Drum Income Plus REIT

Full Year Results & Notice of AGM
RNS Number : 9317L
Drum Income Plus REIT PLC
18 January 2021
 

 

18 January 2021

 

Drum Income Plus REIT plc
("Drum" or the "Company")

FULL YEAR RESULTS AND NOTICE OF AGM

 

Drum Income Plus REIT plc (LSE: DRIP) today announces the Company's audited results for the 12 months ended 30 September 2020

 

The Company also announces that its 2021 Annual General Meeting will be held on Thursday, 18 March 2021 at 12.00 p.m. at 16 Charlotte Square, Edinburgh EH2 4DF.

 

The Company's Annual Report and Financial Statements for the year ended 30 September 2020 and the formal Notice of the Annual General Meeting will be posted to shareholders and in accordance with Listing Rule 9.6.1 copies of the documents have been submitted to the UK Listing Authority and will shortly be available to view on the Company's corporate website at https://www.dripreit.co.uk and have also been submitted to the UK Listing Authority and will be shortly available for inspection from the National Storage Mechanism at: https://data.fca.org.uk/#/nsm/nationalstoragemechanism  

 

It is possible that due to the Government restriction related to COVID-19, this year's AGM will be held in a "restricted format" with attendance limited to those Board members to enable quorum requirements to be met.  Shareholders should therefore submit their votes by proxy by 6.00 p.m. on 16 March 2021.  In light of the social distancing measures imposed by the UK Government as a result of the current COVID-19 pandemic, any proxy you appoint other than the Chairman could be refused entry to the meeting.

Given the unprecedented circumstances, the Board will host the AGM but with contingency arrangements that mean that the AGM will not follow its usual format.  Only the statutory, formal business (consisting of voting on the resolutions proposed in the Notice of AGM) to meet the minimum legal requirements will be conducted and the AGM.

Given the social distancing measures currently in force and in light of the latest published government guidance and pursuant to the Corporate Insolvency and Governance Act 2020, proceeding with a "technical" AGM is in the best interests not only of the Company, but also of each of its individual shareholders. If circumstances change and if social distancing measures are relaxed before the AGM, the Company will notify shareholders of any changes to the proposed format for the AGM via RIS and its website https://www.dripreit.co.uk

 

LEI: 213800FG3PJGQ3KQH756

Enquiries:

Drum Real Estate Investment Management (Investment Manager)

 

Bryan Sherriff 

0131 285 0050

 

 

Dickson Minto W.S. (Sponsor)

 

Douglas Armstrong

020 7649 6823

Weber Shandwick (Financial PR)

 

Nick Oborne

020 7067 0721

 

 

JTC (UK) Limited (Company Secretary)

 

Susan Fadil

020 3893 1005

 

 

Important information:

 

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014. Upon the publication of this announcement via Regulatory Information Service this inside information is now considered to be in the public domain.

 

REPORT & FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 SEPTEMBER 2020

CHAIRMAN'S STATEMENT

Introduction

Drum Income Plus REIT PLC ('Drip') was established in May 2015 with the objective to provide its shareholders with a regular dividend income and capital growth over the longer term from a portfolio of regional real estate assets in the UK. I am pleased to present the annual report and accounts for the year to 30th September 2020.

Financial Highlights

The Group's Net Asset Value per share ('NAV') at 30th September, 2020 was 73.01 pence per share, a fall of 14.1% from 12 months earlier, and a decrease of 7.9% on the NAV as at March 31, 2020 as per the Interim Statement.

The Group has paid two interim dividends of 1.5p per share during the first half of the year, and the two planned interim dividends due in the second half year were postponed in order to preserve cash as a result of the economic damage caused by the global pandemic.

The Board remain committed to fully covered quarterly dividend payments. As we navigate our way through the COVID-19 pandemic the Board is looking for an opportunity to start the process of building the dividend back up again as soon as it is prudent to so do, ensuring that it meets the REIT requirements in the meantime.

Review of the Year

The global pandemic known as COVID-19, which began in January 2020, has, at the time of writing, brought about over 1.5 million fatalities throughout the world, and over 62,000 in the UK alone. A second wave is now underway across many countries, and it is very clear that any return to a normality of some kind will only be possible once a successful vaccine has not only been approved, but also manufactured and administered in the vast quantities that will be required around the world. Recent news on a possible vaccine has been positive, but we remain some way from commercial availability.

 

As I indicated in my Interim statement back in May, global recessions are now at hand, and the only question is to how deep and how long-lasting they will be. Quantitative easing measures by governments worldwide have served to reduce pressures and may well continue in to 2021 in the short term, but to continue with such a strategy over the medium to longer term is unproven at best, and potentially damaging at worst.

The UK economy has not escaped - there have been and there will continue to be many corporate casualties, big and small, with certain sectors such as hospitality, travel and retail the worst hit - and in sectors such as these it could take years to recover to pre COVID levels of business.

The UK commercial real estate market in which your company operates has inevitably been hit, primarily in high street retail, shopping centres, hotels, leisure parks and centres and pubs, and other sectors such as offices and industrial have not completely escaped. Our portfolio comprises office, industrial, shopping centre and retail, and, as we anticipated, many of the tenants in those properties have suffered significant falls in their revenues, and some are clearly fighting for their very survival.

Our Investment Adviser and their agents have though, in the circumstances, done outstandingly well in terms of collecting rental income - in the first three rental quarters of 2020, they recovered over 91% of rental and service fee income due in Q1, over 81% in Q2, and over 90% to date in Q3. This figure is highly likely to grow as the quarter passes. In cases where there has been non-payment, they have engaged appropriately with the tenants and their agents to attempt to work out revised payment plans and in some cases revised lease terms. In some instances these will lead to a loss of revenue in the short term, but they will also achieve our primary aim in these most challenging of circumstances of securing income streams for the medium and longer terms.

In the circumstances described above, it has been especially pleasing to see certain of the asset management initiatives throughout the portfolio reaching a satisfactory outcome - in particular at Monteith House in Glasgow where a new 10 year lease has been signed with Skills Development Scotland, which has resulted in a meaningfully higher valuation of the property.

DIVIDENDS

When the economic damage caused by COVID first became clear back in March/April of this year, your Board took the prudent decision to suspend dividend payments for the final two quarters of the financial year in order to maintain cash during a period in which revenues were inevitably going to fall. This has resulted in the final dividend for the year being 3p per share compared to the anticipated 6p per share. Looking forward, it is clear that revenues will be lower as tenants face the challenges of the continuing recession without the prospect of similar levels of government support as we have seen to date. That said, the Board considers it important to resume the payment of dividends to shareholders as soon as is practicable, and to that end it proposes to re-commence quarterly dividends in February 2021, albeit at the reduced level of 3.0p per share. As soon as it becomes possible to increase that level of quarterly distribution, we will attempt to do so.

OUTLOOK

With the uncertainty remaining over post-deal Brexit outcomes adding to the economic damage which will continue to be caused for some time by the pandemic, there will still be real uncertainty in markets around the world, including real estate. That said, your company owns a high class portfolio of property assets which are the subject in many cases of long term leases, and I therefore remain confident that the Company will in time achieve its primary aim of providing satisfactory long term returns to its shareholders.

Hugh Little | Chairman
15 January 2021

INVESTMENT ADVISER'S REPORT

Drum Income Plus REIT plc ("DRIP" or "the Group") is a UK real estate investment trust ("REIT") which listed on the main market of the London Stock Exchange on 29 May 2015 ("Admission"). Its portfolio comprises ten properties predominantly let to institutional grade tenants on long leases throughout the UK and is characterised by smaller lot sizes. The Group offers investors the opportunity to access a diversified portfolio of UK commercial real estate through a closed-ended fund.

The Group paid two dividends at 1.5p per share in November 2019 and February 2020. The dividends were suspended for the remainder of the year ended 30 September 2020. This equates to a dividend for the year of 3.0p per share.

 

Financial Year Ended September 2020 has seen unprecedented impact on the Real Estate sector by Covid-19 and ongoing discussions regarding Brexit. Yields remained relatively flat in September 2020 as UK commercial investment volumes reached £7.2 billion in Q3, which was a 55% increase on Q2, but the second quarter was one of the lowest ever recorded. In comparison to the quarterly average, based upon the last couple of years, Q3 2020 was approximately half this 'normal' level. The shopping centre and leisure sectors have seen the prime yield move out by a full percentage point since the end of 2019, despite the lack of transactional activity to support this movement. For example Gosforth Shopping Centre has been hit by this sentiment despite having a WAULT of around 8 years and c 40% of the Gross Contracted Rent being for greater than 10 years.

The valuation of the portfolio as at 30 September 2019 was £55.4m which aligned with a total purchase price for the assets of £55.6m. The valuations remained largely static until March 20 when the impact of Covid began to set in. With limited market comparables a Material Uncertainty clause was inserted into the quarterly valuations and the valuations were reduced to £53.3m in March 2020 with a further reduction to £48.9m in June 2020. Valuations increased in September 2020 as slightly improved conditions were evidenced during the quarter. Together with the SDS letting at Monteith House, this resulted in a £2.2m improvement in the quarter and a year-end valuation of £51.1m. The Material Uncertainty clause has been removed from the December 2020 valuation.

The total net rent roll as at September 2020 is now c £3.6m pa. Accepting that we will have to work with the pandemic restrictions the Government impose on the UK, as we enter this next period of the Business Plans, having a multi-sector and multi-tenant portfolio should be of benefit. The income from the portfolio remains strong and tenant retention is high as we continue to agree tenant lease variations.

The WAULT to expiry is 5.17 years. The WAULT including breaks is 3.17 years.

Active Asset management
DRIP's strategy of active asset management to drive income returns remains the core to portfolio performance and has been exhibited by the strong rental income figures throughout the Covid Pandemic from March.

The Group invests significantly in the portfolio which both attracts new and retains existing high quality occupiers, evidenced through our sustained high occupancy. This has recently been evidenced by the 10 year lease entered into by Skills Development Scotland at Monteith House in Glasgow.

Innovative Investment

The Group continue to invest strategically in the portfolio. A physical change drives a clear perception change in our assets which helps to facilitate corresponding investment from our customers and fellow stakeholders, as well as helping to attract new occupiers to the asset.

 

Mayflower House
Gateshead

Monteith House
Glasgow

Acquisition Price

£2.6m

Acquisition Price

£5.8m

Net Initial Yield at Acquisition

9.25%

Net Initial Yield at Acquisition

7.60%

Equivalent Yield at Acquisition

8.23%

Equivalent Yield at Acquisition

6.87%

Occupancy at 30.09.2020

88%

Occupancy at 30.09.2020

100%

WAULT (including breaks at 30.09.2020

3.41 years

WAULT (including breaks at 30.09.2020

9.87 years

 

 

Lakeside 5500
Cheadle Royal Business Park, Manchester

Arthur House

Manchester

Acquisition Price

£5.4m

Acquisition Price

£4.4m

Net Initial Yield at Acquisition

6.71%

Net Initial Yield at Acquisition

4.87%

Equivalent Yield at Acquisition

7.56%

Equivalent Yield at Acquisition

7.75%

Occupancy at 30.09.2020

100%

Occupancy at 30.09.2020

63%

WAULT (including breaks at 30.09.2020

1.48 years

WAULT (including breaks at 30.09.2020

1.22 years

 

 

3 Lochside Way
Edinburgh

Burnside
Aberdeen

Acquisition Price

£4.5m

Acquisition Price

£2.6m

Net Initial Yield at Acquisition

8.44%

Net Initial Yield at Acquisition

10.55%

Equivalent Yield at Acquisition

7.79%

Equivalent Yield at Acquisition

8.47%

Occupancy at 30.09.2020

100%

Occupancy at 30.09.2020

76%

WAULT (including breaks at 30.09.2020

1.66 years

WAULT (including breaks at 30.09.2020

4.09 years

 

 

Kew Retail park
Southport

Duloch Park
Dunfermline

Acquisition Price

£8.65m

Acquisition Price

£4.5m

Net Initial Yield at Acquisition

8.75%

Net Initial Yield at Acquisition

7.39%

Equivalent Yield at Acquisition

7.25%

Equivalent Yield at Acquisition

7.20%

Occupancy at 30.09.2020

89%

Occupancy at 30.09.2020

100%

WAULT (including breaks at 30.09.2020

4.18 years

WAULT (including breaks at 30.09.2020

3.57 years

 

 

Eastern Avenue

Gloucester

Gosforth Shopping Centre

Gosforth

Acquisition Price

£5.3m

Acquisition Price

£12.2m

Net Initial Yield at Acquisition

8.41%

Net Initial Yield at Acquisition

7.47%

Equivalent Yield at Acquisition

7.16%

Equivalent Yield at Acquisition

7.42%

Occupancy at 30.09.2020

22%

Occupancy at 30.09.2020

99%

WAULT (including breaks at 30.09.2020

6.37 years

WAULT (including breaks at 30.09.2020

7.99 years

 

 

Outlook
Commercial property investment turnover recovered quite sharply in both September and October 2020. While this recovery will by no means compensate for the very low levels of turnover in the preceding five months, it does give an indication that investors still have confidence in the UK, despite the twin uncertainties of COVI D-19 and Brexit. Of the transactions undertaken in September and October a significant percentage took place in Greater London, a trend that is absolutely normal as markets emerge from recession and investors head towards core assets and locations as part of wider 'risk-off' strategy.

 

The uncertainties arising from the pandemic are going to be present for the foreseeable future. The short-term focus will therefore remain on income not just in terms of rent collection, but also through active asset management to retain existing occupiers and attract new ones. However, the acceleration in the rate of change in real estate markets is creating opportunity and we are looking at ways in which the Group can benefit from this opportunity.

PRINCIPAL RISKS AND UNCERTAINITIES

There are a number of potential risks and uncertainties which could have a material impact on the Group's performance over the forthcoming financial year and could cause actual results to differ materially from expected and historical results.

The Directors have carried out a robust assessment of the principal risks facing the Group, including those that would threaten the business model, future performance, solvency or liquidity.

The table on the right outlines the key risk factors identified, but does not purport to be exhaustive as there may be additional risks that materialise over time that the Group has not yet identified or has deemed not likely to have a potentially material adverse effect on the business.

Risk Type:

Strategic
Investment Portfolio
Investment management
Financial
Operational
Regulatory

 

RISKS

MITIGATING FACTORS

·      Political: now that the UK has left the EU, albeit with a deal, the impact of Brexit still remains unclear.  This may be particularly significant with reference to the retail sector.

·      Weak economic environment including impact of COVID-19.

·      Well diversified regional property portfolio, with no exposure to London.

·      Asset management remains a high priority and cash control continues to be strong.

·      Tenant default

·      Investment policy limits the Group's rent roll to no more than 20% to a single tenant.

·      Change in demand for space particularly in the retail sector

·      Focused on established business locations for investment

·      Market pricing affecting value

·      Active portfolio diversification between office, industrial and retail.

·      Excess concentration in geographical location or sector

·      Active management of lease expiry profile in forming acquisition decisions.

·      Decrease in occupancy.

·      Building specifications not tailored to one user.

·      Poor Investment decisions

·      Experienced Investment Adviser

·      Over exposure to a specific tenant, sector or geographic location

·      Agreed concentration limits reviewed quarterly by the Board and continuously by the Investment Adviser.

·      Ineffective added value asset management of properties

·      Investment Adviser is experienced in active asset management and pro-active with regard to lease and development opportunities.

·      Reduced availability or increased cost of debt

·      3 year £25m revolving credit facility extended in September 2019.

·      Breach of borrowing covenants

·      New facility sufficient for spending plans

·      On-going monitoring and management of the forecast, liquidity and covenant position.

·      Inadequate performance controls or systems operated by the Investment Adviser and Administrator

·      Ongoing review of performance by independent Board of Directors.

·      Adverse impact of new or revised legislation or regulations or by changes in the interpretation or enforcement of existing laws and regulations.

·      External professional advisers are engaged to review and advice upon control environment and ensure regulatory compliance.

·      Non-compliance with the REIT regime.

·      REIT regime compliance is reviewed by external tax advisers and considered by the Board in assessing the Group's financial position and by the manager in making operational decisions.

 

APPROVAL OF STRATEGIC REPORT

The Strategic Report incorporating the Chairman's Statement, Investment Adviser's Report and Principal Risks and Uncertainties was approved by the Board of Directors and signed on its behalf by:

Hugh Little

Chairman

15 January 2021

SECTION 172 STATEMENT AND STAKEHOLDER RELATIONSHIPS

The Directors consider that in conducting the business of the Company over the course of the year they have complied with Section 172(1) of the Companies Act 2006 ("the Act") by fulfilling their duty to promote the success of the Company and act in the way they consider, in good faith, would be most likely to promote the success of the Company for the benefit of its members as a whole.

 

The Company recognises the increasing importance of sustainability and addressing Environmental, Social and Governance (ESG) issues. It is committed to putting ESG as the heart of its investment objectives and to operating in a responsible and sustainable manner, looking at both the direct and indirect impact on tenants, suppliers, service providers, local communities and the environment.

Issues, factors and stakeholders

The Board has direct engagement with the Company's shareholders and seeks a rounded and balanced understanding of the broader impact of its decisions through regular engagement with its stakeholder groups (detailed below) to understand their views, typically through feedback from the Investment Manager, which is regularly communicated to the Board via quarterly meetings. Stakeholder engagement also ensures the Board is kept aware of any significant changes in the market, including the identification of emerging trends and risks, which in turn can be factored into its strategy discussions. Management of the Company's day-to-day operations has been delegated to the Investment Manager, and the Company has no employees. This externally managed structure allows the Board and the Investment Manager to have due regard to the impact of decisions on the following matters specified in Section 172 (1) of the Act:

 

Section 172(1) factor

Approach taken

a)   Likely consequence of any decision in the long term

The business model and strategy of the Company is set out within the Strategic Report. Any deviation from or amendment to that strategy is subject to Board and, if necessary, shareholder approval. The Company's Management Engagement Committee ensures that the Investment Manager is operating within the scope of the Company's investment objectives.

At least annually, the Board considers a budget for the delivery of its strategic objectives based on a three-year forecast model. The Investment Manager reports non-financial and financial key performance indicators to the Board.

The Board's commitment to keeping in mind the long-term consequences of its decisions underlies its focus on risk, including risks to the long-term success of the business, leading to the conclusion that during the current period of heightened political and market uncertainty both in the UK and globally, cash resources should be retained as far as possible.

The investment strategy of the Company is focused on medium to long-term returns as such the long-term is firmly within the sights of the Board when all material decisions are made. The board gains an understanding of the views of the Company's key stakeholders from the Investment Manager and Management Engagement Committee and considers those stakeholders' interests and views in board discussions and long-term decision-making

b) The interests of the Company's employees

The Company has no employees as a result of its external management structure, but the Directors have regard to the interests of the individuals responsible for delivery of the property management and administration services to the Company to the extent that they are able to.

c) The need to foster the Company's business relationships with suppliers, customers and others

Business relationships with suppliers, tenants and other counterparties are managed by the Investment Manager. Suppliers and other counterparties are typically professional firms such as lenders, property agents and other property professionals, accounting firms and legal firms and tenants with which the Investment Manager often has a longstanding relationship. Where material counterparties are new to the business, checks, including anti money laundering checks are conducted prior to transacting any business to ensure that no reputational or legal issues would arise from engaging with that counterparty. The Company pays suppliers in accordance with pre-agreed terms.

The Investment Manager has open lines of communication with tenants and can understand and resolve any issues promptly.

d)    The impact of the Company's operations on the community and the environment

The Board recognises the importance of supporting local communities where the Company's assets are located and seeks to invest in properties which will be fit for future purpose.

The Board takes overall responsibility for the Company's impact on the community and the environment and its ESG policies are set out and strategy section of the Strategic report.

e)    The desirability of the Company maintaining a reputation for high standards of business conduct

The Board believes that the ability of the Company to conduct its investment business and finance its activities depends in part on the reputation of the Board and Investment Manager's team. The risk of falling short of the high standards expected and thereby risking its business reputation is included in the Board's review of the Company's risks. The principal risks and uncertainties facing the business are set out in that section of the Strategic report.

f)     The   need to act fairly as between members of the Company

The Company's shareholders are a very important stakeholder group. The Board and Investment Manager aim to be open with shareholders and available to them, subject to compliance with relevant securities laws.

The Investment Manager also engages with existing investors who may request meetings and with potential new investors on an ad hoc basis throughout the year, including where prompted by Company announcements. Information is made available on the Company's website. The Company has a single class of share in issue with all members of the Company having equal rights.

 

METHODS USED BY THE BOARD

The main methods used by the Directors to perform their duties include:

·      Board Strategy discussion held at least annually to review all aspects of the Company's business model and strategy and assess the long-term success of the Company and its impact on key stakeholders;

 

·      The Management Engagement Committee engages with the Company's key service providers and reports on their performance to the Board. The responsibilities of the Management Engagement Committee are detailed in the
Management  Engagement  Committee report;

 

·      The Board is responsible for  the Company's ESG activities  set out in the Business strategy  section of the Strategic report, which it believes are a key part of benefitting the local communities where the Company's assets are located;

 

·      The Board's risk management procedures set out in the Governance report identify the potential consequences of decisions in the short, medium and long-term so that mitigation plans can be put in place to prevent, reduce or eliminate risks to the Company and wider stakeholders;

 

PRINCIPAL DECISIONS IN THE YEAR

The Board has delegated operational functions to the Investment Manager and other key service providers. In particular, responsibility for management of the Company's property portfolio has been delegated to the Investment Manager. The Board retains responsibility for reviewing the engagement of the Investment Manager and exercising overall control of the Company, reserving certain key matters as set out in the Governance report.

The principal non-routine decision taken by the Board was the decision to suspend the quarterly dividend due to the disruption to cash collection caused by the COVID-19 pandemic and to protect the business in the long-term for all of the stakeholders. The REIT regulations also require the Company to distribute, subject to detailed regulations, 90% of net rental income by the way of dividend. Therefore, both the prudential payment of dividends based on cash receipts, and meeting the REIT requirements, may result in an upward recalibration of dividends, either by increasing the quarterly rate or by payment of a special dividend. However, market rates on rental income are still high and the impact of COVI D-19 is likely to be particularly significant on UK commercial property so in the short-term the Company will continue to take a prudent approach. This decision was taken to manage cash resources and maintain liquidity to mitigate the risks associated with a period of uncertainty created by the COVID-19 pandemic. Due to the nature of this decision a variety of stakeholders had to be factored into the Board's discussions. Each decision was announced at the time, so that all stakeholders were aware of the decisions.

 

STAKEHOLDERS

The Board recognises the importance of stakeholder engagement to deliver its strategic objectives and believes its stakeholders are vital to the continued success of the Company. The Board is mindful of stakeholder interests and keeps these at the forefront of business and strategic decisions. Regular engagement with stakeholders is fundamental to understanding their views. The below section highlights how the Company engages with its key stakeholders, why they are important and the impact they have on the Company and therefore its long-term success, which the Board believes helps demonstrate the successful discharge of its duties under s172(1) of the Act.

Stakeholder

Stakeholder interests

Stakeholder engagement

Tenants

The Investment Manager understands the businesses occupying the Company's assets and seeks to create long-term partnerships and understand their needs to deliver fit for purpose real estate and develop asset management opportunities to underpin long-term sustainable income growth and maximise occupier satisfaction.

·High quality assets

·Profitability

·Efficient operations

·Knowledgeable and committed landlord

·Flexibility to adapt to the changing UK commercial landscape

·Buildings with strong environmental credentials

·Regular dialogue through rent collection process.

·Review published data, such as accounts, trading updates and analysts' reports.

·Ensured buildings comply with the necessary safety regulations and insurance.

·All tenants have been directly contacted to understand the impact of the COVID-19 pandemic on their businesses.

The Investment Manager and its employees

As an externally managed fund the Company's key service provider is the Investment Manager is a key stakeholder. The Investment Manager's culture aligns with that of the Company and its reputation of operating in the small lot-size market is key when representing the Company.

·Long-term viability of the Company

·Long-term relationship with the Company

·Maintaining a positive and transparent relationship with the Board

·Board and Committee meetings

·Face-to-face and video-conference meetings with the Chairman and other Board Directors

·Monthly and quarterly KPI reporting to the Board

·External Board evaluation, including feedback from key Investment Manager personnel

·Informal meetings and calls

Suppliers

A collaborative relationship with our suppliers, including those to whom key services are outsourced, ensures that we receive high quality services to help deliver strategic and investment objectives.

 

·Collaborative and transparent working relationships

·Responsive communication

·Being able to deliver service level agreements

 

·Board and Committee meetings

·One-to-one meetings particularly in relation to the challenges presented by COVID-19 and the need to test the resilience of all the Company's operations and supply

·Annual review of key service providers by the Management Engagement Committee

·Regular contact with the two main service providers, the Investment Manager and Administrator

Shareholders

Building a strong investor base through clear and transparent communication is vital to building a successful and sustainable business and generating long-term growth.

 

· Attractive level of income returns

· Strong Corporate Governance and environmental credentials

· Transparent reporting framework

 

· Quarterly NAV statements and half yearly accounts

· AGM

· Market announcements and corporate website

 

Lenders

Our lender plays an important role in our business. The Investment Manager maintains close and supportive relationships with this group of long-term stakeholders, characterised by openness, transparency and mutual understanding

 

· Stable cash flows

· Stronger covenants

· Being able to meet interest payments

· Maintaining agreed gearing ratios

· Regular financial reporting

· Proactive notification of issues or changes

 

· Regular covenant reporting

· Face-to-face meetings

 

Government, local authorities and communities

As a responsible corporate citizen the Company is committed to engaging constructively with central and local government and ensuring we support the wider community

 

 

· Openness and transparency

· Compliance with new
legislation

· Proactive engagement

· Support for local economic and environmental plans and strategies

· Playing its part in providing the real estate fabric of the economy, giving employers a place of business

 

· Engagement with local authorities where we operate

· Two way dialogue with regulators and HMRC

 

INVESTMENT POLICY

The Group pursues its investment objective by investing in a diversified portfolio of UK commercial properties.

The Group invests principally in three commercial property sectors: office, retail (including retail warehouses) and industrial, without regard to a traditional property market relative return benchmark.

The Group invests predominantly in income producing investments. Investment decisions are based on analysis of, inter alia, prospects for future income and capital growth, sector and geographic prospects, tenant covenant strength, lease length, initial and equivalent yields and the potential for active asset management of the property.

The Group does not invest in other investment companies or funds. However, the Group may hold property through special purpose vehicles and is permitted to invest up to 25% of total assets, at the time of investment, in joint ventures which hold real estate directly. The Group is also permitted to forward fund purchases of properties on a pre-let or a non-pre-let basis and obtain options over properties.

Investment risk is spread through investing in a range of geographical areas and sectors, and through letting properties, where possible, to low risk tenants. Although the Group has not set any maximum geographic exposure or maximum weightings in any of the three principal property sectors, it may invest no more than 25% of total assets, at the time of investment, in other sectors such as leisure, residential, student residential, healthcare and hotels. The Group is now fully invested (including drawdown of available debt facilities), and no single property may exceed 20% of total assets at the time of investment. Speculative development (i.e. properties under construction which have not been pre-let) is restricted to a maximum of 10% of total assets at the time of investment or commencement of the development. Development, other than speculative development, is also restricted to a maximum of 10% of total assets at the time of investment or commencement of the development.

The Group is not permitted to acquire an investment if, as a result, income receivable from any one tenant, or from tenants within the same group (other than from central or local government), would in any one financial year exceed 20% of the total rental income of the Group for that financial year.

The Group is permitted to invest cash held for working capital purposes and awaiting investment in cash deposits, gilts and money market funds. The Board intends that gearing, calculated as borrowings as a percentage of the Group's gross assets, will not exceed 50% at the time of drawdown.

Any material change to the investment policy requires the prior approval of shareholders.

 

KEY PERFORMANCE INDICATORS

The Board uses a number of performance measures to assess success in meeting objectives. The key performance indicators are as follows:

·           Dividend per share;

·           Net Asset Value ("NAV") per share; and

The Group's key performance indicators were chosen in light of its investment objective.

The Group's performance against the key performance indicators for the year under review is reported in the Financial Statements.

In addition to the key performance indicators, the Board also reports a number of other measures which it believes may be of interest to shareholders. These include diversification; loan-to-value; occupancy rate; annual rent roll; current yield; gross contracted rent; and, WAULT. The Board believes these measures provide background information which shareholders should be aware of.

GOING CONCERN

Under Provision 35 of the AIC Code, the Board needs to consider whether it is appropriate to adopt the going concern basis of accounting in preparing the Financial Statements. Based on this information the Directors believe that the Group has the ability to meet its financial commitments for a period of at least 12 months from the date of approval of the Financial Statements. For this reason they continue to adopt the going concern basis in preparing the Financial Statements.

VIABILITY STATEMENT

In accordance with the AIC Code and FRC Guidance on Risk Management, Internal Controls and Related Financial Business Reporting, the Directors have also assessed the prospects of the Group over a period longer than the 12 months required by the 'Going Concern' provision.

The Board conducted this review for a period of three years, which was selected for the following reasons:

- The Board regularly considers a detailed cash flow model covering a longer time period which does not indicate any matters which does not indicate any matters which would give concern over the Group's longer term viability, the property portfolio held by the Group is not expected to remain unchanged over the longer term.

-The Investment Adviser is expected to undertake property acquisitions, and may undertake sales, in line with the Group's investment objective and policy. While the weighted average unexpired lease term ("WAULT") of the portfolio is 5.17 years, 5 of the 10 properties have a WAULT less than 4.0 years. The longer the time horizon which is considered, the higher the degree of uncertainty over the constituents of the Group's investment property portfolio and, on balance, the Board considers that a period of three years is an appropriate length of time over which a detailed sensitivity analysis can be conducted whilst retaining a reasonable level of accuracy regarding forecast rental income and valuation movements.

The three-year viability assessment conducted by the Board considered the Group's cash flows, dividend cover, REIT compliance and other key financial ratios over the period. The three-year viability assessment conducted by the Board takes cognisance of the COVID-19 pandemic.

The lease incentive assumptions in the three- year viability assessment are prudent. A downside scenario including additional void costs and bad debt was also prepared. Both the three-year viability assessment and downside scenario recorded sufficient working capital to meet obligations and covenant compliance.

At 30 September 2020 the Group held £1.12 million in cash and £22.8 million of the £25 million facility agreement had been drawn down. The Group continues to be fully compliant with its loan covenants. This resource is sufficient to finance all currently identified capital expenditure opportunities within the Group's existing property portfolio.

Based on the results of this analysis, the Directors have concluded that there is a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due, for a period of three years from the date of approval of this Report.

POST BALANCE SHEET EVENTS

After the balance sheet date, within the investment property valuations the "material uncertainty" clause has now been removed from external valuations.

STATEMENT OF DIRECTORS' RESPONSIBILITIES

 

The directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulation.

Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have prepared the group financial statements in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and international financial reporting standards adopted pursuant to Regulation (EC) No. 1606/2002 as it applies in the European Union and company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 101 "Reduced Disclosure Framework", and applicable law). Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the group and company and of the profit or loss of the group and company for that period. In preparing the financial statements, the directors are required to:

·           select suitable accounting policies and then apply them consistently;

·           state whether applicable international accounting standards in conformity with the requirements of the Companies Act 2006 and international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union have been followed for the group financial statements and United Kingdom Accounting Standards, comprising FRS 101, have been followed for the company financial statements, subject to any material departures disclosed and explained in the financial statements;

·           make judgements and

accounting estimates that are reasonable and prudent; and

·           prepare the financial statements on the going concern basis unless it is inappropriate to presume that the group and company will continue in business.

The directors are also responsible for safeguarding the assets of the group and company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the group and company's transactions and disclose with reasonable accuracy at any time the financial position of the group and company and enable them to ensure that the financial statements and the Directors' Remuneration Report comply with the Companies Act 2006.

The directors are responsible for the maintenance and integrity of the company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

 

Directors' confirmations

Each of the directors, whose names and functions are listed in Board of Directors confirm that, to the best of their knowledge:

·           the company financial statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 101 "Reduced Disclosure Framework", and applicable law), give a true and fair view of the assets, liabilities, financial position and profit of the company;

·           the group financial statements, which have been prepared in accordance with with international accounting standards in conformity with the requirements of the Companies Act 2006 and international financial reporting standards adopted pursuant to Regulation (EC) No. 1606/2002 as it applies in the European Union, give a true and fair view of the assets, liabilities, financial position and profit of the group; and

·           the Directors' Report includes a fair review of the development and performance of the business and the position of the group and company, together with a description of the principal risks and uncertainties that it faces.

 

Hugh Little
Chairman

15 January 2021

 

CONSOLIDATED STATEMENTS

 

Consolidated Statement of Comprehensive Income

 

 

 

Year ended

30 September 2020

 

 
Year ended 
30 September 2019 

 

Note

   Revenue  Capital   Total

 £'000    £'000  £'000

Revenue

£'000

     Capital   Total

   £'000   £'000

Capital losses on investments

 

 

 

 

 

Held at fair value

9

    -    (5,518)  (5,518)

-

(3,133)

(3,133)

Revenue

 

 

 

 

 

Rental income

 

4,145         -   4,145

4,249

-

4,249

Total income/(expense)

 

 4,145  (5,518)  (1,373)

4,249

(3,133)

1,116

Expenditure

 

 

 

 

 

Investment adviser's fees

2

   (205)        -      (205)

(335)

-

(335)

Other expenses

3

(1,254)       -    (1,254)

(1,193)

-

(1,193)

Total expenditure

 

(1,459)        -    (1,459)

(1,528)

-

(1,528)

Profit/(loss) before finance costs and taxation

 

 2,686  (5,518)   (2,832)

2,721

(3,133)

(412)

Interest receivable

4

    -         -          -

-

-

-

Interest payable

5

  (592)         -      (592)

(657)

-

(657)

Profit/(loss) before taxation

 

2,094   (5,518)   (3,424)

2,064

(3,133)

(1,069)

Taxation

6

  -             -              -

-

-

-

Other Comprehensive income

 

  -             -              -

-

-

-

Total comprehensive Income/(expense) for the year

 

2,094  (5,518)    (3,424)

2,064

(3,133)

(1,069)

Basic and diluted earnings/(loss) per ordinary share

  5.48p  (14.44)p   (8.96)p

5.40p

(8.20)p

(2.8)p

 

The total column of this statement represents the Group's Consolidated Statement of Comprehensive Income, prepared in accordance with IFRS. There are no other gains and losses for the year other than total comprehensive income/(expenses) reported above.

 

The supplementary revenue and capital return columns are prepared under guidance published by the Association of Investment Companies. All revenue and capital items in the above statement are derived from continuing operations.

 

No operations were acquired or discontinued in the year.

 

The accompanying notes form an integral part of these Financial Statements.

 

 

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

 

Notes

As at 30 September 2020 £'000

As at 30 September 2019 £'000

Non-current assets

 

 

 

Investment properties

9

49,569

54,880

 

 

 

49,569

54,880

 

Current assets

 

 

 

 

Trade and other receivables

11

3,003

2,643 

 

Cash and cash equivalents

12

1,120

510

 

 

 

4,123

3,153

 

Total assets

 

53,692

58,033

 

 

 

 

 

 

Current liabilities

 

 

 

 

Trade and other payables

14

(3,176)

(3,014)

 

 

 

(3,176)

(3,014)

 

 

 

 

 

Non-current liabilities

 

 

 

Loan

13

(22,626)

(22,559)

 

Total liabilities

 

(25,802)

(25,573)

 

Net assets

 

27,890

32,460

 

 

 

 

 

 

Equity and reserves

 

 

 

 

Called up equity share capital

16

3,820

3,820

 

Share premium

 

5,335

5,335

 

Special distributable reserve

 

20,694

21,840

 

Capital reserve

 

(11,231)

(5,713)

 

Revenue reserve

 

9,272

7,178

 

Total Equity

 

27,890

32,460

 

Net asset value per Ordinary Share

15

73.01p

84.97p

 

               

 

The accompanying notes form an integral part of these Financial Statements.

Company number: 09511797.

 

The Financial Statements were approved by the Board of Directors on 15 January 2021 and signed on its behalf by:

 

Hugh Little

Chairman

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

 

For the year ended 30 September 2020

 

 

 

 

 

Share Capital Account

Share Premium

Special Distributable Reserve

Capital Reserve

Revenue Reserve

Total equity

 

Note

£'000

£'000

£'000

£'000

£'000

£'000

As at 1 October 2019

 

3,820

5,335

21,840

(5,713)

7,178

32,460

(Loss/profit for the year and total comprehensive (expense)/income for the year

-

-

-

-

(5,518)

2,094

(3,424)

Other Comprehensive Income

 

-

-

-

-

-

-

Transfers

 

-

-

(1,146)

-

1,146

-

Transactions with owners recognised in equity:

 

 

 

 

 

 

 

Issue of Ordinary Share capital

16

-

-

-

-

-

-

Dividends paid

7

-

-

-

-

(1,146)

(1,146)

As at 30 September 2020

 

3,820

5,335

20,694

(11,291)

9,272

27,890

 

During the year, the Group transferred £1,146,000 from the special distributable reserve to the revenue reserve to cover dividends.

 

For the year ended 30 September 2019

 

 

 

Share Capital Account

Share Premium

Special Distributable Reserve

Capital Reserve

Revenue Reserve

Total equity

 

Note

£'000

£'000

£'000

£'000

£'000

£'000

As at 1 October 2018

 

3,820

5,335

21,840

(2,580)

7,406

35,821

Profit and total comprehensive expense for the year

-

-

-

-

-

2,213

2,213

(Loss/profit for the year and total comprehensive (expense)/income for the year

 

-

-

-

(3,133)

2,064

(1,069)

Other Comprehensive Income

 

-

-

-

-

-

-

Transactions with owners recognised in equity:

 

-

-

-

-

-

-

Issue of Ordinary Share capital

16

-

-

-

-

(2,292)

(2,292)

Dividends paid

7

 

 

 

 

 

 

As at 30 September 2019

 

3,820

5,335

21,840

(5,713)

7,178

32,460

 

CONSOLIDATED STATEMENT OF CASH FLOW

 

 

Note

Year ended 30 September 2020

£'000

Year ended

30 September 2019

£'000

Cash flows from operating activities

 

 

 

(Loss)/profit before tax

 

(3,424)

(1,069)

Adjustments for:

 

 

 

Amortisation

 

42

16

Interest payable

 

592

657

Unrealised revaluation loss on property portfolio

 

5,518

3,133

Operating cash flows before working capital changes

 

2,728

2,737

(Increase)/decrease in trade and other receivables

 

(360)

6

increase in trade and other payables

 

615

60

Net cash inflow from operating activities

 

2,983

2,803

 

 

 

 

Cash flows from investing activities

 

 

 

Purchase of investment properties

 

-

-

Property costs capitalised

 

(437)

(489)

Net cash outflow from investing activities

 

(437)

(489)

 

 

 

 

Cash flows from financing activities

 

 

 

Bank loan drawn down net of arrangement fees

13

-

-

Issue of Ordinary Share capital

 

-

-

Interest paid

 

(790)

(651)

Equity dividends paid

7

(1,146)

(2,292)

Net cash (outflow)/inflow from financing activities

 

(1,936)

(2,943)

Net increase/(decrease) in cash and cash equivalents

12

610

(629)

Opening cash and cash equivalents

 

510

1,139

Closing cash and cash equivalents

 

1,120

510

 

The accompanying notes form an integral part of these Financial Statements.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

The entity is incorporated and registered in England and Wales and is domiciled in the United Kingdom. It is public limited company and is limited by shares.

 

1. ACCOUNTING POLICIES

(A) BASIS OF PREPARATION

Basis of Accounting

These Consolidated Financial Statements have been prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and international financial reporting standards adopted pursuant to Regulation (EC) No. 1606/2002 as it applies in the European Union, the Statement of Recommended Practice in line with the Association of Investment Companies (AIC) best accounting practice, applicable legal and regulatory requirements of the Companies Act 2006 as applicable to companies using IFRS and the Disclosure, Guidance and Transparency Rules. The Financial Statements have been prepared on a historical cost basis, except for investment property valuations that have been measured at fair value.

The Group opted for one single statement of profit or loss and other comprehensive income approach as permitted under IFRS.

The major accounting policies of the Group are set below and have been applied consistently throughout the current and prior years.

The notes and Financial Statements are presented in pounds sterling (being the functional currency and presentational currency for the Company and Group) and are rounded to the nearest thousand except where otherwise indicated.

Going Concern

Under Provision C.1.3 of the UK Corporate Governance Code, the Board needs to report whether the business is a going concern. In considering this requirement, the Directors have taken the following into account:

·           the Group's forecast for the next three years, in particular the cash flows, borrowings and occupancy rate;

·           A new facility was signed on 30 September 2019 on compatible terms, for three years;

·           the ongoing ability to comply with the Group's financial covenants (details of the loan covenants are included in Note 13);

·           the risks included on the Group's risk register that could impact on the Group's liquidity and solvency over the next 12 months (details of risks are included in the Strategic Report; and

·           the risks on the Group's risk register that would be a potential threat to the Group's business model (details of risks are included in the Strategic Report).

The directors have also assessed the following specific areas in relation to the COVID-19 pandemic:

·           The extent of any operational disruption

·           Potential curtailment of rental receipts

·           Diminished demand for leasing the Company's assets going forward

·           The impact of the material uncertainty clause which is included as a disclosure as part of the external valuations, highlights that less certainty, and consequently a higher degree of caution, should be attached to the valuation.

The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic Report. The Strategic Report also includes the Group's risks and risk management processes.

Having due regard to these matters and after making appropriate enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Therefore, the Board continues to adopt the going concern basis in preparing these Consolidated Financial Statements.

Significant Accounting Judgements, Estimates and Assumptions

The preparation of Financial Statements requires management to make judgements, estimates and assumptions that affect the amounts reported for revenues, expenses, assets and liabilities and the disclosure of contingent liabilities as at the year-end date. The nature of the estimation means that actual outcomes could differ from those estimates. Estimates and underlying assumptions are reviewed on an ongoing basis.

Key Estimates

The only significant source of estimation uncertainty relates to the assumptions made in the investment property valuations, further details are provided in note 1(f) of the financial statements. Revisions to accounting estimates are recognised in the year in which the estimate is revised, if the revision affects only that year, or in the year of the revision and future years, if the revision affects both current and future years.

The fair value measurement for the assets and liabilities are categorised into different levels in the fair value hierarchy based on the inputs to valuation techniques used. The different levels have been defined as follows:

Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities that the Group can access at the measurement date.

Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3: unobservable inputs for the asset or liability. Value is the Directors' best estimate, based on advice from relevant knowledgeable experts, use of recognised valuation techniques and on assumptions as to what inputs other market participants would apply in pricing the same or similar instrument. As explained in more detail in Note 9, all investment properties are included in Level 3. The Group recognises transfers between levels of the fair value hierarchy as at the end of the reporting period during which the transfer has occurred.

Valuation of Investment Properties The fair value of investment properties is determined by independent real estate valuation experts using recognised valuation techniques. The properties have been valued on the basis of 'Fair Value' as adopted by the International Accounting Standards Board. Further detail is provided in note 1(f) to the financial statements. 30 September 2020 valuations are subject to a "material uncertainty" clause in line with prevailing RICS guidance. Further information regarding this is provided in Note 9.

Key judgements

Key judgements relate to the treatment of compliance with REIT status, the valuation of investment properties, production of consolidated financial statements and property acquisitions where different accounting policies could be applied. These are described in more detail below.

Compliance with REIT Status

As disclosed in Note 6, the Group has been approved as a REIT. As a result, the Group does not pay UK corporation tax on its profits and gains from qualifying rental business in the UK provided it meets certain conditions. Non-qualifying profits and gains of the Group continue to be subject to corporation tax as normal. In order to achieve and retain group REIT status, several entrance tests had to be met and certain ongoing criteria must be maintained. The main criteria are as follows:

·           at least 90% of the tax exempt rental business profits must be distributed in the form of a Property Income Distribution;

·           at the start of each accounting period, the assets of the tax exempt business must be at least 75% of the total value of the Group's assets;

·           at least 75% of the Group's total profits must arise from the tax exempt business; and

·           the Group must hold a minimum of three properties with no

single property exceeding 40% of the portfolio value.

The Directors intend that the Group should continue as a group REIT for the foreseeable future, with the result that deferred tax is not recognised on temporary differences relating to the property rental business. Should the ongoing criteria not continue to be met, the corporation tax payable by the Group may be significantly higher. Further detail is provided in note 1(e) to the financial statements.

When reviewing dividend policy, the Board confirmed that dividends paid and payable will allow the Group to continue to meet REIT status. The Board has taken account of the suspension of dividend.

Production of Consolidated Financial Statements

The Company is required to consider whether it is an 'investment entity' under the definition contained within IFRS 10. The Directors have concluded that the Company is not an investment entity as so defined. In arriving at this conclusion the Directors considered:

·           the Company does not have a defined timeframe for exiting each investment property;

·           although the Company measures the investment properties held by its subsidiary at fair value, other measures, such as cash flows and rental income, are also considered when making and evaluating investment decisions; and

·           the Company does not, through its subsidiary, just hold a portfolio of static investment properties but also undertakes other business activities including maintenance, capital expenditure and leasing activities.

Were the Directors to conclude that the Company was an investment entity then it would not consolidate its wholly owned subsidiary and would instead report the investment in its subsidiary at fair value through profit or loss.

Basis of Consolidation

The Consolidated Financial Statements comprise the Financial Statements of the Company and its subsidiary drawn up to 30 September 2019. The Subsidiary is an entity controlled by the Company as detailed in Note 10. Control exists when the Company is exposed, or has rights, to variable returns from its investment with the investee and has the ability to affect those returns through its power over the investee. In assessing control, potential voting rights that presently are exercisable are taken into account. The Financial Statements of the subsidiary are included in the Consolidated Financial Statements from the date that control commences until the date that control ceases. In preparing the Consolidated Financial Statements, intra-Group balances, transactions and unrealised gains or losses have been eliminated in full. Uniform accounting policies are adopted by the Company and the Subsidiary.

(B) REVENUE RECOGNITION

Rental Income

Rental income excluding VAT arising on investment properties is accounted for in the Statement of Comprehensive Income on a straight-line basis over the terms of the individual leases.

Lease incentives including rent-free periods and payments to tenants, are allocated to the Statement of Comprehensive Income on a straight-line basis over the lease term or on another systematic basis, if applicable. Where income is recognised in advance of the related cash flows, an adjustment is made to ensure that the carrying value of the relevant property, including accrued rent disclosed separately within 'trade and other receivables' does not exceed the external valuation.

Lease incentives are spread evenly over the lease term, even if payments are not made on such a basis. The lease term is the non-cancellable period of the lease together with any further term for which the tenant has the option to continue the lease, where, at the inception of the lease, the Directors are reasonably certain that the tenant will exercise that option. The Group may from time to time receive surrender premiums from tenants who break their leases early. To the extent they are deemed capital receipts to compensate the Group for loss in value of the property to which they relate, they are credited to capital reserves. All other surrender premiums are recognised within rental income in the Statement of Comprehensive Income.

Amounts drawn down from escrow which arise from rent free periods are accounted for on an accruals basis and recognised as rental income within the Statement of Comprehensive Income over the length of the time that the rental guarantee exists as it pertains to vacant space and/or rent-free periods.

Interest Income

Interest income is accounted for on an accruals basis.

Service Charges and Expenses Recoverable from Tenants

Where service charges and other expenses are recharged to tenants, the expense and the income received in reimbursement are offset within the Statement of Comprehensive Income and are not separately disclosed, as the Directors consider that the Group acts as agent in this respect. Service charges and other property-related expenses that are not recoverable from tenants are recognised in expenses on an accruals basis.

(C) OTHER EXPENSES

Expenses are accounted for on an accruals basis. The Group's investment management and administration fees, finance costs and all other expenses are charged to revenue through the Statement of Comprehensive Income net of Value Added Tax.

Amounts drawn down from escrow which arise from non-recoverable expenses relating to vacant space are recognised as a deduction from expenses.

(D)        DIVIDENDS PAYABLE

Dividends are accounted for in the period in which they are paid.

(E)        TAXATION

The Group is a REIT and is thereby exempt from tax on both rental profits and chargeable gains. In order to retain REIT status, certain ongoing criteria must be maintained.

The Directors intend that the Group should continue as a REIT for the foreseeable future, with the result that deferred tax is no longer recognised on temporary differences relating to the property rental business which is within the REIT structure.

Taxation on any profit or loss for the period not exempt under UK-REIT regulations comprises current and deferred tax. Taxation is recognised in the Statement of Comprehensive Income except to the extent that it relates to items recognised as direct movements in equity, in which case it is also recognised as a direct movement in equity.

Current tax is the expected tax payable on the taxable income for the year, using tax rates and laws enacted or substantively enacted at the year-end date. Deferred income tax is provided using the liability method on all temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax assets are recognised only to the extent that it is probable that taxable profit will be available against which deductible temporary differences, carried forward tax credits or tax losses can be utilised. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities. In determining the expected manner of realisation of an asset the Directors consider that the Group will recover the value of investment property through sale. Deferred income tax relating to items recognised directly in equity is recognised in equity enacted or substantively enacted at the balance sheet date.

(F)        INVESTMENT PROPERTIES

 Investment properties consist of land and buildings which are not occupied for use by or in the operations of the Group or for sale in the ordinary course of business but are held to earn rental income together with the potential for capital and income growth.

Investment properties are initially recognised at cost, being the fair value of consideration given, including transaction costs associated with the investment property. Any subsequent capital expenditure incurred in improving investment properties is capitalised in the period incurred and included within the book cost of the property.

After initial recognition, investment properties are measured at fair value, with gains and losses recognised in the Statement of Comprehensive

 

Income. Fair value is based on an open market valuation provided by Savills (UK) Limited, Chartered Surveyors at the year-end date using recognised valuation techniques appropriately adjusted for unamortised lease incentives, lease surrender premiums and rental adjustments. The determination of the fair value of investment properties requires the use of estimates such as future cash flows from assets (including lettings, tenants' profiles, future revenue streams, capital values of fixtures and fittings, plant and machinery, any environmental matters and the overall repair and condition of the property) and discount rates applicable to those assets. These estimates are based on local market conditions existing at the balance sheet date.

Investment property is derecognised when it has been disposed of or permanently withdrawn from use and no future economic benefit is expected from its disposal. On derecognition, gains and losses on disposals of investment properties are recognised in the Statement of Comprehensive Income and transferred to the Capital Reserve - investments sold. Recognition and derecognition occurs on the completion of a sale.

Gains or losses on the disposal of investment property are determined as the difference between net disposal proceeds and the carrying value of the asset in the previous period's financial information.

(G)        CASH AND CASH EQUIVALENTS

 Cash consists of cash in hand and short-term deposits in banks with an original maturity of three months or less.

(H)        TRADE AND OTHER RECEIVABLES

Rents receivable, which are generally due for settlement at the relevant quarter end, are recognised and carried at the original invoice amount less an allowance for any uncollectable amounts. An estimate for credit losses in accordance with IFRS 9 is made when collection of the full amount is no longer probable. Bad debts are written off when identified.

(I)         INTEREST-BEARING LOANS AND BORROWINGS

All loans and borrowings are initially recognised at cost, being fair value of the consideration received net of arrangement costs associated with the borrowing. After initial recognition, all interest bearing loans and borrowings are subsequently measured at amortised cost; any difference is recognised in the Statement of Comprehensive Income over the period of the borrowing using the effective interest method. Amortised cost is calculated by taking into account any loan arrangement costs and any discount or premium on settlement.

(J)        PROPERTY ACQUISITIONS

Where property is acquired, via corporate acquisitions or otherwise, the substance of the assets and activities of the acquired entity is considered whether the acquisition represents the acquisition of a business or the acquisition of an asset.

Where such acquisitions are not judged to be an acquisition of a business, they are not treated as business combinations. Rather, the cost to acquire the corporate entity is allocated between the identifiable assets and liabilities of the entity based on their relative fair values at the acquisition date. Accordingly, no goodwill or additional deferred taxation arises. Otherwise, acquisitions are accounted for as business combinations.

(K)        RESERVES

Share Premium

The surplus of net proceeds received from the issuance of new shares over their par value is credited to this account and the related issue costs are deducted from this account. The reserve is non-distributable.

Capital Reserves

The amount of the capital reserve that is distributable is complex to determine and is not necessarily the full amount of the reserve as disclosed within these Financial Statements.

The following are accounted for in the capital reserve:

-           gains and losses on the disposal of investment properties;

-           increases and decreases in the fair value of investment properties held at the year-end; and

-           the cost of professional advice relating to the capital structure of the Group.

Revenue Reserve

The amount of the revenue reserve that is distributable is complex to determine and is not necessarily the full amount of the reserve as disclosed within these Financial Statements. The net profit/(loss) arising in the revenue column of the Statement of Comprehensive Income is added to or deducted from this reserve

Special Distributable Reserve

An application to Court was successfully made for the cancellation of the launch share premium account which allowed the transfer of monies to the special distributable reserve. This reserve is available for paying dividends and buying back the Company's shares to the extent that the remaining reserve is sufficient to cover the deficit on the capital reserve.

Capital Management

The Group's capital is represented by the Ordinary Shares, Share Premium, Capital Reserves, Revenue Reserve and Special Distributable Reserve. The Group is not subject to any externally-imposed capital requirements.

The capital of the Group is managed in accordance with its investment policy, in pursuit of its investment objective. Capital management activities may include the allotment of new shares, the buy back or re-issuance of shares from treasury, the management of the Group's discount to net asset value and consideration of the Group's net gearing level. There have been no changes in the capital management objectives and policies or the nature of the capital managed during the year.

The account policies adopted are consistent with those of the previous financial year.

(L)        CHANGES IN ACCOUNTING

POLICIES

The following new standards have been adopted in the current year with no material impact on the Financial Statements:

- IFRS 16 'Leases'

IFRS 16 specifies how an IFRS reporter will recognise, measure, present and disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognise assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. Lessors continue to classify leases as operating or finance, with IFRS 16's approach to lessor accounting substantially unchanged from its predecessor, IAS 17. IFRS 16 applies to annual reporting periods beginning on or after 1 January 2019.

The leasing activity of the Group relates fully to the leasing of investment property. The weighted average unexpired lease term of the leases held by the Group is just over 5 years.

There has been no material impact on the financial statements as presented by implementing IFRS 16 in the current year.

Standard issued but not yet effective

The following standards have been issued but are not yet effective for the accounting year and have not been adopted early.

- IFRS 3 (Amendments) 'Definition of a Business'

The amendments clarify that, when an entity obtains control of a business that is a joint operation, it applies the requirements for a business combination achieved in stages, including remeasuring previously held interest in the assets and liabilities of the joint operation at fair value. In doing so, the acquirer remeasures its entire previously held interest in the joint operation.

These amendments are expected to have no impact on the financial statements.

 

2.  INVESTMENT ADVISER'S FEE

 

 

Year ended 30 September 2020

Year ended 30 September 2019

 

£'000

£'000

Investment Adviser's fee

205

335

Total

205

335

The Group's Alternative Investment Fund Manager ("AIFM") and Investment Manager, R&H Fund Services (Jersey) Limited was appointed on 28 April 2015. The property management arrangements of the Group were delegated by R&H Fund Services (Jersey) Limited, with the approval of the Group, to Drum Real Estate Investment Management Limited ("the Investment Adviser") on 28 April 2015. The Investment Adviser is responsible for the day to day management of the portfolio. See note 17 for further details.

 

The capital of the Group is managed in accordance with its investment policy, in pursuit of its investment objective. Capital management activities may include the allotment of new shares, the buy back or re-issuance of shares from treasury, the management of the Group's discount to net asset value and consideration of the Group's net gearing level.

There have been no changes in the capital management objectives and policies or the nature of the capital managed during the year.

 

3.  OTHER EXPENSES

 

 

Year ended
30 September 2020

Year ended
 30 September 2019

 

£'000

£'000

Administration fee

40

20

AIFM Fee

15

15

Directors' fees

75

75

Statutory audit - PWC

54

35

Tax services - Deloitte

15

12

Services charges*

391

386

Consultancy fees

48

49

Valuation fees

23

24

Legal fees

45

32

Property expenses

84

77

Abortive costs"

-

264

Bad debts

373

82

Other

91

122

Total

1,254

1,193

*Service charges relate to non-recoverable expenses on vacant properties.

"Abortive costs relate to a cost incurred in relation to a deal which was not finalised.

4.  INTEREST RECEIVABLE

 

 

Year ended
30 September 2020

Year ended
 30 September 2019

 

£'000

£'000

Bank interest received

-

-

Total

-  

-

 

5.  INTEREST PAYABLE

 

 

Year ended
30 September 2020

Year ended
 30 September 2019

 

£'000

£'000

Bank loan interest and non-utilisation fee

524

609

Loan arrangement fees

68

48

Total

592

657

 

 

6.  TAXATION

 

 

 

Year ended
30 September 2020

Year ended
 30 September 2019

 

£'000

£'000

Total tax charge

-

-

A reconciliation of the corporation tax charge applicable to the results at the statutory corporation tax rate to the charge for the year is as follows:

 

 

Year ended
30 September 2020

Year ended
 30 September 2019

 

£'000

£'000

(Loss)/profit before taxation

(3,424)

(1,069)

Effects of:

 

 

REIT exempt profits

398

392

REIT exempt (losses)

(1,048)

(595)

Total tax charge

-

-

 

The Company served notice to HM Revenue & Customs that the Company, and its subsidiary, qualified as a Real Estate Investment Trust with effect from August 2015. Subject to continuing relevant UK-REIT criteria being met, the profit from the Group's property rental business, arising from both income and capital gains, are exempt from corporation tax.

 

 

7.  DIVIDENDS

 

The Group declared the following dividends:

 

 

Year ended
30 September 2020

Year ended
 30 September 2019

 

£'000

£'000

A fourth interim dividend of 1.5p (1.5p) in respect of the period ended 30 September 2019 was paid to shareholders on 22 November 2019

573

573

A first interim dividend of 1.5p (1.5p) in respect of the period ended 31 December 2019 was paid to shareholders on 21 February 2020.

573

573

No second interim dividend (1.5p) was paid in respect of the period ended 31 March 2020.

-

573

No third interim dividend (1.5p) was paid in respect of the period

ended 30 June 2020.

-

573

Total dividends paid

1,146

2,292

 

The directors are not proposing a final dividend in respect of 2020 at this time.

8.  BASIC AND DILUTED EARNINGS/(LOSS) PER ORDINARY SHARE

 

Year ended
30 September 2020

Year ended
 30 September 2019

 

£'000

Pence per share

£'000

Pence per share

Revenue earnings

2,094

5.48

2,064

  5.40

Capital loss

(5,518)

(14.44)

(3,133)

(8.20)

Total (loss)/earnings

(3,424)

(8.96)

(1,069)

(2.80)

Average number of shares in issue

38,201,990

38,201,990

 

9.  INVESTMENT PROPERTIES

 

Year ended 30 September 2020 £'000

Year ended 30 September 2019 £'000

Opening fair value

54,880

57,351

Purchases

-

-

Property costs capitalised

250

678

Amortisation of lease costs

(43)

(16)

Revaluation movement (including lease incentive movement)

(3,133)

Closing fair value

49,569

54,880

Changes in the valuation of investment properties

 

 

 

2020

2019

 

£'000

Unrealised loss on revaluation of investment properties

(5,518)

(3, 133)

 

 

The properties were valued at £51,050,000 as at 30 September 2020 (30 September 2019: £55,350,000) by Savills (UK) Limited ('Savills'), in their capacity as external valuers adjusted for lease incentives of £1,480,679 (2019: £470,000). 30 September 2020 valuations are subject to a "material uncertainty" clause in line with prevailing RICS guidance, however post year end this has been removed. The impact of the material uncertainty clause as at 30 September 2020, which is included as a disclosure as part of the external valuations, highlights that less certainty, and consequently a higher degree of caution, should be attached to the valuation.

The fair value of investment properties is determined by independent real estate valuation experts using recognised valuation techniques. The properties have been valued on the basis of 'Fair Value' and VPGA1 Valuations for Inclusion in the Financial Statements, which adopt the definition of Fair Value as adopted by the International Accounting Standards Board. In line with the recommendation of the European Public Real Estate Association, all properties have been deemed to be Level 3 under the fair value hierarchy classification. This is described in more detail in the accounting policy. Revisions to accounting estimates are recognised in the period in which the estimate is revised, if the revision affects only that period, or in the period of the revision and future period/years, if the revision affects both current and future period/years.

The Group is required to classify fair value measurements of its investment properties using a fair value hierarchy, in accordance with IFRS 13 'Fair Value Measurement'. In determining what level of the fair value hierarchy to classify the Group's investments within, the Directors have considered the content of IFRS 13. The position paper on IFRS 13 prepared by the European Public Real Estate Association concludes that, it is likely that valuers of investment property will use unobservable inputs resulting in the vast majority of investment properties being classified as level 3.

After significant consideration of the Group's valuation process and IFRS 13, the Directors believe it is reasonable to classify the Group's assets within level 3 of the fair value hierarchy, as all assets are subject to operating leases.

10.     INVESTMENT IN SUBSIDIARY

The Group's results consolidate those of Drum Income Plus Limited, a wholly owned subsidiary, incorporated in England & Wales (Company Number: 09515513). Drum Income Plus Limited was incorporated on 28 March 2015, acquired on 19 August 2015 and began trading on 19 January 2016, when it was transferred the ownership of the entirety of the Group's property portfolio. Drum Income Plus Limited continues to hold all the investment properties owned by the Group and is also the party which holds the Group's borrowings. The registered office of Drum Income Plus Limited is Level 13, Broadgate Tower, 20 Primrose Street, London, EC2A 2EW.

 

11.       TRADE AND OTHER RECEIVABLES

 

 

Year ended
30 September 2020

Year ended
 30 September 2019

 

£'000

£'000

Rent receivable

307

441

Service charge receivable

962

1,042

Lease incentives

1,481

470

Other

253

690

Total

3,003

2,643

 

12.  CASH AND CASH EQUIVALENTS

All cash balances at the year-end were held in cash, current accounts or deposit accounts.

 

 

Year ended
30 September 2020

Year ended
 30 September 2019

 

£'000

£'000

Cash and cash equivalents

1,120

510

Total

1,120

510

 

13.  LOAN

 

Year ended
30 September 2020

Year ended
 30 September 2019

 

£'000

£'000

Principal amount outstanding

22,760

22,760

Set-up costs

(134)

(201)

Total

22,626

22,559

On 6 January 2017 the Group entered into a £25 million secured 3 year revolving credit facility agreement with the Royal Bank of Scotland ('the Bank') at a rate of 1.75% plus LIBOR per annum which had a maturity date of January 2020. This facility was extended on 30 September 2019 for a further 3 years.

As part of the loan agreement the Bank has a standard security over the properties currently held by the Group, with an aggregate value of £51,050,000 at 30 September 2020 (30 September 2019 - £55,350,000).

Under the financial covenants related to this loan, the Group has to ensure that for Drum Income Plus Limited:

-           the interest cover, being the rental income as a percentage of finance costs is at least 250%;

-           the loan to value ratio, being the value of the loan as a percentage of the aggregate market value of the relevant properties, must not exceed 50%.

Breach of the financial covenants, subject to various cure rights, may lead to the loans falling due for repayment earlier than the final maturity date stated above. The Group has complied with all the loan covenants during the year.

 

14.  TRADE AND OTHER PAYABLES

 

 

Year ended
30 September 2020

Year ended
 30 September 2019

 

£'000

£'000

Rental income received in advance

718

890

Service charge

920

923

Accruals

205

744

VAT

78

95

Other creditors

1,255

362

Total

3,176

3,014

 

The policy is to ensure settlement of supplier invoices in accordance with stated terms.

15.       NET ASSET VALUE

The Group's net asset value per ordinary share of 73.01 pence (30 September 2019: 84.97 pence) is based on equity shareholders' funds of £27,890,000 (30 September 2019: £32,460,000) and on 38,201,990 (30 September 2019: 38,201,990) ordinary shares, being the number of shares in issue at the year end.

16.       CALLED UP EQUITY SHARE CAPITAL

 

 

Year ended
30 September 2020

Year ended
30 September 2019

Year ended
30 September 2020

Year ended
 30 September 2019

 

Shares

Shares

£'000

£'000

Issued and fully paid

 

 

 

 

Opening total issued ordinary shares of 10p each

38,201,990

38,201,990

3,820

3,820

Closing total issued ordinary shares

38,201,990

38,201,990

3,820

3,820

No shares were issued to increase capital base of the Company.

 

Ordinary shareholders are entitled to all dividends declared by the Company and to all of the Company's assets after repayment of its borrowings and ordinary creditors. Ordinary shareholders have the right to vote at meetings of the Company. All Ordinary Shares carry equal voting rights.

 

There is only one class of share in issue.

 

17.        RELATED PARTY TRANSACTIONS

 

The Directors are considered to be related parties. No Director had an interest in any transactions which are, or were, unusual in their nature or significant to the nature of the Group.

 

The Directors of the Group received fees for their services. Total fees for the year were £75,000 (30 September 2019: £75,000 ) of which £nil was payable at the year-end (30 September 2019: £nil).

The Investment Manager and Investment Adviser are considered to be related parties.

 

Under the terms of the agreements amongst the Group, R&H Fund Services (Jersey) Limited (the "AIFM") and Drum Real Estate Investment Management Limited (the "Investment Adviser"), the Group paid to the AIFM a fixed fee of £15,000 per annum. The AIFM agreed that the annual portfolio management fee would be paid to the Investment Adviser, in accordance with the terms of the agreements. With effect from 1 October 2019, Drum Real Estate Investment Management Limited reduced its annual portfolio management fee to 0.7%.

 

The management agreements are terminable by any party on 12 months' written notice, provided that such notice shall expire no earlier than the fourth anniversary of Admission.

 

R&H Fund Services (Jersey) Limited, as AIFM and Investment Manager, earned £15,000 during the year (30 September 2019: £15,000). £47,000 was payable at the year-end (30 September 2019: £32,000).

 

Drum Real Estate Investment Management Limited, as Investment Adviser, earned £205,000 during the year (30 September 2019: £335,000). £nil was payable at the year-end (£nil at 30 September 2019).

 

18.        OPERATING SEGMENTS

 

The Board has considered the requirements of IFRS 8 'Operating Segments'. The Board is of the view that the Group is engaged in a single unified business, being property investment, and in one geographical area, the United Kingdom, and that therefore the Group has no segments. The Board of Directors, as a whole, has been identified as constituting the chief operating decision maker of the Group. The key measure of performance used by the Board to assess the Group's performance is the total return on the Group's net asset value. As the total return on the Group's net asset value is calculated based on the net asset value per share calculated under IFRS as shown at the foot of the Consolidated Statement of Financial Position, the key performance measure is that prepared under IFRS. Therefore no reconciliation is required between the measure of profit or loss used by the Board and that contained in the Financial Statements.

The view that the Group is engaged in a single unified business is based on the following considerations:

-          one of the key financial indicators received and reviewed by the Board is the total return from the property portfolio taken as a whole;

-          there is no active allocation of resources to particular types or groups of properties in order to try to match the asset allocation of an index or benchmark; and

-          the management of the portfolio is ultimately delegated to a single Investment Adviser, Drum Real Estate Investment Management Limited.

 

19.        FINANCIAL INSTRUMENTS

 

Consistent with its objective, the Group holds UK commercial property investments. In addition, the Group's financial instruments comprise cash and receivables and payables that arise directly from its operations. The Group does not have exposure to any derivative instruments.

 

The Group is exposed to various types of risk that are associated with financial instruments. The most important types are credit risk, liquidity risk, interest rate risk and market price risk. There is no foreign currency risk as all assets and liabilities of the Group are maintained in pounds sterling.

 

The Board reviews and agrees policies for managing the Group's risk exposure. These policies are summarised below. These disclosures include, where appropriate, consideration of the Group's investment properties which, whilst not constituting financial instruments as defined by IFRS, are considered by the Board to be integral to the Group's overall risk exposure.

 

The Company has not, in the year to 30 September 2020 (2019: same), participated in any: repurchase transactions; securities lending or borrowing; buy-sell back transactions; margin lending transactions; or total return swap transactions (collectively called SFT).  As such, it has no disclosure to make in satisfaction of the EU regulations on transparency of SFT.

 

The following table summarises the Group's financial assets and liabilities into the categories required by IFRS 7 'Financial Instruments: Disclosures':

 

 

 

 

 

 

 

 

As at 30 September 2020

As at 30 September 2019

Financial assets

Held at fair value through profit and loss £'000

Financial assets and liabilities at amortised cost £'000

Held at fair value through profit and loss £'000

Financial assets and liabilities at amortised cost £'000

Investment properties

49,569

-

54,880

-

Cash and cash equivalents

-

1,120

-

510

Rent receivable

-

307

-

441

Service charge receivable

-

962

-

1,042

Lease incentives

-

1,481

-

470

Other receivables

-

253

-

690

 

49,569

4,123

54,880

3,153

Financial liabilities

 

 

 

 

Loan

-

(22,626)

-

(22,559)

Trade and other payables

-

(3,176)

-

(3,014)

 

-

(25,802)

-

(25,573)

 

CREDIT RISK                                       

 

Credit risk is the risk that an issuer or counterparty will be unable or unwilling to meet a commitment that it has entered into with the Group. At the reporting date, the Group's financial assets exposed to credit risk amounted to £4,123,000 (2019: £3,153,000), consisting of cash of £1,120,000 (2019: £510,000), rent receivable of £307,000 (2019: £441,000), service charge receivable of £962,000 (2019: £1,042,000), lease incentives of £1,480,679 (2019: £470,000), and other receivables of £252,321 (2019: £690,000).

 

In the event of default by a tenant if it is in financial difficulty or otherwise unable to meet its obligations under the lease, the Group will suffer a rental shortfall and incur additional expenses until the property is re-let. These expenses could include legal and surveyor's costs in reletting, maintenance costs, insurances, rates and marketing costs and may have a material adverse impact on the financial condition and performance of the Group and/or the level of dividend cover. The Board receives regular reports on concentrations of risk and any tenants in arrears. The Investment Adviser monitors such reports in order to anticipate, and minimise the impact of, defaults by occupational tenants.

 

Where there are concerns over the recoverability of rental income, the amounts outstanding will be fully provided for. There was a provision recognised in the year to 30 September 2020 for potential bad debts. The increase in this provision in comparison to prior years was as a result of the COVID-19 pandemic. The Group has also seen an increase in lease incentives and rent concessions as a result of the COVID-19 pandemic.

 

All of the Group's cash was placed with The Royal Bank of Scotland plc as at 30 September 2020. Bankruptcy or insolvency of the bank holding cash balances may cause the Group's ability to access cash placed with them to be delayed, limited or lost. RBS is rated at BBB- or better by the main rating agencies, with a stable or positive outlook. Should the credit quality or the financial position of the banks currently employed significantly deteriorate, cash holdings would be moved to another bank.

 

LIQUIDITY RISK

Liquidity risk is the risk that the Group will encounter difficulties in realising assets or otherwise raising funds to meet financial commitments. The Group's investments comprise commercial properties.

 

Property and property-related assets in which the Group invests are not traded in an organised public market and may be illiquid. As a result, the Group may not be able to liquidate quickly its investments in these properties at an amount close to their fair value in order to meet its liquidity requirements.

 

The Group's liquidity risk is managed on an ongoing basis by the Investment Adviser and monitored on a quarterly basis by the Board. In order to mitigate liquidity risk the Group has a comprehensive three year cash flow forecast that aims to have sufficient cash balances, taking into account projected receipts for rental income and property sales, to meet its obligations for a period of at least 12 months. The three year viability assessment conducted by the Board takes cognisance of the COVID-19 pandemic.

 

At the reporting date, the maturity of the financial assets was:

 

 

As at 30 September 2020

As at 30 September 2019

 

£'000

£'000

Trade and other receivables

 

 

-       3 months or less

1,710

2,173

-       3 months to 3 years

4

34

-       More than 3 years

387

436

 

2,101

2,643

 

 

The lease incentive debtor is shown in the period in which the lease incentive ends

 

At the reporting date, the financial liabilities on a contractual maturity basis were:

 

 

As at 30 September 2020

As at 30 September 2019

 

£'000

£'000

Loan

 

 

-       3 months

-

-

-       3 months to 3 years

22,760

22,760

-       More than 3 years

-

-

 

22,760

22,760

Trade and other payables

 

 

-       3 months or less

3,176

3,014

-       3 months to 3 years

-

-

-       More than 3 years

-

-

 

3,176

3,014

Total

25,936

25,774

 

 

IMPACT OF BREXIT AND THE COVID-19 PANDEMIC

 

As set out in the Principal Risks and Uncertainties section of the Strategic Report, the Board believes it too early to fully understand the impact of the COVID-19 pandemic and Brexit, but the Board believes the Company is well placed to weather any short-term impact due to the reasons set out in the Strategic Report.

 

INTEREST RATE RISK

 

Some of the Group's financial instruments will be interest-bearing. During the year to 30 September 2020, the Group only held interest-bearing financial instruments that carried interest at a variable rate. As a consequence, the Group will be exposed to cash flow interest rate risk due to fluctuations in the prevailing market rate. The Group did not hold any interest-bearing financial instruments that carried interest at a fixed interest rate and was therefore not exposed to fair value interest rate risk.

 

When the Group retains cash balances, they will ordinarily be held on interest-bearing deposit accounts. The Group's policy is to hold cash in variable rate or short-term fixed rate bank accounts. Exposure varies throughout the year as a consequence of changes in the composition of the net assets of the Group arising out of the investment and risk management policies.

 

The following table sets out the carrying amount of the Group's financial instruments that are exposed to interest rate risk:

 

 

As at 30 September 2020

As at 30 September 2019

Fixed rate

Variable rate

Fixed rate

Variable rate

£'000

£'000

£'000

£'000

Cash and cash equivalents

-

1,120

-

510

Loan

-

(22,760)

-

(22,760)

 

An increase of 0.50% in interest rates would have increased the reported loss for the year and decreased the net assets at the year-end by £113,000 (30 September 2019: £113,000), a decrease of 0.50% in interest rates would have an equal and opposite effect. These movements are calculated as at 30 September 2020 (30 September 2019) and may not be reflective of actual future conditions.

 

MARKET PRICE RISK

The management of market price risk is part of the investment management process and is typical of a property investment company. The portfolio is managed with an awareness of the effects of adverse valuation movements through detailed and continuing analysis, with an objective of maximising overall returns to shareholders. Investments in property and property related assets are inherently difficult to value due to the individual nature of each property. As a result, valuations are subject to substantial uncertainty. There is no assurance that the estimates resulting from the valuation process will reflect the actual sales price even where such sales occur shortly after the valuation date. Such risk is minimised through the appointment of external property valuers. The basis of valuation of the property portfolio is set out in detail in the accounting policies. Any changes in market conditions will directly affect the profit and loss reported through the Statement of Comprehensive Income. Details of the Group's investment property portfolio held at the balance sheet date are disclosed in Note 9. Every 25 bps movement in yield can impact valuation by £2.5m. Every 1% movement in rent can impact the valuation by £0.5m.

 

The calculations are based on the investment property valuations at the respective balance sheet date and are not representative of the year as a whole, nor reflective of future market conditions.

 

20.  CAPITAL COMMITMENTS

 

The Group did not have any contractual commitments to refurbish, construct or develop any investment property, or for repair, maintenance or enhancements as at 30 September 2020 (30 September 2019: nil).

 

21.     LEASES

The Group earns rental income from operating leases as defined by IFRS 16. Income as earned by leases is defined as follows:

 

 

As at 30 September 2020

As at 30 September 2019

£'000

£'000

 

 

 

Operating lease income - variable lease payments

-

-

Operating lease income - other

4,252

4,484

Finance lease income

-

-

Total

4,252

4,484

 

The Group leases out its investment properties under operating leases. These properties are measured under the fair value model as the properties are held to earn rentals. All leases are non-cancellable with a weighted average unexpired lease term of 5.15 years.

The minimum lease payments based on the unexpired lessor lease length at the year-end were as follows (based on actual rentals):

 

 

As at 30 September 2020

As at 30 September 2019

£'000

£'000

 

 

 

Less than one year

181

298

Between one and five years

4,626

4,521

Over five years

13,191

11,608

Total

17,998

16,427

 

The largest single tenant at the year-end accounted for 12 % (30 September 2019: 10%) of the passing rental income.

 

22.     POST BALANCE SHEET EVENTS

In the period between the year end and the signing of these accounts the RICS Material Valuation Uncertainty Leaders Forum (UK) reached consensus that reporting material valuation uncertainty may no longer be appropriate for most sectors and assets and following that guidance the independent valuers have removed the material uncertainty clause from the valuation for 31 December. This will not have a material impact on the property valuations.

 

COMPANY STATEMENT OF FINANCIAL POSITION AS AT 30 SEPTEMBER 2020

 

 

Non-current assets

Notes

As at 30 September 2020 £'000

As at 30 September 2019 £'000

Investment in subsidiary undertaking

C

27,764

30,400

 

 

27,764

30,400

 

 

 

 

Current assets

 

 

 

Trade and other receivables

D

326

8

Cash and cash equivalents

E

6

36

 

 

332

44

Total assets

 

28,096

30,444

 

 

 

 

Current liabilities

 

 

 

Trade and other payables

F

(205)

(473)

Total liabilities

 

(205)

(473)

Net assets

 

27,891

29,971

 

 

 

 

Equity and reserves

 

 

 

Called up equity share capital

G

3,820

3,820

Share premium

 

5,334

5,334

Special distributable reserve

 

20,694

21,840

Capital reserve

 

(1,146)

(1,146)

Revenue reserve

 

(811)

123

Equity shareholders' funds

 

27,891

29,971

 

The accompanying notes are an integral part of these Financial Statements.


Company number 09511797.

 

The Company Financial Statements were approved by the Board of Directors on 15 January 2021 and signed on its behalf by:

 

Hugh Little

Chairman

 

 

Company Statement of Changes in Equity

 

For the year ended 30 September 2020

 

 

 

Share Capital Account

Share Premium Reserve

Capital Reserve

Special Distributable Reserve

Revenue equity

Total

 

Note

£'000

£'000

£'000

£'000

£'000

£'000

As at 1 October 2019

 

3,820

5,334

(1,146)

21,840

123

29,971

Total comprehensive expense for the year

-

-

-

-

-

(934)

(934)

Transfer to revenue reserves

 

-

-

-

-

(1,146)

(1,146)

Transactions with owners recognised in equity:

 

 

 

 

 

 

 

Issue of Ordinary Share capital

G

-

-

-

-

-

-

Issue costs

 

-

-

-

-

-

-

Dividends paid

B

-

-

-

-

(1,146)

(1,146)

As at 30 September 2020

 

3,820

5,334

(1,146)

20,694

(811)

27,891

 

For the year ended 30 September 2019

 

 

 

Share Capital Account

Share Premium Reserve

Capital Reserve

Special Distributable Reserve

Revenue equity

Total

 

Note

£'000

£'000

£'000

£'000

£'000

£'000

As at 1 October 2018

 

3,820

5,334

(1,146)

21,840

202

30,050

Profit and total comprehensive expense for the year

-

-

-

-

-

2,213

2,213

Transfer to revenue reserves

 

-

-

-

-

(1,146)

(1,146)

Transactions with owners recognised in equity:

 

 

 

 

 

 

 

Issue of Ordinary Share capital

G

-

-

-

-

-

-

Issue costs

 

-

-

-

-

-

-

Dividends paid

B

-

-

-

-

(2,292)

(2,292)

Transfer to revenue reserves

 

 

 

 

 

 

 

As at 30 September 2019

 

3,820

5,334

(1,146)

21,840

123

29,971

 

 

The accompanying notes are an integral part of these Financial Statements.

 

Notes to the company Financial Statements

 

The entity is incorporated and registered in England and Wales and is domiciled in the United Kingdom. It is public limited company and is limited by shares.

 

A. ACCOUNTING POLICIES

BASIS OF PREPARATION

 

The Company Financial Statements have been prepared in accordance with Financial Reporting Standard 101: Reduced Disclosure Framework ('FRS 101') and in accordance with applicable legal and regulatory requirements of the Companies Act 2006.

 

The Financial Statements have been prepared on a historical cost basis except for investment property valuations that have been measured at fair value. A summary of the principal accounting policies, all of which have been applied consistently throughout the year, is set out below.

 

The major accounting policies of the Company are set out below and have been applied consistently throughout the current and prior year.

 

The Company has taken advantage of the following disclosure exemption available under FRS 101: Reduced Disclosure Framework:

 

·           the requirement to prepare a cash flow statement;

·           the disclosure of related party transactions between a parent and its wholly owned subsidiaries;

·           the requirement to present comparative reconciliations from investment property;

·           the requirement to present capital management disclosures; and

·           the requirement to disclose standards in issue which are not yet effective.

 

The results of the Company are included in the consolidated Financial Statements of its parent company as presented, Drum Income Plus REIT plc which are available from Broadgate Tower, 20 Primrose Street, London EC2A 2EW.

 

The notes and Financial Statements are presented in pounds sterling (being the functional currency and presentational currency for the Company) and are rounded to the nearest thousand except where otherwise indicated.

 

GOING CONCERN

Under Provision C.1.3 of the UK Corporate Governance Code, the Board needs to report whether the business is a going concern. In considering this requirement, the Directors have taken the following into account:

·           the Company's forecast for the next three years;

·           the risks included on the Company's risk register that could impact on the Company's liquidity and solvency over the next 12 months (details of risks are included in the Group Strategic Report); and

·           the risks on the Company's risk register that would be a potential threat to the Company's business model (details of risks are included in the Group Strategic Report).

 

The directors have also assessed the following specific areas in relation to the COVID-19 pandemic:

·           The extent of any operational disruption

The Company's business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic Report. The Strategic Report also includes the Company's risks and risk management processes.

 

Having due regard to these matters and after making appropriate enquiries, the Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. Therefore, the Board continues to adopt the going concern basis in preparing these Consolidated Financial Statements.

 

INVESTMENTS IN SUBSIDIARY UNDERTAKINGS

Investments in subsidiary undertakings are stated at cost less, where applicable, any provision for impairment.

 

CAPITAL MANAGEMENT

The Company's capital is represented by the Ordinary Shares, Share Premium, Capital Reserves, Revenue Reserve and Special Distributable Reserve and is managed in line with the policies set out for the Group.

 

COMPANY PROFIT FOR THE FINANCIAL YEAR AFTER TAX

Under Section 408 of the Companies Act 2006 the Company is exempt from the requirement to present its own profit and loss account. The loss for the financial year was £934,000 (2019: profit £2,213,000).

 

The Company does not have any employees (2019: nil). Details of the Directors' fees paid during the year are disclosed in the Group's Remuneration Report and in Note 3 to the Consolidated Financial Statements.

Audit fees payable to PwC in relation to the parent Company were £19,000 (2019: £19,000), excluding VAT.

 

KEY JUDGEMENTS

Key judgements relate to the treatment of compliance with REIT status, the valuation of investment properties, production of consolidated financial statements and property acquisitions where different accounting policies could be applied. These are described in more detail below.

 

COMPLIANCE WITH REIT STATUS

As disclosed in Note 6, the Group has been approved as a REIT. As a result, the Group does not pay UK corporation tax on its profits and gains from qualifying rental business in the UK provided it meets certain conditions. Non-qualifying profits and gains of the Group continue to be subject to corporation tax as normal.

In order to achieve and retain group REIT status, several entrance tests had to be met and certain ongoing criteria must be maintained. The main criteria are as follows:

·           at least 90% of the tax exempt rental business profits must be distributed in the form of a Property Income Distribution;

·           at the start of each accounting period, the assets of the tax exempt business must be at least 75% of the total value of the Group's assets;

·           at least 75% of the Group's total profits must arise from the tax exempt business; and

·           the Group must hold a minimum of three properties with no single property exceeding 40% of the portfolio value.

 

The Directors intend that the Group should continue as a group REIT for the foreseeable future, with the result that deferred tax is not recognised on temporary differences relating to the property rental business. Should the ongoing criteria not continue to be met, the corporation tax payable by the Group may be significantly higher. Further detail is provided in note 1(e) to the financial statements.

 

OTHER EXPENSES

Expenses are accounted for on an accruals basis. The Group's investment management and administration fees, finance costs and all other expenses are charged to revenue through the Statement of Comprehensive Income net of Value Added Tax.

 

DIVIDENDS PAYABLE

Dividends are accounted for in the period in which they are paid.

 

TAXATION

The Group is a REIT and is thereby exempt from tax on both rental profits and chargeable gains. In order to retain REIT status, certain ongoing criteria must be maintained.

 

The Directors intend that the Group should continue as a REIT for the foreseeable future, with the result that deferred tax is no longer recognised on temporary differences relating to the property rental business which is within the REIT structure.

Taxation on any profit or loss for the period not-exempt under UK-REIT regulations comprises current and deferred tax. Taxation is recognised in the Statement of Comprehensive

 

Income except to the extent that it relates to items recognised as direct movements in equity, in which case it is also recognised as a direct movement in equity.

 

Current tax is the expected tax payable on the taxable income for the year, using tax rates and laws enacted or substantively enacted at the year-end date.

 

Deferred income tax is provided using the liability method on all temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

 

Deferred income tax assets are recognised only to the extent that it is probable that taxable profit will be available against which deductible temporary differences, carried forward tax credits or tax losses can be utilised. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities. In determining the expected manner of realisation of an asset the Directors consider that the Group will recover the value of investment property through sale.

 

Deferred income tax relating to items recognised directly in equity is recognised in equity enacted or substantively enacted at the balance sheet date.

 

RESERVES

Share Premium

The surplus of net proceeds received from the issuance of new shares over their par value is credited to this account and the related issue costs are deducted from this account. The reserve is non-distributable.

 

Capital Reserves

the cost of professional advice relating to the capital structure of the Group are accounted for in the capital reserve. The amount of the capital reserve that is distributable is complex to determine and is not necessarily the full amount of the reserves as disclosed within these financial statements.

 

Revenue Reserve

The amount of the revenue reserve that is distributable is complex to determine and is not necessarily the full amount of the reserve as disclosed within these Financial Statements. The net profit/ (loss) arising in the revenue column of the Statement of Comprehensive Income is added to or deducted from this reserve.

 

Special Distributable Reserve

An application to Court was successfully made for the cancellation of the launch share premium account which allowed the transfer of monies to the special distributable reserve.

 

This reserve is available for paying dividends and buying back the Company's shares to the extent that the remaining reserve is sufficient to cover the deficit on the capital reserve and the revenue reserve.

 

Capital Management

The Group's capital is represented by the Ordinary Shares, Share Premium, Capital Reserves, Revenue Reserve and Special Distributable Reserve. The Group is not subject to any externally- imposed capital requirements.

 

The capital of the Group is managed in accordance with its investment policy, in pursuit of its investment objective. Capital management activities may include the allotment of new shares, the buy back or re- issuance of shares from treasury, the management of the Group's discount to net asset value and consideration of the Group's net gearing level.

 

There have been no changes in the capital management objectives and policies or the nature of the capital managed during the year.

 

B.             DIVIDENDS

Details of dividends paid by the Company are included in Note 7 to the Consolidated Financial Statements.

C.             INVESTMENTS IN SUBSIDIARY UNDERTAKING

 

 

As at 30 September 2020

As at 30 September 2019

£'000

£'000

 

 

 

Opening balance

30,400

30,400

Impairment

(2,636)

-

Closing balance

27,764

30,400

The Company has a single equity investment in a wholly owned subsidiary, Drum Income Plus Limited. This is the only regulated undertaking of the Company. The registered office address is: Level 13, Broadgate Tower, 20 Primrose Street, London EC2A. See Note 10 to the Consolidated Financial Statements.

During the year, an impairment review was carried out by evaluating the net asset value of the subsidiary. This resulted in an impairment of the investment of £2,636,000.

D.             TRADE AND OTHER RECEIVABLES

 

 

As at 30 September 2020

As at 30 September 2019

£'000

£'000

Amount due from subsidiary undertaking

-

-

Other debtors

326

8

Total

326

8

 

E.                CASH AND CASH EQUIVALENTS

All cash balances at the year-end were held in cash, current accounts or deposit accounts.

F.                TRADE AND OTHER PAYABLES

 

 

As at 30 September 2020

As at 30 September 2019

£'000

£'000

Amount due from subsidiary undertaking

-

-

Other payables

205

473

Total

205

473

The Company's payment policy is to ensure settlement of supplier invoices in accordance with stated terms.

G.         CALLED UP SHARE CAPITAL

Allotted, called-up and fully paid Ordinary Shares of 10 pence par value

 

 

Number of Shares

£'000

Opening balance as at 1 October 2019

38,201,990

3,820

Balance as at 30 September 2020

38,201,990

3,820

Shares were issued to increase the base of the company.

There is only one class of share in issue.

H.         FINANCIAL INSTRUMENTS

The Company's risks associated with financial instruments and the policies for managing its risk exposure are consistent with those detailed in Note 19 to the Consolidated Financial Statements.

With regards to the categorisation required by IFRS 7 'Financial Instruments: Disclosures' all of the Company financial assets and liabilities are categorised as 'financial assets and liabilities at amortised cost'. The Company's financial assets consist of trade and other receivables and cash and cash equivalents. The Company's financial liabilities consist of trade and other payables.

At the reporting date, the Company's financial assets exposed to credit risk amounted to £332,000 (2019: £44,000) consisting solely of the Company's cash balance of £6,000 (2019: £36,000) and other debtors and accrued income of £326,000 (2019: £8,000).

The maturity of the Company's financial liabilities (on a contractual maturity basis) at 30 September 2020 was as follows:

 

 

As at 30 September 2020

As at 30 September 2019

 

£'000

£'000

Three months or less

205

473

More than three months but less than three years

-

-

More than three years

-

-

 

205

473

The Company's only financial instrument exposed to interest rate risk at 30 September 2020 was its cash balance of £6,000 (2019: £36,000) which received variable rate of interest. An increase of 0.50% in interest rates would have decreased the reported loss for the year, and the net assets at year end, by £30 (2019: £180). A decrease in interest rates would have had an equal and opposite effect. These movements are calculated as at 30 September 2020 (30 September 2019) and may not be reflective of actual future conditions.

 J.        OPERATING SEGMENTS

The Board has considered the requirements of IFRS 8 'Operating Segments'. The Board is of the view that the Company is engaged in a single unified business, being property investments, and in one geographical area, the United Kingdom, and that therefore the Company has no segments. Full details are provided in Note 18 to the Consolidated Financial Statements.

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