Sustaining Delivery with Steady Growth Circle Property Plc Report - - PDF document
Sustaining Delivery with Steady Growth Circle Property Plc Report and Consolidated Financial Statements for the period 4 December 2015 to 31 March 2016 Circle Property Plc is a specialist and imaginative regional office investment and
Circle Property Plc Report and Consolidated Financial Statements for the period 4 December 2015 to 31 March 2016
circleproperty.co.uk/ar2016
At a Glance
OUR PORTFOLIO
The Group’s portfolio consists
investments and developments in the UK with a current value of £77 .73m. All of the properties are currently held by CPUT and/or the Jersey
approximately 640,148 sq ft
majority of which, by floor area, is in the office sector.
For more detailed information on our portfolio please see page 6 Portfolio Review Above: One Castlepark, Tower Hill, Bristol Below: Kents Hill Park, Timbold Drive, Milton Keynes
The map below shows the location
Above: 36 Great Charles Street, Birmingham
2 2 2 3
FINANCIALS GOVERNANCE STRATEGIC REPORT
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Circle Property Plc Report and Consolidated Financial Statements for the period 4 December 2015 to 31 March 2016
OPERATIONAL HIGHLIGHTS
ʱ The letting of the entire first floor of K1 in Milton Keynes to Trafficmaster enabled us to proceed with the refurbishment of K2 in the knowledge that K1 was fully let. Those works are now complete and we are pleased that K2 is attracting considerable interest. We are drawing-in tenants from competing local developments who appreciate our high specification and thoughtfully planted landscaped grounds with ample car parking. ʱ In Birmingham, we are already on site and working through our rolling refurbishment of 36 Great Charles Street retaining existing tenants and extending leases to meet tenants requirements. The entrance is being enlarged and all floors are being refurbished in “media-style” with exposed ceiling services and open plan yet flexible floor plates. ʱ At Somerset House in Temple Street Birmingham we are securing pre-lets on the two Ground Floor restaurants for which planning permission has now been
upper floors completing in Spring 2017.
FINANCIAL HIGHLIGHTS
Profits and Earnings: STRATEGIC REPORT 1–9
Highlights of the Period 1 Chairman’s Statement 2 CEO’s Review 4 Portfolio Review 6
GOVERNANCE 10–19
Board of Directors 10 Directors’ Report 12 Governance Report 15 Remuneration Report 18
FINANCIALS 21–40
Independent Auditor’s Report 20 Consolidated Statement of Comprehensive Income 21 Consolidated Statement of Financial Position 22 Consolidated Statement of Changes in Equity 23 Consolidated Statement of Cash Flows 24 Notes to the Consolidated Financial Statements 25 Officers and Professional Advisers
£1.1m
PROFIT BEFORE TAX
EARNINGS PER SHARE
£43.2m
SHAREHOLDERS’ FUNDS
NET ASSET PER SHARE
FINAL DIVIDEND PER SHARE
£77
PORTFOLIO VALUATION
Highlights of the Period
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Circle Property Plc Report and Consolidated Financial Statements for the period 4 December 2015 to 31 March 2016
Chairman’s Statement
WELCOME TO OUR INAUGURAL REPORT.
On 16 February 2016, Circle Property Plc successfully listed on AIM with stock being taken up at a price of £1.49 which reflected the NAV with no discount. As expected, on 16 May 2016 we were in position to pay a maiden dividend
March 2016, the Company’s financial period end, while acknowledging that the Company had been in existence for a mere four months. Despite the recent political and economic uncertainties, culminating in the United Kingdom’s decision to leave the European Union, the share price has proven to be remarkably
shareholders being long-term investors who share our confidence in the earnings’ potential
as per our branding, our active investment within it. On 31 March 2016 the net asset value attributable to shareholders amounted to £43.2m translating into a net asset value per share of approximately £1.53. The Executive team is well experienced in dealing with difficult times having successfully brought Circle Property Unit Trust through the market recession of 2008. Although our team is small they are working hard to identify the right
delighted, although after the accounting period closed, to note that we have secured a significant line of debt funding from our bankers. I would like to thank the Royal Bank of Scotland for getting this facility in place, notwithstanding the turbulence created around the Brexit referendum. The governance of the Company is evolving to match both changing regulation and the needs
Remuneration and Audit Committees and deal with any nomination issues through the Board as a whole. I am confident that the Audit Committee has the requisite skills and the Remuneration Committee is focussed on rewarding fairly and motivating the Executive within constraints of the property improvement programme and a progressive dividend policy. I am committed to ensuring the Company operates at the highest level of integrity and embraces the challenges of an ever-changing regulatory
procedures manual for board approval which includes, but is not limited to, policies on Anti- Bribery and Corruption, Gifts and Entertainment, Code of Conduct, Insider Dealing, Risk, Financial Procedures, Meetings, Whistleblowing and the additional requirements regarding the insider dealing rules via the Market Abuse Regulations which recently came into effect. We are on budget and on target with our stated aims to enhance value through strategic acquisition in improving areas and to expend c £8m on capital improvements by actively investing in property. I thank the Board for its support and the Executive team for their energy and focus but, most importantly, I thank you the shareholders for backing our efforts and we will strive to reward that trust. Ian Henderson Non-Executive Chairman
FINANCIALS GOVERNANCE STRATEGIC REPORT
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Circle Property Plc Report and Consolidated Financial Statements for the period 4 December 2015 to 31 March 2016
“We are on budget and on target with our stated aims to enhance value through strategic acquisition in improving areas and to expend c£8m on capital improvements by actively investing in property. “
36 Great Charles Street, Birmingham Somerset House, Temple Street, Birmingham
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Circle Property Plc Report and Consolidated Financial Statements for the period 4 December 2015 to 31 March 2016
CEO’s Review
CIRCLE PROPERTY PLC’S PRIMARY STRATEGY POST THE BREXIT VOTE REMAINS UNCHANGED; TO BUY AND REFURBISH REGIONAL OFFICE BUILDINGS IN LOCATIONS WHERE THERE IS GOOD DEMAND, BUT WHICH WILL BENEFIT FROM CAPITAL EXPENDITURE TO SHOW ABOVE AVERAGE RETURNS FOR THE SECTOR.
The refinancing of our debt facility with RBS has improved our flexibility and reduced our interest charges, the benefit of which we expect to be passed on to our shareholders given our commitment to a progressive dividend policy. We are sure that income will continue to prevail as the key consideration by investors with NAV performance being a secondary driver. We will continue to advance and progressively let our three key developments in Milton Keynes and Birmingham all of which, when fully let, will contribute an additional £2m per annum to the rent roll to show a rental return on total cost approaching 10%. This level of return would not be achievable by buying those completed investments in the open market. We have a developer mentality but instead of selling the completed investments, they are retained and held within our investment portfolio. Valuation uplifts allow further advances from the RBS loan to facilitate further purchases. We remain optimistic that the economy has the strength to withstand the short term stresses and strains imposed by the prospect of leaving the EU and that demand will continue for good quality offices at economic rents in the right
a relatively small number of funds that have down-valued their units overnight as a knee-jerk reaction to the post BREXIT political fallout rather than an economic collapse. We suspect that their actions were driven by a need to try and create some liquidity but this has heightened the sense of nervousness and accelerated the rush for the exit door. Auction houses are often quoted as the barometers of the commercial property markets and after their successful auction on 7 July 2016 Acquitus’ auctioneer, Richard Auterac, reported that; “There was no apparent difference in pricing between our pre and post Brexit auctions”. This is not to say that prices will continue to hold firm and we are mindful that there is a risk of contagion from property funds spreading to multi-asset funds and there may be some modest softening of property values at least in the short term, but are optimistic that internal progress within the portfolio should moderate or negate any downward pressure. We continue to take a cautious approach and will be ensuring that our level of debt is contained or
within the portfolio. Our letting agents confirm that although the level of enquiries were down in the lead up to the referendum, there is still unsatisfied occupational demand and viewings are continuing. We are also pleased to report that all of our tenants appear happy to remain in
markets will recover any lost ground over the remainder of the financial year which may prove to be a buying opportunity so we are poised, as ever, to make opportunistic acquisitions where the upside is evident and there is modest downside risk. We have a number of “legacy” properties where we are carrying out lease re-gears or renewal negotiations prior to sale. The proceeds from these sales are anticipated to be at prices ahead
refurbishment programme. The fundamentals for Circle Property Plc remain attractive, given the continuing strength in provincial offices which the Company holds at reversionary rents, principally let to strong covenants in prime locations and the more dynamic earnings generated by the developments in progress. John Arnold Chief Executive Officer
FINANCIALS GOVERNANCE STRATEGIC REPORT
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Circle Property Plc Report and Consolidated Financial Statements for the period 4 December 2015 to 31 March 2016
Property is still in demand
Although the market drew breath in the lead up to Brexit and was slightly “winded” by the somewhat surprising outcome we are seeing a gradual resumption of normal working with
investors competing to buy buildings with a living yield. As gilt yields harden, property yields for longer let property should follow. Our share price reflects the strength of our well located portfolio with strong tenant covenants and low rental base offering scope for rental growth – or insulation from any future weakness in rental
stream from the investment portfolio and projected future income from the development stock produces the prospect for a dynamic total return when all lettings complete. The focus of the Company will remain targeted upon value added stock where the location justifies the risk.
MARKET REVIEW
“Our development programme is progressing well. “
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Circle Property Plc Report and Consolidated Financial Statements for the period 4 December 2015 to 31 March 2016
Portfolio Review
The refurbishment of K1, Kents Hill Business Park, Milton Keynes went well and the property is now fully let and income producing. The refurbishment
tenants in what is arguably Milton Keynes best out of town office accommodation. Three further buildings were acquired by Circle Property Unit Trust (“CPUT”) in the six months preceding its acquisition by Circle Property Plc. The first was on Aztec West, which is Bristol’s main out of town business park. The other two are located in Birmingham city centre. Of these, 36 Great Charles Street is currently under a rolling refurbishment programme, whilst planning has been obtained at Somerset House, Temple Street for two enlarged restaurant units. We have programmed the refurbishment of the
units to commence in the autumn of 2016. Moving forward, the current uncertainty in the market may give rise to further opportunities which we will endeavour to exploit, should the returns be sufficiently attractive.
PORTFOLIO OVERVIEW
As of 31 March 2016, the total portfolio value was £77.73m made up of 16 assets, primarily being well-located provincial offices. By floor area, 82.5% of the total portfolio are income producing investment assets, whilst the remaining 17.5% are office developments. The void rate within the total portfolio is 10.9% which includes the developments, decreasing to 1% when the developments are excluded. 89% of the portfolio by value is in the office and conference sector which forms the core
four sectors, being the non-core portfolio, which provides good high yielding income. 68% of the portfolio by value is located in three provincial cities, being Milton Keynes, Bristol and Birmingham. Principal tenants within the portfolio include Compass Contract Services Ltd (15%), Which? Financial Services Ltd (6%), Grant Thornton LLP (5%), B&M Retail Ltd (5%) and New World Trading Company Ltd (4.3%). The total annual contracted income produced by the portfolio is over £5.9m, with a reversionary rent based on full ERV and once the development assets are complete of approximately £8m.
“ Over the period, we have concentrated on increasing the portfolio’s income by undertaking lease renewals and lettings.”
Edward Olins Chief Operating Officer
FINANCIALS GOVERNANCE STRATEGIC REPORT
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Circle Property Plc Report and Consolidated Financial Statements for the period 4 December 2015 to 31 March 2016
343,805 45,319 37,169 177,211 7,706 16,382 12,556 28.4M 18.5M 4.0M 13.6M 7.4M 1.0M 1.1M 3.7MPORTFOLIO FLOOR AREA (SQ FT) BY SECTOR PORTFOLIO LOCATION BY REGION AND VALUE Office Retail Warehouse Retail Warehouse Roadside Conference Facility Other South East South West London West Midlands East Midlands North West North of England East of England In June 2016, Circle Property Plc completed the refinancing of its entire senior debt with the Royal Bank of Scotland PLC on the terms: Loan amount Increased loan amount from £39.2m to £50m to allow for refinancing of the portfolio, undertake refurbishments and fund further acquisitions. Term Three year term with two options to extend for a further year at the expiry of the 1st and 2nd anniversary of the term. Loan to Value A maximum drawdown to LTV of 60% for the first year of the term decreasing to 55% thereafter. Interest Rate Decreased to 1.85% over libor from 2.95% over libor. Interest Rate Cover 1.75:1 for the first two years of the term increasing to 2.00:1 thereafter. Debt to Rent Ratio No greater than 11:1 for the first two years of the terms decreasing to 10:1 thereafter.
KENTS HILL PARK, MILTON KEYNES
OFFICES This regional conference facility and business park was purchased in December 2013 by CPUT for £11.05m. The regional conference facility is let to Compass Contract Services and provides hotel, leisure and conference facilities within six buildings totalling approximately 177,200 sq ft. The business park provides some 70,000 sq ft of
fully let to three tenants namely Lundbeck, IFG Management and Traffic Master. K2 is vacant, its refurbishment just having been completed. Both the regional conference facility and business park have a combined contracted rent
CORE OFFICE PORTFOLIO
The key office investment assets:
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Circle Property Plc Report and Consolidated Financial Statements for the period 4 December 2015 to 31 March 2016
141 MOORGATE, LONDON EC2
OFFICES
PARK HOUSE, NORTHAMPTON
300 PAVILION DRIVE, NORTHAMPTON BUSINESS PARK The property was purchased in May 2009 by CPUT for £4m and provides approximately 43,577 sq ft of office accommodation. The property is fully let to three tenants being Grant Thornton (53%), NRG Group UK Ltd, t/a Ricoh (30%) and Cedar Open Accounts (17%). The weighted unexpired lease term is 3.83 years to lease expiry and 2.51 years to breaks. The total rent passing is £526,490 pax (equating to £12.08 psf overall). This prime City office building of some 11,400 sq ft was acquired in March 2003 by CPUT for £2.375m. The property was refurbished in 2013 and is well located being situated immediately adjacent to Moorgate Crossrail Station. The property is multi let to 5 tenants and has a contracted rental income of £206,000 pax.
Portfolio Review continued
CORE OFFICE PORTFOLIO
The key office investment assets:
ONE CASTLEPARK, TOWER HILL, BRISTOL
OFFICES Purchased in November 2012 by CPUT for £4.035m, the property provides approximately 78,500 sq ft of refurbished office accommodation. The property is fully let to eight tenants which include Which? Financial Services Limited, Irwin Mitchell LLP and JISC. The total passing contracted rent is approximate £1.04m pax (equating to £13.28 psf).
FINANCIALS GOVERNANCE STRATEGIC REPORT
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Circle Property Plc Report and Consolidated Financial Statements for the period 4 December 2015 to 31 March 2016
SOMERSET HOUSE, TEMPLE STREET, BIRMINGHAM
OFFICES Acquired in January 2016 by CPUT for £7.75m, the property is located on Temple Street, within the heart of Birmingham’s financial and professional core and just a two minute walk from Birmingham New Street Station. The property provides 43,700 sq ft of vacant
restaurant and retail accommodation of some 3,100 sq ft. Planning permission has been granted for the change of use and reconfiguration of the ground floor to provide two restaurant units
It is anticipated the refurbishment of the vacant
Once the redevelopment has been completed and based upon and ERV of £21 psf for the
the estimated annual rental income for the property is around £1.2m pax. The key office development assets:
GREAT CHARLES STREET, BIRMINGHAM
OFFICES 36 Great Charles Street provides 24,500 sq ft
August 2015 by CPUT for £2.5m. The property is located on the city’s inner ring road within Birmingham’s traditional office core. The immediate area around the property is undergoing significant change with Argent’s Paradise Island development providing 1.8m sq ft of grade A office accommodation along with retail, leisure and a 4 star hotel located just 200 yards away. The building is currently undergoing refurbishment at a cost of approximately £2.3m and once complete in spring 2017, will have an estimated rental value of £480,000 pax.
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Circle Property Plc Report and Consolidated Financial Statements for the period 4 December 2015 to 31 March 2016
Board of Directors JOHN ARNOLD EDWARD OLINS IAN HENDERSON
Chief Executive Chief Operating Officer Non-Executive Chairman
BIOGRAPHY Mr Arnold left St Quintin Chartered Surveyors (now CBRE) after seven years in the management department and joined Hambros plc in January 1986. He became a Director of Berkeley Hambro plc, its property subsidiary, in 1991, where he remained until Investec’s acquisition of Hambros Bank in 1998, when he was appointed Managing Director of Investec Property plc. He left Investec at the end
Mr Arnold is a Fellow of The Royal Institution of Chartered Surveyors. Mr Olins joined DE & J Levy LLP as a graduate surveyor and became a salaried partner in 2000. He left the partnership in 2003 to join London & County Estates Limited as Investment Director. In 2006, he joined CPML to take control of new business acquisitions and assist Mr Arnold in the running of CPML. Mr Olins is a Member of The Royal Institution of Chartered Surveyors. Mr Henderson is the Non-Executive Deputy Chairman and Senior Independent Non-Executive Director of Capital & Counties Properties plc, the Chairman of the Dolphin Square Foundation and the Chairman of the Estate and Advisory Committee of The National History
Chief Executive of Land Securities Group plc and has been widely involved in the UK property industry, including being a past president of the British Property
The Royal Institution of Chartered Surveyors.
FINANCIALS GOVERNANCE STRATEGIC REPORT
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Circle Property Plc Report and Consolidated Financial Statements for the period 4 December 2015 to 31 March 2016
RICHARD HEBERT JAMES HAMBRO THE DUKE OF ROXBURGHE MICHAEL FARROW
Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director
Mr Hebert has 30 years’ experience in the trust and corporate services sector in Jersey, working in the trust departments
practices and banks. This included being a member of the management team
trust businesses in Jersey and on the integration project team for two major
Partnership Limited. Mr Hebert is a Fellow of the Association
a Fellow of the Association of Accounting Technicians and an Associate of the Chartered Institute of Secretaries and Administrators. Mr Hambro is Chairman of James Hambro &
Hambros Bank from 1982 to 1985, co-founder of the original J O Hambro Group and Managing Director of J O Hambro Magan before going on to found J O Hambro Capital Management. He is Chairman of Hansteen Holdings plc and a director of Primary Health Properties plc. Mr Hambro recently stepped down as Chairman of The Henry Smith Charity, a large grant-making charity, after almost 25 years of service. He holds a Diplome d’Etudes en Langue Francaise from the University of Grenoble and completed the Advanced Management Programme at Harvard Business School. More recently he became chairman of “the Guide Dogs for the Blind” charity. Guy Innes Ker, The Duke of Roxburghe was previously non-executive director of Townhouse Hotel Investments Limited and The Sport Entertainment & Media Group Limited. The Duke of Roxburghe is involved in the day-to-day running of the Roxburghe Estates including the opening
in 1997. Mr Farrow is a founding director of Consortia Partnership Limited, a Jersey licensed trust and fund services company. He heads their institutional business which, amongst other services, provides property and private equity fund administration. He is currently the Senior Independent Director of Redefine International plc (a FTSE 250 property company), the Chairman of Bellzone Mining plc (AIM listed), the Chairman of STANLIB Funds Limited (a Jersey regulated open-ended investment company), and a non-executive director of RedT Energy plc (formerly Camco Clean Energy plc) (AIM listed). Between 1997 and 2004, Mr Farrow was an executive director and trustee
diversified investment and trading portfolios, primarily focused on real estate in Europe and California. He has also been group company secretary of Cater Allen Jersey, a banking, fiduciary and investment management group, and formerly a regular Army officer. Mr Farrow holds a Master of Science in Corporate Governance, and is a Fellow of the Chartered Institute of Secretaries and Administrators.
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Circle Property Plc Report and Consolidated Financial Statements for the period 4 December 2015 to 31 March 2016
The Directors present their report and the audited consolidated financial statements of Circle Property Plc and its subsidiaries (“the Group”) for the period from the date of incorporation of the Company on 4 December 2015 to 31 March 2016. A review of the Group’s business and results for the period is contained within the Chairman’s Statement and CEO’s Review, which should be read in conjunction with this report. The Directors have adopted the provisions of Companies (Jersey) Law 1991 in preparing the financial statements. The Directors submit their report together with the Group’s consolidated statement of comprehensive income, consolidated statement of financial position, consolidated statement of changes in equity, consolidated statement of cash flows and related notes for the financial period ended 31 March 2016, which have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the EU and are in agreement with accounting records which have been properly kept in accordance with Section 103 of the Companies (Jersey) Law 1991. PRINCIPAL ACTIVITY The Group’s principal activity is to invest in commercial property in order to offer the potential for capital appreciation from long term investment yet enjoy strong dividend income. The Directors actively manage the property assets acquired by the Group to enhance rental and capital growth opportunities. The Company was formed on 4 December 2015 as a Jersey Public Company and was admitted to the AIM market of the London Stock Exchange (“AIM”)
Unit Trust in exchange for the issue to Unitholders of Ordinary Shares. At the same time the Company acquired 100% ownership of the subsidiary entities of CPUT namely Circle Property (Milton Keynes) Limited (“CPMKL”) and Circle Property (Warrington) Limited (“CPWL”). Both CPMKL and CPWL are registered in Jersey and hold certain properties in a nominee capacity on behalf of CPUT. The Company also acquired 100% ownership of Circle Property Management Limited (“CPML”) a UK registered company who acted as property manager for CPUT on an exclusive basis to provide property management services in respect of the day-to-day management of all of the properties within CPUT’s portfolio. The provision of property management services to the Group has been now been internalised and it is intended to place CPML into liquidation as soon as possible. Further information relating to the acquisitions are detailed in note 13 on pages 32 and 33 of the consolidated financial statements. RESULTS AND DIVIDENDS The results for the period are set out in the consolidated statement of comprehensive income on page 21. Subsequent to the period end, the Directors declared a final dividend of 2.4p per share for the period ended 31 March 2016. The final dividend was paid
DIRECTORS’ INTERESTS IN SHARES Directors’ interests in the shares of the Company, including family interests, were as follows:
Ordinary shares
John Arnold 977,971 Edward Olins 128,089 The Duke of Roxburghe 2,483,069 James Hambro 3,267,656 There have been no changes in the Directors’ shareholdings since the period end. DIRECTORS’ REMUNERATION AND SERVICE CONTRACTS Ian Henderson is the non-executive chairman and his letter of appointment continues until 15 February 2019 unless it is terminated by either party giving three months’ notice, such notice not to be given before 15 February 2017. From 16 February 2016 his fees were £50,000 per annum. John Arnold is the chief executive and his service agreement continues unless it is terminated by either party giving 12 months’ notice. His salary from 16 February 2016 was £200,000 per annum. Edward Olins is the chief operating officer and his service agreement continues unless it is terminated by either party giving 12 months’ notice. His salary from 16 February 2016 was £180,000 per annum. The letter of appointment of The Duke of Roxburghe continues until 15 February 2019 unless it is terminated by either party giving three months’ notice, such notice not to be given before 15 February 2017. From 16 February 2016 his fees were £20,000 per annum. The letter of appointment of James Hambro continues until 15 February 2019 unless it is terminated by either party giving three months’ notice, such notice not to be given before 15 February 2017. From 16 February 2016 his fees were £20,000 per annum. The letter of appointment of Michael Farrow continues until 15 February 2019 unless it is terminated by either party giving three months’ notice, such notice not to be given before 15 February 2017. From 16 February 2016 his fees were £20,000 per annum.
Directors’ Report
FINANCIALS GOVERNANCE STRATEGIC REPORT
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Circle Property Plc Report and Consolidated Financial Statements for the period 4 December 2015 to 31 March 2016
The letter of appointment of Richard Hebert continues until 15 February 2019 unless it is terminated by either party giving three months’ notice, such notice not to be given before 15 February 2017. From 16 February 2016 his fees were £20,000 per annum. The remuneration paid to the Directors during the period ended 31 March 2016 is shown below:
Fees/Salaries £
Ian Henderson 6,079 John Arnold 24,204 Edward Olins 21,813 The Duke of Roxburghe 2,432 James Hambro 2,432 Michael Farrow 2,466 Richard Hebert 2,466 FINANCIAL RISK MANAGEMENT AND FINANCIAL INSTRUMENTS The Group’s policy in relation to financial risk management and use of financial instruments is set out in note 23 to the financial statements. DIRECTORS’ RESPONSIBILITIES The Directors are responsible for preparing the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with IFRS, as adopted by the EU. 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 the profit or loss of the Company for that period. In preparing these financial statements, the Directors are required to: – select suitable accounting policies and then apply them consistently; – make judgements and estimates which are reasonable and prudent; – state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and – prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group will continue in business. 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 the financial statements comply with Companies (Jersey) Law 1991. They 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. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the Jersey governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. CORPORATE GOVERNANCE The Directors are responsible for the Group’s system of internal control and reviewing its effectiveness. The risk management process and systems of internal control are designed to manage rather than eliminate the risk of failure to achieve the Group’s objectives. Any such system of internal control can only provide reasonable, but not absolute, assurance against material misstatement or loss. BOARD STRUCTURE The Board consists of seven Directors of which two are executives and five non-executives. The Board will meet as and when required and is satisfied that it is provided with information in an appropriate form and quality to enable it to discharge its duties. The Group has Audit and Remuneration Committees. The following board members are members of these committees: The Duke of Roxburghe James Hambro (Chair – Audit Committee) Michael Farrow (Chair – Remuneration Committee) During the period and subsequently no meetings were held by the Audit Committee. The inaugural meeting of the remuneration committee was held 27 July 2016.
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Circle Property Plc Report and Consolidated Financial Statements for the period 4 December 2015 to 31 March 2016
Directors’ Report continued
INTERNAL CONTROLS The Board is responsible for the Group’s system of internal controls and for reviewing their effectiveness. The internal controls are designed to ensure the reliability of financial information for both internal and external purposes. The Directors are satisfied that the current controls are effective with regard to the size of the Group. Any internal control system can only provide reasonable, but not absolute, assurance against material misstatement or loss. Given the size of the Group, the Board do not deem it necessary to have an internal audit function. PROVISION OF INFORMATION TO AUDITORS The Directors who held office at the date of approval of the financial statements confirm that, so far as they are aware: – there is no relevant audit information of which the Group’s auditors are unaware; and – each Director has taken all the steps that he ought to have taken as a Director to make himself aware of any relevant audit information and to establish that the Group’s auditors are aware of that information. KPMG Channel Islands Limited have indicated their willingness to continue in office as auditors and a resolution proposing their reappointment will be proposed at the Annual General Meeting. By order of the Board Consortia Secretaries Limited Company Secretary 22 August 2016
FINANCIALS GOVERNANCE STRATEGIC REPORT
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Circle Property Plc Report and Consolidated Financial Statements for the period 4 December 2015 to 31 March 2016
The Company acknowledges the importance of and is committed to high standards of Corporate Governance. The Directors are aware of the importance of good Corporate Governance and as such their approach has been informed by the best practice principles outlined by the UK Corporate Governance Code. This is the first period of reporting for the Company and, whilst wishing to be as transparent as is practicable, it recognizes the limitations of its internal
such as a disclosure (conflicts) policy, insider list and an anti-bribery policy. As the Company evolves the Board is committed to enhancing the Company’s corporate governance policies and practices appropriate for its size and maturity. The Board of Directors is responsible for the success of the Group and, through the independent oversight of management, is accountable to shareholders for the performance of the business. LEADERSHIP The Board of Directors comprises three independent Non-Executive Directors, two further Non-Executive Directors and two Executive Directors, providing the requisite independent oversight, expertise and experience to meet the responsibility of making the business a success. THE ROLE OF THE BOARD The principal role of the Board is to set the Group’s strategy and to review regularly its performance in relationship to the agreed strategy. In doing this, the Board also has responsibility for corporate governance. The Board has established committees which are responsible for audit and remuneration issues. Nomination issues will be addressed by the entire Board. Responsibility for day-to-day management of the business is delegated to the Chief Executive Officer and Chief Operating Officer. The Board directs and monitors the Company’s affairs within an evolving framework of controls which enable risk to be assessed and managed effectively. BOARD MEETINGS The core activities of the Board are carried out in scheduled meetings of the Board and its Committees. These meetings are timed to link to key events in the Company’s corporate calendar and regular reviews of the business are conducted. Additional meetings and conference calls are arranged to consider matters which require decisions outside the scheduled meetings. All meetings are held in Jersey. The Board held its first meeting on listing in February and its first scheduled quarterly meeting in March 2016. Outside the scheduled meetings of the Board, the Directors maintain frequent contact with each other to discuss any issues of concern they may have relating to the Company or their areas of responsibility, and to keep themselves fully briefed on the Company’s operations. Independent Non-Executive Directors The independent Non-Executive Directors bring a broad range of business and property experience to the Company and have a particular responsibility to monitor and challenge independently and constructively the performance of the executive management team in the delivery of the agreed objectives and targets. Delegations of authority Certain other matters are delegated to the Board committees, namely the Audit and Remuneration Committees. The memberships, roles and activities of these committees are detailed on the Company’s website. Each committee reports to the Board and the issues considered at meetings of the committees are presented by the respective committee chairmen. Other governance matters All of the Directors are aware that independent professional advice is available to each Director in order to properly discharge their duties as a Director. In addition, each Director and Board committee has access to the advice of the corporate Company Secretary. The Company Secretary The Company Secretary is Consortia Secretaries Limited, a limited liability company regulated by the Jersey Financial Services Commission, which provides full secretarial services. Michael Farrow and Richard Hebert are both Directors of the Company Secretary. Effectiveness In assessing the composition of the Board, the Directors have had regard to the following principles: – the Chairman should be an independent Non-Executive Director; – the role of the Chairman and the Chief Executive Officer should not be exercised by the same person; – the Board should include at least two independent Non-Executive Directors, increasing where additional expertise is considered desirable in certain areas, or to ensure a smooth transition between outgoing and incoming Non-Executive Directors; and – the Board should comprise Directors with an appropriate range of qualifications and expertise.
Governance Report
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Circle Property Plc Report and Consolidated Financial Statements for the period 4 December 2015 to 31 March 2016
Governance Report continued
Biographical details of the Directors are set out on pages 10 and 11 of this report. The Directors are of the view that the Board and its committees consist of Directors with an appropriate balance of skills, experience, independence and diverse backgrounds to enable them to discharge their duties and responsibilities effectively. Independence The Board has adopted a formal policy for the determination of the independence of the Non-Executive Directors. Among the key criteria of the independence policy are independence from management and the absence of a relationship, such as ownership, which could materially interfere with the Director’s independence of judgment. Where contracts in the ordinary course of business exist between Circle Property Plc and a company in which a Director has declared an interest, these are reviewed for materiality both to the Group, and the other party to the contract. “Material” is defined in the policy as being where the relationship accounts for more than 10% of either party’s consolidated gross revenue per annum, although the test also takes other circumstances into account. Appointments Directors appointed by the Board are subject to election by shareholders at the following Annual General Meeting of the Company and thereafter are subject to re-election in accordance with the Company’s Memorandum and Articles of Association. Commitments All Directors have disclosed any significant commitments to the Board and confirmed that they have sufficient time to discharge their duties. Conflict of interest A Director has a duty to avoid a situation in which he or she has, or can have, a direct or indirect interest that conflicts, or possibly may conflict with the interests of the Company. The Board has satisfied itself that there is no compromise to the independence of those Directors who have appointments on the boards of, or relationships with, companies outside the Company. The Board requires Directors to declare all appointments and other situations which could result in a possible conflict of interest. Board performance and evaluation The Board is not formally evaluated at present but will consider this at the appropriate juncture. It is envisaged that annual assessments will take place. Accountability The Board is committed to providing shareholders with a clear assessment of the Company’s position and prospects. This is achieved through this report and as required other periodic financial and trading statements. The Board has delegated to the Audit Committee oversight of the relationship with the Company’s auditors. Going concern The Company’s business activities, together with factors likely to affect its future operations, financial position, and liquidity are set out in the Chairman’s Statement and the CEO’s Report in this report. In addition, note 23 to the consolidated financial statements discloses the Company’s financial risk management practices with respect to its capital structure, liquidity risk, interest rate risk, credit risk and other related matters. The Directors’ statement on going concern is set out in note 2 on page 25 of the consolidated financial statements. Internal Controls The Board of Directors reviews the effectiveness of the Company’s system of internal controls. The internal control system is designed to manage the risk of failure to achieve the Company’s business objectives. This covers internal financial and operational controls, compliance and risk management. The Company had necessary procedures in place for the period under review and up to the date of approval of the report and consolidated financial
confirms the need for an ongoing process for identification, evaluation and management of significant risks faced by the Company. The Audit Committee The Audit Committee regularly reviews and reports to the Board on the effectiveness of the system of internal control. Given the size of the Company and the relative simplicity of the systems, the Board considers that there is no current requirement for an internal audit function. The procedures that have been established to provide internal financial control for the Company are considered appropriate for a company of its size and include controls over expenditure, regular reconciliations and management accounts. Remuneration Committee The Board has delegated to the Remuneration Committee responsibility for agreeing the remuneration policy for senior executives.
FINANCIALS GOVERNANCE STRATEGIC REPORT
17
Circle Property Plc Report and Consolidated Financial Statements for the period 4 December 2015 to 31 March 2016
SHAREHOLDER RELATIONS Open, relevant and transparent communication with shareholders is given high priority. No shareholder or interested party is to be provided information that is not available to all shareholders without restrictive covenants related to trading in equities. The Board has processes to manage disclosures in compliance with all regulations and Company share trading policies. All Directors are kept aware of changes in major shareholders in the Company and are available to meet with shareholders who have specific interests or concerns within the constraints of not placing any party in a position of advantage. The Company issues its results to shareholders promptly and also publishes them on the Company’s website. Regular updates to record news in relation to the Company and the status of its assets are included on the Company’s website. The Directors are available to meet with shareholders to discuss any issues and gain an understanding of the Company’s business, its strategies and
At every Annual General Meeting shareholders are given the opportunity to put questions to the Chairman, Executive Directors and to other members of the Board that may be present. Ian Henderson Chairman
18
Circle Property Plc Report and Consolidated Financial Statements for the period 4 December 2015 to 31 March 2016
Remuneration Report
TERMS OF REFERENCE The Remuneration Committee (“RemCom” or “Committee”) was established on admission to AIM in February 2016 and comprises only Non-Executive Directors with the chairman of the RemCom being independent. The Terms of Reference have been informed by the best practice principles outlined by the UK Corporate Governance Code considering the nature of, size and stage of development of the business. Its objective is to design and maintain processes that retain and reward the Executive Directors and senior management in accordance with best practice, and to ensure that members of the executive management of the Company are provided with appropriate incentives to encourage enhanced performance and are, in a fair and reasonable manner, rewarded for their individual contributions to the success of the Company. The RemCom shall agree with the board the framework or broad policy for the remuneration of the Company’s Chairman and Executive Directors. The remuneration of Non-Executive Directors shall be a matter for the chairman and the executive members of the Board. When setting remuneration policy the RemCom may obtain reliable up-to-date information about remuneration in other companies. The RemCom will approve the design of, and determine targets for, any performance related pay scheme operated by the Company and approve the total annual payments made under such schemes. It will ensure that failure is not rewarded and that the duty to mitigate loss is fully recognized. It will also determine the policy and scope for pension arrangements for each Executive Director. The Committee will arrange for periodic reviews of its own performance and, at least annually, review its constitution and terms of reference to ensure it is operating effectively and recommend any changes it considers necessary for board approval. The Committee is authorised by the board to obtain, at the Company’s expense, outside legal or other professional advice on any matters within its terms of reference. REPORTING RESPONSIBILITIES The Committee chairman shall report to the board on its proceedings after each meeting on all matters within its duties and responsibilities. The RemCom shall make whatever recommendations to the board it deems appropriate on any area within its remit where action or improvement is needed. The RemCom shall produce a report of the Company’s remuneration policy and practices to be included in the Company’s annual report and ensure each year that it is put to shareholders for approval at the AGM. POLICY Non-Executive Directors The Company’s policy is to pay fees to Non-Executive Directors, including the Chairman, which are at the lower end of peer group companies listed on AIM with the intention of revision in line with the success of the Company. Non-executives are not currently eligible for bonuses, share options, long term incentives, pensions or other remuneration. They are entitled to reasonable expenses made in pursuit of their duties. Executive Directors The Company’s policy is to provide remuneration and other benefits sufficient to attract, retain and motivate executives of the required calibre. Total remuneration includes salary, performance related bonus, benefits (including pension and health insurance) and long term incentives based on share
Remuneration during the period ended 31 March 2016
Salary or Fees £’000 Bonus £’000 LTIP £’000 Benefits in Kind £’000 Pension Contributions £’000 Total Value £’000
Executive Directors John Arnold 24,204 – – 2,370 – 26,574 Edward Olins 21,813 – – 1,758 – 23,571 Non-Executive Directors – Ian Henderson 6,079 – – – – 6,079 James Hambro 2,432 – – – – 2,432 Duke of Roxburghe 2,432 – – – – 2,432 Michael Farrow 2,466 – – – – 2,466 Richard Hebert 2,466 – – – – 2,466 Total 61,892 – – 4,128 – 66,020
FINANCIALS GOVERNANCE STRATEGIC REPORT
19
Circle Property Plc Report and Consolidated Financial Statements for the period 4 December 2015 to 31 March 2016
BONUS A bonus may be awarded to an employee of the Company. Any annual bonus is restricted to 100% of salary for the year under consideration. The Key Performance Indicators comprise the net asset value, EBITDA and maintenance of dividend policy and having regard always to the individual performance of the Executive and of the business as a whole but such bonus awards remain at the absolute discretion of the board. DEFINED CONTRIBUTION PENSION PLAN The Company operates a defined contribution pension plan for the executives and senior management. Currently only John Arnold and Edward Olins have been offered this benefit. LONG TERM INCENTIVE PLAN (THE “LTIP”) A key employee of the Company may be invited to join the LTIP scheme, the purpose of which is to align the longer term objectives of shareholders and
and 120,805 to Edward Olins. 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 in which the performance of the Company must satisfy the targets in order that the awards will vest at the end of that period. The targets set will be based on both Total Shareholder Return and Net Asset Value adding back dividends compared with both a bespoke basket of peer companies and the appropriate IPD Property Index. 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 quantum of LTIP awards is restricted to 100% of the equivalent salary of the executive. In numeric terms the annual awards are capped at 765,102 shares (at a price of £1.49 per ordinary share) which will alter from time to time in line with the salary and share price. Michael Farrow Committee Chairman
20
Circle Property Plc Report and Consolidated Financial Statements for the period 4 December 2015 to 31 March 2016
Independent Auditor’s Report to the Members
We have audited the consolidated financial statements of Circle Property Plc (the “company”) and its subsidiaries (collectively the “group”) for the period from incorporation on 4 December 2015 to 31 March 2016 which comprise the Consolidated Statement of Comprehensive Income, the Consolidated Statement of Financial Position, the Consolidated Statement of Changes in Equity, the Consolidated Statement of Cash Flows and the related notes. The financial reporting framework that has been applied in their preparation is International Financial Reporting Standards as adopted by the EU. This report is made solely to the company’s members, as a body, in accordance with Article 113A of the Companies (Jersey) Law 1991. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no
members as a body, for our audit work, for this report, or for the opinions we have formed. RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS As explained more fully in the Statement of Directors’ Responsibilities set out on page 13, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit, and express an opinion on, the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. SCOPE OF THE AUDIT OF THE FINANCIAL STATEMENTS An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the group’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non- financial information in the Highlights of the period, the Chairman’s statement, the CEO’s review, the Portfolio review, the Board of Directors, the Directors’ report, the Governance report and the Remuneration Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. OPINION ON FINANCIAL STATEMENTS In our opinion the financial statements: – give a true and fair view of the state of the group’s affairs as at 31 March 2016 and of the group’s profit for the period from 4 December 2015 to 31 March 2016; – have been properly prepared in accordance with International Financial Reporting Standards as adopted by the EU; and – have been prepared in accordance with the requirements of the Companies (Jersey) Law 1991. MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION We have nothing to report in respect of the following matters where the Companies (Jersey) Law 1991 requires us to report to you if, in our opinion: – adequate accounting records have not been kept by the company; or – the company financial statements are not in agreement with the accounting records; or – we have not received all the information and explanations we require for our audit. Lesley Averell for and on behalf of KPMG Channel Islands Limited Chartered Accountants 37 Esplanade St Helier Jersey, JE4 8WQ 22 August 2016
FINANCIALS GOVERNANCE STRATEGIC REPORT
21
Circle Property Plc Report and Consolidated Financial Statements for the period 4 December 2015 to 31 March 2016 Note 4 December 2015 to 31 March 2016 £
Rental income 4 664,392 Other income 4 595,178 1,259,570 Property expenses 5 (122,529) Net rental income 1,137,041 Administrative expenses 6 (293,255) Negative goodwill on acquisition of CPUT 13 3,817,264 Impairment of goodwill on acquisition of CPML 13 (2,117,591) Listing costs 12 (1,326,054) Operating profit 1,217,405 Finance income 8 17,875 Finance costs 9 (129,476) Net finance costs (111,601) Profit for the period before taxation 1,105,804 Taxation 10 (32,399) Profit after taxation 1,073,405 Earnings per share 11 0.04 There is no comprehensive income other than that included in the profit for the period. All of the profit for the period is attributable to the owners of the Company. All items in the above statement derive from continuing operations. The Company’s loss for the period (non-consolidated) was £1,480,133. The notes on pages 25 to 40 are an integral part of these consolidated financial statements.
Consolidated Statement of Comprehensive Income For the period from 4 December 2015 to 31 March 2016
22
Circle Property Plc Report and Consolidated Financial Statements for the period 4 December 2015 to 31 March 2016 Note 31 March 2016 £
Non-current assets Investment properties 14 75,780,824 Property plant and equipment 22,371 Trade and other receivables 15 1,771,394 Deferred tax 10 914,949 78,489,538 Current assets Trade and other receivables 15 2,555,037 Deferred tax 10 104,504 Cash and cash equivalents 16 4,516,153 7,175,694 Total assets 85,665,232 Equity Stated capital 20 42,542,179 Treasury share reserve (380,001) Retained earnings 1,073,405 Total equity 43,235,583 Non-current liabilities Loan borrowings 17 40,028,371 Financial liability at fair value through profit and loss 18 94,855 40,123,226 Current liabilities Trade and other payables 19 2,306,423 2,306,423 Total liabilities 42,429,649 Total liabilities and equity 85,665,232 The statements on pages 21 to 40 were approved and authorised for issue by the Board of Directors on 22 August 2016 and signed on its behalf by: Richard Hebert The notes on pages 25 to 40 are an integral part of these consolidated financial statements.
Consolidated Statement of Financial Position As at 31 March 2016
FINANCIALS GOVERNANCE STRATEGIC REPORT
23
Circle Property Plc Report and Consolidated Financial Statements for the period 4 December 2015 to 31 March 2016 Share capital £ Treasury shares reserve £ Retained earnings £ Total £
Profit for the period – – 1,073,405 1,073,405 Issue of ordinary share capital 42,162,178 – – 42,162,178 Issue of treasury shares 380,001 (380,001) – – Balance at 31 March 2016 42,542,179 (380,001) 1,073,405 43,235,583 The notes on pages 25 to 40 are an integral part of these consolidated financial statements.
Consolidated Statement of Changes in Equity For the period from 4 December 2015 to 31 March 2016
24
Circle Property Plc Report and Consolidated Financial Statements for the period 4 December 2015 to 31 March 2016 Note 4 December 2015 to 31 March 2016 £
Cash flows from operating activities Profit for the period 1,105,804 Adjustments for: Finance income (17,875) Finance expense 129,476 Depreciation 1,195 Amortisation of loan arrangement fees 7,223 Fair value movement on interest rate swaps 2,146 Effective interest rate adjustment on loan borrowings (53,578) Negative goodwill on acquisition of CPUT 13 (3,817,264) Impairment of goodwill on acquisition of CPML 13 2,117,591 Decrease in trade and other receivables 1,712,781 Decrease in trade and other payables (580,888) Cash generated from operating activities 606,611 Interest paid (60,158) Interest received 4,107 Net cash from operating activities 550,560 Cash flows from investing activities Cost of additions to investment properties (266,755) Cost of additions of property plant and equipment (15,150) Acquisition of subsidiaries, net of cash acquired (i) 13 3,891,568 Net cash from investing activities 3,609,663 Cash flows from financing activities Repayment of borrowings (827,790) Proceeds of issue of shares 20 1,183,720 Net cash used in financing activities 355,930 Net increase in cash and cash equivalents 4,516,153 Cash and cash equivalents at the end of the period 4,516,153 (i) The acquisition of subsidiaries incorporates certain non cash elements as disclosed in note 13. The cash elements are as follows:
£
Cash paid for acquisition of CPML (1,028,313) Less: cash acquired in respect of acquisition of CPUT 4,621,745 cash acquired in respect of acquisition of CPML 298,136 3,891,568 The notes on pages 25 to 40 are an integral part of these consolidated financial statements.
Consolidated Statement of Cash Flows For the period from 4 December 2015 to 31 March 2016
FINANCIALS GOVERNANCE STRATEGIC REPORT
25
Circle Property Plc Report and Consolidated Financial Statements for the period 4 December 2015 to 31 March 2016
1 GENERAL INFORMATION These financial statements are for Circle Property Plc (“the Company”) and its subsidiary undertakings. The Company was admitted to the AIM market of the London Stock Exchange (“AIM”) on 16 February 2016 having been incorporated in Jersey on 4 December 2015 as a Jersey Public Company. The address of its registered office is 3rd Floor, Standard Bank House, 47-49 La Motte Street, St Helier, Jersey, JE2 4SZ. Upon admission to AIM the Company acquired all of the units of Circle Property Unit Trust (“CPUT”), a Jersey closed ended unlisted Unit Trust in exchange for the issue to Unitholders of Ordinary Shares. At the same time the Company acquired 100% ownership of the subsidiary entities of CPUT namely Circle Property (Milton Keynes) Limited (“CPMKL”) and Circle Property (Warrington) Limited (“CPWL”). Both CPMKL and CPWL are registered in Jersey and hold certain properties in a nominee capacity on behalf of CPUT. The Company also acquired 100% ownership of Circle Property Management Limited (“CPML”) a UK registered company who acted as property manager for CPUT on an exclusive basis to provide property management services in respect
now been internalised and it is intended to place CPML into liquidation as soon as possible. Further information relating to the acquisitions are detailed in note 13 on pages 32 and 33 of the consolidated financial statements. The nature of the Company’s operations and its principal activities are set out in the CEO review on page 4. 2 PRINCIPAL ACCOUNTING POLICIES BASIS OF ACCOUNTING 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 (IFRS) as adopted by the EU and the Companies (Jersey) Law 1991. The financial statements have been prepared in pounds 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 CEO review on page 4. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in these financial
and its exposures to credit, liquidity and market risk. The Group’s policy for managing capital is included in note 21. 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 risk successfully. 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 24. 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 period are included from the effective date of acquisition, being the date on which the Group obtains
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 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 Statement of Comprehensive Income. Acquisition-related costs are expensed as incurred. ADOPTION OF NEW AND REVISED IFRSS All standards effective as at the first reporting date have been applied in the preparation of the consolidated financial statements.
Notes to the consolidated financial statements For the period from 4 December 2015 to 31 March 2016
26
Circle Property Plc Report and Consolidated Financial Statements for the period 4 December 2015 to 31 March 2016
Notes to the consolidated financial statements continued For the period from 4 December 2015 to 31 March 2016
2 PRINCIPAL ACCOUNTING POLICIES CONTINUED NEW STANDARDS AND INTERPRETATIONS As of the date of the approval of these financial statements the following Standards and Interpretations, some of which have not been endorsed by the EU, have not been applied in these financial statements but were in issue but not yet effective: International Accounting Standards (IAS/IFRSs)
Effective date – period beginning on or after
Endorsed by the EU: Annual improvements to IFRS (2012 - 2014) 1 January 2016 Not yet endorsed by the EU: IAS 1 (amendment) ‘Presentation of Financial Statements - Disclosure initiative 1 January 2016 IAS 16 (amendment) ‘Property, Plant and Equipment’ 1 January 2016 IAS 38 (amendment) ‘Intangible Assets’ - Clarification of acceptable methods of depreciation and amortisation 1 January 2016 IAS 27 (amendment) ‘Separate Financial Statements’ - Equity Method in Separate Financial Statements 1 January 2016 IFRS 10 (amendment) ‘Consolidated Financial Statements’ 1 January 2016 IAS 28 (amendment) ‘Investments in Associates and Joint Ventures’ - Sale or contribution of assets between an investor and its associate or joint venture 1 January 2016 IFRS 11 (amendment) ‘Joint Arrangements’ - Accounting for acquisitions of interests in joint operations 1 January 2016 IFRS 14 ‘Regulatory Deferral Accounts’ 1 January 2016 IAS 7 (amendment) ‘Statement of Cash Flows’ 1 January 2016 IAS 12 (amendment) ‘Income Taxes’ 1 January 2017 IFRS 9 ‘Financial Instruments’ 1 January 2018 IFRS 15 ‘Revenue from Contracts with Customers’ 1 January 2018 IFRS 16 ‘Leases’ 1 January 2019 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. Fair value of investment property The Directors employed professional valuer’s Savills (UK) Limited to perform valuations of the investment property using Royal Institute of Chartered Surveyors (“RICS”) valuation standards as at 31 March 2016. Volatility in the global financial system is reflected in commercial real estate markets. In arriving at their estimate of market value as at 31 March 2016, the valuer’s 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 valuer’s in estimating the fair value of investment property are set out in note 14. Fair value of interest rate swap The fair values of interest rate swaps have been calculated and provided by the relevant counterparty bank using recognized valuation techniques. Details of the interest rate swaps are set out in note 18. Business combinations In determining whether to account for a property acquisition in a special purpose vehicle as a business combination or as an acquisition of an investment property, management make an assessment based on the application of IFRS 3 “Business Combinations”. Management make a professional judgement
business or whether these are limited and represent solely an asset purchase. In respect of business combinations during the period, estimation and judgement was applied in assessing the fair value of the assets and liabilities at the date of acquisition. The significant methods and assumptions applied are disclosed in note 13. Impairment of goodwill The Group is required to test whether goodwill arising on the business combinations has suffered any impairment. The assessment and quantification of any such impairment charges are determined by key management judgements in terms of: – The extent to which the goodwill is, in substance, a cost to the Company; and – an assessment of the expected future life of the cash generating unit on which goodwill arises, being goodwill’s indefinite useful economic life. As detailed in note 13 goodwill on the acquisition of Circle Property Management Limited has been tested for impairment and written down to a value of nil.
FINANCIALS GOVERNANCE STRATEGIC REPORT
27
Circle Property Plc Report and Consolidated Financial Statements for the period 4 December 2015 to 31 March 2016
2 PRINCIPAL ACCOUNTING POLICIES CONTINUED 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. 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. Listing costs as detailed in note 12 are recognised in profit and loss in the period in which they are incurred. FINANCE INCOME AND FINANCE COSTS Finance income comprises bank and loan interest income. Finance costs comprise interest expense on borrowings and net interest on interest rate
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 the 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. 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 active market prices, adjusted if necessary, for any difference in the nature, location or condition of the specific assets. 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. 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 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 period end are disclosed as properties held for sale and stated at fair value. At 31 March 2016 none existed. 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 2016 none existed. 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 on page 27 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 three months or less. These are carried at cost. 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 transactions 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 payables Trade payables are not interest bearing and are recognised initially at fair value. The subsequent carrying amount of these liabilities approximates their fair value.
28
Circle Property Plc Report and Consolidated Financial Statements for the period 4 December 2015 to 31 March 2016
Notes to the consolidated financial statements continued For the period from 4 December 2015 to 31 March 2016
2 PRINCIPAL ACCOUNTING POLICIES CONTINUED FINANCIAL INSTRUMENTS CONTINUED 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. 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 considers evidence of impairment for these assets at both an individual asset and a collective level. All individually significant assets are individually assessed for impairment. Those found not to be impaired are then collectively assessed for any impairment that has been incurred but not yet individually identified. Assets that are not individually significant are collectively assessed for impairment. Collective assessment is carried out by grouping together assets with similar risk characteristics. In assessing collective impairment, the Group uses historical information on the timing of recoveries and the amount of loss incurred, and makes an adjustment if current economic and credit conditions are such that the actual losses are likely to be greater or lesser than suggested by historical trends. 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, CPUT and CPUT’s subsidiary investments are registered in Jersey, Channel Islands. The Company and CPUT’s subsidiaries are taxed at the Jersey company standard rate of 0%. The Unit Trust is not subject to tax in Jersey. Circle Property Management Limited (“CPML”) is registered in the United Kingdom and is subject to corporation tax at a rate of 20%. From the date of the acquisition of CPML the Company is no longer in receipt of income and it is anticipated that no further corporation tax will be payable. 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. No provision for taxation has been included in these financial statements as capital allowances reduce the tax payable to nil. 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 period in which they are approved.
FINANCIALS GOVERNANCE STRATEGIC REPORT
29
Circle Property Plc Report and Consolidated Financial Statements for the period 4 December 2015 to 31 March 2016
2 PRINCIPAL ACCOUNTING POLICIES CONTINUED TREASURY SHARES Treasury shares held are equity shares of the Company issued to Circle Property Plc for the purpose of awarding shares in the 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. 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
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
4 December 2015 to 31 March 2016 £
Rental income 664,392 Insurance recovery 18,884 Other income 576,294 1,259,570 5 PROPERTY EXPENSES
4 December 2015 to 31 March 2016 £
Property expenses 18,450 Property service charges 35,828 Property repairs and maintenance costs 41,103 Property insurance 19,157 Property rates 7,991 122,529
30
Circle Property Plc Report and Consolidated Financial Statements for the period 4 December 2015 to 31 March 2016
Notes to the consolidated financial statements continued For the period from 4 December 2015 to 31 March 2016
6 ADMINISTRATIVE EXPENSES
4 December 2015 to 31 March 2016 £
Staff costs 77,913 Legal and professional fees 140,914 Audit fees 32,500 Accountancy fees 1,733 Rent, rates and other office costs 5,696 Other overheads 33,304 Depreciation of tangible fixed assets 1,195 293,255 7 EMPLOYEES AND DIRECTORS’ REMUNERATION
4 December 2015 to 31 March 2016 £
Staff costs during the period were as follows: Non-Executive Directors’ fees 15,874 Wages and salaries 50,083 Social security costs 7,826 Other employment costs 4,130 77,913 8 FINANCE INCOME
4 December 2015 to 31 March 2016 £
Bank interest 4,107 Loan interest 13,768 17,875 9 FINANCE COSTS
4 December 2015 to 31 March 2016 £
Swap interest 16,749 Loan interest 110,581 Fair value movement on interest rate swaps 2,146 129,476
FINANCIALS GOVERNANCE STRATEGIC REPORT
31
Circle Property Plc Report and Consolidated Financial Statements for the period 4 December 2015 to 31 March 2016
10 TAXATION
4 December 2015 to 31 March 2016 £
Current tax – Deferred tax 32,399 32,399 A reconciliation of the current tax charge applicable to the results at the statutory income tax rate to the charge for the period is as follows:
4 December 2015 to 31 March 2016 £
Current taxation Profit for the period before tax 1,105,804 UK income tax at a rate of 20% 221,161 Effects of: Negative goodwill on acquisition of CPUT non-taxable (763,453) Impairment of goodwill on acquisition of CPML non-taxable 423,518 Expenses not deductible for tax purposes 278,597 Non-taxable income (128,197) Capital allowances (31,626) –
4 December 2015 to 31 March 2016 £
Deferred taxation Deferred taxes at 31 March relates to the following: Deferred tax asset Capital allowances available to carry forward 1,019,453 Deferred tax recognised on the acquisition of CPUT 1,051,852 Deferred tax charge for the period (32,399) Deferred tax asset carried forward 1,019,453 At 31 March 2016, the Group had capital allowances of £5,097,266 available to carry forward against future profits. A deferred tax asset of £1,019,453 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 period (as shown on the Consolidated Statement of Comprehensive Income) and the weighted average number of ordinary shares in issue during the period.
4 December 2015 to 31 March 2016 £
Profit for the period 1,073,405 Weighted average number of shares 28,165,517 Earnings per ordinary share: 0.04 For the purposes of the above calculation the period is deemed to start from 16 February 2016 being the date on which operating revenue and expenditure commenced. In the opinion of the Board, treasury shares held to satisfy share awards to management, as disclosed in note 22, currently do not have any material value and hence do not have any dilutive effect. Therefore no diluted earnings per share has been presented.
32
Circle Property Plc Report and Consolidated Financial Statements for the period 4 December 2015 to 31 March 2016
Notes to the consolidated financial statements continued For the period from 4 December 2015 to 31 March 2016
12 LISTING COSTS
4 December 2015 to 31 March 2016 £
Nomad fees 307,193 Legal and professional fees 450,987 Audit and advisory fees 232,700 Administration fees 168,114 Tax and accountancy fees 65,000 Valuation fees 49,000 Other fees 53,060 1,326,054 The costs listed above related to the Company’s admission to AIM. The costs may also include some elements relating to the acquisition of the subsidiary entities described in note 13. However, as the acquisition of the subsidiary entities was conditional on the Company listing and, due to the combined nature of the fees payable, they have all been presented as listing costs in the consolidated statement of comprehensive income. 13 BUSINESS COMBINATIONS CIRCLE PROPERTY UNIT TRUST (“CPUT”) On 16 February 2016 the Group acquired 100% of the Units of CPUT for a consideration of £39,884,764. The consideration was satisfied by issuing 26,768,298 ordinary shares at a price of £1.49. CPUT is a closed-ended unit trust in Jersey regulated under the Control of Borrowings (Jersey) Order 1958 and was purchased in order to acquire CPUT’s property portfolio.
Fair value at acquisition date £
Investment properties 77,264,267 Lease incentive debtor of investment properties acquired (1,903,808) Property plant and equipment 4,000 Trade and other receivables 5,782,155 Deferred tax asset 1,051,852 Cash and cash equivalents 4,621,745 Loan borrowings (40,902,516) Financial liabilities at fair value through profit and loss (92,709) Trade and other payables (2,122,958) Total identifiable net assets acquired 43,702,028 Consideration transferred 39,884,764 Negative goodwill on acquisition 3,817,264 The acquired subsidiary contributed £869,864 to the profit of the Group. The fair value of the investment properties at acquisition of £77,264,267 was based on a valuation performed by Savills (UK) Limited (“Savills”) at the time of the acquisition amounting to £73,928,000. This was compared to the subsequent valuation prepared by Savills as at 31 March 2016 which confirmed that between 16 February 2016 and 31 March 2016 there were no material property events and that the unrealised gains on property revaluation amounting to £3,336,267 should be included in the fair value of the investment properties acquired. The fair value of the loan borrowings was calculated at the date of acquisition using a discounted cash flow model and applying a rate of interest to the loan borrowings of 1.85% over LIBOR as the Directors believe this rate is representative of a market rate at the date of acquisition. The deferred tax asset arises at the date of acquisition in respect of the capital allowances pool attributable to the previous unitholders of CPUT which will transfer to the Company under a section 198 CAA 2001 election. Of the trade and other receivables totalling £5,782,155, £4,324,210 pertain to contractual amounts due. None of these were deemed to be uncollectable at 16 February 2016. The remaining £1,457,945 related to a debtor due to CPUT by the Company which is considered to be fully recoverable. The consideration for the purchase of CPUT of £39,884,764 was calculated based on CPUT’s net asset value as at 30 September 2015 of £42,614,315 discounted for the value of the consideration for the purchase of Circle Property Management Limited of £2,122,077 and a distribution to Unitholders
£61,663, which is not considered material. The difference between the purchase consideration and the fair value of net assets at the date of acquisition resulted in negative goodwill of £3,817,264 which has been recognised in profit and loss for the period.
FINANCIALS GOVERNANCE STRATEGIC REPORT
33
Circle Property Plc Report and Consolidated Financial Statements for the period 4 December 2015 to 31 March 2016
13 BUSINESS COMBINATIONS CONTINUED CIRCLE PROPERTY MANAGEMENT LIMITED (“CPML”) On 16 February 2016 the Group acquired 100% of the share capital of CPML, who were contracted by CPUT to manage CPUT’s portfolio of properties under a contract which was due to expire in October 2016. The purpose of the purchase of CPML was to facilitate the internalisation of the management team and to compensate them for the loss of opportunity under the contract. The acquisition was completed at a negotiated price which was corroborated by Lubbock Fine Limited, an independent firm of Chartered Accountants. The purchase consideration of £2,122,007 was satisfied by issuing 734,023 ordinary shares at a price of £1.49 and by cash of £1,028,313.
Fair value at acquisition date £
Property plant and equipment 4,416 Trade and other receivables 243,288 Cash and cash equivalents 298,136 Trade and other payables (541,424) Total identifiable net assets acquired 4,416 Consideration transferred 2,122,007 Goodwill on acquisition 2,117,591 The acquired subsidiary contributed nil to the profit of the Group. The trade and other receivables comprise gross contractual amounts due of £243,288 all of which are expected to be recoverable. The difference between the consideration and the carrying value of net assets at the acquisition date represents goodwill on acquisition. It is anticipated that subsequent to the period end the remaining assets of CPML will be transferred to the Company and that CPML will be dissolved. Goodwill is tested annually for impairment and the goodwill on the acquisition of CPML has been written down to a value of nil. Such write down is recognised as an impairment loss in profit and loss. 14 INVESTMENT PROPERTIES
31 March 2016 £
Fair value of investment properties acquired (note 13) 77,264,267 Cost of additions to investment properties 420,365 Lease incentive amortisation 50,368 Fair value of investment properties per valuation report 77,735,000 Unamortised lease incentives (1,954,176) Closing fair value 75,780,824 No properties were held for sale at 31 March 2016. As at 31 March 2016 the fair value of investment properties under development included in the above amount was nil. £73,735,000 of the above properties’ value, estimated by the valuer, relate to property held on a freehold basis and £4,000,000 on a long leasehold basis. The fair value of the Group’s investment properties per the Valuation Report amounted to £77,735,000. The difference between the fair value of the investment properties per the Valuation Report and the fair value per the balance sheet of £1,954,176 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 17. The fair value of the Group’s investment properties at 31 March 2016 has been arrived at 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 valuer’s 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 period.
34
Circle Property Plc Report and Consolidated Financial Statements for the period 4 December 2015 to 31 March 2016
Notes to the consolidated financial statements continued For the period from 4 December 2015 to 31 March 2016
14 INVESTMENT PROPERTIES CONTINUED 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 67,150,000 All Risks Yield – Estimated void periods range from 6 to 24 months after the end of each lease. – Market rents have been based on the specific circumstances of each property. – Estimated rent free periods range from 6 to 12 months on new leases. – Letting fees have been estimated on vacant units. – Rent per square foot ranges from £2 to £46. – Net equivalent yields range from 5.66% to 9.63%. – Market conditions are considered based
The estimated fair value would increase/ (decrease) if: – void periods were shorter/(longer); – market rents were higher/(lower); – rent free periods were shorter/(longer); – letting fees were lower/(higher); – rent per square foot were higher/(lower); – equivalent yields were lower/(higher); or – market conditions were to improve/ (decline). Retail Warehousing 3,725,000 Retail 1,800,000 Industrial 1,125,000 Other 3,935,000 Total 77,735,000 The ranges are based on averages per property. Individual tenancies within properties may fall outside these ranges. 15 TRADE AND OTHER RECEIVABLES
31 March 2016 £
Non-current Lease incentives 1,771,394 Current Circle Property Trading (Maidstone) Limited 1,526,167 Loan interest due from Circle Property Trading (Maidstone) Limited 22,002 Lease incentives 182,782 Amounts due from property agents 100,956 Amounts due from tenants 135,276 VAT 387,031 Other receivables 200,823 2,555,037 On 20 January 2016 the Group entered into a loan facility agreement with Circle Property Trading (Maidstone) Limited (“CPTML”) for an amount of £1,425,000. The purpose of the loan was to finance CPTML’s acquisition of a 999 year lease of the residential elements of the Group’s property located at 69-77 Week Street, Maidstone, Kent and its subsequent refurbishment and development works. Rent is charged under the lease at a rate of one peppercorn (if demanded). The loan is secured by a first legal mortgage over the property and a fixed charge over the assets of CPTML. The loan is interest bearing at a rate of 8% per annum and is due for repayment on 19 January 2017. On 17 March 2016 a deed of variation was entered into increasing the facility amount to £1,625,000. 16 CASH AND CASH EQUIVALENTS
31 March 2016 £
RBSI 3,176,679 National Westminster Bank plc 1,339,187 Other cash 287 4,516,153 As at 31 March 2016 £382,335 of cash is held on blocked accounts. Of this, £131,048 relates to deposits received from tenants and £251,287 is held
FINANCIALS GOVERNANCE STRATEGIC REPORT
35
Circle Property Plc Report and Consolidated Financial Statements for the period 4 December 2015 to 31 March 2016
17 LOAN BORROWINGS
31 March 2016 £
Fair value of loans acquired 40,902,516 Loan repayments (827,790) Effective interest rate and amortisation adjustment (46,355) 40,028,371 On 16 February 2016 a term loan and revolving credit facility liability of £38,796,067 with National Westminster Bank Plc and a credit facility liability of £827,790 with HSBC Bank Plc were taken on by the Group on acquisition of CPUT. The fair value at the date of acquisition of these facilities has been estimated at £40,902,516. The facility with HSBC Bank Plc was repaid in full on 10 March 2016. The National Westminster Bank Plc loan facility is for a total commitment of £39,200,000 and is secured by the investment properties and rental income detailed in notes 14 and 4. There is also a security interest agreement over the issued share capital of the CPUT’s wholly owned subsidiaries, Circle Property (Milton Keynes) Limited and Circle Property (Warrington) Limited who hold certain properties in a nominee capacity on behalf of CPUT. The term loan element of the facility is fully drawn down in the sum of £19,100,000 and bears interest at 2.95% over LIBOR. The revolving credit facility is drawn down in the sum of £19,866,135 and bears interest at 2.95% over LIBOR. The term loan and revolving credit facility have a repayment date of 31 January 2019. The financial covenants in place relating to the facility are 55% loan to value, 2.25% interest cover and 11% debt to rent cover. There were no breaches
On 21 June 2016 the Directors agreed a new £50m revolving facility with National Westminster Bank plc for the purpose of refinancing of CPUT’s existing facility. The new facility has a three year term with two options to extend for a further year, with a drawdown loan to value of up to 55% of the gross portfolio value and an interest rate of 1.85% over LIBOR. The new facility was drawn down on 22 June 2016 and the existing facility repaid. 18 FINANCIAL LIABILITY AT FAIR VALUE THROUGH PROFIT AND LOSS
31 March 2016 £
Interest rate swap 94,855 The Group uses interest rate swaps to manage its exposure to interest rate movements on a proportion of its bank borrowings (see note 17). The contracts entered into with The Royal Bank of Scotland plc., have a notional value of £10,000,000, a fixed interest rate of 1.98% from 25 August 2015 to 29 September 2016 and a cap strike rate of 3% from 15 October 2016 to maturity on 31 January 2019. At 31 March 2016 the combined fair value of the interest rate swaps resulted in a liability of £94,855. The interest rate swaps are fair valued using recognised valuation techniques and the movement in fair value has been recorded in profit and loss. 19 TRADE AND OTHER PAYABLES
31 March 2016 £
Trade payables 674,206 Deferred income 639,269 Final distribution due to CPML shareholders 396,670 Listing costs 338,888 Rental deposit accounts 137,705 Loan interest payable 62,756 SWAP interest payable 28,929 Valuation Fee 28,000 2,306,423 Deferred income relates to deferred rental income of £532,444 and deferred insurance recharges of £106,825. 20 STATED CAPITAL Issued and fully paid share capital is as follows:
31 March 2016 £
28,551,796 Ordinary Shares of no par value 42,542,179 On admission to AIM, on 16 February 2016, the Company issued 89,744 Ordinary Shares at a price of £1.49 pursuant to the Placing Agreement. The Company issued 704,697 Ordinary Shares at a price of £1.49 pursuant to the Subscription Agreement of which 436,241 were issued and allotted on the admission date and 268,456 were issued and allotted on 9 March 2016.
36
Circle Property Plc Report and Consolidated Financial Statements for the period 4 December 2015 to 31 March 2016
Notes to the consolidated financial statements continued For the period from 4 December 2015 to 31 March 2016
20 STATED CAPITAL CONTINUED As disclosed in note 13 the Company issued 26,768,298 shares at a price of £1.49 in part consideration for the purchase of 100% of the Units of CPUT and 734,023 shares at a price of £1.49 in part consideration for the purchase of 100% of the share capital of CPML. 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 22. Whilst held in treasury, these shares are not entitled to dividends and have no voting rights. 21 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. The Group’s debt and capital structure comprises the following:
31 March 2016 £
Total Liabilities 42,429,649 Less: cash and cash equivalents (4,516,153) Net debt 37,913,496 Total equity 43,235,583 Net debt to equity ratio 0.88 22 SHARE BASED PAYMENTS 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
financial years ending 31 March 2019. Awards will be granted annually over three year vesting period and take the form of a conditional right or (nil cost) option to acquire Ordinary Shares. For administrative simplicity, awards will be satisfied by the transfer to a participant of Ordinary Shares held in treasury. A bespoke comparator group, selected by Peel Hunt has been adopted. On 11 February 2016 two Directors were granted options. John Arnold was granted an Option by Deed to acquire 134,229 Shares and Edward Olins was granted an Option to acquire 120,805 Shares both at nil cost subject to performance conditions. The Vesting Period for the Award shall be the third anniversary of the Deed exercisable to the extent set out under the mechanism below. The mechanism for award is that every 31 March, commencing March 2017, a combination of the growth in Total Shareholder Return (“share price growth plus dividends”) and Net Asset Value (“absolute growth in Net Asset Value plus dividends”) for each selected peer company will be calculated. If the Group reaches the median of its selected peer ranking it will attract an LTIP award of 50% of salary equivalent at the mid-market share price. If the performance is below the median then no LTIP award will be given. If above the median, then an award between 50% and 100% will be granted on a straight line basis. The Board may make additional annual grants of LTIP to the Executive but such grants will not vest until their third anniversary. 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. At the reporting date no Ordinary Shares had vested and the board have concluded that the fair value of the options at the grant date and the period end are not material to these financial statements. 23 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 period comprised interest bearing receivable and payable loans, cash and cash equivalents and trade receivables and payables that arise directly from its
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.
FINANCIALS GOVERNANCE STRATEGIC REPORT
37
Circle Property Plc Report and Consolidated Financial Statements for the period 4 December 2015 to 31 March 2016
23 FINANCIAL RISK MANAGEMENT CONTINUED The Directors review and agree policies for managing its risk exposure. These policies are summarised on the following pages. 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 property manager 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 carrying amount of financial assets, including cash balances, recorded in the financial statements represents the Group’s maximum exposure to credit risk. The carrying amount of these assets at 31 March 2016 was £6,501,377. There were no financial assets which were past due or considered impaired at 31 March 2016. All of the Group’s cash is placed with financial institutions with a Moody’s long-term credit rating of A3. 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 2016 Financial assets Trade and other receivables 1,985,224 1,985,224 – – – 1,985,224 Cash and cash equivalents 4,516,153 4,516,153 – – – 4,516,153 6,501,377 6,501,377 – – – 6,501,377 Financial liabilities Trade and other payables 2,243,667 2,243,667 – – – 2,243,667 Financial liabilities at fair value 94,855 – 98,053 (3,198) – 94,855 Loan borrowings 40,091,127 1,441,378 1,378,622 40,121,911
42,429,649 3,685,045 1,476,675 40,118,713 – 45,280,433 As described in note 17 a refinancing of the Group’s loan borrowings was agreed on 21 June 2016. The contractual amount outstanding at that date was repaid. INTEREST RATE RISK Some of the Group’s financial instruments are interest bearing. They are a mix of both fixed and 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 detailed in note 17 the Group uses interest rate swaps to manage exposure to some of the interest rate movements on its bank borrowings. The swap contracts have been entered into with The Royal Bank of Scotland plc for a notional amount of £10,000,000. As a result the Group is exposed to changes in prevailing interest rates on the remaining balance of its borrowing detailed in note 17. Having assessed the level of risk the Directors have concluded that it is within acceptable limits.
38
Circle Property Plc Report and Consolidated Financial Statements for the period 4 December 2015 to 31 March 2016
Notes to the consolidated financial statements continued For the period from 4 December 2015 to 31 March 2016
23 FINANCIAL RISK MANAGEMENT CONTINUED The interest profile of the Group’s financial assets and financial liabilities after the impact of the swaps held at the period end are as follows:
Floating rate £ Fixed rate £ Interest free £ Total £
31 March 2016 Financial assets Trade and other receivables – 1,526,167 459,057 1,985,224 Cash and cash equivalents 4,516,153 – – 4,516,153 Financial liabilities Trade and other payables – – 1,667,154 1,667,154 Financial liabilities at fair value – 94,855 – 94,855 Loan borrowings 28,966,135 10,000,000 – 38,966,135 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 0.5% as at 31 March 2016. The Group’s policy is to hold cash on variable rate bank accounts. After the impact of the swaps, the Group has loans amounting to £28,966,135 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 £298,661. 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 management of market price risk is part of the investment management process and is typical of commercial property investment. The portfolio is managed with an awareness of the effects of adverse valuation movements through detailed analysis, with an objective of maximising overall returns to shareholders. Investments in property and property-related assets are inherently difficult to value due to the individual nature of each property. As a result, valuations are subject to substantial uncertainty. There is no assurance that the estimates resulting from the valuation process will reflect the actual sales price even where such sales occur shortly after the valuation date. Such risk is managed through the appointment of independent external property valuer’s, Savills (UK) Limited. Any changes in market conditions will directly affect the profit or loss reported through the Consolidated Statement of Comprehensive Income. Details
2016 would have increased net assets and profit for the period by £7,773,500. A decrease of 10% would have an equal but opposite effect. The calculations are based on the investment property valuations at the balance sheet date. FAIR VALUES Accounting standards recognise a hierarchy of fair value measurements for financial instruments which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The classification of fair value measurements depends on the lowest significant applicable input, as follows: – Level 1: Unadjusted, fully accessible and current quoted prices in active markets for identical assets or liabilities. – Level 2: Quoted prices for similar assets and or liabilities, or other directly or indirectly observable inputs which exist for the duration of the period
– Level 3: External inputs are unobservable. Value is the Directors’ best estimate, based on advice from relevant knowledgeable experts, use of recognised valuation techniques and on assumptions as to what inputs other market participants would apply in pricing the same or similar
All of the Group’s investment properties are classified as level 3. There have been no transfers of investment properties in or out of level 3 during the
properties is included in note 14 of the financial statements. The fair value of the Group’s financial instruments are not materially different from their carrying values. The classification of the fair value of the interest rate swaps outstanding at the period end, as detailed in note 18, are deemed level 2.
FINANCIALS GOVERNANCE STRATEGIC REPORT
39
Circle Property Plc Report and Consolidated Financial Statements for the period 4 December 2015 to 31 March 2016
24 INVESTMENT IN SUBSIDIARIES
Country of incorporation Ownership interest
Circle Property Unit Trust Jersey 100% Circle Property (Warrington) Limited Jersey 100% Circle Property (Milton Keynes) Limited Jersey 100% Circle Property Management Limited England 100% 25 COMMITMENTS UNDER CONSTRUCTION CONTRACTS As at 31 March 2016, the Group had contracted capital expenditure on existing properties of £533,318. They were committed but not yet provided for in the financial statements. 26 OPERATING LEASES The Group leases out its investment properties under operating leases. As at the reporting date, the future minimum lease payments under non-cancellable leases are receivable as follows (based on annual rentals):
31 March 2016 £
Less than one year 4,279,104 Between two and five years 13,700,180 Over five years 11,053,958 Total 29,033,242 Operating lease payments in respect of rents payable on leasehold properties were payable as follows:
31 March 2016 £
Less than one year 16,829 27 ULTIMATE CONTROLLING PARTY In the opinion of the Directors there is no ultimate controlling party as no one individual is deemed to satisfy this definition. 28 RELATED PARTY DISCLOSURES Consortia Partnership Limited (“CPL”) and Consortia Trustees Limited (“CTL”) are joint Trustees of CPUT and provide administration and accounting services to the Group. Michael Farrow and Richard Hebert are Directors of CPL and CTL. During the period CPL and CTL charged and received a total of £30,797 for administration and accountancy services and £168,115 for administration services in relation to the admission to AIM. As disclosed in note 15, on 20 January 2016 the Group entered into a loan facility agreement with Circle Property Trading (Maidstone) Limited (“CPTML”). John Arnold, Edward Olins, The Duke of Roxburghe and James Hambro are all Directors and Shareholders of CPTML. At the period end date the balance of the loan was £1,526,167, excluding accrued loan interest of £22,002. Directors’ interests in the shares of the Company, including family interests:
Ordinary shares
John Arnold 977,971 Edward Olins 128,089 The Duke of Roxburghe 2,483,069 James Hambro 3,267,656 There have been no changes in the Directors’ shareholdings since the period end. The remuneration of the Directors who are key management personnel of the group, is set out below in aggregate. Further information about the remuneration
for planning, directing and controlling the activities of the Group either directly or indirectly, including any Director, whether executive or otherwise.
4 December 2015 to 31 March 2016 £
Short-term employee benefits 66,020
40
Circle Property Plc Report and Consolidated Financial Statements for the period 4 December 2015 to 31 March 2016
Notes to the consolidated financial statements continued For the period from 4 December 2015 to 31 March 2016
28 RELATED PARTY DISCLOSURES CONTINUED A bonus may be awarded to the Executive Directors of the Company. Any annual bonus is restricted to 100% of salary for the year under consideration. The Key Performance Indicators comprise the net asset value, EBITDA and maintenance of dividend policy and having regard always to the individual performance of the Executive and of the business as a whole but such bonus awards remain at the absolute discretion of the board. No bonus was due
On 11 February 2016 two Directors were granted options under the Company Long Term Incentive Plan (“LTIP”) as described in note 22. John Arnold was granted an Option by Deed to acquire 134,229 Shares and Edward Olins was granted an Option to acquire 120,805 Shares both at nil cost subject to performance conditions. 29 SUBSEQUENT EVENTS On 11 May 2016 the Directors declared a final dividend of 2.4p per share for the period ended 31 March 2016. The final dividend was paid on 26 May 2016 with an ex-dividend date of 19 May 2016. On 21 June 2016 the Directors agreed a new £50m revolving facility with National Westminster Bank plc for the purpose of refinancing of CPUT’s existing facility. The new facility has a three year term with two options to extend for a further year, with a drawdown loan to value of up to 55% of the gross portfolio value and an interest rate of 1.85% over LIBOR. The new facility was drawn down on 22 June 2016 and the existing facility repaid. On 23 June 2016 a referendum held in the UK resulted in a vote to leave the European Union (“Brexit”). The Directors have considered the situation and continue to monitor developments. Further reference to Brexit is detailed in the CEO review on page 4.
Officers and professional advisers
DIRECTORS APPOINTED RESIGNED CPL Services Limited Director 4 December 2015 10 December 2015 Consortia Directors Limited Director 5 December 2015 10 February 2016 Ian Henderson Non-Executive Chairman 29 January 2016 John Arnold Chief Executive 10 December 2015 Edward Olins Chief Operating Officer 10 December 2015 The Duke of Roxburghe Non-Executive Director 29 January 2016 James Hambro Non-Executive Director 29 January 2016 Michael Farrow Non-Executive Director 10 December 2015 Richard Hebert Non-Executive Director 10 December 2015 COMPANY SECRETARY Consortia Secretaries Limited 7 December 2015 REGISTERED OFFICE 3rd Floor Standard Bank House 47-49 La Motte Street St Helier Jersey JE2 4SZ INDEPENDENT AUDITOR KPMG Channel Islands Limited 37 Esplanade St Helier Jersey JE4 8WQ NOMINATED ADVISER AND BROKER Peel Hunt LLP Moor House 120 London Wall London W1G 0JD INDEPENDENT PROPERTY VALUER Savills 33 Margaret Street London W1G 0JD INDEPENDENT TAX ADVISERS Lubbock Fine Paternoster House 65 St Paul’s Churchyard London EC4M 8AB ADMINISTRATOR Consortia Partnership Limited 3rd Floor Standard Bank House 47-49 La Motte Street St Helier Jersey JE2 4SZ UK LEGAL ADVISERS Charles Russell Speechlys LLP 5 Fleet Place London EC4M 7RD JERSEY LEGAL ADVISERS Pinel Advocates 32 Commercial Street Jersey JE2 3RU REGISTRARS Computershare Investor Services (Jersey) Limited Queensway House Hillgrove Street St Helier Jersey JE1 1ES
REGISTERED OFFICE Circle Property Plc
c/o Consortia Partnership Limited 3rd floor Standard Bank House 47-49 La Motte Street St Helier Jersey, JE2 4SZ Tel: 01534 834 600
REPRESENTATIVE OFFICE Circle Property Plc
15 Duke Street St James’s London SW1Y 6DB Tel: 0207 930 8503 www.circleproperty.co.uk