Full Year results for the year ended 31 March 2019

McKAY DELIVERS CAPITAL AND RENTAL GROWTH AS IT CONTINUES TO CAPTURE VALUE FROM FOCUSED PORTFOLIO

McKay Securities Plc, the only Real Estate Investment Trust (REIT) specialising exclusively in the London and South East office, industrial and warehouse markets, today announces its Full Year results for the year ended 31st March 2019.

Financial Highlights

Portfolio Highlights

· 1.4% (£6.47 million) valuation surplus with portfolio valuation at a historic high of £482.70 million

· 2.1% increase in rental value, taking portfolio ERV to £33.83 million pa (net)

· 19 open market lettings (8.1% ahead of ERV) completed at a combined contracted rent of £1.29 million pa, in addition to 21 lease renewals at a 31% increase to prior contracted rents

· Practical completion of 30 Lombard Street, EC3 achieved in January 2019, triggering commencement of the 15 year pre-let secured in March 2018 for the entire building, at a rent of £3.40 million pa (net)

· Development of a new 134,430 sq ft logistics warehouse at Junction 12 of the M4 at Theale underway with December 2019 completion

· Substantial 24.3% portfolio reversion of £6.61 million pa, well placed to deliver future value and income growth, building on track record of delivery

· Recognition of ESG efforts with a GRESB (Global Real Estate Sustainability Benchmark) Green Star award for the third year running

Richard Grainger, Chairman of McKay, said:

"I'm pleased to be able to report another successful year of delivery for McKay which concludes five years of exceptional growth since our 2014 capital raise. The past year saw further delivery against our long-term strategic objectives as it captured more of the portfolio's reversion for the benefit of shareholders, despite navigating a turbulent market environment. McKay's concerted focus on the office, industrial and logistics markets of London and the South East continues to deliver robust performance, whilst the substantial income potential still to be released, and our proven ability to unlock this, leaves us well placed to deliver future value."

Simon Perkins, Chief Executive of McKay, said:

"The growth delivered across all key metrics is a direct result of the carefully selected and actively managed portfolio that we have built up over recent years, combined with our ability to enhance and release its potential, which has resulted in rental and capital uplifts out-performing the market over the period.

"Our office development programme has been significantly de-risked following the completion of our 30 Lombard Street, EC3 scheme, which triggered commencement of the 15 year pre-let secured last year. On-going construction is now limited to our warehouse development at Theale Logistics Park at Junction 12 of the M4, an area with deep occupier appeal. While our focus on the office, industrial and logistics sectors of the UK's strongest regions puts us in a strong position for the future, we now also benefit from enhanced operational flexibility following the new debt facility that was secured following period-end, which provides us with an additional £55 million of firepower for opportunistic investment activity.

"We remain wary of the political uncertainty affecting our operating environment, however the strong fundamentals underpinning our markets and significant reversion that remains to be unlocked within our portfolio leaves us well positioned to deliver future growth."

- ENDS -

NOTE:

For reconciliation of adjusted profit before tax, see note 5 below

For reconciliation of adjusted basic earnings per share, see note 9 below

For reconciliation of EPRA NAV and EPRA NNNAV, see note 22 below

LTV - Loan to Value being net debt over value of investment properties

About McKay

McKay Securities Plc is a commercial property investment company with Real Estate Investment Trust (REIT) status, listed on the main market of the London Stock Exchange. It specialises in the development and refurbishment of good quality office, industrial and logistics buildings within established and proven markets of London and South East England. The portfolio, which was valued at 31st March 2019 at £482.70 million, comprises 33 properties in strong and established areas, which deliver diversity in terms of both sector and location.

Forward looking statements

This announcement is for information purposes only and contains certain forward-looking statements which, by their nature, involve risk and uncertainty because they relate to or depend upon future events and circumstances.

There are a number of factors which could cause actual results and developments to differ materially from those expressed or implied by these forward looking statements, including a number of factors outside McKay Securities Plc's control. All forward-looking statements are based upon information known to McKay Securities Plc on the date of this announcement and no representation or warranty is given in relation to them, including as to their completeness or accuracy or the basis on which they were prepared. McKay Securities Plc gives no undertaking to update forward-looking statements whether as a result of new information, future events or otherwise. Information contained in this announcement relating to the Company should not be relied upon as an indicator of future performance.

Details of the programme for the payment of the final dividend of the Ordinary Shares is as follows:

CHAIRMAN'S STATEMENT

This has been another successful year of delivery for the Company, during which we have continued to build on the growth strategy put in place at the beginning of 2014. Since then, we have delivered an 89.6% increase in portfolio value from £254.55 million to £482.70 million, and a 46.9% increase in shareholders' funds from £211.79 million to £311.08 million. Valuation gains from our portfolio and development programme combined with the profitable disposal and recycling of assets totalling £67.97 million over the same period have enabled us to maintain a stable loan to value ratio that sits well within our target range. Shortly after the year end we were able to improve our future investment firepower by £55.00 million with an increase in our loan facilities.

Our focus on the office, industrial and logistics sectors in the UK's strongest economic regions combined with our in-house development, refurbishment and management skills, continued to deliver shareholder value. We are seeing the changing needs of business, building obsolescence and the loss of space to alternative uses combining to underpin a steady level of occupier demand and investor appetite. With historically constrained levels of supply and a limited development pipeline, capital and rental values within these markets have so far proved remarkably resilient and stable.

It is not surprising that capital values have remained high for prime, well let assets, as investors seek security in these uncertain times. In this climate, we have been quite happy investing in our existing portfolio assets to extract value while being on the lookout for additional earnings enhancing acquisitions which also offer the potential to add value through McKay's repositioning skills. There are signs that pricing for this more opportunistic stock is becoming more realistic and we now have greater headroom to capitalise on this.

We took advantage of this strong pricing at the end of the prior year to sell three properties, and during the year have exchanged contracts for the sale of The Planets, Woking, conditional on planning consent. Despite the loss of £1.32 million of income from the properties sold last year and a further £0.75 million from the transition of property into development, adjusted profit before tax for the year increased by 2.3% to £9.27 million (March 2018: £9.07 million). As set out in more detail in the Property and Financial Review, this loss of income was offset by income contributions from our recently completed development schemes and interest savings as a result of the cancellation of our remaining legacy interest rate hedging facilities at the end of last year.

EPRA net asset value per share increased by 1.2% to 326 pence (March 2018: 322 pence) predominantly due to the £6.47 million (1.4%) surplus generated by the independent valuation of the property portfolio at the end of the period, of £482.70 million (March 2018: £460.15 million).

This surplus and the 2.1% (£0.69 million pa) increase in portfolio rental value ("ERV"), which ended the year at £33.83 million pa (March 2018: £33.15 million), both outperformed the MSCI IPD (All property) benchmark which delivered movements for each of 0.2%.

Our three main priorities over the year to maintain delivery of our growth strategy have been:

· The continued implementation of our development programme

· The release of the substantial income potential generated within the portfolio

· Capitalising on our progress to date by improving our scope for further growth

Our development priority was the delivery of the two remaining active schemes at 30 Lombard Street, EC3 and at Theale Logistics Park on the outskirts of Reading, following the successful completion and letting of our office developments in Reading and Redhill last year.

In March 2018 we announced that the whole of 30 Lombard Street (58,585 sq ft) scheme had been pre-let to St. James's Place plc on a 15 year lease at a contracted rent of £3.40 million pa (net of ground rent), with upward only rent reviews every five years. Construction works completed in January 2019, triggering commencement of the lease and the new tenant is now fitting out for occupation this summer. This was a complex construction project and the end result is a striking office headquarters building that has enhanced the streetscape of this core City of London location. Securing a financially strong tenant on a long lease, ahead of forecast, has also created a valuable high-quality asset which contributed to the valuation surplus again this year.

This has further de-risked our development programme with ongoing construction now limited to our warehouse distribution scheme at Theale Logistics Park (134,430 sq ft). With excellent access adjacent to Junction 12 of the M4 motorway, low site cover and low passing rent, we identified the strong value-add potential when we purchased what was a dated chilled distribution unit on the site in 2015. It provided the scope for either refurbishment or redevelopment at lease expiry in 2021, or earlier if the tenant exercised a break option in January 2018. We achieved planning consent for a high bay warehouse and a 38.5% increase in floor area in 2017 and, with the benefit of a 12 month rent penalty when the break clause was exercised and encouraging market conditions, we took the decision at the end of last year to progress redevelopment. Demolition has now been completed and the contractor is on site with completion expected by December 2019. The improved specification and the substantial increase in floor area have increased the rental potential by 92.2% to £1.48 million pa in a sector that has seen strong demand driven by the growth of e-commerce, and our marketing campaign continues to generate interest.

The development programme has proven to have been well timed. The three completed office schemes are now let at a total contracted rent of £5.99 million pa, representing 22.0% of portfolio contracted rent.

Our second priority area has been generating additional income from vacant properties and securing increases to ERV at lease expiry and rent review. This income potential, which totalled £4.66 million pa at the beginning of the period, has been built up as a result of positioning portfolio assets to benefit from rental growth in our markets. To release this income potential, we have continued with the selective refurbishment and direct management of the portfolio and implemented innovative and thorough letting campaigns. Office occupiers in particular increasingly expect choice and flexibility, and the increase in the serviced office sector over the last few years has resulted in a far wider range of occupational solutions on offer. In this evolving market we have continued to demonstrate our ability to design and deliver the right product with the completion of 19 open market lettings, at a combined contracted rent of £1.29 million pa, exceeding March 2018 ERV by 8.1%.

We also pride ourselves on working in partnership with a diverse range of occupiers to deliver the very best business environments, with sustainability at the heart of our projects and the management of our buildings. We will be emphasising the "McKay way" to prospective and existing occupiers to highlight our commitment to create the right environment with high standards of customer service in directly managed buildings, offering flexibility and value for money. This operational approach contributed to high approval ratings in our most recent occupier survey. It also played an important part in our high occupier retention rate at lease break and lease expiry, when 74.0% of occupiers remained in occupation and a £0.21 million pa (31.6%) increase in passing rent was achieved.

Having achieved these rental gains, the portfolio reversion has been topped up with several lease expiries over the period, as well as increases in ERV mainly driven by refurbishment and achieved rents. These expiries have provided us with a number of excellent refurbishment opportunities to improve occupier appeal and to achieve higher rental values, including schemes at Crawley, Staines and Croydon, which are all well established markets with constrained supply. With the trend to greater flexibility in lease terms, our track record of cost effective refurbishment will be of increasing value.

Taking this portfolio activity into account, we ended the period with contracted rents up slightly to £27.22 million pa (March 2018: £27.05 million) compared with the portfolio ERV of £33.83 million pa. The difference maintains the opportunity to increase contracted rents by a substantial £6.61 million pa (24.3%), of which the development at Theale represents £1.48 million pa.

Our third area of priority over the year has been to capitalise on our strategic progress to date, by improving our scope for further growth. Since 2014, we have invested £63.05 million into acquisitions, and £90.02 million in capital expenditure on the development programme and other portfolio projects. This investment has added significant value to the portfolio, allowing us to increase our borrowings without pushing up gearing beyond acceptable levels. This, and the ability to add completed development schemes into the security pool, enabled us to increase our loan facilities by £55.00 million shortly after the year end to £245.00 million. This has provided us with substantial firepower and secured low margins for another five years.

Dividend

The Board is recommending a 2.8% increase in the final dividend to 7.4 pence per share (March 2018: 7.2 pence).

The final dividend will be paid as an ordinary dividend on 25th July 2019 and will take the total dividend for the year to 10.2 pence per share (2018: 10.0 pence), an increase of 2%.

Outlook

The deferral of a Brexit solution has extended uncertainty over the future pace of economic growth and the trading environment for the year ahead. The occupier is at the heart of all we do, and much will depend on how this delay affects business confidence.

However, our focus on the office, industrial and logistics markets of London and the South East provides us with exposure to the two strongest and most resilient economic regions of the UK. This, combined with the substantial income potential still to be released from the portfolio with a range of development and refurbishment initiatives and our additional headroom, leaves us well placed to deliver future shareholder value.

Richard Grainger

Chairman

Property and Financial Review

Overview

McKay is a specialist in the development, refurbishment and management of commercial property, with Real Estate Investment Trust ("REIT") status. We adopt a proactive approach to the release of value from our assets using in-house skills, and manage completed projects internally. Our headquarters in Reading sits at the heart of our portfolio of 33 assets, ending the period valued at £482.70 million (March 2018: £460.15 million).

Table 1

Location and sector (by value)

As at 31st March 2019

The sector and location breakdown of these assets is shown in table 1, highlighting that we remain entirely focused on the office, industrial and logistics markets of London and the South East, where we have a clear expertise. These are the most dynamic regions of the UK, dominating in terms of population, business prosperity and productivity, and provide a strong platform for our continued growth.

The rent and occupancy profile of the portfolio at the end of the period is shown in table 2. Contracted rental income and the rental value of the portfolio (ERV) both increased over the period, with the difference of £6.61 million representing the significant 24.3% reversionary potential still to be released from the portfolio. Occupancy has reduced slightly, ending the period at 88.0% (March 2018: 89.3%) and at 91.0% (March 2018: 92.6%) excluding developments.

Occupational demand for office, industrial and logistics space within London and the South East has proved stable over the period, despite the continuing political uncertainly. The historically constrained supply of modern business space looks set to result in future shortfalls of available space across a number of centres, supporting current rents and increasing the prospects for future rental growth.

We recognised the potential for successful development in these supply constrained markets in 2014 and embarked on the development of three office schemes with the benefit of the £86.70 million capital raise at that time. Having completed and let the schemes in Reading and Redhill last year, we achieved practical completion of the last of the three schemes at 30 Lombard Street, EC3 in January 2019 which triggered commencement of the 15 year lease to St. James's Place plc for the entire building. These three schemes are now 98.0% let overall, on 10-15 year leases with a combined contracted rent of £5.99 million pa.

Sustainability has been of increasing importance to us, our occupiers and our supply chain for a number of years. We continue to evolve our sustainability strategy, which has ensured that the importance of creating and managing environmentally sustainable buildings has been integrated into our business since its adoption in 2014. In September 2018 we were delighted to be awarded our highest ever Green Star award by the Global Real Estate Sustainability Benchmark ("GRESB"), maintaining our status for the third year running as amongst the most sustainable companies in the commercial property sector.

Table 2

Portfolio yields and reversions

1 Net of ground rents

2. Yield on portfolio valuation with notional purchaser's costs (6.75%) added

3 By ERV--

Market review

The South East office market, which represents the largest sector in our portfolio (54.3% by value), is currently experiencing its lowest levels of both vacancy and supply for ten years. The vacancy rate across the market of 7.6% has almost halved from 14.2% five years ago and the vacancy rate for new floorspace of 1.9% (1.75 million sq ft) is now at an historic low. The supply of new stock shows no signs of alleviating this, with speculative development completions estimated to add just 0.5 million sq ft in 2019 and 0.4 million sq ft in 2020, well below the ten year annual average of 0.70 million sq ft. Building obsolescence is also restricting the supply of modern accommodation in this market, with 50.1% of the stock within the relevant MSCI IPD ("IPD") index now older than the generally held building design life of 25 years.

Despite the political uncertainty, office take-up in the South East in 2018 totalled 2.44 million sq ft, which was the highest for the last five years and comfortably above the ten year average of 1.92 million sq ft. A number of larger lettings that had been in the market for some time completed during the year, with these occupiers recognising the need to commit to protect against future supply constraints. However, 77.5% of 2018 take up was for unit sizes below 60,000 sq ft, maintaining the long term trend for smaller lettings which supports our continued focus on this area of the market. Whilst take up in Q1 2019 of 0.36 million sq ft was 16.2% below the ten year average, named demand at the end of the quarter of 3.02 million sq ft was only 6.7% lower than Q4/2018, of which 0.50 million sq ft was under offer.

Our four central London office properties accounted for 25.0% of our portfolio at the end of the period, all of which are fully let. Market conditions in London have remained stable, as new supply is constrained by uncertainty while demand and take up have remained broadly in line with long term averages. Current availability in central London stands at 14.24 million sq ft compared to the ten year average of 16.12 million sq ft, showing a low vacancy rate of 6.2% (ten year average: 7.1%).

The industrial and logistics sector remains buoyant with occupier demand being driven by the exponential rise of the e-commerce sector and supply constrained by a scarcity of land on which to build conveniently located warehouses. Total supply in the South East of 4.50 million sq ft reflects a low vacancy rate of 4.5%, the lowest of any core region in the UK. This provides just 1.1 years' supply based on current levels of take up. These market dynamics continue to support the development of our 134,430 sq ft distribution warehouse at Theale Logistics Park on the outskirts of Reading.

There has undoubtedly been more caution generally in the investment market over the year given the protracted Brexit negotiations. Within our markets, fewer investment opportunities and stable yields suggest distressed sellers have been limited. Investment volumes within the South East office market totalled £2.80 billion in 2018 compared to the five year average of £3.57 billion. Local authorities remained the largest single investor group, accounting for 33.0% of the total volume.

The weight of money seeking office investment opportunities in central London was still evident in 2018, with investment totalling £16.31 billion. This trend has been maintained in Q1 2019 with investment turnover totalling £5.04 billion, significantly ahead of the ten year quarterly average of £3.76 billion.

Development programme

Practical completion of our new build 58,590 sq ft City core office scheme at 30 Lombard Street, EC3 was achieved in January 2019. The building had been pre-let to St. James's Place plc in March 2018, and completion triggered commencement of the 15 year lease of the entire building. The net contracted rent of £3.40m pa, equating to £65.00 per sq ft overall, was in line with ERV.

Theale Logistics Park, our 134,430 sq ft distribution warehouse development at Junction 12 of the M4 motorway, is now under construction with completion due in December 2019. In the period, demolition of the old warehouse was completed, after which further planning conditions had to be resolved. During this time, we were able to negotiate a more favourable build contract which was signed in early April 2019.

This self-contained, innovatively designed distribution warehouse, with a large secure 72 metre yard, will provide best in class supply to meet growing industrial and distribution occupier demand, in a location which is already favored by a number of blue chip companies. The marketing campaign is already underway with interesting leads, but tenant commitment within this sector is more likely once the building is fully, or substantially, built out.

Asset management

Following the letting success of our recent developments the focus over the year has been on releasing the substantial portfolio reversion and strengthening relationships with our occupiers to assist with retention at lease break and expiry.

The occupational market in both London and the South East is witnessing increasing demand for flexibility and convenience. For tenants, there is the perceived flexibility of serviced offices at one end of the spectrum countered by the desire for identity, branding and a sense of ownership at the other. We have the assets and skills to offer a middle ground and can provide tenants with the benefits of a traditional lease across a range of unit sizes and lease lengths, whilst managing our buildings in-house and giving occupiers direct access to their landlord.

Having recognised this trend a number of years ago, we have evolved a flexible offer at One Crown Square, Woking (50,190 sq ft) and 329 Bracknell (32,800 sq ft) where we continue to deliver rental growth. This year saw 7.1% and 4.1% rental value growth respectively for these buildings compared to the IPD benchmark of 1.9%, driven by strong tenant demand for this model which is being actively applied elsewhere within the portfolio.

At Portsoken House, EC3, as part of the refurbishment of the vacant floors (part 8th floor: 3,260 sq ft and 2nd floor: 5,146 sq ft) we fitted out the space to give potential occupiers the convenience of immediate occupation while also providing better value space compared to the equivalent serviced office market. With the trade-off of minimal letting incentives, we let both floors before practical completion at rents 8.2% ahead of ERV on the part 8th floor (£0.19 million pa) and 9.0% ahead on the 2nd floor (£0.28 million pa).

In a number of cases, this flexible offer is combined within a building with longer lease arrangements. This has worked to our advantage at The Mille, where we completed the ten year pre-let of the entire 2nd floor (8,312 sq ft at a contracted rent of £0.21 million pa) to serviced office provider UBC, which was previously operating under a legacy loss making management agreement on the 3rd floor. This in turn has enabled us to progress a refurbishment of the third floor into four smaller suites of c. 2,000 sq ft each, which is the most sought after unit size in the Brentford market.

At the end of the period, the rental value of the 9.0% portfolio void (excluding developments) totalled £2.60 million pa, of which 58.1% was undergoing refurbishment. The two most significant projects to begin during the period were at Pegasus Place, Crawley and at Mallard Court, Staines-upon-Thames. Pegasus Place is a campus of three office buildings developed by the Company in 2003, where we are carrying out a major overhaul of Pegasus Two (12,720 sq ft), to enable a multi-letting campaign at top Crawley rents. Completion of the refurbishment is due in July and good interest is already apparent.

At Mallard Court, in the centre of Staines-upon-Thames, we are carrying out a wholesale refurbishment of two of the three office floors (11,390 sq ft) as well as upgrading the reception. Where this was previously a traditional multi-let building with a manned reception, the refurbishment will deliver a modern, unmanned, smart building incorporating the latest technology with an occupier app enabling mobile-device control of heating, cooling, lighting and access. Completion is due shortly and marketing is under way.

Our South East industrial and logistics assets represented 15.6% of the portfolio (by value) at the end of the period and continue to deliver strong returns. Our seven existing industrial and logistics assets are 91.9% let and lease renewals and other management initiatives have continued to improve the value and quality of these holdings.

Across the portfolio as a whole over the year, this activity resulted in a total of 19 open market lettings with a combined contracted rent of £1.29 million pa, which was 8.1% ahead of ERV. In addition, we achieved a high tenant retention rate of 74.0% of tenants at lease break and expiry, including the renewal of 21 leases at a 31.6% (£0.21 million pa) increase to the prior contracted rent.

With the lack of new and Grade A supply in the South East office market, we continue to work up our pipeline of refurbishment and development initiatives which include Great Brighams Mead, Reading and Station Plaza, Theale. Great Brighams Mead is a standalone 84,840 sq ft office headquarters building exceptionally well located just a few minutes' walk from the recently upgraded railway station. The Company developed and let the building to Hutchison 3G for 21 years in 2001. The potential exists at expiry in 2022 to refurbish and benefit from the recent uplift in central Reading rents and the opening of the Elizabeth Line, which is set to strengthen Reading's position as the capital of the Thames Valley.

Station Plaza is an estate of three office buildings totalling 41,420 sq ft situated opposite Theale railway station, purchased in 2014 with an income yield of 10.1%. The existing 20 year lease, which expires in July 2019, is currently generating a rent of £0.90 million pa (£21.82 psf) which compares to recent Grade A Theale rents in excess of £30.00 psf. The property has attracted a wide range of freehold and leasehold interest and a number of options are being reviewed, including refurbishment plans to refresh the buildings to create a vibrant estate next to the station.

Acquisitions and disposals

We continued to monitor potential investment properties both on and off market over the year but did not make acquisitions despite appraising many opportunities. We remain of the view that there will be better value available as the market continues to mature, and we are well placed to take advantage of any weakness or attractive prospects that become available.

Having recycled £67.97 million from 12 disposals between 2015 and 2018 into new and existing portfolio properties, this has been a quieter year. However, we continue to keep a number of sales under review, particularly where we can take advantage of one-off pricing or reinvest into new assets with better growth prospects. The only disposal activity over the period was announced in March 2019 following the exchange of conditional contracts for the sale of The Planets (98,255 sq ft) in Woking town centre. It is let to Woking Borough Council until 2020, operating as a conference centre, amusement arcade, bingo hall and hotel. The asset has delivered an income yield in excess of 8.0%, and was purchased in 2014 with the intention to redevelop a mixed use scheme including offices on expiry of the lease. Having reviewed a range of scenarios with our professional team, it was clear that the most viable option would be residential use. To maximise value, we designed a 35-storey scheme and presented it to Woking Council and, with approval in principle for its height and massing, we offered the site to the residential market rather than redevelop beyond our recognised area of expertise and focus. Completion of the sale is conditional on the buyer gaining planning consent, and the price will be determined by the number of units consented.

Valuation

Knight Frank's independent valuation of the Company's property portfolio as at 31st March 2019 totalled £482.70 million (March 2018: £460.15 million). This delivered a surplus of £6.47 million (1.4%) for the 12 month period, with the first half contributing 1.7% and the second half -0.3%.

Tables 3 and 4 show the portfolio capital and rental values as determined by our valuers against the corresponding IPD benchmarks. Overall portfolio capital and rental growth outperformed IPD All Property, and the portfolio total return of 5.4% outperformed the IPD All Property return of 5.0%.

Through our asset selection and refurbishment initiatives, the rental value of our largest weighting, South East offices, outperformed the benchmark, but the capital growth underperformed. There are two reasons for this. Firstly, as anticipated with future pipeline opportunities at Great Brighams Mead, Reading and Station Plaza, Theale, values have declined by 7.8% and 18.1% respectively as the leases approach expiry. The subsequent uplift in value following refurbishment will see values enhanced. Secondly, at Pegasus Place, Crawley and One Crown Square, Woking we suffered tenant defaults which led to capital value declines of 5.4% and 8.2% respectively, which will be recovered on re-letting.

Table 3

Capital value movement

1 Valuation movements (%) after allowing for capex incurred during the period

2. IPD Monthly index allocations, IPD London = City segment

3 IPD Monthly index (All property)

4 Theale Logistics Park and Lombard Street, EC3

Table 4

Rental value movement

1 Segments analysed by IPD geographical area, exc dev

2 IPD Monthly index - movement by segment where applicable, IPD London = City segment

3 IPD Monthly index (All property)

4 Theale Logistics Park and Lombard Street, EC3

Our South East industrial and logistics portfolio saw capital growth of 7.8% compared to the IPD Benchmark of 10.7%. Our two largest assets by value in this sector, The McKay Industrial Estate at Poyle, next to Heathrow, and Oakwood Trade Park in Crawley, increased in value by 12.8% and 11.1% respectively. The overall performance was below the benchmark due to lease expiries over the period and other properties holding their value after a strong performance last year.

Although rental growth of 1.5% in our London offices outperformed IPD, capital growth was marginally lower due to characteristics of the small number of assets in this sector.

The Planets in Woking (within "Other") saw strong capital value growth of 20.2% to reflect the uplift in the conditional sale price over the March 2018 book value.

Development properties over the year consisted of Brunel Road, Theale and 30 Lombard Street, EC3. Much of the value created by the pre-letting of 30 Lombard Street was included within the 2018 valuation, but the 4.9% overall valuation surplus incorporated further gains primarily due to lease completion.

Dividends

The final dividend of 7.4 pence per share (March 2018: 7.2 pps) will be paid on 25th July 2019 to those on the register on 31st May 2019. With the interim dividend of 2.8 pence per share, this takes the total dividend for the year to 10.2 pence per share, an increase of 2.0% on the previous year.

As a REIT, the Company is required to distribute at least 90.0% of rental income profits arising each financial year by way of a Property Income Distribution ("PID"). Subject to exemptions, this is paid after deduction of withholding tax, at present 20.0%. Previous losses attributed to the cost of cancelling interest rate hedging instruments has offset the profits attributable to the PID. As a result, the final dividend will be paid as an ordinary dividend rather than a PID.

Income Statement

Profit before tax (IFRS) totalled £13.19 million (March 2018: £43.44 million). This included the unrealised surplus on valuation (including SIC 15 adjustment) for the period of £4.83 million (March 2018: £25.07 million).

Adjusted profit before tax, our measure of recurring profit, increased by £0.20 million (2.3%) to £9.27 million (March 2018: £9.07 million) primarily due to lower interest costs as a result of cancelling the remaining interest rate swap in March 2018. Adjusted basic earnings per share increased by 2.1% to 9.85 pps (March 2018: 9.65 pps).

Gross rents, including SIC 15 adjustments, increased on a like-for-like basis (excluding sales and developments) by 6.6% (£1.31 million). However, overall gross rents reduced by 1.1% (£0.24 million) to £21.61 million (March 2018: 21.84 million) due to the loss of income of £1.32 million from the profitable disposals made last year and the loss of £0.75 million of rental income following commencement of redevelopment at Theale Logistics Park. These anticipated reductions were partially offset by a rental contribution of £0.53 million from 30 Lombard Street, EC3 following the lease commencement in January 2019, in addition to further significant rental contributions from Prospero, Redhill (£0.78 million) and The Mille, Brentford (£0.25 million).

Administration costs reduced to £6.25 million (March 2018: £6.31 million), primarily due to a reduced cost of bonus offsetting the inflationary rise in salaries.

The interest cost for the year reduced to £6.13 million (March 2018: £6.74 million), despite the average debt in the period increasing to £157.96 million (March 2018: £144.82 million). This significant reduction reflects the benefit of cancelling the £33.00 million remaining swap in March 2018, which carried a coupon of 5.17%. The cancellation also contributed to the weighted average cost of debt reducing to 3.34% prior to amortisation and finance lease interest (March 2018: 4.06%).

Balance sheet

Shareholders' funds increased from £306.44 million to £311.08 million over the period, principally due to the £6.47 million valuation surplus (£4.83 million excluding SIC 15 adjustment).

EPRA NAV per share increased by 1.2% over the period to 326 pence (March 2018: 322 pence). NNNAV per share also increased by 1.2% to 326 pence (March 2018: 322 pence) and IFRS NAV per share increased by 1.5% to 331 pence (March 2018: 326 pence).

At the year end, debt facilities totalled £190.00 million (March 2018: £190.00 million). Drawn debt at the end of the period was £165.00 million (March 2018: £147.00 million). The gearing ratio of drawn debt to portfolio value (LTV: net debt basis) as at 31st March 2019 was 33.3% (March 2018: 31.6%). The increase in drawings over the year was primarily a result of £13.79 million of capital expenditure being invested on portfolio development and refurbishment projects.

On 8th April 2019, we announced an increase in available facilities from £190.00 million to £245.00 million. Building on our strong relationships with our banking group, three bilateral facilities (£125.00 million) were replaced by one club facility of £180.00 million. The club comprises Barclays, Lloyds, NatWest and Santander, all contributing equally. The facility is for five years and commencement contributed to a weighted average length of debt of 6.6 years and a low weighted average cost of debt, if fully drawn, of 3.0%.

The current £65.00 million facility with Aviva and the new club facility provides £80.00 million of headroom over our current drawings to support operational flexibility, deliver further portfolio initiatives and provide increased scope for new investments.

Net cash inflow from operating activities was £8.42 million (March 2018: inflow £7.50 million) and interest cover based on adjusted profit plus finance costs as a ratio to finance costs was 2.08x (March 2018: 1.98x).

As a REIT, the Company is tax exempt in respect of qualifying capital gains and qualifying rental income, which covers the majority of the Company's activities. Any residual income has been offset by allowable costs, and there is therefore no tax charge for the period (March 2018: nil).

Defined benefit pension scheme

Under the application of accounting standard IAS19, the Company's pension deficit reduced over the period from £2.16 million to £2.11 million. The decrease in the deficit was mainly due to the contributions paid into the scheme compensating for the increase in scheme liabilities resulting from a lower discount rate.

As a result of the triennial valuation for the period to 31st March 2017, which showed a funding level of 87.5% on a continuing valuation basis, our annual contribution to the scheme remains at £0.24 million. The scheme was closed to new entrants in the 1980s, and now consists of six pensioners and no active members.

Signed on behalf of the Board of Directors.

S. Perkins

G. Salmon

The summary of the consolidated results of McKay Securities PLC and its subsidiary undertakings (the "Group") for the year ending 31st March 2019 are as follows:

Consolidated Profit and Loss and other Comprehensive Income

For the year ended 31st March 2019

The total comprehensive income for the year is all attributable to the equity holders of the parent Company.

Group Statement of Financial Position

As at 31st March 2019

Company Statement of Financial Position

As at 31st March 2019

Group Cash Flow Statement

For the year ended 31st March 2019

Company Cash Flow Statement

For the year ended 31st March 2019

Consolidated Statement of Changes in Equity

For the year ended 31st March 2019

Company Statement of Changes in Equity

For the year ended 31st March 2019

Notes to the Financial Statements

For the year ended 31st March 2019

1 Accounting policies

Basis of preparation

The financial information set out in the final results announcement does not constitute the Group's statutory accounts for the year ended 31st March 2019 or 2018 but is derived from those accounts. The statutory accounts for the period ended 31st March 2019 will be delivered to the Registrar of companies following the Company's Annual General Meeting. The statutory accounts for the year ended 31st March 2018 have been delivered to the Registrar of Companies. The auditors have reported on the accounts for both the years ended 31st March 2019 and 2018; their reports were (i) unqualified (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under Section 498(2) or (3) of the Companies Act 2006.

While the financial information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards as adopted by the European Union (IFRS), this announcement does not itself contain sufficient information to comply with IFRS.

The Group and Company financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU) and therefore comply with Article 4 of the EU IAS Regulation.

In accordance with Section 408 Companies Act 2006 a separate Profit and Loss and other Comprehensive Income for McKay Securities Plc (the Company) is not presented. The profit for the year after tax of the Company is £9,417,000 (2018: £38,545,000).

The Group is required to adopt IFRS 9 Financial Instruments, IFRS 15 Revenue Recognition, both effective from 1st January 2018, and IFRS 16 leases effective from 1st January 2019.

Newly effective accounting standards

Management has considered the impact on the Group of new standards IFRS 9, IFRS 15, IFRS 16, amendments to standards and interpretations that are endorsed by the EU. The Group's assessment of the impact of these new standards is set out below.

IFRS 9 Financial Instruments

IFRS 9 Financial Instruments was issued in July 2014 and was endorsed by the EU in 2016. It replaces existing financial instruments guidance, including IAS 39 Financial Instruments: Recognition and Measurement. This standard is effective for accounting periods commencing on or after 1st January 2018. The standard addresses the classification and measurement of financial instruments and will require additional disclosures. Further to this, a new impairment measurement model for financial assets based around expected credit losses has been introduced. There is no longer a requirement for a credit event to have occurred before a credit loss is recognised.

The Group has adopted the new standard in its consolidated financial statements for the year ended 31st March 2019. The Group has considered the impact of adopting IFRS 9 and determined that there was no material impact on the results and as such there is no required restatement disclosure.

IFRS 15 Revenue from Contracts with Customers

IFRS 15 Revenue from Contracts with Customers was issued in 2014 and was endorsed by the EU in 2016. IFRS 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognised. It replaces existing revenue recognition guidance, including IAS 18 Revenue. IFRS 15 is effective for annual periods beginning on or after 1st January 2018, with early adoption permitted.

The Group has adopted the new standard in its consolidated financial statements for the year ended 31 March 2019. The Group has considered the impact of adopting IFRS 15 and determined that there was no material impact on the Group's revenue accounting policies.

Standards issued but not yet effective

IFRS 16 Leases

IFRS 16 Leases was issued in January 2016, and was endorsed by the EU in 2017. IFRS 16 introduces a single on-balance sheet lease accounting model for lessees. A lessee recognises a right-of-use asset representing its right to use the underlying asset and a corresponding lease liability representing its obligation to make lease payments. There are optional exemptions for shortterm leases and leases of low value items.

IFRS 16 replaces existing leases guidance including IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases-Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The standard is effective for annual periods beginning on or after 1st January 2019. Early adoption is permitted for entities that apply IFRS 15 Revenue from Contracts with Customers at or before the date of initial application of IFRS 16.

The Group did not early adopt this standard, as no material impact is expected with the adoption of IFRS 16 as the Group has no current lease commitments.

The financial statements are prepared on a going concern basis.

Basis of consolidation

The consolidated financial statements of the Company and its subsidiary (the Group) have been prepared on a historical cost basis, except for investment property which is measured at fair value through the Profit and Loss and other Comprehensive Income. The subsidiary company is under the control of the Company. Control means being exposed or have rights to variable returns from its involvement and has the ability to affect those returns through its power over the subsidiary.

Intra-group balances, income and expenses and unrealised gains and losses resulting from intra-group transactions are eliminated in preparing the consolidated financial statements.

Significant judgements and estimates

In the process of preparing the Group's financial statements management is required to make judgements, estimates and assumptions when applying accounting policies that may affect the reported amounts of revenues, expenses, assets and liabilities. Any judgements, estimates and associated assumptions used in the preparation of the financial statements are based on management's best information at the time, however actual outcomes may differ from estimates used. Not all accounting policies require estimates and assumptions, however management consider them significant in applying to valuations, for which qualified external advisors are used, of investment properties and are disclosed in the applicable policies and notes below.

Investment properties

The Group's properties are held as investments to earn rental income and for capital appreciation and are stated at fair value at the balance sheet date. The value, reflecting market conditions, is determined at each reporting date by independent external valuers and any gain or loss arising from a change in value is recognised in the Profit and Loss and other Comprehensive Income and transferred to the revaluation reserve in the Group Statement of Financial Position. Any accrued rent receivable recognised as a separate asset in accordance with the Group's accounting policy on lease incentives is deducted from the external valuation.

Properties purchased are recognised on legal completion in the accounting period and measured initially at cost including transaction costs. Sales of properties are recognised on unconditional exchange of contracts when the significant risks and rewards of ownership have been transferred. Gains and losses arising on the disposal of investment properties are recognised in the Profit and Loss and other Comprehensive Income, being the difference between net sale proceeds and the carrying value of the property.

Subsequent expenditure on investment properties is capitalised only when it increases the future economic benefits associated with the property. All other expenditure is charged to the Profit and Loss and other Comprehensive Income.

Interest and other outgoings less rental income relating to investment properties in the course of development are capitalised, and added to the cost of the property. Interest capitalised is calculated on development outgoings, including material refurbishments to investment property, using the weighted average cost of general Group borrowings for the year. A property ceases to be treated as being in the course of development when substantially all the activities that are necessary to prepare the property for use are completed.

Properties held under long leases where the Group has substantially all the risks and benefits of ownership are accounted for as finance leases and carried at the lower of fair value or present value of future minimum lease payments. The present value of the future minimum lease payments is recognised as a liability with a corresponding asset added to the carrying value of the leasehold property. The minimum lease payments are apportioned between finance charges in the Profit and Loss and other Comprehensive Income and the reduction of the Group Statement of Financial Position liability. Contingent rents are charged as an expense in the Profit and Loss and other Comprehensive Income in the period incurred.

Assets held for sale

Properties held for sale are classified as non-current assets if their carrying amount will be recovered principally through sale rather than through continuing use, they are available for immediate sale and sale is highly probable within one year.

Investment Properties held for sale are carried at fair vale in the Statement of Financial Position. Intangible assets and property, plant and equipment once classified as held for sale or distribution are not amortised or depreciated.

Plant and equipment

Plant and equipment is stated at cost less accumulated depreciation. Depreciation is provided on a straight line basis at rates calculated to write off the cost less estimated residual value over their useful lives, which are estimated to be between three and five years.

Cash and cash equivalents

Cash comprises cash at bank and short term deposits held on call. Cash equivalents comprise investments with minimal risk to changes in value that are readily convertible into cash with an original maturity of three months or less. Bank overdrafts that are repayable on demand and form an integral part of the Group's cash management are included as a component of cash and cash equivalents for the purpose only of the cash flow statement.

Trade and other receivables and payables

Trade and other receivables are recognised at invoice cost unless an impairment provision has been made. Impairment provisions are always measured at an amount equal to lifetime expected credit losses. Balances are written off when the probability of recovery is assessed as being remote.

Interest bearing loans and borrowings

All loans and borrowings are initially recognised at fair value less directly attributable transaction costs. Subsequent to initial recognition, loans and borrowings are measured at amortised cost using the effective interest rate method.

Reserves

The revaluation reserve represents the unrealised surpluses and deficits arising on revaluation of the Group's properties and is not available for distribution until realised through sale. This forms part of retained earnings.

Segmental analysis

All of the Group's revenue is derived from the ownership of investment properties located in South East England and central London. The management team works within a single structure which includes the Executive Directors acting as chief operating decision maker. Responsibilities are not defined by type or location, each property being managed individually and reported on for the Group as a whole directly to the Board of Directors. Properties under development generate no revenue and are treated as investment properties in the portfolio. The Directors therefore consider there to be only one reporting segment.

Revenue

The Group has entered into commercial property leases on its investment property portfolio. The Directors consider, based on the terms and conditions, the significant risks and rewards of ownership of the properties are retained and therefore account for the leases as operating leases. Rental income receivable under operating leases less initial direct costs on arranging the leases is recognised on a straight line basis over the non-cancellable term of the lease.

The aggregate value of incentives for lessees to enter into lease agreements, usually in the form of rent free periods or capital contributions, is recognised over the lease term or to tenant option to break as a reduction of rental income.

The Revenue recognition policy for the following revenue streams are in line with IFRS 15, as revenue is recognised when it transfers control over a product or service to a customer.

Premiums received from tenants to terminate leases are recognised as income from investment properties when they arise.

Service charges and other such receipts arising from expenses recharged to tenants, with the Group acting as principal, are recognised in the period that the expense can be contractually recovered and included gross in income from investment properties.

Interest received on short term deposits is recognised in finance income as it accrues.

Borrowing costs

Interest on borrowings, including interest on finance leases, is recognised in the Profit and Loss and other Comprehensive Income in the period during which it is incurred, except for interest capitalised in accordance with the Group's policy on properties under development (see Investment Properties above). Costs incurred on putting in place borrowing facilities are recognised in finance costs over the term of the facility.

Derivative financial instruments

The Group uses derivative financial instruments, such as interest rate swaps, to manage its exposure to interest rate risk. The differences between interest payable by the Group and interest payable to the Group by the swap counterparties are dealt with by using an effective interest rate.

At each reporting date the instruments are stated at fair value in the Group Statement of Financial Position which is the estimated amount that the Group would receive or pay to terminate the instruments based on the current interest rate yield structure. The Group has not applied hedge accounting for any financial instrument in place and any movement in fair value is recognised in the Profit and Loss and other Comprehensive Income.

Share-based payments

The Group operates an equity-settled share-based performance plan outlined in the Directors' Remuneration Report under which Directors and employees are able to acquire shares in the Company. The fair value cost benefit of the employee services received for the options granted is recognised over the vesting period in employee costs within administration expenses with a corresponding amount recognised in equity. The charge is measured using valuation models and assumptions outlined in note 18 with adjustment for when non-market conditions are not expected to be met. This also includes the share-based payment element of the bonus.

Post employment benefits

The Group operates two pension schemes. The defined benefit scheme is based on final pensionable pay and has been closed to new entrants since 1989. The assets of the scheme are held separately from those of the Group and are measured at fair value, the scheme obligations being calculated at discounted present value, with any net surplus or deficit recognised in the Group Statement of Financial Position. Current service cost and net interest on scheme liabilities and scheme assets are recognised as an expense in the Profit and Loss and other Comprehensive Income. Actuarial gains and losses on scheme assets and liabilities are recognised in equity through the Profit and Loss and other Comprehensive Income. The assumptions used by a qualified actuary are outlined in note 24.

The Group contributes to eligible employees' defined contribution personal pension plans and does not accept any responsibility for the benefits gained from these plans. The contributions are recognised as an expense in the Profit and Loss and other Comprehensive Income as incurred but the Group does not recognise any gains or losses arising from movements in the value of the personal pension plans.

Taxation

Any tax charge recognised in the Profit and Loss and other Comprehensive Income comprises current and deferred tax except to the extent that it relates to items recognised directly in equity, in which case the related tax is recognised in equity.

Current tax is the expected tax liability on the results for the year adjusted for items that are not taxable or deductible, or taxable and deductible in other periods, together with any adjustment in respect of previous years calculated using tax rates and laws enacted or substantively enacted at the balance sheet date.

Deferred tax is the tax expected to be paid or recovered on temporary differences arising between the carrying amounts of assets and liabilities for financial reporting purposes and their tax base. 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. Tax liabilities are recognised for all taxable temporary differences and tax assets to the extent that future taxable profits will be available against which the asset can be utilised.

The Group converted to REIT status on 1st April 2007 and as a consequence substantially all the Group's activities as a property rental business are exempt from tax, including rental profits and gains on rental property disposals.

2 Net rental income from investment properties

Rent receivable under the terms of the leases is adjusted, in accordance with SIC 15, for the effect of any incentives given.

3 Administration costs

1 Amount charged to income in year to 31st March 2019.

2 Including prior year deferred bonus charges and adjustments.

The average number of persons employed by the Group and Company during the year was 20 (2018: 19).

In advance of each audit, the Committee obtains confirmation from the external auditor that it remains independent and that the level and nature of non-audit fees are not an independence threat. Note 3 details the total fees paid to KPMG. The Committee considers KPMG to be independent to the Company.

4 Operating profit

Operating profit is identified in the income statement and represents the profit on activities before finance costs, share of associated undertakings and taxation.

5 Adjusted profit before tax

Adjusted profit before tax is the Group's preferred measure to provide a clearer picture of recurring profits from core rental activities before tax, adjusted as set out below.

6 Net finance costs

7 Taxation

8 Capitalised interest

Interest relating to investment properties in the course of development is dealt with as explained in note 1.

Interest capitalised during the year amounted to £1,637,218 (2018: £1,658,692) and relates to works to London, 30 Lombard Street, EC3; and Theale, Brunel Road.

Total development interest capitalised amounts to £14,186,547 (2018: £12,549,320).

9 Earnings per share

Basic earnings per share on ordinary shares is calculated on the profit in the year of £13,190,000 (2018: £43,442,000) and 94,087,315 (2018: 93,925,375) shares, being the weighted average number of ordinary shares in issue during the year.

EPRA earnings per share is calculated on the same profit after tax and on the weighted average diluted number of shares in issue during the year of 94,833,582 (2018: 94,633,180) shares, which takes into account the number of potential ordinary shares under option.

Adjusted earnings per share excludes the after tax effect of profit from the disposal of investment properties, surrender premiums received, the change in the fair value of derivatives, the cancellation of derivatives, the movement in revaluation of investment properties and share-based payments. The EPRA measure includes all of these adjustments except surrender premiums included in other property income, which are added back.

10 Dividends

The final dividend is not included in the accounts as a liability as at 31st March 2019, as it is subject to shareholder approval at the Annual General Meeting. The final dividend for 2018 and interim for 2019 paid in the year are included in the Consolidated Statement of Changes in Equity.

11 Investment properties

In accordance with the Group's accounting policy on properties there was an external valuation at 31st March 2019. These valuations, were carried out by Knight Frank LLP, Chartered Surveyors and Valuers. All valuations were carried out in accordance with the Appraisal and Valuation Standards of RICS, on an open market basis.

The historical cost of properties stated at valuation is approximately £335 million (2018: £319 million) for the Group and £278 million (2018: £269 million) for the Company.

The amount of interest capitalised during the year was £1,637,218 (2018: £1,658,692). The Group is a REIT and therefore does not obtain relief from Corporation Tax.

Investment property valuation method and assumptions

The fair value of the property portfolio has been determined using income capitalisation techniques, whereby contracted and market rental values are capitalised with a market value for properties under development, the fair value is calculated by estimating the fair value of the completed property using the income capitalisation technique less estimated costs to completion and a risk premium. The resulting valuations are cross-checked against the equivalent yields and the fair market values per square foot derived from comparable recent market transactions on arm's length terms.

One of the assets held for sale has been valued based on the capital value per square foot. If the capital value per square foot were to increase by 10%, the year-end calculation will increase or decrease by £1.4 million.

These techniques are consistent with the principles in IFRS 13 Fair Value Measurement and use 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. There were no transfers in or out of Level 3 for investment properties during the year.

Gains and losses recorded in profit or loss for recurring fair value measurements categorised within Level 3 of the fair value hierarchy amount to £4.8 million (2018: £25.1 million) and are presented in the Group income statement in the line item 'Revaluation of investment properties'.

The significant unobservable inputs used in the fair value measurement categorised within Level 3 of the fair value hierarchy of the Group's property portfolio, together with the impact of significant movements in these inputs on the fair value measurement, are shown below:

A further £24.55 million has been designated other and not included in the analysis above.

Definitions for ERV and true equivalent yield are provided in the glossary.

12 Plant and equipment

13 Investments

At 31st March 2019 McKay Securities Plc had the following wholly owned subsidiary undertaking which operates in England and is registered in England and Wales: 20 Greyfriars Road, Reading, Berkshire, RG1 1NL.

Baldwin House Limited

The above subsidiary is included in the consolidation.

The principal activity of the subsidiary undertaking is property investment and development.

The Directors are of the opinion that the investment in the subsidiary undertaking is not worth less than the current book value.

14 Trade and other receivables

Group trade receivables that were past due but not impaired are as follows:

The Group holds no collateral in respect of these receivables.

The transactions relate to capital expenditure funded by the parent £7,354,000.

15 Liabilities

The fair value of current liabilities is estimated as the present value of future cash flows which approximate their carrying amounts due to the short term maturities.

Creditor days for the Group were 7 days (2018: 4 days).

Loans and other borrowings

The analysis of bank loans which are secured on certain of the freehold and leasehold properties of the Group is as follows:

The bank loans are secured against land and buildings with a carrying amount of £403,300,000 (2018: £395,125,000).

Borrowing facilities

The Group has various undrawn committed borrowing facilities. The facilities available in respect of which all conditions precedent had been met were as follows:

Liquidity risk

Liquidity risk is managed through committed bank facilities that ensure sufficient funds are available to cover potential liabilities arising against projected cash flows. The Group's facilities are revolving, allowing the Group to apply cash surpluses to temporarily reduce debt.

On 8th April the company increased total facility to £245m (from £190m). Three bilateral facilities (£125m) were replaced with one credit facility (RCF) of £180m.

Financial instrument maturity

Credit risk

Credit evaluations are performed on all tenants looking to enter into lease or pre-lease agreements with the Group. Credit risk is managed by tenants paying rent in advance. Outstanding tenants' receivables are regularly monitored.

At the Statement of Financial Position date there were no significant concentrations of credit risk, except for the low risk lease commitments which were either government departments or held a top credit rating. The maximum exposure to credit risk is represented by the carrying amount of each financial asset including derivative financial instruments on the Group Statement of Financial Position.

The Group has no exposure to currency risks.

Market risk

The Group is exposed to market risk through changes in interest rates or availability of credit.

Interest rate risk

The Group adopts a policy of ensuring that its exposure to interest rate fluctuations is mitigated by the use of financial instruments. The remaining swap was cancelled on 28th March 2018 for £13,352,210.

A 25 basis points change in interest rate levels would increase or decrease the Group's annual profit and equity £250,000 (2018: £367,500). This sensitivity has been calculated by applying the interest rate change to the variable rate borrowings at the year end. The comparative figure for 2018 was also based on a 25 basis points change in interest rates. The 25 basis points change being used shows how the profit or loss and equity would have been affected by changes in the relevant risk variable that were reasonably possible at the year end.

Interest rate derivatives

The remaining swap was cancelled on 28th March 2018 in full at a cost to the Group of £13,352,210.

The Group does not hedge account its interest rate derivatives and states them at fair value in the statement of financial position based on quotations from the Group's banks, any movement passing through the Statement of Profit and Loss and other Comprehensive Income. Interest rate swaps are classed as level 2 in accordance with the fair value hierarchy stated in IFRS 13. The fair value of these level 2 contracts are estimated by discounting expected future cash flows using current market interest rates and yield curve over the remaining term of the instrument.

There are no liabilities at maturity and no material unrecognised gains or losses.

In both 2019 and 2018 there was no difference between the book value and the fair value of all the other financial assets and liabilities of the Group and Company.

16 Obligations under finance leases

The above finance lease liabilities relate to investment properties with a carrying value of £97,250,000 (2018: £84,900,000). The terms of these lease agreements are for periods of between 99 and 125 years. There are no restrictions imposed by the lease agreements. No contingent rents are payable.

Finance lease liabilities are effectively secured as the rights to the leased assets revert to the lessor in event of default.

17 Operating leases

The Group leases out all of its investment properties under operating leases.

The future aggregate minimum rentals receivable under non-cancellable operating leases are as follows:

18 Share based payments

During the year to 31st March 2019, the Group had one share based payment arrangement, which is described below. In the case of the PSP awards, the expected volatility was determined by calculating historical volatility of the Group's share price.

Performance Share Plan

The performance targets for PSP awards are a combination of TSR and absolute NAV performance over a three year period. If the performance criteria have not been met at the end of the vesting period then the awards will lapse.

The nil cost awards outstanding at 31st March 2019 have been fair valued using a Monte Carlo valuation pricing model using the following main assumptions:

19 Called up share capital

20 Capital management

The Group's objectives when managing capital are to safeguard its ability to continue as a going concern, to provide returns to shareholders and to maintain an appropriate capital structure to minimise the cost of capital. The current capital structure of the Group comprises a mix of equity and debt. Equity comprises issued share capital, reserves and retained earnings, as disclosed in the Group Balance Sheet.

The Group uses a number of key metrics1 to manage its capital structure:

· gearing

· LTV

The Board monitors the ability of the Group to pay dividends out of available cash and distributable profits.

1 See glossary.

21 Related party transactions

There were no transactions with Directors, who are considered key management personnel, other than remuneration.

The estimated IFRS2 share based payment charge to the Directors is £697,000 (2018: £592,000).

These related party transactions are between Baldwin House Limited and the Company. They relate to property payments and receipts for the two properties held in Baldwin House Limited. This balance is zero at Group level.

22 Net asset value per share

23 Commitments and contingent liabilities

These commitments relate to the Group's one current development in place at the end of the year.

24 Pensions

The Group and Company operates a defined benefit pension scheme in the UK providing benefits based on final pensionable salary. The assets of the scheme are held separately from those of the Group, being invested with insurance companies and managed funds. The contributions are determined by a qualified actuary on the basis of a triennial valuation using the attained age method. The most recent actuarial valuation was as at 31st March 2017. The assumptions which have the most significant effect on the results of the valuation are those relating to the rate of return on investments and the rate of increase in salaries. It was assumed that the investment returns would be 5.0% per annum.

The Group contributes £240,000 per annum into the Scheme.

At the 31st March 2017 actuarial valuation the scheme was 88% funded on the continuing valuation basis. A recovery plan and schedule of contributions has been agreed designed to address this shortfall.

The IAS 19 valuation for the pension scheme disclosures is based on the most recent actuarial valuation at 31st March 2017 and updated by First Actuarial in order to assess the liabilities of the scheme at 31st March 2019. Scheme assets are stated at their market value at 31st March 2019.

The Scheme has been closed to new entrants since 1989.

The assets of the scheme have been taken at market value and the liabilities have been calculated using the following principal actuarial assumptions:

The mortality assumptions adopted at 31st March 2019 imply the following life expectancies for members currently aged 60:

Male = 26.3 years

The asset split is approximated using the current fund splits for each manager.

Analysis of changes in the value of the defined benefit obligation over the period:

Sensitivity analysis

Analysis of the amount charged to operating profit:

Analysis of the amount recognised directly in equity via other comprehensive income:

Analysis of the movement in the balance sheet deficit:

The last active member reached retirement age in May 2013.

The Report and Financial Statements will be posted to Shareholders on 3rd June 2019 with copies available from the Group's registered office at 20 Greyfriars Road, Reading, RG1 1NL from the same date, and from the Group's website www.mckaysecurities.plc.uk

GLOSSARY

Adjusted EPS

Earnings per share based on profits and adjusted to exclude certain items as set out in note 9.

Adjusted profit before tax

Profit before tax adjusted to exclude certain recurring and non-recurring items relating to non core rental activity as set out in note 5.

Book value

The amount at which assets and liabilities are reported in the accounts.

BREEAM

Building Research Establishment Assessment Method. An environmental standard that rates the sustainability of buildings in the UK.

Carrying value

The value of an asset based on prior valuation with the addition of any subsequent capital expenditure.

Contracted rent

Rent payable under the terms of a lease, less ground rent, with no allowance for the value of incentives granted at lease commencement.

CRC

Carbon Reduction Commitment. A mandatory emissions reduction standard in the UK and covers all forms of energy excluding transportation fuels.

Diluted figures

Reported amount adjusted to include the effects of potential shares issuable under employee share schemes.

Dun and Bradstreet

Provider of business information and risk management insight.

Earnings per share (EPS)

Profit after taxation attributable to ordinary shareholders divided by the weighted average number of ordinary shares in issue during the year.

EPC

Energy Performance Certificate. Certificates carry ratings which measure the energy and carbon emission efficiency of the property using a grade from an 'A' to a 'G'.

EPRA

Standard calculation methods for adjusted EPS, NAV and NNNAV as set out by the European Public Real Estate Association (EPRA) in their Best Practice and Policy Recommendations.

Equivalent yield

The internal rate of return from an investment property, based on the value of the property assuming the current rent passing reverts to ERV and assuming the property becomes fully reoccupied over time. It assumes that rent is received quarterly in advance.

Estimated Rental Value (ERV)

The valuers estimated amount for which floor space should let on the date of valuation on appropriate lease terms net of ground rents payable. Also known as MRV.

Extensible Business Reporting Language (XBRL)

A computer language for electronic transmission of business and financial information.

Gearing

Drawn debt to shareholders' funds.

GRESB

Global Real Estate Sustainability Benchmark.

Industrial property

Term used to include light industrial, industrial and distribution warehouse property falling within classes B1c, B2 and B8 of the Town & Country Planning Use Classes Order. The term does not include retail warehousing, falling within class A1 of the Order.

Initial yield

Net rents payable at the valuation date expressed as a percentage of the value of property assets after allowing for notional purchasers' costs.

Interest cover (ICR)

The number of times Group net interest payable is covered by underlying profit before interest and taxation.

Interest rate swap

A financial instrument where two parties agree to exchange an interest rate obligation for a pre-determined amount of time.

IPD/MSCI

Investment Property Databank. Leading provider of independent statistical analysis to the commercial property sector.

Loan to value (LTV)

Drawn debt divided by the value of property assets.

Net asset value (NAV) per share

Total equity divided by the number of ordinary shares in issue at the period end.

Net debt

Total borrowings less cash credit balances.

Property Income Distribution (PID)

PID dividend payments are taxable as letting income in the hands of shareholders who pay tax. They are paid after deduction of withholding tax at the basic rate.

REIT (Real Estate Investment Trust)

A tax efficient structure for the management of property. It must be publicly quoted with 75% of its profits and assets derived from a qualifying property rental business which is exempt from tax on income and gains.

Rental value growth

Increase in rental value, as determined at the valuation date, over the period on a like-for-like basis.

Reversion

Potential uplift in rental value to market rent, as determined at the valuation date, likely to arise from a rent review, lease renewal or letting.

RPIX

Retail Price Index excluding mortgage interest.

Shareholders' funds

Total equity of the Company.

SIC 15

The IFRS treatment in respect of letting incentives. It requires the Company to offset the value of incentives granted to lessees against the total rent due over the length of the lease, or to a break clause if earlier.

Stamp duty land tax

Government tax levied on certain legal transactions including the purchase of property.

Total shareholder return (TSR)

The growth in the value of an ordinary share plus dividends reinvested during the year expressed as a percentage of the share price at the beginning of the year.

True equivalent yield

The constant capitalisation rate, which, if applied to all cash flows from an investment property, including current net reversions and such items as voids and expenditure, equates to the market value having taken into account notional purchasers' costs and assuming rents paid quarterlyin advance.

Weighted average unexpired lease term (WAULT)

The average lease term remaining to expiry across the portfolio weighted by rental income. This is also disclosed assuming all break clauses are exercised at the earliest date.