Results for the six months to 30 June 2021

9 September 2021

Results for the six months to 30 June 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 six months ended 30 June 2021.

Highlights

· Gross property valuation up 2.0% over six months driven by rental uplifts up to the end of July of 1.9% with Topped Up Net Initial Yield steady at 5.4%

· EPRA NTA per share up 3.1% over six months to 391.1 pence per share

· Rents have returned to 92% of the levels they would have been without pandemic rent concessions and are anticipated to fully resume the levels originally contracted by January 2022

· 19.6% uplift in Adjusted EPRA EPS to 6.1p per share

‐ Like for like earnings have increased by 8.5% as rents continue to return to their pre pandemic course

‐ Impact of temporary rent concessions of 1.6p per share for the six months to 30 June 2021, down from 2.0p per share reflecting some three months of concessions reported in the half year to 30 June 2020

· Shareholder returns have rebounded:

‐ Total Accounting Return of 5.0% following a negative 8.1% return for the same period in 2020

‐ Total Shareholder Return of 29.1% following share price recovery to within 97% of EPRA NTA at 30 June 2021 and above 30 June 2021 EPRA NTA by 7 September 2021

· The Group's Weighted Average Unexpired Lease Term of 19.7 years remains one of the longest amongst UK REITs

· Net LTV at 35.6% down from 36.4% at 31 December 2020 

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

· The Company has further formalised its ESG policies including committing to sign up to the UN Principles for Responsible Investment in 2022. We actively engage with our tenants to work with them where possible on their own ESG initiatives and we continue to monitor this evolving area of regulation, reporting and best practice.

· The Management Team's 12.4% interest in the Company, worth £161 million at the 7 September 2021 share price, provides strong alignment with shareholders. Every member of the Prestbury senior Management Team is personally heavily invested in the Company and together invested a further £5.3 million of cash in interests in the Company's shares in 2020.

· In the next six months the Company is seeking to deploy its surplus cash above an appropriate liquidity buffer, firstly to optimise the terms of our debt refinancing with the remainder deployed in asset management opportunities and acquisitions. This should materially enhance shareholder returns.

(1) Using independent external valuers' RPI estimates averaging 2.5%

(1) This is illustrative and does not constitute 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:

"Following an undoubtedly turbulent 2020, we are pleased to be able to demonstrate with these results for the six months to 30 June 2021 that the growth trajectory of the Company is recovering. EPRA NTA per share has increased by 3.1% over the period contributing to a 5.0% Total Accounting Return, and with a significant share price recovery over the six months we can report a 29.1% Total Shareholder Return. Testament to the strength of our strategy of focussing on long term growth, in the seven years since listing the Company has delivered a Total Shareholder Return of 15.6% p.a. which compares to the FTSE EPRA NAREIT UK Index equivalent of 4.1% p.a.

"While we have all learned not to call an end to Covid-19 challenges too soon, rents across the entire portfolio are contracted to return to their pre-pandemic trajectory by the start of 2022 and we continue to believe that this Company is well positioned to further benefit from the recovery; our Management Team remains very ambitious and fully aligned to exploit our exceptional portfolio and strong cash position to drive performance, which altogether gives us strong cause for optimism."

For further information on the Company, please contact:

Interim Results Presentation

Secure Income REIT will be holding a presentation for analysts and investors today 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:

Webcast link: https://webcasting.brrmedia.co.uk/broadcast/61139ca20ddc2b060ef529e2

About Secure Income REIT Plc

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

The Company's robust balance sheet, strong liquidity and experienced Management Team enabled us to support any tenants suffering business disruption through the pandemic, allowing the Company to resume its own strong growth trajectory.

The Company continued to pay quarterly dividends throughout the pandemic without interruption and, over seven years since listing, delivered a Total Accounting Return of 15.0% p.a. and a Total Shareholder Return of 15.6% p.a.. Over the same period, the FTSE EPRA NAREIT UK Index delivered 4.1% p.a..

The Company has £2.0 billion of gross property assets, £1.3 billion of net assets, £184 million of uncommitted and unfettered cash, structurally secure non-recourse debt, and difficult to replicate very long leases on Key Operating Assets in defensive sectors. The Management Team is strongly aligned with shareholders through its 12.4% interest in the business worth £161 million at the 7 September 2021 share price.

The Company is a UK REIT which floated on the AIM market of the London Stock Exchange in June 2014.

The Company's LEI is 213800M1VI451RU17H40

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

Forward looking statements

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 the date of this document.

Chairman's Statement

Following an undoubtedly turbulent 2020, we are pleased to be able to demonstrate with these results for the six months to 30 June 2021 that the growth trajectory of the Company is recovering. EPRA NTA per share has increased by 3.1% over the period contributing to a 5.0% Total Accounting Return, and with a significant share price recovery over the six months we can report a 29.1% Total Shareholder Return.

Our major tenants are either in the healthcare sector which was sheltered from the economic impact of Covid-19, or are in the leisure and hospitality sectors, where we have started to see the benefits of supporting them through the challenges of the pandemic. Those businesses have begun their own recovery and appear to be gaining momentum in building their trade back to pre-pandemic levels. While we have all learned not to call an end to Covid-19 challenges too soon, we believe that this Company is well positioned to further benefit from the recovery in future.

Results and financial position

The Group's net asset value per share at 30 June 2021 reported under IFRS was 388.9 pence, up 3.2% since 31 December 2020. Using the industry standard EPRA measures for ease of comparison with other quoted real estate businesses, the Group's EPRA NTA per share at 30 June 2021 was 391.1 pence, up 3.1% since 31 December 2020.

A 1.9% increase in rents up to the end of July, captured in the 30 June 2021 valuations, has resulted in a return to the positive momentum in Total Accounting Return reported in pre-pandemic reporting periods with the independent portfolio valuation increasing by 2.0% in the six months to 30 June.

Since 31 December 2020, we have agreed in a small number of cases further short term cash flow smoothing of rental payments amounting to less than 1.5% of total portfolio rents, but there have been no further rent concessions granted with any material impact on the Group's reported earnings. In our 2021 earnings we can see the positive impact from our long term inflation protected lease structure in the increased like for like earnings under both IFRS and Adjusted EPRA earnings measures. Rent collections throughout the period have also remained strong.

Over two thirds of the Company's portfolio has the benefit of annual fixed or inflation linked upwards only rent reviews and the balance is reviewed at five yearly intervals. The reduction in the impact of the temporary rent concessions in our Adjusted EPRA EPS measure in comparison with the same period last year reflects our approach to reporting on the cash impact of these concessions, with earnings reduced by 2.0 pence per share in the first half of 2020, where the concession period was three months, compared with 1.6 pence per share in the six months to 30 June 2021. This culminates in a 19.6% improvement in Adjusted EPRA EPS in the period compared to the same period last year.

We were able to deploy an element of our surplus liquidity toward supporting the dividend through 2020. In 2021 the level of support required is beginning to tail off as our increased earnings and cash flows reflect the expiry of various rent concessions. We were pleased to be able announce an increase of 8.2% in the rate of the quarterly dividend to 3.95 pence per share in July 2021. Unless our earnings change as a result of acquisitions, debt refinancing, lease variations or disposals, that level of dividend is the Board's expectation for the remaining three quarters to June 2022.

Outlook

Throughout the pandemic our hospitals, which represent some 40% of our portfolio by value, have provided a pivotal role in the pandemic response. Our tenant Ramsay, the £8.6 billion listed group which is the largest private healthcare provider in Australia, France and Scandinavia, supported the global Covid response, reporting that they have treated more NHS patients than any other UK private sector provider. With waiting lists rising to unprecedented levels and Ramsay predominantly carrying out NHS work even before the pandemic, our hospitals are likely to continue to be in great demand, underpinning this excellent global tenant covenant.

Alton Towers and Thorpe Park are two of the UK's top theme parks and are leased to Merlin, the world's second biggest visitor attraction operator after Disney. Both our theme parks and regional budget hotels have been beneficiaries of the staycation effect with Travelodge reporting revenues within 5% of 2019 levels for the four week period including "Freedom Day" on 19 July 2021 and revenue per available room above 2019 levels in the early weeks of August. Whilst the general economy has also rebounded strongly, there are obstacles in the path of a complete recovery. Labour shortages are feeding through into supply chain interruptions, inflation is rising and a fourth wave of infections is widely predicted in the autumn, albeit with a predominantly vaccinated adult population and a Government eager to avoid the reimposition of restrictions this should temper those headwinds. These elements may hamper the speed of recovery but we do not foresee that they will ultimately knock it off course.

In our long lease property market the combination of low interest rates and rising inflation creates a very supportive environment. Yields for properties let on long inflation protected leases are typically 7% above the gross redemption yield of long dated index linked gilts, providing an attractive blend of income return and inflation protection that is generating strong bidding for these types of assets in the market. However, whilst we have seen a revival in the trading and share prices of many leisure and hospitality businesses and a recovery in their bond prices, the property investment market in this sector remains subdued. We believe that the low number of transactions is primarily due to buyers seeking to obtain a pandemic discount whilst owners feel little compulsion to sell unless they can receive much closer to pre-pandemic pricing. This stand-off is generating little comparable evidence, leaving the valuation yields for our leisure and hospitality assets largely unchanged since the pandemic nadir of last summer, at a time when vaccines were yet to be approved let alone being successfully rolled out. Eventually the bid-offer spread will narrow and whilst we can only speculate on the timing, we strongly believe that it will be resolved in our favour and that as trading continues to improve, our yields will start to re-rate. In the meantime, the rents across the entire portfolio are contracted to return to their pre-pandemic trajectory by the start of 2022.

We are pleased to have seen a resumption of our performance track record with a Total Shareholder Return of over 15% per annum since float in 2014. We are excited about the opportunity to further drive future returns not only as valuations recover but with a reduction in our cost of our debt. Our biggest loan of £376 million, maturing in October 2022, represents over 40% of our total debt and is our most expensive facility, carrying a coupon of 5.7%. We have the flexibility of our considerable uncommitted cash buffer of £184 million, some of which may play a part in optimising financial terms of new loans. Our aim is to maintain all the structural safety and covenant headroom that we have always sought while delivering savings on the interest cost to the benefit of shareholders through increased dividends. We also look beyond the Merlin refinancing date to our wider asset pool and will continue to seek opportunities to further drive shareholder returns within a well-managed capital structure. We are also actively seeking opportunities to deploy cash for acquisitions or for asset management within our existing portfolio. We are, therefore, seeking to deploy all of our surplus cash within the next six months in opportunities that we consider will be materially accretive to shareholder returns.

Over the course of last year our share price discount to net assets has closed but with most of our long income peers currently trading at a material NAV premium, we and our Management Team remain very ambitious and fully aligned to exploit our exceptional portfolio and strong cash position to drive performance over the long term as our strategy is designed to deliver.

Martin Moore

Chairman

8 September 2021

Investment Adviser's Report

Prestbury Investment Partners Limited, the investment adviser to Secure Income REIT Plc, presents its report on the operations of the Group for the six months to 30 June 2021.

The Supplementary Information which follows the condensed financial statements includes calculations of the various EPRA and Adjusted EPRA performance measures referred to in this report. Capitalised terms are explained in the Glossary at the end of the Supplementary Information.

Tenant support provided

No rent reductions have been granted since 31 December 2020. Largely as a consequence of the later than originally expected relaxation of all Covid-19 restrictions, delayed from June to July this year, we have agreed one further rent deferral since the 2020 year end on less than 1.5% of total Group rents as further explained below.

The support measures granted in 2020 with an impact on the 2021 financial year are:

· June 2020 and September 2020 rents due from Merlin Entertainments Limited, amounting to £17.6 million at the 30 June 2021 exchange rate, were deferred to September 2021. The deferred rent was recorded in the income statement for the year to 31 December 2020 but in order to more clearly and 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 will be recorded in Adjusted EPRA EPS in the period in which they are received, which, under the terms of the agreement made with the tenant, is contracted to be in the second half of the 2021 financial year.

· A CVA approved by Travelodge Hotels Limited creditors in 2020 has resulted in £8.8 million of rent foregone in 2021, of which £4.4 million relates to the six months to 30 June 2021. Rents return to the levels originally contracted in January 2022. As a further result of the CVA, receipt of any rental uplifts arising in 2020 and 2021 is deferred until the rents have returned to their contractual levels. Cash flows from a further £0.6 million of rent that would otherwise have been receivable in 2021 have therefore been deferred to January 2022, of which £0.2 million relates to the six months to 30 June 2021. Consistent with the treatment of the Merlin rent deferral, the deferred uplifts will be recorded in Adjusted EPRA EPS in the period in which they are received. The majority of the Travelodge rent reductions took effect in the 2020 financial year and for the purposes of comparison, the rent reduction in 2020 was £14.5 million relating to the nine months from April to December 2020.

Further support provided in the year to date:

· Monthly rents totalling £0.6 million originally due in May and June 2021 from the tenant of the Brewery have been deferred so they are payable in twelve monthly instalments from September 2021. The deferred rent has been recorded in the income statement for the period to 30 June 2021 but will be recorded in Adjusted EPRA EPS in the period in which it is received.

The impact of these concessions on the Group's rental cash flows and on Adjusted EPRA EPS for the six months to 30 June 2021 and the contractually scheduled impact on the second half of the 2021 financial year is set out below.

(1) This is a contractual position and does not constitute a profit forecast

There are no concessions in place which reduce rents receivable in 2022 or future financial years.

The accounting policy for rent concessions is explained in the Financial Review section of this Investment Adviser's Report and remains unchanged since the 31 December 2020 annual report.

Rent collections

Over the period to 7 July 2021, the Group reported only minimal rent arrears in each quarterly collection cycle.

Amounts collected by the due date in the prior year, calculated on the same basis, were:

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

The portfolio

The Group held 160 properties at 30 June 2021 with passing rent before temporary concessions of £114.7 million, up from £113.3 million at 31 December 2020.

Portfolio valuation and rents by sector

The portfolio is valued by qualified independent external valuers every six months. There was a 2.3% increase in valuation at constant currency over the six month period, resulting in a net movement of 2.0% after exchange rate movements on the German assets.

* £6.8 million of the passing rent at 30 June 2021 and £113.7 million of the valuations at that date relate to the German Leisure properties which are denominated in Euros, translated at the period end exchange rate of €1:£0.86

In reaching their assessment of market values, the independent external valuers had all details of agreed rent concessions. The valuations therefore take into account the full effect of the concessions agreed to date and also recognise that under the terms of all of the concessions, rental income returns to its previously contracted levels by January 2022. While the 30 June 2020 and 31 December 2020 valuations of the Leisure and Budget Hotels assets were required under the RICS rules to be expressed as subject to "material valuation uncertainty", there is no such caveat applied to the 30 June 2021 valuations. Further details of valuations are given in note 10 to the condensed financial statements.

Yields by sector

* Topped Up Net Initial Yield ignores the temporary rent concessions. The Leisure Topped Up Net Initial Yield increased to 5.57% and the total Topped Up Initial Yield to 5.41% by the end of July 2021.

^ The healthcare valuations and yields take no account of any uplift from an outstanding May 2018 open market review on the Ramsay hospitals; the Ramsay rents account for 94% of the healthcare rents at 30 June 2021.

† the Leisure and Budget Hotels Running Yields are calculated using the independent external valuers' estimates of RPI averaging 2.5% per annum (31 December 2020: 2.5%)

The growth in like for like passing rent before concessions was 1.3% over the period. Rent reviews were completed on 62% of portfolio rents in the period. Very shortly after the period end, rents on the German leisure assets increased by their fixed annual uplift of 3.34% and the rents receivable from The Brewery on Chiswell Street also increased from £3.4 million to £3.8 million per annum following the five yearly fixed uplift on that property. These increases amount to a further 0.6% uplift, bringing the total growth to 1.9% by the end of July 2021.

Portfolio total rents before temporary concessions

The Group's principal lease counterparties, analysed by contracted rent before temporary concessions, are as follows:

* £6.8 million (31 December 2020: £7.1 million) of the Merlin annualised rents are Euro denominated. The total Merlin contracted rent increased to £36.3 million in July 2021, following the fixed annual uplift on the German assets.

^ contracted rent increased to £3.8 million in July 2021

† including £0.3 million (31 December 2020: £0.5 million) of estimated variable net income for the car park at Manchester Arena

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

Basis of rent reviews

The income arising on the portfolio benefits from fixed contractual rental uplifts averaging 2.8% per annum on 41% of total rents. There are upwards only RPI-linked rent reviews on 58% of the income with 1% subject to upwards only open market rent reviews. 68% of the rent is subject to annual review and the balance to five yearly review cycles.

* annual reviews with a 2% collar and 5% cap; five yearly reviews with collars between 1% and 1.5% and caps between 3.5% and 4.0%

† weighted average increase of 2.9% per annum

^ weighted average increase of 2.5% per annum

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 0.8 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.

Lease lengths

The leases on the Group's portfolio are very long, with a Weighted Average Unexpired Lease Term of 19.7 years from 30 June 2021 without tenant break, which is significantly longer than the vast majority of the other major UK REITs (defined as those with a market capitalisation in excess of £1 billion).

98% of contractual passing rents have an unexpired term without break of more than 15.5 years.

No material vacancies or landlord costs

The portfolio is fully let, other than a small restaurant unit at Manchester Arena. All occupational leases are on full repairing and insuring ("FRI") terms, meaning that property running costs are low and there is no material capital expenditure requirement. There is one small income stream that arises from an operating agreement rather than an FRI lease, which currently accounts for a negligible percentage of the Group's income.

Leisure assets (41% of portfolio value)

The Company's leisure assets are:

· four well established, large scale visitor attractions with 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, including all of the on-site accommodation at the three attractions. The German assets operated by Merlin are the 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 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. 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 an enterprise value of some £6 billion. 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, a long term fund comprising part of Blackstone's latest reported assets under management of c. £495 billion, Canada Pension Plan Investment Board, one of the world's largest pension fund investors with latest reported assets under management of over £300 billion and the Wellcome Trust which invested in a 10% interest in 2020 and which has assets under management of c. £29 billion. During the pandemic, Merlin was able to access capital from public bond markets as part of their liquidity management strategies. The quoted pricing for Merlin's publicly traded 5.75% bonds maturing in 2026, which have been in issue since before the onset of the pandemic, has recovered to within 95% of the pre pandemic price (taking the quoted price at 1 January 2020) and trading above par at a yield to maturity on 3 September 2021 of 4.9%.

Total contracted rents receivable from Merlin were £36.1 million per annum at 30 June 2021 and increased to £36.3 million per annum in July 2021 following the fixed annual rental increase on the German assets. This is an increase of 3.0% over £35.3 million at 31 December 2020 (on a constant currency basis). The weighted average term to expiry of the Merlin leases is 21.0 years without break from 30 June 2021 and the tenants have two successive rights to renew for 35 years at the end of each term. There are upwards only uncapped RPI-linked rent reviews on the UK properties every June throughout the term, which in the six months to 30 June 2021 resulted in a rental increase of 2.9%. The German properties are subject to fixed annual increases of 3.34% every July throughout the term. The leases are on full repairing and insuring terms.

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 arena, the UK's largest indoor arena by capacity, some additional 160,000 sq ft of office and leisure space, a multi-storey car park with approximately 1,000 spaces, and other income sources.

The Arena is let to SMG and SMG Europe Holdings Limited, part of ASM Global, with 24.0 years unexpired without break from 30 June 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 21 countries and with pro forma annualised 2019 revenues of $500 million estimated at the time of the merger. The Arena was closed throughout the pandemic period but it was able to reopen in August 2021 and the current expectation is that it is likely to be 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 tenant. The office and ancillary leisure space at Manchester Arena is let to tenants including Serco, Unison, JCDecaux and go-karting operator TeamSport. The leases on the Manchester site as a whole have a weighted average term to expiry of 17.3 years from 30 June 2021 and produce net passing rent of £5.6 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 new Crossrail Station at Liverpool Street. As with Manchester Arena, the Brewery has been closed throughout the pandemic period but has been permitted to reopen from July 2021. It is now staging events again and is expected to be fully operational from September 2021.

The lease term to expiry is 35.0 years without break from 30 June 2021 and the lease provides for five-yearly fixed uplifts of 2.5% per annum compounded. The passing rent was £3.4 million per annum as at 30 June 2021 and increased to £3.8 million in July 2021.

Pubs portfolio

At 30 June 2021 the portfolio of 17 high street pubs produced passing rent of £2.2 million per annum and the leases have an average term to expiry of 24.0 years without break. The pubs had all reopened for indoor trading, subject to Covid restrictions, by May 2021 and with final social distancing restrictions lifted in July 2021. During the period, one pub with negligible rent was sold with vacant possession for £150,000, slightly ahead of its 31 December 2020 book value.

16 of the pubs are let on individual leases either to, or guaranteed by, Stonegate Pub Company Limited. Stonegate acquired the Ei Group for £1.27 billion in March 2020, creating the largest pub company in the UK with over 4,500 pubs. Stonegate was able to access public debt markets during the pandemic period in support of the group's liquidity needs. Stonegate's Sterling bonds maturing in 2025, issued in July 2020, were trading above par at a yield to maturity of 6.9% at close on 3 September 2021. The lease of the remaining pub in Palmers Green, London, which was assigned to another operator in the period, represents 1.5% of the pub rents and a negligible proportion of total Group rents.

Pub rents are subject to five-yearly RPI-linked increases collared between 1% and 4% per annum compounded. The next review falls in February 2025.

Healthcare assets (39% of portfolio value)

The Group's healthcare assets, 11 freehold private acute hospitals and a central London freehold private psychiatric hospital, have 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, a very substantial European operator of retirement homes, rehabilitation clinics and psychiatric care.

The Ramsay hospitals are let on full repairing and insuring leases with a term to expiry at 30 June 2021 of 15.9 years without break. The rents increase in May each year by a fixed minimum of 2.75% per annum throughout the lease term. Following the May 2021 fixed uplifts, the rents on the Ramsay portfolio 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 and then in May 2022 and every five years thereafter. The May 2018 open market review remains outstanding. It is 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. 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 these financial statements take 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. Ramsay is a constituent of the ASX 50 index of Australia's largest companies, with a market capitalisation at 7 September 2021 (and using the exchange rate on that date) of £8.6 billion (£8.1 billion at 9 March 2021).

The Ramsay hospitals continued to trade without pause throughout the pandemic and, through their contracts with NHS England, provided guaranteed capacity to the NHS 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. In their results for the year to 30 June 2021 Ramsay announced 11.9% earnings growth for their worldwide group and 9.9% growth in EBITDAR in the UK segment. The Ramsay balance sheet is strong with low leverage and significant cash flows supporting material capital expenditure over the year in the existing estate and also earmarked for further investment in future. Ramsay noted that private admissions returned strongly after lockdown restrictions eased in April, demonstrating the strength of their business model which allows them to mix private treatment with NHS cases. Ramsay's management highlights 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 30 June 2021 of 23.1 years without break. The rent increases in May each year by a fixed 3.0% per annum throughout the lease term and as a result increased from £2.17 million to £2.23 million on 3 May 2021. The lease is guaranteed by Orpea SA, a leading European operator of retirement homes, rehabilitation clinics and psychiatric care, listed on Euronext Paris with a market capitalisation at 7 September 2021 (and using the exchange rate on that date) of £6.1 billion (£5.7 billion at 9 March 2021).

Budget Hotels assets (20% of portfolio value)

At 30 June 2021 the Group owned 123 Travelodge hotels in England, Wales and Scotland, 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 over 45,100 rooms as at 30 June 2021.

As a response to liquidity issues created by the forced closure of nearly all of their hotels, Travelodge concluded a Company Voluntary Arrangement (CVA) in June 2020. As a consequence of the CVA, £14.5 million of rent was foregone by the Group in the 2020 financial year but the extent of the rent reduction has reduced significantly in the current financial year. The contractually scheduled rent reduction for the 2021 financial year is £8.8 million, of which £4.4 million is attributable to the six months to 30 June 2021. Rents are due to return to the levels originally contracted from January 2022. Travelodge rents are currently receivable monthly in advance as part of the concession granted and all rent demanded under the terms of the CVA has been received when due.

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. Travelodge's publicly traded bonds which have been in issue throughout the pandemic period are trading at within 5% of their pre-pandemic levels at the start of 2020, with a yield to maturity of 6.8% on 3 September 2021.

One of the attractions of investment specifically in budget hotels rather than the wider hotel market is their relative resilience in recessionary times, and our expectation of a stronger recovery in this sector of the hotels market has been borne out by industry data showing a widening outperformance by budget hotels over the rest of the sector since UK hotels were permitted to fully reopen in July 2021. The most recent financial statements published by Travelodge cover the six months to 30 June 2021, which is before the date in which the Covid-19 operating restrictions for hotels were fully lifted. However, they also reported strong recovery in trading since restrictions were fully lifted, as the most recent month for which trading has been reported, the four week period in which 19 July's "Freedom Day" fell, saw revenues return to within 5% of the same period in 2019. Trading is also improving at the EBITDA level, with each of the three most recent weeks reported by them seeing revenue per available room retuning to levels above those for the same period in 2019. While uncertainties remain for budget hotel businesses in the UK, including Travelodge, a clear trend towards improvement is shown in their most recent public reports.

The average term to expiry of the Travelodge leases is 20.9 years from 30 June 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. 23% of the passing rent is subject to review in 2021, all of which falls in the second half of the year, 38% in 2022, 10% in 2023, 5% in 2024 and 24% in 2025. Reviews arising during the CVA concession period, which runs to January 2022, continue to be calculated and documented but are temporarily reduced in line with the terms of the CVA and any remaining uplifted rent becomes receivable at the end of the concession period.

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 diverted to a security group in order to maintain covenant compliance if and when necessary.

Any rent concessions agreed have been implemented with the consent of the relevant lenders. In certain cases this included covenant waivers during the concession period which are no longer necessary given the significant recovery in rents payable.

The Group's total gross debt decreased by £6.6 million in the period: £3.6 million from scheduled loan repayments and £3.0 million from foreign currency translation movements on the Group's Euro denominated debt. Net debt decreased by £1.3 million, including the impact of the application of £4.3 million to topping up dividends paid above Adjusted EPRA EPS in the period.

The Group's Net Loan To Value ratio decreased from 36.4% to 35.6% over the period.

* free cash within secured facilities is released to the parent company after each quarterly interest payment date for as long as all loan covenants are complied with, increasing the balance of unfettered cash within the Group.

The terms of the facilities have not changed in the period.

* £314.4 million of senior and mezzanine Sterling loans secured on UK assets and €71.2 million of senior and mezzanine Euro denominated loans secured on German assets (translated at the period end exchange rate of €1:£0.86) with all loan tranches cross-collateralised.

† amortisation in each of the years ending October 2021 and October 2022 comprises £3.2 million on the Sterling facility and €0.6 million on the Euro facility.

The Board manages interest rate risk by either fixing or capping rates over the term of each loan. As at 30 June 2021, 97.5% of the Group's borrowings were at fixed rates. The weighted average interest rate payable in the period remained the same as in 2020 at 4.9% per annum.

There have been no defaults in any facility during the period 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.

The Board has launched the detailed work on the refinancing of the Merlin leisure facility with the objective of closing that refinancing before the results for the year to 31 December 2021 are released next year and ahead of the October 2022 maturity date. While it remains too early to state with certainty what terms will be achieved on refinancing, our ambition remains to deliver a robust structure with good covenant protection and to deliver earnings accretion to shareholders by way of lower interest costs to increase dividends payable. The Board keeps under review the prospects for a wider refinancing of the Group's assets with a view to delivering earnings accretion where possible, alongside careful risk management in structuring debt security and covenant headroom.

Financial review

Key Performance Indicators

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

Total impact of existing Rent Smoothing Adjustments and rent concessions

From the time of its listing seven years ago, the Group has had the benefit of a high proportion of income with fixed rental increases over very long lease terms, therefore the requirement to spread rents over the whole of any lease has always created a mismatch between cash rents receivable and rental income reported under IFRS. That mismatch was a major contributing factor to the adoption by the company of its Adjusted EPRA earnings measure. Adjusted EPRA earnings is designed to give a clearer calculation of Dividend Cover, on a basis that more closely reflects the Group's actual cash flows, than would be achieved by using EPRA earnings, as that measure would materially overstate Dividend Cover while cash rents are lower than rents required to be recognised in the income statement. As explained at the start of this Investment Adviser's Report we also adjust EPRA Earnings to reflect the cash flow impact of any Covid-19 rent concessions, rather than spreading them over the very long lease terms as required by IFRS reporting standards. This measure is further explained under the "Adjusted EPRA Earnings Per Share" heading later in this report and in the Supplementary Information which follows the condensed financial statements.

The overall composition of Adjusted EPRA earnings is explained later in this report. The impact of the Rent Smoothing Adjustments and the rent concessions on Adjusted EPRA Earnings is as follows:

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 RPI rental uplifts together with largely fixed debt costs and stable and predictable administrative expenses.

The dividend policy was varied 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 redeployed for the benefit of shareholders.

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 in early 2020. 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. 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.

Consistent with the guidance provided in the 2020 annual report, the basis of dividend payment therefore reverted to the 'core' dividend without the previously applicable hospitals top-up. This equated to a quarterly dividend of 3.65 pence per share payable in each of the last two quarters of 2020 and the first two quarters of 2021, increasing to 3.95 pence per share declared in the third quarter of 2021.

The dividend for the third quarter of 2021 was declared on 22 July 2021 at 3.95p per share, an increase of 8.2% over the rate payable for the prior quarter. While the actual earnings outturn may vary from expectations if there are any acquisitions, disposals, debt refinancing or lease variations, the availability of substantial surplus cash and the near term contracted resumption of rents to their pre pandemic trajectory means that the Board's current expectation is that dividends will continue to be paid at this level for the fourth quarter of 2021 and the first two quarters of 2022.

While the UK's vaccination programme and the reopening of most of the economy has resulted in an easing of the risk environment, uncertainty arising from the pandemic remains elevated. For as long as it does, and in the event of any other material unexpected events arising, the dividend policy remains under review. The importance of the dividend to many investors is acknowledged and is carefully considered in any evaluation of the appropriateness of declaring a dividend in the context of the conditions prevailing at that time and in setting dividend policy.

Key performance indicator - Total Accounting Return

In measuring progress towards 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 not necessarily related to the Group itself.

* including £7.6 million or 2.3 pence (2020: £9.8 million or 3.0 pence) of Rent Smoothing Adjustments

The industry standard EPRA NTA measure takes IFRS net asset value and excludes items that are considered to have no relevance to the assessment of long term performance. Consistent with the EPRA Guidance, which requires an assessment of the likelihood of investment properties being sold, the Group's reported IFRS NAV is adjusted to exclude 50% of the deferred tax on investment property revaluations (in this case relating to the German assets) and all of the fair value movements on derivatives. EPRA NTA and EPRA NTA per share are reconciled to net asset value measured in accordance with IFRS in note 19 to the condensed financial statements.

* adjusted by £7.6 million or 2.3 pence per share (2020: £9.8 million or 3.0 pence per share) of Rent Smoothing Adjustments

The analysis of the investment property revaluation in the period is presented in the Portfolio section of this report.

Key performance indicator - Adjusted EPRA earnings

The calculation of basic EPS under IFRS, as reported in the condensed financial statements, is shown below.

IFRS earnings include unrealised property revaluation movements, gains and losses on any property disposals and certain other elements such as unrealised valuation movements in 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. The calculation of EPRA earnings and EPRA Earnings Per Share is presented in note 9 to the condensed financial statements.

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 incentive fees which are payable in shares. A further measure, Adjusted EPRA Earnings, is therefore presented, both for comparison of the performance of the Group from year to year and with its peer group, and to avoid distortions in the per share figures 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, including those arising from Covid-related rent concessions, from rental income 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 such adjustments since 2016); and

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

Adjusted EPRA EPS is reconciled to basic EPS in note 9 to the condensed financial statements. The table below shows the analysis of the Adjusted EPRA earnings in the period in order to demonstrate where the adjusting items take effect.

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 below.

Adjusted EPRA earnings per share - property outgoings

On an Adjusted EPRA earnings basis, various items are reclassified within the income statement to more accurately reflect the net cost of the Group's property outgoings. The adjusted figure is used in the calculation of the industry standard EPRA Cost Ratio shown in the Supplementary information. This includes the recovery of certain head rent and other costs from the occupational tenants.

Adjusted EPRA Earnings Per Share - administrative expenses

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

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 line item in the table above. The proportion of disallowed VAT on administrative expenses averaged 19% during the period (six months to 30 June 2020: 21%).

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 advisory fee for the period amounted to £6.0 million plus irrecoverable VAT of £0.5 million (six months to 30 June 2020: £6.7 million plus irrecoverable VAT of £0.4 million).

The basis of calculating the advisory fees is explained in note 20 to the condensed financial statements. In summary, the fees are calculated on a reducing scale based on the Group's EPRA NAV (as defined in 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.

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 August 2019 from the EPRA NAV on which the advisory fee is calculated. With effect from 1 April 2020, for the purposes of calculating the advisory fee, EPRA NAV excludes the balance of that surplus cash 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.

The saving for the six months to 30 June 2021 as a result of this amendment is £0.3 million (year to 31 December 2020: £0.8 million). The surplus cash realised on the disposal was £164.0 million and the balance of the surplus at 30 June 2021 was £109.9 million (31 December 2020: £113.9 million).

The management contract between the Company and the Investment Adviser has a term through to December 2025 and will be subject to its next review in the ordinary course by the Remuneration Committee in December 2022. There are no renewal rights or payments at the time of expiry. Any payments triggered by a change of control of the Company are limited to four times the most recent quarterly fee at the time any such change occurs, which is the maximum amount payable on any form of termination of the contract.

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.

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 £0.1 million in the period (six months to 30 June 2020: £0.1 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 total £0.1 million (six months to 30 June 2020: £0.2 million) in the period.

If the Total Accounting Return to investors over a financial year as set out in the audited accounts exceeds a compound growth rate of 10% per annum above the 2016 basis EPRA NAV per share the last time any incentive fee was paid, the Investment Adviser earns an incentive fee amounting to 20% of any surplus above that priority return to shareholders, subject to a cap of 5% of 2016 basis EPRA NAV (other than in the event of a sale of the business, where an incentive fee would not be capped). Any such fee is payable in shares which are not permitted to be sold, save in certain limited circumstances, for a period of between 18 and 42 months following the end of the year for which they were earned.

In order to make a reasonable assessment of whether or not such a fee is likely to be payable in respect of the 2021 financial year, the Board has estimated the EPRA NAV of the Group at 31 December 2021 on the basis of the assumptions set out in note 20 to the condensed financial statements. On the basis of that assessment, no fee would be payable for the 2021 financial year and as a result no fee is accrued at 30 June 2021 (30 June 2020: £nil). In order for an incentive fee to be earned in respect of the 2021 financial year, the aggregate of the Group's EPRA NAV growth and dividends paid in the year would need to exceed 124.4 pence per share which is estimated, based on dividends paid and currently expected to be paid in 2021, to be equivalent to an EPRA NTA of 489.3 pence per share at the year end.

Adjusted EPRA EPS: net finance costs

* 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

The Group is a UK Group REIT, so its rental operations which make up the majority of the Group's earnings are exempt from UK corporation tax, subject to the Group's 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 period of 13% (six months to 30 June 2020: 11%), resulting in a current tax charge of £0.2 million (six months to 30 June 2020: £0.2 million). The balance sheet includes a deferred tax liability of £12.0 million (31 December 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.

On an IFRS basis, there is a current tax charge of £0.2 million (six months to 30 June 2020: £0.1 million) and a £0.7 million deferred tax charge (six months to 30 June 2020: £0.1 million credit), which results in a total tax charge of £0.9 million (six months to 30 June 2020: £nil). Deferred tax is excluded from Adjusted EPRA EPS as shown in note 9 to the condensed financial statements.

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.

Adjusted EPRA EPS - currency translation

94% by value of the Group's property assets are located in the UK (94% at 31 December 2020) and the condensed financial statements are therefore presented in Sterling. 3.9% (31 December 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 €132.5 million as at 30 June 2021 (31 December 2020: €128.2 million) and the Euro denominated secured debt amounts to €71.2 million (31 December 2020: €71.8 million). The Euro weakened against Sterling over the period by 4.6% and as a result there was a net currency translation loss of £2.0 million (six months to 30 June 2020: £2.6 million gain) on an IFRS basis. Half of the deferred tax liability is excluded from EPRA NTA and as a result of this adjustment a further currency translation loss of £0.3 million arises in the movement in EPRA NTA in relation to the German operations (six months to 30 June 2020: gain of £0.3 million).

Key performance indicator - Net Loan To Value ratio

The Board structures 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.

During the period, the Group's Net LTV decreased from 36.4% to 35.6%, which largely reflects the rise in property valuations in the period.

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 on various scenarios within a realistic range of outcomes, including stress tested and reverse stress tested scenarios. At the inception of new loans, facilities have been 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 it is needed.

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 all of the occupational leases 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 fixed rental uplifts on 38% of portfolio income, with a further 3% subject to five yearly uplifts and the additional prospect of increases from the upwards only principally RPI-linked reviews on the rest of the portfolio. Overall, just over two thirds of portfolio rents before any Covid related rent concessions are subject to annual review, with the remainder subject to five yearly reviews. 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 Board reviews the headroom on all financial covenants at least quarterly, including stress tested and reverse stress tested scenarios. The headroom on key financial covenants at the first test date following the balance sheet date (which in all cases fell before the end of July 2021) 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 some of the Group's significant Uncommitted Cash of £183.6 million as at 30 June 2021 and which is further explained under the heading 'Key performance indicator - Uncommitted Cash'.

Significant headroom was built into each facility at the outset, to act as a "shock absorber" in the event that tenant difficulty or property investment market disruption puts pressure on those debt covenants. In the cases of the Leisure and Budget Hotels facilities where the financial effects of the pandemic have manifested themselves, in the case of all but one test in one facility the headroom over covenant levels has now increased since those reported for 31 December 2020 as the rent concessions gradually expire and income and valuations start to revert to their pre pandemic levels. While the credit facilities include various cash cure rights in the event needed to avoid covenants being breached, no cash cures have been implemented to date.

In each case where concessions have been granted, lender consent was required and was granted by the lenders without penalty or cost, other than the modest costs of their legal fees. Any covenant waivers that were required to accommodate the concessions are no longer needed and so are no longer in effect.

Key performance indicator - Uncommitted Cash

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

* interest payable is only excluded from Uncommitted Cash to the extent that secured cash within the specific facility is not available to cover the liability, which was the case at 30 June 2020 as a result of the deferral of the Merlin rent immediately prior to that date.

The ability to prevent or mitigate debt covenant breaches is an important part of the Board's leverage strategy. Headroom considered appropriate to the business and to each underlying portfolio individually has been negotiated on all financial covenants together with certain contractual cure rights, including the ability to inject cash (subject to some limitations as to the frequency and duration of cash cures) into ring-fenced financing structures in the event of actual or prospective breaches of financial covenants. 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. The Board's assessment is that while pandemic risks have eased since the last reporting period, uncertainty is still at higher than historic levels therefore the retention of a significant liquidity buffer as at 30 June 2021 continued to be appropriate.

Cash flow

The business is structured to provide an efficient flow through of net income to the payment of dividends. Rents are in the ordinary course predictable, financing costs are in the main fixed and the majority of operating costs are represented by the advisory fees, which are transparently calculated relative to the Group's net assets.

Rent reductions and deferrals granted in the period have reduced the cash flow from operating activities by £4.4 million and £0.8 million respectively (six months to 30 June 2020: £5.3 million of rent reductions and £8.9 million of rent deferrals). No material concession costs arose in the period (six months to 30 June 2020: £0.5 million).

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 the 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 period and it is not currently expected that material costs of that nature will be incurred on the portfolio as it stands at 30 June 2021.

Nick Leslau

Chairman, Prestbury Investment Partners Limited

8 September 2021

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. Given the elevated risks following the onset of the Covid-19 pandemic, the risk register, which was most recently reviewed in March 2021 in connection with the publication of the 2020 annual report, has been reviewed again in conjunction with the approval of this interim report.

Material changes to the Group risk register

Pandemic disruption was added to the overarching risks (which comprised Brexit risk and Climate risk) 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 are impacted by the consequences of the pandemic and the response of governments and public health bodies to it. This remains the case in the current schedule of risks. While the risk appears to be easing materially with high vaccination rates and full permission for UK businesses to reopen from July 2021, risks and uncertainties arising from the pandemic, while lower than six months ago, are still elevated.

Consultation on further developments in environmental regulations for landlords has been launched since the risk register was last reviewed. While the consultation remains open and the ultimate outcome is therefore uncertain, we consider that this risk is elevated and have raised its rating. We have also elevated the refinancing risk, not because debt market conditions have worsened - if anything they are better than at the time of the previous review - but because the date of the next debt maturity in October 2022 is now within some 13 months of the date of issue of this report. The risk assessments are otherwise unchanged.

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. These are not classified as separate risks in their own right but as general risks affecting many of the specific risk factors faced by the Group, which are kept under review.

i) 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. However, the global reach, sudden onset and extensive impact of the spread of Covid-19 is in a class of its own in its scale and unpredictability. While the full force of the lockdowns and other pandemic related restrictions has been felt by our tenants in the Leisure and Budget Hotels sectors, this has been mitigated from the Company's perspective through its significant weighting in healthcare assets which account for 33% of the Group's passing rents before Covid-related concessions and through flexibility in the capital structure which allowed the Company to provide support in the way of rent concessions to assist the tenants in managing the impact of the pandemic. The Company's Uncommitted Cash balance remains available to deploy in response to further threats arising. While the path of the virus, of consumer and government or regulatory responses in the face of it and of any further economic impacts cannot be known, the experience of the Board and Management Team members is being brought to bear on every aspect of the risks faced by the Company as a result of the current pandemic. The Covid-19 experience also 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.

ii) Climate risk, including the risks and costs of 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 directly produced emissions to report. 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 and of potential 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 assessed 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 section of the Strategic Review in our annual report and in the ESG Centre on the Company's website.

iii) 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:

Independent Review Report

Introduction

We have been engaged by the Company to review the condensed financial statements included within this interim report for the six months to 30 June 2021 which comprise the Group Income Statement, the Group Statement of Other Comprehensive Income, the Group Statement of Changes in Equity, the Group Balance Sheet, the Group Cash Flow Statement and the related notes.

We have read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed financial statements.

Directors' responsibilities

The interim report, including the financial information contained therein, is the responsibility of and has been approved by the Directors. The Directors are responsible for preparing the interim report in accordance with the rules of the London Stock Exchange for companies trading securities on the Alternative Investment Market ("AIM"). Those rules require that the interim report be presented and prepared in a form consistent with that which will be adopted in the Company's annual accounts having regard to the accounting standards applicable to such annual accounts.

As disclosed in note 2, the annual financial statements of the Group will be prepared in accordance with UK adopted International Accounting Standards ("UK IFRS"). The condensed financial statements included in this interim report have been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting" as adopted by the UK.

Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed financial statements in the interim report based on our review.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity", issued by the Financial Reporting Council for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed financial statements in the interim report for the six months to 30 June 2021 are not prepared, in all material respects, in accordance with International Accounting Standard 34, as adopted by the European Union, and the rules of the London Stock Exchange for companies trading securities on AIM.

Use of our report

Our report has been prepared in accordance with the terms of our engagement to assist the Company in meeting the requirements of the rules of the London Stock Exchange for companies trading securities on AIM and for no other purpose. No person is entitled to rely on this report unless such a person is a person entitled to rely upon this report by virtue of and for the purpose of our terms of engagement or has been expressly authorised to do so by our prior written consent. Save as above, we do not accept responsibility for this report to any other person or for any other purpose and we hereby expressly disclaim any and all such liability.

BDO LLP

Chartered Accountants and Registered Auditors

London, United Kingdom

8 September 2021

BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).

Group Income Statement