AEW UK REIT plc
AEW UK REIT plc
- ISIN: GB00BWD24154
- Land: Großbritannien
Nachricht vom 11.06.2018 | 08:00
Annual Financial Report
AEW UK REIT plc (AEWU)
AEW UK REIT PLC
The Board of AEW UK REIT plc (the 'Company') is pleased to announce results for the 11 month period from 1 May 2017 to 31 March 2018.
The following text is copied from the Annual Report and Financial Statements for the period ended 31 March 2018:
*see Glossary below for definition of alternative performance measures
The current period being reported is for the 11 months from 1 May 2017 to 31 March 2018. The prior period ended 30 April 2017 was a 12 month period and so cannot be used as a direct comparator.
I am pleased to present the audited results of AEW UK REIT plc (the 'Company') for the period from 1 May 2017 to 31 March 2018. This Annual Report covers a period of 11 months following a change in year end from 30 April to 31 March, which was made in order to align the Company's reporting dates with those of its peers in the UK commercial property sector. As at 31 March 2018, the Company had
established a diversified portfolio of 36 commercial investment properties throughout the UK with a portfolio value of £192.34 million. On a like-for-like basis (like-for-like being the movement in the valuation provided by the valuer of those properties which have been held for the duration of the period in question), the Company's property portfolio valuation increased by 3.95% over the 11 month period.
The Company's focus during the period remained on growth in a way that is beneficial to its shareholders and this was achieved through the issue of 27.91 million new Ordinary Shares in October 2017. The shares were issued at 100.50 pence per share, raising gross proceeds of £28.05 million. In a climate of continued Brexit related uncertainty, this was a positive result and has allowed the Investment Manager to continue to strengthen and diversify the portfolio of assets. It has also contributed to the fall in the ongoing charges ratio which is 1.24% for the period to 31 March 2018 (year ended 30 April 2017: 1.52%). The Initial Issue price represented a premium of 3.76% to NAV, enabling the 2% issuance costs to be absorbed without diluting the NAV.
In addition to growth, the Company has continued to deliver its target dividend of 8.00 pence per share per annum and the Investment Manager has remained focussed on sourcing assets which can deliver sustainable income streams to support this dividend. During the quarter ended 31 July 2017, preceding the Initial Issue, the Company was fully invested, having utilised its capital proceeds in full, as well as all of its available loan facility. This allowed the Company to achieve EPRA EPS of 2.10 pence per share for the quarter ended 31 July 2017, ahead of the target dividend of 2.00 pence per share, demonstrating the ability of the portfolio to deliver an income yield which can sustain the Company's target dividend when fully invested.
To supplement the high yielding profile of the portfolio, the Investment Manager also continues to add value through active asset management. In September 2017, the Company realised a valuation uplift on Valley Retail Park, Belfast, selling the asset for £11.05 million. The property was acquired in August 2015 for £7.15 million and following extensive asset management and repositioning of the asset, the business plan had been fully implemented and the Investment Manager took the opportunity to realise a gain on historical cost of over £3 million.
This disposal, together with the share issue in October 2017, had a temporary dilutive effect on EPRA EPS until the funds had been fully invested in new acquisitions. During the period of investment following the Initial Issue and up to the period end 31 March 2018, the Company made seven further acquisitions totalling £49.49 million, fully utilising the capital raised as well as an additional £17.50 million of debt, bringing the gearing level up to 26.00% as at 31 March 2018. As at the period end, the Company was again in the position of being fully invested, which should enable it to cover its quarterly dividend target of 2.00 pence per share.
The Company's shares traded at a premium to NAV for the majority of the period and peaked at a premium of 8.88% in May 2017. In the three months to 31 March 2018, the share price fell by 3.92%, which is a reflection of the performance of the wider market, as the FTSE EPRA/NAREIT UK Index fell in value by 4.91% over the same period. As at 31 March 2018, the Company's share price was 95.60 pps, which is a 0.79% discount to NAV. The fall in share price over the 11 month period, offset by total dividend payments of 7.33 pence per share, generated a shareholder total return of 3.65%, compared with a NAV total return (see Glossary below for definition) of 8.70%.
During the period, a resolution was passed to amend the Company's investment restrictions so that the value of properties, measured at the time of each investment, in any one of the following sectors: offices; retail warehouses; high street retail and industrial/warehouses will not exceed 50% of the Company's GAV, previously this had been measured against NAV. This has allowed the Company to purchase further properties in the industrial sector, in which the Investment Manager continues to see significant opportunities. The Board and the Investment Manager continually review the investment strategy and investment restrictions in order to maximise potential returns from an appropriate risk profile. Any material change to the investment policy of the Company may only be made with the prior approval of the shareholders.
Operating profit, profit after tax and earnings per share have all increased significantly for the 11 months to 31 March 2018, compared with the 12 months to 30 April 2017. This is largely a result of a positive movement in the fair value of investment properties of £1.01 million (year ended 30 April 2017: decrease of £3.16 million). These movements can be attributed to both the positive effect
of asset management initiatives in the current period and positive yield movement, particularly across our portfolio of industrial assets.
On the other hand, EPRA Earnings per Share, which excludes fair value movements on investment property, has fallen to 6.56 pence per share or 7.16 pence per share pro-rated over 12 months (year ended 30 April 2017: 7.57 pence per share). This is largely a reflection of the cash drag from the issue of new equity during the period. During the 11 months ended 31 March 2018, the Company raised gross equity proceeds of £28.05 million (year ended 30 April 2017: £6.00 million).
The small increases in NAV per share and EPRA NAV per share reflect the aforementioned valuation increases in the property portfolio.
The Company increased its credit facility to £60.00 million in March 2018, following the share issue in October 2017.
The Company made three drawdowns during the period, utilising £3.49 million of the facility in July 2017, £7.50 million in February 2018 and £10.00 million in March 2018. The total balance drawn as at 31 March 2018 was £50.00 million (30 April 2017: £29.01 million).
The loan attracts interest at 3 month LIBOR +1.4%, making an all-in rate at 31 March 2018 of 2.11% (30 April 2017: 1.74%). The Company is protected from a significant rise in interest rates as it has interest rate caps with a combined notional value of £36.50 million (30 April 2017: £26.50 million), resulting in the loan being 73% hedged. A notional value of £26.50 million is capped at 2.50%, and
£10.00 million at 2.00% (30 April 2017: £26.50 million at 2.50%).
As at 31 March 2018, the unexpired term of the facility was 2.6 years (30 April 2017: 3.5 years) and the gearing was 26.00% (30 April 2017: 19.31%) (as calculated on the GAV of the investment portfolio).
At the Company's General Meeting on 17 October 2017, a resolution was passed to increase the Company's maximum borrowing limit to 35% of GAV. The long term gearing target remains 25% or less of GAV, but the Company can borrow up to 35% of GAV in advance of an expected capital raise or asset disposal. The Board and Investment Manager will continue to monitor the level of gearing and the gearing target may change in future.
The Company has continued to deliver on its target of paying annualised dividends of 8.00 pence per share per annum. During the period, the Company has declared and paid three quarterly dividends of 2.00 pence per Ordinary Share and one dividend of 1.33 pence per Ordinary Share, which relates to the two month period ended December 2017.
On 26 April 2018, the Board declared an interim dividend of 2.00 pence per Ordinary Share in respect of the period from 1 January 2018 to 31 March 2018. This interim dividend was paid on 31 May 2018 to shareholders on the register as at 11 May 2018. Including this dividend, the Company has paid 20.83 pence per share since launch.
The Directors will declare dividends taking into account the level of the Company's net income and the Directors' view on the outlook for sustainable recurring earnings. As such, the level of dividends paid may increase or decrease from the current annual dividend of 8.00 pence per share. Based on current market conditions, the Company expects to pay an annualised dividend of 8.00 pence per share in respect of the financial year ending 31 March 2019 and for the interim period to 30 September 2018.
The Board and the Investment Manager are pleased with the strong income returns delivered to our shareholders to date through the diversified and high yielding property portfolio that has been established. Based on annualised dividend payments of 8.00 pence per share, the Company delivers a dividend yield of 8.37% as at 31 March 2018.
The Company has now established a stabilised portfolio and as such, we expect to be able to more frequently deliver a covered dividend, with recent acquisitions giving a significant boost to the initial yield of the portfolio, which was 7.74% as at 31 March 2018.
There is also value to be gained through asset management initiatives. The portfolio had a vacancy rate of 7.10% as at 31 March 2018 and has since achieved sales comprising 1.9% of total vacancy with a further 1.3% under offer to let. There is one planned capex project at Eastpoint Business Park, Oxford, which is expected to increase the ERV and future potential income from the asset once complete.
In the wider economic environment, prospects continue to be dominated by Brexit negotiations, although it seems that some progress has been made towards arriving at a trade deal. The ultimate outcome remains unknown, and it remains difficult to assess the impact on the UK commercial property market. For some businesses it seems this lack of clarity is making it difficult to plan and invest, and it is hoped that negotiations during the remainder of 2018 should bring about more certainty. Our portfolio is relatively defensively positioned with regards to Brexit. We have no central London exposure, where it is anticipated Brexit will have the most significant impact. The Company's investment is primarily focussed on strong, regional centres and exposure is well diversified both geographically and by sector, which serves to mitigate risk.
Looking forward, our focus remains on continuing to grow the Company with further share issues as part of the 12 month share issuance programme as set out in the Company's Prospectus, subject to market conditions. The Company has a strategy to raise funds at intervals in order to minimise cash drag. Subject to future fund raising, the Investment Manager will focus on finding further acquisitions which will deliver an attractive return as part of a well-diversified portfolio.
8 June 2018
Business Model and Strategy
AEW UK REIT plc is a real estate investment company listed on the premium segment of the Official List of the UK Listing Authority and traded on the London Stock Exchange's Main Market. As part of its business model and strategy, the Company has and intends to maintain UK REIT status. HM Revenue and Customs has acknowledged that the Company has met and intends to continue to meet the necessary qualifying conditions to conduct its affairs as a UK REIT.
The investment objective of the Company is to deliver an attractive total return to shareholders from investing predominantly in a portfolio of smaller commercial properties in the United Kingdom.
In order to achieve its investment objective the Company invests in freehold and leasehold properties across the whole spectrum of the commercial property sector (office properties, retail warehouses, high street retail and industrial/warehouse properties) to achieve a balanced portfolio with a diversified tenant base.
Within the scope of restrictions set out below (under the heading 'Investment restrictions') the Company may invest up to 10% of its Net Assets (at the time of investment) in the AEW UK Core Property Fund (the 'Core Fund').
The Company did not hold any investment in the Core Fund as at 31 March 2018 and does not intend to reinvest in the Core Fund, but will keep this under review.
The Company will at all times invest and manage its assets in a way that is consistent with its objective of spreading investment risk and in accordance with its published investment policy. The Company will not, at any time, conduct any trading activity which is significant in the context of the business of the Company as a whole.
The Company will invest and manage its assets with the objective of spreading risk through the following investment restrictions:
The Directors currently intend, at all times, to conduct the affairs of the Company so as to enable the Company to qualify as a REIT for the purposes of Part 12 of the Corporation Tax Act 2010 (and the regulations made thereunder).
In the event of a breach of the investment policy or restrictions, the Investment Manager shall inform the Board upon becoming aware of such a breach and if the Board considers the breach to be material, notification will be made to a Regulatory Information Service and the Investment Manager will look to resolve the breach.
Any material change to the investment policy of the Company may only be made with the prior approval of shareholders.
The Company exploits what it believes to be the compelling relative value opportunities offered by pricing inefficiencies in smaller commercial properties let on shorter occupational leases. The Company intends to supplement this core strategy with asset management initiatives to upgrade buildings and thereby improve the quality of income streams. In the current market environment the focus will be to invest in properties which:
The Company's strategy is focused on delivering enhanced returns from the smaller end (up to £15 million) of the UK commercial property market. The Company believes that there are currently pricing inefficiencies in smaller commercial properties relative to the long term pricing resulting in a significant yield advantage, as demonstrated in the graphs below, which the Company aims to exploit.
Please refer to Appendix 1 'Investing in smaller assets of <£15 million can result in significant yield advantage', accessible through the link at the end of this announcement.
How we add value
An Experienced Team
The investment management team average 19 years working together, reflecting stability and continuity.
The Investment Manager's investment philosophy is based on the principle of value investing. The Investment Manager looks to acquire assets with an income profile coupled with underlying characteristics that underpin long-term capital preservation. As value managers, the Investment Manager looks for assets where today's pricing may not correspond to long-term fundamentals.
Active Asset Management
The Investment Manager has an in-house team of dedicated asset managers with a strong focus on active asset management to enhance income and add value to commercial properties.
Please refer to Appendix 2 'Our Asset Management Process', accessible through the link at the end of this announcement.
Strategy in Action
Acquiring a stable income stream on a site with a higher alternative use value
London East Leisure Park, Dagenham
Opportunities to drive rental growth and reduce vacancy
Diamond Business Park, Wakefield
Repositioning an asset to maximise income
Pearl Assurance House, Nottingham
Extending income streams to maximise value
Langthwaite Industrial Estate, South Kirkby
Acquiring a strong income stream with potential to renew
Geddington Road, Corby
Active asset management driving value in prime locations
Queen Square, Bristol
Key Performance Indicators
Investment Manager's Report
UK Economic Outlook
In April 2018, Q1 2018 growth was reported at 0.1% by the Office of National Statistics ('ONS'), well below the expected 0.3% and the weakest quarterly growth since 2012. This could trigger a downward revision for the full year 2018 growth forecasts, following on from a weak performance in 2017. UK growth for 2017 was reported at 1.8% by the ONS, the weakest performance of the UK economy in five years, due to a sharp rise in inflation squeezing household spending power.
This left the UK falling behind other major economies, such as the US and Germany, which grew by 2.3% and 2.5% respectively, as the global recovery begins to gather pace. The strength of the global economy, and the competitive value of the pound, should boost growth in export-oriented sectors. However, consumers continue to be squeezed by high inflation, while uncertainty surrounding Brexit is deterring business investment.
The 2017 figures demonstrate the impact on household budgets, with spending growing by 1.7%, which is the slowest rate of annual growth since 2012. This came as a result of inflation outpacing wage growth, driven by the post-Brexit fall in Sterling. However for the three months to February 2018, ONS figures reported wage inflation (including bonuses) of 2.8%, which exceeded cost inflation as the consumer price index ('CPIH') dipped to 2.5% in February 2018.
Many thought that this, coupled with low unemployment levels, would allow the Bank of England ('BoE') to make a second interest rate rise in May 2018, following a rise of 0.25% in November 2017, which was the first increase in a decade. However, the recent slowdown in economic growth has delayed any such increase, although it is anticipated that the BoE could raise interest rates once or twice during the remainder of 2018 and 2019. It is thought that the pace of rate rises will remain gradual and, with growth now slowing, the prospect of higher interest rates and inflation driven by growth should not be seen as a serious threat. Therefore we anticipate interest rates to remain stable and supportive of the prospects for UK growth.
UK Real Estate Outlook
Despite the economic pressures, we think that the property sector is set for another strong year, primarily due to its relative high yield compared with other sectors. The property market continues to show healthy spreads over 10 year government bond yields, and is still in the advantageous position of offering one of the highest yields from traditional asset classes.
All property total returns were 1.7% for the three months ended 31 March 2018 (IPD Quarterly Index for standing investments) and the 12 month return to 31 March 2018 was 9.3%. Overseas capital was a key feature of the property market in 2017, with overseas buyers accounting for almost half the 2017 UK investment. It is expected that the weight of money targeting the sector will remain high in 2018 from overseas private wealth investors attracted by the relative yield.
One of the main risks to the real estate market outlook will be the possibility of a 'Hard Brexit'. Although a relatively favourable end trading relationship is anticipated, with a transition period likely to last until December 2020 following the UK's exit from the EU in 2019, we still do not have a comprehensive agreement on the UK's long-term future with the EU and there remains a risk that the UK could leave without a trade deal. The outlook should become clearer during the remainder of 2018, but in the event that the future trading relationship includes barriers to trade, the real estate occupier market could weaken.
The wider political landscape in the UK also contains risks, both in terms of political leadership and policy, and specifically for the real estate sector, which could face increased taxation and regulation. The November 2017 Budget proposed measures to end capital gains tax exemption for overseas investors in commercial property from 2019, which could lead to some moderation in overseas investment.
It has been well documented that the retail sector has weakened in many areas and this has been reflected in financial difficulties for many well-known high street names such as New Look and Toys R Us. Since inception, the Company has positioned its retail purchases to take account of this trend. Our retail assets are located in town and city centres with large catchment populations and in many cases are supported by strong alternative use values and asset management options. Indeed, Valley Retail Park, Belfast, has been one of our strongest performing assets, as detailed in the 'Portfolio Activity' section. While we remain cautious on the retail sector, mispriced opportunities can still be found.
The industrial sector remains robust and it represents the largest proportion of our portfolio with 42%. We generally focus on assets with low capital value in locations with good accessibility from the national motorway network. In general, with the exception of large regional logistics units, industrial values have not yet reached levels which support the cost of new development, creating a tension between supply and demand often resulting in significant rental growth. Total returns for the industrials market were 19.6% for 2017 (IPD) and rental growth was 5.3%, more than double the all-property average.
This has been demonstrated within the Company's portfolio, for example at Sarus Court Industrial Estate, Runcorn, where new letting deals have moved rental values from £4.50 per sq ft at purchase to £5.50 per sq ft today, which has resulted in a valuation increase of 28% over the 29 months since acquisition of the initial four units. We therefore believe that the portfolio's low average passing rent from industrial property of £3.92 per sq ft make it well placed to benefit from further rental growth and we expect the sector to continue to be an area of opportunity for the Company over the next year.
Offices represent the Company's second largest sector holding and in some areas we have seen significant value growth. Locations with either high levels of tenant demand or where purchase values are well below that of surrounding residential uses are the focus of our stock selection process. The implementation within the planning regime of permitted development rights ('PDR') allowing for conversion to residential has contributed to a shortage of office stock in some locations and this in turn has led to rental growth in areas of robust occupational demand.
This remains an area where we see interesting opportunities to purchase assets with attractive initial yields. Post purchase, the asset management team work proactively, often implementing initiatives to drive rental value at the same time as working on permitted residential consents to improve the assets residual value ensuring downside protection. For example, the Company's holding in Queen Square, Bristol, has benefited from rental growth as a result of our asset management programme of improvement and refurbishment. The average passing rent at purchase in December 2015 date was under £17 per sq ft, compared to the latest leasing interest at £24 per sq ft. Average rental growth of 44% has contributed to an increase in value from £7.2 million at purchase to £10.7 million as at 31 March 2018.
The alternatives holding in the Company's portfolio works to diversify risk and enhance performance. Alternatives are a growing allocation in most balanced real estate portfolios and this is an area in which we have significant expertise and would like to increase our holding. Our strategy will focus on shorter lease profiles in economically robust areas where tenants are trading profitably from the location. The assets will often provide asset management opportunities, such as the ability to agree longer leases with tenants who often prefer index linked rent reviews. It is a growing sector of the market and presents opportunities to acquire interesting assets at attractive prices, such as London East Leisure Park in Dagenham, which was purchased by the Company in March 2018.
As demonstrated by the weight of the Company's purchases during the first quarter of 2018, the opportunity persists to purchase assets across all sectors, with attractive and sustainable yield profiles, along with the potential for growth. The Company's investment strategy continues to focus on well located assets, of comparatively small lot size with shorter than average unexpired lease lengths that can be used to actively drive value as part of a business plan. Our stock selection process also closely examines alternative use values for each asset and selects those that provide a strong recovery rate in a downside scenario.
Our pipeline of opportunities remains supportive of our target dividend of 8 pps per annum and our aim of providing an attractive total return from a diversified portfolio of assets. In the short term, purchases will continue to focus on business space and alternatives and will remain opportunistic in the retail sector.
The Company continues to build on a diversified portfolio of properties and as at 31 March 2018 held 36 investment properties (30 April 2017: 29 investment properties). Net rental income earned from the portfolio for the 11 months ended 31 March 2018 was £11.22 million (year ended 30 April 2017: £11.07 million), contributing to an operating profit before fair value changes and disposals of £9.60 million (year ended 30 April 2017: £9.81 million).
The Company disposed of its remaining holding in the Core Fund on 9 May 2017 for total proceeds of £7.67 million. The Company had held an ownership in the Core Fund since May 2015 and saw a total return of 13% over the hold period. The units were sold at a price in excess of the Core Fund's then most recent published NAV and generated a profit on disposal of £0.07 million.
The portfolio has seen a gain of £1.01 million on revaluation of investment property over the period (year ended 30 April 2017: loss of £3.16 million). Performance was strongly supported by the Company's industrial assets, which saw the greatest like-for-like increase in valuation over the period of each sector. The Company's office and retail warehousing portfolios also increased in valuation during the period on a like-for-like basis. Geographically, performance was strongest in the South West, North West, Eastern and West Midlands regions, while Scotland was the only region with a negative like-for-like valuation movement, highlighting continued uncertainty in occupational markets in this location. That said, we are encouraged by signs of improvement that have been seen here during the first quarter of 2018 and we are hopeful that the current business plan will yield a more positive outcome during the coming 12 months.
The Company reported a loss on disposal of investment properties of £0.22 million (year ended 30 April 2017: gain of £0.73 million), which wholly relates to sales costs for the disposal of Valley Retail Park, Belfast, in September 2017.
Administrative expenses, which include the Investment Manager's fee and other costs attributable to the running of the Company, were £1.62 million for the 11 month period (year ended 30 April 2017: £1.84 million) and Ongoing Charges for the period were 1.24% (year ended 30 April 2017: 1.52%).
The Company incurred finance costs of £0.65 million during the period (year ended 30 April 2017: £0.76 million).
The total profit before tax for the period of £9.82 million (year ended 30 April 2017: £6.10 million) equates to a basic earnings per share of 7.17 pence (year ended 30 April 2017: 5.04 pence).
The Company's Net Asset Value as at 31 March 2018 was £146.03 million or 96.36 pence per share ("pps") (30 April 2017: £118.67 million or 95.98 pps). This is an increase of 0.38 pps or 0.40%, with the underlying movement in NAV set out in the table below:
EPRA earnings per share for the 11 month period was 6.56 pps which, based on dividends paid of 7.33 pps, reflects a dividend cover of 89.50%.
As at 31 March 2018, the Company had utilised £50.00 million (30 April 2017: £29.01 million) of an available £60.00 million (30 April 2017: £40.00 million) credit facility with RBSi, maturing in October 2020. Gearing as at 31 March 2018 was 26.00% (Loan to GAV) (30 April 2017: 19.31%). The loan attracts interest at LIBOR + 1.4% (30 April 2017: LIBOR + 1.4%). To mitigate the interest rate risk that arises as a result of entering into a variable rate linked loan, the Company holds interest rate caps on £36.51 million (30 April 2017: £26.51 million) of the loan at strike rates of 2.5% on £26.51 million and 2.0% on £10.00 million (30 April 2017: 2.5% on £26.51 million), meaning that the loan is 73% hedged (30 April 2017: 91%).
The Company's objective is to build a diversified portfolio of commercial properties throughout the UK. New acquisitions have been selected to provide a sustainable income return and the potential for growth, whilst also limiting downside risk. The majority of the Company's assets are fully let and as at 31 March 2018, the Company had a vacancy rate of 7.10% (30 April 2017: 7.22%). The following significant investment transactions were made during the period:
Acquisitions during the period
Unit 1005, Sarus Court, Runcorn
Excel 95, Deeside
Storeys Bar Road, Peterborough
Commercial Road, Portsmouth
Cedar House, Gloucester
Knowles Lane, Bradford
Diamond Business Park, Wakefield
2 Geddington Road, Corby
London East Leisure Park, Dagenham
Gresford Industrial Estate, Wrexham
We undertake active asset management to seek opportunities to achieve rental growth, let vacant space and enhance value through initiatives such as refurbishments. During the period, key asset management initiatives have included:
- Langthwaite Industrial Estate, South Kirkby - In October 2017 the Company completed the renewal of two leases with its largest tenant, Ardagh Glass, on two warehouse buildings at the Langthwaite Industrial Estate in South Kirkby, Yorkshire, located c.4 miles from Junction 38 of the A1M and c.10 miles from Junction 37 of the M1. Ardagh Glass, whose parent group's latest reported full year figures show annual turnover in excess of EUR6,000 million, use the premises for storage and distribution serving their nearby factories. The manufacturing group has taken the units for an additional term with just under 3 years to expiry resulting in a total valuation uplift for the Company of 14% since acquisition.
- Eastpoint Business Park, Oxford - The Company completed a new letting of 2,800 sq ft of office accommodation to publishing company Capstone at the Eastpoint Business Park in Oxford. The unit has been let for a term of 5 years with a break option in year 3 at a rent of £15.50 per sq ft which is in excess of ERV.
- Queen Square, Bristol - In late summer 2017 the Company announced that it had let 1,986 sq ft to Kingston Barnes, a construction recruitment firm, at its office building at 40 Queen Square in central Bristol meaning that the 38,301 sq ft Grade-A building is now fully let. We have implemented a significant refurbishment programme at 40 Queen Square which was acquired by the Company with c 50% vacancy. In line with the Company's strategy of driving rental growth and adding value through active asset management the asset has seen a valuation increase of 49% since purchase. This latest transaction concludes six lettings totalling c 25,000 sq ft within the last 12 months.
- Pearl Assurance House, Nottingham - After the period end, on 5 April 2018, the Company completed the part sale of Pearl Assurance House, which was purchased by the Company in 2016 for £8.15 million. The sale of £3.65 million comprises the first to the ninth floors of the building as well as a ground floor reception and car parking spaces, providing a total area of 41,262 sq ft. The transaction reflected a net initial yield of 6.9% and significantly reduces the overall vacancy level in the portfolio.
The Company will retain the fully let ground floor accommodation in this busy city centre location, totalling 28,432 sq ft, let to national retail operators including Costa Coffee, Poundland and Lakeland. The retained element will provide the Company with an ongoing yield of 9.5% based on its component value of £5.26 million.
Please refer to Appendix 3 'Since Inception', accessible through the link at the end of this announcement.
Please refer to Appendix 4 'UK property locations as at 31 March 2018', accessible through the link at the end of this announcement.
Summary by Sector as at 31 March 2018
Summary by Geographical Area as at 31 March 2018
Please refer to Appendix 5 'Properties by Market Value', accessible through the link at the end of this announcement.
The Company's top ten properties listed above comprise 49.1% of the total value of the portfolio.
Source: Valuation provided by Knight Frank LLP as at 31 March 2018.
Top Ten Tenants
The Company's top ten tenants, listed above, represent 40.8% of the total passing rental income of the portfolio.
Please refer to Appendix 6 'Lease Expiry Profile', accessible through the link at the end of this announcement.
Alternative Investment Fund Manager ('AIFM')
AEW UK Investment Management LLP is authorised and regulated by the Financial Conduct Authority as a full-scope AIFM and provides its services to the Company.
The Company has appointed Langham Hall UK Depositary LLP ('Langham Hall') to act as the depositary to the Company, responsible for cash monitoring, asset verification and oversight of the Company.
Information Disclosures under the AIFM Directive
Under the AIFM Directive, the Company is required to make disclosures in relation to its leverage under the prescribed methodology of the Directive.
The AIFM Directive prescribes two methods for evaluating leverage, namely the 'Gross Method' and the 'Commitment Method'. The Company's maximum and actual leverage levels are as per below:
In accordance with the AIFM Directive, leverage is expressed as a percentage of the Company's exposure to its NAV and adjusted in line with the prescribed 'Gross' and 'Commitment' methods. The Gross method is representative of the sum of the Company's positions after deducting cash balances and without taking into account any hedging and netting arrangements. The Commitment method is representative of the sum of the Company's positions without deducting cash balances and taking into account any hedging and netting arrangements. For the purposes of evaluating the methods above, the Company's positions primarily reflect its current borrowings and NAV.
The AIFM has adopted a Remuneration Policy which accords with the principles established by AIFMD.
AIFMD Remuneration Code Staff includes the members of the AIFM's Management Committee, those performing Control Functions, Department Heads, Risk Takers and other members of staff that exert material influence on the AIFM's risk profile or the AIFs it manages.
Staff are remunerated in accordance with the key principles of the firm's remuneration policy, which include (1) promoting sound risk management; (2) supporting sustainable business plans; (3) remuneration being linked to non-financial criteria for Control Function staff; (4) incentivise staff performance over longer periods of time; (5) award guaranteed variable remuneration only in exceptional circumstances; and (6) having an appropriate balance between fixed and variable remuneration.
As required under section 'Fund 3.3.5.R(5)' of the Investment Fund Sourcebook, the following information is provided in respect of remuneration paid by the AIFM to its staff. The information provided below is provided for the year from 1 January 2017 to 31 December 2017, which is in line with the most recent financial reporting period of the AIFM, and relates to the total remuneration
of the entire staff of the AIFM.
AEW UK Investment Management LLP
8 June 2018
Principal Risks and Uncertainties
The Company's assets consist primarily of UK commercial property. Its principal risks are therefore related to the commercial property market in general, but also to the particular circumstances of the individual properties and the tenants within the properties.
The Board has carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. Twice a year, the Audit Committee reviews the adequacy and effectiveness of the Company's risk management system. Some risks are not yet known and some that are currently not deemed material, could turn out to be material in the future. All principal risks are the same as detailed in the 2017 Annual Report. Financial risk management and objectives and policies are further detailed in Note 20 of the Financial Statements.
An analysis of the principal risks and uncertainties is set out below:
Statement of Directors' Responsibilities in respect of the Annual Report and Financial Statements
The Directors are responsible for preparing the Annual Report and Financial Statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial period. Under that law they are required to prepare the financial statements in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU) 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 Company and of its profit or loss for that period. In preparing these financial statements, the Directors are required to:
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that complies with that law and those regulations.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Responsibility statement of the Directors in respect of the Annual Report and the Financial Statements
We confirm that to the best of our knowledge:
* the Financial Statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and
* the Strategic Report includes a fair review of the development and performance of the business and the position of the UK Company, together with a description of the principal risks and uncertainties that it faces.
We consider the Annual Report and the Financial Statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy.
On behalf of the Board
8 June 2018
The financial information set out below does not constitute the Company's statutory accounts for the period ended 31 March 2018 but is derived from those accounts. Statutory accounts for the period ended 31 March 2018 will be delivered to the Registrar of Companies in due course. The Independent Auditor has reported on those accounts; their report was (i) unqualified, (ii) did not include a reference to any matters to which the Independent Auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006. The text of the Independent Auditors' Report can be found in the Company's full Annual Report and the Financial Statements on the Company's website.
Statement of Comprehensive Income
for the period 1 May 2017 to 31 March 2018
The notes below form an integral part of these financial statements.
Statement of Changes in Equity
for the period 1 May 2017 to 31 March 2018
The notes below form an integral part of these financial statements.
Statement of Financial Position
as at 31 March 2018
The financial statements were approved by the Board on 8 June 2018 and signed on its behalf by:
AEW UK REIT plc (Company number: 09522515)
The notes below form an integral part of these financial statements.
Statement of Cash Flows
for the period 1 May 2017 to 31 March 2018
Notes to the Financial Statements
for the period 1 May 2017 to 31 March 2018
1. Corporate information
AEW UK REIT plc (the 'Company') is a closed ended Real Estate Investment Trust ('REIT') incorporated on 1 April 2015 and domiciled in the UK. The registered office of the Company is 6th Floor, 65 Gresham Street, London, EC2V 7NQ.
The Company's Ordinary Shares were listed on the Official List of the UK Listing Authority and admitted to trading on the Main Market of the London Stock Exchange on 12 May 2015.
The nature of the Company's operations and its principal activities are set out in the Strategic Report above.
2. Accounting policies
2.1 Basis of preparation
These financial statements are prepared and approved by the Directors in accordance with International Financial Reporting Standards ('IFRS') and interpretations issued by the International Accounting Standards Board ('IASB') as adopted by the European Union ('EU IFRS').
The current period is for a period of 11 months, due to a change of the year end of the Company from 30 April to 31 March. As a result the comparative information disclosed is not directly comparable.
These financial statements have been prepared under the historical-cost convention, except for investment property, investments and interest rate derivatives that have been measured at fair value.
The financial statements are presented in Sterling and all values are rounded to the nearest thousand pounds (£'000), except when otherwise indicated.
The Company is exempt by virtue of Section 402 of the Companies Act 2006 from the requirement to prepare group financial statements. These financial statements present information solely about the Company as an individual undertaking.
New standards, amendments and interpretations
There are a number of new standards and amendments to existing standards which have been published and are mandatory for the Company's accounting periods beginning after 31 March 2018 or later periods. The following are the most relevant to the Company and their impact on the financial statements:
* IFRS 7 (Financial Instruments: Disclosures) amendments regarding additional hedge accounting disclosures (applied when IFRS 9 is applied);
* IFRS 9 Financial Instruments. The standard will replace IAS 39 Financial Instruments and contains two primary measurement categories for financial assets (effective for annual periods beginning on or after 1 January 2018);
* IFRS 15 (Revenue from Contracts with Customers) issued in May 2014 and applies to an annual reporting period beginning on or after 1 January 2018;
* IFRS 16 (Leases): issued in January 2016 and is effective for annual periods beginning on or after 1 January 2019; and
* IAS 40 Investment Property: effective for annual periods beginning on or after 1 July 2018.
The adoption of new accounting standards issued and effective is not expected to have a significant impact on the financial statements. The IFRS 16 disclosure requirements will be considered in due course.
2.2 Significant accounting judgements and estimates
The preparation of financial statements in accordance with EU IFRS requires the Directors of the Company to make judgements, estimates and assumptions that affect the reported amounts recognised in the financial statements. However, uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or liability in the future.
i) Valuation of investment property
The Company's investment property is held at fair value as determined by the independent valuer on the basis of fair value in accordance with the internationally accepted Royal Institution of Chartered Surveyors ('RICS') Appraisal and Valuation Standards.
ii) Valuation of investments
Investments in collective investment schemes are stated at NAV with any resulting gain or loss recognised in profit or loss. The NAV value is considered by the Directors to be the best reflection of fair value available to the Company.
iii) Segmental information
In accordance with IFRS 8, the Company is organised into one main operating segment being investment in property and property related investments in the UK.
2.3 Going concern
The Directors have made an assessment of the Company's ability to continue as a going concern and are satisfied that the Company has the resources to continue in business for at least 12 months. Furthermore, the Directors are not aware of any material uncertainties that may cast significant doubt upon the Company's ability to continue as a going concern. Therefore, the financial statements have been prepared on the going concern basis.
2.4 Summary of significant accounting policies
The principal accounting policies applied in the preparation of these financial statements are set out below.
a) Presentation currency
These financial statements are presented in Sterling, which is the functional and presentational currency of the Company. The functional currency of the Company is principally determined by the primary economic environment in which it operates. The Company did not enter into any transactions in foreign currencies during the year.
b) Revenue recognition
i) Rental income
Rental income receivable under operating leases is recognised on a straight-line basis over the term of the lease, except for contingent rental income, which is recognised when it arises. Incentives for lessees to enter into lease agreements are spread evenly over the lease term, even if the 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.
ii) Deferred income
Deferred income is rental income received in advance during the accounting period.
c) Dividend income
Dividend income is recognised in profit or loss on the date the entity's right to receive a dividend is established.
d) Financing income and expenses
Financing income comprises interest receivable on funds invested. Financing expenses comprise interest and other costs incurred in connection with the borrowing of funds. Interest income and interest payable are recognised in profit or loss as they accrue, using the effective interest method.
e) Investment property
Property is classified as investment property when it is held to earn rentals or for capital appreciation or both. Investment property is measured initially at cost including transaction costs. Transaction costs include transfer taxes and professional fees to bring the property to the condition necessary for it to be capable of operating. The carrying amount also includes the cost of replacing part of an existing investment property at the time that cost is incurred if the recognition criteria are met.
Subsequent to initial recognition, investment property is stated at fair value. Gains or losses arising from changes in the fair values are included in profit or loss.
Investment properties are valued by the independent valuer on the basis of a full valuation with physical inspection at least once a year. Any valuation of an Immovable by the independent valuer must be undertaken in accordance with the current issue of RICS Valuation - Professional Standards (the 'Red Book').
The determination of the fair value of investment property requires the use of estimates such as future cash flows from assets (such as 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 cash flows.
For the purposes of these financial statements, the assessed fair value is:
Investment property is derecognised when it has been disposed of or permanently withdrawn from use and no future economic benefit is expected after its disposal or withdrawal.
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 at the date of disposal.
Any gains or losses on the retirement or disposal of investment property are recognised in the profit or loss in the year of retirement or disposal.
f) Investments in collective investment schemes
Investments in collective investment schemes are stated at fair value with any resulting gain or loss recognised in profit or loss.
Investments are derecognised when they have been disposed of or the rights to receive cash flow from the investments have expired or the Company has transferred substantially all risks and rewards of ownership.
g) Investments in subsidiaries
AEW UK REIT 2015 Limited is the subsidiary of the Company. The subsidiary was dormant during the reporting period. The investment in the subsidiary is stated at cost less impairment and shown in note 17.
As permitted by Section 405 of the Companies Act 2006, the subsidiary is not consolidated as its inclusion is not material for the purposes of giving a true and fair view.
h) Investment property and investments held for sale
Investment property and investments are classified as held for sale when it is being actively marketed at year end and it is highly probable that the carrying amount will be recovered principally through a sale transaction within 12 months.
Investment property and investments classified as held for sale are included within current assets within the Statement of Financial Position and measured at the fair value.
i) Derivative financial instruments
Derivative financial instruments, comprising interest rate caps for hedging purposes, are initially recognised at fair value and are subsequently measured at fair value, being the estimated amount that the Company would receive or pay to terminate the agreement at the period end date, taking into account current interest rate expectations and the current credit rating of the Company and its counterparties. Premiums payable under such arrangements are initially capitalised into the Statement of Financial Position.
The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data is available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs significant to the fair value measurement as a whole. Changes in fair value of interest rate derivatives are recognised within finance expenses in profit or loss in the period in which they occur.
j) Cash and cash equivalents
Cash and short-term deposits in the Statement of Financial Position comprise cash at bank and shortterm deposits with an original maturity of three months or less.
k) Receivables and prepayments
Rent and other receivables are initially recognised at fair value and subsequently at amortised cost. Provision is made when there is objective evidence that the Company will not be able to recover balances in full.
l) Capital prepayments
Capital prepayments are made for the purpose of acquiring future property assets, and held as receivables within the Statement of Financial Position. When the asset is acquired, the prepayments are capitalized as a cost of purchase. Where a purchase is not successful, these costs are expensed within profit or loss as abortive costs in the period.
m) Other payables and accrued expenses
Other payables and accrued expenses are initially recognised at fair value and subsequently held at amortised cost.
n) Rent deposits
Rent deposits represents cash received from tenants at inception of a lease and are consequently transferred to the rent agent to hold on behalf of the Company. These balances are held as creditors in the Statement of Financial Position.
o) Interest bearing loans and borrowings
All loans and borrowings are initially recognised at fair value less directly attributable transaction costs. After initial recognition, interest bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Borrowing costs are amortised over the lifetime of the facilities through profit or loss.
p) Impairment of financial assets
A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably.
A provision is recognised in the Statement of Financial Position when the Company has a present legal or constructive obligation as a result of a past event, that can be reliably measured and is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects risks specific to the liability.
r) Dividend payable to shareholders
Equity dividends are recognised when they become legally payable.
s) Share issue costs
The costs of issuing or reacquiring equity instruments (other than in a business combination) are accounted for as a deduction from equity.
t) Finance leases
Finance leases are capitalised at the lease commencement, at the lower of fair value of the property and present value of the minimum lease payments, and held as a liability within the Statement of Financial Position.
Corporation tax is recognised in profit or loss except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.
As a REIT, the Company is exempt from corporation tax on the profits and gains from its investments, provided it continues to meet certain conditions as per REIT regulations.
Taxation on the profit or loss for the period not exempt under UK REIT regulations comprises current and deferred tax. Current tax is expected tax payable on any non-REIT taxable income for the period, using tax rates applicable in the period.
Deferred tax is provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax that is provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantially enacted at the period end date.
v) European Public Real Estate Association
The Company has adopted European Public Real Estate Association ('EPRA') best practice recommendations, which it expects to broaden the range of potential institutional investors able to invest in the Company's Ordinary Shares. For the 11 month period to 31 March 2018, audited EPS and NAV calculations under EPRA's methodology are included in note 8 and further unaudited measures are included below.
*Property income distribution (PID) arose on the investment in the AEW UK Core Property Fund which holds property directly.
Rent receivable under the terms of the leases is adjusted for the effect of any incentives agreed.
* Charged to share premium account.
A summary of the Directors' remuneration is set out in the Directors' Remuneration Report in the full Annual Report and Financial Statements. The Company had no employees in either period.
1Standard rate of corporation tax was 19% to 31 March 2018. The corporation tax rate is to reduce to 17% with effect from 1 April 2020.
Factors that may affect future tax charges
At 31 March 2018 the Company has unrelieved management expenses of £8,056 (30 April 2017: £6,826). It is unlikely that the Company will generate sufficient taxable income in the future to use these expenses to reduce future tax charges and therefore no deferred tax asset has been recognised.
Due to the Company's status as a REIT and the intention to continue meeting the conditions required to obtain approval as a REIT in the foreseeable future, the Company has not provided deferred tax on any capital gains and losses arising on the revaluation or disposal of investments.
Earnings per share (EPS) amounts are calculated by dividing profit for the period attributable to ordinary equity holders of the Company by the weighted average number of Ordinary Shares in issue during the period. As at 31 March 2018, EPRA NNNAV was equal to IFRS NAV and as such a reconciliation between the two measures has not been performed.
* The fourth interim dividend declared is not included in the accounts as a liability as at period ended 31 March 2018.
** The fourth interim dividend declared is not included in the accounts as a liability as at year ended 30 April 2017.
10.a) Investment property
Valuation of investment property
Valuation of investment property is performed by Knight Frank LLP, an accredited external valuer with recognised and relevant professional qualifications and recent experience of the location and category of the investment property being valued.
The valuation of the Company's investment property at fair value is determined by the external valuer on the basis of market value in accordance with the internationally accepted RICS Valuation - Professional Standards (incorporating the International Valuation Standards).
The determination of the fair value of investment property requires the use of estimates, such as future cash flows from assets (based on 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 flows.
Valuation of investment
Investments in collective investment schemes were stated at NAV with any resulting gain or loss recognised in profit or loss. Fair value is assessed by the Directors based on the best available information.
As at 31 March 2018, the Company had no investment in the Core Fund.
10.c) Fair value measurement hierarchy
The following table provides the fair value measurement hierarchy for investments:
Explanation of the fair value hierarchy:
Level 1 - Quoted prices for an identical instrument in active markets;
Level 2 - Prices of recent transactions for identical instruments and valuation techniques using observable market data; and
Level 3 - Valuation techniques using non-observable data.
Sensitivity analysis to significant changes in unobservable inputs within Level 3 of the hierarchy
The significant unobservable inputs used in the fair value measurement categorised within Level 3 of the fair value hierarchy of the entity's portfolio of investment property and investments are:
1) Estimated Rental Value ('ERV')
2) Equivalent yield
Increases/(decreases) in the ERV (per sq ft per annum) in isolation would result in a higher/(lower) fair value measurement. Increases/(decreases) in the discount rate/yield in isolation would result in a lower/(higher) fair value measurement.
The significant unobservable input used in the fair value measurement categorised within Level 3 of the fair value hierarchy of the entity's investment is:
Increases/(decreases) in the NAV would result in a higher/(lower) fair value measurement.
The significant unobservable inputs used in the fair value measurement, categorised within Level 3 of the fair value hierarchy of the portfolio of investment property and investments are:
*Valuation per Knight Frank LLP.
Where possible, sensitivity of the fair values of Level 3 assets are tested to changes in unobservable inputs against reasonable alternatives.
Gains and losses recorded in profit or loss for recurring fair value measurements categorised within Level 3 of the fair value hierarchy are attributable to changes in unrealised gains or losses relating to investment property and investments held at the end of the reporting period.
With regards to both investment property and investments, gains and losses for recurring fair value measurements categorised within Level 3 of the fair value hierarchy, prior to adjustment for rent free debtor and rent guarantee debtor where applicable, are recorded in profit and loss.
The carrying amount of the assets and liabilities, detailed within the Statement of Financial Position, is considered to be the same as their fair value.
The aged debtor analysis of receivables which are past due is as follows:
To mitigate the interest rate risk that arises as a result of entering into variable rate linked loans, the Company entered into interest rate caps. The facilities have a combined notional value of £36.51 million with £10.00 million at a strike rate of 2.0% and £26.51 million at a strike rate of 2.5% (30 April 2017: £26.51 million at a strike rate of 2.5%) for the relevant period in line with the life of the loan.
Fair value hierarchy
The following table provides the fair value measurement hierarchy for interest rate derivatives:
The fair value of these contracts are recorded in the Statement of Financial Position as at the period end.
There have been no transfers between level 1 and level 2 during the period, nor have there been any transfers between level 2 and level 3 during the period.
The carrying amount of all assets and liabilities, detailed within the Statement of Financial Position, is
considered to be the same as their fair value.
The Company has a £60.00 million (30 April 2017: £40.00 million) credit facility with RBSi of which £50.00 million (30 April 2017: £29.01 million) has been utilised as at 31 March 2018.
Under the terms of the Prospectus, the Company has a target gearing of 25% Loan to GAV, but can borrow up to 35% Loan to GAV in advance of a capital raise or asset disposal. As at 31 March 2018, the Company's gearing was 26.00% Loan to GAV (30 April 2017: 19.31%).
Under the terms of the loan facility, the Company can draw up to 35% Loan to NAV at drawdown.
Borrowing costs associated with the credit facility are shown as finance costs in note 6 to these Financial Statements.
Reconciliation to cash flows from financing activities
Finance leases are capitalised at the lease's commencement at the lower of the fair value of the property and the present value of the minimum lease payments. The present value of the corresponding rental obligations are included as liabilities.
The following table analyses the minimum lease payments under non-cancellable finance leases:
16. Guarantees and commitments
As at 31 March 2018, there were capital commitments of £nil (30 April 2017: £48,628).
Operating lease commitments - as lessor
The Company has entered into commercial property leases on its investment property portfolio. These noncancellable leases have a remaining term of between zero and 24 years.
Future minimum rentals receivable under non-cancellable operating leases as at 31 March 2018 are as follows:
During the period ended 31 March 2018 there were contingent rents totalling £149,192 (30 April 2017: £169,724) recognised as income.
17. Investment in subsidiary
The Company has a wholly owned subsidiary, AEW UK REIT 2015 Limited:
AEW UK REIT 2015 Limited is a subsidiary of the Company incorporated in the UK on 2 April 2015. At 31 March 2018, the Company held one share being 100% of the issued share capital. AEW UK REIT 2015 Limited is wholly owned by the Company and is dormant. The cost of the subsidiary is £0.01 (30 April 2017: £0.01). The registered office of AEW UK REIT 2015 Limited is 6th Floor, 65 Gresham Street, London, EC2V 7NQ.
18. Issued share capital
On 24 October 2017, the Company issued 27,911,001 Ordinary Shares at a price of 100.5 pence per share, pursuant to the Initial Placing, Initial Offer for Subscription and Intermediaries Offer of the Share Issuance Programme, as described in the prospectus published by the Company on 28 September 2017.
19. Share premium account
20. Financial risk management and objectives and policies
20.1 Financial assets and liabilities
The Company's principal financial assets and liabilities are those derived from its operations: receivables and prepayments, cash and cash equivalents and payables and accrued expenses. The Company's other principal financial liabilities are interest bearing loans and borrowings, the main purpose of which is to finance the acquisition and development of the Company's property portfolio.
Set out below is a comparison by class of the carrying amounts and fair value of the Company's financial instruments that are carried in the financial statements.
1 Excludes VAT, certain prepayments and other debtors
2 Excludes tax, VAT liabilities and deferred income
Interest rate derivatives are the only financial instruments classified as fair value through profit and loss. All other financial assets and financial liabilities are measured at amortised cost. All financial instruments were designated in their current categories upon initial recognition.
Fair value measurement hierarchy has not been applied to those classes of asset and liability stated above which are not measured at fair value in the financial statements. The difference between the fair value and book value of these items is not considered to be material.
20.2 Financing management
The Company's activities expose it to a variety of financial risks: market risk, real estate risk, credit risk and liquidity risk.
The Company's objective in managing risk is the creation and protection of shareholder value. Risk is inherent in the Company's activities but it is managed through a process of ongoing identification, measurement and monitoring, subject to risk limits and other controls.
The principal risks facing the Company in the management of its portfolio are as follows:
20.3 Market price risk
Market price risk is the risk that future values of investments in direct property and related property investments will fluctuate due to changes in market prices. To manage market price risk, the Company diversifies its portfolio geographically in the United Kingdom and across property sectors.
The disciplined approach to the purchase, sale and asset management ensures that the value is maintained to its maximum potential. Prior to any property acquisition or sale, detailed research is undertaken to assess expected future cash flow. The Investment Management Committee ('IMC') of the Investment Manager, meets twice monthly and reserves the ultimate decision with regards to investment purchases or sales. In order to monitor property valuation fluctuations, the Investment Manager meets with the independent external valuer on a regular basis. The valuer provides a property portfolio valuation quarterly, so any movements in the value can be accounted for in a timely manner and reflected in the NAV every quarter.
20.4 Real estate risk
The Company is exposed to the following risks specific to its investments in investment property:
Property investments are illiquid assets and can be difficult to sell, especially if local market conditions are poor. Illiquidity may also result from the absence of an established market for investments, as well as legal or contractual restrictions on resale of such investments. In addition, property valuation is inherently subjective due to the individual characteristics of each property, and thus, coupled with illiquidity in the markets, makes the valuation in the scheme property difficult and inexact.
No assurances can be given that the valuations of properties will be reflected in the actual sale prices
even where such sales occur shortly after the relevant valuation date.
There can be no certainty regarding the future performance of any of the properties acquired for the Company. The value of any property can go down as well as up. Property and property-related assets are inherently subjective as regards value due to the individual nature of each property. As a result, valuations are subject to uncertainty.
Real property investments are subject to varying degrees of risk. The yields available from investments in real estate depend on the amount of income generated and expenses incurred from such investments.
There are additional risks in vacant, part vacant, redevelopment and refurbishment situations although these are not prospective investments for the Company.
20.5 Credit risk
Credit risk is the risk that the counterparty (to a financial instrument) or tenant (of a property) will cause a financial loss to the Company by failing to meet a commitment it has entered into with the Company.
It is the Company's policy to enter into financial instruments with reputable counterparties. All cash deposits are placed with an approved counterparty, The Royal Bank of Scotland International Limited.
In respect of property investments, in the event of a default by a tenant, the Company will suffer a rental shortfall and additional costs concerning re-letting the property. The Investment Manager monitors tenant arrears in order to anticipate and minimise the impact of defaults by occupational tenants.
The table below shows the Company's exposure to credit risk:
20.6 Liquidity risk
Liquidity risk arises from the Company's management of working capital and the finance charges and principal repayments on its borrowings. It is the risk the Company will encounter difficulty in meeting its financial obligations as they fall due as the majority of the Company's assets are investment properties and therefore not readily realisable. The Company's objective is to ensure it has sufficient available funds for its operations and to fund its capital expenditure. This is achieved by continuous monitoring of forecast and actual cash flows by management.
The table below summarises the maturity profile of the Company's financial liabilities based on contractual undiscounted payments: