Real Estate Investors : Annual Report 2023 648.01 KB

FINANCIAL STATEMENTS

Company Registration Number:

05045715

Registered Office:

2nd Floor

75-77 Colmore Row, Birmingham

B3 2AP

Directors:

W P Wyatt: Chairman

P London: Non-Executive Director

I M Stringer: Non-Executive Director P P S Bassi CBE: Chief Executive

M H P Daly: Finance DirectorSecretary:

M H P Daly

Auditor:

Cooper Parry Group Limited Statutory Auditor

Sky View, Argosy Road Castle Donington Derby

DE74 2SA

Solicitor:

Gateley Plc One Eleven Edmund Street Birmingham B3 2HJNominated Adviser:

Cavendish Capital Markets Limited One Bartholomew Close

London

EC1A 7BL

Broker:

Liberum Capital Limited Ropemaker Place, Level 12 25 Ropemaker Street London

EC2Y 9LY

Banker:

National Westminster Bank plc 3rd Floor

2 St Philips Place Birmingham

B3 2RB

Lloyds Banking Group plc 125 Colmore Row Birmingham

B3 3SD

Registrar:

Link Market Services Limited 10th Floor

Central Square

29 Wellington Street Leeds

LS1 4DL

1

Commercial in confidence
REAL ESTATE INVESTORS PLC
CONTENTS
For the year ended 31 December 2023
INDEX	PAGE
Chairman's and Chief Executive's report	3 - 6
Property Report	7 - 9
Finance Director's report	10 - 12
Directors' report	13 - 16
Group strategic report	17 - 18
Corporate governance report	19 - 24
Remuneration report	25 - 26
Independent auditor's report	27 - 31
Consolidated statement of comprehensive income	32
Consolidated statement of changes in equity	33
Company statement of changes in equity	34
Consolidated statement of financial position	35 - 36
Company statement of financial position	37
Consolidated statement of cash flows	38
Company statement of cash flows	39
Notes to the financial statements	40 - 67
2

Successful sales, debt reduction and underlying profitability

• • Completed sales totalling £17.97 million (an aggregate uplift, pre-costs, of 2.93% above December 2022 valuations)

• • Disposal proceeds used to pay down £17.1 million of debt, reducing drawn debt to £54.4 million (FY 2022: £71.5 million)

• • LTV (net of cash) reduced to 32.4% (FY 2022: 36.8%)

• • Revenue of £11.5 million (FY 2022: £13.3 million) - decrease mainly due to sales

• • Underlying profit before tax* of £4.5 million (FY 2022: £4.6 million)

• • EPRA** EPS of 2.6p (FY 2022: 2.7p)

• • Basic (loss)/earnings per share of (5.4p) (FY 2022: 6.3p)

• • Loss before tax of £9.4 million (FY 2022: £10.9 million profit), primarily as a result of a revaluation deficit of £13.2 million on investment properties (FY 2022: gain of £3.2 million) (non-cash item)

• • EPRA** Net Tangible Assets ("NTA") per share of 54.9p (FY 2022: 62.2p)

• • £8 million cash at bank as at 31 December 2023

• • Deficit in market value of hedging instrument of £499,000 (FY 2022: gain of £2.2m) (non-cash item)

Uninterrupted Fully-Covered Dividend

• • Final dividend of 0.625p per share, payable in April 2024 as an ordinary dividend

• • Total fully covered dividend for 2023 of 2.5p per share (FY 2022: 2.5p) (the level of dividend for 2024 will be subject to the pace of further disposals) reflecting a yield of 7.4% based on a mid-market opening price of 33.75p on 25 March 2024

• • £50.6 million total declared/paid to shareholders since commencement of dividend policy in 2012

Robust Portfolio Performance

• • Gross property assets of £145.5 million (FY 2022: £175.4 million) with 41 assets and 183 occupiers

• • Like-for-like portfolio valuation down by 8.44% to £143.1 million (FY 2022: £156.3 million)

• • Continued robust rent collection levels with overall rent collection for 2023 of 99.82%

• • Completed 90 lease events during the year

• • WAULT*** of 5.24 years to break and 6.01 years to expiry (FY 2022: 4.98 years & 6.29 years)

• • Contracted rental income of £10.9 million p.a. (FY 2022: £12.6 million p.a.) net of disposals

• • Portfolio occupancy of 83.03% (FY 2022: 84.54%)

• • Major letting contracted to complete in April 2024. This will improve existing occupancy to 85.91% and boost contracted rental income to £11.2 million p.a. (subject to sales and other lease activity)

Post Year-End Activity

• • Additional £1 million of disposals completed since period-end

• • Further £2.7 million of debt repaid since period-end, resulting in debt reducing to £51.7 million

• • Additional pipeline sales in legals

• • Healthy pipeline lettings of £803,107 p.a. (gross) (£529,471 p.a. net)

• • Revised remuneration policy and Shorter Term Incentive Plan announced in January 2024, improving alignment with the Disposal Strategy

• • In March 2024, the Group extended the £20 million facility with Lloyds Banking Group Plc for a further 12 months to 31 May 2025, the £28 million facility with National Westminster Bank Plc for a further 12 months to June 2025 and the £7 million facility with Barclays Bank PLC for a further 6 months to 30 June 2025. As a result, following the multiple increases in interest rates by the Bank of England, the new average cost of debt is now 6.5%. It is the Group's intention to prioritise the repayment of debt from property sales proceeds, as reflected by the short-term nature of the facilities

Financial and Operational Results

31 Dec 2023	31 Dec 2022
Revenue	£11.5 million	£13.3 million
Pre-tax (loss)/profit	(£9.4 million)	£10.9 million
Underlying profit before tax*	£4.5 million	£4.6 million
Contracted rental income	£10.9 million	£12.6 million
EPRA EPS**	2.6p	2.7p
Basic (loss)/earnings per share	(5.4)p	6.3p
Dividend per share	2.5p	2.5p
Average cost of debt	3.7%	3.7%
Like-for-like rental income	£10.9 million	£11.1 million
31 Dec 2023	31 Dec 2022
Gross property assets	£145.5 million	£175.4 million
EPRA NTA per share	54.9p	62.2p
Like-for-like capital value psf	£115.46 psf	£126.10 psf
Like-for-like valuation	£143.1 million	£156.3 million
Tenants	183	201
WAULT to break***	5.24 years	4.98 years
Total ownership (sq ft)	1.24 million sq ft	1.37 million sq ft
Net assets	£95.6 million	£109 million
Loan to value	38.0%	42.2%
Loan to value net of cash	32.4%	36.8%

Definitions

*	Underlying profit before tax excludes gain on revaluation and sale of properties and interest rate swaps
**	EPRA = European Public Real Estate Association
***	WAULT = Weighted Average Unexpired Lease Term
4

During 2023, the UK property market has seen very low levels of investment transactions, a consequence of widespread political uncertainty, combined with high interest rates and elevated inflation levels. Despite this, REI's portfolio remains resilient and stable, shielded from wider economic pressures due to its diversified nature and limited exposure to high-risk sectors, achieving 99.82% overall rent collection for 2023.

Against this challenging backdrop, REI successfully disposed of £17.97 million of assets during the period, achieving an aggregate uplift (pre-costs) of 2.93% above December 2022 book values. This is due to the nature of our portfolio and our ability to 'break up' selected assets, unlocking the underlying portfolio value and feeding the appetite from private investors and owner occupiers for smaller, well-positioned assets.

Demand from larger corporate and institutional buyers is yet to materialise and we will therefore continue to intensively manage our larger assets, maximising rental income and occupancy levels to support our dividend payments, until such demand returns, which we anticipate to be in the latter part of 2024 and 2025.

Using proceeds from sales and in line with our recently announced Disposal Strategy, we repaid £17.1 million of debt during 2023, reducing our total drawn debt to £54.4 million (FY 2022: £71.5 million). Over the last three years, REI has sold over £56.4 million of assets, on an aggregate basis, at or above book value, and repaid over £46 million of debt, in line with our stated strategy.

We currently have numerous disposals in solicitors' hands and are progressing our disposal programme, with a number of completions anticipated before the end of H1 2024. With the benefit of our unique market insight, we anticipate 2024 to be a year of continued sales to our unique buyer pool, consisting of special purchasers, owner occupiers and private investors.

Whilst REI's portfolio is diverse and attractive to these buyers, general market sentiment remains weak due to an increased cost of capital, persistent inflationary pressures and global uncertainty. Against this backdrop, market-wide valuation reductions were expected. The REI portfolio has suffered a relatively mild 8.44% reduction (£13.2 million) in like-for-like portfolio valuations to £143.1 million (FY 2022: £156.3 million). This is predominantly due to the nature of our stock, combined with the intensive management carried out across the portfolio by our asset management team.

Despite the £1.5 million p.a. loss of income associated with disposals during the period, asset management initiatives generated 90 lease events, stabilising occupancy at 83.03% (FY 2022: 84.54%), contracted rental income at £10.9 million p.a. (FY 2022: £12.6 million p.a.), and improving portfolio WAULT to 5.24 years to break and 6.01 years to expiry (FY 2022: 4.98 years & 6.29 years). This has resulted in revenue of £11.5 million (FY 2022: £13.3 million), underlying profits of £4.5 million (FY 2022: £4.6 million) and a loss before tax of £9.4 million (FY 2022: £10.9 million profit) (valuation decline is a non-cash item).

The notable letting of 2023 was to DHU Healthcare CIC at Birch House, Oldbury for £625,000 p.a., which was previously unoccupied. The Agreement for Lease was signed in October 2023 on a 10-year lease with a 5-year break and 6-months' rent free. NHS England have awarded the Midlands NHS111 contract to DHU Healthcare CIC, commencing in early April 2024 and making DHU the largest provider of NHS111 services in England, with responsibility for 11 million patients. Once the DHU lease commences, occupancy will rise to 85.91% and contracted rental income to £11.2 million p.a.

We have continued to manage the portfolio actively, resulting in 90 lease events. New tenants to the portfolio include; SpaMedica Limited, Luxury Leisure, and Swarco Smart Charging Limited. There are currently other lettings in pipeline legals which will improve occupancy and rental income further, subject to further portfolio disposals.

Following a healthy year of disposals and debt repayment, the total drawn debt now sits at £54.4 million, with debt spread across 3 lenders. Group LTV (net of cash) improved to 32.4% (FY 2022: 36.8%) and cost of debt was 3.7%. However, the fixed rate hedges on our debt expired on 30 November 2023 on £10 million for Lloyds Banking Group, 29 December 2023 for Barclays Bank and 1 March 2024 for National Westminster Bank. As a result, following the multiple increases in interest rates by the Bank of England, the new average cost of bank interest is 6.5%. It is the Group's intention to prioritise the repayment of debt from future property sales proceeds.

Following discussions with our bankers, in March 2024 the Group extended the £20 million facility with Lloyds Banking Group Plc for a further 12 months to 31 May 2025, the £28 million facility with National Westminster Bank Plc for a further 12 months to June 2025 and the £7 million facility with Barclays Bank PLC for a further 6 months to 30 June 2025. The facilities have been extended on short term bases as it is the Board's intention to repay portfolio debt in full, from the proceeds of the sales programme. Since the year-end, a further £2.7 million of debt has been repaid, reducing total drawn down debt to £51.7 million.

Against a challenging backdrop, the Board is pleased with the robust operational performance of the business which is reflected in the covered, uninterrupted dividend payment of 2.5p for 2023, taking the total declared/paid to shareholders since the commencement of our dividend policy in 2012 to £50.6 million. It is the Board's intention to continue paying an uninterrupted, fully-covered quarterly dividend payment to shareholders, subject to the pace of portfolio disposals.

The Board is committed to its formalised Disposal Strategy and maximising shareholder returns and remains open to a corporate transaction that is in the best interest of shareholders.

Disposal Strategy

As confirmed in our January 2024 'Trading and Strategic Update', the Board is committed to pursuing an orderly strategic sale of the Company's portfolio over the next three years, disposing of assets individually or collectively, at or above book value, to optimise returns to shareholders. The pace of the disposal programme will be dictated by market conditions, with an initial focus on repaying the Company's debt.

Whilst management are aligned with the business and remain major shareholders, a new Shorter Term Incentive Plan (STIP) has been introduced to replace the existing Long Term Incentive Plan (LTIP), which is aimed at retaining staff whilst providing an incentive to facilitate the orderly sale in the best interests of the shareholders. The Remuneration Committee has approved the new STIP along with a 33% reduction in Board and Executive remuneration to support the Company's ongoing cost saving initiative. In determining the revised remuneration policy and STIP, the Company's Remuneration Committee consulted with REI's largest institutional shareholders.

Dividend

The Company's dividend payments continued throughout 2023, despite market uncertainty and significant disposals. The first three quarterly dividend payments in respect of 2023 were paid at a level of 0.625p per share, fully covered. Due to the level of disposals, the final dividend in respect of 2023 is confirmed at the same level at 0.625p per share, reflecting a total fully-covered dividend payment for 2023 of 2.5p (FY 2022: 2.5p) (which would be the basis for the dividend for FY2024, subject to the pace of further disposals) and a yield of 7.4% based on a mid-market opening price of 33.75p on 25 March 2024. The Board remains committed to paying a covered dividend, subject to business performance and the pace of further disposals.

The proposed timetable for the final dividend, which will be an ordinary dividend, is as follows:

Ex-dividend date:	4 April 2024
Record date:	5 April 2024
Dividend payment date:	26 April 2024
Outlook for 2024

The Board is steadfast in its commitment to maximising shareholder returns via sales and full repayment of our debt, with the view to then returning capital to shareholders.

REI will continue to strive to achieve maximum pricing on disposals and anticipate potential future valuation growth, via intensive asset management and a much needed improvement in market conditions.

We remain confident that our proven and diversified portfolio will withstand market headwinds and any uncertainty this election year will bring. We expect that any interest rate reduction will lead to a market recovery that will allow us to accelerate our sales programme and dispose of our larger corporate and institutional grade assets.

In the meantime, we remain open to a corporate transaction including selling the whole of the portfolio on terms that are in the best interests of shareholders.

Our Stakeholders

We sincerely thank our shareholders, advisers, tenants and staff for their ongoing support and in particular, in assisting management with the finalised strategy, which is intended to maximise returns to shareholders.

William Wyatt	Paul Bassi CBE D. Univ
Chairman	Chief Executive
25 March 2024	25 March 2024
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PROPERTY REPORT

UK Property Market Overview

Commercial property investment was suppressed throughout 2023, with high and uncertain interest rates taking their toll on activity across the property market.

According to JLL Research, total UK property investment reached £31.3 billion in 2023, a 36% decrease on 2022 volumes of £49.0 billion and 40% below the 10-year average of £51.8 billion. This represents the lowest annual total since 2012 when volumes reached £30.7 billion. The lack of transactional activity contributed to weak market sentiment across the property market, which has directly impacted our year-end valuations which have declined by 8.44% on a like for like basis, mitigated by active asset management and the diversity of our portfolio which gives access to the relatively stronger private investor market.

Throughout the year, and in accordance with previous years' strategy, we continued to break up sales in order to achieve premiums, mainly to private investors, owner occupiers and special purchasers as they were willing to pay higher sums. We expect private investors and companies less reliant on finance will continue to seek opportunities at levels below £1 million or less and we will continue to benefit from this position.

Interest rate cuts and lower inflation would support real income growth and this would likely trigger a gradual improvement in market sentiment and economic activity. We are already seeing signs of traditional institutional investors returning to the market, which will bring a wider audience for sales, greater activity, appetite for larger lot sizes and improved valuations.

REI Portfolio Disposals

Our unique regional network of agent contacts and close proximity to owner occupiers allows access to more non-traditional purchasers and during the year, we disposed of 30 units/assets with an average lot size of £600,000, for a combined consideration of £17.97 million at an aggregate 2.93% uplift to December 2022 book valuations (pre-costs).

The sales comprised break-ups of retail/leisure units at Alcester Road South, Acocks Green, Leamington Spa, Redditch, Newcastle Under Lyme and Walsall. However, they also included the sale of Land at Market Shopping Centre in Crewe (McDonalds), York House in Birmingham (to a college), and Castlegate House in Dudley (West Midlands Police). It is therefore worth noting that around 53% of sales (by value) can be accredited to smaller units sales, and around 47% of sales (by value) were from the individual asset sales, all of which were bought by owner occupiers for their own purposes.

Post Period End Disposals

Since 31 December 2023, we have completed a further £1 million of disposals at Barracks Road, Newcastle-under-Lyme to an owner occupier.

At present, we have disposal transactions that are in solicitors' hands, with several completions expected before the conclusion of H1 2024. We have additional sales being actively marketed and we have earmarked further assets for sale, where management initiatives have been concluded and are now ready for marketing. Staying agile and responsive to evolving market conditions will be key to successfully executing this strategy throughout the coming year. However, we intend to make further opportunistic sales, should investor demand prevail.

The REI Portfolio

The REI portfolio, comprising of 41 assets with 183 tenants has a net initial yield of 7.18% and a reversionary yield of 8.81%. Valuations have seen a decline of 8.44% on a like-for-like basis to £143.1 million (FY 2022: £156.3 million). It is management's intention to continue with asset management initiatives to maximise income, occupancy and capital value.

REAL ESTATE INVESTORS PLC

PROPERTY REPORT

For the year ended 31 December 2023

The current portfolio sector weightings are:

Sector

Office

Traditional Retail

Discount Retail - Poundland/B&M etc

Medical and Pharmaceutical - Boots/Holland &

Barrett etc

Restaurant/Bar/Coffee - Costa Coffee etc

Financial/Licences/Agency - Bank of Scotland etc

Income by Sector	Income by Sector
(£)	(%)
4,968,850	45.42%
1,480,039	13.53%
1,274,000	11.65%
652,649	5.97%
423,751	3.87%
216,500	1.97%
406,545	3.72%
Other - Hotels (Travelodge & Vine Hotels), Leisure
(The Gym Group & Luxury Leisure), Car parks, AST	1,517,306	13.87%
Total	10,939,640	100%

Food Stores - Co-op, Iceland etc

Asset Management

During 2023, the asset management team completed 90 lease events. New lettings during the year totalled just over £500,000 p.a. with lettings at Titan House (Telford) and Venture Court (Wolverhampton), being prominent.

As a result of the asset management activity in 2023 our WAULT was 5.24 years to break and 6.01 years to expiry (FY 2022: 4.98 years & 6.29 years) and occupancy is stable at 83.03% (FY 2022: 84.54%).

Of the 16.97% vacancy as at 31 December 2023 within the portfolio, almost two thirds (10.72%) can be attributed to spaces at 4 properties (Barracks Road, Newcastle-under-Lyme; Crewe Shopping Centre; Kingston House and Birch House). We have already reduced this void in the period since 31 December 2023, with the sale of Units 1&2 at Barracks Road, occupancy to 84.98% (as at 25 March 2024). The scheduled letting at Oldbury and further sales will improve occupancy in H1 2024.

Key asset management initiatives undertaken during the year and subsequently to the date of this report include:

Titan House

Following the refurbishment of the office space to a Grade A specification and the letting to BohoMoon Limited at £111,145 p.a., SpaMedica Limited completed the lease for the third floor at £112,779 p.a. on a 10-year lease with a tenant break in year 5.

Oldbury

DHU Health Care CIC signed the Agreement for Lease at £625,608 p.a. to facilitate the move into all the 35,749 sq ft at Birch House. The refurbishment commenced and is due to complete in April 2024.

Avon House

AFH Financial Group Limited took out a new lease for 11.5 years at the passing rent of £396,077 p.a. (at ERV) with no break, now occupying all 25,000 sq ft at Avon House, Bromsgrove.

Acocks Green

Following a number of sales, the previous Argos unit was refurbished and let to Poundstretcher on a 10-year lease at £62,500 p.a. with a tenant break at year 5.

Walsall

Following a lengthy planning process, Luxury Leisure signed a lease and undertook a tenant fit-out of 9-11 Park Street on a 10-year lease at £60,000 p.a. with a break at year 5.

Topaz Business Park

Costa have signed an Agreement for Lease at £89,000 p.a. The forward sale of the Lease is proceeding, despite the challenges in the investment market. The contract to build the Costa unit has been secured with completion due in

September 2024.

PROPERTY REPORT

Boundary House

The 2023 rent review has been settled, achieving an increase from £260,000 p.a. to £316,500 p.a., representing a very strong result in a challenging office market.

New tenants to the portfolio in 2023

SpaMedica Limited, Luxury Leisure and Swarco Smart Charging Limited.

Post Period End Activity and Sentiment

There is a strong level of pipeline lettings of £803,107 p.a. (gross) (£529,471 p.a. net) that will have a positive impact on our void space and contracted rental income.

Portfolio Summary

Value (£)	Area (Sq ft)	Contracted Rent (£)	ERV (£)	NIY (%)	EQY (%)	RY (%)	Occupancy (%)
Portfolio	143,105,000	1,239,467	10,939,640	13,701,260	7.18%	8.89%	8.81%	83.03%
Land*	2,394,594	-	-	-	-	-	-	-
Total	145,499,594	1,239,467	10,939,640	13,701,260	7.18%	8.89%	8.81%	83.03%

*Our land holdings are excluded from the yield calculations

Environmental, Social and Governance ("ESG")

REI is now working alongside Systemslink, (a leading energy management software provider), to collect, track and report carbon emissions data across REI's landlord-controlled areas. As at the date of this report, accurate and certified data for the Scope 1 and 2 emissions for 2021-2022 is unavailable, as this is being verified. The reduction of the portfolio's carbon footprint is a priority for the business.

Portfolio Energy Performance Certification

In accordance with government guidelines, REI has undertaken a programme to ensure our assets meet the UK statutory regulations and timeframes for EPCs. We will continue to upgrade assets when required.

An overview of the asset EPC ratings across the portfolio is noted below:

% of portfolio (by sq ft)
EPC Rating	A	B	C	D	E	F	G	Total
31 Dec 2023	2.25	36.88	22.71	35.13	3.03	0	0	100
31 Dec 2022	1.36	22.99	31.18	37.49	6.98	0	0	100