.2	0.5
EPRA Capital Expenditure	0.2	0.5

 

The Group does not have any joint ventures or other partial interests in investment property so any EPRA capital expenditure relates to wholly owned properties. The Group does not capitalise any overheads or interest into its property portfolio and it does not develop properties.

 

The Group's properties are let on full repairing and insuring leases, so the Group incurs no routine ongoing capital expenditure on its property portfolio except at Manchester Arena, where such costs relating to the structure and common areas are liabilities of the Group in the first instance. The EPRA Capital Expenditure in the current period represents £0.2 million (2020: £0.2 million) for capital works at Manchester Arena within the service charge that is not recoverable from tenants. The remaining expenditure in the prior year comprised £0.3 million for the acquisition of car park equipment.

 

EPRA Cost Ratio

	Year to	Year to
	31 December	31 December
	2021	2020
	£m	£m
Revenue (note 4)	122.4	121.7
Tenant contributions to property outgoings (note 4)	(1.6)	(1.7)
EPRA gross rental income	120.8	120.0
Non-recoverable property operating expenses (note 5) *	0.9	1.7
Less headlease costs included in non-recoverable property operating expenses (note 5)	(0.6)	(0.6)
Administrative expenses (note 6)	15.2	17.0
EPRA costs including direct vacancy costs	15.5	18.1
Direct vacancy costs	(0.3)	(0.3)
EPRA costs excluding direct vacancy costs	15.2	17.8
EPRA Cost Ratio including direct vacancy costs	12.8%	15.1%
EPRA Cost Ratio excluding direct vacancy costs	12.6%	14.8%

* included within the £2.5 million (2020: £3.3 million) of property costs payable by the Group are £1.6 million (2020: £1.7 million) of headlease and other costs that are recoverable from tenants.

 

The Group capitalises the initial direct costs incurred in obtaining a lease, which are then charged to the income statement over the term of the relevant lease. During the year, lease incentive payments of £33.5 million (2020: £nil) and costs of £122,000 (2020: £54,000) were capitalised, of which £10,000 (2020: £nil) and £6,000 (2020: £4,000) was respectively released from the capitalised balances and charged to the income statement. Non-recoverable property costs include £33,000 (2020: £568,000) for negotiating and documenting Covid-19 rent concessions, and rent review and other letting costs of £46,000 (2020: £35,000). A further £6,000 (2020: £106,000) relating to the amendment of loan facilities as a result of the Covid-19 rent concessions is included in finance costs.

 

The Group has no capitalised overheads or other operating expenses and does not capitalise interest.

 

 

 

 

 

Adjusted EPRA Cost Ratio excluding non-cash items

The Group also calculates an Adjusted EPRA Cost Ratio excluding revenue recognised ahead of cash receipt as a result of Rent Smoothing Adjustments (described in note 4) to present what the Board considers to be a measure of cost efficiency more directly relevant to its business model:

 

	Year to	Year to
	31 December	31 December
	2021	2020
	£m	£m
EPRA gross rental income	120.8	120.0
Rent Smoothing Adjustments (note 4)	(15.2)	(23.6)
Adjusted EPRA gross rental income excluding non-cash items	105.6	96.4
EPRA costs including direct vacancy costs	15.5	18.1
Direct vacancy costs	(0.3)	(0.3)
Adjusted EPRA costs excluding direct vacancy costs	15.2	17.8
Adjusted EPRA Cost Ratio including direct vacancy costs	14.7%	18.7%
Adjusted EPRA Cost Ratio excluding direct vacancy costs	14.4%	18.4%

 

 

 

 

 

Like for like rental growth by portfolio

Passing rent	Leisure portfolio £m	Healthcare portfolio £m	Budget Hotels portfolio £m	Total portfolio £m
At 1 January 2021	47.5	36.6	29.2	113.3
Movement in Euro exchange rate	(0.5)	-	-	(0.5)
Like for like passing rent	47.0	36.6	29.2	112.8
Rental uplifts	1.7	1.0	1.0	3.7
New letting	0.3	-	-	0.3
At 31 December 2021	49.0	37.6	30.2	116.8
Increase in like for like passing rent	4.1%	2.8%	3.7%	3.6%
Portfolio valuation at 31 December 2021	919.2	790.4	418.0	2,127.6

 

Passing rent	Leisure portfolio £m	Healthcare portfolio £m	Budget Hotels portfolio £m	Total portfolio £m
At 1 January 2020	46.8	35.6	28.3	110.7
Movement in Euro exchange rate	0.4	-	-	0.4
Like for like passing rent	47.2	35.6	28.3	111.1
Rental uplifts	1.1	1.0	0.9	3.0
Lease expiry and new letting	(0.8)	-	-	(0.8)
At 31 December 2020	47.5	36.6	29.2	113.3
Increase in like for like passing rent	0.8%	2.8%	2.9%	2.0%
Portfolio valuation at 31 December 2020	793.0	769.1	384.8	1,946.9

 

Like for like figures exclude foreign currency translation movements and any properties not held throughout the period.

 

The rental uplifts, all of which are upwards only, included in the tables above comprise:

 

Year to 31 December 2021	Leisure portfolio £m	Healthcare portfolio £m	Budget Hotels portfolio £m	Total portfolio £m
Annual RPI uplifts (uncapped)	0.9	-	-	0.9
Annual RPI uplifts (capped)	0.1	-	-	0.1
Annual fixed uplifts	0.2	1.0	-	1.2
Five-yearly RPI uplifts (uncapped)	0.1	-	1.0	1.1
Five-yearly RPI uplifts (capped)	-	-	-	-
Five-yearly fixed uplifts	0.4	-	-	0.4
	1.7	1.0	1.0	3.7

 

Year to 31 December 2020	Leisure portfolio £m	Healthcare portfolio £m	Budget Hotels portfolio £m	Total portfolio £m
Annual RPI uplifts (uncapped)	0.6	-	-	0.6
Annual RPI uplifts (capped)	0.1	-	-	0.1
Annual fixed uplifts	0.2	1.0	-	1.2
Five-yearly RPI uplifts (uncapped)	-	-	0.9	0.9
Five-yearly RPI uplifts (capped)	0.2	-	-	0.2
Five-yearly fixed uplifts	-	-	-	-
	1.1	1.0	0.9	3.0

 

 

 

 

 

 

Like for like rental growth by country

Passing rent		UK £m	Germany £m	Total portfolio £m
At 1 January 2021		106.2	7.1	113.3
Movement in Euro exchange rate		-	(0.5)	(0.5)
Like for like passing rent		106.2	6.6	112.8
Rental uplifts		3.5	0.2	3.7
New letting		0.3	-	0.3
At 31 December 2021		110.0	6.8	116.8
Increase in like for like passing rent		3.6%	3.3%	3.6%
Portfolio valuation at 31 December 2021		1,992.9	134.7	2,127.6

 

Passing rent		UK £m	Germany £m	Total portfolio £m
At 1 January 2020		104.2	6.5	110.7
Movement in Euro exchange rate		-	0.4	0.4
Like for like passing rent		104.2	6.9	111.1
Rental uplifts		2.0	0.2	2.2
At 31 December 2020		106.2	7.1	113.3
Increase in like for like passing rent		1.9%	3.3%	2.0%
Portfolio valuation at 31 December 2020		1,831.6	115.3	1,946.9

 

Like for like figures exclude foreign currency translation movements and any properties not held throughout the period.

 

 

 

Unaudited Supplementary Information

Rent Smoothing Adjustments

 

 

The Group's revenue recognition accounting policy set out in note 2d, in line with IFRS, requires the impact of any fixed or minimum rental uplifts to be spread evenly over the term of a lease and as a result there is a material mismatch between the rental cash flows and rental revenues shown in the income statement. The adjustments relate to the 41% of portfolio rents that are subject to fixed uplifts, the 31% of portfolio rents with minimum uplifts on inflation-linked reviews, and the temporary Covid-19 rent concessions agreed with the tenants of the Budget Hotels and Pubs portfolios in 2020 which represented lease modifications under IFRS 16.

 

A receivable is included in the book value of investment property for the amount of rent included in the income statement ahead of actual cash receipts. A receivable relating to fixed and minimum uplifts increases over broadly the first half of the later of the lease commencement or the date of acquisition, then unwinds to zero over the remainder of each lease term. If a lease is extended, the receivable at the date of modification is not adjusted but the smoothing is recalculated over the new term from that date. A receivable relating to rent concessions increases over the period during which the rent is reduced, then unwinds to zero over the remainder of each lease term.

 

So as not to overstate the portfolio value in the balance sheet, any movement in the receivable is offset against property revaluation movements. Since this adjustment initially increases rental income and reduces property revaluation gains or increases property valuation losses (and the reverse in the second half of each lease term or once the rent concession has expired) it does not change the Group's retained earnings or net assets. Income recognised in this way in excess of cash flow is also taken out of Adjusted EPRA EPS so as not to artificially flatter the Group's reported dividend cover.

 

The impact of the Rent Smoothing Adjustments on the Group's balance sheet as at 31 December 2021 is as follows:

 

	Receivable at
	31 December	Maximum	Date of maximum
	2021	receivable	receivable
	£m	£m
Fixed/minimum uplifts recognised ahead of cash receipt:
Healthcare - Ramsay hospitals	110.1	111.8	March 2023
Leisure - German theme parks *	36.8	251.6	September 2052
Healthcare - Lisson Grove hospital	12.8	20.6	March 2035
Leisure - The Brewery	5.0	23.5	June 2041
Leisure - Manchester Arena	3.4	8.9	June 2032
Leisure - Pubs	0.6	2.0	March 2030
Leisure - UK theme parks	0.2	145.8	December 2050
	168.9	564.2
Covid-19 related rent concessions:
Budget Hotels	21.1	21.1	December 2021
Pubs	1.1	1.1	September 2020
	191.1	586.4

* at the year end exchange rate of €1:£0.84.

 

The future impact of this adjustment would change if there were acquisitions, disposals, further rent concessions or lease variations of properties with fixed or minimum inflation-linked rental uplifts, as was the case during the year with lease extensions and other changes on the UK and German theme parks in the Leisure portfolio. Assuming no change in the portfolio, the adjustment to rental income that was recognised during the current year and is expected for each of the next three financial years is as follows:

 

		Fixed/minimum	Covid-19 rent
		uplifts *	concessions	Total
		£m	£m	£m
2021		7.4	7.4	14.8
2022		26.1	(1.1)	25.0
2023		24.4	(1.2)	23.2
2024		22.8	(1.1)	21.7

* with the German adjustment translated at the 2021 average exchange rate of €1:£0.86.

 

 

 

Unaudited Supplementary Information

Rent Smoothing Adjustments

 

 

The other areas where accounting policies result in a material mismatch between the rental cash flows and rental revenues shown in the income statement are:

 

· rent received during a prior year from a May 2017 rent review on the Healthcare portfolio, where £0.4 million of rent is being recognised in revenue each year over the remaining lease term to 2037 despite the cash having been received in 2017

· the cost of the lease incentives granted for the extension of the theme parks leases in 2021, where going forward revenue will be reduced by £0.6 million per annum to reflect the spreading of that cost over the extended lease term to 2077

 

As for the Rent Smoothing Adjustments above, the movements in revenue are offset against property revaluation movements so there is no change the Group's retained earnings or net assets from this accounting treatment, and they are reversed in the calculation of Adjusted EPRA EPS.

 

 

 

Unaudited Supplementary Information

RPI methodology

 

 

Change in RPI calculation methodology from 2030

In November 2020, the UK Government and UK Statistics Authority announced changes to its calculation of RPI to align it with the Consumer Prices Index ("CPIH") from February 2030. CPIH has been on average 0.9 percentage points lower than RPI over the past ten years. The exact impact on the Group will depend on precisely how the UK Statistics Agency implements the change because that will have a bearing on how any change interacts with the specific terms of the leases. On a downside basis, if CPIH continues to run below RPI the rental uplifts from 2030 onwards would be lower than they would otherwise have been. However, depending on how the change is implemented, lease provisions may provide protection resulting in there being no change in some or all cases. In the event that rental uplifts do change from 2030, any valuation impact in such circumstances is expected to be insignificant as the market tends not to differentiate materially between RPI and CPIH lease structures, with the other property characteristics carrying greater weight in establishing pricing.

 

33% of the Group's annual rents as at 31 December 2021 are subject to RPI-linked reviews. This is reduced since 31 December 2020 as 25% of the Group's rents were subject to lease variations in 2021 whereby upwards only RPI reviews were changed to collared CPI reviews which are not affected by this change in methodology.

 

We note that, to date, long income investment transactions have demonstrated limited yield differentials between leases with RPI-linked reviews and those linked to CPI, with other property, income and tenant covenant characteristics carrying greater weight in the assessment of value.

 

 

 

Unaudited Supplementary Information

Glossary

 

 

Adjusted EPRA EPS	EPRA EPS adjusted to exclude non-cash items and non-recurring costs, calculated on the basis of the time-weighted number of shares in issue
AGM	Annual General Meeting
CVA	Company Voluntary Arrangement, a process under UK insolvency law which allows a company to reschedule its debts with the consent of a specified majority of its creditors
Dividend Cover	Adjusted EPRA EPS divided by dividends per share
EPRA	European Public Real Estate Association
EPRA EPS	A measure of EPS designed by EPRA to present underlying earnings from core operating activities
EPRA Guidance	The EPRA Best Practices Recommendations Guidelines October 2019
EPRA NTA	A measure of NAV designed by EPRA to present the fair value of a company on a long term basis. For these purposes, the Group uses EPRA Net Tangible Assets as defined in the EPRA Guidance
EPS	Earnings per share, calculated as the profit or loss for the period after tax attributable to shareholders of the Company divided by the weighted average number of shares in issue in the period
ERV	Estimated Rental Value: the independent valuers' opinion of the open market rent which, on the date of valuation, could reasonably be expected to be obtained on a new letting or rent review of a property
IFRS	International Financial Reporting Standards
Investment Adviser	Prestbury Investment Partners Limited or, as the context requires, its predecessor Prestbury Investments LLP
Investment Advisory Agreement	The agreement between the Company (and its subsidiaries) and the Investment Adviser, key terms of which are set out on pages 204 to 221 of the Secondary Placing Disclosure Document as modified by the amendments to the basis of fee calculation set out in note 25b to the financial information
Key Operating Asset	An asset where the operations conducted from the property are integral to the tenant's business
LTV	Loan to value: the outstanding amount of a loan as a percentage of property value
Management Team	Nick Leslau, Mike Brown, Tim Evans, Sandy Gumm and Ben Walford, who are directors of the Investment Adviser
NAV	Net asset value
Net Initial Yield	Annualised net rents on an investment property as a percentage of the investment property valuation, less purchaser's costs
Net Loan To Value or Net LTV	LTV calculated on the gross loan amount less cash balances
REIT	Real Estate Investment Trust
Rent Smoothing Adjustments	The adjustments required to recognise any mismatch between rent received in the income statement and cash rent received
Running Yield	The anticipated Net Initial Yield at a future date, taking account of any rent reviews or other changes in rent in the intervening period
Secondary Placing Disclosure Document	The Secondary Placing Disclosure Document dated 14 March 2016 which is available in the Investor Centre of the Company's website under "Circulars to Shareholders/2016"
Total Accounting Return	The movement in EPRA NTA over a period plus dividends paid in the period, expressed as a percentage of the EPRA NTA at the start of the period
Total Shareholder Return	The movement in share price over a period plus dividends paid in the period, expressed as a percentage of the share price at the start of the period
Uncommitted Cash	Cash balances not subject to fixed charges in favour of lenders, net of any creditors or other cash commitments at the balance sheet date
Weighted Average Unexpired Lease Term	The term to the first tenant break or expiry of the leases in the portfolio, weighted by rental value before rent concessions, also referred to as WAULT

 

 

 

Unaudited Supplementary Information

Company Information

 

 

Registered office	Cavendish House, 18 Cavendish Square, London W1G 0PJ
Directors	Martin Moore, Non-Executive Chairman and Chairman of the ESG Committee
	Mike Brown
	Leslie Ferrar, Chairman of the Audit Committee
	Sandy Gumm
	Jonathan Lane, Chairman of the Nomination Committee
	Nick Leslau
	Ian Marcus, Senior Independent Director and Chairman of the Remuneration Committee
Company Secretary	Sandy Gumm
Investment Adviser	Prestbury Investment Partners Limited Cavendish House, 18 Cavendish Square, London W1G 0PJ
Nominated Adviser and Broker	Stifel Nicolaus Europe Limited 150 Cheapside, London EC2V 6ET
Auditor	BDO LLP 55 Baker Street, London W1U 7EU
Property valuers	CBRE Limited Henrietta House, Henrietta Place, London W1G 0NB
	Christie & Co Whitefriars House, 6 Carmelite Street, London EC4Y 0BS
Derivative valuers	Chatham Financial Europe Limited 12 St James's Square, London SW1Y 4LB
Financial PR advisers	FTI Consulting LLP 200 Aldersgate, Aldersgate Street, London EC1A 4HD Email: [email protected]
Registrar	Link Group 10th Floor, Central Square, 29 Wellington Street, Leeds LS1 4DL   Registrar's helpline: 0371 664 0300 Calls are charged at the standard geographic rate and will vary by provider. Calls outside the United Kingdom will be charged at the applicable international rate. The helpline is open 9.00am - 5.30pm, Monday to Friday excluding public holidays in England and Wales   Registrar's email: [email protected]
Website	www.SecureIncomeREIT.co.uk
Email	[email protected]

 

 

 

Unaudited Supplementary Information

Important notes

 

 

Forward looking information

This document includes forward looking statements which are subject to risks and uncertainties. You are cautioned that forward looking statements are not guarantees of future performance and that if risks and uncertainties materialise, or if the assumptions underlying any of these statements prove incorrect, the actual results of operations and financial condition of the Group may differ materially from those made in, or suggested by, the forward looking statements. Other than in accordance with its legal or regulatory obligations, the Company undertakes no obligation to review, update or confirm expectations or estimates or to release publicly any revisions to any forward looking statements to reflect events that occur or circumstances that arise after 9 March 2022.

 

Rounding of financial information

The financial information, including comparative amounts, and certain other figures in this document are presented in millions of pounds, rounded to one decimal place. Accordingly, figures shown in the same category presented in different tables may vary slightly and figures shown as totals in certain tables may not be an arithmetic aggregation of the figures that precede them as a result of rounding.