Highcroft Investments Plc Annual Report 2020

Plain-text annual report

Job number12 April 2021 6:54 pmV8Shareholder FocusedMarket AwareOpportunity DrivenHighcroft Investments PLC Annual report and accounts for the year ended 31 December 2020Stock code: HCFTANNUAL REPORT AND ACCOUNTSFor the year ended 31 December 2020Stock code: HCFTwww.highcroftplc.comNAVIGATING MARKET UNCERTAINTY FOR LONG-TERM SUCCESS Highcroft-AR-2020.indd 5Highcroft-AR-2020.indd 512-Apr-21 6:55:33 PM12-Apr-21 6:55:33 PMJob number 12 April 2021 6:54 pm V8We ensure that we are a sustainable business through our culture of being:Shareholder focusedOur actions are centred on our shareholders; investments are considered in order to execute our strategy and increase shareholder value. Market awareUnderstanding the industry we operate within enables us to invest in specific areas and sectors to generate maximum value. Opportunity driven We are able to identify and react quickly to market opportunities in order to deliver returns above the industry average.Who we areHighcroft Investments PLC is an internally managed Real Estate Investment Trust (REIT), which invests in commercial property in England and Wales. Our purposeHighcroft’s purpose is to provide our tenants with excellent properties, in optimal locations, enabling them to succeed and our stakeholders to benefit on a long-term sustainable basis.Our visionOur vision is to ensure every opportunity has a positive impact on others.Our strategyHighcroft aims to deliver sustainable long-term income and capital growth for its shareholders through accretive asset management initiatives and recycling of capital in its regionally based property portfolio.We deliver our strategy by leveraging our strengths:An experienced internal teamFinancial strengthHigh-quality property assetsModerate gearingAnnual report and accounts 2020View more online at: www.highcroftplc.comHighcroft-AR-2020.indd 6Highcroft-AR-2020.indd 612-Apr-21 6:55:34 PM12-Apr-21 6:55:34 PMAnnual report and accounts 2020 Highlights BUSINESS OVERVIEW Dividends payable to shareholders 57.00p +18.7% Net asset value per share 1,104p −6.0% 2020 2019 2018 2017 2016 57.00p 48.00p 52.50p 46.25p 41.00p 2020 2019 2018 2017 2016 Contents BUSINESS OVERVIEW Highlights Chairman’s statement COVID-19 statement Group at a glance Our portfolio 1,104p 1,175p 1,207p 1,161p 1,071p STRATEGIC REPORT Gross property income £6.1m +4.2% Net property income £5.5m –3.4% 2020 2019 2018 2017 2016 £6.1m £5.8m £5.0m £4.8m £3.8m 2020 2019 2018 2017 2016 £5.5m £5.7m £4.9m £4.5m £3.7m Adjusted earnings per share 67.7p −13.8% Total earnings per share -22.2p 2020 2019 2018 2017 2016 67.7p 78.5p 87.3p 64.8p 55.7p 2020 2019 2018 2017 2016 (22.2)p 23.3p 95.3p 84.0p 132.3p Value of property assets £82.1m –5.4% Net debt/gearing £23.9m/42% 2020 2019 2018 2017 2016 £82.1m £86.7m £77.7m £77.1m £66.0m 2020 2019 2018 2017 2016 £23.9m/42% £24.6m/41% £14.2m/23% £17.5m/29% £11.5m/21% Average lot size £3.7m -5.4% Occupancy in our portfolio 99% 2020 2019 2018 2017 2016 £3.7m £3.9m £3.9m £3.6m £3.3m 2020 2019 2018 2017 2016 99% 100% 100% 100% 100% Stock code: HCFT www.highcroftplc.com Our marketplace Our business model Our strategy Our key performance indicators Operating review Financial review Our risks Going concern statement Stakeholder engagement Section 172(1) Statement Corporate social responsibility OUR GOVERNANCE Chairman’s introduction to corporate governance Board of directors Corporate governance Report of the audit committee Report of the nomination committee Directors’ remuneration report Remuneration at a glance Report of the directors Statement of directors’ responsibilities FINANCIAL STATEMENTS Independent auditors’ report Consolidated statement of comprehensive income Consolidated statement of financial position Consolidated statement of changes in equity Consolidated statement of cashflows Notes to the consolidated financial statements Company statement of financial position Company statement of changes in equity Notes to the company financial statement List of definitions Group five-year summary (unaudited) Directors and advisers 01 02 03 04 06 14 16 18 20 22 24 28 32 33 34 38 40 42 45 49 50 51 61 63 66 71 72 73 74 75 87 88 89 93 94 95 01 Highcroft-AR-2020.indd 1 Highcroft-AR-2020.indd 1 Job number 12 April 2021 6:54 pm V8 12-Apr-21 6:55:36 PM 12-Apr-21 6:55:36 PM Chairman’s statement Highcroft produced a commendable performance in 2020.” Dear shareholder, Introduction While 2020 will go down in history as one of the most difficult post war periods we have experienced I am pleased to report that in the circumstances Highcroft have delivered a commendable performance with net rent after bad debt provisions falling just 3.4% to £5.46m. Property portfolio Over the last few years we have purposefully repositioned the portfolio significantly, moving away from high street retail and into warehouses and onto well located out of town retail parks, to reflect the changing patterns of consumer behaviour. Whilst all retail locations were hit hard by lockdowns throughout 2020 it is fair to say high street retail took the worst of it with retail parks faring slightly better due to their ability to adhere more easily to social distancing rules and work as click and collect locations for online orders. At the year end, high street retail represented just 8% of the total portfolio with retail warehouses at 26% and warehouses at 46%. The positive trends on warehouse demand and values during the year partially offset the decline in capital values for retail assets meaning that the valuation of the Highcroft portfolio fell by only 5.4% to £82.1m by the year-end. This compares favourably to the MSCI UK all property index which fell by 6.2% over the same period. Due to the levels of uncertainty created by the COVID-19 pandemic we chose not to buy or sell any assets during the year and instead concentrated on working closely with our tenants to ensure we minimised rental voids and empty units. Our rental collection for 2020 to date is 94% of the contractual rent due. We also kept our debt levels conservative and manageable with our ratio of net debt to property value at 29% and an LTV of 33%. The overall impact on the company’s net assets for the year was a reduction of just 6%. People When times are tough like they were in 2020 it is far too easy to just focus on the fact that returns for the year have been negative. Whilst not what we had hoped to deliver, it is easy to forget that in exceptional years like this the team have to go above and beyond their normal duties to protect shareholder value. To that end, I would like to thank the team at Highcroft for all their hard work and dedication during the year. On 10 December 2020 David Kingerlee announced that he would be representing the interests of our largest shareholder, Kingerlee Holdings Limited, on the board and, with effect from 7 April 2021 (the date of signing of the year end accounts), would change his status from an executive director to a non-independent non-executive director. I would like to thank David for his contribution to the business over the many years he has worked as an executive director. Dividend Whilst we recognise the importance of dividends to our shareholders, we must balance this with ensuring we keep sufficient cash available to take account of unforeseen circumstances in what continue to be unpredictable times. The company’s interim dividend was held at 21p as a result of good rent collection levels and we are proposing a final dividend of 30p per ordinary share taking the total ordinary dividend for the year to 51p. When deciding on the final dividend for 2019 and interim dividend for 2020 we took certain rent collection projections into account. As actual rent collections have been have strong we are also declaring a special dividend of 6p per ordinary share for 2020, making the total dividend payable in May 2021 36p per ordinary share. Charles Butler Chairman Outlook This time last year when we released our 2019 full year results we were aware of the COVID-19 outbreak and the first 3-month UK wide lockdown had commenced. I certainly didn’t think that a full year later we would only just be starting to see signs of the country getting back to some semblance of normality. Whilst we have a well-diversified portfolio, a relatively low level of gearing and a healthy cash balance, as a board we will continue to take a cautious approach to managing our portfolio and the group to ensure we can weather any further market volatility and continue to deliver long-term shareholder value. Charles Butler Chairman 7 April 2021 02 Highcroft Investments PLC Annual report and accounts for the year ended 31 December 2020 Highcroft-AR-2020.indd 2 Highcroft-AR-2020.indd 2 Job number 12 April 2021 6:54 pm V8 12-Apr-21 6:55:38 PM 12-Apr-21 6:55:38 PM BUSINESS OVERVIEW with Simon Gill Chief executive collection rates for 2020? Q What were your rent A We were pleased that our rent collection rates were ahead of the market average. After taking into account asset management exercises, and rent received under deferred payment plans, our rent collection data as a proportion of the contractual rent due for the four quarters were: Q1 2020 Q2 2020 Q3 2020 Q4 2020 Total 2020 100% 89% 95% 91% 94% In addition, we have, at the date of this report, collected 89% of the contractual rent due for Q1 2021 and 88% of that due for Q2 2021.. Q What was the impact of COVID-19 on your acquisition and disposal strategy? A We made no property acquisitions or disposals in 2020 as we concentrated on managing our existing portfolio and assisting some of our tenants who were experiencing difficult trading conditions due to the pandemic. We also concentrated on potential asset management opportunities within our portfolio. Towards the end of the year, we decided to take advantage of emerging market trends for the attractiveness of long-dated income and started to market one of our long-leasehold investments. COVID-19 statement COVID-19 and its impact on our performance COVID-19, and the resultant series of lockdowns, has had a significant effect on the property market. At Highcroft, we have worked with our tenants to get through these difficult times to ensure their businesses survive for the future; our high rent collection rates are testament to this. Where necessary, we have agreed rent concessions or rent payment plans to assist those unable to trade and most affected by the lockdowns. The amount of rent we collect affects the amount of dividend that we pay to our shareholders and Highcroft has worked hard to maintain these dividends. The assistance that Highcroft received from the government Unfortunately, the government provided very little direct assistance for property owners. At the beginning of the pandemic they introduced an embargo on commercial rent arrears recovery, and the coronavirus business interruption loans were not available to property companies. As a result, Highcroft did take advantage of the PAYE and NIC payment deferral that was available for the March and April payroll liabilities and repaid this £198,000 in full by the due date in June. In addition, it took advantage of the VAT payment deferral that was available and repaid this £316,000 in 2021 prior to the deadline of 31 March. Highcroft also used the concession agreed with HMRC that the payment period for the 2019 PID could be extended by up to six months. Furthermore, part of this 2019 PID was able to remain unpaid at the expiration of the six month period, subject to the payment of corporation tax on the unpaid element. For more details see page 32. How we considered our stakeholders during the pandemic The board took the decision on 30 April 2020 to pay a reduced final dividend in the light of the financial uncertainty arising from the global COVID-19 pandemic. In reaching this decision, the board specifically considered stakeholder interests and the matters set out in section 172 (1) of the Companies Act 2006. A key driver of the decision was to provide greater flexibility in the short to medium-term that would enable us to provide some flexibility to our tenants who operated in the sectors that were suffering the greatest impact from the lockdown at that time, protect the long- term value of the business and further strengthen our financial resilience at a time when the future path of the pandemic was unknown. The board considered the impact to the local communities that their tenants operate in when considering the level of support that would be offered to them. The board followed government guidance and ensured that employees did not need to go into the office and could work effectively from home, and replaced its face-to-face meetings by video calls to minimise risk to the board, our employees and our advisers. Our asset managers provided support to our tenants in multi-let units to ensure that they followed the relevant government guidance applicable at the time. The board communicated regularly and held additional formal and informal meetings during the period since the start of the pandemic to consider the changing environment, the issues arising from our tenants and the mitigation steps that we should take to ensure the long-term success of the company. Read more about stakeholder engagement on page 33 The implications that COVID-19 has had on our portfolio The lockdowns during 2020 forced many of our tenants to close their operations or operate on a limited basis; in some cases, this affected their ability to pay their rent and the government embargo for any commercial rent arrears recovery made the task of the landlord very difficult. The after effects of COVID-19 will continue for some time and occupiers will be wary in making long-term lease commitments until after a long period of certainty; this may impact on the level of achievable rents and the resultant values. What the long term looks like The rapid roll out of the vaccination programme is starting to give the market, and the public, confidence. There is an urgency amongst many to return to ‘normal’, which means returning to places of work and being able to frequent leisure and hospitality venues. It is forecasted that the UK economy will grow by 3.4% to 4.6% in 2021, most of which will happen in the second half of the year, and this will lead on to businesses wanting to grow, which will have a direct and positive impact on the property market. However, the dramatic increase in online shopping, resulting from the stay-at-home ruling, is likely to have a serious long-term effect on retailing, to the detriment of the secondary high streets; the UK public’s shopping habits have changed for the future. Stock code: HCFT www.highcroftplc.com Highcroft-AR-2020.indd 3 Highcroft-AR-2020.indd 3 Job number 12 April 2021 6:54 pm V8 03 12-Apr-21 6:55:39 PM 12-Apr-21 6:55:39 PM Group at a glance Our structure The property-owning subsidiaries, Rodenhurst Estates Limited and Belgrave Land (Wisbech) Limited, are wholly owned and carry out the management and administration of the property assets on behalf of the group. Read more about our business model on page 16 Highcroft Investments PLC Group administration Investment case – four reasons to invest in Highcroft: 1 Strong balance sheet and cash generative Our £82.1m, 868,000 sq ft of assets underpin our balance sheet and financial strength Read more about our assets pages 06 to 11 Property investments Rodenhurst Estates Limited Belgrave Land (Wisbech) Limited With effect from 10 December 2020, Highcroft has been considered to be an associated undertaking of Kingerlee Holdings Limited, which owns, through its wholly-owned subsidiaries, 27.2% of Highcroft. More details are on pages 16 and 17. Aligning to stakeholder interests Highcroft has identified its key stakeholder groups, and these are set out on page 33, together with their interests and how we engage with them. Each stakeholder group requires a tailored engagement approach to foster effective and mutually beneficial relationships. By understanding our stakeholders, we can factor into boardroom discussions the potential impact of our decisions on each stakeholder group and consider their needs and concerns. This, in turn, ensures we continue to provide space that our occupiers desire, work effectively with our advisers, make a positive contribution to local communities and achieve long-term sustainable returns for our investors. Our shareholders Our tenants Our advisory team Society and communities Read more about our stakeholder engagement on page 33 Our employees 2 Progressive dividend returns Our dividends have increased by a compound annual rate of 7.4% since joining the REIT regime in 2009 Read more about our dividend history on page 24 3 Diversified and sustainable income from the UK property market We have 22 assets, spread across five sectors, geographically focused in the south of the UK with a WAULT of 5.9 years Read more about our property portfolio on pages 06 to 11 4 Strong internal management team, aligned with shareholders’ interests, with a consistent track record Our experienced executive team has consistently delivered on our strategy Read more about our board on pages 40 and 41 04 Highcroft Investments PLC Annual report and accounts for the year ended 31 December 2020 Highcroft-AR-2020.indd 4 Highcroft-AR-2020.indd 4 Job number 12 April 2021 6:54 pm V8 12-Apr-21 6:55:39 PM 12-Apr-21 6:55:39 PM BUSINESS OVERVIEW Property investments – shift in portfolio sector balance Split by valuation Split by sector 2015 Split by sector 2020 Multi-le 22 % t 20% 1% 33% 12% 34% Sin gle-let 8 % 7 7% 9% 12% M 2 u 2 l t i % - l e t 26% 46% Sin gle-let % 78 Warehouse Office Retail warehouse High street retail Leisure Residential Shift in portfolio In 2014, the directors set an objective to rebalance the portfolio to take advantage of a changing property market. The emphasis was to move away from high street retail as shopping patterns were changing, principally due to the internet, and to focus more on warehousing and retail warehousing. It was decided that, as the cost of managing the small residential assets in the portfolio was disproportionate to their value, the group would divest all of its residential properties. We have continued with this rebalancing in 2020. Portfolio outlook The directors will continue to pay very close attention to forecast market trends and will look to rebalance the portfolio to meet our objectives within our risk appetite. Read more about our performance on pages 22 to 27 Read more about our risk appetite on page 28 Read more about our portfolio on pages 06 to 11 Investment properties at annual valuation £82.1m –5.4% Weighed average lease length 5.9 years -6.3% Weighted average lease expiries 2020 2019 2018 2017 2016 £82.1m £86.7m £77.7m £77.1m £66.0m 2020 2019 2018 2017 2016 5.9 years 6.3 years 6.5 years 7.2 years 8.5 years >5 years 2–5 years 26% 1–2 years 0% <1 year 1% 73% Stock code: HCFT www.highcroftplc.com Highcroft-AR-2020.indd 5 Highcroft-AR-2020.indd 5 Job number 12 April 2021 6:54 pm V8 05 12-Apr-21 6:55:41 PM 12-Apr-21 6:55:41 PM Our portfolio – Shift in portfolio We continually assess the balance of our portfolio against market trends and predictions, which has resulted in a reduction in our exposure to the high street over the past few years and an increase in our holdings in the warehouse sector. By way of illustration, in 2015 our high street retail holdings constituted 20% of our portfolio compared with 7% in 2020, and for warehouse the corresponding figures are 34% and 46%. The COVID-19 pandemic has brought new factors and changes into the property market, producing an even greater demand for warehouse space, fuelled by online retailing, at a great cost to the high street, and an uncertainty among office occupiers. The future shaping of our portfolio will take these factors into account. The south of England and Wales Our portfolio is based throughout the southern half of England and Wales, and Highcroft has benefited from the growth in rents and values in these areas. Our area of search for new opportunities is not solely confined to these areas and we will consider the merits of any opportunity subject to solid property fundamentals. There has been a government emphasis in promoting business in the regions beyond the south east, which will hopefully provide us with future opportunities. Our property assets Our property assets are valued at £82,060,000. During the year, our property assets decreased in value by 5.4% on a like-for-like basis. 6 19 20 2 12 15 7 4 14 11 17–18 & 22 13 10 16 5 3 1 21 Total property asset value £82.1m 9 Number of property investments 22 Our core sectors Warehouse Leisure High street retail Retail warehouse Office Numbering corresponds to order of assets by valuation. For more detail see pages 07 to 10. 8 Split by tenure % 5% 8% 87% Freehold £71.6m Virtual freehold £6.5m Long leasehold £4.0m Movements in investment property valuation –5.4% £m 90 80 70 60 50 Valuation gains £2.5m Valuation losses £(7.1)m £86.7m £82.1m 2019 2020 06 Highcroft Investments PLC Annual report and accounts for the year ended 31 December 2020 Highcroft-AR-2020.indd 6 Highcroft-AR-2020.indd 6 Job number 12 April 2021 6:54 pm V8 12-Apr-21 6:55:41 PM 12-Apr-21 6:55:41 PM BUSINESS OVERVIEW Sector overview Warehouse/industrial Once again, this sector outperformed all other property sectors. The COVID-19 pandemic produced an even greater demand for warehouse space due to the exponential increase in online retailing. The demand was not only for large distribution hubs but also for smaller, in-town units to cater for last mile distribution logistics. We have witnessed the benefit of the increase in activity in the warehouse/ industrial sector in our portfolio with lease renewals and increased rental levels at our properties in Milton Keynes and Kidlington. Retail warehouse Leisure The continued decline in the high street retail sector was evidenced in the retail warehouse sector in 2020. Lockdown meant that the majority of tenants could not trade for a significant part of the year and, therefore, there was little interest from occupiers to take new units. This sector represents 26% of our portfolio and all of our units are occupied. The leisure industry suffered considerably in 2020 due to lockdown regulations, which saw the food and beverage sector, along with gyms, close to abide by social distancing rules, resulting in a massive decline in revenues. We, unfortunately, had direct experience of this with one of the tenants of our Ipswich property, DW Sports and Fitness Club, entering into CVA; also one of our tenants in Coventry, The Restaurant Group, went into CVA but in this instance we inherited a sub-tenant who continues to trade from the property at the same rent. Warehouse portfolio Llantrisant Value £’000 6,500 Nottingham 6,300 Milton Keynes 5,700 Retail warehouse portfolio 1 4 5 Grantham Wisbech Bicester St Austell 4,250 16 Crawley Value £’000 6,700 6,250 6,000 2,525 21,475 Leisure portfolio Rubery Ipswich Coventry 7 15 19 Total Value £’000 5,150 3,000 1,900 10,050 Ash Vale Andover Kidlington Bedford Total Office Total 4,250 3,250 4,125 3,175 37,550 A lot of offices have remained unoccupied for a significant period throughout 2020 due to the pandemic, and it is anticipated that the new work from home style will have long-term repercussions on the office sector. There will be greater demand for non-core offices to reduce commuting to busy city centres; although, counter to this, there is a desire from the workforce after months of lockdown to return to ‘normal’ and a more sociable working environment. The offices in our portfolio are fully occupied and we expect them to perform well. High street retail 2020 was another poor year for the high street with a significant number of retailers entering into administration/CVAs – Debenhams, Arcadia, EWM, M&Co, T M Lewin, etc. Highcroft also had experience of this when Jigsaw went into CVA in September; however, our other tenants continue to trade but undoubtedly conditions are very difficult; we continue to work closely with our tenants. This sector accounts for only 6.7% of our portfolio. Alternatives We are constantly looking for opportunities to acquire new properties and would look favourably at the alternatives sector – retirement homes, hospitals, etc. – where we believe there may be some good growth to come in both rental and capital terms. This would also help to further balance our portfolio and spread our risk. Total property asset value £82.1m Number of property investments 22 2 3 6 8 9 13 11 14 Office portfolio Oxford Cardiff 10 12 Total Value £’000 4,150 3,300 7,450 High street retail portfolio 16 17 Oxford (2 units) Value £’000 2,550 20 21 22 Total Leamington Spa 1,285 Norwich Oxford 950 750 5,535 Stock code: HCFT www.highcroftplc.com Highcroft-AR-2020.indd 7 Highcroft-AR-2020.indd 7 Job number 12 April 2021 6:54 pm V8 07 12-Apr-21 6:55:42 PM 12-Apr-21 6:55:42 PM Job number 12 April 2021 6:54 pm V8Highcroft Investments PLC Annual report and accounts for the year ended 31 December 202008WarehousesTotal value: £37.6mTenureLet toValue £’000Size sq ft13AndoverLong leasehold warehouseSaint-Gobain t/a 3,25019,3319Ash ValeFreehold warehouse4,25025,08114BedfordFreehold warehouse3,17540,53611KidlingtonFreehold warehouse4,12530,6382LlantrisantVirtual freehold warehouse/r&d facility6,500107,6846Milton KeynesFreehold warehouse5,70043,4443NottinghamFreehold warehouse6,30083,9168St AustellFreehold warehouse4,250250,087Our portfolio continuedHighcroft-AR-2020.indd 8Highcroft-AR-2020.indd 812-Apr-21 6:55:50 PM12-Apr-21 6:55:50 PMJob number 12 April 2021 6:54 pm V8Stock code: HCFTwww.highcroftplc.com09BUSINESS OVERVIEWRetail warehousesTotal value: £21.5mTenureLet toValue £’000Size sq ft5BicesterFreehold retail warehouse6,00029,13018CrawleyFreehold retail warehouse2,5256,8981GranthamFreehold retail warehouse 6,70042,0904WisbechFreehold retail warehouse park 6,25055,628LeisureTotal value: £10.0mTenureLet toValue £’000Size sq ft19CoventryFreehold leisure 1,9005,9535IpswichFreehold leisure/retail* * in administration3,00043,7387RuberyFreehold leisure5,15038,264Highcroft-AR-2020.indd 9Highcroft-AR-2020.indd 912-Apr-21 6:55:56 PM12-Apr-21 6:55:56 PMOur portfolio continued Office Total value: £7.5m 10 Oxford Summertown Tenure Let to Value £’000 Size sq ft 12 Cardiff Freehold offices Freehold offices 4,150 11,526 3,300 17,797 High street retail Total value: £5.5m 20 Leamington Spa 21 Norwich 22 Oxford High Street 17 18 Oxford High Street Tenure Let to Value £’000 Size sq ft Freehold shop Sabre Retail Ltd t/a 1,285 3,139 Freehold shop 950 4,658 Freehold shop Void 750 1,741 One long leasehold One freehold shop/office Robinson Webster t/a 2,550 6,895 10 Highcroft Investments PLC Annual report and accounts for the year ended 31 December 2020 Highcroft-AR-2020.indd 10 Highcroft-AR-2020.indd 10 Job number 12 April 2021 6:54 pm V8 12-Apr-21 6:56:04 PM 12-Apr-21 6:56:04 PM Job number 12 April 2021 6:54 pm V8Stock code: HCFTwww.highcroftplc.com11BUSINESS OVERVIEWRetail warehouse - CrawleyWarehouse - AndoverWarehouse - Ash ValeWarehouse - LlantrisantOffices - OxfordOffices - CardiffWarehouse - St AustellWarehouse - KidlingtonA diversified portfolio well-placed to perform in uncertain timesHighcroft-AR-2020.indd 11Highcroft-AR-2020.indd 1112-Apr-21 6:56:20 PM12-Apr-21 6:56:20 PMJob number 12 April 2021 6:54 pm V8STRATEGIC REPORTOur marketplace14Our business model16Our strategy18Our key performance indicators20Operating review22Financial review24Our risks28Going concern statement32Stakeholder engagement33Corporate social responsibility34Highcroft-AR-2020.indd 12Highcroft-AR-2020.indd 1212-Apr-21 6:56:21 PM12-Apr-21 6:56:21 PMHighcroft-AR-2020.indd 13 Highcroft-AR-2020.indd 13 Job number 12 April 2021 6:54 pm V8 12-Apr-21 6:56:22 PM 12-Apr-21 6:56:22 PM Our marketplace Economic backdrop The UK economy contracted by a record 10% in 2020, caused by the COVID-19 pandemic and the ensuing lockdowns; businesses struggled to survive and the workforce was fearful of attending workplaces. The protracted Brexit negotiations added to the frustration of businesses, which were unable to plan ahead and put any prospect of expansion on hold. However, interest rates remained at an all-time low but with the new threat of negative interest rates in the background. The overall negative effect on the economy has been profound. Looking forward, the forecast for 2021 is a slow start to the year with a projected GDP growth of 3.4% to 4.6%; the accelerating roll out of the vaccine programme will give a positive drive to the economy and there is a widespread desire to return to work and normality. Brexit will cause problems for specific areas such as financial services and some areas of logistics, but the overall effect will be a long-term drag on growth. All property forecast summary Dec-21 Dec-22 Dec-23 2021-2025 ERV Growth (% pa) Equivalent Yield (% eop) Capital Growth (% pa) Total Return (% pa) Source: Colliers International Total return by sector % 15 10 5 0 -5 -10 -15 (1.9) 5.9 (0.8) 3.8 1.0 5.8 1.2 6.3 2.0 5.9 0.3 5.5 0.9 5 bps 0.6 5.6 Retail All Office All Industrial All Property 2020 2021 2022 2021-25 Source: MSCI Colliers International Market trend What this means for Highcroft How are we responding COVID-19 The pandemic caused by COVID-19 has been the overriding dominant factor to the economy during 2020. Some of our tenants have been seriously affected by the restrictions imposed by the lockdowns – particularly in the retail and hospitality sectors. We work with our tenants to ensure the continuity of their businesses; however, high street retail forms the smallest part of our portfolio. Online retailing There has been a dramatic increase in online retailing. A potential impact on the future rental growth of our high street retail and retail warehouse assets. We have reduced our exposure to the high street over the past few years and closely monitor our retail warehouse properties. Economic backdrop UK GDP contracted by an estimated 10% in 2020 and is estimated to grow by 3.4% to 4.6% in 2021. The businesses of some of our tenants were badly affected in 2020. Our assets should perform if consumer spending increases as forecast. Brexit 2020 finally witnessed the completion of a trade agreement with the EU. This will provide the business community with confidence and certainty for future trading. Our investments will benefit from this increased confidence and resultant growth. 14 Highcroft Investments PLC Annual report and accounts for the year ended 31 December 2020 Highcroft-AR-2020.indd 14 Highcroft-AR-2020.indd 14 Job number 12 April 2021 6:54 pm V8 12-Apr-21 6:56:23 PM 12-Apr-21 6:56:23 PM STRATEGIC REPORT Market trend What this means for Highcroft How are we responding Industrial The demand for industrial space in 2020 was the highest on record. Offices High prices are still being achieved making it difficult for Highcroft to buy and show good returns, although we still seek out opportunities. This demand has meant Highcroft has achieved good increases in rents upon lease renewals and significant uplifts on valuation of some of our industrial assets. The work from home discipline imposed by the lockdowns has led to a review of future office occupation and demand, particularly in city centres. Highcroft’s office investments are in locations not affected by this new sentiment. Our investments have performed well and we look to improve upon this performance. Retail warehouses Retail warehouses were also affected by online sales and lockdowns, but certain ‘essential’ traders thrived in this period. We have a mix of tenants in this sector including Jewson, Wickes and Pets at Home, who traded for most of the year within the government guidelines. Our rent collection rates were high and all of our units are occupied. High street retail The lockdowns enforced by the pandemic saw an unprecedented amount of CVAs, administrations and receiverships on the high street. We have a minimal exposure to the high street but 2020 saw one of our tenants, Jigsaw, enter into a CVA. Where necessary, we work out payment plans to assist our tenants and potentially revert to turnover rents when a tenant is in CVA. Leisure The leisure, food and beverage industries were the most affected by the pandemic lockdowns. This does not form a large part of our portfolio, but we experienced one CVA and one administration. One of our units in a multi-let site has become vacant in 2021 and is being marketed, and we inherited a sub-tenant from the tenant in CVA. Investment Total returns from nearly all sectors of the property market were negative in 2020, ranging from offices at -0.9% to shopping centres at -19.0%; the exception being distribution, which showed a total return of +8.9%. Overseas investors were still present in the UK market in 2020, although the uncertainties of the Brexit negotiations still led to an element of caution. There were very few opportunities available in the market worth Highcroft’s consideration and we did not want to pay such low yields for distribution. We took a cautious approach during 2020 and concentrated on managing our existing assets, which resulted in good lease renewals at enhanced rents. Overseas investors look mainly at London, and trophy buildings. These are not the sectors in which Highcroft look to compete. Investors still seeking secure, well-let investments on long leases. Prices for this category are still very keen. Highcroft is prepared to look at alternatives to this to obtain better returns on properties we consider have a good long-term future and in regions further from the south-east. Stock code: HCFT www.highcroftplc.com Highcroft-AR-2020.indd 15 Highcroft-AR-2020.indd 15 Job number 12 April 2021 6:54 pm V8 15 12-Apr-21 6:56:23 PM 12-Apr-21 6:56:23 PM Our business model Our business model and structure Our method of value generation is simple: we aim to maximise our return for shareholders, primarily via an increase in dividend. We endeavour to operate a cyclical model, buying when the market is low, generating rental income and selling, if appropriate, when the market is high in order to maximise cash to reinvest. We use a combination of our key resources in order to select the best opportunities within our chosen market sectors, redevelop and refurbish in order to increase the value of the property, thus allowing us to secure higher rental incomes. We let our properties out on long leases, guaranteeing consistent income for our shareholders. We are: Shareholder focused Market aware Opportunity driven Our key resources and competitive advantage Key activities 1 Buying We research, identify and react quickly to market opportunities, creating competitive advantage. Using our property management skills, we create opportunities within our portfolio to improve value and/or yield. What we look for: • Location • Growth markets • Areas of decline • Potential of development Read more about our marketplace on pages 14 to 15 People We are a small team with diverse skill sets. Our knowledge and understanding of the marketplace informs decisions. As a source of competitive advantage, the talent of our staff is integral in prudent decision making, ensuring that our performance is in line with our objectives. Financial strength We have a medium level of gearing for a company investing in property. Our conservative capital structure and track record of delivering strong returns make us a lower risk investment than others. Our tenants Our tenants are diverse companies with wide-ranging requirements. As shown on pages 08 to 10, they are mainly large commercial companies requiring property on long-term leases. Our key relationships Our key relationships are with our tenants, our advisory team and with local communities. Read more about our stakeholders on page 33 2 Generating rental income We use a combination of our key resources in order to select the best opportunities within our chosen market segments, to asset manage, redevelop or refurbish, to increase the value of the property. Asset management: We maximise the value of our portfolio through forward thinking and practical planning. Redevelop and refurbish: We consider sustainable development, redevelopment or refurbishment where opportunities can be created. Maintain strong relationships: We work closely with our advisers and specialists to ensure that the right decisions are taken to maximise the opportunities for generating rental income. Money reinvested 16 Highcroft Investments PLC Annual report and accounts for the year ended 31 December 2020 Highcroft-AR-2020.indd 16 Highcroft-AR-2020.indd 16 Job number 12 April 2021 6:54 pm V8 12-Apr-21 6:56:23 PM 12-Apr-21 6:56:23 PM STRATEGIC REPORT Our purpose Highcroft’s purpose is to provide our tenants with excellent properties in optimal locations, enabling them to succeed, and our shareholders to benefit on a long-term sustainable basis. Our culture Highcroft’s culture is hard-working and flexible, progressive and pragmatic, collaborative and supportive, efficient and effective. Our values Highcroft’s values are reputation, integrity and good governance built on long- term relationships, and on sustainability and responsibility. Key activities The value we generate 3 Selling We sustain income through letting our properties to commercial tenants on long leases and managing our properties ensuring we continually meet the needs of our tenants. Average length of lease 5.9 years Shareholders Short term: Secure dividend income stream. Medium term: Income growth in excess of inflation. Long term: Increased shareholder value via sustained capital and income growth, arising from our low-risk business strategy. Tenants Short term: Supportive landlord/asset manager/tenant relationships. Medium term: Improving environments as opportunities to enhance our properties are identified and actioned. Long term: High quality environments that help our tenants succeed with their business strategy. Society Short term: Taking cost-effective action to reduce the environmental impact of our properties. Medium term: Helping to support the terminally ill and disadvantaged via our charitable donations. Long term: Enabling economic prosperity by supporting the provision of appropriate space in appropriate locations to encourage employment and business to flourish. Money reinvested Stock code: HCFT www.highcroftplc.com Highcroft-AR-2020.indd 17 Highcroft-AR-2020.indd 17 Job number 12 April 2021 6:54 pm V8 17 12-Apr-21 6:56:23 PM 12-Apr-21 6:56:23 PM Our strategy Introduction to our strategy The objective of the group is to generate secure and sustainable income growth to drive a progressive dividend, which, when coupled together with capital value growth, will deliver strong total shareholder returns. We set clear strategic priorities against which we measure our performance. The effect of the global COVID-19 pandemic on our strategy As the pandemic began to unfold during the second quarter, the board considered the impact of this on Highcroft’s stated strategy. It concluded that, whilst there was no change to the long-term strategy of the business, in the short term certain actions should be carried out to ensure that the business was being managed prudently, particularly with respect to cashflow. It was agreed that Highcroft would take advantage of an HMRC concession regarding PID payments and pay a final dividend for 2019 at a 20% discount to the prior year, and the 2020 interim dividend was held at the same level as the prior year, enabling the group to conserve cash. It was decided not to pursue any disposal or acquisition opportunities in the year and to consolidate our positions with our existing tenants. In addition, the group drew an additional £1m from Handelsbanken plc in November 2020 to further enhance its cash resources. Our purpose Highcroft’s purpose is to provide our tenants with excellent properties in optimal locations, enabling them to succeed, and our shareholders to benefit on a long-term sustainable basis. Our strategic priorities 1. Build a high-quality portfolio 2. Use capital effectively 3. Deliver sustainable growth s d n e r t t e k r a M S t a k e h o l d e r s i n t e rests Understanding the external environment Aligning to our stakeholders interests All of our strategic priorities and the associated risk management strategies are developed with a focus on our overall objective of generating progressive returns for our investors with benefits to all our stakeholders. We pay great attention to market trend forecasts and consider the impact that these may have on our strategy. Our decision to rebalance the portfolio away from residential and high street retail assets, and focus more on warehousing assets, together with a move to the larger average lot size, was taken in anticipation of evolving market trends. Our strategy was also altered in the short term, as the COVID-19 pandemic evolved. Underpinned by our values: Shareholder focused Market aware Opportunity driven 18 Highcroft Investments PLC Annual report and accounts for the year ended 31 December 2020 Highcroft-AR-2020.indd 18 Highcroft-AR-2020.indd 18 Job number 12 April 2021 6:54 pm V8 12-Apr-21 6:56:24 PM 12-Apr-21 6:56:24 PM STRATEGIC REPORT Strategic priority How this priority will help us achieve our overall objective Progress in 2020 Future opportunities Link to risks – page 30 Building a portfolio of high-quality commercial properties in the right places occupied by the right tenants with good lease fundamentals A B C Continue to grow our commercial property portfolio with a bias towards the south of England and Wales. Increase the average lot size to £5m, with no asset representing more than 15% of the portfolio. The directors regard commercial assets in these geographical areas as being best placed to outperform the market in any cycle. These locations are also considered relatively low risk and fit our risk profile. As many costs are directly related to the number of assets rather than their size, increasing the average lot size should reduce average property costs, thus increasing the net property income available for distribution. Seek capital growth opportunities within our property asset base. Identifying growth opportunities will enable either enhanced sales prices to be achieved or improve the yield from our properties. As a result of the COVID-19 pandemic, we took the decision to consolidate our portfolio during 2020 and not to pursue any acquisition opportunities. Average lot size decreased slightly to £3.73m from £3.94m, wholly due to a decrease in the valuation of the portfolio. As asset sourcing remains challenging in 2021, the geographical spread may need to be expanded to ensure that adequate yields are maintained without increasing the inherent risk to an unacceptable level. Future growth will come from revaluation gains, new assets being bought that are larger lots than our average, and from the disposal of smaller underperforming units. Lease events which occurred during the year have led to an improvement in yields on those properties. Options are being considered for additional asset management opportunities. Using available capital, including debt, efficiently and effectively D Use medium- term gearing at a modest level. The use of keenly priced debt to expand our property portfolio should increase our net property income. Deliver a sustainable income growth to our investors E Provide a dividend increase in excess of inflation. Maintenance of a property income distribution stream that is increasing in real terms is our highest priority for enhancing shareholder value. £4m of maturing medium- term debt with a weighted average interest rate of 4.45%, refinanced and supplemented with an additional £1m medium- term loan with a weighted average interest rate of 2.22%. Our debt has increased to £27.2m. Highcroft took the decision to conserve cash and took advantage of the HMRC concession regarding PID payments in 2020. Dividends payable for the year increased by 3p to 51p (6.25%) and we are also proposing a 2020 special dividend of 6p per share. We have headroom with one lender of £2.8m and would consider additional gearing to fund further acquisitions alongside existing cash resources. As a REIT, we are required, subject to HMRC COVID-19 concessions, to distribute 90% of our net property income. ALL 1 2 3 4 3 4 1 2 3 4 5 5 6 Risk key 1 2 3 Economic outlook Political and regulatory outlook Occupier demand and tenant default 4 5 6 Commercial property investor demand Availability and cost of finance Business strategy 7 Key personnel Stock code: HCFT www.highcroftplc.com Highcroft-AR-2020.indd 19 Highcroft-AR-2020.indd 19 Job number 12 April 2021 6:54 pm V8 19 12-Apr-21 6:56:24 PM 12-Apr-21 6:56:24 PM Our key performance indicators (KPIs) The following key performance indicators are considered to be the most appropriate for measuring how successful the company has been in meeting its strategic objectives. Due to the COVID-19 pandemic and its effect on dividend policy the board has adopted a KPI of “achieve an adjusted EPS in line with the market” to replace its KPI of “increase dividends payable to shareholders”. 1. Increase value of property assets 2. Increase in net property income 3. Increase in net asset value per share 2020 2019 2018 2017 2016 £82.1m £86.7m £77.7m £77.1m £66.0m 2020 2019 2018 2017 2016 £5.5m £5.7m £4.9m £4.5m £3.7m 2020 2019 2018 2017 2016 1,104p 1,175p 1,207p 1,161p 1,071p Link to strategy A C D E Link to risks 1 2 3 Link to strategy A B C D E Link to risks 1 2 3 Link to strategy A C D E Link to risks 1 2 3 Why we use this indicator The value of our commercial property portfolio and its movement on a like- for-like basis versus the market give a good measure of the performance of our assets, on a capital basis, in the year. Why we use this indicator As a REIT, we are required to distribute 90% of our relevant property profits. Increasing net property income contributes towards an increase in our dividend. Commentary on performance The value of our assets has decreased by £4,650,000, 5.4% on a like-for-like basis, which is better than the all property MCSI UK result of -6.2%. Looking forward The sector and geographical spread of our assets, together with the lease lengths and covenant strength, result in a portfolio that should perform well in a challenging market. Commentary on performance Net property income decreased by 3.4% in the year as a result of a bad debt provision of £366,000 and increased property costs of £70,000, offset by a £244,000 growth in rental income. Looking forward We expect a period of consolidation as we take positive asset management steps to deal with voids and to create opportunities arising from our potential sale of Andover in 2021. Why we use this indicator Net asset value per share measures the value of shareholders, equity in the business. It gives a simple, clear message of the overall performance, taking into account asset performance, the result for the year and dividends to shareholders. Commentary on performance Net asset value per share decreased by 6% in 2020, primarily as a result of the decrease in our property valuation, offset by a reduction in our dividend distribution in 2020. Looking forward The market remains challenging in 2021 but our asset base is strong and we believe that it is well placed to outperform the market in the future. 20 Highcroft Investments PLC Annual report and accounts for the year ended 31 December 2020 Highcroft-AR-2020.indd 20 Highcroft-AR-2020.indd 20 Job number 12 April 2021 6:54 pm V8 12-Apr-21 6:56:26 PM 12-Apr-21 6:56:26 PM Job number 12 April 2021 6:54 pm V8Stock code: HCFTwww.highcroftplc.com21STRATEGIC REPORTKPI key1–4Financial KPIs5–6Non-financial KPIs4. Achieve an adjusted EPS per share that is in line with the market5. Average occupancy levels6. Maintain the quality of our tenant covenantsThis KPI was new in 2020 and the performance was 5.8% compared to a weighted market return of 5.5%.2020201920182017201699%100%100%100%100%Link to strategyE Link to risks1 2 3 Link to strategyELink to risks1 2 3 Link to strategyELink to risks1 2 3 Why we use this indicatorThis KPI measures our adjusted earnings per share and compares it to the MSCI income return for the year weighted to our portfolio. This links our performance for our shareholders to the performance of the market as a whole.Commentary on performanceThe 2020 performance was greater than the MSCI income return for the year which is considered to be a commendable performance in a challenging year.Looking forwardIt is hoped that future increase will remain ahead of the market.Why we use this indicatorThis indicator is a measure of the extent to which we are maximising income and minimising void costs.Commentary on performanceWe had 99% occupancy at the year-end, which remains ahead of general market performance. Looking forwardWhilst we will strive to maintain high occupancy levels one unit in a multi-let building has become void in 2021, and we have a number of tenants who have been particularly badly affected by COVID-19.Why we use this indicatorThis indicator is an indication of the quality of our long-term income stream.Commentary on performanceWe continue to have the majority of our properties let to strong covenants. During the year one covenant improved as it went to the parent company, and we took the covenant of an undertenant at our Coventry property to replace a tenant in CVA.Looking forwardThe strength of the covenant will remain important in assessing new acquisitions.Highcroft-AR-2020.indd 21Highcroft-AR-2020.indd 2112-Apr-21 6:56:27 PM12-Apr-21 6:56:27 PMOperating review In 2020 we took a cautious approach to the market and concentrated our efforts on liaising with our tenants, minimising voids and maximising our rent collections” Simon Gill Chief Executive Property income Contracted annual rent at year end £5,907,000 £6,253,000 £5,025,000 £4,966,000 £4,110,000 (Decrease)/increase in year Occupancy (5.5)% 99% +24.4% 100% +1.2% 100% +20.8% 100% +9.5% 100% 2020 2019 2018 2017 2016 2020 was not only the year of COVID-19, but because of the pandemic, it became the year of the CVA, administration and receivership. The headline news became a daily bulletin of the latest crisis, mainly in the retail, and food and beverage sectors, which witnessed the closure of many high street shops, cafés and restaurants. The government tenant protection scheme meant that many landlords could not recover any rent for 12 months and certain tenants took advantage of this situation. The non-payment of rent by many tenants led to significant reductions in rent collections for many property companies, particularly those with a retail bias. Over the past few years, Highcroft has concentrated in realigning its property portfolio and reducing its exposure to the high street, which meant that we were able to maintain a high rent collection rate. Whilst we experienced CVAs with The Restaurant Group and Jigsaw, and an administration with DW Sports and Fitness Club, we also achieved significant lease renewals with IKEA and Parcelforce, and did a regearing with Nuffield Health for a new 20-year lease without breaks. These management events have increased our income and improved the average unexpired terms of our leases. Other negotiations are currently in progress. During 2020, one small high street retail unit became void due to a break clause being exercised. We continued with 100% occupancy throughout the rest of our portfolio, although one additional unit will become void in Q2 2021. Investments Our property valuation decreased by 5.4%. This compares favourably to the MSCI UK monthly all property capital value decrease of 6.2%. There were significant increases, 22%, in the value of our Kidlington property, and 16 % in our Milton Keynes property, due to lease renewals at higher rents. The industrial sector showed an increase of 1.9%, which is lower than the MSCI comparable of 3.65%, as we had two properties with relatively short leases that performed less well. Since the year end, a new reversionary lease has been agreed on one of these properties. In line with the market, our high street retail sector witnessed noticeable decreases in valuation, of between 12.8% and 18.1%, as the existing poor performance of the high street was exacerbated by the impact of the COVID-19 pandemic. Our retail warehouse assets also showed a combined fall of 10.1%, compared to an MCSI performance of -14.8%. Our Grantham and Bicester assets, with their strong covenants, performed relatively well with a valuation fall of 5.6% and 7.7% respectively. Wisbech showed a fall of 14.4% and Crawley a drop of 15.8%. Five-year summary of acquisitions and disposals £7.0m Warehouse Llantrisant £4.9m Leisure Ipswich £5.2m Leisure Rubery 19 £11.9 m 0 2 2 0 1 8 £ 5.2 m £2.5m Leisure units Coventry £1.8m High street retail Cirencester 2 0 1 6 £ 9 . 9 m £37.1m Total acquisitions £7.4m Retail warehouse Grantham 7 £ 1 0.1m 2 0 1 £4.5m Warehouse St Austell £5.6m Warehouse Nottingham £3.7m Warehouse Southampton £0.4m Residential x2 2 0 1 6 m 2 . 6 £ 8 1 0 2 £11.5m Total disposals £ 3 . 0 m m 0 17 £2.3 2 £1.5m Warehouse Warwick £1.1m High street retail Kingston £2.3m High street retail Staines £0.7m Residential Note: there were no acquisitions or disposals in 2020. 22 Highcroft Investments PLC Annual report and accounts for the year ended 31 December 2020 Highcroft-AR-2020.indd 22 Highcroft-AR-2020.indd 22 Job number 12 April 2021 6:54 pm V8 12-Apr-21 6:56:29 PM 12-Apr-21 6:56:29 PM STRATEGIC REPORT Contracted rent at the year- end pa £5.9m Reduction in contracted rent pa 5.5% Rental pipeline £34.8m Reduction in rental pipeline 10.9% We have performed relatively well in a year where the marketplace was dominated by the effects of the worldwide pandemic.” Our leisure assets showed a combined fall in value of 14.5%, primarily due to the fact that the primary tenant at our Ipswich property, DW Sports and Fitness Club, went into administration in August 2020. The property was occupied under licence for part of the subsequent period but the lease has now reverted to the administrator. Property acquisitions and disposals We made no property acquisitions or disposals in 2020 as we concentrated on managing our existing portfolio and assisting some of our tenants who were experiencing difficult trading conditions due to the pandemic. It was not the year to sell retail assets, which, even if it were possible to sell, were realising only significantly discounted prices. Meanwhile, warehouse and logistics were commanding premium figures making any new acquisitions too expensive to give our shareholders a satisfactory return. The overall volume of available investments was dramatically reduced in 2020. Sector balance The sector balance in our portfolio is now, by valuation: Warehouse Retail warehouse Leisure Office Retail Residential Total 2020 % 2019 % 2018 % 2017 % 2016 % 46 26 12 9 7 0 42 27 14 9 8 0 39 33 9 9 10 0 100 100 100 40 34 3 9 13 1 100 29 39 3 10 18 1 100 Over the past five years, we have worked to reduce our exposure to the retail sector, particularly the high street, whilst increasing our holdings in other sectors where we consider there are prospects for better growth and security of income. We continue to look for opportunities and opportunistic deals throughout the market. Simon Gill Chief executive 7 April 2021 Stock code: HCFT www.highcroftplc.com Highcroft-AR-2020.indd 23 Highcroft-AR-2020.indd 23 Job number 12 April 2021 6:54 pm V8 23 12-Apr-21 6:56:29 PM 12-Apr-21 6:56:29 PM Financial review In a challenging marketplace, in a year dominated by the COVID-19 pandemic, our underlying financial performance for the year was resilient.” Overview Profitability Net rental income Adjusted earnings per share IFRS profit for the year Net admin expenses to gross rent Investment returns Net asset value per share Dividend per share* Total shareholder return Return on equity Financing Net debt Net debt to property value Average cost of debt at the year end Roberta Miles Finance director and company secretary 2020 2019 £5,464,000 £5,656,000 67.7p 78.5p (£1,147,000) £1,154,000 17.6% 14.1% 1,104p 57p (18.5%) (1.9%) 1,175p 48p 12.7% 1.9% £23,905,000 £24,641,000 29% 3.1% 28% 3.5% * For 2020 the figure includes a special dividend of 6p per share. The group has shown resilient performance during 2020, which has been dominated by the COVID-19 pandemic. Gross rental income increased by 4.2% to £6,084,000; however, net rental income was affected by a bad debt provision of £366,000 and reduced by 3.4% to £5,464,000. Our administrative and finance costs also increased in the year, primarily due to the effect of the second year of the Highcroft Incentive Plan and an adjusted accounting treatment for the first year, and the increased costs associated with being a listed company. Our underlying adjusted revenue profit (excluding realised and revaluation gains) has decreased by 14% but notwithstanding this we are proposing an increase in our dividend payable for the year of 6.25% and a special dividend of 6.0p per ordinary share. Net assets have reduced by 5.9% to £57,121,000 and we have a moderate net debt to property value of 29%. The average cost of debt at the year end is 3.1%, which reduced from 3.5% last year due to the effect of the two loan refinancing activities that took place in 2020, these had an average interest rate of 2.2%. Our investment properties decreased in value by £4,650,000 (5.4% on a like-for-like basis). We are proposing a final dividend this year of 30p per share, giving a total dividend for 2020 of 51p per share, an increase of 6.25%. Additionally, we are proposing a special dividend of 6p per share for 2020, giving a total dividend increase for 2020 of 18.7%. Since 2009 (our first full accounting year as a REIT), our dividends have risen by a total of 119% – a compound annual increase of 7.4%. In the same period, our net assets per share have increased by 66% from £6.66 to £11.04 per share. 24 Highcroft Investments PLC Annual report and accounts for the year ended 31 December 2020 Highcroft-AR-2020.indd 24 Highcroft-AR-2020.indd 24 Job number 12 April 2021 6:54 pm V8 12-Apr-21 6:56:29 PM 12-Apr-21 6:56:29 PM STRATEGIC REPORT Commercial property income Residential property income Income from equity investments Income Total income has increased by 4%. 6,500 6,000 5,500 0 0 0 £ ’ 5,000 4,500 4,000 3,500 3,000 Total £’000 6,084 3 5,840 54 8 5,035 92 16 4,749 2020 6,084 2019 5,843 2018 5,097 2017 4,857 144 20 3,886 2016 4,050 The annual growth in our property income can be summarised as: Increase in gross rental income The growth in property income is comprised below: 2020 % 4 2019 % 16 2018 % 6 2017 % 22 2016 % 14 Full year of 2019 acquisitions 299 Negative effects of COVID-19 concessions (111) Other changes (8) Positive effects of asset management activity 119 Effect of void (55) 6,000 5,840 5,000 0 0 0 £ ’ 4,000 3,000 2019 6,084 2020 Administration and other expenses Directors’ remuneration Auditor’s remuneration including other services Other expenses Administration expenses Net finance expense Total expenses 2020 £’000 801 58 210 1,069 892 1,961 2019 £’000 2018 £’000 2017 £’000 2016 £’000 597 35 194 826 850 541 32 163 736 699 1,676 1,435 492 31 140 663 649 1,312 451 58 142 651 495 1,146 Director’s remuneration rose primarily due to two years of the share element of the Highcroft Incentive Plan being expensed in the year (2019 one year). In addition, a change in accounting treatment resulted in a change to the timing of the recognition of cost of the share award. More information can be found in the director’s remuneration report on pages 50 to 60. Other expenses have increased as a result of the rising professional costs associated with our status as a premium main marked listed entity. It is likely that these costs will increase significantly in the future due to the governance and regulatory demands facing all listed entities. Net finance expenses increased as a result of a full years cost of the new £6,800,000 borrowing in 2019, net of the interest savings arising from our £4,000,000 loan refinancing and additional £1,000,000 loan drawn in 2020. Stock code: HCFT www.highcroftplc.com Highcroft-AR-2020.indd 25 Highcroft-AR-2020.indd 25 Job number 12 April 2021 6:54 pm V8 25 12-Apr-21 6:56:30 PM 12-Apr-21 6:56:30 PM Financial review continued Summary of profit before tax and income tax credit on revenue activities Profit before tax Income tax credit Profit for the year 2020 £’000 3,503 – 3,503 2019 £’000 3,983 72 4,055 2018 £’000 4,445 67 4,512 2017 £’000 3,287 61 3,348 2016 £’000 2,840 72 2,912 The decrease in the revenue profit for the year in 2020 was influenced by a decrease in net rental income of £192,000, a decrease in dividend revenue of £3,000, and an increase in administration expenses of £243,000 and net finance expenses of £42,000. Investments 90,000 80,000 0 0 0 £ ’ 70,000 60,000 50,000 Total £’000 82,060 86,710 679 77,700 2,131 798 76,315 Commercial property* Residential property* Equities 2,469 584 65,413 2020 £82,060 2019 £86,710 2018 £78,379 2017 £79,244 2016 £68,466 * Including assets held for sale classified as current asset investments Our investments decreased due to revaluation losses. Summary of property investment activities During 2020, primarily due to the effect of the COVID-19 pandemic on the marketplace, there were no additions to or disposals of property. Acquisitions at cost Net proceeds from disposals Net investment/(divestment) into/(from) the property portfolio 2020 £’000 – – – 2019 £’000 11,898 – 2018 £’000 5,226 (6,090) 2017 £’000 10,086 (2,259) 2016 £’000 9,896 (2,972) 11,898 (864) 7,827 6,924 Realised and unrealised property gains Our valuations are undertaken by Knight Frank LLP as reported in Note 8 to the consolidated accounts. The capital performance of our property portfolio can be summarised as follows: Realised gains on investment property Realised losses on investment property Revaluation gains on investment property Revaluation losses on investment property 2020 £’000 2019 £’000 – – – 2,525 (7,175) (4,650) – – – 739 (3,627) (2,888) 2018 £’000 967 – 967 2,600 (2,116) 484 2017 £’000 1 – 1 3,365 (77) 3,288 2016 £’000 134 – 134 2,509 (1,536) 973 Overall, our property portfolio reduced in value during the year by £4,650,000, which represents 5.4% on a like-for-like basis. Our most significant revaluation gains related to two of our warehouse units as a result of successful lease renewals during the year. The most significant revaluation losses were in our leisure, high street retail and retail warehouse assets, where a further move in market sentiment, coupled with the effect of two CVAs and an administration, has resulted in a reduced valuation. The largest individual decrease, representing 35% of the total valuation fall, was at our Ipswich property, where one of the tenants went into administration in the year and, after a short period of occupancy under licence from the administrator, the property has reverted to the administrator. The revaluation movement is summarised by class of asset in the following table. 26 Highcroft Investments PLC Annual report and accounts for the year ended 31 December 2020 Highcroft-AR-2020.indd 26 Highcroft-AR-2020.indd 26 Job number 12 April 2021 6:54 pm V8 12-Apr-21 6:56:30 PM 12-Apr-21 6:56:30 PM Warehouse Office High street retail Leisure Retail warehouse STRATEGIC REPORT Valuation movement £’000 Movement to opening value or cost if later 690 (25) (1,190) (1,700) (2,425) (4,650) 1.9% (0.3%) (17.7%) (14.5%) (10.1%) (5.4%) Financing and cashflow Net cash generated from operating activities was £340,000 lower at £3,220,000. The reduction primarily arose from a number of factors including lower profitability, an increase in trade debtors as tenants take slightly longer to pay their rent, and an increase in accrued rent receivable arising from the IFRS spreading of rent incentives. It is the directors’ intention to reinvest surplus cash, that is not required for PID payments into the commercial property portfolio when suitable opportunities arise. Opening cash Net cash from operating activities Investment acquisitions – property Investment acquisitions – equities Investment disposals – property Investment disposals – equities Dividend paid Net new bank borrowings Closing cash Analysis of borrowing Handelsbanken term loans 2030 Handelsbanken term loans 2029 Handelsbanken term loan 2027 Handelsbanken term loan 2026 Handelsbanken term loan 2022 Handelsbanken term loans 2020 Total debt Cash Net debt Net assets Gearing (net of cash) 2020 £’000 1,559 3,220 – – – – (2,484) 1,000 3,295 2020 £’000 5,000 6,800 4,500 3,400 7,500 – 27,200 (3,295) 23,905 57,121 42% – – 724 (2,829) 6,800 1,559 2019 £’000 – 6,800 4,500 3,400 7,500 4,000 26,200 (1,559) 24,641 60,721 41% 2019 £’000 5,202 3,560 2018 £’000 1,904 3,620 2017 £’000 3,369 3,568 (11,898) (5,226) (10,086) – 6,090 1,333 (2,519) – 5,202 – 2,259 477 (2,183) 4,500 1,904 2016 £’000 4,852 2,909 (9,896) (3) 2,972 1,176 (2,041) 3,400 3,369 2018 £’000 2017 £’000 2016 £’000 – – 4,500 3,400 7,500 4,000 19,400 (5,202) 14,198 62,384 23% – – 4,500 3,400 7,500 4,000 19,400 (1,904) 17,496 59,977 29% – – – 3,400 7,500 4,000 14,900 (3,369) 11,531 55,325 21% Our average cost of total debt was 3.13% (2019 3.50%). Outlook The investment and occupational commercial property markets remain cautious in the current macro economic climate. However, we believe that the quality of our assets, our ongoing asset management programme and spread of sector risk, all combined with our concentration of assets in the south east of England and Wales, means that we are in a strong position to deliver a secure dividend return to our shareholders. We remain optimistic about the prospects for the group and its ability to meet its strategic objectives in the medium and long term. Approved by the board and signed on its behalf Roberta Miles Finance director 7 April 2021 Stock code: HCFT www.highcroftplc.com Highcroft-AR-2020.indd 27 Highcroft-AR-2020.indd 27 Job number 12 April 2021 6:54 pm V8 27 12-Apr-21 6:56:31 PM 12-Apr-21 6:56:31 PM The ongoing COVID-19 pandemic affecting the macro economic climate Notwithstanding a very positive start to the vaccine roll-out, there remain key uncertainties regarding the extent and duration of lockdown and social distancing measures that will be imposed in the UK and their effect on our tenants and on our business. During 2020, we had a shortfall of 6% on our rent collections and we have had two tenants go into CVA and one into administration. We have undertaken positive asset management initiatives with some tenants, who were particularly affected by the pandemic, to achieve mutually agreeable outcomes. Our charged property valuations have fallen, albeit less than the market, and we have taken steps to ensure bank covenants are complied with. The board have established protocols for remote working for itself and its employee. In the search for new premises during the year, the related health and safety issues connected with the virus were taken into account in the selection criteria. The board continue to pay close attention to the evolving situation and to mitigating the risks for our business and all our stakeholders. Our risks Risk framework The board has overall responsibility for risk management with a focus on determining the nature and extent of exposure to principal risks the group is willing to take in achieving its strategic objectives. The amount of risk is assessed in the context of the core strengths of our business and the external environment in which we operate. Whilst risk is an integral part of our business, the general appetite of the group for risk is low. The board believes that effective risk management is integral to our strategy of delivering long-term sustainable income and capital growth. Strategic risk management reporting Board of directors • Overall responsibility for risk management • Regular review of effectiveness of system of internal control • Regular assessment of emerging and principal risks Audit committee • Assurance of risk management process Executive committee • Day-to-day risk management • Ongoing identification, assessment and mitigation of risk • Design implementation and evaluation of system of internal control • Ensuring operational effectiveness of control system Our approach to risk management is to identify the financial operational and compliance risks that may prevent the attainment of our strategic objectives, our future performance, solvency or liquidity. We then evaluate the risks and take any appropriate action to reduce or remove the likelihood of any of these having a material impact. This process is regularly monitored and reviewed. At the point that any key strategic decision is taken, the potential risks are considered. Effective risk management is an important part of our board decision making process. All directors are kept up to date with key issues on at least a monthly basis. The small size of the management team and regular consideration of risk areas means we can respond quickly to changes in the risk environment. The principal risks that have been identified and the management and/or mitigation of these are set out on pages 30 to 31. The board has identified that emerging risks are likely to be linked to our existing principal risks and these are also included as appropriate in the table on pages 30 to 31. Against the backdrop of economic and political challenges arising from the global COVID-19 pandemic and Brexit, we have continued to actively manage our risk exposure by maintaining a high occupancy across our portfolio and an efficient capital structure and liquidity position. Risk appetite Whilst risk is an integral part of our business the general appetite of the group for risk is low. Changes to our principal risks The principal risks and uncertainties facing the group in 2020 are set out on pages 30 to 31 together with the mitigating actions and controls in place. We define a principal risk as one that is currently impacting on the group or could impact the group over the next 12 months. These principal risks are not a complete list of all risks facing the group but are a snapshot of the group’s risk profile as at the date of this report. New principal risks or new factors affecting existing principal risks International trade negotiations affecting the political and regulatory outlook The full effect of the trade agreement with the EU completed just prior to the end of the transition period on 31 December 2020, and our trade agreements with other countries cannot be fully assessed as the UK was in lockdown at 31 December 2020. Whilst all our properties are in the UK, our tenants operate global businesses with international supply chains and recruitment policies. We are not yet aware of any adverse effect on our tenants that may have an impact on our income. We have also not seen any reduction in demand for properties arising from the Brexit process. 28 Highcroft Investments PLC Annual report and accounts for the year ended 31 December 2020 Highcroft-AR-2020.indd 28 Highcroft-AR-2020.indd 28 Job number 12 April 2021 6:54 pm V8 12-Apr-21 6:56:31 PM 12-Apr-21 6:56:31 PM Job number 12 April 2021 6:54 pm V8Stock code: HCFTwww.highcroftplc.com29STRATEGIC REPORTRisk heat mapThe risk heat map below illustrates the principal risks that have the potential to significantly impact the group’s strategic objectives, financial position or reputation. It highlights net risk, after taking account of principal mitigations. LowHighImpactLowHighLikelihood45672135762134As at 30 April 2020As at 7 April 2021Principle risk keyExternal risksLink to strategic objectives1Economic outlookA B E2Political and regulatory outlookA B E3Occupier demand and tenant defaultA B E4Commercial property investor demandE5Availability and cost of financeD EInternal risks6Business strategyA B C D E7Key personnelA B C D EStrategic priorities keyThe objective of the group is to enhance shareholder value via a combination of increasing net asset value, profits and dividends. We set clear strategic objectives against which we measure our performance:AContinue to grow our commercial property portfolio with a bias towards the south of England and Wales BIncrease the average lot size to £5m with no asset representing more than 15% of the portfolioCSeek capital growth opportunities within our property asset baseDUse medium-term gearing at a modest level EProvide a dividend increase in excess of inflation Read more about our strategy on pages 18 and 19Highcroft-AR-2020.indd 29Highcroft-AR-2020.indd 2912-Apr-21 6:56:32 PM12-Apr-21 6:56:32 PMOur risks continued Principal risk External risks 1 Macro economic outlook The UK economic climate, any further adverse consequences of COVID-19 and future movements in interest rates, present both risks and opportunities in the property and associated financial markets. This could impact the delivery of our planned revenue and capital strategy. 2 Political and regulatory outlook The end of the Brexit transition period and the effect of the new trade deals may impact the profitability of our tenants. The ever-increasing regulatory framework for listed companies will increase our cost base. 3 Occupier demand and tenant default Any weakening in the UK economy, reduced consumer confidence, business activity and investment could result in tenant administration/CVA and reduce income, rental growth and capital performance. 4 5 Commercial property investor demand Any drop in, inter alia, the health of the UK economy, or in the availability of finance, or the attractiveness of Sterling, may result in a reduction in investor demand for UK property, which may result in a fall in our asset valuations. Availability and cost of finance and debt covenant requirements Bank of England monetary policy may result in interest rate rises and future increased costs of borrowing. Reduced availability of appropriately priced finance would affect our ability to refinance and/or increase cost. Breach of debt covenants could trigger loan defaults and repayment of facilities. Internal risks 6 Business strategy If the group has the wrong strategy for the current stage of the property cycle and the macro economic climate there will be reduced profitability and capital values. How we manage/mitigate the risk Commentary Change in risk assessment in Link to strategic the year priority • Monitoring of economic and property industry research by the executive team and review at board meetings and adjustment of strategy as necessary. • Our activities are restricted solely to the UK with no foreign exchange exposure. • Use of advisers as appropriate when considering key transactions. • Ongoing review of tenant, asset and sector profile. • We are not able to influence political events and decisions, however, we review and monitor potential scenarios and consider them in our planning process. • We use our advisory team to ensure that the board remain up to date with the evolving regulatory requirements for a listed real estate company. • We have introduced a board portal to enhance our governance systems and procedures. • We review market data, with our advisers together with industry trends to assess whether any risk mitigating steps need to be taken. • Our strategy is to in invest in the lower risk areas of the south of England and Wales. • Our strategy to invest across different sectors reduces our exposure to an individual sector or tenant. • We maintain close relationships with our tenants and support them through their business cycle. • We review the managing agents rent collection reports regularly and take action where necessary. We review market data with our advisers, together with industry trends, to assess whether any risk mitigating steps need to be taken. The board aims to only assume a moderate level of gearing, thus increasing the likelihood of being seen as an attractive banking proposition for lenders. Our preference is for fixed interest, non-amortising debt with a spread of maturity dates. We monitor our LTV and debt requirements and maintain good long-term relationships with our current and potential financing partners. Our strategy is determined to be consistent with our stated risk appetite and is based on our evaluation of the macro economic environment. Individual investment or divestment decisions are made by the board and subject to a risk evaluation. 7 Key personnel A number of critical business processes lie in the hands of a few people. Failure to recruit, develop and retain staff and directors with the right skills and experience may result in significant underperformance or impact the effectiveness of operations and decision making, in turn, impacting business performance. Remuneration packages are reviewed annually to ensure that the group can retain, motivate and incentivise key staff. We outsource a number of key routine processes to minimise the risk of business interruption. Succession planning and the composition of the board are regularly reviewed by the nomination committee and the board review the key advisers at least annually. Future recruitment may require the use of a headhunter to source candidates with the appropriate skillset. 30 Highcroft Investments PLC Annual report and accounts for the year ended 31 December 2020 Highcroft-AR-2020.indd 30 Highcroft-AR-2020.indd 30 Job number 12 April 2021 6:54 pm V8 12-Apr-21 6:56:32 PM 12-Apr-21 6:56:32 PM During 2020, the economic position in the UK worsened significantly due to the pandemic. Whilst inflation and interest rates remain low, there remains a level of uncertainty regarding the future. Our property valuations have fallen as a result of the uncertainty in the marketplace. In 2021, we will continue to carry out our controls, management and mitigation procedures. As the Brexit transition period expired on 31 December 2020, there were a number of significant changes introduced including many related to relation to travel and trade. As the UK was in lockdown at this time, we have not yet been able to fully assess the effect that this may have on our tenants, supply chains and recruitment strategies. Listed real estate company compliance requirements continue to increase. In 2021, we will consider strengthening our team by splitting the role of finance director and company secretary and further enhancing our reporting procedures. We have 22 properties with 30 tenants and 28 individual covenants. One property became void in the year representing 0.9% of the annual rent roll. Our bad debt provision in the year is £366,000 which represents 6% of gross rental revenue. The weighted average lease expiry is 5.9 years, which provides a reasonable longevity of income. Portfolio occupancy is 99% at the year end, although we expect one unit in a multi-let property to become void in Q2 2021. In 2021, we will continue to carry out our controls with a particular focus on the ongoing impact of COVID-19. During 2020, in the light of the uncertainties arising from the global pandemic, coupled with the political issues associated with finalising the transition agreement there were relatively few property transactions. In 2021, we will continue with our current controls and will look to take opportunities to invest or divest at particularly opportune points in the property cycle. During 2020, we refinanced two loans totalling £4m and drew an additional £1m of borrowing. The terms were more favourable than for the maturing loans. Our next loan maturity is in 2022. In 2021, we will carry out our annual review with our current lender and continue to carry out our monitoring procedures. During 2020, a year dominated by the global pandemic, our capital performance was close to the market and our rent collection was 94%. In 2021, we will hold an annual strategy away day to discuss the group’s five-year strategy, monitor our portfolio for further asset management activities and manage the void rate, examine opportunities for acquisitions and disposals to recycle capital, and we will continue to monitor and react to the impact of COVID-19 on our business. There were no changes during the year. This is the second year of operation of the Highcroft Incentive Plan, designed to enhance the linkage between director remuneration and performance. In 2021, we will consider splitting the role of finance director and company secretary to further reduce risk. A B E A B E A B E E D E A B C D E A B C D E Principal risk External risks 1 Macro economic outlook The UK economic climate, any further adverse consequences of COVID-19 and future movements in interest rates, present both risks and opportunities in the property and associated financial markets. This could impact the delivery of our planned revenue and capital strategy. 2 Political and regulatory outlook The end of the Brexit transition period and the effect of the new trade deals may impact the profitability of our tenants. The ever-increasing regulatory framework for listed companies will increase our cost base. 3 Occupier demand and tenant default Any weakening in the UK economy, reduced consumer confidence, business activity and investment could result in tenant administration/CVA and reduce income, rental growth and capital performance. 4 5 Commercial property investor demand Any drop in, inter alia, the health of the UK economy, or in the availability of finance, or the attractiveness of Sterling, may result in a reduction in investor demand for UK property, which may result in a fall in our asset valuations. requirements Bank of England monetary policy may result in interest rate rises and future increased costs of borrowing. Reduced availability of appropriately priced finance would affect our ability to refinance and/or increase cost. Breach of debt covenants could trigger loan defaults and repayment of facilities. Internal risks 6 Business strategy • Monitoring of economic and property industry research by the executive team and review at board meetings and adjustment of strategy as necessary. • Our activities are restricted solely to the UK with no foreign exchange exposure. • Use of advisers as appropriate when considering key transactions. • Ongoing review of tenant, asset and sector profile. • We are not able to influence political events and decisions, however, we review and monitor potential scenarios and consider them in our planning process. • We use our advisory team to ensure that the board remain up to date with the evolving regulatory requirements for a listed real estate company. • We have introduced a board portal to enhance our governance systems and procedures. • We review market data, with our advisers together with industry trends to assess whether any risk mitigating steps need to be taken. • Our strategy is to in invest in the lower risk areas of the south of England and Wales. • Our strategy to invest across different sectors reduces our exposure to an individual sector or tenant. • We maintain close relationships with our tenants and support them through their business cycle. • We review the managing agents rent collection reports regularly and take action where necessary. We review market data with our advisers, together with industry trends, to assess whether any risk mitigating steps need to be taken. gearing, thus increasing the likelihood of being seen as an attractive banking proposition for lenders. Our preference is for fixed interest, non-amortising debt with a spread of maturity dates. We monitor our LTV and debt requirements and maintain good long-term relationships with our current and potential financing partners. Availability and cost of finance and debt covenant The board aims to only assume a moderate level of How we manage/mitigate the risk Commentary During 2020, the economic position in the UK worsened significantly due to the pandemic. Whilst inflation and interest rates remain low, there remains a level of uncertainty regarding the future. Our property valuations have fallen as a result of the uncertainty in the marketplace. In 2021, we will continue to carry out our controls, management and mitigation procedures. As the Brexit transition period expired on 31 December 2020, there were a number of significant changes introduced including many related to relation to travel and trade. As the UK was in lockdown at this time, we have not yet been able to fully assess the effect that this may have on our tenants, supply chains and recruitment strategies. Listed real estate company compliance requirements continue to increase. In 2021, we will consider strengthening our team by splitting the role of finance director and company secretary and further enhancing our reporting procedures. We have 22 properties with 30 tenants and 28 individual covenants. One property became void in the year representing 0.9% of the annual rent roll. Our bad debt provision in the year is £366,000 which represents 6% of gross rental revenue. The weighted average lease expiry is 5.9 years, which provides a reasonable longevity of income. Portfolio occupancy is 99% at the year end, although we expect one unit in a multi-let property to become void in Q2 2021. In 2021, we will continue to carry out our controls with a particular focus on the ongoing impact of COVID-19. During 2020, in the light of the uncertainties arising from the global pandemic, coupled with the political issues associated with finalising the transition agreement there were relatively few property transactions. In 2021, we will continue with our current controls and will look to take opportunities to invest or divest at particularly opportune points in the property cycle. During 2020, we refinanced two loans totalling £4m and drew an additional £1m of borrowing. The terms were more favourable than for the maturing loans. Our next loan maturity is in 2022. In 2021, we will carry out our annual review with our current lender and continue to carry out our monitoring procedures. If the group has the wrong strategy for the current stage of the property cycle and the macro economic climate there will be reduced profitability and capital values. Our strategy is determined to be consistent with our stated risk appetite and is based on our evaluation of the macro economic environment. Individual investment or divestment decisions are made by the board and subject to a risk evaluation. 7 Key personnel A number of critical business processes lie in the hands of a few people. Failure to recruit, develop and retain staff and directors with the right skills and experience may result in significant underperformance or impact the effectiveness of operations and decision making, in turn, impacting business performance. Remuneration packages are reviewed annually to ensure that the group can retain, motivate and incentivise key staff. We outsource a number of key routine processes to minimise the risk of business interruption. Succession planning and the composition of the board are regularly reviewed by the nomination committee and the board review the key advisers at least annually. Future recruitment may require the use of a headhunter to source candidates with the appropriate skillset. During 2020, a year dominated by the global pandemic, our capital performance was close to the market and our rent collection was 94%. In 2021, we will hold an annual strategy away day to discuss the group’s five-year strategy, monitor our portfolio for further asset management activities and manage the void rate, examine opportunities for acquisitions and disposals to recycle capital, and we will continue to monitor and react to the impact of COVID-19 on our business. There were no changes during the year. This is the second year of operation of the Highcroft Incentive Plan, designed to enhance the linkage between director remuneration and performance. In 2021, we will consider splitting the role of finance director and company secretary to further reduce risk. STRATEGIC REPORT Change in risk assessment in the year Link to strategic priority A B E A B E A B E E D E A B C D E A B C D E Stock code: HCFT www.highcroftplc.com Highcroft-AR-2020.indd 31 Highcroft-AR-2020.indd 31 Job number 12 April 2021 6:54 pm V8 31 12-Apr-21 6:56:32 PM 12-Apr-21 6:56:32 PM Going concern statement The directors have made an assessment of the group’s ability to continue as a going concern. This includes a review of the current uncertainties created by the COVID-19 pandemic, particularly in respect of rental income, the group’s cash resources, borrowing facilities and dividend distributions. The group’s business activities, together with the factors likely to affect its future development, performance and financial position are set out in the strategic report. The financial performance of the group for 2020 including its cashflows, liquidity and borrowing facilities are set out in the financial statements with additional information in the financial review on pages 24 to 27. Note 19 to the accounts on page 85 includes information on the group’s financial instruments and on its approach to credit and liquidity risk. At 31 December 2020, the group had £3.3m of cash and cash equivalents and fixed-term, fixed interest, non- amortising borrowing of £27.2m that expires during the period May 2022–July 2030. In addition, there was an undrawn overdraft facility of £1m and additional headroom of £1.8m. The next facility maturity is in May 2022 for £7.5m with no other renewals falling due before August 2026. The group has a modest gearing of 42% and its net debt to investment property valuation is 29%. Our primary debt covenants relate to interest cover and loan-to-value. They are tested annually, and the LTV covenant is based on the valuations addressed to the bank (which may not be the same as the current valuations). In order to respond to a potential shortfall in the LTV covenant as a result of a reduction in valuation of our secured properties, the group offered additional property as security prior to the year end and the charging has been completed in 2021. The group has a secure property income stream from 29 occupiers with no undue reliance on any one tenant. The COVID-19 pandemic has, however, resulted in us being unable to quickly relet our unit in Oxford High Street that went void in March 2020, nor have we been able to secure a new tenant for part of our Ipswich property where DW Sports and Fitness Club went into administration in Q3 2020. As we approach the end of lockdown, there are, however, potential new tenants interested in both properties. Based on this experience, the board has carefully reviewed its forecast assumptions regarding potential void periods and lease incentives at break dates and lease ends. In addition, we have two tenants with whom we are in detailed discussion regarding their arrears positions, and one on whom we have taken further action to recover the sums owed to us. Notwithstanding the impending easing of lockdown restrictions, there remain uncertainties regarding the extent and duration of the social distancing measures that will be required and the impact on our tenants’ ability to carry on their normal business and generate cash to pay their rent. We have taken this into account in our sensitivity analyses. The group’s most significant outflows are its PID and bank interest payments, which made up 54% and 20% of the 2020 cashflow respectively. The directors have had discussions with HMRC during 2020 and have agreed mitigating steps such that they will not pay 43% of the 2019 PID pool outstanding at 31 December 2019 and will incur a tax charge on this element. This retains £1.3m of cash in the business and does not prejudice the group’s REIT status. The directors have reviewed the projected cashflows of the group and its compliance with debt covenants. They have also overlaid their best estimates of the impact of the COVID-19 pandemic onto their forecasting and debt covenant reviews and considered scenarios including: – The pandemic continuing to affect rent collections throughout 2021, affecting cash generation and covenant compliance – Void properties and those that may become void at lease end and/or break dates remaining void for a longer than usual period thereby reducing income and increasing costs – The ongoing pandemic affecting property valuations and related debt covenants The directors have also stress tested the forecasts considering the level of fall in income and valuations that would cause the business to be unable to pay its liabilities as they fall due, and have concluded that the possibility of these scenarios occurring is remote. The audit committee reviewed the analysis supporting the going concern basis of preparation of the accounts. This review included the forecast 12-month cashflows, loan maturities, headroom on debt covenants, undrawn loan facilities and the quality and parameters of the stress testing. Having completed their review, the committee recommended to the board that it was appropriate to adopt a going concern basis. The directors are not aware of any material uncertainties that may cast significant doubt upon the group’s ability to continue as a going concern. They have considered the audit committee recommendation and concluded that there is a reasonable expectation that the group has adequate resources to continue in operational existence for the foreseeable future. Viability statement In accordance with provision 31 of the Code, the directors have assessed the viability of the group over a longer period than the 12 months required by the ‘going concern’ provision. The board conducted this review for a period of five years to coincide with its detailed review of the group’s financial budgets and forecasts. The period is consistent with the periods until the next lease event on many of our properties and expires after the expiry of one term loan, which represents 28% of our total debt. This five-year period is considered to be the optimal balance between the long-term strategy of delivering sustainable income and capital growth, and the fact that property investment is a long-term business, counterbalanced by the inherent uncertainties involved in medium to long-term forecasting in an industry that has been cyclical in nature. The board, in conjunction with the audit committee, carried out a robust assessment of the principal risks and uncertainties facing the group including those that would threaten its business model, strategy, future performance, solvency, or liquidity over the five-year period. This review provided the board with assurance that the mitigations and management systems are operating as intended. The board receives regular (at least monthly) briefings from the executive team, which include rent collection data, portfolio updates including issues and tenant discussions, debt covenants and a review of the principal risks and any adverse movements in risk exposure. The board considered the group’s cashflows including the required cashflows to meet the dividend requirement of the REIT regime, REIT compliance, income profile, loan to value and other key financial metrics. The board has also considered the level of property capital transactions that are likely to occur. The board also conducted a sensitivity analysis, taking into account the potential impacts of one, or more, of the group’s principal risks, as set out on pages 30 to 31, actually occurring. Having considered the forecast cashflows, covenant compliance, and the impact of the sensitivities, the directors confirm that they have a reasonable expectation that the group will be able to continue in operation and meet its liabilities as they fall due over the period to 31 December 2025. 32 Highcroft Investments PLC Annual report and accounts for the year ended 31 December 2020 Highcroft-AR-2020.indd 32 Highcroft-AR-2020.indd 32 Job number 12 April 2021 6:54 pm V8 12-Apr-21 6:56:32 PM 12-Apr-21 6:56:32 PM Stakeholder engagement STRATEGIC REPORT Effective stakeholder engagement is embedded into all our activities.” Section 172(1) statement The board of directors confirm that it has, during the year, acted to promote the long-term success of the company for all of its stakeholders, including its shareholders, whilst having due regard to the matters set out in section 172 (1) (a) to (f) of the Companies Act 2006 being: (c) the need to foster the company’s business relationships with suppliers, customers and others (d) the impact of the company’s operations on the community and the environment (e) the desirability of the company maintaining a reputation (a) the likely consequences of any decision in the long term for high standards of business conduct (b) the interests of the company’s employees (f) the need to act fairly between members of the company. The nature of our business means that we have a ongoing dialogue with a wide group of stakeholders, as summarised below. Stakeholder Why is important to engage? Ways we engage Key interests How do we respond? Our shareholders Our tenants In order to understand the views and aspirations of shareholders as the owners of our business Direct and indirect shareholder engagement via the annual report, shareholder meetings and calls with our two main shareholder groups. We also seek all shareholders views via our website and at the AGM. Further details on page 44 • Growth strategy and healthy returns whilst meeting our environmental and social responsibilities Reviewing our strategy on a regular basis to ensure that it is the right one to deliver returns in the long term In order to have the ability to react swiftly to issues and opportunities and to understand how tenant demands are changing to help us evolve our strategy We build relationships with tenants, directly if possible, and also via our asset managers • Tenant satisfaction, with fit-for-purpose spaces that are able to evolve with their business Reviewing our strategy to ensure that it takes into account future demand • Ability to meet future tenants’ needs Our employees We value the input and insight that all team members can provide As we only have one employee outside the board, our engagement is informal • Wellbeing • Health and safety • Personal development Informal reviews with the employee by a director who is not her line manager Our advisory team and other suppliers In order to have the ability to react swiftly to opportunities and issues To ensure we are aware of emerging trends and risks in the marketplace Our local communities and the environment We wish to ensure that our activities have a positive impact on communities and the environment Building close relationships, where advisers have a detailed understanding of the business, its purpose, culture, and objectives Engagement with tenants and local communities to understand their views and concerns and, particularly in 2020, their COVID-19 related issues, either directly or via our asset managers. Charitable donations • Responsible payment practices • No conflicts of interest • Mutually beneficial relationships, supporting both parties’ interests • Making a positive contribution to communities and the environment Key relationships are informally agreed by engagement director periodically Quarterly meetings with asset managers that include environmental matters as an agenda item Stock code: HCFT www.highcroftplc.com Highcroft-AR-2020.indd 33 Highcroft-AR-2020.indd 33 Job number 12 April 2021 6:54 pm V8 33 12-Apr-21 6:56:33 PM 12-Apr-21 6:56:33 PM Corporate social responsibility Our culture At Highcroft, we strive to conduct our business in an ethical and responsible manner, making a positive contribution to society whilst minimising any negative impacts on people and the environment. Our stakeholders Our key stakeholders are our shareholders, tenants, employees, advisory team and other suppliers, and our local communities and the environment. Our engagement with them and their key interests is set out in our stakeholder engagement statement on page 33. The environment and climate change We recognise that natural resources are finite and should be used responsibly. We seek to understand the environmental performance of our portfolio and to implement improvement policies where possible. Streamlined energy and carbon reporting regulations (SECR) The nature of our business is such that we fall below the de minimis limit for required reporting under the SECR. The taskforce on climate-related financial disclosures (TCFD) In 2020, the FCA has proposed a new listing rule for commercial companies with a UK premium listing, including Highcroft, to state whether they comply with the recommendations of TCFD and explain any non-compliance. Full compliance is expected for reporting periods starting on or after 1 January 2021. We have summarised our compliance to date with the TCFD guidelines below. Governance The board is responsible for approving the group’s climate change targets and monitoring portfolio performance. Describe the board’s oversight of climate-related risks and opportunities • Our audit committee, a principal committee of the main Board, will, from 2021, oversee the management of our climate-related risks and opportunities. Describe management’s role in assessing and managing climate-related risks and opportunities. • Simon Gill, CEO, is the main Board member with overall accountability for climate and sustainability. Strategy The board considers climate change as part of its decision making, particularly around acquisitions and refurbishment projects Describe the climate-related risks and opportunities the organisation has identified over the short, medium, and long term. • Short term (0–5 years) – market shift in terms of stricter legislation, such as the introduction in the UK of the new minimum energy efficiency standards (MEES) for commercial and domestic property. • Medium term (5–10 years) – market demand from occupiers for buildings and spaces with higher levels of efficiency and lower carbon footprints. • Long term (15+ years) – changing climate conditions in the south east of England and Wales, principally temperature increases and flooding and their potential impact on our buildings. Describe the impact of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning. • As a REIT, we invest in, maintain, and manage property in the south of England and Wales and, as such, climate-related issues affect the way we assess new properties for acquisition and how we and our tenants maintain existing ones. Describe the resilience of the organisation’s strategy, taking into consideration different climate related scenarios, including a 2°C or lower scenario. • Physical climate-related risks, such as increasing temperatures, could increase the stresses on our properties and, in turn, increase our cost base and/or make them less attractive to existing or potential tenants. We will continue to consider energy and carbon reduction, ensuring that our buildings operate as efficiently as possible. Risk management Potential climate change risks are identified and monitored as part of our wider risk management procedures. Describe how processes for identifying, assessing, and managing climate- related risks are integrated into the organisation’s overall risk management. • Our asset managers report on climate change as part of their quarterly reporting and the CEO considers whether any issues arising from this or other matters are material enough to be considered further. From 2021, this will be included as an agenda item at audit committee meetings. Metrics and targets Due to our size and the limited amount of carbon emissions that we are able to influence as a business, we are considering the extent of metrics and targets that will be appropriate for us to adopt. 34 Highcroft Investments PLC Annual report and accounts for the year ended 31 December 2020 Highcroft-AR-2020.indd 34 Highcroft-AR-2020.indd 34 Job number 12 April 2021 6:54 pm V8 12-Apr-21 6:56:33 PM 12-Apr-21 6:56:33 PM The taskforce on climate-related financial disclosures (TCFD) In 2020, the FCA has proposed a new listing rule for commercial companies with a UK premium listing, including Highcroft, to state whether they comply with the recommendations of TCFD and explain any non-compliance. Full compliance is expected for reporting periods starting on or after 1 January 2021. We have summarised our compliance to date with the TCFD guidelines below. Governance The board is responsible for approving the group’s climate change targets and monitoring portfolio performance. Describe the board’s oversight of climate-related risks and opportunities • Our audit committee, a principal committee of the main Board, will, from 2021, oversee the management of our climate-related risks and opportunities. Describe management’s role in assessing and managing climate-related risks and opportunities. climate and sustainability. • Simon Gill, CEO, is the main Board member with overall accountability for Strategy The board considers climate change as part of its decision making, particularly around acquisitions and refurbishment projects Describe the climate-related risks and opportunities the organisation has identified over the short, medium, and long term. • Short term (0–5 years) – market shift in terms of stricter legislation, such as the introduction in the UK of the new minimum energy efficiency standards (MEES) for commercial and domestic property. • Medium term (5–10 years) – market demand from occupiers for buildings and spaces with higher levels of efficiency and lower carbon footprints. • Long term (15+ years) – changing climate conditions in the south east of England and Wales, principally temperature increases and flooding and their potential impact on our buildings. Describe the impact of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning. • As a REIT, we invest in, maintain, and manage property in the south of England and Wales and, as such, climate-related issues affect the way we assess new properties for acquisition and how we and our tenants maintain existing ones. Describe the resilience of the organisation’s strategy, taking into consideration different climate related scenarios, including a 2°C or lower scenario. • Physical climate-related risks, such as increasing temperatures, could increase the stresses on our properties and, in turn, increase our cost base and/or make them less attractive to existing or potential tenants. We will continue to consider energy and carbon reduction, ensuring that our buildings operate as efficiently as possible. Risk management risk management procedures. Potential climate change risks are identified and monitored as part of our wider Describe how processes for identifying, assessing, and managing climate- related risks are integrated into the organisation’s overall risk management. • Our asset managers report on climate change as part of their quarterly reporting and the CEO considers whether any issues arising from this or other matters are material enough to be considered further. From 2021, this will be included as an agenda item at audit committee meetings. Metrics and targets Due to our size and the limited amount of carbon emissions that we are able to influence as a business, we are considering the extent of metrics and targets that will be appropriate for us to adopt. STRATEGIC REPORT The environment – energy efficiency actions taken during 2020 During 2020, we have continued to ensure that: • • • subject to the limitations imposed by the COVID-19 restrictions, all sites are visited at least annually by our asset managers, and any environmental issues identified are reported to the chief executive immediately and recorded in the managers’ quarterly management report and appropriate actions are taken; all new leases require occupiers to observe relevant environmental regulations; all our property maintenance suppliers have SafeContractor accreditation. The vetting, tendering, appointment and management of these suppliers follows the principles of our asset manager’s purchasing policy; • our asset managers recognise the requirement for, and actively encourage, sustainable working practices to minimise environmental impacts both in respect of their own business activities and when managing clients’ properties; • our asset managers are committed to operating to an environmental policy and management system that satisfies the requirements of BS EN ISO 14001: 2004 accreditation and as part of which they measure and set targets for improvement; • steps are taken to reduce the weighted average of the EPCs on the 19 of our 22 properties where we have certificates. In the year, this has improved from 69 to 64, which is a C rating, which is above the national average; for any reason. We encourage effective communication with all our stakeholders ensuring that everyone understands our culture and purpose. Employee alignment We align our executive management team with our shareholders via the Highcroft Incentive Plan, which includes a share-based element for those executive directors eligible to participate. More details of the incentive plan can be found on page 53. Diversity We believe that a diverse team is an important factor in maximising business effectiveness. We aim to maintain the right blend of skills, experience and knowledge in the board and its advisory teams. The diverse experience of the board is highlighted on pages 40 and 41. At 31 December 2020, and throughout the year, the average composition of the group’s employees was as follows: 1 2 Directors’ composition Total staff composition 4 4 Male Female Communities we serve The board consider the impact on the local communities, including neighbouring tenants, when development and refurbishment activity take place. A project manager is used to oversee the work and only approved suppliers are used. Care is taken to ensure that health and safety is taken into account at all stages of the work. The board also considers the potential impact on the local community and on existing tenants when planning permissions are applied for, and would listen to any legitimate concerns raised. Charity During 2020, donations were made to local and national charities totalling £11,000. These charities support the sick, terminally ill and disadvantaged. Examples of our support include: • We continue to adopt a paperless • Funding three weeks of a national freephone helpline that gives therapeutic strategy with our shareholders, which has reduced our paper mailings to shareholders by 75% in the last two years; and • We make recommendations to the landlord of our serviced office for energy savings that could be made. Fairness and equality We value the contributions made by all of our employees, including our directors and our advisory team, and believe that a diverse team is key to maximising business effectiveness. We aim to select, recruit and develop the best employees and advisers, and create an environment where everyone is treated with dignity and respect and where individual differences are valued. We achieve this by ensuring that there are equal opportunities in recruitment and selection processes, paying fair and competitive salaries and fees, and being opposed to any form of discrimination advice, support and hope to bereaved children. • Contributions towards the funding of palliative care in two hospices, in a day centre, in hospitals and at home. • Funding towards the support of those with learning disabilities in the local community to help them to live life to the full. • Contributions towards national campaigns for support of those who suffer from abuse, neglect, autism and heart disease. Future focus In 2021, we will continue to conduct our business in an ethical and responsible manner. Highcroft will endeavour to find the correct balance between regulation, cost, and the absolute impact of any changes that it is able to influence. This strategic report on pages 12 to 35 was approved by the board and signed on its behalf Simon Gill Chief executive 7 April 2021 Stock code: HCFT www.highcroftplc.com Highcroft-AR-2020.indd 35 Highcroft-AR-2020.indd 35 Job number 12 April 2021 6:54 pm V8 35 12-Apr-21 6:56:33 PM 12-Apr-21 6:56:33 PM Job number 12 April 2021 6:54 pm V8Highcroft Investments PLC Annual report and accounts for the year ended 31 December 202036OUR GOVERNANCEChairman’s introduction to corporate governance38Board of directors40Corporate governance42Report of the audit committee45Report of the nomination committee49Directors’ remuneration report50Remuneration at a glance51Report of the directors61Statement of directors’ responsibilities63Highcroft-AR-2020.indd 36Highcroft-AR-2020.indd 3612-Apr-21 6:56:35 PM12-Apr-21 6:56:35 PMOUR GOVERNANCE Stock code: HCFT www.highcroftplc.com Highcroft-AR-2020.indd 37 Highcroft-AR-2020.indd 37 Job number 12 April 2021 6:54 pm V8 37 12-Apr-21 6:56:36 PM 12-Apr-21 6:56:36 PM Chairman’s introduction to corporate governance The board believes that good corporate governance helps to ensure that the board is making effective decisions, based on the right information, to achieve our strategic objectives.” Charles Butler Chairman Board and committee attendance for the year ended 31 December 2020 100% Female representation on our board 20% Independent directors (including chairman) 40% Key governance activities in 2020 The board’s key governance activities during the year have included: • • • • the 2020 annual general meeting (AGM); the introduction of a board portal to facilitate the governance processes around board meetings and information sharing; evaluation of the board; and review of the issues associated with David Kingerlee’s change of status to shareholder representative. Dear shareholder, Welcome to the corporate governance section of the group’s annual report. Whilst Highcroft is a relatively small premium listed group, good corporate governance remains one of our core values and the board strives to follow the appropriate guidance and rules. The board believes that good corporate governance helps to ensure proper oversight by the board and to ensure that the board is making effective decisions, based on the right information, to achieve our strategic objectives. Governance underpins the way in which the group is managed, our behaviour and culture. Compliance with the UK Corporate Governance Code The board recognises the importance of staying up to date with the ever-evolving corporate governance framework that we operate within, and in adopting the spirit of all the recommendations. We are reporting against the 2018 UK Corporate Governance Code (the Code) available at www.frc.org.uk. The Code contains a set of principles that emphasise the value of good corporate governance to long-term sustainable success. It is intended that by applying the spirit of the principles, following the more detailed provisions, and using the associated guidance, Highcroft can demonstrate through its reporting how the governance of the company contributes to its long-term sustainable success and achieves its wider objectives. More detail is on page 39. Highcroft is compliant with the Code other than in the areas listed on page 39. These non-compliances relate to the size of the board and employee base. The board has concluded that compliance would outweigh any potential benefits given the size and lack of complexity of the group. The board will continue to review compliance with the Code, and with evolving best practice at least annually. Our strategy is set out on pages 18 to 19. All the board support this strategy and ensure that any matters that it approves are in line with this strategy. We recognise the importance of shareholder communication and its place within a sound governance framework. During the year, we have had regular contact with our key shareholders. The Kingerlee Concert Party falls within the definition of a controlling shareholder as it owns in excess of 30% of the share capital of the company, and there is a Controlling Shareholder Agreement in place as required by the Listing Rules. We were unable to hold a face-to-face AGM in 2020 due to COVID-19 restrictions, however, we set up a dedicated email address for any shareholder wishing to raise questions and encouraged shareholders to appoint the chairman of the meeting as their proxy to ensure that the shareholders’ votes would be counted. We look forward to welcoming many of our shareholders to our 2021 AGM, subject to any COVID-19 restrictions in force at the time. This governance report on pages 36 to 63 sets out in more detail our compliance with the Code during the year and explains governance structure. All members of the board support the principles of good corporate governance, and believe that we complied with the principles and provisions of the Code as was appropriate throughout the year, and have explained any non- compliances and our explanations for these. Changes in the year As explained further on page 41, on 10 December 2020, David Kingerlee changed his status to that of a shareholder representative of Kingerlee Holdings Limited and its subsidiary undertakings. As a result, the board, on 1 February 2021, agreed that, with effect from 10 December 2020 Highcroft, effectively, became an associated undertaking of Kingerlee Holdings Limited. As a further consequence it has been agreed that, with effect from the date of this report, David Kingerlee will change his status from an executive director to that of a non-independent, non-executive director. 38 Highcroft Investments PLC Annual report and accounts for the year ended 31 December 2020 Highcroft-AR-2020.indd 38 Highcroft-AR-2020.indd 38 Job number 12 April 2021 6:54 pm V8 12-Apr-21 6:56:36 PM 12-Apr-21 6:56:36 PM OUR GOVERNANCE Compliance with the provisions of the 2018 UK Corporate Governance Code (the Code) Our governance section evidences our compliance with Principles (A to R) of the Code and illustrates how we have applied the Code principles and complied with the provisions. Section Description Further information 1. Board leadership and company purpose A. Effective board B. Purposes, values and culture C. Governance framework and board resources D. Stakeholder engagement E. Workforce polices and practices 2. Division of responsibilities F. Board roles G. Independence H. External commitments and conflicts of interest I. Key activities of the board in 2020 You can read about the board’s effectiveness on pages 40 to 42 You can read about our purpose values and culture on page 17 Learn more about our governance framework and board resources on page 43 Learn more about our engagement with stakeholders on page 33 Learn more about our workforce policies and practices on page 43 You can read about the division of responsibilities on page 43 Learn more about the board independence on pages 40 to 41 You can read about the board’s other roles on pages 40 to 41 Learn more about the board’s key governance activities on page 43 3. Composition, succession and evaluation J. Appointments to the board You can read about the work of the nomination committee on page 49 K. Board skills, experience and knowledge Learn more about our board on pages 40 to 41 L. Annual board evaluation You can read about the board’s evaluation process on page 44 4. Audit, risk and internal control M. Financial reporting external auditor and internal audit N. Review of the 2020 annual report O. Internal financial controls Risk management 5. Remuneration P. Linking remuneration with purpose and strategy Q. Remuneration policy R. Performance outcomes in 2020 Strategic targets You can read about our audit process on pages 47 to 48 Learn more about the our review of the annual report on page 47 You can read more about our approach to risk management on page 48 You can read about the Highcroft Incentive Plan on page 53 Read more on our remuneration policy on pages 52 to 53 You can read about the board’s effectiveness on pages 56 to 57 The board still recognises that, due to the size of its board and the fact that there is only one non-board employee, the group is non-compliant with five of the 41 Code provisions as outlined below. The board has agreed that the risks of non-compliance are not significant and that the costs of compliance would outweigh any potential benefits. The board will review compliance with the Code and evolving best practice, at least annually. New Code provision Detail Potential action to enable compliance with the provision Highcroft decision 11 24 32 36 41 At least half the board, excluding the chair, should be independent non-executive directors Audit committee – the chairman of the board should not be a member Recruit at least two more independent non-executive directors Compliance would outweigh any potential benefits given the small size and lack of complexity of the group Before appointment as chair of remuneration committee, the appointee should have served on a remuneration committee for at least 12 months Recruit at least one more independent non-executive director who had the necessary experience to assume the role of committee chair Compliance would outweigh any potential benefits given the small size and lack of complexity of the group. The selection criteria for a future non- executive director will include this point Share awards should have a total vesting and holding period of five years or more Amend Incentive Plan and/or remuneration policy This will be considered further in the next policy review in 2022 There should be engagement by the workforce by remuneration committee None appropriate As there is only one employee other than the board, it is not believed that such engagement and disclosure thereof would add value to shareholders Stock code: HCFT www.highcroftplc.com Highcroft-AR-2020.indd 39 Highcroft-AR-2020.indd 39 Job number 12 April 2021 6:54 pm V8 39 12-Apr-21 6:56:37 PM 12-Apr-21 6:56:37 PM Board of directors Board leadership and company purpose Effective board Our board is composed of highly skilled professionals who bring a range of skills, perspective and corporate experience to our boardroom. Charles Butler Non-executive chairman Simon Costa Non-executive director and senior independent director Simon Gill Chief executive Appointment to the board Charles joined the group as non- executive chairman in January 2018. Appointment to the board Simon joined the board as senior independent director in May 2015. Committee membership Chairman of the nomination committee, and a member of the audit and remuneration committees. Committee membership Chairman of the remuneration and audit committees, and member of the nomination committee. Other appointments Charles holds the following appointments: • non-executive chairman of Mysale Group PLC, an international online retailer; • non-executive director of Essensys plc, a global provider of SaaS platforms and on-demand cloud services to the flexible workspace industry; and • executive director of Belerion Capital Group Limited, an FCA regulated firm advising high net worth individuals and family offices. Previous experience/ brings to the board Charles is a chartered accountant who, prior to joining the board, was the CEO of Market Tech Holdings PLC, where he transformed a small group of central London real estate assets into a profitable, listed company with a £1.3bn portfolio. With a successful track record in running public companies, M&A, raising equity and debt for expansion, Charles is well positioned to help the company navigate its next phase of growth. Other appointments Simon is currently the interim finance director of the Royal Agricultural University, Cirencester, where his remit includes overseeing all the financial and related operations of the university. Previous experience/ brings to the board Simon was formerly the Senior Bursar of a college of the University of Oxford. He was responsible for overseeing the management of the endowment, and the finance and estates functions, and he served on all the college’s core committees. Prior to that, he was an investment banker specialising in global M&A activities, and then for nine years he ran his own property company. In these roles, he advised US and UK public and private corporations on financial and related matters, and owned a modest property portfolio. Simon’s breadth of experience provides the board with a greater range of market knowledge and skills, which are particularly relevant to a company in Highcroft’s position. Appointment to the board Simon joined the group as property director in April 2013 and assumed the role of chief executive in August 2013. Committee membership Simon chairs the executive committee. Other appointments Simon runs his own property investment and development business, and is a director of Waingate Management Services Limited and Solar Estates Limited. Previous experience/ brings to the board Simon is a chartered surveyor who started his property career in one of the major London practices, subsequently becoming a partner in Allsop & Co, before setting up his own advisory practice in 1988. Later, he took on the role of principal by setting up various joint ventures and becoming an asset manager to one of Close Brothers’ private equity funds. Simon’s long-term involvement and experience in the property market in his various positions mean that opportunities for the board are assessed on a quick and efficient basis so that the correct decisions are reached at an early stage. 40 Highcroft Investments PLC Annual report and accounts for the year ended 31 December 2020 Highcroft-AR-2020.indd 40 Highcroft-AR-2020.indd 40 Job number 12 April 2021 6:54 pm V8 12-Apr-21 6:56:40 PM 12-Apr-21 6:56:40 PM David Kingerlee Executive director to 7 April 2021 and then non- independent non-executive director Roberta Miles Finance director and company secretary Appointment to the board Appointment to the board David joined the group as an executive Roberta joined the group in April 2010 director in September 1996. and was appointed to the board as finance director and company secretary Committee membership in July 2010. Executive committee to 7 April 2021. Committee membership Other appointments Executive committee. David is an executive director of each of the Kingerlee group of companies, Other appointments which trade in the construction and Roberta acts as company secretary or property development sectors. He is chief financial officer for a number of chairman of Kingerlee Limited and companies. She is currently a director of Kingerlee Holdings Limited. Mechadyne International Limited and Previous experience/ brings to the board David has a long-term knowledge of MCD Ventures Limited. Previous experience/ brings to the board the group. On 10 December 2020, David Roberta qualified as a chartered notified that board that he would be accountant in 1988 and, after leaving changing his role to that of a shareholder the profession in 1996, has maintained representative representing the interests a portfolio of part-time executive of Kingerlee Holdings Limited with board-level roles in a variety of immediate effect. Consequently, with businesses at various stages of their effect from the date of this report, life cycle. Her acute attention to detail, David has changed his status to that financial acumen and business expertise of non-independent non-executive are a valuable asset to the board director. In this role, he will not sit on any together with her project management board committees. capabilities. The board benefits greatly from the experience of her varied executive roles. Charles Butler Non-executive chairman Simon Costa Non-executive director and senior independent director Simon Gill Chief executive Appointment to the board Appointment to the board Appointment to the board Charles joined the group as non- executive chairman in January 2018. Simon joined the board as senior independent director in May 2015. Committee membership Committee membership Chairman of the nomination committee, Chairman of the remuneration and Simon joined the group as property director in April 2013 and assumed the role of chief executive in August 2013. Committee membership audit committees, and member of the Simon chairs the executive committee. and a member of the audit and remuneration committees. Other appointments Charles holds the following appointments: • non-executive chairman of Mysale Group PLC, an international online retailer; • non-executive director of Essensys plc, a global provider of SaaS platforms and on-demand cloud services to the flexible workspace industry; and • executive director of Belerion Capital Group Limited, an FCA regulated firm advising high net worth individuals and family offices. Previous experience/ brings to the board Charles is a chartered accountant who, prior to joining the board, was the CEO of Market Tech Holdings PLC, where he transformed a small group of central London real estate assets into a profitable, listed company with a £1.3bn portfolio. With a successful track record in running public companies, M&A, raising equity and debt for expansion, Charles is well positioned to help the company navigate its next phase of growth. nomination committee. Other appointments Other appointments Simon runs his own property investment Simon is currently the interim finance and development business, and is a director of the Royal Agricultural director of Waingate Management University, Cirencester, where his remit Services Limited and Solar Estates includes overseeing all the financial and Limited. related operations of the university. Previous experience/ brings to the board Previous experience/ brings to the board Simon is a chartered surveyor who Simon was formerly the Senior Bursar started his property career in one of the of a college of the University of Oxford. major London practices, subsequently He was responsible for overseeing becoming a partner in Allsop & Co, the management of the endowment, before setting up his own advisory and the finance and estates functions, practice in 1988. Later, he took on the and he served on all the college’s core role of principal by setting up various committees. Prior to that, he was an investment banker specialising in global M&A activities, and then for nine years he ran his own property company. In these roles, he advised US and UK public and private corporations on financial and related matters, and owned a modest property portfolio. Simon’s breadth of experience provides the board with a greater range of market knowledge and skills, which are particularly relevant to a company in Highcroft’s position. joint ventures and becoming an asset manager to one of Close Brothers’ private equity funds. Simon’s long-term involvement and experience in the property market in his various positions mean that opportunities for the board are assessed on a quick and efficient basis so that the correct decisions are reached at an early stage. David Kingerlee Executive director to 7 April 2021 and then non- independent non-executive director Roberta Miles Finance director and company secretary Appointment to the board David joined the group as an executive director in September 1996. Committee membership Executive committee to 7 April 2021. Other appointments David is an executive director of each of the Kingerlee group of companies, which trade in the construction and property development sectors. He is chairman of Kingerlee Limited and Kingerlee Holdings Limited. Previous experience/ brings to the board David has a long-term knowledge of the group. On 10 December 2020, David notified that board that he would be changing his role to that of a shareholder representative representing the interests of Kingerlee Holdings Limited with immediate effect. Consequently, with effect from the date of this report, David has changed his status to that of non-independent non-executive director. In this role, he will not sit on any board committees. Appointment to the board Roberta joined the group in April 2010 and was appointed to the board as finance director and company secretary in July 2010. Committee membership Executive committee. Other appointments Roberta acts as company secretary or chief financial officer for a number of companies. She is currently a director of Mechadyne International Limited and MCD Ventures Limited. Previous experience/ brings to the board Roberta qualified as a chartered accountant in 1988 and, after leaving the profession in 1996, has maintained a portfolio of part-time executive board-level roles in a variety of businesses at various stages of their life cycle. Her acute attention to detail, financial acumen and business expertise are a valuable asset to the board together with her project management capabilities. The board benefits greatly from the experience of her varied executive roles. OUR GOVERNANCE Membership of the board – 1 January to 10 December 2020 1 1 5 3 Non-executive chairman Non-executive directors Executive directors Membership of the board – at the date of this report 1 1 2 5 1 Non-executive chairman Independent non-executive directors Non-independent non-executive directors Executive directors Experience of the board 2 3 3 3 2 Finance Mergers and acquisitions Property Corporate governance Technology Stock code: HCFT www.highcroftplc.com Highcroft-AR-2020.indd 41 Highcroft-AR-2020.indd 41 Job number 12 April 2021 6:54 pm V8 41 12-Apr-21 6:56:43 PM 12-Apr-21 6:56:43 PM Corporate governance Governance framework More detail can be found below and on page 44• The board The board has overall responsibility for the group. It has delegated authority to the following committees and there are terms of reference of these committees are available on the group’s website www.highcroftplc.com. Chairman: Charles Butler Comprised: Three executive and two non-executive directors* Role: The board is responsible to the shareholders for the long-term strategy, control and leadership of the group Board committees Executive committee Audit committee Remuneration committee Nomination committee Chair: Simon Gill Chair: Simon Costa Chair: Simon Costa Chair: Charles Butler This committee is comprised of the executive directors and chaired by the chief executive. Roles: Implementation of strategy and policies, day- to-day decision making and administration of the group. This committee is comprised of the non- executive directors. Audit committee meetings are attended, by invitation, by the auditor and the finance director, and other executives may be invited to attend from time to time. Roles: Financial reporting, monitor risk management and internal control, monitor external. This committee is comprised of the non- executive directors. Roles: Remuneration policy, setting of directors’ remuneration packages, agreeing incentive plan targets and outcomes. This committee is comprised of the non- executive directors. Roles: Recommends board appointments, succession planning, reviewing board composition, skills and diversity, performance evaluation. *With effect from the date of this report, David Kingerlee changes his role from executive to non-executive director. Board effectiveness The board meets at least five times per year and has a schedule of matters specifically reserved for its decision, including approval of strategy, all capital transactions, issue of shares, documents to shareholders including annual report and accounts, stock exchange announcements, dividends, board membership and remuneration and related party transactions. It also approves the terms of reference of all sub-committees and conducts an annual evaluation of the board. 42 Highcroft Investments PLC Annual report and accounts for the year ended 31 December 2020 Highcroft-AR-2020.indd 42 Highcroft-AR-2020.indd 42 Job number 12 April 2021 6:54 pm V8 12-Apr-21 6:56:43 PM 12-Apr-21 6:56:43 PM OUR GOVERNANCE Each of the directors has committed to attend all scheduled and relevant committee meetings. If a director cannot, for unseen circumstances, attend a meeting, they will be provided with the papers in advance of the meeting as usual and can discuss them with the chairman or chief executive and provide comments. Attendance at the committee meetings is shown in the respective committee reports. Attendance at board meetings is shown below: Charles Butler Simon Costa Simon Gill David Kingerlee Roberta Miles Attendance 9/9 9/9 9/9 9/9 9/9 The board receives appropriate and timely information and the directors are free to seek any further information they consider necessary. All directors have access to advice from the company secretary and independent professionals at the company’s expense. The chairman reviews directors’ training needs annually and appropriate training is available for new directors and other directors as identified by that plan. All directors receive an induction on joining the board and there is an annual review of skills and knowledge and any necessary training is identified and undertaken. Division of responsibilities Division of responsibilities Chairman: Charles Butler Leads of the board ensuring • its operates effectively and in accordance with good governance. • Sets board agenda for meetings and ensures that adequate, accurate, clear board information is circulated in a timely manner, that all matters are discussed properly and promotes a culture that encourages constructive open debate on all key issues. Charles Butler was considered to be independent upon appointment and is considered, by the board, to have remained independent throughout the year. Chief executive There is a clear division of responsibilities between the chairman and the chief executive. • Oversees the day-to-day running of the group’s business including the development and implementation of the board’s agreed strategy. • Leads the executive team. Company secretary • Provides advice and assistance to the board, chairman and other directors. • Supports the chairman with the development of agenda for board meetings and provision of information to the board. • Advises the board on corporate governance developments. Independent non-executive director: Simon Costa • Brings an external perspective, independent judgement and objectivity to the board’s deliberations and decision making. • Drawing on their extensive experience and knowledge, they act as both a sounding board and as objective, constructive scrutinisers and challengers to the executive board. • Help facilitate the strategic decision making process and the monitoring of the performance of the executive management in achieving the agreed strategy and objectives. Senior independent director: Simon Costa • Provides a sounding board for the chairman and serves as an intermediary for other directors when necessary. Board tenure 1 3 2–5 years 5–10 years >10 years Age of the board • Available to discuss concerns 1 1 1 with shareholders that cannot be resolved by the normal channels of communication with the chairman or chief executive. On 10 December 2020, David Kingerlee informed the board that he would, with immediate effect, be representing the views of Kingerlee Holdings Limited. As a consequence, with effect from the date of this report, David has changed his status from executive director to non- independent non-executive director. Stock code: HCFT www.highcroftplc.com Highcroft-AR-2020.indd 43 Highcroft-AR-2020.indd 43 Job number 12 April 2021 6:54 pm V8 3 <50 years 51-60 years >60 years Read more about the nomination commitee on page 49 43 12-Apr-21 6:56:44 PM 12-Apr-21 6:56:44 PM The directors have put in place measures to ensure that the election or re-election by the shareholders of any independent non-executive director should be approved by an ordinary resolution of the shareholders and separately approved by those shareholders who are not controlling shareholders, namely the independent shareholders. Shareholders who wish to communicate with the board should contact the company secretary in the first instance via our website www.highcroftplc.com. Directors powers at the year end At the 2019 AGM, the directors were given powers, as follows: • • To allot new shares, or to grant rights to subscribe for or convert any security into shares of the company for the purpose of the satisfaction of awards granted under the Highcroft Incentive Plan up to an aggregate nominal amount of £64,591; and To allot equity securities for cash on a non-pre-emptive basis up to an aggregate nominal amount of £64,591. During 2020 new ordinary shares with a nominal amount of £1,984 were allotted under these authorities in satisfaction of the 2019 awards under the Highcroft Incentive Plan leaving £62,607 of authorities remaining. Corporate governance continued Governance framework and board resources Corporate governance is essential to ensuring our business is run in the right way for the benefit of all of our stakeholders. Our governance framework, on page 42, was established to provide clear lines of accountability and responsibility. It also assists with the sharing of information and facilitates fast decision making and effective oversight. Our governance arrangements support the development and delivery of strategy by ensuring accountability and responsibility, facilitating the sharing of information to inform decisions, enabling engagement with key stakeholders, maintaining a sound system of risk oversight, management and internal controls, providing independent insight and knowledge from the non- executive directors; and facilitating the development and monitoring of key performance indicators. The Directors utilise an electronic board portal, which provides immediate and secure access to current and past papers. The chairman of the board and the chairs of the committees set the agendas for upcoming meetings with support from the company secretary. Workforce policies and practice Since there are only five directors and one employee, our policies are informal. Everyone is aware of the group’s purpose and understand its values. We require all directors to notify the company if there is a situation that could give rise to a conflict or potential conflict of interest, and we ensure that our independent non-executive directors remain independent of executive management and free from any business relationship that might materially interfere with exercise of their judgement. Board evaluation Formal procedures appropriate to the size of the business are in use for performance evaluation of the board and its committees. They include objective setting and review with the use of an external facilitator on a periodic basis. In 2019, the board conducted a self-performance evaluation by way of a questionnaire designed to assess the strength of the board and its committees, and also to identify areas for improvement. This process was led by the chairman and the results were discussed by the board. The board considered itself to be generally effective in all the key areas identified in the questionnaire. These areas included contribution to results and achievement of strategic objectives, management controls and risk, operating styles and methods and shareholder relationships. Relations with shareholders The board values the views of its shareholders and recognises their interest in the company’s strategy and performance, board membership and quality of management. The chairman and other directors are available to meet shareholders if required. The AGM provides a forum, both formal and informal, for shareholders to meet and discuss relevant matters with all the directors. Documents are sent to shareholders at least 23 clear days before the meeting. Separate resolutions are proposed on each substantial issue so that they can be given proper consideration, and there is a resolution to receive and consider the annual report and financial statements, and the directors’ remuneration report. The company counts all proxy votes and will indicate the level of proxies lodged on each resolution. Full details of the AGM voting are included on the company’s website after the meeting. The company has no institutional shareholders but has continued a programme of meetings with key shareholders, subject to regulatory constraints, and the board is provided with feedback from these meetings. The company has a controlling shareholder, and this is explained fully on page 62. 44 Highcroft Investments PLC Annual report and accounts for the year ended 31 December 2020 Highcroft-AR-2020.indd 44 Highcroft-AR-2020.indd 44 Job number 12 April 2021 6:54 pm V8 12-Apr-21 6:56:44 PM 12-Apr-21 6:56:44 PM Report of the audit committee Audit, risk and internal control OUR GOVERNANCE We monitor the quality and integrity of the financial reporting and the valuation process, and focus on the risks affecting the group.” Main responsibilities • Risk management and internal controls – reviewing the system of internal controls and risk management. • Financial reporting – monitoring the integrity of the company’s financial statements and any formal announcements relating to financial performance, and considering significant financial reporting issues, judgements and estimates. • Property valuations – considering the process and outcome and the effectiveness and independence of the external valuer. • External audit – oversight and remuneration of the external auditor, and review of the policy for non- audit services provided by the external auditor. Welcome to the report of the audit committee. We set out below a summary of our main responsibilities and key activities during the year. As a committee, we are responsible for monitoring the integrity of the group’s reporting, and in continuing to develop and maintain a sound system of risk management and internal control. Composition of the committee and attendance at meetings There have been no changes to the membership of the committee during the year. The committee continues to be composed solely of the independent chairman of the board and the independent non-executive director. The board is satisfied that they both have sufficient financial experience, business acumen and real estate sector experience to carry out their duties effectively. Their attendance at committee meetings is set out below: Director Simon Costa Charles Butler Committee position Attendance Chairman Member 4/4 4/4 Simon Costa Chairman of the audit committee The committee meets regularly during the year, in line with the financial reporting timetable and, in 2020, met four times for routine business. Roberta Miles, as finance director, attends part of each meeting and the external auditor attends all meetings. The committee has an agenda item at each meeting to discuss business without any executive directors being present. In addition to the three main meetings, there were also several informal meetings, and general discussions between the committee members and, at times, the finance director and/or the auditor during the initial peak of the COVID-19 pandemic, and also as a result of David Kingerlee’s announcement regarding his change of status to that of a shareholder representative. The terms of reference were reviewed during the year and are available on the group’s website at highcroftplc.com. Stock code: HCFT www.highcroftplc.com Highcroft-AR-2020.indd 45 Highcroft-AR-2020.indd 45 Job number 12 April 2021 6:54 pm V8 45 12-Apr-21 6:56:44 PM 12-Apr-21 6:56:44 PM Report of the audit committee continued Principal responsibilities of the committee and its related activities Financial reporting The committee is responsible for monitoring the integrity of the group’s financial statements and any formal announcements relating to performance. It paid particular attention to those matters that were considered to be important to the group due to their subjectivity, the level of judgement involved or their effect on the financial statements. In 2020, the key issues relating to our financial statements that were considered are set out below: Significant issues considered Valuation of property portfolio Potential risk How those issues were addressed Conclusion The valuation of our investment property portfolio is inherently subjective as it is undertaken on the basis of assumptions made by valuers, which may not prove to be accurate. The outcome of the valuation is significant in terms of our results, future investment decisions and remuneration. The external valuers carry out a valuation every year at 30 June and 31 December. They also provide an overview of the UK property market and the detailed performance of the group’s assets. The valuer attended a meeting with the board and the auditor after the year end, where the agenda included the process adopted by the valuer, data provision by management, comparable market data and assumptions used by the valuer, in particular estimated rental values and yields. It also included a commentary on the relevant qualifications of the valuer and on their independence. It noted that the fee for the recurring valuation work was £18,000 and for other advisory work including valuation fees for lenders was £16,000 (2019 £18,000 and £22,000). The audit committee analysed the reports, reviewed the valuation outcomes and challenged assumptions where it believed appropriate. It also noted that the fee arrangement with the valuer was on a fixed fee basis in line with best practice. The committee was satisfied with the valuation process, the independence and effectiveness of the group’s external valuer and the valuation disclosures included in the annual report. Revenue recognition Revenue may be recorded in the incorrect accounting period, or fail to be recorded at all, or fictitous revenues may be recorded. REIT status The group loses its REIT status. The committee considered the appropriateness of the controls in place in the Revenue cycle, having particular regard to the use of external agents and the controls in place over their work including the reconciliations performed and reviewed internally. The committee concluded that revenue recognition policies and controls were appropriate. The committee consider the controls in place to ensure compliance with REIT tests. In particular, they review the compliance with the distribution requirement and the impact of forecasted results and trends on this criterion. They also review the non-close company status requirement. The committee concluded that the group’s REIT status had been maintained during the year. Going concern statement If this basis was inappropriate then there could be material misstatements in the financial statements. The committee reviewed the analysis supporting the going concern basis of preparation, particularly in the light of the ongoing COVID-19 pandemic This review included forecast cashflows, loan maturities, headroom on our debt covenants and undrawn debt facilities. The committee concluded that the going concern method of preparation remained appropriate. The going concern statement is set out on page 32. 46 Highcroft Investments PLC Annual report and accounts for the year ended 31 December 2020 Highcroft-AR-2020.indd 46 Highcroft-AR-2020.indd 46 Job number 12 April 2021 6:54 pm V8 12-Apr-21 6:56:44 PM 12-Apr-21 6:56:44 PM OUR GOVERNANCE Significant issues considered Viability statement Impact of COVID-19 Potential risk How those issues were addressed Conclusion If the statement was incorrect then corrective action might need to be undertaken to ensure the group’s viability. The committee considered whether the period of five years covered by the statement was reasonable. It also considered the reasonableness of the assumptions used, taking into account the market environment and the group’s strategy. The committee reviewed the sensitivies identified and stress tested and whether they were the most appropriate. A detailed analysis of the impacts of COVID-19 on the group's risk framework is included within the risk review on pages 28 to 32. The potential impacts of the COVID-19 pandemic on the assessment of the group’s principal risks and uncertainties, risk appetite and viability statement may have not been fully considered, affecting the results and conclusions that were drawn from them. The committee concluded that the statement had been drawn up on a reasonable basis and agreed with its assessment. The viability statement, together with further details on the assessment undertaken, is on page 32. The committee concluded that the potential impacts of COVID-19 had been appropriately considered. As a result of David Kingerlee’s announcement to the board, on 10 December 2020, that he would, in future, be representing the interests of Kingerlee Holdings Limited, the committee considered the issue of whether or not Highcroft should, in the future, consider itself to be an associated undertaking of Kingerlee Holdings Limited. The committee and board consulted extensively with its advisers on this matter. On 1 February 2021, the audit committee and board agreed that, as a result of Kingerlee Holdings Limited’s indirect 27% holding in Highcroft, its place in the wider Kingerlee Concert Party, and David Kingerlee’s new status, Highcroft was, with effect from 10 December 2020, an associated undertaking of Kingerlee Holdings Limited. The impact of this is that Highcroft’s external auditors, Mazars, have to carry out additional audit work for 2020 as a result of a lower materiality level being imposed by the group auditor, the requirement for a group audit questionnaire, and additional risk. Highcroft has received an indemnity from Kingerlee Holdings Limited to pay, each year, any additional fees that relate to the impact of this change. The committee also considers the results of the auditor’s work, the interim and annual reports prior to their publication, the application of the company’s accounting policies and the detail of any changes to the financial reporting requirements. The committee also considered the annual report and accounts, as a whole, on behalf of the board and made a recommendation to the board that it resolve that they were fair, balanced and understandable and provided the information necessary for stakeholders to assess the group’s position, performance, business model and strategy. The committee ensures that the board presents a balanced and understandable assessment of the company’s position and prospects in all interim and other price- sensitive public reports to regulators. The responsibilities of the directors as regards the financial statements are described on page 63, and that of the auditor on pages 69 and 70. External auditor The audit committee reviews the terms of engagement with the external auditor annually and ensures that the external auditor is independent. It has received and reviewed written disclosures from the auditor regarding independence. Mazars LLP were appointed as auditors to the group in 2017, following a formal competitive tender, and carry out no other services for the group other than a review of the interim statement for which the fee is £1,000. The audit fee is £48,000. The group’s audit partner is Stephen Eames who has been in role since Mazars were appointed. The committee will ensure that rotation of audit partner takes place in line with legislation. In order to ensure that the external audit is as effective as possible, the auditors must identify the appropriate risks as part of their planning process. For this financial year, Mazars LLP submitted a detailed audit plan at the planning audit committee meeting, which outlined key risks (including the valuation of investment property, risk of revenue misstatement due to the inclusion of fraudulent transactions and areas of accounting capable of manipulation). This plan was updated after the decision regarding Highcroft’s status as a subsidiary undertaking of Kingerlee Holdings Limited and presented to the audit committee for approval. The directors are satisfied that the risks identified by the auditors are consistent with those identified internally. At each audit committee meeting, the committee reserves time for a meeting without executive management being present. We discuss matters including the quality of the information provided to the auditor by the executives, confirmation that the auditor has not been restricted in their audit process and a discussion of any areas where they have had to use their professional scepticism. Stock code: HCFT www.highcroftplc.com Highcroft-AR-2020.indd 47 Highcroft-AR-2020.indd 47 Job number 12 April 2021 6:54 pm V8 47 12-Apr-21 6:56:45 PM 12-Apr-21 6:56:45 PM Report of the audit committee continued Internal audit The committee has considered the need for an internal audit function but has decided that the size and complexity of the group does not justify it at present. The work of the external auditor provides an element of comfort that controls are operating as intended and the executive team review the operation of the group’s policies and procedures. The committee is mindful of the need to ensure a sufficiently robust evaluation of the group’s risk management and internal control systems is undertaken. In the absence of an internal audit function, it will keep the arrangements for achieving internal assurance under review, at least annually, and endeavour to improve this. The audit committee reports on each of its meetings at the subsequent board meeting. Simon Costa Chairman of the audit committee 7 April 2021 The key procedures, which exist to provide effective internal control, include: • Clear limits of authority; • Annual revenue, cash flow and capital forecasts, reviewed regularly during the year, monthly monitoring of cash flow and capital expenditure reported to the board, quarterly and half-year revenue comparisons with forecast; • Financial controls and procedures; • Clear protocols for capital expenditure and disposals, including defined levels of authority; • An audit committee, which approves audit plans and published financial information, and reviews reports from the external auditor arising from the audit and deals with significant control matters raised; • Regular board meetings to monitor areas of concern; • Annual review of risks and internal controls; and • Annual review of compliance with the Code. More detail regarding our management of risk within our strategic framework is set out on page 28. The committee has considered the internal control and risk management systems in relation to the financial reporting process and considered them adequate. These include suitably qualified staff preparing the documents, information being prepared in good time to allow adequate internal review and audit processes to take place and a review with the auditors prior to the release of the financial results. The audit committee reviews the appointment of the external auditor on an annual basis, reviews their objectivity, effectiveness, independence and remuneration. As part of this review, Mazars provide the committee with an annual report on its integrity, objectivity and independence and on the policies and procedures that they have in place to ensure this. The committee concluded that, on the basis of this review, the auditor was objective, effective and independent and recommended to the board that a resolution proposing Mazars’ reappointment be put to shareholders at the 2020 AGM. Risk management and internal controls The board is responsible for an ongoing process to identify, evaluate and manage the risks facing the business, establishing and maintaining a sound system of internal control and for reviewing its effectiveness. The committee considered the group’s risk appetite and concluded that it remains set at an appropriate level in line with the group’s strategy. The audit committee is responsible for overseeing the effectiveness of the risk management and internal control systems. The system of internal control is designed to meet the needs of the group and the risks to which it is exposed, and by its very nature provide reasonable, but not absolute, assurance against material misstatement or loss. The internal control system was in place for the period under review up to the date of approving the accounts. There is an ongoing process to identify, evaluate and manage the risks facing the business. The entire system of internal control and board protocols was reviewed during the year and the conclusion was that the systems are adequate for a group of this size and complexity. This review has been undertaken in accordance with guidance published by The Institute of Chartered Accountants in England and Wales. 48 Highcroft Investments PLC Annual report and accounts for the year ended 31 December 2020 Highcroft-AR-2020.indd 48 Highcroft-AR-2020.indd 48 Job number 12 April 2021 6:54 pm V8 12-Apr-21 6:56:45 PM 12-Apr-21 6:56:45 PM Report of the nomination committee Composition, succession and evaluation OUR GOVERNANCE The committee keeps the structure and composition of the Board under regular review to ensure that it has the right balance of skills, knowledge, experience and diversity to carry out its duties and provide effective leadership.” Main responsibilities In line with the authority delegated by the board, the nomination committee has the following main responsibilities: • Board appointments – leads the process for board appointments, ensures plans are in place for orderly succession to the board. • Board composition – reviews the structure, size and composition of the Board and its committees, recommending to the Board any new appointees and the reappointment of existing directors and committee members. • Board diversity – ensures there is a balance of skills, knowledge, experience, and diversity on the board. • Board evaluation – oversees a formal and rigorous annual evaluation of the Board, its committees, and directors. Welcome to the report of the nomination committee. We set out below a summary of the main responsibilities and key activities during the year. Composition of the committee and attendance at meetings There have been no changes to the membership of the committee during the year. The committee continues to be composed solely of the independent chairman of the board and the independent non-executive director, their attendance at committee meetings is set out below: Director Charles Butler Simon Costa Committee position Attendance Chairman Member 1/1 1/1 If this committee is dealing with the successor to the chairmanship it would be chaired by another non-executive director and may involve an external consultant. Activities of the committee Change of status During the year, on 10 December 2020, David Kingerlee informed the board that he would, in future, be representing the views of Kingerlee Holdings Limited. The committee have considered the impact of this statement, taken advice and, after the year-end, recommended to the board that, with effect from the date of this report, David Kingerlee changed his status from an executive director to a non-independent non-executive director. This was agreed by the board and David Kingerlee on 25 March 2021. There have been no other changes to the composition of the board during the year. The committee further recommended that no additional executive director needed to be appointed. Succession planning The committee recognises that succession planning is a key part of its remit. It recognises the importance of creating succession plans for the board so that they can fulfil the group’s long- term strategy. The committee started to consider, during 2020, the potential need to split the role of finance director and company secretary due to both the significant increase in governance and financial reporting requirements, and also to minimise the risk from these two roles being carried out by one person. David Kingerlee’s change of status has heightened our governance risks and this topic will be a key area of focus for 2021. Charles Butler Chairman of the board and of the nomination committee Our plans are reviewed regularly in the light of the skills and experience that are required both now and in the medium term, in a rapidly changing environment to ensure that board members have the skills and experience necessary to ensure the continuing success and good governance of the group. Tenure The board considers that the length of time that each director serves on the board should not necessarily be limited and has not set a finite tenure policy. However, all directors offer themselves for reappointment on an annual basis at the AGM. The board carry out an evaluation exercise each year. The committee concludes on whether each director continues to make an effective and valuable contribution, demonstrates commitment to their role and that it is in the best interest of the shareholders that the director is re-elected. Diversity The company has a culture that recognises the benefits of all aspects of diversity (not limited to gender, ethnic group, background, age or cognitive and personal strengths). The company maintains a policy of ensuring that, during its review of board composition and during any recruitment process, all aspects of diversity are considered. The company aims to employ the best candidates available based on merit and ability. Given the small size of the organisation, the board does not consider that diversity quotas are appropriate in determining its composition. Charles Butler Chairman of the nomination committee 7 April 2021 Stock code: HCFT www.highcroftplc.com Highcroft-AR-2020.indd 49 Highcroft-AR-2020.indd 49 Job number 12 April 2021 6:54 pm V8 49 12-Apr-21 6:56:46 PM 12-Apr-21 6:56:46 PM Directors’ remuneration report Remuneration The objective of the group’s remuneration policy is to embed a clear remuneration structure, which helps drive strategy by properly rewarding performance.” Simon Costa Chairman of the remuneration committee Main responsibilities In line with the authority delegated by the board, the remuneration committee has the following main responsibilities: • Remuneration policy – sets the company’s remuneration policy and ensures that it is effectively implemented. • Terms and conditions of employment for executive directors – is responsible for determining remuneration terms and conditions of employment for the executive directors ensuring that they are appropriately incentivised to enhance the group’s performance and are rewarded for their contribution to the success of the business by designing, monitoring, and assessing incentive arrangements, and assessing performance and outcomes against them. • Dialogue with shareholders – maintains an active dialogue with shareholders, ensuring their views are sought and considered when setting remuneration policy. Annual statement Introduction I am pleased to introduce the remuneration report for the year ended 31 December 2020. This report comprises three sections: The board considered our independence during the year and concluded that we were both independent. Neither of the committee members had any potential conflicts of interest arising from cross- directorships nor any day-to-day involvement in running the business. • • • This annual statement; The summary of directors’ remuneration policy; and The annual report on remuneration for the year. This report describes the second year of the application of the remuneration policy incorporating the Highcroft Incentive Plan and explains the committee’s intentions for 2021. Membership of the committee There have been no changes to the membership of the committee during the year. The committee continues to be comprised solely of the independent chairman of the board and the independent non-executive director, and meets at least three times per year, together with ad-hoc meetings when required. The attendance at committee meetings during the year is set out below: Director Simon Costa Charles Butler Committee position Attendance Chairman Member 4/4 4/4 Major decisions made during the year During the year the remuneration committee met to: • Ensure that the Highcroft Incentive Plan continues to add rigour and transparency to the determination of awards while also rewarding both the delivery of returns to shareholders and sustained long- term performance in line with the requirements of the Code; • Agree the incentive plan criteria and awards for executive directors for 2020; and • Begin the review the level of directors’ fees for 2021. The directors’ salaries were informally benchmarked against the external market and changes for all directors were proposed and confirmed after the year end. Advisers The committee did not appoint any external advisers to carry out any work during 2020. 50 Highcroft Investments PLC Annual report and accounts for the year ended 31 December 2020 Highcroft-AR-2020.indd 50 Highcroft-AR-2020.indd 50 Job number 12 April 2021 6:54 pm V8 12-Apr-21 6:56:46 PM 12-Apr-21 6:56:46 PM Remuneration at a glance OUR GOVERNANCE Remuneration philosophy The board’s stated objective is to enhance shareholder value through a combination of increasing asset value, profits and dividends. In order to achieve this objective, the board must focus its efforts on the strategic priorities that it believes will maximise the likelihood of success. The committee welcomes engagement with shareholders and welcomes feedback on the form and content of this report. Remuneration strategy The current remuneration policy was approved by the shareholders at the 2019 AGM, it was not changed in 2020, and it is not proposed that any significant changes are made in 2021. During the coming year, our task will be to review the remuneration policy to ensure that it is effective in supporting our strategy. Executive director total remuneration Simon Gill 52% 2019 48% 49% 2020 Fixed Base salary 51% Pension and other benefits Performance-linked Highcroft Incentive Plan – cash Highcroft Incentive Plan – share award Roberta Miles 52% 2019 48% 49% 2020 51% Fixed Base salary Pension and other benefits Performance-linked Highcroft Incentive Plan – cash Highcroft Incentive Plan – share award David Kingerlee Fixed Base salary 35% 52% 2019 48% 2020 Performance-linked Pension and other benefits 65% Highcroft Incentive Plan – cash Highcroft Incentive Plan – share award 2019 52% 52% – 48% 42% 6% 2020 43% 42% 1% 57% 34% 23% 2019 2020 53% 51% 2% 47% 41% 6% 2019 61% 60% 1% 39% 39% – 43% 42% 1% 57% 34% 23% 2020 65% 63% 2% 35% 35% – Single total figure of remuneration for executive directors for year ended 31 December 2020 £’000 Simon Gill Roberta Miles 129 113 100 68 297 88 59 260 David Kingerlee 39 21 60 Fixed pay Highcroft Incentive Plan – cash Highcroft Incentive Plan – shares Stock code: HCFT www.highcroftplc.com Highcroft-AR-2020.indd 51 Highcroft-AR-2020.indd 51 Job number 12 April 2021 6:54 pm V8 51 12-Apr-21 6:56:48 PM 12-Apr-21 6:56:48 PM Remuneration at a glance continued Summary of directors’ remuneration policy The objective of the group’s remuneration policy is to embed a clear, transparent remuneration structure, which helps drive the group’s strategy by properly rewarding performance. This section of the report summarises the group’s remuneration policy, which was approved by shareholders at the 2019 AGM. An ordinary resolution to approve this, or any updated policy, will be put to shareholders at least every three years. The policy is available on the group’s website www.highcroftplc.com. The board’s policy is that the remuneration of all directors should reflect their experience and expertise, and the particular value that they add to the group. In addition, the packages should be sufficient to attract and retain individuals of an appropriate calibre and capability, and should reflect the duties and responsibilities of the directors and the value and amount of time committed to the group’s affairs. The packages should continue to be aligned with our remuneration philosophy with at least one element of performance-related pay for each executive director. The remuneration packages of all directors are reviewed annually, and these are listed in the table below together with an explanation of who they apply to, their purpose, their link to our strategy, the mechanics of the operation of the element and any maximum amounts or performance criteria that apply. Element Purpose Link to strategy Operation Maximum Performance target To assist with recruitment and retention. Reviewed at least annually. Paid monthly via payroll. Not set N/A Executive directors Fixed Base salary Pension Competitive remuneration base, benchmarked to the market reflecting role, responsibilities, skills and experience. To provide the legal minimum post-retirement benefits. To assist with recruitment and retention. Benefits Provide a competitive level of benefits. To assist with recruitment and retention. Not set N/A N/A The maximum will be set at the cost of providing the benefits described. There is an auto-enrolment compliant scheme in place. The group will pay either to this, or another personal pension scheme nominated by the director, at least the minimum legal level of company auto-enrolment contribution. The group may pay a non-pensionable cash sum in lieu of pension contributions. There is no intention to introduce direct benefit provision for the executive directors at this time. However, the remuneration committee recognises the need to maintain suitable flexibility to ensure it is able to attract and retain directors. Accordingly, the remuneration committee expects to be able to pay a cash allowance in lieu of benefits such as private medical insurance and death in service life assurance as appropriate. 52 Highcroft Investments PLC Annual report and accounts for the year ended 31 December 2020 Highcroft-AR-2020.indd 52 Highcroft-AR-2020.indd 52 Job number 12 April 2021 6:54 pm V8 12-Apr-21 6:56:48 PM 12-Apr-21 6:56:48 PM Element Variable The Highcroft Incentive Plan OUR GOVERNANCE Purpose Link to strategy Operation Maximum Performance target To incentivise the executive directors to deliver both strong in-year financial and non-financial performance and sustained longer- term returns to shareholders. To assist with recruitment and retention. To align executive director interests with those of shareholders. Annual cash award capped at 10% of distributions paid to shareholders. Up to 200% of base salary. Up to 100% of base salary. Annual awards paid part in cash and part in shares. For executive directors other than David Kingerlee: The cash element shall be the higher of 80% of base salary or 50% of the total award and will be paid out after the end of the financial year to which the award relates. Any balance will be paid in the form of deferred shares that vest 50% after three years, and 50% after four years subject to the executive director’s continued employment at the date of vesting. Malus will apply for the period from grant to vesting with clawback applying for the two- year period post vesting. For David Kingerlee: David Kingerlee is not eligible to participate in the share element of the plan due to the Kingerlee Concert Party restrictions, and so 100% of his award will be paid in cash after the end of the financial year to which the award relates. Performance is measured over the financial year. 75% of the award is payable on the achievement of financial targets, with the balance being payable on the achievement of strategic targets. The remuneration committee is of the opinion that given the commercial sensitivity arising in relation to the detailed financial targets, disclosing precise targets in advance would not be in shareholder interests. Actual targets, performance achieved and awards made will be published at the end of the performance periods so shareholders can fully assess the basis for any payouts. The remuneration committee retains discretion in exceptional circumstances to change performance metrics and targets and the weightings attached to metrics part way through a performance year if there is a significant and material event which causes the remuneration committee to believe the original metrics, weightings and targets are no longer appropriate. Discretion may also be exercised in cases where the remuneration committee believe that the formulaic outcome is not a fair and accurate reflection of business performance Shareholding requirement To support long- term commitment to the company and the alignment of executive director interests with those of shareholders. To align the executive director interests with those of shareholders. Chairman and non-executive director Fees To assist with recruitment and retention. Competitive remuneration, benchmarked to the market reflecting role, responsibilities, skills and experience. 100% of base salary. None Not set N/A The remuneration committee has adopted formal shareholding guidelines that will encourage the executive directors to build up over a five-year period and then subsequently hold a shareholding equivalent to a percentage of base salary. This requirement will continue until the audited accounts for the year of cessation are finalised and the sale of any shares will then be subject to orderly market provisions. Fees are reviewed annually taking into account responsibilities, time commitment and benchmark data for organisations of a similar size and complexity. Fees are paid monthly via the payroll and relevant expenses incurred are reimbursed. Stock code: HCFT www.highcroftplc.com Highcroft-AR-2020.indd 53 Highcroft-AR-2020.indd 53 Job number 12 April 2021 6:54 pm V8 53 12-Apr-21 6:56:48 PM 12-Apr-21 6:56:48 PM Directors’ remuneration report continued The committee addressed the following factors when determining the remuneration policy and practices, as recommended by the Code. Code principles How the committee has addressed these Clarity Remuneration arrangements should be transparent and promote effective engagement with shareholders and the workforce. The committee is satisfied that the remuneration arrangements in the new policy are transparent, comprising simple incentive structures that are commonplace in the market and best practice remuneration provisions. Key shareholders were consulted when the remuneration policy was adopted. Our one employee is aware of the policy. Simplicity Remuneration structures should avoid complexity and their rationale and operation should be easy to understand. The components of our remuneration policy are straightforward and are simple to operate and communicate. Risk Remuneration arrangements should ensure reputational and other risks from excessive rewards, and behavioural risks that can arise from target-based incentive plans, are identified and mitigated. The range of performance outcomes is looked at carefully when setting performance target ranges. Discretion is used where the outcomes lead to an inappropriate pay outcome. The deferred share element of the Highcroft Incentive Plan, the shareholding requirement and clawback and malus provisions all help to mitigate risk. Predictability The range of possible values of rewards to individual directors and any other limits or discretions should be identified and explained at the time of approving the policy. Incentive plans are determined based on a proportion of base salary so there is a sensible balance between fixed pay and performance-linked elements. There is the ability to override a formulaic driven outcome of incentive plans to minimise the likelihood of a poor link between reward and performance. Proportionality The link between individual awards, the delivery of strategy and the long-term performance of the company should be clear. Outcomes should not reward poor performance. The incentive plan is determined based on a proportion of base salary, and is capped, so there is a sensible balance between fixed pay and performance linked elements. Alignment to culture Incentive schemes should drive behaviours consistent with company purpose, values and strategy. The committee ensure that the Highcroft Incentive Plan criteria are consistent with the company purpose and values, and that the performance measures are linked to the business strategy. 54 Highcroft Investments PLC Annual report and accounts for the year ended 31 December 2020 Highcroft-AR-2020.indd 54 Highcroft-AR-2020.indd 54 Job number 12 April 2021 6:54 pm V8 12-Apr-21 6:56:48 PM 12-Apr-21 6:56:48 PM OUR GOVERNANCE Recruitment policy The remuneration committee’s approach to recruitment remuneration is to apply the same structure as described in the policy table. On appointment, base salary levels will be set taking into account a range of factors including expected time commitment, market levels, experience, internal relativities and affordability. The maximum annual opportunity under the Highcroft Incentive Plan will be no more than 200% of base salary as set out in the remuneration policy. The remuneration committee’s policy is not to provide sign-on compensation or to provide buyouts as a matter of course. However, should the remuneration committee determine that the individual circumstances of recruitment justified the provision of a buyout, the equivalent value of any incentives that will be forfeited on cessation of a director’s previous employment will be calculated, taking into account the proportion of the performance period completed on the director’s cessation of employment, the performance conditions attached to the vesting of these incentives and the likelihood of them being satisfied, and any other terms and conditions having a material effect on their value. The remuneration committee may then grant up to the same value as this calculated value, where possible, under the company’s incentive plan. To the extent that it is not possible or practical to provide the buyout within the terms of the company’s existing incentive plan, a bespoke arrangement would be used. Loss of office policy The remuneration committee will honour any contractual arrangements. When determining any loss of office payment for a departing individual, the remuneration committee will always seek to minimise cost to the company whilst seeking to address the circumstances at the time. Leaving arrangements under the Highcroft Incentive Plan are defined in the plan rules and vary by leaver type as set out below: • A ‘good leaver’ is defined as a participant ceasing to be in employment by reason of death, injury, ill health, disability, redundancy, retirement or otherwise at the remuneration committee’s discretion. In these circumstances, unvested incentive awards will vest in full on the usual date but pro-rated for time served and the achievement of performance conditions. • The remuneration committee may at its discretion bring forward the vesting date for a good leaver, in which case the performance would be assessed at that point. • All other leavers who cease employment prior to the cash element of the incentive award being paid, or who are under notice of cessation at the time that the cash element of the award is paid, will not be eligible to receive the cash element of the award for that financial year, and all deferred shares for such leavers will lapse and any dividends paid on such shares will be clawed back. Illustration of policy The tables below illustrate the remuneration opportunity provided to each executive director in line with different levels of performance for 2021. Simon Gill Chief executive Roberta Miles Finance director David Kingerlee Executive director* (to 7 April 2021) Maximum 34% 66% £386,000 Maximum 34% 66% £341,000 On target 45% 55% £291,000 On target 45% 55% £257,000 Maximum On target 51% 62% 49% £19,000 38% £16,000 Minimum 100% £131,000 Minimum 100% £116,000 Minimum 100% £10,000 Salary, benefits and pension Highcroft Incentive Plan * David Kingerlee becomes a non-executive director with effect from the date of this report On target performance Comprising base salary, pension allowances and an incentive plan payment at 62.5% of the maximum opportunity. Maximum performance Comprising base salary, pension allowances and an incentive plan payment at 100% of the maximum opportunity. Minimum performance Comprising the minimum remuneration receivable being base salary and pension allowances. Directors’ service contracts Executive directors are given service contracts within which there is a notice period by either party of six months. Non-executive directors have a formal appointment document for a period of up to three years subject, at any time, to termination on six months’ notice by either party. All directors retire and are subject to election at the first AGM after their appointment. The board follows the Code recommendations in that all directors offer themselves for re-election at each AGM. Consideration of employment conditions elsewhere in the company There is only one other employee in the company, a part-time management accountant, whose salary is decided by benchmarking to the market, her skills, experience, and contribution. The directors did not consult with this employee in setting the directors’ remuneration policy as it was not considered appropriate to do so. Consideration of shareholder views During the year, the remuneration committee engages with key shareholders to ensure that their views are understood when considering remuneration policy. Stock code: HCFT www.highcroftplc.com Highcroft-AR-2020.indd 55 Highcroft-AR-2020.indd 55 Job number 12 April 2021 6:54 pm V8 55 12-Apr-21 6:56:49 PM 12-Apr-21 6:56:49 PM Directors’ remuneration report continued Audit The law requires the group’s auditor, Mazars LLP, to report on whether the part of the directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006. Where disclosures have been audited, they are indicated as such. The auditor’s opinion is included in the independent auditor’s report on pages 66 to 70. Directors’ contracts A summary of the directors’ contracts is set out below: Non-executive directors Date of appointment as director Effective date of current appointment letter Charles Butler Simon Costa 2 January 2018 15 May 2015 2 January 2021 15 May 2021 Expiry of term Notice period 1 January 2024 Six months 14 May 2024 Six months Executive directors Date of appointment as director Simon Gill 1 April 2013 Date of contract 7 December 2017 David Kingerlee* 12 September 1996 7 December 2017 Roberta Miles 1 July 2010 7 December 2017 Notice period Six months Six months Six months * With effect from the date of this annual report, David Kingerlee has changed his status from an executive director to a non-independent non- executive director, and his contractual arrangements are now governed by an appointment letter with an effective date of 7 April with a term expiring on 6 April 2024. Annual report on remuneration for the year Relative importance of spend on pay The directors are the only employees of the group other than one part-time management accountant. Directors’ remuneration Increase in director’s remuneration* Distributions paid to shareholders Directors’ remuneration as a % of distributions paid to shareholders Cash element of directors’ remuneration as a % of distributions paid to shareholders 2020 £’000 703 31.6% 2,484 28.3% 8.4% 2019 £’000 534 10.4% 2,829 18.9% 6.7% * In 2020 the accounting treatment for the PAYE/NI on the share award was altered – see page 57 for more details. Directors remuneration 2020 (audited) 2020 Incentive plan Cash award £ Share award* £ Total £ Base salary £ Pension £ 2019 Incentive plan Cash award £ Share award* £ Base salary £ 49,000 37,000 Pension £ – – Charles Butler Simon Costa Simon Gill 125,000 3,750 100,000 68,171 296,921 113,500 – – – – 49,000 40,000 37,000 31,500 – – – – – – – 90,800 12,801 David Kingerlee 38,000 1,125 20,944 – 60,069 36,000 672 22,950 – 59,622 Roberta Miles 110,000 3,300 88,000 58,983 260,283 95,500 359,000 8,175 208,944 127,154 703,273 316,500 2,865 3,537 76,400 190,150 10,771 185,536 23,572 533,759 * Element relating to the financial year including, where appropriate, the proportion of previous year’s award expensed in financial year. In 2020 the accounting treatment for the PAYE/NI on the share award was altered – see page 57 for more details. Simon Gill opted out of receiving pension contributions in 2019. Highcroft Incentive Plan 2020 The maximum opportunity under the Highcroft Incentive Plan for 2020 was 200% of salary for Simon Gill and Roberta Miles and 100% of salary for David Kingerlee. The original 2020 award was based on four performance measures. Due to the COVID-19 pandemic and its impact on our dividend policy during the year the committee decided to use the discretion available to it and change the EPS growth performance measure to one of adjusted EPS performance versus the market. The adjusted EPS performance was also adjusted for the change in accounting treatment of the Highcroft Incentive Plan during the year. The committee also replaced the performance measures for NAV per share growth and EPS performance to ones related to the weighted performance of the relevant MSCI annual index as being an appropriate relevant market index. The relative weighting, thresholds and outcomes together with the 2020 outcome for the individual directors is tabulated on the following page. 56 Highcroft Investments PLC Annual report and accounts for the year ended 31 December 2020 Highcroft-AR-2020.indd 56 Highcroft-AR-2020.indd 56 Job number 12 April 2021 6:54 pm V8 12-Apr-21 6:56:49 PM 12-Apr-21 6:56:49 PM 2018 £’000 483 9.9% 2,519 19.2% 7.7% Total £ 40,000 31,500 217,101 OUR GOVERNANCE Weighting Threshold % of maximum payout Performance agreed Agreed % outcome Actual % of maximum awarded Award as % of base salary Simon Gill Roberta Miles David Kingerlee Deferred Cash shares Cash Deferred shares Cash Performance measure Adjusted NAV per share movement Adjusted EPS performance 30% 30% Gross rent growth 15% Strategic personal 25% objectives Simon Gill Roberta Miles David Kingerlee Total Simon Gill Roberta Miles David Kingerlee 100% -3.69% 0% 2.76% 11.02% 2.3% 9.0% 25% 100% 25% 100% 25% 100% -1.72% 65.04% 19.5% 5.93% 53.84% 16.2% 4.17% 46.33% 6.9% 100% 100% 50% 25% 25% 12.50% 67.62% 80% 55.23% 67.62% 55.12% 80% 55.23% 55.12% Deferred share element of award The cost of the net pay, used to purchase shares for the deferred share element of the award is, for accounting purposes, spread across the total service and vesting periods of the deferred shares, which are: Deferral period 2019 award 2020 award 50% of the award years 50% of the award years 3.77 3.37 4.77 4.37 Deferred share element Base salary £ % of base salary Gross pay put through payroll £ MV of shares issued @53% PAYE/NI payable on award* Expensed in 2019 £ 2020 £ 2021 £ 2019 award 113,500 47.50% 53,913 28,574 12,802 768 6,785 2022 £ 5,913 – 2023 £ 2,306 – 2024 £ – – Simon Gill Roberta Miles Total 2020 award 125,000 55.23% 69,039 36,591 25,339 – – 25,339 – 9,616 9,616 9,616 6,195 1,548 32,448 32,448 – – – – 12,802 68,171 16,401 15,529 8,501 1,548 2019 award 95,500 47.50% 45,363 24,042 10,771 646 5,709 4,975 1,941 2020 award 110,000 55.23% 60,754 32,200 21,321 28,554 – – – 21,321 – – – 8,462 8,462 8,462 5,452 1,362 28,554 – – – 10,771 58,983 14,171 13,437 7,393 23,573 127,154 30,572 28,966 15,894 – – – 1,362 2,910 * In 2020 the accounting treatment for the share award was altered, in that the PAYE/NI on the whole share award is expensed in the service period and only the expense of the net salary used to acquire shares is spread across the total service and vesting period. This has resulted in a net additional expense of £35,580 related to the 2019 share award being charged in 2020, together with £10,447 of employers national insurance. Stock code: HCFT www.highcroftplc.com Highcroft-AR-2020.indd 57 Highcroft-AR-2020.indd 57 Job number 12 April 2021 6:54 pm V8 57 12-Apr-21 6:56:50 PM 12-Apr-21 6:56:50 PM Directors’ remuneration report continued 2019 award The 2019 award was paid via the payroll in March 2020 and the net sum (calculated as 53% of the gross sum, after deducting PAYE and NI) was used to purchase shares on 5 May 2020 at £6.63 per share being the average of the closing share price for the previous three working days. Simon Gill Roberta Miles 2019 award Purchase price £ 28,569 24,040 Value at 31 December 2020 £ 31,025 26,107 Number of shares 4,309 3,626 Remuneration of the chief executive (‘CEO’) The table below shows the total remuneration of Simon Gill (from 31 July 2013) and Jonathan Kingerlee (until 31 July 2013) in respect of their role as CEO together with the annual percentage change. 2020 £’000 2019 £’000 2018 £’000 2017 £’000 2016 £’000 2015 £’000 2014 £’000 2013 £’000 2012 £’000 2011 £’000 2010 £’000 Fixed remuneration Simon Gill Jonathan Kingerlee (deceased) Variable remuneration 129 – 113 – 108 – 98 – 95 – 70 – 51 – 21 20 Simon Gill 168 104 101 94 87 82 60 – Single total figure of remuneration Simon Gill Jonathan Kingerlee (deceased) Percentage change in total remuneration of CEO Annual variable element award payout against maximum opportunity* 297 – 297 217 – 217 209 – 209 192 – 192 182 – 182 152 – 152 111 – 111 21 20 41 37% 4% 9% 5% 20% 37% 171% 17% 0% 3% 0% 68% 64% N/A N/A N/A N/A N/A N/A N/A N/A N/A – 35 – – 35 35 – 35 – – 35 35 – 34 – – 34 34 *The Highcroft Incentive Plan was introduced in 2019. Prior to that, any bonuses paid were entirely discretionary with no maximum opportunities defined. If the share price increased, there would be no effect on the remuneration of CEO as disclosed above. Executive directors’ remuneration 2020 The charts below show the 2020 actual remuneration against the potential opportunity for the year and the 2019 remuneration for each executive director. Full disclosure of the single total figure for remuneration is set out above. Simon Gill Chief executive Roberta Miles Finance director David Kingerlee Executive director 2020 actual 42% 57% £296,921 2020 actual 42% 56% £260,283 2020 actual 2020 potential 32% 67% £391,521 2020 potential 32% 67% £342,160 2020 potential 2019 actual 52% 48% £217,101 2019 actual 51% 47% £185,536 2019 actual 63% 49% 60% 35% £60,069 49% £77,125 38% £59,622 Base salary Pension Incentive plan/discretionary bonus * 2020 potential assumes that maximum incentive plan payment was made and spread evenly over the service and vesting period and takes into account the revised accounting treatment for the PAYE and NI on the 2019 and subsequent share awards. Annual percentage change in remuneration of directors and employees The table below shows a comparison of the annual change of each individual director’s pay. As there is only one non-board employee it is not considered appropriate or beneficial to include that information as a comparator. 58 Highcroft Investments PLC Annual report and accounts for the year ended 31 December 2020 Highcroft-AR-2020.indd 58 Highcroft-AR-2020.indd 58 Job number 12 April 2021 6:54 pm V8 12-Apr-21 6:56:50 PM 12-Apr-21 6:56:50 PM OUR GOVERNANCE Change in pay between the year ended 31 December 2019 and 31 December 2020 Executive directors Simon Gill David Kingerlee Roberta Miles Non-executive directors Charles Butler Simon Costa * 2020 was the first year that Simon Gill was paid a pension allowance. Incentive plan Base salary/ fees % change Pension % change Cash award % change Share award % change** 10.1 5.6 15.2 22.5 17.5 –* 67.4 15.2 – – 10.1 (8.7) 15.2 – – 28.1 – 33.9 – – ** The % change is calculated by reference to the gross value of the award for the year and not the amount expensed in the year (see page 57). Company performance The board is responsible for the group’s performance. The graph below shows the company’s Total Shareholder Return (TSR) compared to the FTSE 350 Super Sector Real Estate Index over the last ten years, which the board considers to be the most appropriate benchmark. TSR is defined as share price growth plus reinvested dividends. Total Shareholder Return performance graph Highcroft Investments FTSE 350 SS Real Estate 86,710 £’000 300 250 200 150 100 50 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: Thomson Reuters Datastream Statement of implementation of remuneration policy in the next financial year The board does not intend to make any significant changes to remuneration policy during 2021. David Kingerlee will cease to be eligible for pension contributions or payments under the Highcroft Incentive Plan with effect from 1 April 2021, in connection with his change of status from an executive to a non-independent non-executive director. Salaries 2021 The committee undertook a benchmarking exercise with PWC at the beginning of 2019. At the end of 2019 and at the end of 2020, the committee carried out their own informal internal update of this exercise and reviewed the board salaries against wider market practice. The following base salaries apply from 1 January 2021: Simon Gill Roberta Miles David Kingerlee to 31 March 2021 £127,500 £112,500 £38,000 Charles Butler Simon Costa David Kingerlee from 1 April 2021 £50,000 £38,000 £25,000 The change in David Kingerlee’s salary during 2021 is linked to his change of status from and executive to a non-independent non-executive director. Stock code: HCFT www.highcroftplc.com Highcroft-AR-2020.indd 59 Highcroft-AR-2020.indd 59 Job number 12 April 2021 6:54 pm V8 59 12-Apr-21 6:56:51 PM 12-Apr-21 6:56:51 PM Directors’ remuneration report continued Highcroft Incentive Plan 2021 The maximum opportunity under the Highcroft Incentive Plan for 2021 will continue to be 200% of salary for Simon Gill and Roberta Miles, and 100% of salary for David Kingerlee for the period 1 January 2021 until 31 March 2021. The awards will be based on four performance measures: • NAV per share performance 30% weighting • Adjusted EPS performance 30% weighting • Gross rent growth 15% weighting • Strategic metrics (non-financial) 25% weighting Performance targets for the Incentive Plan for 2021 are not disclosed here on the grounds of commercial sensitivity, and will be disclosed in the 2021 directors’ remuneration report. Interests of the directors in the shares of the company (audited) The interests of the directors, and their connected persons, in the shares of the company at 31 December 2020, were as follows: Charles Butler Simon Costa Simon Gill David Kingerlee Roberta Miles – – 4,309 1,498,333 9,576 Director’s shareholding guideline Executive directors are subject to within-employment and post-employment shareholding requirements – see page 53. They are encouraged to build up over a five-year period from May 2020; a holding equivalent to 100% of base salary. At 31 December 2020, the executive directors are on track to build up, on a straight-line basis, to their shareholding guideline within the five-year period. Executive director Simon Gill Roberta Miles David Kingerlee – personal – his connected persons, Kingerlee Holdings Limited and it subsidiaries David Kingerlee – total Within employment shareholding guideline by May 2025 Beneficially held shares* 2020 base salary £ Target by May 2025 £ Achieved at 31 December 2020 125,000 110,000 38,000 125,000 110,000 38,000 24.8% 62.7% 720% 4,309 9,576 89,470 1,408,863 1,498,333 Value of beneficially held shares £ 31,025 68,947 644,184 10,143,814 10,787,998 * For Simon Gill and Roberta Miles, the number of shares includes those issued in their name but not yet vested under the Highcroft Incentive Plan. The value of the executive directors’ shareholdings has been calculated using the closing price at 31 December 2020 of £7.20. Statement of shareholder voting At the AGM in 2020, the resolution to approve the directors’ remuneration report received the following voting from shareholders: Votes cast in favour Votes cast against Total votes cast Votes withheld Approved by the board of directors and signed by Simon Costa Chairman of the remuneration committee 7 April 2021 1,933,225 2,500 1,935,725 – 99.9% 0.1% 100% – 60 Highcroft Investments PLC Annual report and accounts for the year ended 31 December 2020 Highcroft-AR-2020.indd 60 Highcroft-AR-2020.indd 60 Job number 12 April 2021 6:54 pm V8 12-Apr-21 6:56:51 PM 12-Apr-21 6:56:51 PM Report of the directors The corporate governance report on pages 38 to 63 forms part of the report of the directors. OUR GOVERNANCE The directors present their report together with the audited financial statements for the year ended 31 December 2020. The principal activity of the group continues to be property investment. Directors The directors, who served throughout the year, are listed below: Charles Butler Non-executive chairman Simon Costa Senior independent non-executive director Simon Gill Chief executive David Kingerlee Executive director* Roberta Miles Finance director * With effect from 10 December 2020, David Kingerlee became a shareholder representative for Kingerlee Holdings Limited and, with effect from the date of this document, he will become a non- independent non-executive director as explained on page 41. The board recognises the requirement of the UK Corporate Governance Code regarding the segregation of roles and division of responsibilities between the chairman and chief executive, and between the leadership of the board and the executive leadership of the business, and has complied with these requirements during the year. The interests of the directors in the shares of the company are included in the remuneration report on page 60. In accordance with the Code, all directors will retire and offer themselves for re- election at the forthcoming 2021 AGM. The board confirms that following performance evaluations, and review by the nomination committee, the performance of each director continues to be effective and that they demonstrate commitment to their role. The board believes that it is in the best interest of shareholders that these directors be re-elected. Financial instruments The groups exposure to, and management of, capital risk and liquidity risk is in Note 18 to the consolidated financial statements. Structure of share capital and rights and obligations attaching to shares The company’s allotted and issued share capital, as at 31 December 2020, was £1,293,794 (2019 £1,291,810) divided into 5,175,175 (2019 5,167,240) ordinary shares of 25 pence each, each of which was called up and fully paid. There have been no changes to the share capital since the year end. Subject to the Companies Act for the time being in force (the ‘Act’) the company’s articles of association confer on holders the following principal rights: • To receive a dividend. The profits of the company available for dividend, and resolved to be distributed, shall be applied in the payment of dividends to the members and to persons becoming entitled to shares by transmission, in accordance with • • • their respective rights and priorities. The company in general meeting may declare dividends accordingly. To a return of capital or assets, if available, on liquidation. Upon any winding up of the company, the liquidator may, with the sanction of a special resolution of the company and any other sanction required by the statutes, divide among the members in specie the whole or any part of the assets of the company and may, for that purpose, value any assets and determine how the division shall be carried out as between the members of different classes of members. To receive notice of, attend and vote at an AGM. At each AGM, upon a show of hands, every member present in person or by proxy shall have one vote, and upon a poll every member present in person or by proxy shall have one vote for every share of which they are the holder. To have, in the case of certificated shares, rights in respect of share certificates and share transfers. Every person whose name is entered as a member in the register as the holder of any certificated share shall be entitled without payment to one certificate for all the shares of each class held by them or, upon payment of such reasonable out-of-pocket expenses for every certificate after the first as the board shall from time to time determine, several certificates each for one or more of their shares. On any transfer of shares, the transferor shall be deemed to remain the holder of the share until the name of the transferee is entered in the register in respect thereof. Substantial shareholders As at 31 December 2020, the following notifications of interests in 3% or more of the company’s ordinary share capital in issue had been received: Shareholder composition D G & M B Conn and associates 22.88% 1,184,405 36.01% 41.11% Beneficial Number of shares Controlling shareholder – Kingerlee Concert Party comprising – the wholly owned subsidiaries of Kingerlee Holdings Limited: Kingerlee Limited Kingerlee Homes Limited T H Kingerlee & Sons Limited Total – Kingerlee Holdings Limited – other associates Total – Kingerlee Concert Party 9.95% 7.71% 9.56% 27.22% 13.89% 515,000 399,093 494,770 1,408,863 718,519 41.11% 2,127,382 22.88% Kingerlee Concert Party Conn Concert Party Other shareholders Stock code: HCFT www.highcroftplc.com Highcroft-AR-2020.indd 61 Highcroft-AR-2020.indd 61 Job number 12 April 2021 6:54 pm V8 61 12-Apr-21 6:56:51 PM 12-Apr-21 6:56:51 PM Disclosure of information to the auditor So far as the directors who held office at the date of approval of this directors’ report are aware there is no relevant audit information of which the auditor is unaware and each director has taken steps that they ought to have taken as a director to make themselves aware of any audit information and to establish that the auditor is aware of that information. Likely future developments in the business of the company In our strategic report we outlined our business model, strategy and future opportunities for development. Read more about this in our strategic report on pages 14 to 35. Auditor Mazars LLP have expressed their willingness to continue in office as auditors and a resolution to appoint them will be proposed at the forthcoming AGM. Post-balance sheet events There were no post-balance sheet events requiring disclosure. This report was approved by the board . Roberta Miles Finance director 7 April 2021 Report of the directors continued Directors’ indemnification and insurance The company’s articles of association provide for the directors’ and officers of the company to be appropriately indemnified, subject to the provisions of the Companies Act 2006. The company purchases and maintains insurance for the directors and officers of the company in performing their duties, as permitted by section 233 Companies Act 2006. Greenhouse gas emissions Under the Companies Act 2006 (Strategic and Directors’ Reports) Regulations 2013, the company is required to report annual greenhouse gas emissions. The directors have considered this obligation and taken into account the following factors: • • • The group operates from a serviced office within a larger building and has no direct responsibility for energy usage; The annual energy cost for the limited shared commercial areas within the property portfolio are less than £40,000kWh and also less than £5,000pa. The car fuel used by the group and its advisers is considered de minimis. On this basis, the directors do not consider that it is practicable or valuable to collect and report any detailed data on greenhouse gas emissions. Engagement with customers, suppliers and others who have a business relationship with the company The directors work closely with tenants, potential tenants and key members of our advisory team. During 2020, our interactions have, due to the COVID-19 pandemic, been less face-to face and more virtual, using teleconference and telephone. More detail can be found on page 33. Dividends The dividends paid by the company during the year and declared prior to the publication of this report are set out in Note 6 of the consolidated financial statements on page 79. Charitable donations During the year, the group made charitable donations of £11,000. More detail can be found on page 35. Controlling shareholder A controlling shareholder is defined by the FCA as ‘any person who exercises or controls, on their own or together with any other person with whom they are acting in concert, 30% or more of the votes able to be cast on all or substantially all matters at general meetings of the company’. The directors are aware that the shareholdings of Kingerlee Holdings Limited and its subsidiaries referred to in the previous table, together with their connected parties and associates form the Kingerlee Concert Party, which, as at 7 April 2021, held 2,127,382 ordinary shares, representing 41.11% of the company’s issued share capital. The Kingerlee Concert Party is therefore a controlling shareholder. The persons comprising the Kingerlee Concert Party were confirmed by the Takeover Panel in 1999. The company can confirm that, in accordance with these rules: • • • • It entered into a controlling shareholder agreement (CSA) with the Kingerlee Concert Party on 13 November 2014; The company has complied with the independence provisions in the CSA from 1 January 2019 until 31 December 2019 (the ‘period’) So far as the company is aware, the independence provisions in the CSA have been complied with by the controlling shareholder and its associates in the period; and So far as the company is aware, the procurement obligation in the CSA has been complied with by the controlling shareholder in the period. The CSA contains undertakings that inter alia: • Transactions and relationships with the controlling shareholder (and/or any of its associates) will be conducted at arm’s length and on normal commercial terms; • Neither the controlling shareholder nor any of its associates will take any action that would have the effect of preventing the company or any member of its group from complying with its obligations under the Listing Rules; and • Neither the controlling shareholder nor any of its associates will propose or procure the proposal of a shareholder resolution, which is intended or appears to be intended to circumvent the proper application of the Listing Rules. The directors have put in place measures to ensure that the election or re-election by the shareholders of any independent non-executive director should be approved by an ordinary resolution of the shareholders and separately approved by those shareholders who are not controlling shareholders, the independent shareholders. 62 Highcroft Investments PLC Annual report and accounts for the year ended 31 December 2020 Highcroft-AR-2020.indd 62 Highcroft-AR-2020.indd 62 Job number 12 April 2021 6:54 pm V8 12-Apr-21 6:56:52 PM 12-Apr-21 6:56:52 PM Statement of directors’ responsibilities in respect of the annual report, remuneration report and the financial statements OUR GOVERNANCE The directors are responsible for preparing the annual report, remuneration report and 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, the directors have prepared the group financial statements in accordance with International Financial Reporting Standards adopted pursuant to Regulation (EC) No 1606/200 2 as it applies in the European Union and have elected to prepare the parent company financial statements in accordance with United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). 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 and of the profit or loss of the company and group 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 that are reasonable and prudent; • state whether applicable IFRSs and UK 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 company 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 and the remuneration report comply with the Companies Act 2006 and Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the company and group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. In so far as each of the directors is aware: • • there is no relevant audit information of which the company’s auditor is unaware; and the directors have taken steps that they ought to have taken to make themselves aware of any relevant audit information and to establish that the auditor is aware of this information. Under applicable law and regulations, the directors are also responsible for preparing a strategic report, directors’ report, directors’ remuneration report and corporate governance statement that comply with that law and those regulations. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company’s website www.highcroftplc.com. Visitors to the website should be aware that legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Responsibility statement of directors in respect of the annual financial report We confirm that to the best of our knowledge: • • • the financial statements have been prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006, and they are prepared in accordance with international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union for the group and United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable laws) for the parent company, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole; the annual report, including the strategic report, includes a fair review of the development and performance of the business and the position of the company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and the report and accounts, taken as a whole, are fair, balanced, and understandable and provide the necessary information for shareholders to assess the group’s performance, business model and strategy. On behalf of the board Charles Butler Chairman 7 April 2021 Stock code: HCFT www.highcroftplc.com Highcroft-AR-2020.indd 63 Highcroft-AR-2020.indd 63 Job number 12 April 2021 6:54 pm V8 63 12-Apr-21 6:56:52 PM 12-Apr-21 6:56:52 PM Job number 12 April 2021 6:54 pm V8Highcroft Investments PLC Annual report and accounts for the year ended 31 December 202064FINANCIAL STATEMENTSIndependent auditors’ report66Consolidated statement of comprehensive income71Consolidated statement of financial position72Consolidated statement of changes in equity73Consolidated statement of cashflows74Notes to the consolidated financial statements75Company statement of financial position87Company statement of changes in equity88Notes to the company financial statement89List of definitions93Group five-year summary (unaudited)94Directors and advisers95Highcroft-AR-2020.indd 64Highcroft-AR-2020.indd 6412-Apr-21 6:56:54 PM12-Apr-21 6:56:54 PMOUR GOVERNANCE FINANCIAL STATEMENTS Independent auditors’ report Consolidated statement of comprehensive income Consolidated statement of financial position Consolidated statement of changes in equity Consolidated statement of cashflows Notes to the consolidated financial statements Company statement of financial position Company statement of changes in equity Notes to the company financial statement List of definitions Group five-year summary (unaudited) Directors and advisers 66 71 72 73 74 75 87 88 89 93 94 95 Stock code: HCFT www.highcroftplc.com Highcroft-AR-2020.indd 65 Highcroft-AR-2020.indd 65 Job number 12 April 2021 6:54 pm V8 65 12-Apr-21 6:56:56 PM 12-Apr-21 6:56:56 PM Independent auditor’s report to the members of Highcroft Investments PLC Opinion We have audited the financial statements of Highcroft Investments PLC (the ‘parent company’) and its subsidiaries (the ‘group’) for the year ended 31 December 2020 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 flow and the notes to the consolidated financial statements, including a summary of significant accounting policies, the company statement of financial position, the company statement of changes in equity and notes to the financial statements, including a summary of significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and international accounting standards in conformity with the requirements of the Companies Act 2006 and, as regards the company financial statements, as applied in accordance with the provisions of the Companies Act 2006 and, as regards the group financial statements, international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union. In our opinion, the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and: • give a true and fair view of the state of the group’s and of the parent company’s affairs as at 31 December 2020 and of the group’s loss for the year then ended; • • the group financial statements have been properly prepared in accordance with International Accounting Standards in conformity with the requirements of the Companies Act 2006 and International Financial Reporting Standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union; and the parent company financial statements have been properly prepared in accordance with International Accounting Standards in conformity with the requirements of the Companies Act 2006, as applied in accordance with the provisions of the Companies Act 2006. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the group and the parent company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard, as applied to listed entities and public interest entities and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Conclusions relating to going concern In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate. In addition to those matters set out in the “Key audit matters” section below, we identified going concern of the group and of the parent company as a key audit matter. The going concern basis that the group’s and the parent company’s financial statements are prepared on is dependent on the group’s financial performance including the ability to collect outstanding debtors, the group’s continued access to borrowing facilities and the group’s ability to continue to operate within its financial covenants. The group’s borrowing facilities are secured against a group of investment properties whose value is subject to financial covenants. The ongoing impact of the Covid-19 pandemic impacts the group’s ability to operate as a going concern. Please refer to Going concern and viability statement on page 32, the Audit Committee report on pages 45 to 48 and note 1 Basis of preparation on page 75. Our audit procedures to evaluate the directors’ assessment of the group’s and the parent company’s ability to continue to adopt the going concern basis of accounting included but were not limited to: • Undertaking an initial assessment at the planning stage of the audit to identify events or conditions that may cast significant doubt on the group’s and the parent company’s ability to continue as a going concern; • Reviewing the Directors’ going concern assessment including COVID-19 implications based on severe but plausible scenarios as approved by the board of directors on 6th April 2021; • Making enquiries of Directors to understand the period of assessment considered by the Directors, the completeness of the adjustments taken into account and implication of those when assessing the severe but plausible scenarios on the group’s future financial performance. This included examining the minimum cash inflow and committed outgoings under the cash flow forecasts and evaluated whether the Directors’ conclusion that liquidity headroom remained in all events was reasonable; • Assessing and challenging the appropriateness of the directors’ key assumptions in their cash flow forecasts, by reviewing supporting and contradictory evidence in relation to these key assumptions and assessing the directors’ sensitivity analysis. This included assessing covenant headroom within the severe but plausible scenarios and recalculating loan covenant compliance to satisfy ourselves that no breaches are anticipated over the going concern period of assessment; • Testing the accuracy used to prepare the directors’ forecasts; and • Evaluating the appropriateness of the directors’ disclosures in the financial statements on going concern. Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the group’s and the parent company’s ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue. In relation to the group’s and the parent company’s reporting on how it has applied the UK Corporate Governance Code, we have nothing material to add or draw attention to in relation to the directors’ statement in the financial statements about whether the director’s considered it appropriate to adopt the going concern basis of accounting. Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report. 66 Highcroft Investments PLC Annual report and accounts for the year ended 31 December 2020 Highcroft-AR-2020.indd 66 Highcroft-AR-2020.indd 66 Job number 12 April 2021 6:54 pm V8 12-Apr-21 6:56:56 PM 12-Apr-21 6:56:56 PM FINANCIAL STATEMENTS Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) we identified, including those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. We summarise below the key audit matters in forming our audit opinion above, together with an overview of the principal audit procedures performed to address each matter and key observations arising from those procedures. The matters set out below are in addition to going concern which, as set out in the “Conclusions relating to going concern” section above, was also identified as a key audit matter. These matters, together with our findings, were communicated to those charged with governance through our Audit Completion Report. Key audit matter How our scope addressed this matter Investment property valuation The group has a significant portfolio of investment properties consisting of warehouse/industrial, retail warehouse, high street retail, office and leisure in England and Wales. The group’s investment properties were carried at £82.1m as at 31 December 2020. The valuation was carried out by the third party valuer Knight Frank (the ‘valuer’). The valuer was engaged by the Directors and performed their work in accordance with the Royal Institute of Chartered Surveyors (“RICS”) Valuation – Professional Standards and the requirements of IAS 40 ‘Investment property’. Investment properties make up 94% of total assets by value and is considered to be the key driver of commercial property return for the group and involves significant level of judgement in ascertaining the value under IFRS 13. The valuation of the investment properties is inherently subjective due to, among other factors, the individual nature of each property, its location and the expected future rentals for that particular property. The wider challenges currently facing the real estate sector as a result of Covid-19 further contributed to the subjectivity at 31 December 2020. As a result, the valuation of investment properties is considered to be a key audit matter. Our audit work included but was not restricted to: • Understanding management’s review controls on the third party valuation report by discussing with management and performing a walkthrough to understand the design and implementation of review controls; • Evaluating the valuer’s competence, capabilities and objectivity; • Obtaining the valuation reports and evaluating that valuation approach was in accordance with the RICS standard; • On a sample basis covering all portfolio sectors, engaging our valuation expert to review reasonableness and suitability of the key valuation assumptions; • Reviewing the key assumptions made by the valuer and appraising these against available market data such as locations and forecasts for market yield, market growth and return on investment percentages; • Comparing the property valuations to publicly available recent comparable property transactions; and • Reviewing the adequacy of the disclosure in the financial statements, including the valuation methodology, assumptions and fair value hierarchy used. Refer to pages 45 to 48 (Report of the Audit Committee), page 76 (Note 1 Significant accounting policies, accounting estimates and judgments and investment property) and pages 79 to 82 (Note 8 Investment property). Our observations Based on the work performed and evidence obtained, we consider the methodology and assumptions used to value the investment properties to be appropriate. Stock code: HCFT www.highcroftplc.com Highcroft-AR-2020.indd 67 Highcroft-AR-2020.indd 67 Job number 12 April 2021 6:54 pm V8 67 12-Apr-21 6:56:56 PM 12-Apr-21 6:56:56 PM Independent auditor’s report continued to the members of Highcroft Investments PLC Our application of materiality and an overview of the scope of our audit The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and on the financial statements as a whole. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: Overall materiality 776,000 How we determined it The overall group statutory materiality has been calculated with reference to the group’s total assets, of which it represents approximately 1%. This level has then been capped by the group materiality set by James Cowper Kreston who is responsible for the audit of the financial statements of Kingerlee Holdings Limited, which from a group perspective includes the results of the company as an associated entity by virtue of its group holding of 27.2% of the company’s shares. Rationale for benchmark applied Total assets have been identified as the principal benchmark within the financial statements as it is considered to be the focus of the shareholders. 1% has been chosen to reflect the level of understanding of the stakeholders of the group in relation to the inherent uncertainties around accounting estimates and judgements. Performance materiality Performance materiality is set to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements in the financial statements exceeds materiality for the financial statements as a whole. On the basis of our risk assessments, together with our assessment of the group’s overall control environment, our judgement was that performance materiality was £543,000 which is approximately 70% of overall group materiality. Reporting threshold We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £23,000 as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons. We also applied a lower level of specific materiality for certain areas such as the revenue return of the consolidated statement of comprehensive income, directors’ remuneration and related party transactions. For each component in the scope of the group audit, we allocated a materiality that is less than our overall group materiality. The range of materiality allocated across components was between £64,000 and £691,000. The parent company materiality was set at £473,000. For all components across the group performance materiality was set at 70%. As part of designing our audit, we assessed the risk of material misstatement in the financial statements, whether due to fraud or error, and then designed and performed audit procedures responsive to those risks. In particular, we looked at where the directors made subjective judgements such as making assumptions on significant accounting estimates. We tailored the scope of our audit to ensure that we performed sufficient work to be able to give an opinion on the financial statements as a whole. We used the outputs of a risk assessment, our understanding of the group and the parent company, its environment, controls and critical business processes, to consider qualitative factors in order to ensure that we obtained sufficient coverage across all financial statement line items. Our group audit scope included an audit of the group and parent financial statements of Highcroft Investments PLC. Based on our risk assessment, all entities within the group were subject to full scope audit and was performed by the group audit team. At the parent level we also tested the consolidation process and carried out analytical procedures to confirm our conclusion that there were no significant risks of material misstatement of the aggregated financial information. Other information The other information comprises the information included in the annual report other than the financial statements and our auditor’s report thereon. The directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the course of audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. 68 Highcroft Investments PLC Annual report and accounts for the year ended 31 December 2020 Highcroft-AR-2020.indd 68 Highcroft-AR-2020.indd 68 Job number 12 April 2021 6:54 pm V8 12-Apr-21 6:56:56 PM 12-Apr-21 6:56:56 PM FINANCIAL STATEMENTS Responsibilities of Directors As explained more fully in the directors’ responsibilities statement set out on page 63, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the group’s and the parent company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or the parent company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud is detailed below. Based on our understanding of the group and the parent company and its industry, we identified that the principal risks of non-compliance with laws and regulations related to breaches of regulatory requirements of the REIT regime, and we considered the extent to which non-compliance might have a material effect on the financial statements. Opinions on other matters prescribed by the Companies Act 2006 In our opinion, the part of the directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006. In our opinion, based on the work undertaken in the course of the audit: • • • the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements and those reports have been prepared in accordance with applicable legal requirements; the information about internal control and risk management systems in relation to financial reporting processes and about share capital structures, given in compliance with rules 7.2.5 and 7.2.6 in the Disclosure Guidance and Transparency Rules sourcebook made by the Financial Conduct Authority (the FCA Rules), is consistent with the financial statements and has been prepared in accordance with applicable legal requirements; and information about the parent company’s corporate governance code and practices and about its administrative, management and supervisory bodies and their committees complies with rules 7.2.2, 7.2.3 and 7.2.7 of the FCA rules. Matters on which we are required to report by exception In light of the knowledge and understanding of the group and the parent company and its environment obtained in the course of the audit, we have not identified material misstatements in; • • the Strategic Report or the Directors’ Report; or the information about internal control and risk management systems in relation to financial reporting processes and about share capital structures, given in compliance with rules 7.2.5 and 7.2.6 of the FCA Rules We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion: • • • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or the parent company financial statements and the part of the directors’ remuneration report to be audited are not in agreement with the accounting records and returns; or certain disclosures of directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit; or • a corporate governance statement has not been prepared by the parent company Corporate governance statement The Listing Rules require us to review the directors’ statement in relation to going concern, longer-term viability and that part of the Corporate Governance Statement relating to the parent company’s compliance with the provisions of the UK Corporate Governance Statement specified for our review. Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the Corporate Governance Statement is materially consistent with the financial statements or our knowledge obtained during the audit: • Directors’ statement with regards the appropriateness of adopting the going concern basis of accounting and any material uncertainties identified set out on page 32; • Directors’ explanation as to its assessment of the entity’s prospects, the period this assessment covers and why the period is appropriate set out on page 32; • Directors’ statement on fair, balanced and understandable set out on page 63; • Board’s confirmation that it has carried out a robust assessment of the e-merging and principal risks set out on pages 46 to 47; The section of the annual report that describes the review of effectiveness of risk management and internal control systems set out on page 48; and; The section describing the work of the audit committee set out on pages 45 to 48. • • Stock code: HCFT www.highcroftplc.com Highcroft-AR-2020.indd 69 Highcroft-AR-2020.indd 69 Job number 12 April 2021 6:54 pm V8 69 12-Apr-21 6:56:57 PM 12-Apr-21 6:56:57 PM Independent auditor’s report continued to the members of Highcroft Investments PLC In identifying and assessing risks of material misstatement in respect to irregularities including non- compliance with laws and regulations, our procedures included but were not limited to: • At the planning stage of our audit, gaining an understanding of the legal and regulatory framework applicable to the group and parent company, the industry in which it operates and considered the risk of acts by the group and the parent company which were contrary to the applicable laws and regulations; • Discussing with the directors and management the policies and procedures in place regarding compliance with laws and regulations; • Discussing amongst the engagement team the identified laws and regulations, and remaining alert to any indications of non- compliance; and • During the audit, focusing on areas of laws and regulations that could reasonably be expected to have a material effect on the financial statements from our general commercial and sector experience and through discussions with the directors (as required by auditing standards), from inspection of the parent company’s and group’s regulatory and legal correspondence and review of minutes of directors’ meetings in the year. We identified that the principal risks of non-compliance with laws and regulations related to breaches of regulatory requirements of the REIT regime. We also considered those other laws and regulations that have a direct impact on the preparation of financial statements, such as the Companies Act 2006 and UK tax legislation. Our procedures in relation to fraud included but were not limited to: • Making enquiries of the directors and management on whether they had knowledge of any actual, suspected or alleged fraud; • Gaining an understanding of the internal controls established to mitigate risks related to fraud; • Discussing amongst the engagement team the risks of fraud such as opportunities for fraudulent manipulation of financial statements, and determined that the principal risks were related to posting manual journal entries to manipulate financial performance, management bias through judgements and assumptions in significant accounting estimates, in particular in relation to valuation of investment property, and significant one-off or unusual transactions; and • Addressing the risks of fraud through management override of controls by performing journal entry testing. The primary responsibility for the prevention and detection of irregularities including fraud rests with both those charged with governance and management. As with any audit, there remained a risk of non-detection of irregularities, as these may involve collusion, forgery, intentional omissions, misrepresentations or the override of internal controls. As a result of our procedures, we did not identify any key audit matters relating to irregularities. The risks of material misstatement that had the greatest effect on our audit, including fraud, are discussed under “Key audit matters” within this report. A further description of our responsibilities is available on the Financial Reporting Council’s website at www.frc.org.uk/auditorsresponsibilities. Other matters which we are required to address Following the recommendation of the audit committee, we were appointed by the Audit Committee on 10 December 2020 to audit the financial statements for the year ended 31 December 2020 and subsequent financial periods. The period of total uninterrupted engagement is four years, covering the years ending 31 December 2017 to 31 December 2020. The non-audit services prohibited by the FRC’s Ethical Standard were not provided to the group or the parent company and we remain independent of the group and the parent company in conducting our audit. Our audit opinion is consistent with the additional report to the Audit Committee. Use of the audit report This report is made solely to the parent company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the parent company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the parent company and the parent company’s members as a body for our audit work, for this report, or for the opinions we have formed. Stephen Eames (Senior Statutory Auditor) for and on behalf of Mazars LLP Chartered Accountants and Statutory Auditor The Pinnacle 160 Midsummer Boulevard Milton Keynes MK9 1FF Date: 7 April 2021 70 Highcroft Investments PLC Annual report and accounts for the year ended 31 December 2020 Highcroft-AR-2020.indd 70 Highcroft-AR-2020.indd 70 Job number 12 April 2021 6:54 pm V8 12-Apr-21 6:56:57 PM 12-Apr-21 6:56:57 PM Consolidated statement of comprehensive income for the year ended 31 December 2020 FINANCIAL STATEMENTS Note Revenue £’000 Gross rental revenue Property operating expenses 8 Net rental income Valuation gains on investment property Valuation losses on investment property Net valuation losses on investment property Dividend revenue Gains on equity investments Net investment income Administration expenses Net operating (loss)/profit before net finance expense Finance income Finance expense Net finance expense (Loss)/profit before tax Income tax credit/(charge) Profit for the year after tax Total (loss)/profit and comprehensive (loss)/income for the year attributable to the owners of the parent Basic and diluted (loss)/earnings per share 8 9 3 5 7 2020 Capital £’000 – – – Total £’000 6,084 (620) 5,464 Revenue £’000 5,840 (184) 5,656 2019 Capital £’000 – – – Total £’000 5,840 (184) 5,656 2,525 2,525 (7,175) (7,175) (4,650) (4,650) – – – – – – – – – – 3 – 3 739 739 (3,627) (3,627) (2,888) (2,888) – 53 53 – 6,084 (620) 5,464 – – – – – – (1,069) (1,069) (826) 4,395 (4,650) 4 (896) (892) 3,503 – – – – (4,650) – (255) 4 (896) (892) (1,147) – 3,503 (4,650) (1,147) 4,833 (2,835) 6 (856) (850) 3,983 72 4,055 – – – (2,835) (66) (2,901) 3 53 56 (826) 1,998 6 (856) (850) 1,148 6 1,154 3,503 (4,650) (1,147) 4,055 (2,901) 1,154 (22.2p) 22.3p The total column represents the statement of comprehensive income as defined in IAS 1. The accompanying notes form an integral part of these financial statements. Stock code: HCFT www.highcroftplc.com Highcroft-AR-2020.indd 71 Highcroft-AR-2020.indd 71 Job number 12 April 2021 6:54 pm V8 71 12-Apr-21 6:56:57 PM 12-Apr-21 6:56:57 PM Consolidated statement of financial position at 31 December 2020 Note 2020 £’000 2019 £’000 8 9 11 10 13 12 13 14 15 78,810 86,710 – – 78,810 86,710 1,692 3,295 4,987 3,250 8,237 87,047 – 2,726 2,726 1,147 1,559 2,706 - 2,706 89,416 4,000 2,495 6,495 27,200 22,200 – 27,200 29,926 57,121 1,294 43 12,814 (53) 51 95 28,995 13,882 57,121 – 22,200 28,695 60,721 1,292 12 12,931 – – 95 28,995 17,396 60,721 Assets Non-current assets Investment property Equity investments at fair value through profit or loss Total non-current assets Current assets Trade and other receivables Cash and cash equivalents Assets classified as held for sale Total current assets Total assets Liabilities Current liabilities Interest bearing loan Trade and other payables Total current liabilities Non-current liabilities Interest bearing loan Deferred tax liabilities Total non-current liabilities Total liabilities Net assets Equity Issued share capital Share-based payment reserve Revaluation reserve – property Other equity reserve Share premium Capital redemption reserve Realised capital reserve Retained earnings Total equity attributable to the owners of the parent These financial statements were approved by the board of directors on 7 April 2021. Simon Gill Director Charles Butler Director Company number: 00224271 The accompanying notes form an integral part of these financial statements. 72 Highcroft Investments PLC Annual report and accounts for the year ended 31 December 2020 Highcroft-AR-2020.indd 72 Highcroft-AR-2020.indd 72 Job number 12 April 2021 6:54 pm V8 12-Apr-21 6:56:57 PM 12-Apr-21 6:56:57 PM Consolidated statement of changes in equity FINANCIAL STATEMENTS Share- based payment reserve £’000 Revaluation reserve property £’000 Other equity reserve £’000 Share premium £’000 Capital redemption reserve £’000 Realised capital reserve £’000 Retained earnings £’000 Total £’000 12 12,931 – 2020 At 1 January 2020 Transactions with owners: Issue of shares Dividends Reserve transfers: Non-distributable items recognised in income statement: Revaluation losses Change in excess of cost over fair value through retained earnings Share award expensed Total comprehensive loss for the year Issued share capital £’000 1,292 2 – 2 – – – – – At 31 December 2020 1,294 2019 At 1 January 2019 Transactions with owners: Dividends Reserve transfers: Non-distributable items recognised in income statement: Revaluation losses Realised gains/(losses) Movement in deferred tax on realisation of equities Surplus attributable to assets sold in the year Reassessment of carrying value of reserve accounts Change in excess of cost over fair value through retained earnings Share award expensed Total comprehensive income for the year Issued share capital £’000 1,292 – – – – – – – – – – At 31 December 2019 1,292 – – – – – – 31 – 43 Share- based payment reserve £’000 – – – – – – – – – 12 – 12 – – – (53) (53) (4,650) 4,533 (117) – – – – – – – – 51 51 – – – – – 95 28,995 17,396 60,721 – – – – – – – – – – – – – – – – – – (2,484) (2,484) (2,484) (2,484) 4,650 (4,533) 117 – – – – 31 (1,147) (1,147) 12,814 (53) 51 95 28,995 13,882 57,121 Revaluation reserves Property £’000 18,770 Other £’000 574 Capital redemption reserve £’000 Realised capital reserve £’000 Retained earnings £’000 Total £’000 95 28,378 13,275 62,384 – (2,888) – – – (4,168) 1,217 – – – 29 (603) – – (5,839) (574) – – 12,931 – – – – – – – – – – – – – – (2,829) (2,829) – 43 (29) 603 – – 617 – – 2,888 (43) – – 4,168 (1,217) 5,796 – – – – – – – – 12 1,154 1,154 95 28,995 17,396 60,721 Stock code: HCFT www.highcroftplc.com Highcroft-AR-2020.indd 73 Highcroft-AR-2020.indd 73 Job number 12 April 2021 6:54 pm V8 73 12-Apr-21 6:56:58 PM 12-Apr-21 6:56:58 PM Consolidated statement of cashflows at 31 December 2020 Operating activities (Loss)/profit before tax Adjustments for: Net valuation losses on investment property Net gain on investments Share-based payment expense Finance income Finance expense Operating cashflow before changes in working capital and provisions Increase in trade and other receivables Increase in trade and other payables Cash generated from operations Finance income Finance expense Income taxes paid Net cashflows from operating activities Investing activities Purchase of non-current assets – investment property Sale of non-current assets – equity investments Net cashflows from investing activities Financing activities Dividends paid Repayment of bank borrowings New bank borrowings Net cashflows from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at 1 January Cash and cash equivalents at 31 December 2020 £’000 2019 £’000 (1,147) 1,148 4,650 2,888 – 31 (4) 896 4,426 (545) 252 4,133 4 (896) (21) 3,220 – – – (2,484) (4,000) 5,000 (1,484) 1,736 1,559 3,295 (53) 12 (6) 856 4,845 (667) 325 4,503 6 (856) (93) 3,560 (11,898) 724 (11,174) (2,829) – 6,800 3,971 (3,643) 5,202 1,559 74 Highcroft Investments PLC Annual report and accounts for the year ended 31 December 2020 Highcroft-AR-2020.indd 74 Highcroft-AR-2020.indd 74 Job number 12 April 2021 6:54 pm V8 12-Apr-21 6:56:58 PM 12-Apr-21 6:56:58 PM Notes to the consolidated financial statements for the year ended 31 December 2020 FINANCIAL STATEMENTS 1 Significant accounting policies Highcroft Investments PLC is a company domiciled in the United Kingdom. The consolidated financial statements of the company for the year ended 31 December 2020 comprise the company and its subsidiaries, together referred to as the group. The principal activity of the group is investment in commercial property in England and Wales. The accounting policies remain unchanged. Basis of preparation The financial statements have been prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006, and they are prepared in accordance with international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union. In light of the significant impact of COVID-19 on the UK economy, and the sectors in which the group and company operates, the directors have placed a particular focus on the appropriateness of adopting the going concern basis in preparing the group’s and company’s financial statements for the year ended 31 December 2020. The group’s and company’s going concern assessment considers the group’s and company’s principal risks, identified on pages 30 to 31 of this document, and is dependent on a number of factors, including cashflow and liquidity, continued access to borrowing facilities and the ability to continue to operate the group’s and company’s borrowings within its financial covenants. The debt has a number of financial covenants that the group is required to comply with including an LTV covenant a 12-month historical interest cover ratio, and the facility agreements have cure provisions in the event of a breach. The going concern assessment is based on a 12-month outlook from the date of the approval of these financial statements, using the group’s five-year forecast. This forecast is based on a reasonable scenario, which includes the following key sensitivities: – 15% reduction in net income from our portfolio. – No new financing or refinancing is assumed – no existing facilities expire until May 2022. Under this scenario, the group and company are forecast to maintain sufficient cash and liquidity resources and remain compliant with its financial covenants. Further sensitivity analysis was performed on this scenario, assuming a lower income collection rate. Even applying this sensitivity analysis, the group and company maintains sufficient cash and liquidity reserves to continue in operation throughout the going concern assessment period. Based on the consideration above, the board believes that the group and company has the ability to continue in business at least 12 months from the date of approval of the financial statements for the year ended 31 December 2020, and therefore have adopted the going concern basis in the preparation of this financial information. These financial statements have been prepared under the historical cost convention, as modified by the revaluation of investment properties and the measurement of equity investments at fair value. Analysis of statement of comprehensive income The profit or loss section of the statement of comprehensive income is analysed into two columns, being revenue and capital. The capital column comprises valuation gains and losses on property and all gains and losses on financial assets and the related tax impact. The revenue column includes all other items. Accounting estimates and judgements The preparation of financial statements requires management to make judgements, assumptions and estimates that affect the application of accounting policies and amounts reported in the consolidated statement of comprehensive income and consolidated statement of financial position. Such decisions are made at the time the financial statements are prepared and adopted based on historical experience and other factors that are believed to be reasonable at the time. Actual outcomes may be different from initial estimates and are reflected in the financial statements as soon as they become apparent. The measurement of fair value and carrying investments at fair value through profit and loss constitutes the principal areas of estimate and judgement exercised by the directors in the preparation of these financial statements. The valuations of investment properties and equity investments at fair value are carried out by external advisers who the directors consider to be suitably qualified to carry out such valuations. The primary source of evidence for property valuations is recent, comparable market transactions on arm’s-length terms. However, the valuation of the group’s property portfolio is inherently subjective, which may not prove to be accurate, particularly where there are few comparable transactions. Key assumptions, which are also the major sources of estimation uncertainty used in the valuation, include the value of future rental income, the outcome of future rent reviews, the rate of voids and the length of such voids. Estimates and judgements are continually evaluated and are based on historical information of the group, the best judgement of the directors, and are adjusted for current market conditions. In the process of applying the group’s accounting policies, management is of the opinion that any instances of the application of judgements did not have a significant effect on the amounts recognised in the financial statements. New accounting standards and interpretations There are no new accounting standards or interpretations issued during the year that are relevant to the group other than: IFRS 16: COVID-19 – related rent concessions (effective date 1 June 2020). This amendment provides lessees with an exemption from assessing whether a COVID-19-related rent concession is a lease modification. The group has not received any rent concessions as a result of COVID-19. There are no amendments to, or interpretations of, existing standards that are relevant to the group but are not yet effective and have not been adopted. Basis of consolidation The group financial statements consolidate the financial statements of the company and its 100% subsidiaries: Rodenhurst Estates Limited, BL (Wisbech) Limited and Belgrave Land (Wisbech) Limited, which are all made up to 31 December 2020, also following consistent accounting policies. Unrealised profits or losses on intra-group transactions are eliminated in full. Stock code: HCFT www.highcroftplc.com Highcroft-AR-2020.indd 75 Highcroft-AR-2020.indd 75 Job number 12 April 2021 6:54 pm V8 75 12-Apr-21 6:56:58 PM 12-Apr-21 6:56:58 PM Notes to the consolidated financial statements continued for the year ended 31 December 2020 1 Significant accounting policies continued Rental revenue as a lessor Investment properties are leased to tenants under operating leases. The rental income receivable under these leases is recognised in the statement of comprehensive income on a straight-line basis over the term of the lease. Any rent-free period is spread over the period of the lease. Since the risks and rewards of ownership have not been transferred to the lessee, the assets held under these leases continue to be recognised in the group’s accounts. Dividend revenue Dividend revenue relating to exchange-traded equity investments is recognised in the statement of comprehensive income when the right to receive the payment is established. In some cases, the group may receive dividends in the form of shares rather than cash. In such cases, the group recognises the dividend income for the amount of cash dividend alternative with a corresponding increase in cost of investments. Finance costs Interest is recognised using the effective interest method, which calculates the amortised cost of a financial liability and allocates the interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability to the net carrying amount of the financial liability. Share-based employee remuneration Share-based employee remuneration is determined with reference to the fair value of the cash award that is used to purchase the newly issued shares at the date which the award is agreed and charged to the income statement over the service and vesting period on a straight-line basis. Expenses All expenses are recognised in the statement of comprehensive income on an accrual basis. Lease expenses Lease expenses related to short-term licences to occupy, that are determinable on less than 12 months’ notice, are recognised on a straight-line basis over the lease term. Realised gains and losses Realised gains and losses are calculated as the difference between the proceeds, less expenses, and the value of the asset at the beginning of the financial year. The related revaluation gains or losses of previous years are transferred from revaluation reserve to realised capital reserve when the asset is disposed of. Income tax Income tax on the profit or loss for the periods presented comprises current and deferred tax, except where it relates to items charged directly to equity, in which case the related deferred tax is also charged or credited to equity. Income tax is recognised in the income statement. As a REIT, tax is not payable on the income and gains generated in the tax-exempt property business. Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. 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. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of equity investments, using tax rates enacted or substantively enacted at the date of the statement of financial position. Investment property Investment property is that which is held either to earn rental income or for capital appreciation or for both. Investment property is stated at fair value. An external independent valuation company, having an appropriate recognised professional qualification and recent experience in the location and category of property being valued, values the properties every six months. The fair values are based on market values, being the estimated amount for which a property could be exchanged on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. An asset will be classified as a short-term investment within current assets when the decision has been made by the board to dispose of it in its present condition and the sale is highly probable. In accordance with IAS 40, a property interest under an operating lease is classified and accounted for as an investment property on a property-by-property basis when the group holds it to earn rentals or for capital appreciation or both. Any such property interest under an operating lease classified as an investment property is carried at fair value. Acquisitions and disposals are recognised on the date of completion. Any unrealised gain or loss arising from a change in fair value is recognised in the statement of comprehensive income. Equity investments The directors have designated the group’s qualifying financial assets at fair value through profit and loss on the basis that to do so is in accordance with its documented investment strategy. All the group’s listed equity investments were disposed of in February 2019. 76 Highcroft Investments PLC Annual report and accounts for the year ended 31 December 2020 Highcroft-AR-2020.indd 76 Highcroft-AR-2020.indd 76 Job number 12 April 2021 6:54 pm V8 12-Apr-21 6:56:58 PM 12-Apr-21 6:56:58 PM FINANCIAL STATEMENTS 1 Significant accounting policies continued Assets classified as held for sale Where a board decision has been made to dispose of an investment property in its present condition prior to the year end and a sale is regarded as highly probable the property is included within current assets and stated at fair value. Trade and other receivables Trade and other receivables, which are generally due for settlement, in advance, prior to the relevant quarter or month, are recognised and carried at the original invoice amount less an allowance for any uncollectible amounts. The group applies the IFRS9 simplified approach to measuring expected credit losses, which uses a lifetime expected impairment provision for all applicable trade receivables. In determining the expected credit losses the group takes into account any recent payment behaviours and future expectations of likely default events such as not making payments on the due date. Trade and other receivables are written off once all avenues to recover the balances are exhausted. Receivables written off are no longer subject to any enforcement activity. Cash and cash equivalents Cash and cash equivalents comprise cash available with an original maturity of less than three months. Financial liabilities The group’s financial liabilities include trade and other payables and borrowings. Trade payables and borrowings are recognised initially at fair value less transaction costs and subsequently measured at amortised cost using the effective interest rate (EIR) method. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included in finance costs in the statement of comprehensive income. Loans and borrowings are classified as current liabilities unless the group has an unconditional right to defer the settlement of the liability for at least 12 months after the balance sheet date. A financial liability is derecognised when it is extinguished, discharged, cancelled or expires. Issued share capital Ordinary shares are classified as equity because they do not contain an obligation to transfer cash or another financial asset. Dividends are recognised as a liability in the period in which they are payable. Share-based payment reserve The share-based payment reserve includes the unissued element of the Highcroft Incentive Plan award that has been recorded in the comprehensive income statement. Revaluation reserve property This revaluation reserve includes annual revaluation gains and losses less applicable deferred taxation and is non-distributable. Other equity reserve The other equity reserve is debited with the value of the shares issues under the Highcroft Incentive Plan and credited with the value of the shares as they vest. Share premium Share premium represents the excess over nominal value of the fair value consideration for equity shares net of expenses of the share issue. Capital redemption reserve The capital redemption reserve is a statutory non-distributable reserve into which amounts are transferred following the redemption or purchase of issued share capital. Realised capital reserve The realised capital reserve includes realised revaluation gains and losses less attributable income tax and are non-distributable. Retained earnings Retained earnings include total comprehensive income less revaluation gains on properties and equities and any applicable taxation less dividends paid. Segment reporting The group has one main operating segment – commercial property – and therefore no additional segmental information is required. A segment is a distinguishable component of the group whose operating results are regularly reviewed by the group’s chief operating decision maker, who is the chief executive. For management purposes, the group uses the same measurement policies as those used in its financial statements. 2 Segment reporting The group is comprised of one main operating segment. In 2020 one tenant represented £684,000, 11.2%, of the gross rental revenue of £ 6,084,000. In 2019 the largest tenant represented 8.8% of gross rental revenue. Stock code: HCFT www.highcroftplc.com Highcroft-AR-2020.indd 77 Highcroft-AR-2020.indd 77 Job number 12 April 2021 6:54 pm V8 77 12-Apr-21 6:56:58 PM 12-Apr-21 6:56:58 PM Notes to the consolidated financial statements continued for the year ended 31 December 2020 3 Administrative expenses Directors (Note 4) Auditor’s fees – Fees payable to the company’s auditor for the audit of the company’s accounts – current year* – Additional fee in respect of prior year – Fees payable to the company’s auditor for other services Staff costs Other expenses 2020 £’000 801 48 8 2 28 182 1,069 2019 £’000 597 33 – 2 16 178 826 *The audit fee for 2020 includes £10,000 (2019 £nil) related to the completion of a group reporting questionnaire for the Kingerlee Holdings Limited’s auditor. This amount is recoverable in full from Kingerlee Holdings Limited and has been netted off other expenses. 4 Directors Remuneration in respect of directors was as follows: Remuneration Pension costs Social security costs 2020 £’000 2019 £’000 703 1 97 801 530 3 64 597 The average number of employees was six (2019 six) all of whom, other than a part-time management accountant, were directors of the group. All directors are considered to be key managers of the company. More detailed information concerning directors’ remuneration is shown in the directors’ remuneration report. 5 Income tax credit Current tax: On revenue profits – current year – prior year On capital profits Deferred tax (Note 14) Income tax credit The tax assessed for the year differs from the standard rate of corporation tax in the UK of 19% (2019 19%). The differences are explained as follows: Profit before tax Profit before tax multiplied by the standard rate of corporation tax in the UK of 19% (2019 19%) Effect of: Tax exempt revenues Profit not taxable as a result of REIT status Chargeable gains more than accounting profit Use of management expenses Change in deferred tax liability Adjustment in respect of previous years Income tax credit 2020 £’000 2019 £’000 (8) 8 – – – – 2020 £’000 (1,147) (218) – 220 – – – (2) – 72 – (99) (27) 33 6 2019 £’000 1,148 218 (11) (216) 103 (67) (33) – (6) 78 Highcroft Investments PLC Annual report and accounts for the year ended 31 December 2020 Highcroft-AR-2020.indd 78 Highcroft-AR-2020.indd 78 Job number 12 April 2021 6:54 pm V8 12-Apr-21 6:56:58 PM 12-Apr-21 6:56:58 PM 6 Dividends In 2020, the following dividends have been paid by the company: 2019 Final: 27.00p per ordinary share (2018 33.75p) 2020 Interim: 21.00p per ordinary share (2019 21.00p) FINANCIAL STATEMENTS 2020 £’000 1,397 1,087 2,484 2019 £’000 1,744 1,085 2,829 On 7 April 2021 the directors declared a final property income distribution for 2020 of £1,553,000, 30.00p per share, together with a special property income distribution for 2020 of £311,000, 6.00p per share, (2019 final property income distribution of £1,397,000, 27.00p per share) both payable on 27 May 2021 to shareholders registered on 23 April 2021. 7 Earnings per share The calculation of earnings per share is based on the total loss after tax for the year of £1,147,000 (2019 profit £1,154,000) and on 5,172,465 shares (2019 5,167,240), which is the weighted average number of shares in issue during the year ended 31 December 2020 (2019 5,167,240). There are no dilutive instruments. In order to draw attention to the profit that is not due to the impact of valuation gains and losses that are included in the statement of comprehensive income, but not available for distribution under the company’s articles of association, an adjusted earnings per share based on the profit available for distribution of £3,503,000 (2019 £4,055,000) has been calculated. Earnings: Basic (loss)/profit for the year Adjustments for: Net valuation losses on investment property Gains on investments Income tax on profit Adjusted earnings Per share amount: (Loss)/earnings per share (unadjusted) Adjustments for: Net valuation losses on investment property Gains on investments Income tax on profits Adjusted earnings per share 8 Investment property Total valuation at 1 January Additions Revaluation gains Revaluation losses Valuation at 31 December Less property held for sale categorised as current asset Property categorised as fixed asset 2020 £’000 2019 £’000 (1,147) 1,154 4,650 2,888 – – (53) 66 3,503 4,055 (22.2p) 22.3p 89.9p – – 67.7p 2020 £’000 86,710 – 2,525 (7,175) 82,060 (3,250) 78,810 55.9p (1.0p) 1.3p 78.5p 2019 £’000 77,700 11,898 739 (3,627) 86,710 – 86,710 In accordance with IAS 40 the carrying value of investment properties is their fair value as determined by independent external valuers. This valuation has been conducted by Knight Frank LLP, as external valuers, and has been prepared as at 31 December 2020, in accordance with the Appraisal & Valuation Standards of the Royal Institution of Chartered Surveyors, on the basis of market value. The historical cost of the group’s investment properties is £76,832,000 (2019 £76,832,000). Stock code: HCFT www.highcroftplc.com Highcroft-AR-2020.indd 79 Highcroft-AR-2020.indd 79 Job number 12 April 2021 6:54 pm V8 79 12-Apr-21 6:56:58 PM 12-Apr-21 6:56:58 PM Notes to the consolidated financial statements continued for the year ended 31 December 2020 8 Investment property continued Valuation process The valuation reports produced by the independent external valuers are based on information provided by the group such as current rents, terms and conditions of lease agreements, service charges and capital expenditure (if any). This information is derived from the group’s property management and financial information systems and is subject to the group’s overall control environment. In addition, the valuation reports are based on assumptions and models used by the independent valuer. The assumptions are typically market related such as yields and discount rates and are based on their professional judgement and market observation. Each property is considered a separate asset class based on the unique nature, characteristics, and risks of the property. During 2020, many valuations were reported with material valuation uncertainty clauses on certain classes of assets. However, valuation markets are mostly functioning again, with transaction volumes and other relevant evidence at levels where an adequate quantum of market evidence exists upon which to base opinions of value. Accordingly, our independent valuers have confirmed that the valuation at 31 December 2020 is not reported as being subject to material valuation uncertainty. The executive director responsible for the valuation process verifies all major inputs to the external valuation reports, assesses the individual property valuation changes from the prior year valuation report and holds discussion with the independent valuer. When this process is complete, the whole board then meet the valuer in the presence of the auditor. The valuation report is recommended to the audit committee, which considers it as part of its overall responsibilities. Valuation technique The fair value of the property portfolio has been determined using an income capitalisation technique whereby contracted and market rental values are capitalised with a market capitalisation rate. The resulting valuations are cross checked against the equivalent yields and the fair market values per square foot derived from comparable recent market transactions on an arm’s- length terms. These techniques are consistent with the principles in IFRS 13 Fair Value Measurement and use significant unobservable inputs such that the fair value measurement of each property within the portfolio has been classified as level 3 in the fair value hierarchy. In 2019, all investment properties were classified were with level 2 inputs. The change to the classification to level 3 is to comply with best practice and for comparison purposes. Total 82,060 868,174 6,642 Significant unobservable inputs 31 December 2020 Valuation technique Warehouse Retail warehouse Leisure Office High street retail Income capitalisation Fair value of property portfolio £’000 37,550 21,475 Area sq ft 600,717 133,746 Gross estimated rental value (ERV) £’000 3,342 1,539 ERV per sq ft Minimum Maximum Weighted average Net initial yield Minimum Maximum Weighted average Reversionary yield Minimum Maximum Weighted average Equivalent yield Minimum Maximum Weighted average £ £ £ % % % % % % % % % 2.00 12.00 8.28 4.97 11.52 8.65 5.50 18.50 11.36 4.99 9.00 6.94 11.33 24.00 13.17 5.98 8.43 6.95 6.08 7.98 6.82 6.03 7.92 6.79 10,050 87,955 818 7.50 28.85 12.09 3.05 12.11 7.56 6.10 10.24 8.07 6.02 9.09 7.57 7,450 29,323 544 19.00 19.00 19.00 4.05 11.31 8.57 4.65 9.57 7.71 4.65 8.42 7.00 5,535 16,433 399 70.00 135.00 109.87 0.00 8.47 2.88 6.48 7.22 6.82 5.95 7.07 6.41 80 Highcroft Investments PLC Annual report and accounts for the year ended 31 December 2020 Highcroft-AR-2020.indd 80 Highcroft-AR-2020.indd 80 Job number 12 April 2021 6:54 pm V8 12-Apr-21 6:56:59 PM 12-Apr-21 6:56:59 PM FINANCIAL STATEMENTS 8 Investment property continued 31 December 2019 Valuation technique Warehouse warehouse Leisure Office retail Total Retail High street Income capitalisation Fair value of property portfolio Area £’000 sq ft Gross estimated rental value (ERV) £’000 36,860 600,717 3,322 ERV per sq ft Minimum Maximum Weighted average Net initial yield Minimum Maximum Weighted average Reversionary yield Minimum Maximum Weighted average Equivalent yield Minimum Maximum Weighted average £ £ £ % % % % % % % % % 2.00 12.00 8.20 5.06 10.47 8.08 5.50 18.50 11.40 4.95 9.01 6.68 86,710 868,174 6,782 23,900 133,746 1,649 11.33 24.00 14.08 5.22 7.23 6.25 6.08 7.98 6.86 5.19 7.56 6.44 11,750 87,955 869 7.85 28.85 12.34 6.75 7.01 6.95 6.10 10.24 8.05 6.75 8.02 7.35 7,475 29,323 546 18.00 19.00 18.62 4.34 10.36 8.07 4.65 9.57 7.70 4.70 8.08 6.79 6,725 16,433 396 70.00 150.00 118.21 5.58 7.47 6.42 6.48 7.22 6.80 4.72 6.25 5.49 Sensitivities of measurement of significant unobservable inputs As set out on page 80, the valuation of the group’s property portfolio is open to judgements that are inherently subjective by nature. Unobservable input Estimated rental value Net initial yield Reversionary yield Equivalent yield Impact on the fair value measurement of a significant increase in input Impact on the fair value measurement of a significant decrease in input Increase Decrease Decrease Decrease Decrease Increase Increase Increase There are inter-relationships between these inputs as they are partially determined by market conditions. An increase in the reversionary yield may accompany an increase in ERV and would mitigate its impact on the fair value measurement. Information about the impact of changes in unobservable inputs on the fair value of the group’s property portfolio Sensitivities for changes in assumptions have been set out below at +/- 5% for ERV and +/- 50bps for EY, which are deemed to be the levels that give a reasonable worst-case scenario given the like-for-like valuation fall of 5.4% already recognised in the year. 31 December 2020 Warehouse £’000 Retail warehouse £’000 Leisure £’000 Fair value of property portfolio 37,550 21,475 10,050 Impact on valuation of: +5% on ERV -5% on ERV -50bps on EY +50bps on EY 1,873 (1,873) 295 (290) 1,072 (1,072) 162 (159) 501 (501) 110 (107) Office £’000 7,450 373 (373) 66 (65) High street retail £’000 Total £’000 5,535 82,060 274 (274) 66 (64) 4,093 (4,093) 699 (685) Stock code: HCFT www.highcroftplc.com Highcroft-AR-2020.indd 81 Highcroft-AR-2020.indd 81 Job number 12 April 2021 6:54 pm V8 81 12-Apr-21 6:56:59 PM 12-Apr-21 6:56:59 PM Notes to the consolidated financial statements continued for the year ended 31 December 2020 8 Investment property continued 31 December 2019 Warehouse £’000 Retail warehouse £’000 Fair value of property portfolio 36,860 23,900 Impact on valuation of: +5% on ERV -5% on ERV -50bps on EY +50bps on EY 1,842 (1,842) 291 (286) 1,193 (1,193) 199 (195) Leisure £’000 11,750 586 (586) 85 (84) Office £’000 7,475 374 (374) 63 (61) High street retail £’000 6,725 334 (334) 54 (53) Total £’000 86,710 4,329 (4,329) 692 (679) Additional property disclosures including property covenant information Thirteen investment properties with a carrying amount of £49,850,000 (2019 ten properties with a valuation of £43,625,000) are charged to Handelsbanken plc to secure the group’s short and medium-term loans. After the year end, one additional investment property with a carrying amount of £5,700,000 was also charged to Handelsbanken plc. The group leases out its commercial investment property under operating leases. The future minimum lease payments receivable under non-cancellable leases are as follows: Less than one year Between one and five years More than five years 2020 £’000 5,161 16,315 13,354 34,830 2019 £’000 5,864 18,321 14,903 39,088 Property operating expenses are all analysed as arising from generating rental income and include the movement in the bad debt provision. 9 Equity investments Valuation at 1 January Disposals Valuation at 31 December Unlisted investments transferred to other receivables Equity investments at 31 December 2020 £’000 – – – – – 2019 £’000 679 (670) 9 (9) – The realised gains on equity investments shown in the statement of comprehensive income were as follows 2020 £nil (2019 £53,000). The listed equity investments were, historically, revalued using level 1 inputs, the quoted market price. The unlisted equity investments were, historically, valued using level 3 inputs, the last known price at which shares were traded in an active market. 10 Assets classified as held for sale Investment property held for sale 2020 £’000 3,250 2019 £’000 – In December 2020, the directors decided to sell our Andover investment property in early 2021 to take advantage of prevailing market sentiment. There were several interested parties and, at the date of this report, contracts have been exchanged for the disposal with a conditional completion arrangement. 82 Highcroft Investments PLC Annual report and accounts for the year ended 31 December 2020 Highcroft-AR-2020.indd 82 Highcroft-AR-2020.indd 82 Job number 12 April 2021 6:54 pm V8 12-Apr-21 6:56:59 PM 12-Apr-21 6:56:59 PM 11 Trade and other receivables Trade receivables Accrued rent receivable Other receivables FINANCIAL STATEMENTS 2020 £’000 783 871 38 1,692 2019 £’000 310 814 23 1,147 Included in trade receivables are amounts due from tenants at each year end include amounts invoiced on 25 December in respect of rents in advance for the period 25 December to 24 March. At 31 December 2020, amounts due from tenants that were more than 90 days overdue, which related to rents for 2020 or earlier, totalled £281,000 (2019 £nil). Trade and other receivables are shown after deducting a provision for bad and doubtful debts of £366,000 (2019 £nil). The provision for doubtful debts is calculated as an expected credit loss on trade and other receivables in accordance with IFRS 9 (see Note 1). The charge to the income statement in relation to write-offs and provisions made against doubtful debts was £366,000 (£2019 £nil). The expected credit loss is recognised on initial recognition of a debtor and is reassessed at each reporting period. In order to calculate the expected credit loss, the group applies a forward-looking outlook to historic default rates. In the current reporting period, the forward-looking outlook has considered the impacts of COVID-19. The historic default rates used are specific to how many days past due a receivable is. Specific provisions are also made in excess of the expected credit loss where information is available to suggest that a higher provision than the expected credit loss is required. In the current reporting period, an additional review of tenant debtors was undertaken to assess recoverability in light of the COVID-19 pandemic. The directors consider that the carrying amount of trade and other receivables is approximate to their fair value. There is no concentration of credit risk with respect to trade and other receivables as all of the group’s tenants have terms that require them to pay their rent in advance. 12 Trade and other payables Deferred income Social security and other taxes Other payables The directors consider that the carrying value of trade and other payables approximates to their fair value. 13 Interest bearing loan Short-term bank loans due within one year Medium-term bank loans The medium-term bank loans comprise amounts falling due as follows: Between one and two years Between two and five years Over five years 2020 £’000 983 960 783 2,726 2020 £’000 – 2019 £’000 1,179 716 600 2,495 2019 £’000 4,000 27,200 22,200 7,500 – 19,700 27,200 – 7,500 14,700 22,200 Further analysis of the short and medium-term bank loans, including the £5,000,000 drawn and the £4,000,000 repaid in 2020, is set out on page 27. The weighted average effective interest rate is 3.13% (2019 3.50%). 14 Deferred tax liabilities Deferred taxation, arising from revaluation gains on equity investments, provided for in the financial statements is set out below and is calculated using a tax rate of 19% (2019 17%). At 1 January Realised in the year At 31 December Stock code: HCFT www.highcroftplc.com 2020 £’000 2019 £’000 – – – 33 (33) – 83 Highcroft-AR-2020.indd 83 Highcroft-AR-2020.indd 83 Job number 12 April 2021 6:54 pm V8 12-Apr-21 6:57:00 PM 12-Apr-21 6:57:00 PM Notes to the consolidated financial statements continued for the year ended 31 December 2020 continued 15 Share capital The movement in the number of 25p ordinary shares in issue is shown below: At 1 January Issued under the Highcroft Incentive Plan At 31 December 2020 2019 Number 5,167,240 7,935 £’000 1,292 2 Number 5,167,240 – 5,175,175 1,294 5,167,240 £’000 1,292 – 1,292 The directors monitor capital on the basis of total equity and operate within the requirements of the articles of association. There was £27,200,000 of medium-term debt at 31 December 2020 (2019 £26,200,000 short and medium-term debt). The directors manage the group’s working capital to take advantage of suitable commercial opportunities as they arise whilst maintaining a relatively low-cost capital base. This capital management policy is principally carried out by the use of surplus cash. In the medium term, the directors may use additional medium-term debt to finance future commercial property acquisitions in line with its long-term strategy. The rights and obligations relating to the company’s share capital is summarised on page 61. 16 Capital commitments There were no capital commitments at 31 December 2020 or at 31 December 2019. 17 Contingent liabilities There were no contingent liabilities at 31 December 2020 or 31 December 2019. 18 Related party transactions Kingerlee Holdings Limited owns, through its subsidiaries, 27.2% (2019 27.3%) of the company’s shares, and David Kingerlee is a director and shareholder of both the company and Kingerlee Holdings Limited. The transactions between the group and Kingerlee Holdings Limited or its subsidiaries were as follows: Transactions by the company: Property income distribution paid to related party Licence fee for use of property and recharge of sundry costs paid to related party 2020 £’000 2019 £’000 676 14 771 15 The company owns 100% of Rodenhurst Estates Limited and BL (Wisbech) Limited and Belgrave Land (Wisbech) Limited. The transactions between these companies have been eliminated on consolidation. Details of the net assets and profit for the financial year of these companies are set out on page 91 of this annual report. Charles Butler is a director of both the company and Belerion Capital Group Limited. During the year, the company was charged £nil (2019 £121) for meeting room hire by Belerion Capital Group Limited of which £nil (2019 £nil) was outstanding at the year end. The key management personnel are the directors of the group. Their remuneration is set out in Note 4. In addition, the following directors received dividends during the year in respect of their shareholdings: Simon Gill David Kingerlee Roberta Miles 2020 £’000 2019 £’000 2 43 5 – 49 3 84 Highcroft Investments PLC Annual report and accounts for the year ended 31 December 2020 Highcroft-AR-2020.indd 84 Highcroft-AR-2020.indd 84 Job number 12 April 2021 6:54 pm V8 12-Apr-21 6:57:00 PM 12-Apr-21 6:57:00 PM 19 Financial instruments and financial risk Categories of financial instruments Financial assets measured at amortised cost: Trade and other receivables Cash and cash equivalents Financial liabilities measured at amortised cost: Interest bearing loans Trade and other payables FINANCIAL STATEMENTS 2020 2019 Carrying amount £’000 Gains/ (losses) £’000 Carrying amount £’000 Gains/ (losses) £’000 1,692 3,295 4,987 27,200 783 27,983 – – – – – – 1,147 1,559 2,706 26,200 600 26,800 – – – – – – Fair value and maturity of financial instruments The group has no derivative financial instruments. Exposure to credit, liquidity and market risks arises in the normal course of the group’s business. At 31 December 2020, the group had £27,200,000 of medium-term borrowing (2019 £26,200,000 of short and medium-term borrowing), of which £7,500,000 is repayable in 2022, £3,400,000 in 2026, £4,500,000 in 2027, £6,800,000 in 2029 and £5,000,000 in 2030 at fixed interest rates with a weighted average of 3.13% (2019 3.50%). The fair values of loans and receivables and financial liabilities held at amortised cost were not materially different from book values. A maturity analysis, based on contractual, undiscounted payments is set out below: Carrying amount £’000 27,200 783 2020 Total contractual undiscounted cashflow £’000 Due in more than 1 but less than 2 years £’000 Due in more than 2 but less than 5 years £’000 Due within 1 year £’000 Due in more than 5 years £’000 31,863 783 850 783 2019 8,166 – 1,672 – 21,175 – Total contractual undiscounted cashflow £’000 30,643 600 Carrying amount £’000 26,200 600 Due within 1 year £’000 4,856 600 Due in more than 1 but less than 2 years £’000 Due in more than 2 but less than 5 years £’000 Due in more than 5 years £’000 740 – 8,946 – 16,101 – Bank loans Trade and other payables Bank loans Trade and other payables Credit risk The group’s credit risk, i.e. the risk of financial loss due to a third party failing to discharge its obligation, primarily affects its trade receivables. Creditworthiness of potential tenants is assessed before entering into contractual arrangements. The amount of trade receivables presented in the balance sheet is calculated after any allowances for credit losses, estimated by the directors. The allowance as at 31 December 2020 was £366,000 (2019 £nil). The group’s maximum exposure to credit risk is limited to the carrying amount of financial assets recognised at 31 December 2020 as summarised in the table above. The group has no significant concentration of credit risk, with exposure spread over a number of tenants. The credit status of tenants is continuously monitored and particularly reviewed before properties are acquired, before properties are let and before new leases are granted. The group’s cash holdings are mainly in Handelsbanken plc and Lloyds Bank plc. Cash is also held by the group’s property managers, lawyers and registrars acting as agents, though not, other than for tenant deposits, for long periods of time. The group only places cash holdings with major financial institutions that satisfy specific criteria. Liquidity risk The group’s liquidity risk, i.e. the risk that it might encounter difficulty in meeting its obligations as they fall due, applies to its trade payables and any short and medium-term borrowings that the group takes out from time to time. The group has not encountered any difficulty in paying its trade payables in good time. The objective of the group in managing liquidity risk is to ensure that it can meet its financial obligations as and when they fall due. The group expects to meet its financial obligations through operating cash flows. Stock code: HCFT www.highcroftplc.com Highcroft-AR-2020.indd 85 Highcroft-AR-2020.indd 85 Job number 12 April 2021 6:54 pm V8 85 12-Apr-21 6:57:00 PM 12-Apr-21 6:57:00 PM Notes to the consolidated financial statements continued for the year ended 31 December 2020 continued 19 Financial instruments and financial risk continued Interest rate risk The group finances its operations through retained profits and medium-term borrowings at an interest rate that is fixed over the term of the loan. Interest rate swaps have not been used. The group places any cash balances on deposit at rates that may be fixed in the short term but for sufficiently short periods that there is no need to hedge against the implied risk. Currency exchange risk The group is not directly exposed to currency risk. Market risk The group is not directly exposed to market risk. Borrowing facilities The group has no undrawn committed borrowing facilities. 20 Changes in liabilities arising from financing activities At 1 January New loans Loans repaid Interest charged Interest paid At 31 December 21 Net assets per share Net assets Ordinary shares in issue Basic net assets per share Bank loans (Note 13) 2020 £’000 26,200 5,000 (4,000) 896 (896) 2019 £’000 19,400 6,800 – 856 (856) 27,200 26,200 2020 2019 £57,121,000 £60,721,000 5,175,175 5,167,240 1,104p 1,175p 86 Highcroft Investments PLC Annual report and accounts for the year ended 31 December 2020 Highcroft-AR-2020.indd 86 Highcroft-AR-2020.indd 86 Job number 12 April 2021 6:54 pm V8 12-Apr-21 6:57:00 PM 12-Apr-21 6:57:00 PM Company statement of financial position at 31 December 2020 FINANCIAL STATEMENTS Fixed assets Investments Current assets Debtors Cash at bank Creditors – amounts falling due within one year Net current assets Total assets less current liabilities Provision for liabilities Net assets Capital and reserves Called up share capital Reserves – Share-based payment – Realised capital – Other equity reserve – Share premium – Capital redemption – Revaluation – Retained earnings Shareholders’ funds 2020 2019 Note £’000 £’000 £’000 £’000 5 6 7 8 9 5,006 2,040 7,046 709 43 8,728 (53) 51 95 40,521 6,442 50,784 54,557 6,164 60,721 – 60,721 1,292 6,337 57,121 – 57,121 1,294 6,650 28 6,678 514 12 8,728 – – 95 44,294 6,300 55,827 57,121 59,429 60,721 These financial statements were approved by the board of directors on 7 April 2021. Simon Gill Director Charles Butler Director Company number: 00224271 The accompanying notes form an integral part of these financial statements. Stock code: HCFT www.highcroftplc.com Highcroft-AR-2020.indd 87 Highcroft-AR-2020.indd 87 Job number 12 April 2021 6:54 pm V8 87 12-Apr-21 6:57:00 PM 12-Apr-21 6:57:00 PM Company statement of changes in equity for the year ended 31 December 2020 Note 2 2 At 1 January 2020 Profit for the year Other comprehensive loss for the year Dividends paid Revaluation loss of subsidiaries Issue of shares Share award expensed Balance at 31 December 2020 Share- based payment reserve £’000 12 – – – – – 31 Share capital £’000 1,292 – – – – 2 – Realised capital reserve £’000 8,728 – – – – – – Other equity reserve £’000 Share premium £’000 Capital redemption reserve £’000 Revaluation reserve £’000 Retained earnings £’000 Total £’000 – – – – – (53) – – – – – – 51 – 51 95 44,294 6,300 60,721 – – – – – – – – – 2,626 2,626 (3,773) (3,773) (2,484) (2,484) (3,773) 3,773 – – – – – – 31 95 40,521 6,442 57,121 1,294 43 8,728 (53) Note 2 2 At 1 January 2019 Profit for the year Other comprehensive loss for the year Dividends paid Revaluation loss of subsidiaries Realised gains Movement in deferred tax on realisation of equities Tax on realised gains Surplus attributable to assets sold in the year Share award expensed Balance at 31 December 2019 Share capital £’000 1,292 – – – – – – – – – 1,292 Share- based payment reserve £’000 Realised capital reserve £’000 Capital redemption reserve £’000 Revaluation reserve £’000 Retained earnings £’000 8,118 95 46,661 – – – – 43 (3) (33) 603 – – – – – – – – – – – – – (1,800) – 3 33 (603) – 6,218 2,954 (1,800) (2,829) 1,800 (43) – – – – Total £’000 62,384 2,954 (1,800) (2,829) – – – – – 12 8,728 95 44,294 6,300 60,721 – – – – – – – – – 12 12 88 Highcroft Investments PLC Annual report and accounts for the year ended 31 December 2020 Highcroft-AR-2020.indd 88 Highcroft-AR-2020.indd 88 Job number 12 April 2021 6:54 pm V8 12-Apr-21 6:57:01 PM 12-Apr-21 6:57:01 PM Notes to the company financial statements for the year ended 31 December 2020 FINANCIAL STATEMENTS 1 Accounting policies Basis of preparation The financial statements have been prepared in accordance with applicable United Kingdom accounting standards, including Financial Reporting Standard 102 The Financial Reporting Standard applicable in the United Kingdom and Republic of Ireland (‘FRS 102’) and with the Companies Act 2006. The financial statements have been prepared under the historical cost convention except for the modification to a fair value basis for certain financial instruments as specified in the accounting policies below. The principal accounting policies of the company have remained unchanged from the previous year. These financial statements have been prepared on a going concern basis and in adopting the going concern basis the directors have, based on the information available at the date of this report, considered the financial implications of COVID-19. In preparing these financial statements, the following disclosure exemptions have been taken: • The requirement to present a cashflow and related notes • Financial instrument disclosures including: – Categories of financial instruments; – Items of income, expenses, gains or losses relating to financial instruments; and – Exposure to, and management of, financial risks. Dividend revenue Dividend revenue relating to exchange-traded equity investments is recognised in the statement of comprehensive income when the right to receive the payment is established. In some cases, the group may receive dividends in the form of shares rather than cash. In such cases, the group recognises the dividend income for the amount of cash dividend alternative with a corresponding increase in cost of investments. Share-based employee remuneration Share-based employee remuneration is determined with reference to the fair value of the cash award that is used to purchase the newly issued shares at the date at which the award is agreed and charged to the income statement over the service and vesting period on a straight-line basis. Interest income Interest is recognised under the effective interest method. Dividends payable Dividend payments are dealt with when paid as a change of equity in retained earnings. Final dividends proposed are not recognised as a liability. Investments Investments are included at the following valuations: • Shares in subsidiary undertakings – at market value (net assets as shown by their financial statements are taken as a reasonable estimate of market value as their assets and liabilities are carried at fair value). • Equity investments at market value. • Unlisted investments – at market value estimated by the directors. The directors manage and evaluate performance on a fair value basis and therefore have designated qualifying financial assets including shares in subsidiary undertakings at fair value through the profit and loss account. Other movements are recognised directly in equity. Receivables Trade receivables and other receivables that have fixed or determinable payments that are not quoted in an active market are categorised as financial assets at amortised cost. These are measured at amortised cost using the effective interest rate method, less any impairment. Discounting is omitted where the effect of discounting is immaterial. Deferred tax Deferred tax is recognised in respect of all timing differences at the reporting date. Deferred tax assets are recognised when it is more likely than not that they will be recovered. Deferred tax is calculated using tax rates and laws that have been enacted or substantively enacted by the reporting date. Deferred tax liabilities are presented within provisions for liabilities. Financial liabilities The company’s financial liabilities include trade and other payables. Trade payables are recognised initially at fair value less transaction costs and subsequently measured at amortised cost. A financial liability is derecognised when it is extinguished, discharged, cancelled or expires. Gains on disposals of assets Gains on disposals of assets are the excess of net proceeds over the valuation at the beginning of the year. They are not available for distribution under the company’s articles of association and are taken to realised capital reserve. Stock code: HCFT www.highcroftplc.com Highcroft-AR-2020.indd 89 Highcroft-AR-2020.indd 89 Job number 12 April 2021 6:54 pm V8 89 12-Apr-21 6:57:01 PM 12-Apr-21 6:57:01 PM Notes to the company financial statements continued for the year ended 31 December 2020 2 Company (loss)/profit for the year after tax The company has not presented its own profit and loss account as permitted under section 408 of the Companies Act 2006. The loss after tax for the year was £1,147,000 (2019 profit £1,154,000). Information regarding directors’ remuneration appears on pages 50 to 60 of this annual report. 3 Auditor’s fees Fees payable to the company’s auditor for the audit of the group’s annual accounts* Additional fee in respect of prior year Fees payable to the company’s auditor for other services: Audit related assurance services 2020 £’000 2019 £’000 48 8 2 58 33 – 2 35 *The audit fee for 2020 includes £10,000 (2019 £nil) related to the completion of a group audit questionnaire for the Kingerlee Holdings Limited’s auditor. This amount is recoverable in full from Kingerlee Holdings Limited and has been netted of other expenses. 4 Dividends In 2020, the following dividends have been paid by the company: 2019 Final: 27.00p per ordinary share (2018 33.75p) 2020 Interim: 21.00p per ordinary share (2019 21.00p) 2020 £’000 1,397 1,087 2,484 2019 £’000 1,744 1,085 2,829 On 7 April 2021 the directors declared a final property income distribution for 2020 of £1,553,000, 30.00p per share, together with a special property income distribution for 2020 of £311,000, 6.00p per share, (2019 final property income distribution of £1,397,000, 27.00p per share) both payable on 27 May 2021 to shareholders registered on 23 April 2021. 5 Investments Valuation at 1 January 2020 Deficit on revaluation in excess of cost Valuation at 31 December 2020 Shares in subsidiary undertaking £’000 54,557 (3,773) 50,784 Equity investments are included at their market value. If investments had not been revalued they would have been included on the historical cost basis at the following amounts: Cost at 31 December 2020 Cost at 31 December 2019 Shares in subsidiary undertaking £’000 10,271 10,271 At 31 December 2020, the company held 100% of the allotted ordinary share capital and voting rights of Rodenhurst Estates Limited, which is a property-owning company registered in England and Wales and operating in England and Wales. In turn, Rodenhurst Estates Limited owned 100% of the allotted ordinary share capital and voting rights of BL (Wisbech) Limited, which is a holding company registered in England and Wales and operating in England. In turn, BL (Wisbech) Limited owned 100% of the allotted ordinary share capital and voting rights of Belgrave Land (Wisbech) Limited, a property-owning company registered in England and Wales and operating in England. All the subsidiaries have the same registered office address as the company: Park Farm Technology Centre, Akeman Street, Kirtlington, Oxon, OX5 3JQ. 90 Highcroft Investments PLC Annual report and accounts for the year ended 31 December 2020 Highcroft-AR-2020.indd 90 Highcroft-AR-2020.indd 90 Job number 12 April 2021 6:54 pm V8 12-Apr-21 6:57:01 PM 12-Apr-21 6:57:01 PM FINANCIAL STATEMENTS 5 Investments continued At 31 December 2020, the net assets and the profit for the financial year of these subsidiaries were: Rodenhurst Estates Limited BL (Wisbech) Limited* Belgrave Land (Wisbech) Limited 2020 2019 Loss for the financial year £’000 Net assets £’000 Net assets £’000 50,784 (773) 54,557 – 2,412 – – (628) 3,040 Profit/(loss) for the financial year £’000 1,203 – (66) * BL (Wisbech) Limited is a dormant intermediate holding company between Belgrave Land (Wisbech) Limited and Rodenhurst Estates Limited. It holds the shares in Belgrave Land (Wisbech) Limited at cost. 6 Debtors Owed by subsidiary undertakings Other debtors 7 Creditors – amounts falling due within one year Other taxes and social security Other creditors 2020 £’000 4,982 24 5,006 2020 £’000 295 414 709 2019 £’000 6,426 224 6,650 2019 £’000 226 288 514 8 Provision for liabilities – deferred tax Deferred tax, arising from revaluation gains on equity investments, provided for in the financial statements is set out below and is calculated using a tax rate of 19% (2019 17%) At 1 January Utilised At 31 December 9 Share capital The movement in the number of 25p ordinary shares in issue is shown below: 2020 £’000 – – – At 1 January Issued under the Highcroft Incentive Plan At 31 December 2020 2019 Number 5,167,240 7,935 £’000 1,292 2 Number 5,167,240 – 5,175,175 1,294 5,167,240 2019 £’000 33 (33) – £’000 1,292 – 1,292 Stock code: HCFT www.highcroftplc.com Highcroft-AR-2020.indd 91 Highcroft-AR-2020.indd 91 Job number 12 April 2021 6:54 pm V8 91 12-Apr-21 6:57:01 PM 12-Apr-21 6:57:01 PM Notes to the company financial statements continued for the year ended 31 December 2020 10 Capital commitments There were no capital commitments at 31 December 2020 or at 31 December 2019. 11 Contingent liabilities There were no contingent liabilities at 31 December 2020 or at 31 December 2019. 12 Related party transactions Kingerlee Holdings Limited, through its subsidiaries, owns 27.2% (2019 27.3%) of the company’s shares, and David Kingerlee is a director and shareholder of both the company and Kingerlee Holdings Limited. The transactions between the company and Kingerlee Holdings Limited or its subsidiaries, all of which were undertaken on an arm’s-length basis, were as follows: Property income distribution paid to related party Licence fee for use of property and recharge of sundry costs paid to related party 2020 £’000 676 14 2019 £’000 771 15 The company terminated its licence with Kingerlee Limited, a subsidiary of Kingerlee Holdings Limited, on 20 January 2021. Charles Butler is a director of both the company and Belerion Capital Group Limited. During the year, the company was charged £nil (2019 £121) for meeting room hire by Belerion Capital Group Limited, of which £nil (2019 £nil) was outstanding at the year end. Under the provisions of section 33 FRS 102, transactions between Highcroft Investments PLC and its subsidiaries Rodenhurst Estates Limited, BL (Wisbech) Limited and Belgrave Land (Wisbech) Limited are exempt from these disclosure requirements as they are all wholly owned subsidiaries. 13 Employees The employees of the group are all employees of the company and all their costs are incurred by the company as follows: Remuneration Pension costs Social security costs 2020 £’000 728 1 100 829 2019 £’000 546 3 65 614 92 Highcroft Investments PLC Annual report and accounts for the year ended 31 December 2020 Highcroft-AR-2020.indd 92 Highcroft-AR-2020.indd 92 Job number 12 April 2021 6:54 pm V8 12-Apr-21 6:57:01 PM 12-Apr-21 6:57:01 PM List of definitions FINANCIAL STATEMENTS Company voluntary arrangement (CVA): A procedure that allows a company to settle debts by paying only a proportion of the amount that it owes to creditors. Estimated rental value (ERV): The rent at which the space could be let out in the market conditions prevailing at the date of valuation. Interest cover ratio (ICR): The number of times net interest payable is covered by rental income of the secured properties. Loan-to-value (LTV): Drawn debt divided by the fair value of the property portfolio. For bank facility purposes, the ‘fair value of the property portfolio’ is replaced by the valuation included on valuation reports addressed to the bank. Net debt: Borrowings plus bank overdraft less cash and cash equivalents. Net initial yield: The initial gross income as a percentage of the market value plus standard costs of purchase. Property income distribution (PID): Dividends from profits of the group’s tax-exempt property rental business under the REIT regulations. Real Estate Investment Trust (REIT): The UK REIT regime was launched on 1 January 2007. On 1 April 2008, Highcroft elected to convert to REIT status. The REIT legislation was introduced to provide a structure that closely mirrors the tax outcomes of direct ownership in property and removes tax inequalities between different real estate investors. It provides a liquid and publicly available vehicle that opens the property market to a wide range of investors. A REIT is exempt from corporation tax on qualifying income and gains of its property rental business providing various conditions are met. It remains subject to corporation tax on non-exempt income and gains. Subject to concessions granted during the COVID-19 pandemic, REITs must distribute at least 90% of their income profits from their tax-exempt property rental business, by way of dividend, known as a property income distribution (PID). These distributions can be subject to withholding tax at 20%. If the REIT distributes profits from the non-tax-exempt business, the distribution will be taxed as an ordinary dividend in the hands of the investors (non-PID). Return on equity: Total profit and comprehensive income divided by average total equity. Reversionary yield: The yield that would be achieved if the passing rent adjusts to the level of the ERV. Total shareholder return: The growth in the ordinary share price as quoted on the London Stock Exchange plus dividends per share received for the year, expressed as a percentage of the share price at the beginning of the year. Weighted average unexpired lease term (WAULT): The average lease term remaining to the first to occur on each lease of a tenant break option, or lease expiry, across the portfolio, weighted by rental income. Stock code: HCFT www.highcroftplc.com Highcroft-AR-2020.indd 93 Highcroft-AR-2020.indd 93 Job number 12 April 2021 6:54 pm V8 93 12-Apr-21 6:57:01 PM 12-Apr-21 6:57:01 PM Group five-year summary (unaudited) Investment properties – at annual valuation Equity investments – at market value Total net assets Net asset value per share in issue at end of each year Revenue (excluding gains/losses on disposals of assets) Gross income from property Net admin expenses to gross rent Profit available for distribution Share capital Weighted average number in issue (000’s) Basic earnings per ordinary share Adjusted earnings per ordinary share 2020 £’000 82,060 – 57,121 1,104p 6,084 17.6% 3,503 5,172 (22.2p) 67.7p 2019 £’000 86,710 – 60,721 1,175p 5,840 14.1% 4,055 5,167 22.3p 78.5p 2018 £’000 77,700 679 62,384 1,207p 5,043 14.6% 4,512 5,167 95.3p 87.3p 2017 £’000 77,113 2,131 59,977 1,161p 4,765 13.9% 3,348 5,167 132.3p 64.8p 2016 £’000 65,997 2,469 55,325 1,071p 3,906 16.7% 2,912 5,167 84.0p 55.7p Dividends payable per ordinary share 57.00p 48.00p 52.50p 46.25p 41.00p FTSE 350 Real Estate Index Highcroft year-end share price 491 602 468 568 515 720.0p 942.5p 885.0p 887.5p 897.5p 94 Highcroft Investments PLC Annual report and accounts for the year ended 31 December 2020 Highcroft-AR-2020.indd 94 Highcroft-AR-2020.indd 94 Job number 12 April 2021 6:54 pm V8 12-Apr-21 6:57:01 PM 12-Apr-21 6:57:01 PM Directors and advisers FINANCIAL STATEMENTS Company number 00224271 Directors Charles Butler, BSc ACA (Non-executive chairman) Simon Costa, BSSc MA MPhil (Non-executive) Simon Gill, BSc FRICS (Chief executive) David Kingerlee (Non-executive) Roberta Miles, MA FCA (Finance) Company secretary Roberta Miles, MA FCA Independent auditor Mazars LLP Statutory Auditor Chartered Accountants The Pinnacle 160 Midsummer Boulevard Milton Keynes MK9 1FF Independent valuer Knight Frank LLP 55 Baker Street London W1U 8AN Bankers Lloyds Bank plc Ground Floor Canons House Canons Way Bristol BS1 5LL and Handelsbanken plc Latimer House Langford Locks Kidlington Oxon OX5 1GG Solicitors Clarkslegal LLP 5th Floor Thames Tower Station Road Reading RG1 1LX and Charles Russell Speechly LLP 5 Fleet Place London EC4M 7RD Property managing agents Workman LLP Alliance House 12 Caxton Street London SW1H 0QS Corporate finance advisers Nplus1 Singer Advisory LLP One Bartholomew Lane London EC2N 2AX Registrars Link Group 10th Floor Central Square 29 Wellington Street Leeds LS1 4DL Tax advisers Grant Thornton UK LLP 30 Finsbury Square London EC2A 1AG Registered office and business address Park Farm Technology Centre Akeman Street Kirtlington Oxon OX5 3JQ Stock code: HCFT www.highcroftplc.com Highcroft-AR-2020.indd 95 Highcroft-AR-2020.indd 95 Job number 12 April 2021 6:54 pm V8 95 12-Apr-21 6:57:02 PM 12-Apr-21 6:57:02 PM H i g h c r o f t I n v e s t m e n t s P L C A n n u a l r e p o r t a n d a c c o u n t s f o r t h e y e a r e n d e d 3 1 D e c e m b e r 2 0 2 0 S t o c k c o d e : H C F T Park Farm Technology Centre Akeman Street Kirtlington Oxon OX5 3JQ Highcroft-AR-2020.indd 3 Highcroft-AR-2020.indd 3 Job number 12 April 2021 6:54 pm V8 12-Apr-21 6:55:31 PM 12-Apr-21 6:55:31 PM

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