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RNS
Circle Property PLC   -  CRC   

Final Results

Released 07:00 10-Jul-2019

RNS Number : 0050F
Circle Property PLC
10 July 2019
 

10 July 2019

Circle Property Plc

("Circle" or the "Company")

Final Results for the year ended 31 March 2019

                FOCUS ON REGIONAL OFFICE ASSETS DELIVERS FURTHER GROWTH AND STRONG SHAREHOLDER RETURNS

 

Circle Property Plc (AIM: CRC), which invests in, develops and actively manages well-located regional office assets, announces record results for the year ended 31 March 2019.

 

John Arnold, Chief Executive of Circle Property Plc, said:

"These results endorse Circle's strong business model, our expertise in identifying well located regional office assets and actively managing the portfolio to deliver consistent income and maximum returns to shareholders.

This year we have continued to outperform the sector having delivered a 20% increase in NAV, a 12% increase in contracted rental income and have in place the firepower to undertake value accretive acquisitions. 

In recognition of our confidence in the outlook and in our ability to deliver consistently strong returns, we are proposing a 12.5% increase in the full year dividend to 6.3p per share."

 

Financial Highlights: delivering on key KPIs

 

·      Third successive year of delivering Net Asset Value ("NAV") growth - average increase in excess of 20% per annum

·      NAV per share of £2.77, up 20.43% (2018: £2.30):

 

NAV up 86% since IPO in February 2016 to £78.4m

NAV Compound Average Growth Rate ("CAGR") of 23% since IPO; total return CAGR of 26%

 

·      9.23% increase in independent valuation of the Group's portfolio of 15 commercial property investment and development assets in the UK to £124.6m (31 March 2018: £114.1m) demonstrating continued growth in the Group's asset management program

 

·      11.71% increase in contracted annual rental income to £7.61m (2018: £6.8m), post successful disposal of non-core assets and a further £0.34m of contracted rent signed post year end

 

·      16.20% increase in operating profit before gains on investment properties to £3.66m (2018: £3.15m)

 

·      Profit before tax up 8.97% to £15.25m (2018: £13.99m) and earnings per share of 53p (2018: 51p) reflecting a combination of operational profit and revaluation gains

 

·      Year-end LTV of 39.92%

 

·      12.50% increase in proposed total annual dividend of 6.3p (2018: 5.6p per share)

 

Operational Highlights:

 

·      Increased focus on well-located office assets with potential, following successful disposal of non-core retail and roadside assets at above or equal to valuation

 

·      Continued resilience and strength of the total portfolio with 94% let and income producing

 

·      95.3% of the Company's portfolio is within the office sector and 82.91% located in Milton Keynes, Bristol and Birmingham 

 

·      Proposed commencement of work in refurbishing Building K3 at Kents Hill Business Park in November 2019 to complete in Summer 2020.  The building will be marketed at a rent of £235,000 per annum

 

·      £100m new financing facility provides firepower for targeted value accretive acquisitions

 

Sell-side analyst briefing

A briefing for sell-side analysts will take place at Camarco, 107 Cheapside, London EC2V 6DN at 10.00am on 10 July 2019. If you would like to register for the meeting, please contact Camarco on 0203 757 4991 or email circleproperty@camarco.co.uk.

 

This announcement is inside information for the purposes of Article 7 of EU Regulation 596/2014.

 

Circle Property Plc              

 +44 (0)207 930 8503

John Arnold, CEO

Edward Olins, COO




Cenkos Securities

+44 (0) 207 397 8900

Azhic Basirov

Katy Birkin 

  



Radnor Capital

+44 (0) 203 897 1830

Joshua Cryer

Iain Daly




Camarco

+44 (0) 203 757 4980

Ginny Pulbrook

Tom Huddart


 

 

About Circle Property Plc

Circle is the best performing quoted UK real estate company by NAV total return (NAV growth and dividend)1 having delivered consistent returns with 86% NAV growth since IPO in 2016 in absolute terms.

Circle focusses on acquiring assets in regional cities, many of which have significant office supply constraints, and on office assets with active management potential (refurbishment opportunities, under-rented or vacant properties or short leases), rather than just maximising initial rental yields.

Circle is not a Real Estate Investment Trust (REIT) and can actively recycle proceeds from asset sales into its refurbishment and redevelopment pipeline, as well as future investment opportunities, therefore targeting a broader range of returns for shareholders, which are primarily driven by NAV growth.

As well as already delivering substantial increases in NAV, the Company's portfolio has significant reversionary potential with current total estimated rental values of £9.72m per annum, compared to contracted rent of £7.61m at 31 March 2019. The Company has a portfolio of 15 regional commercial property investment and development assets in the UK valued at £124.6m.

 

1 Source: Radnor Capital research, 31 March 2019

 

CHAIRMAN'S STATEMENT

Continued outperformance and strong returns

 

Our strategic focus combined with the demand for regional office space and our proven expertise in the regional office market, makes us confident of continuing to deliver strong returns for our shareholders.

 

The strong performance of the business set out in these results represents a third successive year of Circle delivering an average increase in NAV of over 20%. In absolute terms NAV has increased 86% since IPO in February 2016 to £78.4m, delivering a NAV CAGR of 23%; and a total return CAGR of 26%.

 

NAV total returns, combining both NAV growth and dividend payments, since IPO have been 33%. It is by this measure that Circle is the best performing quoted UK real estate company over the last two years.

 

A successful regional model driven by careful asset management

The ability to deliver such strong returns lies in our business model which focuses on the regional office market, and in particular, well-located but under-utilised office space where we can actively manage the asset to add value, rather than just maximising initial yields.

Our focus on regional offices is proving well founded as rental values move upward, largely as a result of the supply constraint as the trend to convert secondary offices into residential units continues. We remain confident that occupational demand in the regions will continue to improve where well-specified offices in good locations remain attractive. This view is supported by the market where investment yields in the regions are firming as investors see the upward trend in rental values and the reduction in vacancy levels.

We will continue to remain focused on this business model, which has had an excellent track record since our admission to AIM, and we are unlikely to increase risk exposure and gearing materially until there is an improvement in the political and economic outlook surrounding Brexit.

Circle continues to offer a value opportunity from its latent income and capital growth potential

Despite consistently delivering market leading returns and offering attractive future earnings potential, we are aware that our share price remains at a significant discount to NAV, with NAV of £2.77 per share compared to a closing price on 9 July 2019 of 192p, a discount of 30.1%.

Our strategy is to continue to deliver attractive total return to investors through further NAV growth and to realise the income growth potential within our portfolio and beyond. The Board remains confident that we are well positioned to do this. This confidence is demonstrated by our decision to advance our progressive dividend policy, which will see our annual dividend increase to 6.3p per share, a rise of 12.5% (2018: 5.6p per share).

I would like to thank shareholders for their support and we remain committed to following our twin objectives of actively managing our existing portfolio to maximise total returns, and undertaking corporate acquisition or portfolio purchase opportunities to add value.

 Ian Henderson

Chairman

 

CHIEF EXECUTIVE'S STATEMENT

The combination of our development stock and our ability to add value through asset management has enabled us to once again achieve an increase in NAV of over 20% for the year.

Following the recent strategic disposals of our two shops in Maidstone and a retail warehouse park in Shipley, both of which were achieved at marginally above valuation, our portfolio has no retail exposure. This leaves us well placed to focus on delivering further strong gains in the regional office sector, as we continue to complete lettings and undertake further asset management initiatives to improve performance.

Record results for 2019 - NAV, rental income, progressive dividend

NAV has increased 86% since IPO to a record level of £78.4m, an increase of 20.7% since 31 March 2018. This equates to a NAV per share of £2.77 (2018: £2.30), which remains at a 30.1% discount to the closing share price on 9 July 2019.

Contracted annual rental income has risen 12% to £7.6m (2018: £6.48m) despite the reduction of almost £0.35m in income from the retail properties sold during the period. The successful continuation of rental income growth can be attributed to the additional lettings and maintenance of high occupancy across the Company's portfolio, which is currently at 92%, excluding buildings recently refurbished or currently undergoing refurbishment. Operating profit has increased by 16.2% to £3.66m for the year ended 31 March 2019.

Given NAV growth and the dynamic earnings stream created by successfully letting our existing development pipeline, the Board is confident to propose to shareholders a final dividend of 3.3p per share in line with our progressive dividend policy. This will bring the total annual dividend to 6.3p per share, a 12.5% increase on the previous year (2018: 5.6p per share).  The final dividend of 3.3p per share, subject to shareholder approval, will be paid on 21 August 2019 to shareholders on the register on 19 July 2019, which gives an ex-dividend date of 18 July 2019.

Future growth prospects - growing lettings and reversion uplift

Whilst we have delivered strong returns to shareholders to date, we continue to explore opportunities to grow the Company and to maximise total future returns. We remain confident that there is a clear prospect of further growth as we capture the reversion in the portfolio and lease the remaining space across our pipeline of newly refurbished assets. Post period end, we have already generated a further £0.35m of contracted rent, further details of which are provided in the Portfolio Review within the report and accounts. Overall our portfolio Estimated Rental Values increased by £145,023 per annum (like-for-like), representing a 1.51% increase, underlining strong potential future income growth as this reversion is captured and recently refurbished vacant space is leased.

Future growth prospects - acquisition opportunities

In addition, we have the opportunity to explore attractive buying opportunities having completed a £100m new financing facility agreement with RBS and HSBC, replacing the previous £55m facility with RBS. This new financing facility provides us with the ability to target value accretive acquisitions, as we continue to focus on developing our portfolio of good quality, well-located but under-utilised offices in key regional centres.

We believe that there are opportunities where vendors are seeking a rapid sale to a reliable purchaser, and particularly with properties that are too small to appeal to institutional buyers, but are too large for private investors. Equally because we are not a REIT, and therefore we do not have to distribute a set level of income, we have the flexibility to target refurbishment opportunities, where we can invest to create future value. This would be a less accessible option to a business with a traditional REIT structure.

The focus of each potential acquisition will be the creation of value by utilising the management team's proven asset management skills and ensuring that they contribute to the strong returns that we are already delivering using our successful model.

Outlook

We continue to outperform with our focus on the regional office market which continues to yield higher total returns despite current market uncertainty. We are confident of our ability to offer investors impressive NAV growth, increasing dividends and income growth potential, as well as generating attractive market leading returns to our investors.

 

John Arnold

Chief Executive Officer

 

Circle Property Plc










Consolidated statement of comprehensive income





for the year ended 31 March 2019











Note

1 April 2018 to 31 March 2019


1 April 2017 to 31 March 2018



£


£






Rental income

4

6,878,912


6,211,820

Other income

4

224,323


142,585



7,103,235


6,354,405






Property expenses

5

(639,440)


(831,189)








6,463,795


5,523,216






Administrative expenses

6

(2,794,124)


(2,368,220)






Operating profit


3,669,671


3,154,996






Gain on disposal of investment properties


471,177


1,497

Gains on revaluation of investment properties

12

12,609,968


11,980,810






Operating profit after revaluation of investment properties and goodwill


16,750,816


15,137,303






Finance income

8

2,717


3,620

Finance costs

9

(1,507,471)


(1,149,720)






Net finance costs


(1,504,754)


(1,146,100)






Profit for the year before taxation


15,246,062


13,991,203






Taxation

10

(291,142)


534,864






Total comprehensive income and profit for the year


14,954,920


14,526,067






Earnings per share


0.53


0.51






There is no comprehensive income other than that included in the profit for the year. All of the profit for the year is attributable to the owners of the Company.






All items in the above statement derive from continuing operations.










The Company's loss for the year (non-consolidated) was £1,774,702 (2018: loss £646,617).



 

Circle Property Plc












Consolidated statement of financial position





As at 31 March 2019














Note

31 March 2019


31 March 2018




£


£

Non-current assets






Investment properties


12

115,320,178


106,372,636

Property, plant and equipment



59,865


56,287

Trade and other receivables


13

8,310,903


7,201,845

Deferred tax


10

1,603,918


1,727,959




125,294,864


115,358,727







Current assets






Trade and other receivables


13

1,553,699


1,141,191

Cash and cash equivalents


14

3,650,372


2,639,783




5,204,071


3,780,974







Total assets



130,498,935


119,139,701







Equity






Stated capital


17

42,542,179


42,542,179

Treasury share reserve



(79,344)


(257,487)

Retained earnings



35,971,206


22,714,092

Total equity



78,434,041


64,998,784







Non-current liabilities






Loan borrowings


15

49,039,681


51,815,616




49,039,681


51,815,616







Current liabilities






Trade and other payables


16

3,025,213


2,325,301




3,025,213


2,325,301







Total liabilities



52,064,894


54,140,917







Total liabilities and equity



130,498,935


119,139,701







The consolidated financial statements were approved and authorised for issue by the Board of Directors on 9 July 2019 and signed on its behalf by:

























Michael Farrow






Director






 

Circle Property Plc






















Consolidated statement of changes in equity







for the year ended 31 March 2019






















Share capital


Treasury share capital


Treasury shares reserve


Retained earnings


Total



£


£


£


£


£












As at 1 April 2017


42,162,178


380,001


(380,001)


9,659,457


51,821,635












Profit for the year


-


-


-


14,526,067


14,526,067












Share-based payments


-


-


122,514


-


122,514












Dividends


-


-


-


(1,471,432)


(1,471,432)












As at 31 March 2018


42,162,178


380,001


(257,487)


22,714,092


64,998,784












Profit for the year


-




-


14,954,920


14,954,920












Share-based payments


-




178,143


-


178,143












Dividends


-




-


(1,697,806)


(1,697,806)












As at 31 March 2019


42,162,178


380,001


(79,344)


35,971,206


78,434,041

 

Circle Property Plc











Consolidated statement of cash flows





for the year ended 31 March 2019














1 April 2018 to 31 March 2019


1 April 2017 to 31 March 2018




£


£

Cash flows from operating activities





Profit for the year before taxation


15,246,062


13,991,203

Adjustments for:





Finance income


(2,717)


(3,620)

Finance costs


1,507,471


1,149,720

Depreciation


13,296


7,405

Gains on revaluation of investment properties


(12,609,968)


(11,980,810)

Gains on disposal of investment properties


(471,177)


(1,497)

Share based payments


178,143


122,514

Fair value movement on interest rate swaps


-


710

Increase in trade and other receivables


(1,521,566)


(293,097)

Increase in trade and other payables


961,902


141,050







Cash generated from operating activities


3,301,446


3,133,578







Interest paid


(1,459,030)


(1,072,403)

Interest received


2,717


3,620







Net cash from operating activities


1,845,133


2,064,795







Cash flows from investing activities





Net proceeds from disposal of investment properties


2,228,749


1,497

Cost of refurbishment of investment properties


(1,006,634)


(4,528,703)

Cost of acquisition of investment property


-


(4,466,652)

Cost of additions of property, plant and equipment


(16,874)


(34,534)







Net cash from investing activities


1,205,241


(9,028,392)







Cash flows from financing activities





Repayment of borrowings


(49,358,932)


-

Drawdown of borrowings


49,016,953


6,181,005

Dividends paid


(1,697,806)


(1,471,432)







Net cash used in financing activities


(2,039,785)


4,709,573







Net increase / (decrease) in cash and cash equivalents


1,010,589


(2,254,024)

Cash and cash equivalents at the beginning of the year


2,639,783


4,893,807

Cash and cash equivalents at the end of the year


3,650,372


2,639,783

 

Circle Property Plc












 
















 

Notes to the consolidated financial statements









 

for the year ended 31 March 2019











 
















 

1

General information












 


These financial statements are for Circle Property Plc ("the Company") and its subsidiary undertakings (together referred to as the "Group"). Notes in respect of the Company's subsidiary undertakings are outlined in note 21.

 
















 


The Company's shares are admitted to trading on AIM, a market operated by the London Stock Exchange plc. The Company is domiciled and registered in Jersey, Channel Islands. The address of its registered office is 3rd Floor, Standard Bank House, 47-49 La Motte Street, St Helier, Jersey, JE2 4SZ.

 
















 


The nature of the Company's operations and its principal activities are that of property investment in the UK.

 
















 

2

Principal accounting policies












 


The Group financial statements show a true and fair view and have been prepared on a going concern basis and in accordance with International Financial Reporting Standards as adopted by the EU (IFRS) and the Companies (Jersey) Law 1991. The financial statements have been prepared in pound sterling, which is the Group's functional currency, and under the historic cost convention as modified by the revaluation of investment property and derivative financial instruments which are measured at fair value.

 
















 


Going concern













 


The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Chief Executive's Statement. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in these financial statements. In addition, note 20 to the financial statements includes the Group's financial management objectives, details of its financial instruments and its exposures to credit, liquidity and market risk. The Group's policy for managing capital is included in note 18.

 
















 


The Group has adequate financial resources together with long term rental contracts with a wide range of tenants. As a consequence, the Directors believe that the Group is well placed to manage its business risks.

 
















 


The Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they have adopted the going concern basis in preparing the financial statements.

 
















 


Basis of consolidation and business combinations







 


The consolidated financial statements incorporate the financial statements of the Company and its subsidiaries, as outlined in note 21.

 
















 


Subsidiaries are all entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has variable returns from, its involvement with the entity and has the ability to affect those returns through its power over the entity. Intragroup balances and any unrealised gains and losses arising from intragroup transactions are eliminated in preparing the Consolidated Financial Statements.

 
















 


The results of subsidiaries acquired during the year are included from the effective date of acquisition, being the date on which the Group obtains control. They are deconsolidated on the date that control ceases.

 
















 


If the consideration transferred for the acquisition of a subsidiary is more than the fair value of the assets and liabilities acquired, the difference is recognised as goodwill and is written off directly in the Consolidated Statement of Comprehensive Income if there is no future economic benefit associated with the goodwill.

 
















 


If the consideration transferred for the acquisition of a subsidiary is less than the fair value of the assets and liabilities acquired, the difference is recognised as negative goodwill and is reflected directly in the Consolidated Statement of Comprehensive Income.

 
















 


Acquisition-related costs are expensed as incurred.



 
















 


Adoption of new and revised IFRSs







 


New and amended standards and interpretations









 


The Group has adopted all new standards, amendments to standards and interpretations which came in to effect for the Group's accounting period starting on 1 April 2018. These changes have not had a significant impact on the preparation of these financial statements.

 
















 


The Group adopted for the first time the following standards during the year:






 
















 


IFRS 9, 'Financial instruments', addresses the classification, measurement and recognition of financial assets and financial liabilities and replaces most of the guidance in IAS 39.

 
















 


IFRS 9 requires financial assets to be classified into the following measurement categories: (i) those measured at fair value through profit or loss; (ii) those measured at fair value through other comprehensive income; and, (iii) those measured at amortised cost. The determination is made at initial recognition. Unless the option to designate a financial asset as measured at fair value through profit or loss is applicable, the classification depends on the entity's business model for managing its financial instruments and the contractual cash flow characteristics of the instrument.

 
















 


IFRS 9 also replaces the "incurred loss" model in IAS 39 with an "expected credit loss" model for the measurement of impairment loss. The new model applies to financial assets that are not measured at fair value through profit or loss.

 
















 


For financial liabilities, the standard retains most of the IAS 39 requirements. The main change is that, in cases where the fair value option is taken for financial liabilities, the part of a fair value change due to an entity's own credit risk is recorded in other comprehensive income rather than the income statement, unless this creates an accounting mismatch.

 
















 


In the Directors' opinion IFRS 9 does not have material impact on the recognition, measurement or disclosures relating to its financial instruments.

 
















 


IFRS 15, 'Revenue from contracts with customers'

 
















 


IFRS 15 is a new standard that introduces the following requirements:







 


• A five-step model is applied to determine when to recognise revenue, and at what amount.




 


• Revenue is recognised when (or as) a company transfers control of goods or services to a customer at the amount to which the company expects to be entitled.

 


• Depending on whether certain criteria are met, revenue is recognised either over time, in a manner that best reflects the company's performance, or at a point in time, when control of the goods or services is transferred to the customer.

 
















 


In the Directors' opinion, adoption of IFRS 15 had no material impact on the recognition, measurement or disclosures relating to its financial statements, as the only contracts are leases with tenants, which are out of scope of the new standard.

 
















 


New Accounting Requirements not yet adopted











 


A number of new standards and amendments to standards and interpretations will become effective for future accounting periods and have not been applied in preparing these consolidated financial statements. The most significant changes are noted below. Other changes are not expected to have a significant impact on the Group.

 
















 


IFRS 16, 'Leases' was issued in January 2016. For lessees, it will result in almost all leases being recognised on the statement of financial position, as the distinction between operating and finance leases will be removed. Under the new standard, an asset (the right to use the leased item) and a financial liability to pay rentals are recognised. The only exceptions are short-term and low value leases. The accounting for lessors will not significantly change. The standard is effective for annual periods beginning on or after 1 January 2019 and earlier application is permitted.  In the Directors' opinion, IFRS 16 will have no material impact on the recognition, measurement or disclosures in the Group's financial statements.

 
















 


IFRIC 23 "Uncertainty over income tax treatments" clarifies application and measurement requirements in IAS 12 Income taxes when there is uncertainty over income tax treatments. IRFIC 23 will be effective for annual periods beginning on or after 1 January 2019 and may be applicable to the Group.

 
















 


The Directors anticipate that the adoption of these Standards and Interpretations in future periods will have no material impact on the financial statements of the Group. The Group does not intend to apply any of these pronouncements early.

 
















 


Estimates and judgements












 


The preparation of the consolidated financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the amounts reported for assets and liabilities as at the balance sheet date and the amounts reported for revenue and expenses during the period. The nature of the estimation means that actual outcomes could differ from those estimates. Estimates and judgements are continually evaluated and are based on experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Revisions to accounting estimates are recognised prospectively.

 
















 


Significant estimates












 


Fair value of investment property







 


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. The Directors employed professional valuers Savills (UK) Limited to perform valuations of the investment property using Royal Institute of Chartered Surveyors ("RICS") valuation standards as at 31 March 2019.  In arriving at their estimate of market value the valuers used their market knowledge and professional judgement and did not rely solely on comparable historical transactions.  There is an inherent degree of uncertainty when using professional judgement in estimating the market values of investment property. 

 
















 


The significant methods and assumptions used by the valuers in estimating the fair value of investment property are set out in note 12.

 
















 


Significant judgements












 


Operating lease commitments - Group as lessor







 


The Group has entered into commercial property leases on its investment property portfolio. The Group has determined that it retains all the significant risks and rewards of ownership of these properties and therefore accounts for them as operating leases.

 
















 


Revenue recognition












 


Rental income from operating leases is recognised in profit or loss on a straight-line basis over the term of the lease. The term of the lease is the full lease period where there is a reasonable expectation at the inception of the lease that the tenant will not utilise the lease break clause. Lease incentives granted are spread evenly over the term of the lease.

 
















 


Property service charges












 


The properties' tenants bear the service charge costs under the terms of their lease and therefore the Group considers that it is acting in the capacity of an agent. Service charges receivable from tenants and related costs are not recognised by the Group. Service charge costs in relation to void areas are recognised within property expenses on an accruals basis.

 
















 


Administrative fees, listing costs and other expenses









 


Administrative and other expenses are recognised in profit or loss in the period in which they are incurred.

 
















 


Finance income and finance costs












 


Finance income comprises bank interest income. Finance costs comprise interest expense on borrowings. Finance income and finance costs are recognised on an effective interest rate basis.

 
















 


Investment property










 


Property that is held for long-term rental yields or for capital appreciation or both, is classified as investment property in accordance with IAS 40 'Investment Property'.

 
















 


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

 
















 


After initial recognition, investment properties are measured at fair value, with unrealised gains and losses recognised in profit or loss in the consolidated statement of comprehensive income. The fair value is based on valuations provided by Savills (UK) Limited at the balance sheet date using recognised valuation techniques.

 
















 


An investment property shall be derecognised on disposal or at a time that no benefit is expected from future use or disposal. Any gain or loss is determined as the difference between the net disposal proceeds and the carrying amount and is recognised in profit or loss in the consolidated statement of comprehensive income.

 
















 


Recognition and derecognition occurs on the completion of a sale between a willing buyer and a willing seller. Any investment properties on which contracts for sale have been exchanged but which had not completed at the year end are disclosed as properties held for sale and stated at fair value. At 31 March 2019 and 31 March 2018 there were no properties classified as held for sale.

 
















 


In accordance with IAS 40 'Investment Property' property that is being constructed or developed for future use as investment property is classified as investment property during its construction or development. At 31 March 2019 and 31 March 2018 there were no properties under construction or development.

 
















 


Technique used for valuing investment properties







 


The traditional method converts anticipated future cash flow benefits in the form of rental income into present value. This approach requires careful estimation of future benefits and application of investor yield or return requirements. One approach to value the property on this basis is to capitalise net rental income on the basis of an Initial Yield, generally referred to as the 'All Risks Yield' approach or 'Net Initial Yield' approach.

 
















 


These fair values are based on comparable market prices where possible, adjusted if necessary, for any difference in the nature, location or condition of the specific assets and factors not included in net rental income such as vacancies and lease incentives.

 
















 


The fair value of investment properties is measured based on each property's highest and best use from a market participant's perspective and considers the potential uses of the property that are physically possible, legally permissible and financially feasible.

 
















 


The 'Brexit' process initiated in 2017 consequent to the 2016 referendum, by which the United Kingdom is due to leave the European Union, continues to create economic and other uncertainties about both the process and its consequences which are risks that affect the real estate industry, particularly market values of investment property which are reliant on a pool of investors and availability of financing. Although there is no evidence to 31 March 2019 that Brexit has adversely affected the Group's activities, as the exit date approaches, and the lack of a "Brexit deal" to date, the uncertainty in relation to the impact on the UK and EU economies as a result of a no deal Brexit increases and this may impact the valuation of the Group's investment.

 
















 


Brexit is one of a number of market factors which the independent valuers have taken into consideration in determining their valuations.  The valuations are not qualified with regard to Brexit.  The Company has 54 tenants with varying degrees of exposure to Brexit. The Board has considered reasonable sensitivities, including potential falls in property valuations arising from, inter alia, Brexit, including that it will remain a going concern for a period of not less than twelve months from the date of the approval of the financial statements.

 
















 


Operating leases













 


Properties leased out under operating leases, where the Group is the lessor, are included in investment property in the consolidated statement of financial position. Please refer to revenue recognition for the discussion of recognition of rental income.

 
















 


Financial instruments












 


Cash and cash equivalents





 


Cash and cash equivalents comprise cash balances and call deposits with original maturities of 3 months or less. These are carried at cost, which in the opinion of the Directors is a reasonable approximation of fair value.

 
















 


Trade and other receivables





 


Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, loans and receivables are measured at amortised cost using the effective interest method, less any impairment losses. Trade and other receivables are derecognised where the rights to receive cash flows have expired and substantially all risks and rewards of the asset have been transferred.

 
















 


Trade and other payables





 


Trade payables are not interest bearing and are recognised initially at fair value.  Subsequent to initial recognition trade and other payables are measured at amortised costs which approximates their fair value.

 
















 


Loan borrowings





 


Loan borrowings are recorded initially at fair value, net of direct issue costs incurred. Loan borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised, within finance costs, in the income statement over the term of the borrowings using the effective interest rate method.

 
















 


The Group derecognises a financial liability when the obligation under the liability is discharged, cancelled or expired.

 
















 


Derivative financial instruments












 


The Group uses derivative financial instruments to hedge its risk associated with interest rate fluctuations. The Group's policy is not to trade in derivative instruments. The Group does not apply hedge accounting.

 
















 


Recognition of the derivative financial instruments takes place on the date at which a derivative contract is entered into. Such derivative financial instruments are measured initially and subsequently at fair value; transaction costs are included as incurred in the statement of comprehensive income under finance costs.  Gains or losses on derivatives are recognised in the statement of comprehensive income in net gain or loss from financial instruments at fair value through profit or loss.  Interest expenses on derivative financial liabilities are included as incurred in the statement of comprehensive income in finance costs.

 
















 


Impairment














 


The Group recognises expected credit loss (ECL) on financial assets measured at amortised cost.  The Group measures loss allowance as an amount equal to the lifetime ECL, except for bank balances for which credit risk (i.e. risk of default occurring over the expected life of the financial instrument) has not increased significantly since initial recognition.

 
















 


An impairment loss is calculated as the difference between an asset's carrying amount and the present value of the estimated future cash flows discounted at the asset's original effective interest rate. Losses are recognised in profit or loss and reflected in an allowance account. When the Group considers that there are no realistic prospects of recovery of the asset, the relevant amounts are written off. If the amount of impairment loss subsequently decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, then the previously recognised impairment loss is reversed through profit or loss.

 


Taxation








 


The Company, Circle Property Unit Trust ("CPUT") and Circle Property (Milton Keynes) Limited ("CPMK") are registered in Jersey, Channel Islands. The Company and CPMK are taxed at the Jersey company standard rate of 0%. CPUT is not subject to tax in Jersey.

 
















 


The Company is registered under the Non-Resident Landlord Scheme and is liable to United Kingdom taxation at a rate of 20% on net rental income from its investment properties.

 
















 


The Finance (No 3) Bill published in November 2018 set out a number of significant changes to the taxation of UK real estate which are due to come into effect in 2019 and 2020 respectively. Capital gains arising on the disposal of UK commercial property held in non-UK resident structures are currently exempt from tax. Going forward UK corporation tax will be applicable to all gains arising on UK commercial property from 6 April 2019 and after April 2020 non-resident corporate landlords will be subject to UK corporation tax rather than income tax. There are a number of exemptions that may be applied and elections to consider based on the investor's composition and status. It is not possible at this stage to determine precisely the impact of these changes on the position of the Company but it is expected that the new rules will result, inter alia, in changes to applicable taxation rates, restrictions on allowable interest and changes in the way losses can be relieved either at the Company and or the tax group or the investor level. The elections made by the investors could have a direct impact on the way the Group is taxed.

 
















 


Deferred taxation













 


Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit.

 
















 


The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

 
















 


Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in profit or loss, except when it relates to items charged or credited directly to other comprehensive income, in which case the deferred tax is also dealt with in other comprehensive income.

 
















 


Share capital














 


Ordinary share capital is classified as equity. Dividends are recognised as a liability in the year in which they are approved.

 
















 


Treasury shares













 


Treasury shares are ordinary shares of the Company held for the purpose of awarding shares in the Circle Property 2016 Long Term Incentive Plan ("LTIP"). The shares are recorded at cost and are deducted from equity.

 
















 


Share based payments












 


The Group has applied the requirements of IFRS 2 Share-Based Payment to share options granted under the LTIP. The fair value of the share options are determined at the grant date and are expensed on a straight line basis over the vesting period, based on the Group's estimate of shares that will eventually vest and adjusted for the effect of non-market based vesting conditions.

 
















 


Provisions














 


Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the Group expects some or all of a provision to be reimbursed, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the income statement net of any reimbursement. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as a borrowing cost.

 


Goodwill














 


Goodwill represents the excess of the cost of an acquisition over the fair value of the Group's share of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill on acquisitions of subsidiaries is included within intangible assets. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.

 
















 

3

Operating segments












 


The Group has adopted IFRS 8 "Operating segments" which requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly reviewed by the Chief Operating Decision Maker ("CODM") to allocate resources to the segments and to assess their performance. For the purposes of IFRS 8 the CODM takes the form of the two executive Directors of the Company.

 
















 


The CODM considers that there is only one geographical segment, which is the United Kingdom, and one reporting segment, which is investment in commercial property. Therefore, no segmental reporting is required.

 
















 

4

Revenue











1 April 2018 to 31 March 2019


1 April 2017 to 31 March 2018

 













£


£

 
















 


Rental income










6,390,514


5,816,610

 


SIC 15 adjustment (spreading of lease incentives)






488,398


395,210

 













6,878,912


6,211,820

 
















 


Insurance recovery










130,323


99,398

 


Other income










94,000


43,187

 
















 













7,103,235


6,354,405

 
















 

5

Property expenses










1 April 2018 to 31 March 2019


1 April 2017 to 31 March 2018

 













£


£

 
















 


Other void property costs









76,229


318,002

 


Void property service charges









271,493


259,588

 


Property repairs and maintenance costs








24,788


29,532

 


Property insurance










148,893


130,328

 


Void property rates









118,037


68,739

 


Lease variation costs









-


25,000

 
















 













639,440


831,189

 
















 

6

Administrative expenses









1 April 2018 to 31 March 2019


1 April 2017 to 31 March 2018

 











Note


£


£

 
















 


Staff costs









7


1,403,844


1,321,982

 


Administration fees









321,013


250,309

 


Legal and professional fees









788,994


504,856

 


Audit fees











57,084


51,875

 


Accountancy fees










7,164


7,648

 


Rent, rates and other office costs









68,521


63,909

 


Other overheads










134,208


160,236

 


Depreciation of tangible fixed assets








13,296


7,405

 
















 













2,794,124


2,368,220

 
















 

7

Employees and Directors' Remuneration








1 April 2018 to 31 March 2019


1 April 2017 to 31 March 2018

 













£


£

 


Staff costs during the year were as follows:











 


Non-executive directors' fees









180,000


133,000

 


Wages and salaries









838,475


817,500

 


Share-based payments









178,143


122,514

 


National insurance costs









131,580


174,918

 


Pension contributions









36,850


32,856

 


Other employment costs









38,796


41,194

 
















 













1,403,844


1,321,982

 
















 

8

Finance income










1 April 2018 to 31 March 2019


1 April 2017 to 31 March 2018

 













£


£

 
















 


Bank interest










2,717


3,620

 
















 













2,717


3,620

 
















 

9

Finance costs










1 April 2018 to 31 March 2019


1 April 2017 to 31 March 2018

 













£


£

 
















 


Loan interest










1,347,779


1,073,998

 


Loan commitment fees









51,219


15,824

 


Loan arrangement fees









108,473


59,188

 


Fair value movement on interest rate contracts








-


710

 
















 













1,507,471


1,149,720

 
















 

10

Taxation











1 April 2018 to 31 March 2019


1 April 2017 to 31 March 2018

 













£


£

 
















 


Current tax











167,101


(77,031)

 


Deferred tax











124,041


(457,833)

 
















 













291,142


(534,864)

 
















 
















 


A reconciliation of the current tax charge applicable to the results at the statutory income tax rate to the (credit) / charge for the year is as follows:

 
















 


Current taxation










1 April 2018 to 31 March 2019


1 April 2017 to 31 March 2018

 













£


£

 
















 


Profit for the year before tax









15,246,062


13,991,203

 
















 


UK income tax at a rate of 20%









3,049,212


2,798,241

 
















 


Effects of:














 


Non-taxable gains on investment properties








(2,593,287)


(2,396,461)

 


Non-taxable income









(19,343)


(9,361)

 


Expenses not deductible for tax purposes








37,118


68,261

 


Capital expenditure deductible for tax purposes








(22,797)


(152,831)

 


Utilisation of capital allowances









(191,444)


(307,849)

 


Utilisation of losses brought forward








(92,358)


-

 


Over provision of current tax in prior year








-


(77,031)

 
















 













167,101


(77,031)

 
















 


Deferred taxation










1 April 2018 to 31 March 2019


1 April 2017 to 31 March 2018

 













£


£

 


Deferred taxes at 31 March relates to the following:









 
















 


Deferred tax asset













 


Capital allowances available to carry forward








1,603,918


1,727,959

 
















 


Deferred tax asset brought forward








1,727,959


1,270,126

 


Under provision of deferred tax credit in prior year






-


373,101

 


Deferred tax charge for the year









(124,041)


-

 


Deferred tax credit for the year









-


84,732

 
















 


Deferred tax asset carried forward








1,603,918


1,727,959

 
















 


At 31 March 2019, the Group had capital allowances of £8,019,591 (2018: £8,639,375) available to carry forward against future profits. A deferred tax asset of £1,603,918 (2018: £1,727,959) has been recognised as it is expected to be utilised in the foreseeable future.

 

 

 

11

Earnings per share













 


Basic earnings per share has been calculated on profit after tax attributable to ordinary shareholders for the year (as shown on the Consolidated Statement of Comprehensive Income) and the weighted average number of ordinary shares in issue during the year.

 
















 













1 April 2018 to 31 March 2019


1 April 2017 to 31 March 2018

 













£


£

 
















 


Profit for the year










14,954,920


14,526,067

 
















 


Weighted average number of shares (excluding treasury shares)




28,296,762


28,296,762

 
















 
















 


Earnings per ordinary share:









0.53


0.51

 
















 


In the opinion of the Board, treasury shares held to satisfy share awards to management, as disclosed in note 19, currently do not have any material value and hence do not have any dilutive effect. Therefore, no diluted earnings per share has been presented.

 
















 

12

Investment properties









31 March 2019


31 March 2018

 













£


£

 
















 


Opening fair value per valuation report








114,075,000


93,025,000

 


Cost of refurbishment of investment properties








826,634


4,207,328

 


Cost of acquisition of investment property








-


4,466,652

 


Disposal of investment properties









(4,300,000)


-

 


Gain on revaluation of investment properties








12,609,968


11,980,810

 


Lease incentive amortisation









1,388,398


395,210

 
















 


Fair value of investment properties per valuation report






124,600,000


114,075,000

 
















 


Unamortised lease incentives recorded within trade and other receivables




(9,279,822)


(7,702,364)

 
















 


Carrying value










115,320,178


106,372,636

 
















 


No properties were classified as held for sale at 31 March 2019 and 31 March 2018.





 
















 


As at 31 March 2019 the fair value of investment properties under development included in the above amount was nil (2018: nil).

 
















 


£121,000,000 (2018: £110,325,000) of the above properties' value, estimated by the valuer, relate to property held on a freehold basis and £3,600,000 (2018: £3,750,000) on a long leasehold basis, for a peppercorn rent.

 
















 


The fair value of the Group's investment properties per the Valuation Report amounted to £124,600,000 (2018; £114,075,000). The difference between the fair value of the investment properties per the Valuation Report and the fair value per the balance sheet of £9,279,822 (2018: £7,702,364) relates to unamortised lease incentives which are recorded in the financial statements within non-current and current assets.

 
















 


The Group has pledged all of its investment properties to secure banking facilities granted to the Group as detailed in note 15.

 
















 


The fair value of the Group's investment properties at 31 March 2019 has been estimated on the basis of valuation carried out by Savills (UK) Limited. The valuation was carried out in accordance with the Practice Statements contained in the Appraisal and Valuation Standards as published by the RICS. In forming their opinion of the fair value, the independent valuers had regard to the current best use of the property, its investment attributes and recent comparable transactions. The valuation was carried out using the "All Risks Yield" method taking into consideration both sales and rental evidence and formulating the opinion of market value taking into account the properties' locations, specifications and specific characteristics.

 
















 


All investment properties are categorised as Level 3 fair values as they use significant unobservable inputs. There were no transfers between Levels during the year.

 
















 


The following table shows the valuation technique used in measuring the fair value of investment properties, as well as the significant unobservable inputs used.

 

















Sector


Valuation
£

Valuation technique


Significant unobservable inputs

Inter-relationship between key unobservable inputs and fair value measurement

 


Office



All Risks Yield

Estimated void periods range from 6 months to 24 months after the end of each lease. (2018: no change)

The estimated fair value would increase / (decrease) if:

 



2018

103,325,000



 



2019

118,700,000







 


Retail









void periods were shorter / (longer);

 


Warehousing




Market rents have been based on the specific circumstances of each property.






 



2018

4,800,000



market rents were higher / (lower);

 



2019

4,600,000








 







rent free periods were shorter / (longer);

 


Retail
















2018

1,700,000


 -

Estimated rent free periods range from 6 to 12 months on new leases. (2018: no change)

letting fees were lower / (higher);

 



2019

-








 







rent per square foot were higher / (lower);

 


Industrial
















2018

1,300,000


 -

Letting fees have been estimated on vacant units.

equivalent yields were lower / (higher); or

 



2019

1,300,000








 











market conditions were to improve / (decline).

 






 - 

Rent per square foot ranges from £4 to £40. (2018: £3 to £46)


 


Other










 



2018

2,950,000














2019

-


 -

Net equivalent yields range from 5.50% to 8.39%. (2018: 5.97% to 8.74%)






 












 


Total
















2018

114,075,000


 -

Market conditions are considered based on the property's location.






 



2019

124,600,000








 












 

















The ranges are based on averages per property. Individual tenancies within properties may fall outside these ranges. The relationship between the unobservable inputs and their impact on the fair value measurement is not certain. Changes to the tenancies may impact the fair value outside one or more of the above inter-relationships according to individual circumstances.

 

 
















 

 

13

Trade and other receivables









31 March 2019


31 March 2018

 

 













£


£

 

 
















 

 


Non-current














 

 


Lease incentives










8,310,903


7,201,845

 

 
















 

 


Current














 

 


Lease incentives










968,919


500,519

 

 


Amounts due from property agents








20,034


147,689

 

 


Amounts due from tenants









275,540


127,930

 

 


VAT











-


167,227

 

 


Other receivables










289,206


197,826

 

 
















 

 













1,553,699


1,141,191

 

 
















 

 


Lease incentives consist of £4,354,622 (2018: £3,477,667) being the prepayments for rent-free periods recognised over the life of the lease and £4,925,200 (2018: £4,224,697) relating to incentives paid to tenants.

 

 
















 

 

14

Cash and cash equivalents









31 March 2019


31 March 2018

 

 













£


£

 

 
















 

 


Royal Bank of Scotland International








3,650,332


2,387,889

 

 


National Westminster Bank plc









40


251,894

 

 
















 

 













3,650,372


2,639,783

 

 
















 

 


As at 31 March 2019 £nil (2018: £377,209) was held on blocked accounts.  Of this, £nil (2018: £125,315) relates to deposits received from tenants and £nil (2018: £251,894) was held on an interest deposit account in relation to the loan borrowings disclosed in note 15.

 

 
















 

 

15

Loan borrowings










31 March 2019


31 March 2018

 

 













£


£

 

 
















 

 


Brought forward










51,815,616


45,590,423

 

 


Loan repayments










(51,901,360)


-

 

 


Loan drawdowns










49,738,852


6,181,005

 

 


Lending costs










(721,900)


-

 

 


Amortisation of lending costs









108,473


44,188

 

 
















 

 













49,039,681


51,815,616

 

 
















 

 


On 13 February 2019 the Group entered into a new revolving facility agreement with National Westminster Bank Plc ("NatWest") and HSBC UK Bank Plc ("HSBC") and repaid the old facility.

 

 
















 

 


The Group is party to a revolving facility, with NatWest and HSBC. The facility is a £60,000,000 revolving facility with accordion option of up to £40,000,000 and has a four year term.  The rate of interest is the aggregate of the margin 2.05% and LIBOR and is payable quarterly.  There is also a commitment fee payable at 0.82% on the undrawn facility and in relation to the accordion facility.

 

 
















 

 


The Group paid an arrangement fee of 0.875% of the facility, which along with the and other cost of arranging the facility including legal costs have been amortised and will be written of over the four year term.

 

 
















 

 


The facility is secured by a first and only legal charge over the Group's investment properties, an assignment of rental income, charges over specified bank accounts of the Group and a floating charge granted over all assets of the Group.

 

 
















 

 


The facility's financial covenants are 60% loan to value, 2.00:1 interest cover looking both forward and backward, the Group shall ensure that the total market value of the charged properties does not fall below £50,000,000 at any time and that no single tenant represents more than 25% of the total contracted rents.

 

 
















 

 


The undrawn facility as at 31 March 2019 was £10,261,148 (2018: £3,098,640).

 

 
















 

 

16

Trade and other payables









31 March 2019


31 March 2018

 

 













£


£

 

 
















 

 


Trade payables










65,997


430,276

 

 


Property improvement costs









-


180,000

 

 


VAT











267,442


-

 

 


Wages and salaries









454,333


443,960

 

 


Deferred income










1,638,217


810,288

 

 


Rental deposit accounts









92,545


129,703

 

 


Finance costs










188,339


248,371

 

 


Valuation Fee










30,000


37,428

 

 


Audit fee











55,080


45,275

 

 


Administration fees









66,159


-

 

 


Current taxation










167,101


-

 

 
















 

 













3,025,213


2,325,301

 

 







 

 


Deferred income relates to deferred rental income of £1,535,383 (2018: £730,744) and deferred insurance recharges of £102,834 (2018: £79,544).

 

 
















 

 

17

Stated capital













 

 
















 

 


Issued and fully paid share capital is as follows:










 

 













31 March 2019


31 March 2018

 

 













£


£

 

 
















 

 


Issued and fully paid shares of no par value








42,542,179


42,542,179

 

 
















 

 


Number of shares in issue












 

 


Brought forward (at £1.49 per share)








28,551,796


28,551,796

 

 


Issued in the year










-


-

 

 
















 

 


Carried forward










28,551,796


28,551,796

 

 
















 

 


The Company has one class of Ordinary Share which carry no rights to fixed income. Holders of these shares are entitled to dividends as declared from time to time and are entitled to one vote per share at general meetings of the Company.

 

 
















 

 


On admission to AIM, the Company issued 255,034 Ordinary Shares at a price of £1.49 each to be held in treasury subject to award under the LTIP described in note 20. While held in treasury, these shares are not entitled to dividends and have no voting rights.

 

 
















 

 

18

Capital management












 

 


The Group's policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The objective is to ensure that it will continue as a going concern and to maximise return to its equity shareholders through appropriate levels of gearing. The Group is not subject to any externally imposed capital requirements with the exception of the loan covenant requirements as disclosed in note 15.

 

 
















 

 


The Group's debt and capital structure comprises the following:







 

 













31 March 2019


31 March 2018

 

 













£


£

 

 
















 

 


Total liabilities










52,064,894


54,140,917

 

 


Less: cash and cash equivalents









(3,650,372)


(2,639,783)

 

 


Net debt











48,414,522


51,501,134

 

 
















 

 


Total equity











78,434,041


64,998,784

 

 


Net debt to equity ratio









0.62


0.79

 

 
















 

 

19

Share based payments












 

 


Circle Property 2016 Long Term Incentive Plan ("LTIP")









 

 


By a resolution of the Board dated 29 January 2016, the Company adopted the LTIP for the purpose of properly motivating and rewarding key employees of the Group in a manner that aligns their interests with that of the Shareholders by measuring performance against shareholder returns over the three financial years ended 31 March 2019.

 

 
















 

 


On admission to AIM, the Company issued 255,034 Ordinary Shares at a price of £1.49 each to be held in treasury subject to award under the LTIP.

 

 
















 

 


A key employee of the Company may be invited to join the LTIP scheme, the purpose of which is to align the long longer term objectives of shareholders and management.  Awards will take the form of a conditional right or nil cost option to acquire Ordinary shares. There will follow a three year vesting period over which the performance of the Company must satisfy the targets in order that the awards will vest at the end of that period. 

 

 
















 

 


The awards currently vest with reference to the Group's Total Shareholder Return ("TSR").  TSR is a comparison of share price plus dividends paid with a bespoke basket of peer companies and REITs.

 

 
















 

 


There are standard good and bad leaver provisions included in the LTIP terms.  Where awards vest the beneficiary will be entitled to the notional dividends accrued over the three year period.  Standard "claw back" provisions are included as is the absolute discretion of the Board to deal with unvested shares.

 

 
















 

 


The fair value of the grant was measured at the grant date using a Black-Scholes pricing model, taking into account the terms and conditions upon which the instruments were granted. The services received and a liability to pay for those services are recognised over the expected vesting period.

 

 
















 

 


Grant date













2016

 

 


Award













255,034

 

 


Share price













£1.49

 

 


Exercise price












0p

 

 


Term













3 years

 

 


Expected volatility












5%

 

 


Expected dividend yield











3.36%

 

 


Risk free rate












0.36%

 

 


Fair value per option











£1.35

 

 
















 

 


During the year only 87.50% of the 2016 shares vested (223,154) at a fair value of £300,657.  The Directors have not yet exercised their options to acquire.

 

 
















 

 


2017 LTIP and 2018 LTIP awards












 

 


The awards for 2017 and 2018 have been held in abeyance, subject to review and are to be placed before the forthcoming annual general meeting for approval by shareholders.  It is anticipated that a further performance condition will be introduced to account for 50% of the award being a fixed hurdle rate for NAV.  This target will be non-vesting if under 8% and if the NAV return is 14% or above then the share will vest in fill.  Where the NAV return falls between 8% and 14% the number of share that vest will be calculated on a straight-line basis between 30% and 100%

 

 
















 

 


Other amendments to the rules of the LTIP are proposed to be made, subject to shareholder approval as the Annual General Meeting, including amending the individual threshold applicable to the value of the awards granted in a financial year from 100% to 200% of basic salary.  Further details of the proposed changes to the rules of the LTIP will be set out in the Notice of Annual General Meeting.

 

 
















 

 


Based on current performance of the 2017 and 2018 awards the following estimates have been made but not provided for in these financial statements:

 

 











% vesting


Number of shares expected to vest


fair value

 

 


31 March 2017








100.00%


261,410


£370,485

 

 


31 March 2018








100.00%


267,944


£189,873

 

 
















 

 

20

Financial risk management












 

 


The strategy of the Group is to invest in United Kingdom commercial property with a view to holding it for capital appreciation whilst enhancing rental and capital growth opportunities.

 

 
















 

 


Consistent with that objective, the Group holds UK commercial property investments. In addition, the Group's financial instruments during the year comprised interest bearing payable loans, cash and cash equivalents and trade receivables and payables that arise directly from its operations. The Group does not have any exposure to any derivative instruments other than the interest rate cap entered into to hedge the interest paid on the interest bearing bank loans.

 

 
















 

 


The Group is exposed to various types of risks 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 Directors review and agree policies for managing its 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.

 

 
















 

 


Credit risk














 

 


Credit risk is the risk that an issuer or counterparty to an asset will be unable or unwilling to meet a commitment that it has entered into with the Group.

 

 
















 

 


In the event of default by an occupational tenant, the Group will suffer a rental shortfall and incur additional costs including: legal expenses; and in maintaining, insuring, and re-letting the property. The Board produces regular reports on any tenant arrears which are monitored by the Directors in order to anticipate, and minimise the impact of, defaults by occupational tenants.

 

 
















 

 


The Group notes that in excess of 30% of its contracted rents are from 2 major tenants, however on has its lease guaranteed by its parent company and the other operates serviced offices of which the Group would take over the letting of.

 

 
















 

 


The carrying amount of financial assets, including cash balances, amounts due from property agents, amounts due from tenants and other receivables recorded in the financial statements represents the Group's maximum exposure to credit risk. The carrying amount of these assets at 31 March 2019 was £4,235,152 (2018; £3,113,228). There were no financial assets which were past due or considered impaired at 31 March 2019 and 31 March 2018.

 

 
















 

 


All of the Group's cash is placed with financial institutions with a Moody's long-term credit rating of Baa2 or better. Bankruptcy or insolvency of such financial institutions may cause the Group's ability to access cash placed on deposit to be delayed or limited. 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 in realising assets or otherwise raising funds to meet financial commitments. The Group's investments comprise UK commercial property. 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 Directors. In order to mitigate liquidity risk the Group aims to have sufficient cash balances (including the expected proceeds of any property sales) to ensure that the Group is able to meet its obligations for a period of at least twelve months.

 

 
















 

 


At the reporting date, the maturity profile of the Group's financial assets and financial liabilities were (on a contractual basis):

 

 
















 







Contractual Value





Carrying Amount


Within one year


1-2 years


2-5 years


More than 5 years


Total





£


£


£


£


£


£


31 March 2019














Financial assets














Trade and other receivables

584,780


584,780


-


-


-


584,780


Cash and cash equivalents

3,650,372


3,650,372


-


-


-


3,650,372





4,235,152


4,235,152


-


-


-


4,235,152


Financial liabilities













Trade and other payables

1,386,996


1,386,996


-


-


-


1,386,996


Loan borrowings


49,039,681


1,410,285


1,236,415


52,563,287


-


55,209,987





50,426,677


2,797,281


1,236,415


52,563,287


-


56,596,983






















Contractual Value





Carrying Amount


Within one year


1-2 years


2-5 years


More than 5 years


Total





£


£


£


£


£


£


31 March 2018













Financial assets













Trade and other receivables

473,445


473,445


-


-


-


473,445


Cash and cash equivalents

2,639,783


2,639,783


-


-


-


2,639,783





3,113,228


3,113,228


-


-


-


3,113,228


Financial liabilities













Trade and other payables

1,515,013


1,515,013


-


-


-


1,515,013


Loan borrowings


51,815,616


1,329,713


52,200,090


-


-


53,529,803





53,330,629


2,844,726


52,200,090


-


-


55,044,816
















Interest rate risk


Some of the Group's financial instruments are interest bearing. They are variable rate instruments with differing maturities. As a consequence, the Group is exposed to interest rate risk due to fluctuations in the prevailing market rate.

















The Group's exposure to interest rate risk relates primarily to the Group's bank borrowings.




















As a result the Group is exposed to changes in prevailing interest rates on the remaining balance of its borrowing detailed in note 15. Having assessed the level of risk the Directors have concluded that it is within acceptable limits.

















The interest profile of the Group's financial assets and financial liabilities after the impact of the interest rate contracts held at the year end are as follows:
























Floating rate


Fixed rate


Interest free


Total









£


£


£


£


31 March 2019














Financial assets














Trade and other receivables





-


-


584,780


584,780


Cash and cash equivalents





3,650,372


-


-


3,650,372

















Financial liabilities














Trade and other payables





-


-


1,386,996


1,386,996


Loan borrowings






49,738,852


-


-


49,738,852
























Floating rate


Fixed rate


Interest free


Total









£


£


£


£


31 March 2018














Financial assets














Trade and other receivables





-


-


473,445


473,445


Cash and cash equivalents





2,639,783


-


-


2,639,783

















Financial liabilities














Trade and other payables





-


-


1,515,013


1,515,013


Loan borrowings






51,901,360


-


-


51,901,360

















When the Group retains cash balances, they are ordinarily held on interest bearing deposit accounts. The benchmark which determines the interest income received on interest bearing cash balances is the bank base rate which was 0.75% as at 31 March 2019 (2018: 0.5%). The Group's policy is to hold cash on variable rate bank accounts.

















The Group has borrowings amounting to £49,738,852 (2018: £51,901,360) which have interest rates linked to the 3 month LIBOR interest rates. A 1% increase in the LIBOR rate will have the effect of increasing interest payable by £497,389 (2018: £519,013). A decrease of 1% would have an equal but opposite effect.
















Market price risk
















The Group holds a portfolio of UK commercial properties. The Group invests in properties which the Directors believe will generate a combination of long-term growth in income and capital for shareholders. Investment decisions are based on analysis of, amongst other things, prospects for future income and capital growth, sector and geographic prospects, tenant covenant strength, lease length and initial and equivalent yields.

















Investment risks are spread through letting properties to low risk tenants. The managem