Riversgold Limited Annual Report 2018

FY2018 Annual Report · Riversgold Limited

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Annual Report and Accounts

for the year ended 31 December 2018

Contents

Overview
About Us
Headlines
At a Glance
A Year in Review

Strategic Report
Chairman’s Statement
Investment Strategy and Business Model
Asset and Investment Managers’ Report
Property Portfolio
Environmental Matters
Financial Review
Principal Risks and Uncertainties
Management Arrangements

Corporate Governance
Board of Directors
Report of the Directors
Statement of Directors’ Responsibilities
Corporate Governance Statement
Audit Committee Report
Management Engagement and Remuneration Committee Report
Remuneration Report
Independent Auditor’s Report
Appendix: Auditor’s responsibilities for the audit of the financial statements

Financial Statements
Consolidated Statement of Comprehensive Income
Consolidated Statement of Financial Position
Consolidated Statement of Changes in Equity
Consolidated Statement of Cash Flows
Notes to the Consolidated Financial Statements

Additional Information
EPRA Performance Measures
Notes to the EPRA Performance Measures
Property Related Capital Expenditure Analysis
Glossary of Terms
AIFMD Disclosure
Company Information
Forthcoming Events
Shareholder Information
Dividend History
Share Price Performance

Cover photo: 800 Aztec West, Bristol

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Overview 1 - 9Annual Report and Accountsfor the year ended 31 December 2018About Us

Regional REIT Limited (“Regional REIT”
or the “Company”) and its subsidiaries1
(the “Group”) is a United Kingdom (“UK”)
based real estate investment trust that
launched in November 2015. It is managed
by London & Scottish Investments Limited
(“LSI”), the Asset Manager, and Toscafund
Asset Management LLP (“Toscafund”), the
Investment Manager.

Regional REIT’s commercial property
portfolio is comprised wholly of UK assets
and comprises, predominantly, offices
and industrial units located in the regional
centres outside of the M25 motorway.
The portfolio is highly diversified, with 150
properties, 1,192 units and 874 tenants as
at 31 December 2018, with a valuation of
£718.4m.

Regional REIT pursues its investment
objective by investing in, actively managing
and disposing of regional Core Property and
Core Plus Property assets. It aims to deliver
an attractive total return to its Shareholders,
targeting greater than 10% per annum (“pa”),
with a strong focus on income supported by
additional capital growth prospects.

Office

Industrial

Retail/Other

One & Two Newstead Court, Annesley

Juniper Park, Basildon

The Brunel Centre, Bletchley

For more information visit the Group’s website at www.regionalreit.com.

1 Regional REIT Limited is the parent Company of a number of subsidiaries which together comprise a group within the definition of The Companies (Guernsey) Law
2008, as amended (the “Law”) and the International Financial Reporting Standard (“IFRS”) 10, ‘Consolidated Financial Statements’, as issued by the International
Accounting Standards Board (“IASB”) and as adopted by the European Union (“EU”). Unless otherwise stated, the text of this Annual Report does not distinguish
between the activities of the Company and those of its subsidiaries.

Overview 1 - 9Annual Report and Accountsfor the year ended 31 December 2018Headlines

Financial Highlights

Dividend and NAV increased – driven by buying and selling well, coupled with
intensive asset management – securing long-term income

£718.4m

Portfolio Valuation

115.5p

EPRA NAV per share

3.8%

£67.4m

Total Net Profit

8.05p

115.2p

IFRS NAV per share

38.3%

Dividend declared per share

Net Loan to Value Ratio

3.5%

6.4 years

Weighted Average Debt
Duration

Weighted Average Cost of Debt
(“WACD”)

Weighted Average Cost of Debt
(Excl. ZDPs)

7.1 years

Weighted Average Debt
Duration (Excl. ZDPs)

Operational Highlights

Deliberately diversified portfolio by location and tenant – regions remain strong

150

Properties

1,192

Units

£59.7m

Contracted Rent Roll

874

Tenants

Diversified portfolio (by value)

Transactional activity (by value)

82.0%

England & Wales

91.6%

Office & Industrial

£73.3m

Property acquisitions (before
costs)

£149.3m

Profitable property disposals
(net of costs)

(plus 9 part sales)

Number of properties

Active management building occupancy

87.3%

by value

85.5%

by area

89.4%

by EPRA ERV

5.4 years

WAULT to expiry

3.4 years

WAULT to first break

Performance Highlights

The high dividend distributions are a major component of the total return

Dividends declared per share:

8.05p

2018

7.85p

2017

7.65p

2016

EPRA:

15.5%

EPRA NAV since Admission*
(Admission: 100p)

37.5%

EPRA Total Return
attributable to Shareholders
since Admission

Member of FTSE All Share Index since March 2016
Member of FTSE EPRA NAREIT UK Index since June 2016

* Admission: 6 November 2015

Total Shareholder Return (from IPO) (EPRA NAV & dividend declared)

e
r
a
h
s

r
e
p

e
c
n
e
P

140

135

130

125

120

115

110

105

100

37.5%

IPO November 2015

December 2015

December 2016

December 2017

December 2018

Overview 1 - 9Annual Report and Accountsfor the year ended 31 December 2018

Property Name: 800 Aztec West, Bristol
Sector: Office

At a Glance

Reported Proﬁt (£m)

£67.4m +149%

Net Rental Income (£m)

£54.4m +19%

EPRA Occupancy (%)

89.4% +1%

67.4

54.4

89.4

45.8

38.1

27.1

13.4

2016

2017

2018

2016

2017

2018

N/A

2016

88.2

2017

Average rent psf (£)

£9.40 +15%

Net LTV (%)

38.3% -15%

WACD (%)

2018

3.8% 0%

9.40

45.0

3.8

3.7

8.18

40.6

38.3

7.36

2016

2017

2018

2016

2017

2018

2016

2017

2018

EPRA NAV – diluted (pps)

115.5p +9%

Average Property Value (£m)

£4.8m +7%

EPRA-Eps-Adj* diluted (p)

7.5p -13%

115.5

4.5

*excluding performance fee

4.8

8.6

106.9

105.9

4.1

7.8

7.5

2016

2017

2018

2016

2017

2018

2016

2017

2018

Number of Properties

150 -9%

Rent Roll (£m)

£59.7m -4%

Dividend per share (p)

£8.05p +3%

164

150

61.9

59.7

8.05

123

44.0

7.85

7.65

2016

2017

2018

2016

2017

2018

2016

2017

2018

WAD (years)

6.4yrs +7%

WAULT to ﬁrst break (years)

3.4yrs -3%

Tenants

874 -15%

6.0

6.4

3.6

3.5

3.4

1,026

874

717

2.9

2016

2017

2018

2016

2017

2018

2016

2017

2018

Units

1,192 -13%

1,368

1,192

941

Terms are defined in the glossary of terms on pages 135 and 136.

2016

2017

2018

Overview 1 - 9Annual Report and Accountsfor the year ended 31 December 2018A Year in Review

HBOS Campus
Aylesbury

Clearblue Innovation
Bedford

Arena Point
Leeds

Overview 1 - 9Annual Report and Accountsfor the year ended 31 December 2018PORTFOLIOKEYACQUISITIONSKEYDISPOSALSDIVIDENDSKEYLETTINGS /REFURBISHMENTSDEBT201812 February£235,000Building 2, Aylesbury 13,832 sq. ft.Letting completed in advance of the Group’s £3.36m refurbishment scheme.7 August£50mSuccessful raise of bond at an annual rate of 4.5%, matures on 6 August 2024.6 December£36mAgreed for a new secured 10-year facility with Scottish Widows Ltd.6 December£15mRepaid in full5% ICG Longbow Ltdloan facility.20 June£14.1mThe Point, GlasgowNet initial yield 6.6%8 August£39.1m Industrial property portfolio, net initial yield of 6.9%. Uplift of 24.1% against the 31 Dec 2017 valuation.8 August£12.2m Arena Point, Leeds227.6% uplift against Dec 17 valuation. Regional REIT retains the ofﬁce building.13 August£26.4mWardpark, CumbernauldUplift of 21.1% against the 31 Dec 2017 valuation.18 May£160,000Building 2, Aylesbury9,068 sq. ft. 2 lettings25 September£50mRepaid of £65m5% ICG Longbow Ltdloan facility.10 September£680,000800 Aztec West, Bristol31,000 sq. ft.Rent at £21.5011 December£335,952120 Wellington Street,LeedsRent at 5-year lease, withan option to purchase21 December£640,000800 Aztec West, Bristol, 32,000 sq. ft. Ministry of Defence at £22.00 rent. Now 87% let within ﬁve months of refurbishment.21 December£290,0002800 The Crescent, Birmingham, Business Park13,356 sq. ft.Rent at £22.0024 August£6.9m800 Aztec West,BristolCompletion of “back to shell” refurbishment201831 August1.85pQ2 201815 November1.85pQ3 201822 February2.45pQ4 201717 May1.85pQ1 201831 December 20171641,3681,026£737.3m£61.9m pa45.0%Properties:Units:Tenant:Portfolio:Contracted rent roll:LTV:Amount:Description:Net initial yield:Rent:Location:Area:Description:Amount:Location:Description:Amount:Description:Amount:Period:31 March1601,339996£727.0m£61.7m pa41.2%30 June1511,294950£758.7m£61.3m pa41.2%30 September1531,246915£723.2m£59.4m pa37.1%31 December1501,192874£718.4m£59.7m pa38.3%26 June£35.2m5 assets8.4%10 September£31.4m8 ofﬁce8.66%III Acre, Princeton Drive
Stockton On Tees

2800 The Crescent
Birmingham

800 Aztec West
Bristol

Chairman’s Statement
The Chairman’s Statement forms part of the Strategic Report and covers the year ended 31 December 2018.

It gives me great pleasure to report that
the Group had another very active year and
continued to achieve strong positive growth,
with Group profit after tax of £67.4m (up
149% on 2017). EPRA company adjusted
diluted earnings per share were 7.5 pence per
share (“pps”) (2017: 8.6pps), IFRS earnings
18.1pps (2017: 9.1pps) with a total dividend
for the year of 8.05pps, an increase of c.3%
on the 7.85pps dividend for 2017. We have
worked closely with our tenants via our
unique offering of integrated asset, property
and finance teams, which add value to both
rental income and capital appreciation.

We have continued to execute our
strategy of acquiring properties where
our asset management initiatives can
be best employed, whilst deliberately
ensuring the portfolio remains diversified
both geographically and by tenant type.
Occupancy rates by value continue to remain
steady at 87.3% compared with 85.0%
in 2017. During the year, the Group made
opportunistic disposals of a substantial
portion of its industrial assets and of
properties which had met their individual
asset management objectives to maximise
realised returns. We have also promptly
recycled much of the capital that has
been generated into high quality income
producing assets to minimise any potential
cash drag effect going forward.

2018 was a very active year for transactions,
with the vast majority completing in the
first half of the year as targeted. The Group
acquired properties with an aggregate
value of £73.3m (before costs), disposed of
properties for an aggregate value of £149.3m
(net of costs), and undertook £7.0m of
capital expenditure.

We executed the latest phase of our
borrowing strategy in the earlier part of
2018. This has resulted in a reduction in the
average cost of debt; increased and staggered
maturity dates; and increased flexibility,
whilst mitigating the risk of interest rate
increases. In August 2018, the Group further
diversified its funding base by the issue
of a 4.5% retail eligible bond quoted on
the London Stock Exchange Retail Bonds
platform. The Group successfully raised
£50.0m through the issue of this bond, which
is due in August 2024.

“ 2018 was a good year for
Regional REIT, generating a
record profit of £67.4m. We
have again delivered to our
Shareholders a sector leading
dividend with an attractive
total return. In line with our
strategic objectives, we have
refreshed the portfolio and
further increased occupancy,
whilst significantly reducing
the loan–to-value figure and
the cost of our debt. We have
created a strong platform
which should underpin our
momentum through both the
economic and geopolitical
uncertainty in the year
ahead”.

Kevin McGrath,
Chairman

2 CoStar UK Commercial Property Investment Review Q4 2018

The proceeds from the bond issuance have
since been deployed in part to settle the
£39.9m 6.5% Zero Dividend Preference Shares
(“ZDPs”) issued by the Company’s indirect
subsidiary, Regional REIT ZDP Plc, which
matured on 9 January 2019, and also the
early repayment of the Company’s £65m ICG
Longbow facility. The remaining £13m balance
of the ICG Longbow facility, at a rate of 5.0%,
was repaid during the year with a new £36.0m
10-year facility from Scottish Widows at a rate
of 3.4% and proceeds from property disposals.

These successful initiatives resulted in a
reduction in the Group’s weighted average
cost of debt including hedging costs, from
c.3.8% at 31 December 2018 (31 December
2017: 3.8%) to 3.5% following the
repayment of the ZDPs on 9 January 2019.

In line with the Group’s strategy for the year, we
reduced our overall net borrowings to 38.3% of
gross investments properties as at 31 December
2018. This was considerably lower than the year
end comparative for 2017 of 45.0% and was
predominately as a result of the realised gains
on the disposal of properties, coupled with the
increase in property valuations. We continue to
target a ratio of approximately 40%.

The combination of the above initiatives has
positioned the Group well for the next stage
of its development over the short to medium
term as it continues to successfully execute
its proven business model.

Market Environment
Following a strong start to the year,
investment in the regional markets continued
at pace in the second half of 2018. In the
final quarter of 2018, investment volumes
in the regions outside of London reached
£5.6 billion, up 8% on the previous quarter
and 13% above the quarterly average. This
brought total investment in the regional
markets in 2018 to £21.3 billion, the highest
figure recorded since 2006.

Increased investment has been underpinned
by strong occupier fundamentals in both
the office and industrial markets, with both
markets witnessing record levels of up-take in
2018. Overseas investment in the UK property
markets accounted for almost half (49%) of
total investment in 2018, according to data
from CoStar2. Despite ongoing uncertainty
surrounding Brexit, overseas investors
continued to take advantage of favourable
exchange rates, with investment in the final
quarter of 2018 reaching £8.1 billion, 16%
higher than the five-year average.

Strategic Report 10 - 57Annual Report and Accountsfor the year ended 31 December 2018Chairman’s Statement (continued)

The Asset Manager continues to see robust
occupational demand in the regional office
markets with high rates of tenant retention
as well as good levels of rental growth.
The Asset Manager has taken advantage of
historically strong pricing for light industrial
assets with tactical and opportunistic sales.
The proceeds of disposals have been recycled
into regional office assets which complement
the diversity of the tenant base.

Given the overarching backdrop of the
Brexit negotiations, the Board remains
supportive of the Asset Manager’s vigilant
and opportunistic approach to acquisitions
and disposals, whilst continuing to grow
underlying rental income and responding to
the needs of our tenants.

Dividends
The dividend is the major generator of the
total return. The Company declared total
dividends of 8.05pps for the year, comprising
of three quarterly dividends of 1.85pps each,
and a fourth quarterly dividend of 2.50pps,
an increase of c.3% on the previous year’s
total dividend. This represented a yield of
8.7% at a share price of 92.50p on the close
of 31 December 2018.

In the absence of unforeseen circumstances,
it remains the Board’s intention to pursue
a progressive covered dividend policy and
continue to pay quarterly dividends.

Shareholder Engagement
The Company has continued to develop its
relations with investors, engaging closely
with its Shareholders. The Company’s website
(www.regionalreit.com) was updated during
the latter half of 2018 to further enhance
communications with Shareholders.

Board of Directors
I am grateful to my fellow Directors for their
skills and expertise through this very active
year, during which we welcomed Frances
Daley as an Independent Non-Executive
Director on 1 February 2018. Frances has
brought extensive financial PLC experience to
the Board.

In accordance with the management
arrangements, the Asset Manager and
Investment Manager are each entitled
to a 50% share of a performance fee of
15% of total shareholder return in excess
of an annual hurdle rate of 8%. The
initial performance fee period ran from
6 November 2015 to 31 December 2018
resulting in an inaugural performance fee
crystallisation of £8.9m. Further details of
the performance fee can be found on pages
54 and 55.

Subsequent Events
On 10 January 2019, the Company
announced the repayment of the Regional
REIT ZDP Plc 6.5% ZDP shares in full,
totalling £39.9m, and in accordance with
its Articles of Association has been placed
into liquidation. This resulted in a reduction
in the weighted average cost of borrowing
(including hedging costs) from c. 3.8% to
c. 3.5%.

On 4 February 2019, the Company
announced the acquisition of Norfolk House
in Birmingham for £20.0m, with a net initial
yield of 7.9%. The building is 98.8% occupied
with a net income of c. £1.69m.

Outlook
The outlook for the Group remains positive.
We are a long-term business and whilst we
remain mindful of the uncertain political and
economic backdrop, we are also conscious of
market cycles and customers’ trends, and our
confidence is underpinned by the positioning
of our diversified asset base and customer
orientated business model.

For the remainder of 2019, the Group is
confident of achieving good returns for
Shareholders, by maintaining the momentum
of asset management initiatives and
continuing to grow income streams, all of
which should provide further opportunities
for capital value enhancement. The Group
remains alert to the opportunities for
potential acquisitions or disposals which may
arise in the near future.

Kevin McGrath

Chairman and Independent
Non-Executive Director

27 March 2019

Following an internal review of the Board’s
effectiveness and as part of a drive to ensure we
evolve appropriately with the development of
the Group, on 20 June 2018 Frances replaced
William Eason as the Chair of the Audit
Committee. William was appointed as the Chair
of the Company’s Management, Engagement
and Remuneration Committee and remains the
Senior Independent Non-Executive Director.
No other significant changes occurred during
the year and the view of the Board is that the
governance structure of the Group operates
effectively with a positive and open culture.
Corporate governance remains a key focus of
the Board and I am satisfied that we continue
to comply with the 2016 edition of the
Association of Investment Companies Code
of Corporate Governance (the “AIC Code”).
Further details on the Company’s compliance
with the AIC Code can be found in the
Corporate Governance Statement on page 68.

The Board, with the assistance of the
Company Secretary, will be undertaking a
full review of our governance against the
2019 version of the AIC Code, published in
February 2019, which applies to our financial
year commencing 1 January 2019, and we will
report further in due course.

The Board has been pleased with the
performance of both the Asset Manager and
Investment Manager, as well as the timing
and execution of both property transactions
and borrowings in an uncertain political and
economic environment.

Strong Relationships
We are a long-term business and ultimately
the experience of our tenants, suppliers and
the communities in which we operate will
influence our performance. Our overriding
aim is to meet the needs and expectations of
our customers, coupled with endeavouring to
maintain strong working relationships with
our suppliers, whilst ensuring we are mindful
of our environmental impact.

Performance
The EPRA total accounting return
performance since listing on 6 November
2015 has amounted to 37.5%. The
Company has generated an annualised total
shareholder return of 10.6% with a 2018
total shareholder return of 16.6%. Total
shareholder return for 2018 was achieved by
our successful individual asset management
plans coming to fruition and associated
profits being realised, together with
unrealised investment property gains.

Strategic Report 10 - 57Annual Report and Accountsfor the year ended 31 December 2018Property Name: Templeton On The Green, Glasgow
Sector: Office

Investment Strategy and Business Model

The Group will invest in, actively manage and dispose of offices and
industrial properties – or debt portfolios secured on such properties
– located predominantly in the regional centres of the UK.

Strategic Report 10 - 57Annual Report and Accountsfor the year ended 31 December 2018INVESTMENTPOLICYINVESTMENTSTRATEGYBORROWINGSOBJECTIVESInvestment Strategy and Business Model (continued)

INVESTMENT STRATEGY

The Group aims to acquire a portfolio of interests that, together, offers Shareholders a diversification of investment risk, by
investing in a range of geographical areas and sectors across a number of assets and tenants and through letting properties,
where possible, to low-risk tenants.

The Group will use gearing, borrowings and other sources of leverage, to implement its investment strategy and enhance
equity returns.

INVESTMENT POLICY

The Group will invest in office and light industrial properties that are situated in the UK and outside of the M25 motorway.

The Group may also invest in property portfolios in which up to 50% of the properties (by market value) are situated inside
the M25 motorway.

In the ordinary course of business, no single property will exceed 10% of the Group’s Gross Investment Properties Value at
the time of the investment; exceptionally, the Board may consider taking this up to 20%.

The normal minimum value for a single property investment is £5m, except where an asset is within a portfolio of
properties for which there shall be no such minimum.

No more than 20% of the Gross Investment Properties Value shall be exposed to any one tenant or group undertaking of
that tenant.

Speculative development (properties under construction, but excluding refurbishment, which have not been pre-let) is
prohibited. Any other development is restricted to an aggregate maximum of 15% of Gross Investment Properties Value at
investment or commencement.

INVESTMENT OBJECTIVE

The Investment Objective of the Company is to deliver an attractive total return to Shareholders of greater than 10% per
annum, with a strong focus on income from investing in UK commercial property, predominantly in the office and industrial
sectors in major regional centres and urban areas outside of the M25 motorway.

BORROWINGS

The Group targets a ratio of net borrowings to Gross Investment Properties Value of 40% over the longer term, with a
maximum limit of 50%.

Strategic Report 10 - 57Annual Report and Accountsfor the year ended 31 December 2018Investment Strategy and Business Model (continued)

Opportunistic
approach to the
property market

Regions
remain
strong

Investing in
income-producing
assets

Highly
experienced asset
manager

Business
Model

Diversiﬁed
Portfolio

Active
management of
the properties

Regions Remain Strong

OUR APPROACH

That the “regions remain strong” in UK commercial real estate, believing that capital inflows into the regions will
grow, the UK domestic economy will continue to remain robust and tenant demand for offices and industrial sites
will outweigh available supply.

Regional offices have outperformed central London offices, delivering superior returns of 11.5% in 2018 compared
to 5.3% – a trend that has been witnessed over the last three years.

HOW WE ADD VALUE

The investment policy focuses on a balanced portfolio of offices and light industrial sites located outside of the
M25 motorway, broadly based on the region’s economic worth and population mix.

The Group seeks to enhance income growth and capital values through the services of the Asset Manager.

The Asset Manager operates through a number of regional offices, implementing a targeted investment policy and
each property’s asset management plan.

Total Shareholder Return of 37.5% since IPO and 10.6% annualised in 2018 (8.8% in 2017).

Strategic Report 10 - 57Annual Report and Accountsfor the year ended 31 December 2018Investment Strategy and Business Model (continued)

Opportunistic Approach to the Property Market

OUR APPROACH

A focus on exploiting pricing inefficiencies and mismatches between regional core and core plus and primary
property yields.

From such opportunities, the Group will acquire, hold and sell commercial real estate that it believes to be
mispriced and have good income and capital growth prospects.

Utilising leverage to build the acquisitions capability of the business.

HOW WE ADD VALUE

An opportunistic approach to UK commercial property and the recycling of capital from the legacy portfolio, aiming
to acquire properties where the Group can add value through the expertise of the Asset Manager.

Seeking to build the income growth and capital values of properties, taking undermanaged and underinvested
properties to being attractive investments to be retained for yield or for disposal.

An established borrower with long-term relationships in place with a number of UK banks. The Group will exploit
opportunities to improve total returns utilising leverage.

With debt maturing and opportunities to renegotiate existing facilities, the Group aims to reduce its funding costs.

Completed acquisitions in 2018 totalled £73.3m (before costs) and disposals (net of costs) of £149.3m, with
average net initial yields of c. 8.7% and c. 5.7% respectively.

During 2018, debt facility payments totalled £101.5m, new borrowings were £102.9m, resulting in total
borrowings of £380.3m. The average funding costs (including hedging) remained in line with 2017 at 3.8%.

Strategic Report 10 - 57Annual Report and Accountsfor the year ended 31 December 2018Investment Strategy and Business Model (continued)

Investing in Income Producing Assets

OUR APPROACH

The Group has a strict set of investment criteria to invest, predominantly, in income producing assets capable of
delivering an attractive total return to our Shareholders.

HOW WE ADD VALUE

Investment decisions are based on identifying strong underlying fundamentals, including inter alia; prospects for
future income growth; sector and geographic prospects; lease length; initial and equivalent yields; and the potential
for active asset management.

Speculative development strictly limited to refurbishment programmes.

Contracted rental income of £59.7m as at end 2018 (31 December 2017: £61.9m).

Average rents have increased to £9.40 per sq. ft. (31 December 2017: £8.18 per sq. ft.)

Declared dividends per share of 8.05p for 2018 (7.85p in 2017).

Active Management of the Properties

OUR APPROACH

The Group prides itself on maintaining a close relationship with its tenants and in the intensive granular
management of its properties, a very hands-on approach.

Our aim is to provide a consistent approach to improving returns, thereby enhancing the quality of the underlying portfolio.

HOW WE ADD VALUE

The Asset Manager undertakes all of the principal property management activities in-house and remains close to its
tenants, with an immediate understanding of their requirements and better decision-making capability.

The Managers can respond in the best interests of the Group and its Shareholders.

The Asset Manager utilises a range of approaches to each asset, tailoring the project programme for each property.

Net capital expenditure of £7.0m in 2018 (£13.4m in 2017); much capital expenditure is recovered through
dilapidations, service charges or improved property rental income.

Active and intense asset management to improve occupancy: from 85.0% (by value) (31 December 2017) to
87.3% (31 December 2018).

Strategic Report 10 - 57Annual Report and Accountsfor the year ended 31 December 2018Investment Strategy and Business Model (continued)

Diversified Portfolio

OUR APPROACH

A distinctive large and diverse commercial property portfolio.

An approach that diversifies the investment risk of the portfolio and enables better management of the timing of
lease re-gears and new lettings.

HOW WE ADD VALUE

The portfolio consists of offices and light industrial units, geographically well spread across the regions of the UK
outside of the M25 motorway and with a broad mix of tenants.

150 properties, 1,192 units and 874 tenants as at 31 December 2018.

The largest single property is only 4.6% of the Gross Investment Properties value and the largest tenant
only 2.7% of Gross Rental Income.

England & Wales represent 82.0% of the Gross Investment Properties value (31 December 2017: 77.6%);
offices and industrial sites are 91.6% (31 December 2017: 90.6%). Scotland represents the remainder.

Highly Experienced Asset Manager

OUR APPROACH

The Asset Manager has the heritage of a long-established property investment management company.

HOW WE ADD VALUE

The capabilities and track record of the management team, including knowledge, expertise and established
relationships, provide an important competitive advantage for operating in the fragmented UK regional secondary
property market.

The senior management team of the Asset Manager collectively have over 180 years of property experience, with a
proven record of creating value.

Management grew property rental income for a similar portfolio on a like-for-like basis through the 2008-12
recession.

LSI is based in Glasgow and has a number of offices around the UK, with the vast majority of the 64 staff
employed, as at 31 December 2018, working on Regional REIT.

Strategic Report 10 - 57Annual Report and Accountsfor the year ended 31 December 2018Property Name: Ashby Park, Ashby De La Zouch
Sector: Office

Asset and Investment Managers’ Report

“ Regional REIT has had another strong year. Our strategic decision to sell c.47% of
our industrial portfolio into what we identified as an overheated market, together
with some non-core assets, has generated substantial profits (c. 21%) over our
December 2017 valuation. We continue to identify off-market acquisition targets
offering value and have been able to re-invest in quality assets with additional
asset management opportunities. We continue to increase the geographic spread
of our assets and remain focussed on creating as wide a spread as possible in the
quality and diversity of our tenants. We have in the year successfully delivered
a number of asset management projects, most notably the refurbishment of
the office building at Aztec West, and we have recently announced lettings for
c. 86% of the building.

We continue to implement our successful approach to intensive asset
management with our initiatives again achieving increased occupancy. We have
yet to see any notable difference to occupier demand for our assets as a result
of the continuing Brexit negotiations but are monitoring events and can react if
necessary to maintain and improve occupancy of the Company’s assets. Our unique management platform ensures that we
will be better placed to deal with any changes resulting from this better than our rivals and peer group. We remain confident
that our continuing strategy and the strength of our core regional office and light industrial property markets will continue
to deliver strong income and capital growth opportunities for our investor.”

Stephen Inglis,
Chief Executive Officer of London & Scottish Investments, the Asset Manager of Regional REIT Limited.

Highlights from 2018:
• Occupancy rate (by value) up 2.7% to 87.3% as at 31 December
2018, an increase from 85.0% from the previous 12 months.

•

Average rent by let sq. ft. up by 14.9% from £8.18 per sq. ft. in
December 2017 to £9.40 per sq. ft. in December 2018.

Valuation increase of 4.5% on a like-for-like basis from the prior
year, adjusting for capital expenditure and disposals during the
period.

Increase of retention of income to 74% (by value) as at
31 December 2018, up from 64% in December 2017.

The lease renewals throughout 2018 achieved an uplift in
contracted rental income of 4.2%.

2018 has been another incredibly active year for the Company,
which has been reflected in a strong set of results. Disposals in 2018
totalled £149.3m (net of costs) at an average net initial yield of
c. 5.7% (December 2017: 6.3%). The Group took a countercyclical
view regarding our industrial portfolio and continued our proactive
sales programme by disposing of 23 industrial properties during the
year. We have also continued to redeploy proceeds throughout 2018
and carefully select assets where we can add value and drive yields,
with property acquisitions in 2018 of £73.3m (before costs), with a
weighted average net initial yield of c. 8.7% (December 2017: 7.9%).
As a result, we have demonstrated our ability to identify arbitrage
opportunities between disposal yields and acquisition yields, whilst
maintaining our income accretive strategy. Our outlook for 2019 is
optimistic, despite wider political and economic uncertainty and,
looking forward, the Company will continue to identify value in the
market with a focus on income.

Investment Activity in UK Commercial Property
Investment in the UK commercial property market reached
£61.8 billion in 2018, according to research from Lambert Smith
Hampton (“LSH”)3, 3% higher than 2017 volumes and 4% above the
five-year average, resulting in the second largest annual figure in a
decade (after 2015). Although investment in the final quarter of 2018
was slightly lower than Q3 2018 volumes, investment in H2 2018
reached £33.6 billion, indicating an increase of 19% when compared to
H1 2018, which helped boost overall investment figures for 2018. 2018
proved to be another strong year for investment in portfolio deals, with
investment totalling £14.0 billion in 2018, up 3% on 2017. Investment
in portfolios was particularly strong in the final quarter of 2018,
reaching £4.0 billion, 10% higher than the five-year quarterly average.

Following a strong start to the year, investment in the regional markets
continued at pace in the second half of 2018. In the final quarter of
2018, investment volumes in the regions outside of London reached
£5.6 billion, up 8% on the previous quarter and 13% above the quarterly
average. This brought total investment in the regional markets in 2018
to £21.3 billion, the highest figure recorded since 2006. LSH research
notes that annual investment in 2018 was above the average volume in
each of the UK’s regional markets, with the largest increase in regional
investment occurring in the North East and the East Midlands, with
2018 investment volumes 61% and 52% above average, respectively.

3 https://www.lsh.co.uk/-/media/files/lsh/research/2019/2019-01-10584-ukit-q42018.ashx?la=en&hash=818DC1417D4DD899079049E9CFECE3BBFCF19C4C

Strategic Report 10 - 57Annual Report and Accountsfor the year ended 31 December 2018Asset and Investment Managers’ Report (continued)

The previous evidence of strong regional investment throughout 2018 has been followed by muted investment at the beginning of 2019. The
expected pre-Brexit “rush to market” appears to be followed by the expected period of potential investors taking a “wait and see” position.
Provisional figures from Property Data shows a sharp decline of 43% in the volume of UK investment deals in the first two months of 2019
when compared to the same period in 20184. Overall, Property Data recorded £4.29 billion of deals in the first two months of 2019, with the
decline in investment volumes more significant in the central London office market. Additionally, data from Calastone reveals that real estate
funds saw an outflow of £1.1 billion in the five months ending February 20195.

Quarterly Investment Volumes

2018 Volumes vs Five-year Average

-20

-40

-60

-80

Shopping
centre

All
retail

Business
park

Retail
warehouse

Hotels
&
leisure

Shops

Mixed
-use

Distribution
warehouse

All
property

Central
London
ofﬁces

All
ofﬁce

Rest of
South
East
ofﬁces

Rest of
UK
ofﬁces

All
industrial

South
East
industrial

Specialist

Rest of
UK
industrial

Figure 2: Lambert Smith Hampton (February 2019)

Overseas investment in the UK property markets accounted for almost half (49%) of total investment in 2018, according to data from CoStar6.
Despite ongoing uncertainty surrounding Brexit, overseas investors continued to take advantage of favourable exchange rates, with investment
in the final quarter of 2018 reaching £8.1 billion, 16% higher than the five-year average. Figures from CoStar indicate that 2018 was a record
year for capital inflows from South Korea and Singapore, which helped support overall Far East investment during the year despite a fall in
spend from China/Hong Kong. Conversely, North American investors became net sellers in 2018. LSH estimate that total overseas investment
for 2018 reached £27.9 billion, 33% higher than the 10-year average.

Research from CBRE indicates that regional offices have outperformed in comparison to central London offices, delivering superior returns
of 11.5% in 2018 in comparison to central London office returns of 5.3% – a trend that has been witnessed over the past three years.
Outperformance reflected better capital returns (driven by rental growth) as well as rental growth of 2.2% in the regions, which was above the
1.1% witnessed in the Central London office market. The Asset Manager expects this trend to continue, enabling Regional REIT to capitalise on
greater returns as a result of the Group’s size and spread of assets throughout the UK’s regional markets.

4 https://www.propertyweek.com/news/investment-volumes-plunge-ahead-of-brexit/5101760.article
5 https://www.propertyweek.com/news/real-estate-funds-see-five-consecutive-months-of-capital-outflows-/5101749.article
6 CoStar UK Commercial Property Investment Review Q4 2018

Strategic Report 10 - 57Annual Report and Accountsfor the year ended 31 December 201825201510050604020-20-40Five-Year Quarterly Average% Quarterly AverageAll Property2014Q12018Q42014Q22014Q32014Q42015Q12015Q22015Q32015Q42016Q12016Q22016Q32016Q42017Q12017Q22017Q32017Q42018Q12018Q22018Q3£ billion%Figure 1: Lambert Smith Hampton (February 2019)Asset and Investment Managers’ Report (continued)

Central London & Regional Office Returns (12 months to December 2018)

22.9%

19.3%

18.5%

16.3%

12.0%

11.5%

8.0%

5.3%

0.9%

2.7%

2014

2015

2016

2017

2018

Figure 3: CBRE (February 2019)

Total Return Relatives: RoUK vs Central London Offices

-2

-4

-6

-8

-10

Dec 13

Figure 4: CBRE (February 2018)

Dec 14

Dec 15

Dec 16

Dec 17

Dec 18

Central London ofﬁces

Rest of UK ofﬁces

Total return relative

Occupational Demand in the UK Regional Office
Market
Savills estimates that take-up of office space across nine regional office
markets7 reached 7 million sq. ft., 3% higher than the 6.8 million sq. ft.
recorded in 2017, and 25% above the 10-year average. Occupational
demand was driven by the public sector, with another strong year of take-
up from Central Government, which included the final two Government
Property Unit (GPU) deals8, resulting in the public sector accounting for
the highest proportion of take-up at 18%. Following the public sector,
the technology, media & telecoms sector and the business & consumer
services sector accounted for the second and third largest proportion of
take-up in the regional cities, accounting for 11% and 10% respectively.
Demand for regional office space also grew within the flexible workspace
sector; Cushman & Wakefield expect this trend to continue, with flexibility
becoming a key driver of leasing activity9. Additionally, GVA predicts that
take-up in the flexible workspace sector will be over 0.5 million sq. ft. in
2019 for the third year in a row.

According to Cushman & Wakefield, a lack of quality stock in the
regional cities will continue to put a downward pressure on vacancy
levels. The supply of offices in the core regional markets remains
low. Savills10 research indicates that occupier demand continues to
reduce availability, with total availability falling by 14% in 2018 to
11.5 million sq. ft. across nine regional office markets, 27% below the
10-year average. This marks the fifth consecutive year that supply of
office stock has declined.

The most recent Deloitte Crane Survey (January 2019), suggests
heightened construction activity in certain regional cities
(Birmingham, Manchester, Leeds and Belfast); with a total
of approximately 4.7m sq. ft. of office space currently under
construction. However, although the supply of office stock is likely to
increase, a considerable proportion of office buildings currently under
construction are already pre-let. Therefore, there is likely to remain
a shortage of office stock, with Cushman & Wakefield11 highlighting
that the vacancy rate for new and refurbished stock in the regions
is only 1.9%, which has driven pre-let activity. The expectation is
that demand for pre-lets will increase across the regional markets.
According to GVA, build cost inflation and future economic
uncertainty are continuing to restrict new development12.

7 Nine regional office markets mentioned by Savills include: Aberdeen, Birmingham, Bristol, Cambridge, Cardiff, Edinburgh, Glasgow, Leeds and Manchester
8 https://www2.avisonyoung.co.uk/media/55201/the-big-nine-q4-2018.pdf
9 http://www.cushmanwakefield.co.uk/en-gb/research-and-insight/uk/united-kingdom-office-snapshot
10 Savills, Regional Office Market Q4 2018
11 Cushman & Wakefield, UK Pre-Let Report- Race for Space 2019
12 https://www2.avisonyoung.co.uk/media/55201/the-big-nine-q4-2018.pdf

Strategic Report 10 - 57Annual Report and Accountsfor the year ended 31 December 2018Asset and Investment Managers’ Report (continued)

The Asset Manager believes that the current supply/demand dynamics within the regional office markets will remain unchanged and that the
lack of supply for prime stock will continue to drive demand for recently refurbished and good quality core and core plus office space in good
locations throughout the regional markets.

Demand: Annual Office Take-Up by Region

Supply: Annual Office Supply by Region

.
t
f

q
s
n
o

i
l
l
i

m
p
u
-
e
k
a
T

2009

2008
Aberdeen
Edinburgh

2010
2011
Birmingham
Glasgow

2012

2013

Bristol
Leeds

2015

2014
Cambridge
Manchester

2016

2017

2018

Cardiff
10-year
average

.
t
f

q
s
n
o

i
l
l
i

m
y
l

p
p
u
S

2009

2008
Aberdeen
Edinburgh

2011
2010
Birmingham
Glasgow

2012

2013

Bristol
Leeds

2015

2014
Cambridge
Manchester

2016

2017

2018

Cardiff
10-year
average

Figure 5: Savills (February 2019)

Figure 6: Savills (February 2019)

Rental Growth in the UK Regional Office Market
A lack of availability in the Big Nine regional markets has put an
upward pressure on headline rents as well as a downward pressure on
rent incentives, which has led to an increase of 4.1% in city centre net
effective rents over the last 12 months, according to GVA13.

The CBRE Monthly Index shows that rental value growth for the rest of
UK office markets in the 12 months ending December 2018 was 2.2%,
higher than the 1.1% rental growth for central London offices. Cushman
and Wakefield expect rental growth in the regions to continue to be
fuelled by strong demand, but anticipate that rents in core London
markets will remain under pressure14. Similarly, Colliers International
expects the rest of the UK and South East office markets to sustain
positive rental growth over the 2019-2022 period15. The Asset Manager
believes regional office markets will continue to experience rental
growth and that supply shortages for Grade A space will result in an
uplift in rents for good quality core and core plus properties.

Regional REIT’s Office Assets
Occupancy by value of the Group’s regional offices rose to 86.5%
(31 December 2017: 83.2%); occupancy by area was 84.4%
(31 December 2017: 82.4%). A like-for-like comparison of the
Group’s regional offices occupancy by value, 31 December 2018
versus 31 December 2017, shows that occupancy increased to 85.3%
(31 December 2017: 84.1%). WAULT to first-break was 3.0 years
(31 December 2017: 3.1 years); like-for-like WAULT to first break was
2.9 years (31 December 2017: 3.1 years).

Occupier Demand Strengthens in the UK
Industrial Market
Take-up in the final quarter of 2018 totalled 11.1 million sq. ft.,
pushing annual take-up during 2018 to 35.9 million sq. ft., a 30%
increase from 2017 levels and the highest annual take-up recorded
since 2008. Although the same number of deals took place in both
2018 and 2017, take-up increased by 30% due to a number of large
‘built to suit’ deals increasing the average deal size to 191,000 sq.
ft.. CBRE16 research shows that 37% of take-up was within the East
Midlands – the highest proportion for a region since 2006. Following
this, Yorkshire, North East, and South East all recorded a strong
performance in terms of take-up throughout 2018.

Occupier demand within the industrial market continues to benefit
from growth in online shopping, as online retailing currently accounts
for 18.8% of total retail sales in the UK, according to the ONS17.
Cushman and Wakefield research highlights that eRetailers were the
most active in terms of take-up throughout 2018, accounting for 26%
of annual take-up.

In terms of development, CBRE indicates that availability levels rose
in 2018 due to an increase in speculative development schemes.
Cushman & Wakefield research suggests that for 2019, there is
approximately 6.9 million sq. ft. of space under construction, 17%
above the five-year average.

13 https://www2.avisonyoung.co.uk/media/55201/the-big-nine-q4-2018.pdf
14 http://www.cushmanwakefield.co.uk/en-gb/research-and-insight/uk/united-kingdom-office-snapshot
15 https://www.colliers.com/-/media/files/emea/uk/research/market-overview/colliers_international_real_estate_investment_forecasts_q4_2018.pdf?la=en-GB
16 https://www.cbre.co.uk/research-and-reports/United-Kingdom-Logistics---The-Property-Perspective-H2-2018
17 https://www.ons.gov.uk/businessindustryandtrade/retailindustry/bulletins/retailsales/january2019#whats-the-story-in-online-sales

Strategic Report 10 - 57Annual Report and Accountsfor the year ended 31 December 2018

Asset and Investment Managers’ Report (continued)

Industrial Rental Growth Continues
Research by BNP Paribas Real Estate illustrates that competition for
standard industrial space led to rental growth in 2018. The research
compared data from the monthly MSCI Index for December 2018,
which showed rental growth of 4.6% for the 12 months to the end of
December 2018, indicating acceleration from the 1.3% rental growth
recorded for the three months to June 2018. Colliers International
estimate that further rental growth in the industrial market during
2019 is likely18.

The Investment Property Forum UK Consensus Forecast, February
2019, anticipates rental growth in the industrial sector of 2.0% in
2019, providing evidence of sustained growth. Additionally, the
IPF UK Consensus Forecast predicts 2.2% and 2.0% average rental
growth rates respectively for 2020 and 2021. In comparison, the IPF
UK Consensus Forecast predicts that the All Property average annual
rental value growth expected for 2019 is 0.2%.

Regional REIT’s Industrial Assets
Occupancy by value of the Group’s industrial sites increased to
88.6% (31 December 2017: 87.9%); occupancy by area also increased
to 88.0% (31 December 2017: 86.4%). A like-for-like comparison
of the Group’s industrial sites’ occupancy by value, 31 December
2018 versus 31 December 2017, shows that occupancy fell to 87.7%
(31 December 2017: 89.1%). In part, this reduction in like-for-like
occupancy is due to the Group’s sales programme during the year,
which included the disposal of some fully let mature assets as well as
some vacant properties. The reduction can also be attributed to one
lease expiry at Southview/Southstar, Aberdeen (20,825 sq. ft), which
was fully anticipated in our projections. WAULT to first break was
5.4 years (31 December 2017: 4.1 years); like-for-like WAULT to first
break was 5.1 years (31 December 2017: 5.1 years).

18 https://www.colliers.com/-/media/files/emea/uk/research/market-overview/colliers_international_property_snapshot_january_2019.pdf?la=en-GB

Strategic Report 10 - 57Annual Report and Accountsfor the year ended 31 December 2018Asset and Investment Managers’ Report (continued)

Property Portfolio
As at 31 December 2018, the Group’s property portfolio was valued at
£718.4m (31 December 2017: £737.3), with contracted rental income
of £59.7m (31 December 2017: £61.9m), and an occupancy rate by
value of 87.3% (31 December 2017: 85.0%). Occupancy by area
amounted to 85.5% (31 December 2017: 84.3%). EPRA occupancy
increased to 89.4% (31 December 2017: 88.2%).

On a like-for-like basis, 31 December 2018 versus 31 December 2017,
occupancy by value was 86.4% (31 December 2017: 85.5%) and
occupancy by area was 84.6% (31 December 2017: 84.4%).

There were 150 properties (31 December 2017: 164), in the portfolio,
with 1,192 units (31 December 2017: 1,368) units and 874 tenants
(31 December 2017: 1,026). If the portfolio was fully occupied at
Cushman & Wakefield’s and Jones Lang LaSalle’s view of market rents,
the contracted rental income would be £70.0m per annum as at
31 December 2018 (31 December 2017: £73.8m).

As at 31 December 2018, the net initial yield on the portfolio was
6.5% (31 December 2017: 6.5%), the equivalent yield was 8.2%
(31 December 2017: 8.3%), and the reversionary yield was 8.8%
(31 December 2017: 9.2%).

Sector

Properties

Valuation
(£m)

% by
valuation

Sq. ft.
(mil)

(by value)
(%)

(by area)
(%)

(EPRA)
(%)

Occupancy

WAULT
to first
break
(yrs)

Gross
rental
income
(£m)

Average
rent
(£psf)

ERV
(£m)

Capital
rate
(£psf)

Yield (%)

Net
initial Equivalent Reversionary

Office

106

546.4

76.1 4.32

111.3

50.8

9.9

15.5

2.46

86.5

88.6

84.4

88.2

88.0

94.5

7.1 0.52

92.1

89.8

92.3

1.4

0.12

59.1

95.0

3.0

5.4

3.9

8.3

46.2 12.66 55.0 126.35

7.9

3.63

5.0 10.55

9.1

5.1

45.18

97.22

0.7

9.85

0.8 80.28

150 718.4

100.0 7.43

85.5

89.4

3.4

59.7

9.40 70.0 96.64

Industrial

Retail

Other

Total

6.6

5.1

8.3

6.3

6.5

8.4

7.2

8.5

7.4

8.2

9.2

7.2

8.8

7.3

8.8

Property Portfolio by UK Region

Location

Properties

Valuation
(£m)

% by
valuation

Sq. ft.
(mil)

(by value)
(%)

(by area)
(%)

(EPRA)
(%)

Occupancy

WAULT
to first
break
(yrs)

Gross
rental
income
(£m)

Average
rent
(£psf)

ERV
(£m)

Capital
rate
(£psf)

Yield (%)

Net
initial Equivalent Reversionary

Scotland

South East

North East

Midlands

North West

South West

Wales

Total

129.0

213.0

98.9

111.8

76.4

69.5

19.7

18.0

1.66

29.7

1.55

13.8

1.31

15.6

1.28

84.6

94.2

82.6

90.0

78.6

84.6

94.9

95.8

87.6

87.5

88.9

90.5

10.6 0.94

75.1

74.7

82.8

9.7 0.45

2.7 0.25

89.7

90.0

78.7

87.9

3.4

3.0

3.1

5.6

3.3

6.5

12.0

9.22 14.6

77.62

17.4 11.83 18.9 137.54

7.9

9.6

5.3

6.88 10.0 75.36

8.47

10.1

87.55

7.52

7.8 81.43

5.9 14.66

6.8 154.62

1.6

8.33

1.7 80.43

7.1

6.9

6.1

6.7

5.0

6.0

7.3

6.5

9.3

7.4

8.7

8.0

8.8

8.1

7.5

8.2

10.6

7.5

9.4

8.2

9.4

9.1

7.8

8.8

150 718.4

100.0 7.43

Tables may not sum due to rounding.

94.9

87.3

88.8

88.5

87.3

85.5

89.4

3.4

59.7

9.40 70.0 96.64

Strategic Report 10 - 57Annual Report and Accountsfor the year ended 31 December 2018Asset and Investment Managers’ Report (continued)

Top 15 Investments (market value) as at 31 December 2018

Property

Sector

Anchor tenants

Tay House,
Glasgow

Office

Barclays Bank Plc, University
of Glasgow

Juniper Park,
Basildon

Industrial

Genesis Business
Park, Woking

Office

Buildings 2 & 3
HBOS Campus,
Aylesbury

Hampshire
Corporate Park,
Eastleigh

Office

Schenker Ltd, A Share &
Sons Ltd, Vanguard Logistics
Services Ltd

Wick Hill Ltd, Alpha
Assembly Solutions UK
Ltd, McCarthy & Stone
Retirement Lifestyles Ltd

Bank of Scotland Plc, The
Equitable Life Assurance
Society, Agria Pet Insurance
Ltd

Aviva Health UK Ltd, The
Royal Bank of Scotland Plc,
Daisy Wholesale Ltd, Utilita
Energy Ltd

Market
value
(£m)

% of
portfolio

Lettable
area
(sq. ft.)

Let by
area
(%)

Let by
rental
value
(%)

Annualised
gross rent
(£m)

% of
Gross
rental
income

WAULT to
first break
(years)

33.2

4.6

156,933

87.7

87.5

2.5

4.2

3.2

29.3

4.1

277,228

98.4

97.0

2.0

3.4

1.3

24.9

3.5

98,359

100.0

1.9

3.3

2.7

24.7

3.4

140,676

92.5

92.6

2.2

3.6

4.0

19.7

2.7

85,422

99.2

99.5

1.4

2.4

1.7

800 Aztec West,
Bristol

Office

Edvance SAS, The Secretary
of State for Defence

17.2

2.4

73,292

86.7

86.3

One & Two
Newstead Court,
Annesley

Road 4 Winsford
Industrial Estate,
Winsford

Columbus House,
Coventry

Office

E.ON UK Plc

16.4

2.3

146,262

100.0

Industrial

Jiffy Packaging Ltd

15.6

2.2

246,209

100.0

Office

TUI Northern Europe Ltd

13.5

1.9

53,253

100.0

Ashby Park, Ashby
De La Zouch

Office

Ceva Logistics Ltd, Hill Rom UK
Ltd, Alstom Power Ltd

13.3

1.9

91,752

100.0

1.3

1.4

1.0

1.4

1.1

2.2

4.2

2.4

1.6

15.7

2.3

1.8

5.0

1.8

Portland Street,
Manchester

Office

Tokenspire
Business Park,
Beverley

Industrial

Templeton On The
Green, Glasgow

Office

Oakland House,
Manchester

Office

The Brunel Centre,
Bletchley

Retail

Total

New College Manchester
Ltd, Mott MacDonald Ltd,
Darwin Loan Solutions Ltd

QDOS Entertainment
(Pantomimes) Ltd, Sargent
Electrical Services Ltd,
TAPCO Europe Ltd

The Scottish Ministers, The
Scottish Sports Council, Heidi
Beers Ltd, Fore Digital Ltd

HSS Hire Service Group
Ltd, Please Hold (UK) Ltd,
CVS (Commercial Valuers &
Surveyors) Ltd, Rentsmart Ltd

Wilkinson Hardware Stores
Ltd, Poundland Ltd, Boots The
Chemist Ltd, WHSmith Plc

13.3

1.8

54,959

100.0

96.9

0.8

1.3

2.5

11.0

1.5

322,211

97.4

96.7

0.9

1.4

0.9

11.0

1.5

141,320

93.7

92.7

1.2

2.0

4.3

10.7

1.5

167,247

77.9

77.1

1.0

1.8

4.1

10.4

1.5

98,351

90.8

94.0

1.0

1.6

264.0

36.7 2,153,474

95.0

94.0

21.0

35.2

3.4

3.5

Tables may not sum due to rounding.

Strategic Report 10 - 57Annual Report and Accountsfor the year ended 31 December 2018Asset and Investment Managers’ Report (continued)

Top 15 Tenants (share of rental income) as at 31 December 2018

Tenant

Property

Barclays Bank Plc

Tay House, Glasgow

Bank of Scotland Plc

Buildings 3 HBOS Campus, Aylesbury
High Street, Dumfries

E.ON UK Plc

One & Two Newstead Court, Annesley

TUI Northern
Europe Ltd

The Scottish
Ministers

Columbus House, Coventry

Calton House, Edinburgh
Quadrant House, Dundee
Templeton On The Green, Glasgow
The Courtyard, Falkirk

The Royal Bank of
Scotland Plc

Hampshire Corporate Park, Eastleigh
Cyan Building, Rotherham

WAULT
to first
break
(years)

Lettable
area
(sq. ft.)

Annualised
gross rent
(£m)

% of Gross
rental
income

2.9

78,044

3.2

92,978

1.6

146,262

1.6

1.5

1.4

2.7

2.4

5.0

53,253

1.4

2.3

2.5

111,076

1.3

2.2

2.7

88,394

1.2

2.0

Sector

Financial and
insurance
activities

Electricity, gas,
steam and air
conditioning
supply

Professional,
scientific and
technical
activities

Public sector

Financial and
insurance
activities

Jiffy Packaging Ltd

Road 4 Winsford Industrial Estate, Winsford

Manufacturing

SPD Development
Co Ltd

Clearblue Innovation Centre, Bedford

Sec of State for
Communities &
Local Govt

Bennett House, Hanley
Cromwell House, Lincoln
Oakland House, Manchester

Fluor Limited

Brennan House, Farnborough

The Secretary of State
for Transport

Festival Court, Glasgow
St Brendans Court, Bristol

A Share & Sons Ltd

1-4 Llansamlet Retail Park, Swansea
Juniper Park, Basildon

Edvance SAS

800 Aztec West, Bristol

Professional,
scientific and
technical
activities

Public sector

Construction

Public sector

Wholesale and
retail trade

Electricity, gas,
steam and air
conditioning
supply

Aviva Health UK Ltd Hampshire Corporate Park, Eastleigh

Total

Table may not sum due to rounding.

insurance
activities

Financial and
insurance
activities

15.7

6.8

246,209

58,167

1.0

0.8

0.5

67,882

0.8

0.4

3.0

5.4

3.5

29,707

55,586

75,791

31,549

0.0

42,612

0.8

0.7

1.6

1.4

1.3

1.2

1.1

3.6

1,225,882

15.1

25.3

Lloyds Bank Plc

Victory House Meeting House Lane, Chatham Financial and

0.0

48,372

Strategic Report 10 - 57Annual Report and Accountsfor the year ended 31 December 2018Asset and Investment Managers’ Report (continued)

Property Portfolio Sector and Region Splits by Valuation and Income

By Valuation
As at 31 December 2018, 76.1% (2017: 67.3%) of the portfolio by
market value was offices and 15.5% (2017: 23.3%) was industrial.
The balance was made up of retail, 7.1%, and other, 1.4% (2017: retail
and other 9.4%). By UK region, as at 31 December 2018, Scotland
represented 18.0% (2017: 22.4%) of the portfolio and England 79.3%
(2017: 74.0%); the balance of 2.7% (2017: 3.6%) was in Wales. In
England, the largest regions were the South East, the Midlands and
the North East.

By Income
As at 31 December 2018, 77.3% (2017: 66.9%) of the portfolio by
income was offices and 13.2% (2017: 23.2%) was industrial. The
balance was made up of retail, 8.3%, and other, 1.2% (2017: retail
and other 10.0%). By UK region, as at 31 December 2018, Scotland
represented 20.1% (2017: 25.7%) of the portfolio and England 77.2%
(2017: 70.7%); the balance of 2.7% was in Wales (2017: 3.6%). In
England, the largest regions were the South East, the Midlands and
the North East.

Sector split by valuation 2018

Sector split by income 2018

Regional split by valuation 2018

Regional split by income 2018

Charts may not sum due to rounding.

Strategic Report 10 - 57Annual Report and Accountsfor the year ended 31 December 2018Ofﬁce (76.1%)Industrial (15.5%)Retail (7.1%)Other (1.4%)Ofﬁce (77.3%)Industrial (13.2%)Retail (8.3%)Other (1.2%)South East (29.1%)South West (9.9%)North West (8.8%)Wales (2.7%)Scotland (20.1%)Midlands (16.1%)North East (13.2%)South East (29.7%)North West (10.6%)South West (9.7%)Wales (2.7%)Scotland (18.0%)Midlands (15.6%)North East (13.8%)Asset and Investment Managers’ Report (continued)

Lease Expiry Profile
The WAULT on the portfolio is 5.4 years (2017: 5.4 years); WAULT
to first break is 3.4 years (2017: 3.5 years). As at 31 December 2018,
10.1% (2017: 14.1%) of income was from leases, which will expire
within 1 year, 4.4% (2017: 10.4%) between 1 and 2 years, 34.0%
(2017: 29.7%) between 2 and 5 years and 51.6% (2017: 45.8%) after
5 years.

Lease expiry income profile

Lease expiry income profile by year

Lease expiry to first break income profile by year

Charts may not sum due to rounding.

Strategic Report 10 - 57Annual Report and Accountsfor the year ended 31 December 20189432018765Contracted Rental Income (£m)20282027202620252024202320222020201920212029+14420861210Contracted Rental Income (£m)20282027202620252024202320222020201920212029+1-2 years (4.4%)5+ years (51.6%)2-5 years (34.0%)0-1 year (10.1%)Asset and Investment Managers’ Report (continued)

UK Property Locations as at 31 December 2018

Ofﬁce

Industrial

Retail

Other

Strategic Report 10 - 57Annual Report and Accountsfor the year ended 31 December 2018Asset and Investment Managers’ Report (continued)

No tenant represents more than 3.0% of the Group’s contracted rent
roll as at 31 December 2018, the largest being 2.7%.

Tenants by Standard Industrial Classification as at
31 December 2018
As at 31 December 2018, 11.5% of income was from tenants in the
professional, scientific and technical activities sector (2017: 10.6%),
10.4% from the administrative and support service activities sector
(2017: 8.7%), 10.1% from the wholesale and retail trade sector (2017:
13.8%), 9.6% from the public sector (2017: 8.9%) and 9.3% from
the banking sector (2017: 4.4%). The remaining exposure is broadly
spread.

Tenants by SIC Codes (% of gross rent)

Chart may not sum due to rounding.

* Other - Human health and social work activities; Not specified; Real estate activities; Other service activities; Arts; Entertainment and recreation; Accommodation
and food service activities; Public administration and defence; Compulsory social security; Activities of extraterritorial organisations and bodies; Water supply;
Sewerage; Waste management and remediation activities; and Residential.

Strategic Report 10 - 57Annual Report and Accountsfor the year ended 31 December 2018Professional, scientiﬁc and technical activities (11.5%)Administrative and support service activities (10.4%)Wholesale and retail trade (10.1%)Public sector (9.6%)Banking (9.3%)Information and communication (8.8%)Manufacturing (7.4%)Financial and insurance activities (other) (6.3%)Electricity, gas, steam and air conditioning supply (4.2%)Construction (3.7%)Transportation and storage (3.5%)Education (3.2%)Other (12.1%)Asset and Investment Managers’ Report (continued)

Top 15 Properties by Sector: Office

Tay House, Glasgow

Market value (£m) : 33.2

Sector : Office

Annualised gross rent (£m) : 2.5

Lettable area (sq. ft.) : 156,933

Anchor tenants : Barclays Bank Plc, University of Glasgow
Let by area (%) : 87.7
Let by value (%) : 87.5

WAULT (years) (to first break) 6.4 (3.2)

•
•
•

Secure Income – Barclays leases re-geared in December 2015, securing income until October 2021 at the earliest.
Break Option Removed – Removal of the University of Glasgow’s break option in September 2019, securing income until September 2024.
Tenant Expansion – Agreement for lease signed with the University of Glasgow to take 9,791 sq. ft. of additional space within the building
(First Floor East Wing) at a gross rental income of £18.50 per square foot (“psf”) for a ten-year term.

• Ongoing Asset Management – continue to market the remaining space on the first floor against the background of limited supply of large

open plan refurbished floor plates with the Glasgow city centre market. Explore potential of increasing Regus’ Spaces occupation.

Genesis Business Park, Woking

Market value (£m) : 24.9

Sector : Office

Annualised gross rent (£m) : 1.9

Lettable area (sq. ft.) : 98,359

Anchor tenants : Wick Hill Ltd, Alpha Assembly Solutions

UK Ltd, McCarthy & Stone Retirement
Lifestyles Ltd

Let by area (%) : 100.0
Let by value (%) : 100.0

WAULT (years) (to first break) : 6.0 (2.7)

•

•
•

Established Business Park – Genesis is the premier out-of-town office park in the town, situated approximately 1 mile from Woking town
centre.
Improving Rental Tone – Letting of part of ground floor in Unit 1 to Wick Hill Limited at £22.50 per sq. ft.
Asset Management Initiatives – Let balance of refurbished space. Seek to improve WAULT by removal of future break options.

Strategic Report 10 - 57Annual Report and Accountsfor the year ended 31 December 2018Asset and Investment Managers’ Report (continued)

Top 15 Properties by Sector: Office (continued)

Buildings 2 & 3 HBOS Campus, Aylesbury

Market value (£m) : 24.7

Sector : Office

Annualised gross rent (£m) : 2.2

Lettable area (sq. ft.) : 140,676

Anchor tenants : Bank of Scotland Plc, The Equitable Life
Assurance Society, Agria Pet Insurance
Ltd
Let by area (%) : 92.5
Let by value (%) : 92.6

WAULT (years) (to first break) : 5.0 (4.0)

•

Adding Value – Comprehensive refurbishment programme of Building 2 now completed with gross capital expenditure of c. £3.3m and
property now the best accommodation in the town.
Continued Letting Activity – Additional lettings on the fourth floor to Prospitalia and Identify Group. These tenancies provide a combined
gross rental income c. £160,000pa across 9,068 sq. ft. (Additionally, 5,380 sq. ft. of space is under offer at a gross rental income of £17psf for
a 10-year term).
Asset Management Initiative – Exercise underway to re-brand location and re-establish development in the local market as high-quality,
cost-effective office space in order to let remaining 10,553 sq. ft. of available space.

Hampshire Corporate Park, Eastleigh

Market value (£m) : 19.7

Sector : Office

Annualised gross rent (£m) : 1.4

Lettable area (sq. ft.) : 85,422

Anchor tenants : Aviva Health UK Ltd, The Royal Bank of

Scotland Plc, Daisy Wholesale Ltd, Utilita
Energy Ltd

Let by area (%) : 99.2
Let by value (%) : 99.5

WAULT (years) (to first break) : 3.2 (1.7)

•

Successful Refurbishment – Interior and exterior refurbishment of Hampshire House. By advance programming and marketing, the void
period for the building was limited to only five months whilst the works were ongoing.
Asset Management Initiatives – The local letting market remains strong and the supply of similar suitable properties is limited. (Agreement
for lease signed with Aviva Health UK for Chilworth House lease (42,612 sq. ft.) at a gross rental income of £22psf for a three-year term).

Strategic Report 10 - 57Annual Report and Accountsfor the year ended 31 December 2018Asset and Investment Managers’ Report (continued)

Top 15 Properties by Sector: Office (continued)

800 Aztec West, Bristol

Market value (£m) : 17.2

Sector : Office

Annualised gross rent (£m) : 1.3

Lettable area (sq. ft.) : 73,292

Anchor tenants : Edvance SAS, The Secretary of State for

Defence

Let by area (%) : 86.7
Let by value (%) : 86.3

WAULT (years) (to first break) : 9.8 (4.2)

•

Successful Refurbishment – Major “back to shell” refurbishment of the whole building completed in August 2018 into active Bristol market
with limited city centre supply.

• Major Lettings Secured – First floor (31,670 sq. ft.) pre-let to Edvance (EDF) on ten-year lease from August 2018 at a gross rental income of
£21.50psf with interest in other space. Following completion of refurbishment works, the Ground Floor (32,007 sq. ft.) has been let to The
Secretary of State for Defence on a ten-year lease from December 2018 at a gross rental income of £20.00psf.
Asset Management Initiative – Let balance of space and grow rental value of the property.

•

One & Two Newstead Court, Annesley

Market value (£m) : 16.4

Sector : Office

Annualised gross rent (£m) : 1.4

Lettable area (sq. ft.) : 146,262

Anchor tenants : E.ON UK Plc
Let by area (%) : 100.0
Let by value (%) : 100.0

WAULT (years) (to first break) : 6.6 (1.6)

• High Quality Assets – Two modern office pavilions in an established business park.
•

Securing Income Streams – New leases agreed with E.ON on both buildings until April 2025, with a review and tenant break options in May
2020. The renegotiated lease of Building 1 attained a 10% improvement in the rental rate.

Columbus House, Coventry

Market value (£m) : 13.5

Sector : Office

Annualised gross rent (£m) : 1.4

Lettable area (sq. ft.) : 53,253

Anchor tenants : TUI Northern Europe Ltd
Let by area (%) : 100.0
Let by value (%) : 100.0

WAULT (years) (to first break) : 5.0 (5.0)

•

Income Profile – Let to TUI until 2024 on a geared lease with fixed annual uplifts. TUI has sublet the entire space to First Utility that provides
an underpinning to the rent.
Asset Management Initiatives – Potential to agree lease surrender with TUI, with benefits of existing sublets to First Utility who have
recently been acquired by Shell Petroleum Company Limited.

Strategic Report 10 - 57Annual Report and Accountsfor the year ended 31 December 2018Asset and Investment Managers’ Report (continued)

Top 15 Properties by Sector: Office (continued)

Ashby Park, Ashby De La Zouch

Market value (£m) : 13.3

Sector : Office

Annualised gross rent (£m) : 1.1

Lettable area (sq. ft.) : 91,752

Anchor tenants : Ceva Logistics Ltd, Hill Rom UK Ltd,
Alstom Power Ltd

Let by area (%) : 100.0
Let by value (%) : 100.0

WAULT (years) (to first break) : 3.4 (1.8)

•

Fully Let – Dilapidations on the inherited vacated space agreed. Jigsaw agreed new lease over revised area with Dunwoody Airline Services
taking the remaining void.
Asset Management Initiatives – Seek to re-gear the lease with Ceva Logistics to secure longer income.

Portland Street, Manchester

Market value (£m) : 13.3

Sector : Office

Annualised gross rent (£m) : 0.8

Lettable area (sq. ft.) : 54,959

Anchor tenants : New College Manchester Ltd, Mott

MacDonald Ltd, Darwin Loan Solutions Ltd

Let by area (%) : 100.0
Let by value (%) : 96.9

WAULT (years) (to first break) : 3.8 (2.5)

•

Action Taken – Completed legacy issues from previous developer’s refurbishment. Building now fully let and improved rental level - now set
at £19.50/sq. ft.
Asset Management Initiatives – Opportunity to secure re-gears and rent reviews at increased rental levels.

Templeton On The Green, Glasgow

Market value (£m) : 11.0

Sector : Office

Annualised gross rent (£m) : 1.2

Lettable area (sq. ft.) : 141,320

Anchor tenants : The Scottish Ministers, The Scottish Sports

Council, Heidi Beers Ltd, Fore Digital Ltd

Let by area (%) : 93.7
Let by value (%) : 92.7

WAULT (years) (to first break) : 8.2 (4.3)

• Diversified Income – Multi-let to 39 tenants on 48 leases.
•
•

Reducing Vacancy – Occupancy by value has increased by 3.6% in the 12 months to 31 December 2018, reaching 92.7%.
Further Lettings – 11 lettings took place during 2018 to ten tenants, providing a combined gross rental income of c. £170,000 across
16,500 sq. ft.

Strategic Report 10 - 57Annual Report and Accountsfor the year ended 31 December 2018Asset and Investment Managers’ Report (continued)

Top 15 Properties by Sector: Office (continued)

Oakland House, Manchester

Market value (£m) : 10.7

Sector : Office

Annualised gross rent (£m) : 1.0

Lettable area (sq. ft.) : 167,247

Anchor tenants : HSS Hire Service Group Ltd, Please Hold

(UK) Ltd, CVS (Commercial Valuers &
Surveyors) Ltd, Rentsmart Ltd

Let by area (%) : 77.9
Let by value (%) : 77.1

WAULT (years) (to first break) : 5.7 (4.1)

•

Adding Value – Front of house works undertaken to improve immediate presentation and installation of high-level external illuminated
signage to “landmark” the building.

• New Letting – New lease agreed with Optimal Claim Ltd for 5,479 sq. ft. on the third floor for a five year term at a gross rental income of

£10psf, with no break option.

• Ongoing Asset Management – 10,900 sq. ft. is currently under offer to two tenants, which would provide a gross rental income of £12.50psf.

Top 15 Properties by Sector: Industrial

Juniper Park, Basildon

Market value (£m) : 29.3

Sector :

Industrial

Annualised gross rent (£m) : 2.0

Lettable area (sq. ft.) : 277,228

Anchor tenants : Schenker Ltd, A Share & Sons Ltd,

Vanguard Logistics Services Ltd

Let by area (%) : 98.4
Let by value (%) : 97.0

WAULT (years) (to first break) : 2.7 (1.3)

• Diversified Income – Multi-let to 11 tenants on 13 leases.
•

Securing Income Streams – Re-gear of lease to Johnson Controls Building Efficiency UK Limited until 2023 at an increased gross rental
income of £60,610pa, an uplift of 3.8%.
Asset Management Initiatives – Various initiatives ongoing with respect to re-gearing or renewal of leases with existing tenants.

•

Road 4 Winsford Industrial Estate, Winsford

Market value (£m) : 15.6

Sector :

Industrial

Annualised gross rent (£m) : 1.0

Lettable area (sq. ft.) : 246,209

Jiffy Packaging Ltd

Anchor tenants :
Let by area (%) : 100.0
Let by value (%) : 100.0

WAULT (years) (to first break) : 15.7 (15.7)

•
•

Long-Term Lease – Let to Jiffy Packaging Limited until 2034.
Business Plan – Seek to sell re-geared low-yielding long lease.

Strategic Report 10 - 57Annual Report and Accountsfor the year ended 31 December 2018Asset and Investment Managers’ Report (continued)

Top 15 Properties by Sector: Industrial (continued)

Tokenspire Business Park, Beverley

Market value (£m) : 11.0

Sector :

Industrial

Annualised gross rent (£m) : 0.9

Lettable area (sq. ft.) : 322,211

Anchor tenants : QDOS Entertainment (Pantomimes) Ltd,

Sargent Electrical Services Ltd, TAPCO
Europe Ltd

Let by area (%) : 97.4
Let by value (%) : 96.7

WAULT (years) (to first break) : 1.9 (0.9)

• Driving Rental Growth – Since acquisition 11 new lettings, 6 existing tenants expanding into larger premises/taking additional space and
numerous lease re-gears completed. Take-up since acquisition of 93,574 sq. ft., with occupancy by value increasing by c.31% to 96.7%
(31 December 2018). The contracted rent has increased by £180,000pa.
Strong Investment Market – Explore potential of selling investment into strong market having improved the rental tone.

•

Top 15 Properties by Sector: Retail

The Brunel Centre, Bletchley

Market value (£m) : 10.4

Sector : Retail

Annualised gross rent (£m) : 1.0

Lettable area (sq. ft.) : 98,351

Anchor tenants : Wilkinson Hardware Stores Ltd,

Poundland Ltd, Boots The Chemist Ltd,
WHSmith Plc

Let by area (%) : 90.8
Let by value (%) : 94.0

WAULT (years) (to first break) : 3.6 (3.4)

•

Tenant Retention – Secured four lease re-gears with existing tenants since acquisition which will provide a combined gross rental income of
£112,500pa, with c. 54% of this secured until 2027 at the earliest.
Asset Management Initiatives – Various initiatives ongoing with respect to re-gearing or renewal of leases with existing tenants.
Opportunities to carry out minor refurbishment works on office space and seek to let vacant space.

Strategic Report 10 - 57Annual Report and Accountsfor the year ended 31 December 2018Asset and Investment Managers’ Report (continued)

Energy Performance Certificate (“EPC”) Ratings and
Implications

For commercial properties located in England and Wales, Minimum
Energy Efficiency Standards Regulations (MEES) will make it unlawful
from 1 April 2019 to let buildings with an EPC rating lower than E.

Regulations for non-domestic buildings in Scotland are materially
different in approach. No minimum EPC requirement is set for
lettings but owners of buildings with a floor area greater than 1,000
square meters are currently obliged to carry out a Section 63 Action
Plan to identify where energy efficiency improvements can be made
and either carry out such works or exhibit a Display Energy Certificate.

An exercise was undertaken in 2018 to review all properties to ensure
we have a record of their EPC status and to allow us to plan any
specific works that might be required to improve any current F or G
rated property to an EPC category of E or higher.

In total, F & G EPC ratings currently apply to 31 units across eight
assets. The cost of undertaking works to allow re-assessment of the
EPC to E or higher in practice will be spread over a number of years as
leases end and re-letting events occur. In addition, an element of the
costs may be included in wider dilapidation and refurbishment works
or properties sold. These units represent less than 5% of the portfolio
by Estimated Rental Value (ERV) and floor area, representing 3.3%
and 3.8%, respectively.

Environmental Matters
The Asset Manager currently has five main aspects to its management
of the environmental impact of the portfolio:

•

An independent environmental report is required for all potential
acquisitions which considers, amongst other matters, the
historic and current usage of the site and the extent of any
contamination.

The process of development and refurbishment projects
considers the choice of materials and equipment used to avoid
health hazards or damage to the environment.

• Ongoing risk examinations of the activities of current and

incoming tenants is carried out by way of site inspections to
identify and prevent pollution.

•

All sites are visited at least annually with material evident
environmental issues reported to the Board.

All new leases seek to commit occupiers to environmental
regulations.

Improving Resource Management at our Assets

In order to reduce energy consumption both in landlords’ areas
and the tenants’ demise, the Asset Manager needs to work closely
with tenants. The Asset Manager engages with tenants on resource
consumption issues where the Asset Manager has responsibility
for the payment of the supply. It has also engaged an energy
consultant to advise on energy efficiencies. Energy improvements
are always considered when repair or refurbishment programmes are
undertaken.

Developments and Refurbishments

Development and refurbishments projects are subcontracted. The
Asset Manager monitors the work directly and with project managers
on larger projects, to ensure they are in accordance with relevant
guidelines and laws. All subcontractors are assessed to ensure that
they have sufficient resources to meet legal requirements.

Strategic Report 10 - 57Annual Report and Accountsfor the year ended 31 December 2018Asset and Investment Managers’ Report (continued)

Case Studies

Buildings 2 & 3 HBOS Campus, Aylesbury

• Original EPC rating: E (120 points)
• New EPC rating: D (80 points)

Buildings 2 & 3 HBOS Campus, Aylesbury comprises two large opposing HQ-style office buildings within a mature landscaped campus-style
setting. The buildings are concrete framed structures with concrete floors and flat roofs, elevations have predominately been formed in
aluminium glazed curtain walling with red faced cavity brick and blockwork. Building 2 was constructed in 1984 and is arranged over ground
and four upper floor levels. The floorplates wrap around a feature central atrium. The external façade walls are formed with full height specialist
glazed curtain walling, with east and west-facing facades leaning outward and the north and south-facing facades facing inward. The building
was refurbished in 2017/18 to provide feature double glazed reception doors, new reception with café and informal meeting areas, new toilet
accommodation and shower block. A new zoned refrigerant VRF air conditioning system has been installed to service the entire ground floor.
In addition, works were carried out to improve the performance and efficiency of the building services including replacement of the hot water
storage tanks with a new high efficiency single unit, new high efficiency condensing boilers were installed, LED lighting fitted throughout all
areas of the building and lighting control modules with sensors installed to reduce energy use.

2800, The Crescent, Birmingham

• Original EPC rating: D (99 points)
• New EPC rating: C (62 points)

2800 The Crescent, Birmingham Business Park, Birmingham is a two storey ‘L’ shaped property with facing brick façade under a pitched tiled
roof with a lettable area of 30,262 sq. ft. The property sits on a self-contained site which provides 150 parking spaces a ratio of 1:200. In terms
of location, the property is situated to the east of the city adjacent to the M42 and M6 motorways, the location also benefits from being two
miles from Birmingham International Airport and railway stations.

Following the Severn Trent lease expiry in March 2016, the building has been substantially refurbished including a remodelled reception, lift
lobby and core at ground floor level, new WC cores on both the ground/ first floor and new entrance with Grade A spec – LED lighting VRF
heating and cooling. The design refurbishment included various improvements targeted at improving the energy efficiency of the building and
as part of the works included installation of a new HVAC system and LED lights throughout. The refurbishment works completed in January
2018 and resulted in an improved Energy Performance Rating for the building from D (99 points) to C (62 points).

Tay House, Glasgow

• Original EPC rating: D (59 points)

• New EPC rating:

•
East Wing: C (45 points)
• West Wing: C (44 points)

Tay House, Glasgow is a landmark modern Grade A office building. The building is of steel frame construction, comprising a series of circular
section columns external to the building fabric which support the steel beams offering a column-free floor plate within the main section of
the building. The bridge deck comprises a previously built in situ concrete slab supported by a number of columns spanning the M8 motorway.
Subsequently, two office floors have been introduced tying into the second and third floor levels of the main building providing general office
accommodation. The internal specification of the building provides modern office accommodation. The property benefits from a double
height reception hall. The first floor has been refurbished to provide a new full raised access floor, metal tiled ceiling system incorporating
recessed LED lighting, toilet accommodation and a four pipe fan coil air conditioning system with new control grillage/ductwork. Following the
refurbishment, the floor was split into an east and west wing, both of which had an improved Energy Performance Rating of C (45 points) and
C (44 points), respectively.

Strategic Report 10 - 57Annual Report and Accountsfor the year ended 31 December 2018Property Name: Tokenspire Business Park, Beverley
Sector: Industrial

Asset and Investment Managers’ Report (continued)

Financial Review

Net Asset Value
In the year ended 31 December 2018, the EPRA NAV of the Group rose to £430.5m (IFRS: £429.5m) from £395.7m (IFRS: £392.9m) as at
31 December 2017, which equates to an increase in diluted NAV of 9.6pps to 115.5pps (31 December 2017: 105.9pps). This is after the payment
of dividends in the period amounting to 8.00pps.

The EPRA NAV increase of some £34.8m since 31 December 2017 is predominately sourced from the revaluation of investment properties held
at 31 December 2017 amounting to £23.9m, and the gain on disposal of investment properties of £23.1m.

The investment property portfolio valuation as at 31 December 2018 totalled £718.4m, (31 December 2017: £737.3m). The decrease since the
December 2017 year end is largely a reflection of the aforementioned investment property valuations offset by realised property disposals. In
the 12 months to 31 December 2018, the valuation increased on a like-for-like basis by 4.5%.

The below table sets out the acquisitions, disposals and capital expenditure for the respective periods:

Acquisitions

Net (after costs)

Gross (before costs)

Disposals

Net (after costs)

Gross (before costs)

Capital Expenditure

Net (after dilapidations)

Gross (before dilapidations)

EPRA Net Asset Value – diluted Bridge 2018

Year ended
31 December 2018
(£m)

Year ended
31 December 2017
(£m)

76.3

73.3

149.3

152.5

7.0

9.8

231.3

228.1

16.9

17.4

13.4

14.8

Strategic Report 10 - 57Annual Report and Accountsfor the year ended 31 December 201813510510095130125115110Pence per shareTaxationNet ﬁnanceexpenseGain on disposal ofinvestmentproperties Net capitalexpenditureNet rentalincomeDilutionreversal31 Dec2017Adminexpenses (excl. performance fee)90120105.914.6(2.8)8.3(1.9)6.2(4.2)(8.0)(2.3)115.50.2(0.5)31 Dec2018Performancefee & impairment of goodwillDividendsValuation(incl. net capitalexpenditure)Asset and Investment Managers’ Report (continued)

The diluted EPRA NAV per share increased to 115.5pps (31 December 2017: 105.9pps). The EPRA NAV is reconciled in the table below:

Opening EPRA NAV

31 Dec 2017 dilution reversal

Opening EPRA NAV

Net rental income

Administration and other expenses

Gain on the disposal of investment properties

Change in the fair value of investment properties

EPRA NAV after operating profit

Net finance expense

Impairment of goodwill

Taxation

EPRA NAV before dividends paid

Dividends paid

Performance Fee Shares

Closing EPRA NAV

Table may not sum due to rounding.

Year ending
2018
(£m)

395.7

54.4

(17.6)

23.1

23.9

479.5

(15.7)

(0.6)

(2.0)

461.2

(29.8)

(0.9)

430.5

Year ending
2018
(pence per Share)

105.9

0.2

106.1

14.6

(4.7)

6.2

6.4

128.6

(4.2)

(0.1)

(0.5)

123.7

(8.0)

(0.2)

115.5

Income Statement
Operating profit before gains and losses on property assets and other investments for the year ended 31 December 2018 amounted to £36.8m
(31 December 2017: £36.4m). Profit after finance items and before taxation was £67.9m (31 December 2017: £28.7m). 2018 included a full rent
roll for properties held as at 31 December 2017, plus the partial rent roll for properties acquired and disposed of during the period.

Realised gain on disposal of investment properties amounted to £23.1m (31 December 2017: £1.2m). The change in the fair value of investment
properties amounted to a gain of £23.9m (31 December 2017: £5.9m). These gains were primarily driven by asset management initiatives, and
the opportunistic disposal of a substantial portion of the industrial portfolio, including properties which had met their individual asset plans to
maximise returns.

Rental income amounted to £62.1m (31 December 2017: £52.3m): the increase was primarily the result of the enlarged investment property
portfolio held in 2018.

Currently more than 80% of the rental income is collected within 28 days of the due date and bad debts in the period were £0.4m
(31 December 2017: £0.5m).

The EPRA cost ratio, including direct vacancy costs, was 40.1% (31 December 2017: 29.7%), adjusting for ground rent. The increase in the cost
ratio is ostensibly a reflection of the realised gains from the disposal of investment properties in the period, coupled with the change in the fair
value of the investment properties, resulting in a performance fee of £7.0m (31 December 2017: £1.6m). The EPRA cost ratio, including direct
vacancy costs and excluding the performance fee, was 28.6% (31 December 2017: 26.6%).

Non-recoverable property costs amounted to £7.7m (31 December 2017: £6.5m), and the contracted rental income reduced to £59.7m
(31 December 2017: £61.9m).

Finance expenses amount to £16.0m (31 December 2017: £14.7m). In part, the increase is a result of the issuance of a £50m 4.5% Retail
Eligible Bond 2024 (the “Retail Bond”) issued on 6 August 2018 to fund the repayment of the £30m 6.5% zero dividend preference shares
(“ZDP shares”) on 9 January 2019.

The Company is a member of the Association of Investment Companies (“AIC”). In accordance with the AIC Code of Corporate Governance, the
ongoing charges for the period ending 31 December 2018 were 4.4% (31 December 2017: 4.5%). The Total EPRA Return to Shareholders from
6 November 2015 to 31 December 2018 was 37.5% (31 December 2017: 19.9%), an annualised rate of 10.6% pa (31 December 2017: 8.8% pa).

Strategic Report 10 - 57Annual Report and Accountsfor the year ended 31 December 2018Asset and Investment Managers’ Report (continued)

Dividend
In relation to the period from 1 January 2018 to 31 December 2018, the Company declared dividends totalling 8.05pps (2017: 7.85pps). Since
the end of the period, the Company has declared a dividend for the fourth quarter of 2018 of 2.50pps.

Period Covered

Announcement Date

1 Jan 2017 to 31 Mar 2017

1 Apr 2017 to 30 Jun 2017

1 Jul 2017 to 30 Sep 2017

1 Oct 2017 to 31 Dec 2017

1 Jan 2018 to 31 Mar 2018

1 Apr 2018 to 30 Jun 2018

1 Jul 2018 to 30 Sep 2018

1 Oct 2018 to 31 Dec 2018

25 May 2017

31 Aug 2017

14 Nov 2017

22 Feb 2018

17 May 2018

31 Aug 2018

15 Nov 2018

21 Feb 2019

Ex Date

8 Jun 2017

7 Sep 2017

23 Nov 2017

1 Mar 2018

24 May 2018

13 Sep 2018

22 Nov 2018

28 Feb 2019

Payment Date

14 Jul 2017

13 Oct 2017

22 Dec 2017

12 Apr 2018

13 Jul 2018

15 Oct 2018

21 Dec 2018

11 Apr 2019

Pence
per Share

1.80p

2.45p

1.85p

2.50p

Debt Financing and Gearing
Borrowings comprise third-party bank debt which is secured over properties owned by the Group and repayable over the next one-to-ten years,
with a weighted average maturity of 6.4 years (31 December 2017: 6.0 years).

The Group’s borrowing facilities are with Scottish Widows Ltd., Royal Bank of Scotland, HSBC and Santander UK, and Aviva Investors Real
Estate Finance. In addition to the bank borrowing, the Group had £30m 6.5% ZDP shares in issue as at 31 December 2018, and a £50m 4.5%
Retail Eligible Bond 2024. In aggregate the total debt available at 31 December 2018 amounted to £380.4m (31 December 2017: £376.5m).

Total bank borrowing facilities at 31 December 2018 amounted to £290.5m (31 December 2017: £339.1m) (before unamortised debt issuance
costs), having been fully drawn down. The total amount payable on the ZDP shares amounted to £39.9m (31 December 2017: £37.4m). The
£50.0m Retail Eligible Bond was raised on 6 August 2018 to fund the repayment of the ZDP shares and to part fund early repayment of the 5%
£65m ICG Longbow Ltd. facility.

At 31 December 2018, the Group’s cash and cash equivalent balances amounted to £104.8m (31 December 2017: £44.6m), which includes
proceeds from the aforementioned Retail Bond.

The Group’s net loan-to-value ratio stands at 38.3% (31 December 2017: 45.0%) before unamortised costs. The Board continues to target a
net loan-to-value ratio of 40%, with a maximum limit of 50%.

Debt Profile and Loan-to-Value Ratios as at 31 December 2018

Lender

Scottish Widows Ltd

Royal Bank of Scotland

HSBC

Santander UK

Scottish Widows Ltd. & Aviva
Investors Real Estate Finance

Zero Dividend Preference Shares

Retail Eligible Bond

Original Facility
(£’000)

Outstanding Debt*
(£’000)

Maturity Date

Gross Loan
to Value**
(%)

36,000

26,458

19,003

44,026

165,000

290,487

39,879

50,000

380,366

36,000

26,458

19,003

44,026

165,000

290,487

39,820

50,000

380,307

Dec-28

Dec-21

Nov-22

Dec-27

Jan-19

Aug-24

38.8

45.9

51.4

36.7

45.4

N/A

Annual Interest Rate

3.37% Fixed

2.00% over 3mth £ LIBOR

2.15% over 3mth £ LIBOR

3.28% Fixed

6.50% Fixed

4.50% Fixed

* Before unamortised debt issue costs
** Based on Cushman and Wakefield and Jones Lang LaSalle property valuations
*** Table may not sum due to rounding

Strategic Report 10 - 57Annual Report and Accountsfor the year ended 31 December 2018Asset and Investment Managers’ Report (continued)

Both the Asset and Investment Managers continue to monitor the borrowing requirements of the Group. As at 31 December 2018, the Group
had substantial headroom against its borrowing covenants.

The net gearing ratio (net debt to ordinary Shareholders’ equity (diluted)) of the Group was 64.1% as at 31 December 2018 (31 December 2017:
84.5%). The decrease is predominantly a result of the reflection of the realised gains from the disposal of investment properties in the period,
coupled with the change in the fair value of the investment properties.

Interest cover stands, including amortised costs, at 2.3 times (31 December 2017: 3.0 times) including the ZDP, and 2.7 times excluding the
ZDP shares (31 December 2017: 3.5 times). The reduction is due to the temporary increase in borrowing, which reduced on repayment of the
ZDP shares on 9 January 2019.

Hedging
The Group applies an interest hedging strategy that is aligned to the property management strategy and aims to mitigate interest rate
volatility on at least 90% of the debt exposure.

Borrowings interest rate hedged (incl. ZDP)

Thereof:

Fixed

Swap

Cap

WACD1

WACD – excluding the ZDPs2

1 WACD – Weighted Average Interest Rate including the cost of hedging

2 Zero Dividend Preference Shares which were assumed on 24th March 2017

The over hedged position has arisen due to the debt repayments during 2018.

31 December
2018
(%)

102.0

76.5

12.8

3.8

3.5

31 December
2017
(%)

89.8

71.0

9.4

3.8

3.5

Tax
The Group entered the UK REIT regime on 7 November 2015 and all of the Group’s UK rental operations became exempt from UK corporation
tax from that date. The exemption remains subject to the Group’s continuing compliance with the UK REIT rules.

On 9 January 2018, the Company registered for VAT purposes in England. Following developments in case law, HMRC have updated their
policy and have published new guidance on the circumstances in which VAT can be recovered. In accordance with the new guidelines, and in
consultation with the Company’s advisors, the Company has registered for VAT and intends to recover VAT which it incurs in the future as well as
that which it has incurred since November 2015, when it first became active.

At 31 December 2018, the Group’s taxation charge amounted to £0.6m, which comprised of corporation tax of £1.6m for the sale of a
property held for trading within the Hamilton Hill Estates Ltd, an offsetting £1.4m of deferred tax raised in the prior year for the same property
subsequently released in 2018, and £0.4m of tax on revenue incurred by activity external to the REIT regime.

Subsequent Events after the Reporting Period
Please see note 36 on page 130.

Strategic Report 10 - 57Annual Report and Accountsfor the year ended 31 December 2018Property Name: Tay House, Glasgow
Sector: Office

Property Name: One & Two Newstead Court, Annesley
Sector: Office

Principal Risks and Uncertainties

The Board recognises that effective risk management is essential to the Group achieving its strategy and has carried out a robust assessment of
the principal risks facing the Group, including those that would threaten its business model and future performance, solvency or liquidity.

While it is not possible to identify or anticipate every risk due to the changing business environment, the Group has established a risk
management process to monitor and mitigate identifiable risks where possible, rather than eliminating them. The Audit Committee reviews the
risk management matrix on a six-monthly basis. The below list sets out the current identifiable principal risks in no particular order which the
Board is monitoring but does not purport to be an exhaustive list of all the risks faced by the Group. The Board is aware that material new risks
will arise which, to date, are not deemed material nor warrant significant resources to monitor. As and when such risks are identified, the Group
will put in place controls to monitor and mitigate.

Strategic Risks

Potential impact

An inappropriate investment strategy
could result in lower income and capital
returns to Shareholders.

Mitigation

Movement in the period

An annual review of the investment
strategy.

A defined and rigorous investment
appraisal process.

Acquire portfolios which offer Shareholders
diversification of investment risk by
investing in a range of geographical areas
and number of properties.

Only acquiring office and industrial
properties in the UK and outside of the
M25 motorway. However, the Group may
invest in property portfolios in which up to
50% of the properties (by market value)
are situated within the M25 motorway.

No single property, in the ordinary course
of business, is expected to exceed 10%
of the Group’s aggregate Investment
Properties. However, the Board may, in
exceptional circumstances, consider a
property having a value of up to 20% of
the Group’s investment property value at
the time of investment.

No more than 20% of the Group’s
investment property value shall be
exposed to any single tenant or group
undertaking of that tenant.

Speculative development (i.e., properties
under construction, but excluding any
refurbishment works, which have not been
pre-let) is prohibited.

The property portfolio remains balanced
across a range of geographical areas and
large number of investment properties.

The Group continues to purchase
properties in the UK outside the M25
motorway.

Tay House is the highest valued property,
which equates to 4.6% of the Group’s
investment properties.

The Group’s largest single tenant exposure
is 2.7% of gross rental income, being
Barclays Bank PLC.

The value of the assets is protected by an
active asset management programme,
which is regularly reviewed against the
business plan for each property.

The Asset Manager continues to actively
manage the investment properties in
accordance with market conditions and the
individual asset programme.

Strategic Report 10 - 57Annual Report and Accountsfor the year ended 31 December 2018Key to risk trendTrend upTrend downNo changePrincipal Risks and Uncertainties (continued)

Valuation Risk

Potential impact

The valuation of the Group’s portfolio
affects its profitability and net assets.

Mitigation

Movement in the period

External valuers, Cushman & Wakefield
and Jones Lang Lasalle, provide
independent valuations for all properties.

The Audit Committee discuss with
the external valuers the basis of their
valuations.

There has been no change in the external
valuers.

Economic and Political Risk

Potential impact

Mitigation

Movement in the period

Significant political events, including the
decision to leave the EU and the triggering
of Article 50 of the Lisbon Treaty, could
impact the health of the UK economy,
resulting in borrowing constraints,
change in demand by tenants for suitable
properties, the quality of the tenants, and
ultimately the portfolio value.

The Group operates with a sole focus on
the UK regions, with no foreign currency
exchange exposure. It remains well
positioned with a deliberately diverse
standard industry classification of tenants
generating in excess of 800 income streams
which are located in areas of expected
economic growth.

The Board receives advice on macro-
economic risks from the Investment Manager
and other advisors and will act accordingly.

Following the triggering of Article 50, there
remains a risk that property valuations
and the occupancy market may be
impacted while this period of uncertainty
is negotiated.

Funding Risk

Potential impact

The Group may not be able to secure
further debt on acceptable terms,
which may impinge upon investment
opportunities and the ability to grow the
Group.

Mitigation

Movement in the period

Borrowings are currently provided by
a range of institutions with targeted
staggered maturities.

Strong relationships with key long-term
lenders.

Funding options are constantly reviewed
with an emphasis on reducing the weighted
average cost of capital and lengthening the
weighted average debt to maturity.

Continual monitoring of loan to value.

Weighted average debt term increased
to 6.4 years from 6.0 years in 2017 and
increased to 7.1 years following settlement
of the ZDPs on 9 January 2019.

Weighted average cost of capital, including
hedging costs was 3.8% (31 December
2017 3.8%) and following settlement of
the ZDPs on 9 January 2019 reduces to
3.5%.

Loan to value decreased to 38.3% from
45.0% at 31 December 2017.

Bank reference interest rates may be set to
rise accompanying higher inflation.

Policy of hedging at least 90% of variable
interest rate borrowings.

Continued adherence to the hedging
policy.

Borrowings are currently provided by
a range of institutions with targeted
staggered maturities.

Strategic Report 10 - 57Annual Report and Accountsfor the year ended 31 December 2018Principal Risks and Uncertainties (continued)

Tenant Risk

Potential impact

Type of tenant and concentration of tenant
could result in lower income from reduced
lettings or defaults.

A high concentration of lease term
maturity and/or break options, could result
in a more volatile contracted rent roll.

Mitigation

Movement in the period

An active asset management programme
with a focus on the Asset Manager working
with individual tenants to assess any
occupational issues and to manage any
potential bad debts.

Diversified portfolio of properties let,
where possible, to a large number of
low risk tenants across a wide range of
different standard industrial classifications
throughout the UK.

Potential acquisitions are reviewed for
tenant overlap.

The portfolio lease and maturity
concentrations are monitored by the
experienced Asset Manager to minimise
concentration.

There is a focus on securing early renewals
and increased lease period.

The requirement for suitable tenants and
the quality of the tenant is managed by
the experienced Asset Manager which
maintains close relationships with current
tenants and with letting agents.

The tenant mix and their underlying
activity remains diversified, with the
number of tenants amounting to 874
(31 December 2017: 1,026).

The WAULT to first break as at
31 December 2018 was 3.4 years.

The largest tenant is 2.7% of the gross
rental income, being Barclays Bank PLC.

The Asset Management team remains
vigilant to the health of current tenants
and continues to liaise with occupiers and
agents.

Financial and Tax Change Risk

Potential impact

Mitigation

Movement in the period

Changes to the UK REIT and non-REIT
regimes, tax and financial legislation.

The Board receives advice on these changes
where appropriate and will act accordingly.

Advice is received from a number of
corporate advisors and the Group adapts
to changes as required.

Operational Risk

Potential impact

Business disruption could impinge on the
normal operations of the Group.

Mitigation

Movement in the period

The Asset and Investment Managers
each have contingency plans in place to
ensure there are no disruptions to the core
infrastructure, including cyber security
measures, which would impinge on the
normal operations of the Group.

An annual due diligence exercise is carried
out on all principal suppliers.

As an externally managed investment
Company, there is a continued reliance on
the Asset and Investment Managers.

Both the Asset and Investment Managers
annually review their Disaster and Business
Continuity Plans.

Annual due diligence visits were
undertaken with the Company’s principal
suppliers.

Both the Asset and Investment Manager
are viable going concerns.

Strategic Report 10 - 57Annual Report and Accountsfor the year ended 31 December 2018Principal Risks and Uncertainties (continued)

Operational Risk (continued)

The Asset Manager remains vigilant to
changes in Health and Safety regulations.

The Asset Manager reviews the adequacy
of insurance cover on an ongoing basis.

All acquisitions undergo a rigorous
due diligence process and all multi-
let properties undergo an annual
comprehensive fire risk.

The impact of physical damage and
destruction to investment properties is
mitigated by ensuring all are covered by a
comprehensive buildings, loss of rent and
service charge plus terrorism insurance
with the exception of a small number of
“self-insure” arrangements covered under
leases.

Accounting, Legal, and Regulatory

Potential impact

Mitigation

Movement in the period

Changes to the accounting legal and/
or regulatory legislation could result in
changes to current operating processes.

Robust processes are in place to ensure
adherence to accounting, legal, regulatory
requirements, and Listing Rules.

The Group continues to receive advice
from its corporate advisors and has
incorporated changes where required.

The Administrator continues to attend all
Board meetings and advise on Listing Rules
in conjunction with the Financial Advisor.

All contracts are reviewed by the Group’s
legal advisors.

The Administrator, in its capacity as Group
Accountant, and the Company Secretary
attend all Board meetings in order to be
aware of all announcements that need to
be made.

All compliance issues are raised with the
Financial Advisor.

Environmental and Energy Efficiency Standards

Potential impact

Mitigation

Movement in the period

Changes to the environment could impact
upon the operations of the Group.

Property acquisitions undergo a rigorous
due diligence process, including an
environmental assessment.

The rigour of the environmental
assessments process continues to be
reviewed with the aim of enhancing it.

The Asset Manager monitors the portfolio
for any detrimental environmental impact,
by way of frequent inspections of the
properties, and the annual insurance review
process.

An Energy Performance Rating of E and
below is required for each asset in order to
be let or sold.

The Group continues to review each
property to ensure adherence with Energy
Performance Rating requirements.

The energy efficiency of investment
acquisitions is fully considered as part of
the buying due diligence.

The Asset Manager is continually
reviewing the feasibility of enhancing
Energy Performance Ratings to exceed the
minimum requirement.

Strategic Report 10 - 57Annual Report and Accountsfor the year ended 31 December 2018Property Name: Juniper Park, Basildon
Sector: Industrial

Management Arrangements

Asset Manager
London & Scottish Investments Limited was appointed as the Asset Manager to provide asset management services to the Company (and
Regional Commercial Midco Limited (“Midco”) and the respective limited companies which hold the properties directly) with effect from the
Company’s shares being admitted to trading on the London Stock Exchange on 6 November 2015.

Under the Asset Management Agreement, the Asset Manager is responsible for the day-to-day asset management of the Property Portfolio,
subject to the Investment Objective of the Company and its Investment Policy (as set out on page 15) and the overall supervision of the Board.
The Asset Manager will also advise the Company on the acquisition, management and disposal of the real estate assets of the Company.

Notice of termination of the Asset Management Agreement may be served at any time on or before the expiry of an Initial Period (being
the period of five years from the date of the Admission of the Company’s Shares to trading), in which case the agreement will terminate one
year after the expiry of the Initial Period. If a notice to terminate is not given, the agreement shall continue for recurring three-year periods
(“Subsequent Periods”). Notice to terminate may be given no later than one year prior to the end of a Subsequent Period, in which case the
agreement will terminate at the end of the Subsequent Period.

Notwithstanding the initial term, the Asset Management Agreement may also be terminated earlier with immediate effect in certain
circumstances, including a material unremedied breach by the Asset Manager or by the Investment Manager.

The Company or Midco may terminate the Asset Management Agreement with immediate effect by giving written notice to the Asset Manager
in the event of the liquidation or insolvency (or analogous event) of the Asset Manager.

At any time after the later of (i) the fifth anniversary of the date of the Asset Management Agreement and (ii) the first date on which EPRA
NAV exceeds £750,000,000, the Board and the Asset and Investment Managers may decide, with the approval of an ordinary resolution (upon
which neither the Asset Manager nor its associates may vote) that individuals providing the services under the Asset Management Agreement
are to become an internal resource of the Company in lieu of the appointment of the Asset Manager under the Asset Management Agreement.

Property Manager
London and Scottish Property Asset Management Limited has been appointed to manage the day-to-day property management of each
property within the Portfolio. A Property Management fee of 4%, based upon the gross rental yield, is charged per annum.

Investment Manager and Alternative Investment Fund Manager
The Company appointed Toscafund Asset Management LLP (“Toscafund”) as the Company’s Investment Manager (and to provide certain
related services to Midco and the respective companies which hold property directly). The Investment Manager is responsible for the
day- to-day management of the Company’s investments, subject to the Investment Objective and the Investment Policy of the Company.
The Investment Manager is the Alternative Investment Fund Manager (“AIFM”) under the Alternative Investment Fund Managers Directive
(“AIFMD”).

Notice of termination of the Investment Management Agreement may be served at any time on or before the expiry of an Initial Period (being
the period of five years from the date of the Admission of the Company’s Shares to trading), in which case the agreement will terminate one
year after the expiry of the Initial Period. If notice to terminate is not given, the agreement shall continue for recurring three-year periods
(“Subsequent Periods”). Notice to terminate may be given no later than one year prior to the end of a Subsequent Period, in which case the
agreement will terminate at the end of the Subsequent Period.

Notwithstanding the initial term, the Investment Management Agreement shall terminate with immediate effect in certain circumstances,
including the Investment Manager ceasing for any reason to be authorised under FSMA to carry out the regulated activity of managing an AIF,
or the Investment Manager committing a material breach of its obligations either (i) not capable of being remedied (after the Company has
served notice to terminate) or (ii) which is capable of being remedied and failing to remedy the same within 30 days after service of notice by
the Company requesting the same to be remedied.

At any time after the later of (i) the fifth anniversary of the date of the Investment Management Agreement and (ii) the first date on which
EPRA NAV exceeds £750,000,000, the Board and the Investment Manager may decide, with the approval of an ordinary resolution (upon
which neither the Investment Manager nor its associates may vote) that individuals providing the services under the Investment Management
Agreement are to become an internal resource of the Company in lieu of the appointment of the Investment Manager under the Investment
Management Agreement.

Strategic Report 10 - 57Annual Report and Accountsfor the year ended 31 December 2018Management Arrangements (continued)

Management and Performance Fees
The Asset and Investment Managers are each entitled in each financial year (or part thereof) to 50% of an annual management fee on a scaled
rate of 1.1% of the Company’s NAV, reducing to 0.9% on net assets over £500,000,000. The fee shall be payable in cash quarterly in arrears.

In addition, the Asset and Investment Managers are each entitled to 50% of a Performance Fee. The fee is calculated at a rate of 15% of
Total Shareholder Returns in excess of the annual Hurdle Rate of 8% for the relevant Performance Period. Total Shareholder Returns for any
Performance Period consists of the sum of any increase or decrease in EPRA NAV per Ordinary Share and the total dividends per Ordinary Share
declared in the Performance Period. The initial Performance Period ran from 6 November 2015 to 31 December 2018. Subsequent Performance
Periods are annual, from 1 January to 31 December.

A Performance Fee is only payable in respect of a Performance Period where the EPRA NAV per Ordinary Share exceeds the High-water
Mark, which is equal to the greater of the highest year-end EPRA NAV Ordinary Share in any previous Performance Period or the Placing Price
(100p per Ordinary Share). Full details of the Managers’ Performance Fee are given on pages 183 to 185 of the IPO Prospectus, published on
3 November 2015.

In accordance with the Financial Conduct Authority’s (“FCA”) Listing Rule 15.4.11, the Company cannot issue shares for cash at a price below
the NAV per share without Shareholder approval. The Company does not have Shareholder approval to do this and any such issue would in any
event be dilutive. Accordingly, the Management Agreements have been amended to clarify that, in this situation, the Performance Fee will be
paid entirely in cash but 50% of that amount will be used to acquire shares in the market on behalf of the Managers within a 20 business day
period on an instruction to do so. On this occasion the shares will be paid for entirely in cash and be acquired from the date of publication of
the preliminary 2018 annual results. These amendments were made to preserve the underlying commercial intention that the Managers should
normally receive 50% of the Performance Fee in shares.

Initial Performance Fee
As reported in the Chairman’s Statement on page 10, the Company has paid an initial Performance Fee of £8.91m to the Asset and Investment
Managers.

Continuing Appointment of Asset Manager and Investment Manager
The Management Engagement and Remuneration Committee (“MERC”) recommended to the Board that the continued appointment of each
the Managers on the terms of their respective agreements be approved and the Directors agreed with this recommendation. Further details can
be found in the MERC Report on pages 82 and 83.

Administrator
The Company appointed Jupiter Fund Services Limited as the Administrator to the Company pursuant to an Administration Agreement.
Under the terms of the Administration Agreement, the Administrator is responsible for the Company’s general administrative functions such
as maintaining Company’s records and statutory registers and acting as the Company’s Designated Administrator. The Administrator has
outsourced certain of its services under the Administration Agreement to Link Alternative Fund Administrators Limited as Sub-Administrator.
An annual fee of £130,180 is payable by the Company to the Administrator and Sub-Administrator in respect of these services.

The Administration Agreement was for an initial term of one year, following which it will automatically renew for 12-month periods unless
notice of termination is served by either party at least 90 days prior to the end of each period.

Company Secretary
Link Company Matters Limited was appointed to provide company secretarial services pursuant to a Company Secretarial Services Agreement.
This agreement will automatically renew for 12-month periods unless notice of termination is served by either party at least six months prior to
the end of each period.

On behalf of the Board

Kevin McGrath
Chairman and Independent Non-Executive Director

27 March 2019

Strategic Report 10 - 57Annual Report and Accountsfor the year ended 31 December 2018Property Name: Hampshire Corporate Park, Eastleigh
Sector: Office

Board of Directors

Kevin McGrath MRICS DL OBE
(Chairman and Independent Non-Executive Director)
Appointed: 16 October 2015
Length of Service: 3 years, 5 months

Kevin McGrath is a chartered surveyor who has worked in the property industry for over 35 years. He
is a member of the Royal Institution of Chartered Surveyors, the Worshipful Company of Chartered
Surveyors and is a Freeman of the City of London. He is a Trustee of several charities including The
Clink Prison Restaurant Charity which he co-founded; The Old Vic Theatre Trust; QPR Community
Trust; and London South Bank University.

Kevin was The High Sherriff for Greater London in 2014/15 and is the Representative Deputy
Lieutenant for Hammersmith and Fulham.

Kevin is chairman of M&M Property Asset Management and the non-executive chairman of INTCAS,
a technology and support service company that assists education institutions from across the world
to attract, recruit and manage international students in a safe, compliant and cost-efficient way.
Kevin was previously managing director and senior adviser of F&C REIT Asset Management and, prior
to that, he was a founding equity partner in REIT Asset Management, having previously worked as a
senior investment surveyor with Hermes Investment Management.

William Eason
(Senior Independent Non-Executive Director)
Appointed: 16 October 2015
Length of Service: 3 years, 5 months

William (“Bill”) Eason was previously head of charities with Quilter Cheviot and, before that, with
Laing & Cruickshank. He has managed diversified high net worth portfolios since 1973 and became
a member of the London Stock Exchange in 1976. Bill was chief investment officer at Laing &
Cruickshank Investment Management and is a former chairman of Henderson High Income Trust plc.

Bill is currently a director of Henderson International Income Trust plc and Institutional Protection
Services Ltd. He is an Associate of the Society of Investment Professionals and a Chartered Fellow of
the Chartered Institute for Securities and Investment. Amongst his charitable roles Bill has acted as a
governor of Henley Management School and is currently a trustee of Marshall’s Charity, The Gordon
Foundation, and the John Hampden Fund. He is also a business fellow of Gray’s Inn.

Daniel Taylor
(Independent Non-Executive Director)
Appointed: 16 October 2015
Length of Service: 3 years, 5 months

Daniel (“Dan”) Taylor is the founder and chief executive officer of Westchester Capital Limited, an
investment and advisory firm specialising in real estate. He currently holds the role as managing
partner of Bourne Office Space Group Ltd, a privately held serviced office business based in London, in
which Westchester Capital is a principal investor.

From 2011 to 2015, Dan was chairman and a principal shareholder of AIM-listed Avanta Serviced
Office Group plc, the UK’s second largest serviced office provider until the sale of the business to
Regus plc.

Over his career, Dan has held both executive and non-executive directorships for various private and
listed companies and has extensive experience in investment management, corporate finance and
corporate governance. He has active registered status with the Financial Conduct Authority (“FCA”) as
an investment manager (CF30) and CF1-Director and has held the following controlled functions at
authorised firms: CF10-Compliance Oversight; CF11-Money Laundering Reporting; CF21-Investment
Advisor; and CF27-Investment Management.

Corporate Governance 58 - 90Annual Report and Accountsfor the year ended 31 December 2018Board of Directors (continued)

Frances Daley
(Independent Non-Executive Director)
Appointed: 1 February 2018
Length of Service: 1 year, 2 months

Frances Daley is a chartered accountant who qualified with a predecessor firm to Ernest & Young,
spending nine years in corporate finance, followed by 18 years in various chief financial officer roles.
From 2007 to 2012, she was group finance director of the private equity backed Lifeways Group, the
UK’s largest provider of specialist support to adults with learning disabilities and mental health needs.
Frances is a non-executive director of Henderson Opportunities Trust Plc and chair of Baring Emerging
Europe Plc. She is also chair of Haven House Children’s Hospice and James Allen’s Girls’ School.

Stephen Inglis
(Non-Executive Director)
Appointed: 16 October 2015
Length of Service: 3 years, 5 months

Stephen Inglis is the chief executive officer and co-founder of the Asset Manager, London &
Scottish Investments. He has over 30 years’ experience in the commercial property market. He
has responsibility for all property functions within the Asset Manager’s structure, from investment
management to asset and property management.

The majority of his experience is in the investment and development sectors, having worked for
several international property consultants in Glasgow and London.

In his current role, Stephen has, since June 2013, acquired or sold over 300 assets in deals totalling
more than £850 million. He was instrumental in establishing, equity raising and investing both Tosca
Property Fund I and Tosca Property Fund II and the subsequent IPO of Regional REIT.

Stephen has, since 1991, been a member of the Royal Institution of Chartered Surveyors and is a
member of the Investment Property Forum.

Timothy Bee
(Non-Executive Director)
Appointed: 7 July 2017
Length of Service: 1 year, 8 months

Timothy (“Tim”) Bee is the chief legal counsel of the Investment Manager. Tim joined Toscafund in
May 2014 having previously been a corporate partner at two leading London-based law firms. He
qualified as a solicitor in 1988 and has extensive experience in mergers and acquisitions, equity capital
markets and financial services.

Corporate Governance 58 - 90Annual Report and Accountsfor the year ended 31 December 2018Report of the Directors

The Directors of Regional REIT are pleased to present their report and
the consolidated audited financial statements of the Group for the year
ended 31 December 2018.

In accordance with the Listing Rules and the Disclosure Guidance and
Transparency Rules, the reports within the Corporate Governance section
of the Annual Report and Accounts should be read in conjunction with
one another, and the Strategic Report. As permitted, some of the matters
normally included in the Directors’ Report have instead been included in
the Strategic Report (pages 10 to 57) as the Board considers them to be
of strategic importance.

Corporate Governance Statement
The Directors are committed to establishing and maintaining high
standards of corporate governance, in line with best practice. The
Board works closely with the Company Secretary in this regard.
The Board is accountable to Shareholders for the governance of the
Group’s affairs.

The Directors have prepared a statement on how the principles and
recommendations of the AIC Code of Corporate Governance have
been applied. This statement may be found on pages 68 to 74 and
forms part of this report by reference.

Principal Activity

The Company has been incorporated for the purpose of investment
in, holding and managing commercial property investments, or
debt portfolios secured on such properties, which are located
predominately in the regional centres of the UK outside the M25
motorway.

Status

The Company was incorporated in Guernsey, Channel Islands and
is registered with the Guernsey Financial Services Commission as a
Registered Closed-Ended Collective Investment Scheme pursuant
to the Protection of Investors (Bailiwick of Guernsey) Law 1987, as
amended and the Registered Collective Investment Schemes Rules
2015. It is a member of the Association of Investment Companies
(“AIC”).

Status for Taxation

The Director of Income Tax in Guernsey has granted the Company
exemption from Guernsey income tax under the Income Tax (Exempt
Bodies) (Guernsey) Ordinance, 1989 and the income of the Company
may be distributed or accumulated without deduction of Guernsey
income tax. Exemption under the above-mentioned Ordinance entails
the Company to pay an annual fee of £1,200.

During the year, the Company’s properties have been held in various
subsidiaries and associates, the majority of which are subject
to UK Income Tax. In each instance, any tax due is computed
after deduction of debt financing costs and other allowances as
appropriate.

Shareholders who are in any doubt concerning the taxation
implications of a REIT should consult their own tax advisers.

On 9 January 2018, the Company registered for VAT purposes in
England. Following developments in case law, HMRC updated their
policy and published new guidance on the circumstances in which
VAT can be recovered. In accordance with the new guidelines and in
consultation with the Company’s advisors, the Company registered
for VAT and has recovered VAT incurred since November 2015.

Directors
All Directors of the Company were in office during the whole of the
year ended 31 December 2018, with the exception of Frances Daley,
who was appointed on 1 February 2018.

The full biographies of the Directors can be found on pages 58 and
59. All Directors will stand for re-election at the forthcoming Annual
General Meeting (“AGM”) on Thursday, 23 May 2019 in accordance
with the Company’s Articles of Incorporation (the “Articles”) and the
AIC Code of Corporate Governance.

The Directors ensure that they maintain their continuing professional
development requirements in accordance with the requirements of
their respective professions as well as receiving briefings from the
Company Secretary and other advisors on a regular basis.

Diversity
The Board of Directors of the Company comprises of five males and
one female.

The Board recognises the importance and benefits of improving the
gender balance of the Board and gender diversity was a consideration
throughout the selection process in respect of the appointment of
Frances Daley in February 2018. Notwithstanding this, the Board does
not consider that it would be appropriate to set diversity targets as all
Board appointments are made on merit, against objective criteria and
with due regard for the benefits of diversity on the Board.

Directors and Officers Liability Insurance
Directors and Officers Liability insurance is maintained through the
Investment Manager’s own insurance policy. Save for the indemnity
provisions in the Articles, there are no qualifying third-party
indemnity provisions in force.

Corporate Governance 58 - 90Annual Report and Accountsfor the year ended 31 December 2018Report of the Directors (continued)

Directors
There is no requirement under the Company’s Articles of Incorporation or the terms of their appointment for Directors to hold shares in the
Company.

The beneficial interests of the Directors of the Company are set out in the table below:

Director

Daniel Taylor

William Eason

Stephen Inglis

Kevin McGrath*

Tim Bee**

Frances Daley

* Held by his minor children.
** Held by his spouse.

At 31 December 2018

At 27 March 2019

Number of Ordinary
Shares

% Interest in share
capital

Number of
Ordinary Shares

% Interest in share
capital

350,000

200,000

752,549

297,030

150,000

30,000

0.09

0.05

0.20

0.08

0.04

0.01

350,000

200,000

752,549

297,030

150,000

30,000

0.09

0.05

0.20

0.08

0.04

0.01

Share Capital
As at 31 December 2018, the Company’s total issued share capital
was 372,821,136 Ordinary Shares (31 December 2017: 372,821,136).
All of the Company’s Ordinary Shares are listed on the premium
listing segment of the London Stock Exchange and each Ordinary
Share carries one vote.

There is only one class of Ordinary Shares in issue for the Company,
in adherence to the REIT requirements. The only other shares the
Company may issue are particular types of non-voting restricted
preference shares, of which none (2017: none) are currently in issue.

Disapplication of Pre-emption Rights
At the 2018 AGM, the Company received authority to allot shares for
cash on a non-pre-emptive basis up to 10% of the Company’s issued
share capital as at 4 April 2018. The Company has not issued any
shares under this authority during the year. This authority will expire
at the conclusion of the 2019 AGM. Resolutions will be proposed at
the 2019 AGM to renew the Company’s authority to issue shares for
cash on a non-pre-emptive basis. These authorities will be sought in
accordance with the Pre-Emption Group’s Statement of Principles.

Purchase of Own Shares
No shares have been bought back in the year. The latest authority for
the Company to purchase its own Ordinary Shares was granted to the
Company at the last AGM on 17 May 2018 and expires on the date of
the next AGM. The Directors are proposing that the authority to buy
back shares be renewed at the forthcoming AGM on 23 May 2019.

Restrictions on the Transfer of Shares
Subject to the Articles, as well as applicable foreign securities laws,
a Shareholder may transfer all or any of his Ordinary Shares in any
manner which is permitted by the Law or in any other manner which
is from time to time approved by the Board.

If any Ordinary Shares are owned directly, indirectly or beneficially
by a person believed by the Board to be a “Non-Qualified Holder”
(see below), the Board may give notice to such person requiring
him either: (i) to provide the Board within 30 days of receipt of such
notice with sufficient satisfactory documentary evidence to satisfy
the Board that such person is not a Non-Qualified Holder, or (ii) to
sell or transfer his Ordinary Shares to a person who is not a Non-
Qualified Holder within 30 days and within such 30 days to provide
the Board with satisfactory evidence of such sale or transfer and
pending such sale or transfer, the Board may suspend the exercise of
any voting or consent rights and rights to receive notice of or attend
any meeting of the Company and any rights to receive dividends
or other distributions with respect to such Ordinary Shares. Where
condition (i) or (ii) is not satisfied within 30 days after the serving of
the notice, (i) the person will be deemed, upon the expiration of such
30 days, to have forfeited his Ordinary Shares or (ii) if the Board in its
absolute discretion so determines, the Company may dispose of the
Ordinary Shares at the best price reasonably obtainable and pay the
net proceeds of such a disposal to the former holder.

A Non-Qualifying Holder is defined as any person whose ownership
of Ordinary Shares, or the transfer of Ordinary Shares to such person,
may:

cause the Company’s assets to be deemed “plan assets” for the
purposes of the US Internal Revenue Code of 1986 (as amended),
or US Employee Retirement Income Security Act of 1974 (as
amended);

cause the Company to be required to register as an “investment
company” under the US Investment Company Act 1940;

cause the Company or any of its securities to be required under
the US Exchange Act, the US Securities Act or any similar
legislation;

cause the Company not being considered a “Foreign Private
Issuer”, as such term is defined in rule 3b-4(c) under the US
Exchange Act;

cause the Investment Manager to be required to register as a
municipal advisor under the US Exchange Act;

•

Corporate Governance 58 - 90Annual Report and Accountsfor the year ended 31 December 2018Report of the Directors (continued)

•

result in the Company being disqualified from issuing securities
pursuant to Rule 506 of Regulation D under the US Securities
Act;

cause a loss of partnership status for US federal income tax
purposes or a termination of the US partnership under US
Internal Revenue Code of 1986 (as amended), Section 708;

•

result in a person holding Ordinary Shares in violation of the
transfer restrictions put forth in any prospectus published by the
Company from time to time; or

cause the Company to be a “controlled foreign corporation” for
the purposes of Section 957 of the US Internal Revenue Code of
1986, (as amended), or may cause the Company to suffer any
pecuniary or tax disadvantage or any person who is deemed to
be a Non-Qualified Holder by virtue of their refusal to provide
the Company within formation that it requires in order to comply
with its obligations under exchange of information agreements.

Substantial Shareholdings
Information on major interests in shares provided to the Company under the Disclosure Guidance and Transparency Rules of the FCA is
published via a Regulatory Information Service and on the Company’s website.

The Company has received notification of the following disclosable interests in the voting rights of the Company:

Shareholder

Toscafund Asset Management LLP

AXA Investment Managers

At 31 December 2018

At 27 March 2019

Number of Ordinary
Shares notified

% Interest in share
capital

27,154,198

18,778,679

7.28

5.03

Number of
Ordinary Shares
notified

27,154,198

18,778,679

% Interest in share
capital

7.28

5.03

As a company registered in Guernsey, the disclosure thresholds for such a non-UK issuer (in accordance with Disclosure Guidance &
Transparency Rule 5) are 5%, 10%, 15%, 20%, 25%, 30%, 50% and 75%.

Dividends
The Directors maintain a dividend policy which has due regard
to sustainable levels of dividend cover and reflects the Directors’
views on the outlook for sustainable recurring earnings, subject to
compliance with REIT status requirements. The Directors intend to
reinvest proceeds from disposals of assets in accordance with the
Company’s Investment Policy.

During 2018, the Company declared three quarterly dividends,
each of 1.85pps. A fourth quarterly dividend of 2.50pps for the year
ended 31 December 2018 was declared on 21 February 2019. This
dividend will be paid on 11 April 2019 to Shareholders on the register
at the close of business on 1 March 2019. The ex-dividend date was
28 February 2019.

Shareholders are not required to vote on the payment of a dividend
under the Law at the Company’s AGM scheduled to be held on
23 May 2019. Given the requirement to distribute at least 90% of
qualifying property rental business income, it is not thought that this
adversely impacts Shareholders’ rights.

At the time of the IPO, the Company’s stated Investment Objective
was to deliver an attractive total return to Shareholders, with a
strong focus on income, from investing in UK commercial property,
predominantly in the office and industrial sectors in major regional
centres and urban areas outside of the M25 motorway. The Company
intends to continue to pursue a progressive dividend policy and
its quarterly dividends provide a source of regular income for
Shareholders, thus improving their cashflow return profile.

For the purpose of determining the profits available for a
dividend distribution, the Company continues to choose to
treat all of its net income from the Property Related Business as
qualifying property income, notwithstanding that the Company
accounts for both property income and interest income.

The payment and level of dividends will always remain subject to
the Company’s performance, its financial position, the business
outlook and to market conditions.

It is the Company’s intention to continue to declare and pay
dividends on a quarterly basis. The dividends for the first, second
and third quarters of any specific financial year are expected to
be declared at or near the same level on a pence per share basis
(if necessary, as adjusted for any capital raising, consolidation
or split). The fourth-quarter dividend in relation to that same
financial year will be declared to at least manage compliance
with the REIT distribution requirement.

The Board will resolve to declare any dividends at an appropriate
time after the end of the relevant quarter dates, being 31 March,
30 June, 30 September and 31 December. The dividends will be
paid approximately one month after being declared.

•

Corporate Governance 58 - 90Annual Report and Accountsfor the year ended 31 December 2018Shareholders are encouraged to attend and vote at the Company’s
AGM, which provides a forum for communication with both private
and institutional Shareholders alike. The Board makes itself available
at the AGM to answer Shareholder questions. The Chairman, and as
necessary all other members of the Board, are also available to meet
with Shareholders throughout the year.

The Group’s Annual Report and Accounts is despatched to all
Shareholders by post at least 20 working days before the AGM,
accompanied by the details of the resolutions to be proposed and the
notice of the AGM. Shareholders are able to lodge their votes via the
CREST system or by returning the proxy card sent with the Annual
Report. Details of the number of proxy votes for, against and withheld
for each resolution will be disclosed at the meeting and in the AGM
RNS announcement.

The Annual Report, notice of AGM including proposed resolutions,
and the interim results and all other announcements by the Group,
are made available on the Group’s website. In addition, Shareholders,
and any other interested parties, can register for email alerts of the
Group’s announcements.

The Group will consider a number of ways of building on its
engagement with Shareholders, sell-side analysts and potential
investors in the course of 2019.

Financial Risk Management
The principal risks and uncertainties faced by the Group and the
Group’s policies for managing these risks are set out on pages 49 to 55.

The principal financial risks relating to financial instruments, including
the Company’s retail eligible sterling bonds, and details of the risk
mitigation factors relating to these financial instruments are set out
in note 30.

Going Concern
The Board confirms that it has a reasonable expectation that the
Group has adequate resources to continue in operational existence
for the foreseeable future. In arriving at this conclusion, the Directors
have considered the liquidity of the portfolio and the Group’s ability
to meet obligations as they fall due for a period of at least 12 months
from the date that these Financial Statements were approved.

Accordingly, the Board of Directors considers that it is appropriate to
prepare the Financial Statements on a going concern basis.

Report of the Directors (continued)

In order to maintain REIT status, the Company is required to meet a
minimum distribution test for each accounting period that it is a REIT.
This minimum distribution test requires the Company to distribute
at least 90% of the income profits (broadly, calculated using normal
tax rules) of the Group to the extent that they are derived from the
Property Related Business of the Group (other than any Property
Related Business carried on outside the UK by non-UK tax resident
members of the Group).

The Company has the ability, by ordinary resolution, to offer
Shareholders the right to elect to receive further Ordinary Shares,
credited as fully paid, instead of cash in respect of all or any part of
any dividend (a scrip dividend). At the current time, and following a
consultation with Shareholders, it is not the Directors’ intention to
offer a scrip dividend option.

Issue of 4.5% Sterling Retail Eligible Bonds
Following the successful raise of £50.0m in a retail eligible bond issue,
the bonds were admitted to trading on the London Stock Exchange on
7 August 2018. Further details of the bond issue can be found in the
Company’s prospectus dated 18 July 2018.

Relations with Shareholders
Communication with Shareholders remains of critical importance to
the Board, who believe that understanding the views of Shareholders
is a key factor in the Group’s strategic direction and successful
development of the business.

The Company places considerable emphasis on maintaining an open
dialogue with Shareholders, and in particular institutions and wealth
managers. It has a regular schedule of announcements and additional
announcements as required. In addition, meetings are held with
institutional Shareholders, private Shareholders, wealth managers,
and sell-side equity analysts to present the Group’s financial and
operational results and to discuss the strategy and business model, as
well as the UK regional commercial property market.

During the year, a site visit was undertaken for institutional and
wealth managers at Portland Street, Manchester. In addition,
roadshows were conducted in Jersey, Liverpool and Manchester
meeting current and potential Shareholders.

The Company also encourages investors and analysts to utilise
its on-line facilities and communications and has developed a
comprehensive website of Group-specific information and other
information generally useful to real estate investment trust investors
and analysts.

The Board receives a regular investor relations report summarising
Shareholder contact, sell-side analysts’ research, media coverage, and
share price movements. In addition, the Board receives feedback from
its Broker on Shareholder issues.

Corporate Governance 58 - 90Annual Report and Accountsfor the year ended 31 December 2018Report of the Directors (continued)

Viability Statement
The Directors have assessed the prospects of the Group and future
viability over a four-year period from the year end, being longer than
the 12 months required by the ‘Going Concern’ provision.

The Board confirms that it has a reasonable expectation that the Group
will be able to operate and meet its liabilities as they fall due over the
next four years, taking account of the Group’s current position and
principal risks as set out in the Chairman’s Statement and the principal
risks and uncertainties report.

During 2018, 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 four-
year period. The risk review process provided the Board with assurance
that the mitigations and management systems are operating as
intended. The Board believes that the Group is well placed to manage
its principal risks and uncertainties successfully, taking into account the
current and economic and political environment.

The Board chose to conduct the review for a four-year period based
upon the Group’s detailed budget covering a rolling four-year period;
and the WAULT of 3.4 years to first-break, which allows the forecast to
include the re-letting and rent reversions arising from tenancy reviews.
The Group’s weighted average debt to maturity was 6.4 years as at
31 December 2018.

The Board’s expectation is further underpinned by the regular briefings
provided by each of the Asset and Investment Manager. These
briefings consider market conditions, opportunities, the ability to
raise third-party funds and deploy these promptly, and changes in the
regulatory landscape, and the current political and economic risks and
uncertainties. These risks, and other potential risks which may arise,
continue to be closely monitored by the Board.

The Directors have carefully reviewed areas of potential financial risk.
The Directors have satisfied themselves that the Group have adequate
financial resources to continue in operational existence for the
foreseeable future.

Corporate, Social and Environmental
Responsibility
Corporate responsibility covers many different aspects of business.
The Group has no direct social or community responsibilities, but the
environmental impact of our properties is important to the Group.
Although the Group is not required by statute to provide reporting on
its environmental impact and, as a Company with no employees, the
Company’s own direct environmental impact is minimal, the Board
considers the environmental impact of the Group to be an important
issue to be monitored by the Asset Manager, who is responsible for
the management of the properties on behalf of the Group. Further
details can be found on pages 40 to 42.

Auditor
RSM UK Audit LLP (“RSM”) was appointed as auditor to the Company
on listing on 6 November 2015. RSM has expressed its willingness to
continue in office as Auditor to the Company and resolutions for its
re-appointment and for the Directors to determine its remuneration
will be proposed at the forthcoming AGM.

Audit Information
The Directors who held office at the date of approval of this
Directors’ Report confirm that, so far as they are each aware, there
is no relevant audit information of which the Company’s Auditor is
unaware; and each Director has taken all the steps that they ought to
have taken as a Director to make themselves aware of any relevant
audit information and to establish that the Company’s Auditor is
aware of that information.

Listing Rules Disclosures
Listing Rule 9.8.4R requires the Company to include specified
information in a single identifiable section of the Annual Report or a
cross reference table indicating where the information is set out. The
Directors confirm that there are no disclosures required in relation to
Listing Rule 9.8.4, with the exception of the details of any contract
of significance in which a Director is or was materially interested. The
details of the Agreements with the Asset and Investment Managers
are set out in note 35.

Corporate Governance 58 - 90Annual Report and Accountsfor the year ended 31 December 2018Report of the Directors (continued)

Subsequent Events
Details of significant subsequent events are set out in note 36.

Annual General Meeting
The Company’s AGM will be held at 11am on Thursday, 23 May 2019,
at the offices of the Company’s solicitors, Macfarlanes LLP, 20 Cursitor
Street, London EC4A 1LT.

The notice of AGM, which sets out the resolutions to be proposed,
together with an explanation of the resolutions proposed,
accompanies this Annual Report and can also be found on the
Company’s website at (www.regionalreit.com).

The Board considers that all the resolutions to be put to the AGM are
in the best interests of the Company and its Shareholders as a whole
and will be voting in favour of all resolutions with their own shares.

The AGM is the Company’s principal forum for communication with
Shareholders. The Chairman of the Board and the Chairmen of the
Committees, together with the other Directors, will be available to
answer Shareholders’ questions at the AGM.

The Directors look forward to meeting Shareholders at the AGM.

For and on behalf of the Board

Kevin McGrath
Chairman and Independent Non-Executive Director

27 March 2019

Corporate Governance 58 - 90Annual Report and Accountsfor the year ended 31 December 2018Property Name: Oakland House, Manchester
Sector: Office

Legislation in Guernsey governing the preparation and dissemination of
financial statements may differ from legislation in other jurisdictions.

Responsibility Statement of the Directors in
respect of the Consolidated Annual Report
Each of the Directors, whose names and functions are listed on pages
58 and 59, confirms that to the best of each person’s knowledge:

•

The Financial Statements, prepared in accordance with the
International Financial Reporting Standards as adopted by the EU
give a true and fair view of the assets, liabilities, financial position
and profit of the Group and the undertakings included in the
consolidation taken as a whole;

The Asset and Investment Managers’ Report include a fair review
of the development and performance of the business and the
position of the Group and the undertakings included in the
consolidation taken as a whole, together with a description of
the principle risks and uncertainties they face; and

The Annual Report and Accounts, taken as a whole, are fair
balanced and understandable and provide the information
necessary for shareholders to assess the Group’s position and
performance, business model and strategy.

This responsibility statement was approved by the Board of Directors
on 27 March 2019 and signed on its behalf by:

Kevin McGrath
Chairman and Independent Non-Executive Director

27 March 2019

Statement of Directors’ Responsibilities

The Directors are responsible for preparing the Annual Report and the
Group Financial Statements in accordance with applicable law and
applicable regulations, including the requirements of the Listing Rules
and the Disclosure Guidance and Transparency Rules.

The Law requires the Directors to prepare financial statements for
each financial year in accordance with generally accepted accounting
principles. The Directors are required under the Listing Rules of
the FCA to prepare group financial statements in accordance with
International Financial Reporting Standards (“IFRS”) as adopted by
the European Union (“EU”).

The financial statements are required by law to give a true and fair
view of the state of the Group’s affairs at the end of the financial
period and of the profit or loss of the Group for that period and are
required by IFRS adopted by the EU to present fairly the financial
position of the Group and the financial performance of the Group.

In preparing the Group Financial Statements, the Directors are
required to:

•

select suitable accounting policies and then apply them
consistently;

present information, including accounting policies, in a manner
that provides relevant, reliable, comparable and understandable
information;

• make judgements and estimates that are reasonable and

prudent;

•

state that the Financial Statements have been prepared in
accordance with IFRS as adopted by the EU, subject to any
material departures disclosed and explained in the financial
statements; and

prepare the Financial Statements on the going concern basis
unless it is inappropriate to presume that the Group will continue
in business.

The Directors are responsible for keeping accounting records which are
sufficient to show and explain the Group’s transactions and are such as to
disclose with reasonable accuracy at any time the financial position of the
Group and enable them to ensure that the Financial Statements comply
with the requirements of the Law and, as regards the Group Financial
Statements, Article 4 of the IAS Regulation. They are also responsible for
safeguarding the assets of the Group and hence for taking reasonable
steps for the prevention and detection of fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Group’s website.

Corporate Governance 58 - 90Annual Report and Accountsfor the year ended 31 December 2018A copy of the AIC Code and the AIC Guide can be obtained via the AIC
website at www.theaic.co.uk. A copy of the UK Code can be obtained
at www.frc.org.uk. A copy of the GFSC Code can be obtained via the
GFSC website at www.gfsc.gg.

The Directors recognise the value of the AIC Code and believe that
reporting against the principles and recommendations of the AIC
Code, and by reference the AIC Guide, will provide Shareholders with
better information. Accordingly, the Company has taken appropriate
measures to ensure that the Company complies with the AIC Code
and the relevant provisions of the UK Code, except as set out below.

The UK Corporate Governance Code includes provisions relating to:

•

the role of the chief executive; and

executive Directors’ remuneration.

For the reasons set out in the AIC Guide, and as explained in the UK
Code, the Board considers that these provisions are not relevant to
the Company’s position, being an externally managed investment
company. In particular, all of the Company’s day-to-day management
and administration functions are outsourced to third parties. As
a result, the Company has no executive Directors, employees or
internal operations. The Company has therefore not reported further
in respect of these provisions.

Corporate Governance Statement

This Corporate Governance Statement forms part of the Report of the
Directors.

The Company is committed to maintaining high standards of
corporate governance, which meet the statutory and regulatory
requirements for companies listed in the UK. The Board is accountable
to the Shareholders for the governance of the Group’s affairs. This
section of the Annual Report sets out the principles of corporate
governance that the Board has adopted and its compliance with the
code of corporate governance that it has chosen to adopt.

The Listing Rules and the Disclosure Guidance and Transparency Rules
of the FCA require listed companies to disclose how they have applied
the principles and complied with the provisions of the corporate
governance code to which the issuer is subject.

As a member of the Association of Investment Companies (“AIC”), the
Board has complied with the principals of the AIC Code of Corporate
Governance (the “AIC Code”), published in July 2016, by reference to
the AIC Corporate Governance Guide for Investment Companies (the
“AIC Guide”), except as set out below. The AIC Code, as explained
by the AIC Guide, addresses all the principles set out in the UK
Corporate Governance Code (the “UK Code”), as well as setting out
additional principles and recommendations on issues that are of
specific relevance to the Company. The Financial Reporting Council
(“FRC”), the UK’s independent regulator for corporate reporting and
governance responsible for the UK Code, has endorsed the AIC Code
and the AIC Guide. The terms of the FRC endorsement mean that AIC
members who report against the AIC Code and the AIC Guide meet
fully their obligations under the UK Code and the related disclosure
requirements contained in the Listing Rules. Details of the Company’s
compliance with the AIC Code is set out within this statement.

The Guernsey Financial Services Commission’s (“GFSC”) Finance
Sector Code of Corporate Governance (the “GFSC Code”), updated
and published in February 2016, applies to all companies that hold
a licence from the GFSC under the regulatory laws or which are
registered or authorised as collective investment schemes, which
includes the Company. Companies which report against the AIC Code
are deemed to meet the requirements of the GFSC Code.

Corporate Governance 58 - 90Annual Report and Accountsfor the year ended 31 December 2018Corporate Governance Statement (continued)

The Principles of the AIC Code
The AIC Code is made up of 21 principles split into three sections, covering:

1. The Board;
2. Board Meetings and the relationship with the Investment Manager; and
3. Shareholder Communications.

The Board

AIC Code

Principle

Compliance Statement

The Chairman should be
independent

The independence
of Directors

The Chairman, Kevin McGrath, was independent of each of the Asset and Investment
Manager at the time of his appointment and remains so. The Chairman has not been
employed by either of the Managers in the five years prior to his appointment, nor did he act
as advisor to either Manager in that period and he does not hold any other directorship of an
investment company managed by either Manager.

There is a clear division of responsibility between the Chairman, the Directors, the Asset
Manager, the Investment Manager and the Company’s other third-party service providers.

The Board, led by the Senior Independent Director met and discussed the performance
of the Chairman, including his independence without the Chairman being present. The
Chairman was deemed independent.

The Board consists of six Non-Executive Directors; four Independent Directors (Kevin
McGrath, Frances Daley, William Eason and Daniel Taylor) who are each independent of
each of the Asset and Investment Manager; and two Non-Independent Directors (Stephen
Inglis and Timothy Bee) who sit on the Board and report on the activities of each of the Asset
and Investment Manager respectively.

William Eason and Frances Daley are Directors of separate companies managed by
investment manager Janus Henderson. This has been considered by the Board, who are
satisfied that they are demonstrably independent and that their independence as Directors
of the Company is not affected. Although managed by the same investment manager, these
appointments are entirely separate from each other and this Company. Therefore, the other
Directors having considered the impact of this relationship, were satisfied that each Director
took an impartial and objective approach in their duties as a Director of the Company.

The independence of the Directors is important to the Company in maintaining good
governance. The independence of each Director is assessed as part of the annual evaluation
process. Having assessed the performance and independence of each Director, the Board is
satisfied that all Directors, including Stephen Inglis and Tim Bee, bring strong independent
oversight and continue to demonstrate independence in judgement and character.

Directors should be submitted
for re-election at regular
intervals. Nomination for
re-election should not be
assumed but based on
disclosed procedures and
continued satisfactory
performance

All Directors submit themselves for annual re-election by Shareholders at the AGM of the
Company.

The individual performance of each Director is evaluated annually by the Chairman, as
well as through the annual Board evaluation process. The Senior Independent Director
led the evaluation of the performance of the Chairman. The recommendations made to
Shareholders to vote in favour of the re-election of all Directors at the AGM are based on the
outcome of the Board evaluation process, which is fully described on page 76.

Corporate Governance 58 - 90Annual Report and Accountsfor the year ended 31 December 2018

Corporate Governance (continued)

AIC Code

Principle

Compliance Statement

The Board should have a
policy on tenure, which
is disclosable in the
annual report

There should be full disclosure
of information about the
Board

The Board acknowledges the AIC Code provisions relating to tenure. The Board’s policy on
tenure is that continuity and experience are considered to add significantly to the strength
of the Board and, as such, there is currently no limit on the overall length of service of any of
the Directors. The Board does not believe that length of service on a wholly non-executive
board has a bearing on independence. An individual Director’s experience and continuity of
Board membership can significantly enhance the effectiveness of the Board as a whole.

Each Director has a signed letter of appointment which formalises the terms of their
engagement as a Director of the Company. These letters detail an initial three-year
appointment, but each Director may be invited by the Board to serve for an additional
period of three years, if both the individual Director and the Board believes this is in the
interest of the Company, having taken into account the independence of the Director.

During the year, the Board agreed to extend the appointment period of Kevin McGrath,
Daniel Taylor, Stephen Inglis and William Eason for a further three-year term.

The biographical details for each Director are set out on pages 58 and 59 of this Report and
demonstrate the wide range of skills, knowledge and experience they bring to the Board.

Details of the Board’s Committees and composition are set out in the Terms of Reference which
are available on the Company’s website.

The Audit Committee report is set out on pages 79 to 81 of this Report. The Audit Committee
membership comprises all the Independent Directors and it is now chaired by Frances Daley.
The Chairman is a member of the Audit Committee but does not chair it.

The MERC report is set out on pages 82 and 83 of this Report. The MERC membership comprises
all the Independent Directors and it is now chaired by William Eason.

For the period from 1 January 2018 to 20 June 2018, the Chairman of the Board was also Chair of
the MERC. Whilst not in compliance with the AlC’s recommendation, due to the size and nature
of the Company, the Board felt that it was appropriate for the Chairman of the Board to also
Chair the MERC, with the caveat that the Chairman’s own remuneration was set by the other
Independent Directors. The Chairman is a member of the MERC.

The Board considers that, as it is comprised of a majority of Non-Executive Directors and given
the size of the Company, it is not appropriate to establish a separate Nomination Committee.

As part of the annual Board evaluation process, the effectiveness of the committee structure is
considered.

The Chairman is responsible for leading the Board, ensuring its effectiveness in all aspects of
its role and he is responsible for ensuring that all Directors receive accurate, timely and clear
information. The Chairman is responsible for setting the Board’s agenda and ensuring that
adequate time is available for discussion of all agenda items, in particular strategic matters.

The Board should aim to have
a balance of skills, experience,
length of service and
knowledge of the Company

The experience, skills and knowledge of the Directors is detailed in the biographies of the
Directors, set out on pages 58 and 59 of this Report.

The Board believes that diversity of experience and approach amongst Board members is of great
importance. It has agreed that while the benefits of diversity, including gender, will be taken into
account in respect of Board appointments, the overriding priority should be appointment on
merit, therefore no measurable targets in relation to Board diversity will currently be set.

Corporate Governance 58 - 90Annual Report and Accountsfor the year ended 31 December 2018Corporate Governance (continued)

AIC Code

Principle

Compliance Statement

The Board should undertake
a formal and rigorous
annual evaluation of its own
performance and that of its
committees and individual
Directors

It is the Board’s policy to evaluate the performance of the Board, Board Committees and
individual Directors through an assessment process on an annual basis. The independence of
each Director is also considered as part of this process.

The Board carried out an evaluation of performance during 2018 by way of questionnaires
specifically designed to assess the strengths and weakness of the Board and its Committees.
The questionnaires were completed by each Director and the assessment covers the
functioning of the Board as a whole and a similar review of the effectiveness of the Board
Committees and the individual performance of the Directors is undertaken. Details of the
evaluation for 2018 are shown on page 76.

The performance of the Chairman is evaluated by the other Directors on an annual basis
using the questionnaires, under the leadership of the Senior Independent Director.

Director remuneration
should reflect their duties,
responsibilities and the value
of their time spent

Details of the Directors’ remuneration is contained in the Directors’ Remuneration Report
on page 84 of this Report.

The MERC annually reviews the fees paid to the Directors (and will compare these with its
peer group and the REIT industry generally), taking into account the level of commitment
and responsibility of each Board member.

The independent Directors
should take the lead in the
appointment of new Directors
and the process should be
disclosed in the annual report

The Company does not utilise a separate Nomination Committee as this function is carried
out by the Board. It is not thought appropriate given the size of the Board.

The Independent Directors would be expected to lead the process of the appointment of any
new Director to the Board. As reported in the 2017 report, the recruitment process for the
appointment of Frances Daley was undertaken by the independent directors. Neither open
advertising or an external search consultancy were used in the recruitment process.

Directors should be offered
relevant training and
induction

New Directors receive a full induction pack containing key information and governance
documents from the Company Secretary when they are appointed. They will also be given
key information on the Company’s regulatory and statutory requirements as they arise.

In addition, they will be offered a tailored induction programme with each of the Asset and
Investment Managers, which covers the investment portfolio and the Managers’ approach to
investment.

All Directors will continue to receive periodic relevant training and updates as necessary
from the Company Secretary, legal advisors and other service providers to enhance and
refresh their knowledge.

The annual Board evaluation process provides Directors with an opportunity to identify any
training or development requirements.

The Directors have access to the advice and services of the Company Secretary through its
appointed representative.

Principle 11 applies to the launch of new investment companies and is, therefore, not
applicable to the Company.

The Chairman (and the Board)
should be brought into the
process of structuring a new
launch at an early stage

Corporate Governance 58 - 90Annual Report and Accountsfor the year ended 31 December 2018Corporate Governance (continued)

AIC Code

Principle

Compliance Statement

Boards and managers should
operate in a supportive,
co-operative and open
environment

The primary focus at regular
Board meetings should
be a review of investment
performance and associated
matters, such as gearing,
asset allocation, marketing/
investor relations, peer group
information and industry
issues

Formal Board meetings provide important forums for the Directors and key members of the
Managers’ teams to interact and for Directors to receive reports and provide challenge to
both the Asset and Investment Managers.

Representatives of each of the Asset and Investment Manager are appointed to the Board,
which facilitates communication between them and the Board and supplements the regular
reporting to the Directors at Board meetings. The Chairman encourages open debate to
foster a supportive and co-operative approach for all participants.

Interaction between the Board and the Asset and Investment Managers is not restricted to
Board meetings. Between meetings, the Managers update the Board on developments and
respond to queries and requests by Directors as they arise.

In addition, informal meetings take place regularly between the Directors and the Asset
and Investment Managers and senior members of the teams are also invited to the Board’s
annual strategy meeting.

At each meeting, the Board receives a report on the performance of the Group from the
Asset and Investment Managers.

The Board is responsible for establishing the investment objectives, strategy, the type of
investment and the level of permitted gearing and borrowings. The Investment Management
Agreement with the Investment Manager sets out restrictions on the activities of the
Investment Manager without Board approval.

The Board, at its regular meetings, undertakes reviews of key investment and financial data,
analyses of asset allocation, peer group information, the economy generally, transactions
and performance comparisons, share price and NAV performance. It also receives an update
from the Asset Manager on property market conditions and trends, movements compared
to previous quarters, yields on properties within the portfolio, lease lengths and letting
activity, including estimated rental values and vacant properties.

The Board regularly considers the merits of a share buy back.

The Chairman is responsible for ensuring that the Directors receive accurate, timely and
clear information and through the Company Secretary ensures that each service provider
reports to the Board as required.

Boards should give sufficient
attention to overall strategy

The Board is responsible for the strategy of the Company and monitors performance against
its agreed strategy on an ongoing basis.

The Board is responsible for setting the overall strategic objectives of the Company and
meets once a year to focus exclusively on strategy.

The Board should regularly
review both the performance
of, and contractual
arrangements with, the
manager

The MERC meet at least once annually to review the overall performance of each of the
Asset and Investment Manager and considers the appropriateness of their continued
appointments and contractual arrangements (including the structure and level of
remuneration).

The Audit Chairman, on behalf of the Committee, reviews the Asset and Investment
Manager’s compliance and control systems in operation insofar as they relate to the affairs
of the Company. The Audit Committee further reviews the arrangements with, and the
services provided by, the Depository to ensure that the safeguarding of the Company’s
assets and security of the Shareholders’ investment is being maintained. The Depository
provides an Annual Depositary Report to the Audit Committee.

Corporate Governance 58 - 90Annual Report and Accountsfor the year ended 31 December 2018Corporate Governance (continued)

AIC Code

Principle

Compliance Statement

The Board should agree
policies with the manager
covering key operational
issues

The Master Asset Management Agreement between the Company and the Asset Manager
sets out the limits of the Asset Manager’s authority, beyond which Board approval is
required, for example an acquisition or disposal of any portfolio property, the value of which
exceeds £15m.

The Master Investment Management and Services Agreement between the Company and
the Investment Manager sets out the limits of the Investment Manager’s authority, beyond
which Board approval is required.

Representatives of both the Asset and Investment Managers attend each meeting of the
Board to address questions on operational issues and specific matters and to seek approval
for specific transaction which are required to be referred to the Board.

The Board has retained responsibility for matters such as Board membership, gearing and
share buy-backs.

The Board should monitor
the level of the share price
discount or premium (if any)
and, if desirable, take action
to reduce it

The Company’s share price is monitored by the Investment Manager on a daily basis. The
Investment Manager also circulates an investor relations bulletin to the Board via email on
a monthly basis. This bulletin contains, amongst other information, the share price discount
or premium.

At each Board meeting, the Board considers the discount or premium to NAV and reviews
the changes in the level of discount or premium and in the share price since the previous
Board meeting and over the longer term.

The Board should monitor
and evaluate other service
providers

On the Company’s behalf, the Investment Manager monitors the performance and systems
and controls employed by the third-party service providers.

The MERC reviews the performance and cost of the Company’s third-party service providers
and considers the recommendations from the Investment Manager in respect of the
continuing appointment of these third parties.

The Board ultimately considers if a provider should be replaced.

The Board should regularly
monitor the shareholder
profile of the Company and
put in place a system for
canvassing shareholder views
and for communicating the
Board’s view to Shareholders

The Board believes that the maintenance of good relations with its Shareholders is
important for the long-term prospects of the Company. The AGM is the Company’s
principal forum for communication with Shareholders and Directors are available to answer
Shareholders’ questions at the meeting.

The Board receives feedback on the views of Shareholders from its corporate brokers.
Through this process, the Board seeks to monitor the views of Shareholders and to ensure an
effective communication programme.

The Asset Manager holds regular discussions with major Shareholders. Any feedback is
provided to and greatly valued by the Board. During 2018, the Chairman met with two
principal Shareholders.

Any views expressed by Shareholders on the remuneration being paid to Directors would be
taken into consideration by the MERC when reviewing levels of remuneration.

Shareholders wishing to communicate with the Chairman, or any other member of the
Board, may do so by writing to the Company, for the attention of the Company Secretary at
the Registered Office address.

The Notice of Meeting sets out the business of the AGM. The Asset Manager will make a
presentation to Shareholders covering the performance and strategy of the Company at the
AGM. The Directors welcome the view of all Shareholders.

Corporate Governance 58 - 90Annual Report and Accountsfor the year ended 31 December 2018Corporate Governance (continued)

AIC Code

Principle

Compliance Statement

The Board should normally
take responsibility for, and have
a direct involvement in, the
content of communications
regarding major corporate
issues if the Asset Manager or
Investment Manager is asked to
act as spokesperson.

The Board should ensure that
Shareholders are provided
with sufficient information
for them to understand the
risk: reward balance to which
they are exposed by holding
the shares

All substantive communications regarding any major corporate matter are discussed by the
Board taking into account representations from the Asset and Investment Managers and, as
appropriate, the Auditor, Legal Adviser, Broker and Company Secretary. Formal Board approval
of any substantive communication is required.

The Board aims to provide Shareholders with a full understanding of the Company’s
investment objective, policy and activities, its performance and the principal risks by means
of the Annual Report and Half-Year Reports.

The Board believes that sufficient information is available to Shareholders to understand
the risk: reward balance to which they are exposed by holding shares in the Company.
The publication of the Key Information Document on the Company’s website, which is
prepared by the Investment Manager, provides the nature and key risks of the Company to
Shareholders.

Details of the Director’s assessment of the Principal Risks and their mitigation are set out on
pages 49 to 52.

The Investment Objective and Policy are set out on page 15.

The performance of the Company and that of the Asset Manager and Investment Manager
is discussed in the Chairman’s Statement and the Asset and Investment Managers Report on
pages 22 to 46. The performance of each of the Asset and Investment Manager is considered
on an annual basis by the MERC. Details of the MERC’s review of the performance of both
the Asset and Investment Manager is set out on pages 82 and 83.

Details of the Performance Fees payable to the Asset and Investment Managers are set out
on page 55.

The ongoing charge is disclosed in the Financial Review section of the Report.

The going concern and viability statements of the Group are set out on pages 63 and 64.

The full list of the property portfolio of the Group is available on the Company’s website. The
Top 15 properties are shown on pages 34 to 39.

There is a formal set of matters reserved for decision by the Board which, together with the
terms of the Master Asset Management Agreement and Master Investment Management
Agreement, limits the decision making of each of the Asset Manager and the Investment
Manager. The set of matters reserved for the Board includes establishing the investment
objectives, strategy, raising new capital, major financing facilities and specific risk
management policies including treasury policies, hedging, borrowing limits and corporate
security.

As the Company only invests in property, it is not relevant for the Board to determine the
Investment Manager’s remit regarding voting and corporate governance issues in respect of
any investee companies.

Details of the Group’s borrowings are set out on pages 45 and 46 and in the notes to the
accounts. Details of the Company’s banking covenants are disclosed in note 23.

Corporate Governance 58 - 90Annual Report and Accountsfor the year ended 31 December 2018Corporate Governance (continued)

The Board of Directors
The Board consists entirely of Non-Executive Directors and has no
employees. Biographical details of the Directors of the Company who
held office during the period are shown on pages 58 and 59.

The Board is responsible for all matters of direction and control of the
Company and the Group, including its investment policy and strategy,
and no one individual has unfettered powers of decision-making. The
Directors possess a wide range of business expertise relevant to the
direction of the Company and consider that they commit sufficient
time to the Company’s affairs.

None of the Directors has a service contract, but letters of
appointment setting out the terms of their appointment are in place.
Directors are not entitled to any compensation for loss of office.
Copies of the letters of appointment are available for inspection at the
Company’s registered office address and will be made available for up
to 15 minutes prior to the start of the AGM.

Senior Independent Director
William Eason was appointed as the Senior Independent Director
on 1 December 2016. He provides a channel for any Shareholder
concerns regarding the Chairman and takes the lead in the annual
evaluation of the Chairman.

Board Diversity
The Board acknowledges the benefits of greater diversity, including
gender, and remains committed to ensuring that the Company’s
Directors bring a wide range of skills, knowledge, experience,
backgrounds and perspectives.

The Board does not feel that it would be appropriate to set diversity
targets as all appointments must be made on merit and objective
criteria. However, gender and diversity generally will be taken into
consideration when evaluating the skills, knowledge and experience
desirable to fill each Board vacancy. The Board has established the
following objectives for achieving diversity on the Board:

•

All Board appointments will be made on merit, in the context
of the skills, knowledge and experience that are needed for the
Board to be effective.

Long lists of potential non-executive Directors will always
include diverse candidates of appropriate merit.

The Board will only engage executive search firms who have
signed up to the voluntary Code of Conduct on gender diversity
and best practice.

Board Operation
The Directors meet at regular Board meetings, held at least four times
a year, with additional meetings arranged as necessary. During the
year to 31 December 2018, the number of scheduled Board meetings
attended by each Director was as follows:

Director

Kevin McGrath

William Eason

Daniel Taylor

Frances Daley

Stephen Inglis

Tim Bee

Scheduled Board Meetings

Number entitled
to attend

Number
attended

Additional Board meetings were also held as required during the year,
including to deal with transactions and other specific events such as
acquisitions, dividends, the bond issue and debt financings and were
attended by those Directors available at the time.

The Board follows a formal agenda, which is approved by the
Chairman and circulated by the Company Secretary in advance
of the meeting to all the Directors and other attendees. A typical
agenda includes a review of investment performance, investment
opportunities, the Company’s financial performance, asset allocation,
updates on investor relations and specific regulatory or governance
matters. Representatives of the Company’s advisors are invited to
attend Board meetings from time to time, particularly the Company’s
valuers, brokers and lawyers.

The Board meets once a year for a whole day to review and focus
on the Company’s strategy. In June 2018, all of the Directors of
the Company attended the strategy meeting held at one of the
Company’s properties located in Bristol.

Conflicts of Interest
The Company’s Articles permit a Director to act in a situation where
a Director has disclosed the nature and extent of an interest that
conflicts, or may possibly conflict, with the interests of the Group in
accordance with the Law.

The Board has established a formal process whereby actual and
potential conflicts of interests are considered by the Directors who
have no interest in the matter, who then decide whether to authorise
the conflict and any conditions to be attached to such authorisations.

The Directors are able to impose limits or conditions when giving
authorisation, if they think this is appropriate in the circumstances. A
register of potential conflicts is maintained by the Company Secretary
and is reviewed at each Board meeting to ensure that any authorised
conflicts remain appropriate. Directors are required to confirm at
these meetings whether there has been any change to their position.

Corporate Governance 58 - 90Annual Report and Accountsfor the year ended 31 December 2018Corporate Governance (continued)

Board Evaluation
The Directors are aware of the need to continually monitor and
improve performance and recognise that this can be achieved through
undertaking a regular Board evaluation exercise, providing a valuable
feedback mechanism for improving Board effectiveness. The Board
agreed that the use of an external evaluation service provider was not
necessary at this stage; however, this would be kept under review.

The Directors have opted to undertake an internal performance
evaluation specifically designed to assess the strengths and
independence of the Board and the Chairman, individual Directors
and the performance of its committees. The evaluation was
conducted using tailored questionnaires and was structured to
analyse the focus of Board composition and effectiveness, the
efficiency of Board and Committee meetings, and to assess whether
the operation of such meetings was appropriate, as well as whether
any additional information may be required to facilitate better Board
discussions. The Board was also asked to consider Board support,
strategic operational oversight, shareholder engagement and
succession planning.

Overall, the results of the evaluation were positive, with Director
engagement and preparation for meetings, and combined knowledge
of the property sector viewed as strengths. There were no significant
concerns amongst the Directors relating to the effectiveness of the
Board.

The results of the 2019 Board evaluation process were reviewed and
discussed by the Board as a whole.

As evidenced by the result of the evaluation, the Board considers that
all the current Directors contribute effectively and have the skills and
experience relevant to foster the effective leadership and direction of
the Company.

The Chairman’s review was positive, and the other Directors
considered that the Chairman remained independent and that he
continued to strongly and effectively lead the Board of the Company.
In addition, post the year end, the Senior Independent Director led
a separate discussion with the other Directors (in the absence of the
Chairman) to discuss the evaluation results and provide a forum for
open discussion. There were no concerns to report.

Board Committees
The Board has two Committees in operation and has delegated
certain responsibilities to its Audit Committee and its Management
Engagement and Remuneration Committee. Given the size of the
Company, it is not felt appropriate for the Company to have a
separate Nomination Committee.

The Board has established formal terms of reference for each of the
Committees, which are available on the Company’s website.

Audit Committee
Throughout 2018, the Audit Committee comprised the four Independent
Directors. Frances was appointed as a member on 1 February 2018 and
subsequently became chairman of the Audit Committee in June 2018.
The Chairman of the Company is a member of the Audit Committee but
does not act as committee chairman.

All members of the Audit Committee are considered to have relevant
experience in the industry in which the Company operates. The Board
is also satisfied that at least one member of the Audit Committee has
recent and relevant financial experience.

Any individual who is not a member of the Audit Committee is not
entitled to attend or to vote at its meetings. However, the Audit
Committee may invite anyone to attend Committee meetings at its
discretion and representatives of the external auditor are invited to
attend as necessary. An Audit Committee Report is set out on pages
79 to 81.

Management Engagement and Remuneration
Committee (“MERC”)
Throughout 2018, the MERC comprised the four Independent
Directors and is now chaired by William Eason. Kevin McGrath
stepped down as Chairman of the MERC in June 2018 but remains a
member of the Committee.

Although an individual who is not a member of the MERC is
not entitled to attend and vote on matters at its meetings, the
Committee may invite anyone to attend at its discretion. A MERC
Report is set out on pages 82 and 83.

Management of Risk and Internal Controls
The Board has overall responsibility for the Company’s systems of
internal controls and for reviewing their effectiveness, ensuring that
risk management and control processes are embedded in day-to-day
operations.

The Board has established an ongoing process for identifying,
evaluating and managing significant risks with the aim of helping to
safeguard the Company’s assets. The Board exercises its oversight
of financial, reporting, compliance, operational and overall risks by
relying on regular reporting on performance and other management
information from the Asset and Investment Managers. These
procedures are designed to manage rather than eliminate risk. The
Board manages risks as set out below:

•

The Board, through the Audit Committee, will conduct a risk and
control assessment on an annual basis, including a review of the
internal controls procedures of the Company’s principal third-
party service providers;

The responsibilities for the investment management, asset
management, accountancy and depository functions are
segregated, and the procedures of the third-party service
providers are designed to safeguard the Company’s assets;

The Board is kept regularly updated by the Asset and Investment
Managers outside of scheduled Board meetings and each
manager provides reports at each meeting of the Board; and

Under the terms of the Asset Management Agreement between
the Company and the Asset Manager, Board-level approval is
required for purchases of property exceeding £15m in value and
for disposals exceeding £15m in value.

Regular risk assessments and reviews of internal controls are
undertaken in the context of the Company’s overall investment
objective by the Board, through the Audit Committee.

Corporate Governance 58 - 90Annual Report and Accountsfor the year ended 31 December 2018Corporate Governance (continued)

Management of Risk and Internal
Controls (continued)
A risk matrix has been produced against which the risks identified and
the controls in place to mitigate those risks can be monitored. The
risks are assessed on the basis of the likelihood of them happening,
the impact on the business if they were to occur and the effectiveness
of the controls in place to mitigate them. This risk register is reviewed
by the Audit Committee every six months.

The principal risks that have been identified by the Board are set out
on pages 49 to 52.

The Board reviews financial information produced by the Investment
Manager and the Sub-Administrator on a regular basis.

Most functions for the day-to-day management of the Company are
sub-contracted, and the Directors therefore obtain regular assurances
and information from principal third-party suppliers regarding the
internal systems and controls operated in their organisations. In
addition, each of the Company’s material third parties, excluding LSI
and Toscafund, provides a copy of its report on internal controls each
year, which is reviewed by the Audit Committee.

The Audit Chairman, on behalf of the Audit Committee, meets with
representatives of LSI and Toscafund to discuss and review their
internal controls. The Depository provides depository services under
the AIFMD to the Company and reports on an annual basis to the
Company, in addition to quarterly reports, on its specific monitoring
of cash transactions and asset verification.

Taking into account the principal risks provided on pages 49 to 52
and the ongoing work of the Audit Committee in monitoring the risk
management and internal control systems on behalf of Board, the
Directors:

•

are satisfied that they have carried out a robust assessment of
the principal risks facing the Group; and

have reviewed the effectiveness of the risk management and
internal controls systems and no significant failings were
identified.

By order of the Board

Kevin McGrath
Chairman and Independent Non-Executive Director

27 March 2019

Corporate Governance 58 - 90Annual Report and Accountsfor the year ended 31 December 2018Property Name: Columbus House, Coventry
Sector: Office

Audit Committee Report

I am pleased to present the Audit Committee Report for the year ended 31 December 2018, this being my first report as Chairman of the Audit
Committee (the “Committee”) having taken over the chairmanship from William Eason. I am a Chartered Accountant and have chaired an
audit committee previously.

The Committee is a Board Committee with governance responsibilities that include the oversight of financial disclosures and corporate
reporting and it is therefore important that the Committee operates effectively and efficiently. The Committee is to meet at least twice
annually and its quorum is two members. None of the members of the Committee are connected to either the Asset or Investment Manager
or to the Auditor. Whilst Kevin McGrath is an independent Director he is also Chairman of the Company. The Committee have considered it
beneficial to have Kevin and his experience.

Role of the Audit Committee
The principal duties of the Audit Committee are:

Financial Reporting

•

to monitor the integrity of the half-yearly financial statements,
full-year financial statements and preliminary results
announcement of the Company;

to review and report to the Board on any significant financial
reporting issues and judgments, having regard to any matters
communicated to it by the Auditor; and

as requested by the Board, to review the contents of the Annual
Report and Accounts and advise the Board on whether, taken
as a whole, the report is fair, balanced and understandable and
provides shareholders with sufficient information to assess
the Company’s position and performance, business model and
strategy.

Risk Management and Control

•

to keep under review the adequacy of the Company’s third-
party service providers’ internal controls and risk management
systems; and

review the Company’s risk register, including significant and
emerging risks.

External Audit

•

to manage the relationship with the Company’s external Auditor,
including reviewing the Auditor’s remuneration, re-appointment,
terms of engagement, objectivity and independence and
performance. The committee makes recommendations to the
Board as appropriate;

to review the policy on the engagement of the Auditor to supply
non-audit services;

to safeguard the Auditor’s independence and objectivity; and

to regularly review the need for an internal audit function.

Corporate Governance 58 - 90Annual Report and Accountsfor the year ended 31 December 2018Audit Committee Report (continued)

External Property Valuation

•

to review the quality and appropriateness of the half-yearly and
full-year external valuations of the Group’s property portfolio.

Other

•

to review the Committee’s terms of reference and performance
effectiveness; and

to report to the Board on how it has discharged its
responsibilities.

The Audit Committee is to meet at least twice annually and its
quorum is two members. It reports and makes recommendations to
the Board, after each meeting.

Matters Considered by the Audit Committee in
the Year
During the year ended 31 December 2018, the Audit Committee met
on three occasions and once post the year end. At these meetings, the
Audit Committee has:

•

reviewed the internal controls and risk management systems of
key third-party service providers;

reviewed financial results;

agreed the audit plan with the Auditor, including the principal
areas of focus, and agreed the audit fee;

reviewed the half-year and annual valuation reports from
Cushman & Wakefield Debenham Tie Leung Limited (trading
as Cushman & Wakefield) and Jones Lang LaSalle Incorporated
(“JLL”);

received and discussed with the Auditor their report on the
results of the audit;

reviewed the provision of non-audit services by the Auditor;

reviewed the independence of the Auditor; and

reviewed the Group’s Financial Statements and advised the
Board accordingly.

The Audit Committee has reviewed and updated, where appropriate,
the risk matrix. The Company’s principal risks can be found on pages
49 to 55.

The Administrator and the Investment Manager update the Audit
Committee on changes to accounting policies, legislation and
best practice and areas of significant judgment undertaken by the
Investment Manager.

Attendance at these meetings was as follows:

Member

Frances Daley (Chairman)

William Eason

Kevin McGrath

Daniel Taylor

Scheduled Audit Committee Meetings

Number of meetings
entitled
to attend

Number
attended

Property Portfolio Valuation
The Audit Committee recognises that the valuation of the properties
within the Company’s portfolio is central to the Company’s business
and that errors could have a material impact on the Company’s net
asset value. Properties are independently valued by specialist third
party service providers, Cushman & Wakefield and JLL.

The valuations are prepared in accordance with the appropriate
sections of the RICS Professional Standards, RICS Global Valuation
Practice Statements, RICS Global Valuation Practice Guidance–
Applications and United Kingdom Valuation Standards contained
within the RICS Valuation-Professional Standards 2014. The
valuations are compliant with International Valuation Standards.

The Asset Manager has held open discussions with the valuers
throughout the year on the valuation process to discuss and challenge
various elements of the property valuations. The Auditor also has
direct access to them as part of the audit process.

Since the year end, the Audit Committee has reviewed the valuation
reports and has discussed these reports with the Asset Manager. The
Audit Committee were satisfied with the valuation reports.

The performance of the valuers is assessed on an annual basis by the
MERC, as set out in their report on pages 82 and 83.

External Audit Process
Each year, the Audit Committee monitors and reviews the
effectiveness of the external audit process for the Annual Report,
undertakes a detailed review of the audit plan and the audit results
report and makes recommendations to the Board on the re-
appointment, remuneration and terms of engagement of the Auditor.

Each year, the Audit Committee meets with the Auditor before the
annual results are prepared to discuss the scope to the audit plan.
They further meet with the Auditor to discuss the findings of the
external audit and consider and evaluate any findings.

The Audit Committee has undertaken a review of the effectiveness
of the external audit process and considered the reappointment of
the Auditor. The review comprised, amongst other factors, the quality
of the staff including the performance of the lead audit partner,
the competence and expertise of the audit team, the resources,
and communication between the audit team and the Asset and
Investment Managers.

Any concerns with the effectiveness of the external audit process
would be reported to the Board. No concerns were raised in respect
of the year just ended and the Audit Committee concluded that
the quality of the external Auditor’s work, and the knowledge
and competence of the audit team, had been maintained at an
appropriate standard during the year.

Following the consideration of the above matters and its detailed
review, the Audit Committee is of the opinion that the Annual Report,
taken as a whole, is fair, balanced and understandable and provides
the information necessary for shareholders to assess the Company’s
position and performance, business model and strategy.

Corporate Governance 58 - 90Annual Report and Accountsfor the year ended 31 December 2018Internal Audit
The Audit Committee has determined that there is no need for an
internal audit function given the limited size and complexity of the
Company and business.

Committee Effectiveness
During the year, the Board carried out an internally facilitated
evaluation of its performance and that of its Committees. This
evaluation confirmed that the Audit Committee continued to operate
at an appropriate standard.

Frances Daley
Audit Committee Chairman

27 March 2019

Audit Committee Report (continued)

Audit Fees and Non-Audit Services
An audit fee of £77,500 has been agreed in respect of the audit of the
Company for the year ended 31 December 2018 (31 December 2017:
£75,000). The Group’s audit fees for the year ended 31 December
2018 totalled £222,500 (31 December 2017: £246,000).

In order to help safeguard the external Auditor’s independence and
objectivity, the Audit Committee has a policy on the engagement
of the Auditor to supply non-audit services, taking into account the
recommendations of the Accounting Practices Board. All non-audit
work to be carried out by the Auditor must be approved by the Audit
Committee in advance and such approval will not be granted in
circumstances where it’s considered that the nature or cost of the
work could interfere with the external Auditor’s independence.

The cost of non-audit services provided by the Auditor to the
Company for the financial year ended 31 December 2018 was
£26,000 (31 December 2017: £122,998). These services related to
work undertaken by RSM Corporate Finance LLP, a separate corporate
body to that of the Auditor (RSM UK Audit LLP) in respect of
corporate finance services.

Deloitte LLP have been engaged to advise on all ongoing taxation
matters.

Independence and Objectivity of the Auditor
RSM UK Audit LLP (“RSM”) has been auditor to the Company since
listing on 6 November 2015, during which time Mr Euan Banks,
Partner at RSM, has been the audit partner on the audit. In line with
the mandatory rotation of the Company’s audit partner every five
years, Mr Banks will rotate as audit partner after the financial year
ending 31 December 2019. No tender for the audit of the Company
has been undertaken.

In evaluating RSM’s performance, the Audit Committee considered
the effectiveness of the audit process, taking consideration of the
quality of delivery, staff expertise, audit fees and the Auditor’s
independence, along with matters raised during the audit.

The Audit Committee received confirmation from RSM that they
maintain appropriate internal safeguards in line with applicable
professional standards.

In accordance with requirements relating to the appointment of
auditors, the Company will need to conduct an audit tender no later
than for the accounting period beginning 1 January 2026.

Having considered the Auditor’s independence in respect of the year
ended 31 December 2018, the Audit Committee is satisfied with the
Auditor’s performance, objectivity and independence.

Review of Auditor Appointment
Following consideration of the performance of the Auditor, the
service provided during the year and a review of their independence
and objectivity, the Audit Committee has recommended to the Board
the continued appointment of RSM UK Audit LLP as the Company’s
external independent auditor.

Corporate Governance 58 - 90Annual Report and Accountsfor the year ended 31 December 2018Management, Engagement and Remuneration Committee Report

As newly appointed Chairman, I am pleased to present the
Management Engagement and Remuneration Committee Report for
the year ended 31 December 2018.

Role of the Management Engagement and
Remuneration Committee (“MERC”)
The principal duties of the MERC are:

•

to have responsibility for setting the remuneration policy for all
Directors and the Company Chairman;

to monitor the level and structure of remuneration of the
Directors, Asset Manager and Investment Manager of the
Company;

to recommend and monitor the appropriateness of the ongoing
appointment of the Asset Manager and Investment Manager of
the Company;

to recommend and monitor the appropriateness of the ongoing
appointment of the third-party service providers; and

• within the terms of the agreed policy and in consultation with
the Chairman, to determine the total individual remuneration
package of each Director and the Managers, including bonuses,
incentive payments and share options or other share awards.

No individual is to be involved in discussions about his/her own
remuneration. The MERC reports, and makes recommendations, to
the Board after each meeting. The MERC is to meet at least once
annually and its quorum is two members.

Activities During the Year
The MERC met twice during the year and once post year end. It
considered the continued appointment and remuneration of the Asset
and Investment Managers and the continued appointment of all of
the Company’s corporate advisers and principal service providers. The
MERC also considered the remuneration of the independent non-
executive Directors.

The Asset Manager, on behalf of the MERC, is currently undertaking
a re-tender of the position of valuer to the Company’s property
portfolio, with a view of engaging the successful party in advance
of the Company’s portfolio valuation as at 30 June 2019. This re-
tender includes the current incumbents. The Asset Manager will make
recommendations to the MERC as to a preferred party to enable
the MERC to subsequently recommend to the Board the party to be
appointed.

The MERC conducted its annual comprehensive review of the
performance of the Managers and the Company’s key service
providers. It assessed the performance, quality of service and ongoing
requirement for the provision of such services, the fees paid to and
the additional added value given by the Managers and the Company’s
service providers. The MERC also reviews the resourcing at the
Managers.

On a regular basis, the Board reviews the investment and disposal
decisions made by the Asset Manager. To ensure open and regular
communication between the Managers and the Board, representatives
of both Managers attend all Board meetings, to update the Board on
the Company’s investments and discuss the market generally and to
discuss the financial performance and strategy of the Company.

The Board keeps the performance of both Managers under continual
review.

On the basis of the review undertaken by the MERC, the MERC was
satisfied with the performance of each of the Asset Manager and
Investment Manager and their ability to support the Company’s
Investment Objective, and agreed to recommend to the Board that the
continued appointment of each of the Asset Manager and Investment
Manager, on the terms agreed, was in the best interests of the Company
and its Shareholders as a whole.

The MERC was satisfied that the Company was benefiting from added
value in respect of the services it procures from third parties. Subject
to the result of the tender, details of which are set out above, the
Committee recommends that all other third-party service providers
should be retained.

Corporate Governance 58 - 90Annual Report and Accountsfor the year ended 31 December 2018Management, Engagement and Remuneration Committee Report (continued)

Attendance at these meetings was as follows:

Member

Bill Eason (Chairman)

Kevin McGrath

Daniel Taylor

Frances Daley

Scheduled MERC Meetings

Number of meetings
entitled to attend

Number
attended

Committee Effectiveness
During the year, the Board carried out an internally facilitated
evaluation of its performance and that of its Committees. This
evaluation confirmed that the MERC Committee continued to
operate at a high standard.

William Eason
MERC Committee Chairman

27 March 2019

Corporate Governance 58 - 90Annual Report and Accountsfor the year ended 31 December 2018Remuneration Report

Statement from the Chairman

Payment for Loss of Office

No payment has been made to any former Director for loss of office.

Remuneration Consultants

The Group did not engage the services of an external remuneration
consultant during the period under review. The Board will consider the
engagement of remuneration consultants in the future if it is thought
appropriate or desirable to do so.

Total Director Remuneration

The following amounts were paid to the Directors as fees for their
services during the year:

Director

Kevin McGrath

William Eason

Daniel Taylor

Frances Daley*

Stephen Inglis

Tim Bee

Aggregate:

Fees paid to
31 December 2018

Fees paid to
31 December 2017

£70,000

£50,000

£45,833

–

£70,000

£50,000

–

£215,832

£170,000

* Appointed on 1 February 2018

No additional remuneration was paid to the Directors during the year.

Any views expressed by Shareholders on the fees being paid to
Directors would be taken into consideration by the MERC when
reviewing levels of remuneration.

By order of the Board

William Eason
MERC Chairman

27 March 2019

I am pleased to present the Directors’ remuneration report for the year
ended 31 December 2018.

As at 31 December 2018 and the date of this report, the Board
consists entirely of non-executive Directors and the Company has
no employees. Annually, the MERC reviews Directors remuneration,
considering the level of activity of the Company, its financial results,
market rates generally and the time commitment and responsibilities
required of each Director. As a result of this review, with effect from
1 April 2019, fees will be increased by 5% to £73,500 (previously
£70,000) per annum for the Chairman and £52,500 (previously
£50,000) per annum for other Directors. No additional increase in fees
would be payable to the Chairman of the Audit Committee and the
Senior Independent Director.

Each Director abstained from voting on their own individual
remuneration. Directors’ fees have not been increased since the
Company’s inception in 2015. The increase in Directors’ fees remains
within well within the approved maximum aggregate set out in the
Company’s Articles of Association of £300,000 per annum.

Directors’ Remuneration

The level of remuneration has been set to reflect the experience
of the Board as a whole, determined with reference to comparable
organisations and appointments. The Directors shall be entitled to
receive fees for their services, such sums not to exceed in aggregate
£300,000 in any financial year (or such sum as the Company in
general meeting shall from time to time determine).

William Eason receives no additional remuneration for his role as
Chairman of the MERC or as Senior Independent Non-Executive
Director. Frances Daley receives no additional remuneration for her
role as Chairman of the Audit Committee.

Stephen Inglis receives no remuneration from the Company due to
his position as chief executive officer of the Asset Manager. Tim Bee
receives no remuneration from the Company due to his position as
chief legal counsel of the Investment Manager.

The Directors may be paid all reasonable travel, hotel and other
out-of-pocket expenses properly incurred by them in attending Board
or Committee meetings or general meetings, and all reasonable
expenses properly incurred by them seeking independent professional
advice on any matter that concerns them in the furtherance of their
duties as a Director.

Additional Remuneration

There are no performance conditions attaching to the remuneration
of the Directors as the Board does not believe that this is appropriate
for non-executive Directors. The Directors do not receive pension
benefits, long-term incentive schemes or share options or any other
non-statutory benefits.

Corporate Governance 58 - 90Annual Report and Accountsfor the year ended 31 December 2018Property Name: Buildings 2 & 3 HBOS Campus, Aylesbury
Sector: Office

Independent Auditor’s Report to the Members of Regional REIT Limited

Opinion
We have audited the financial statements of Regional REIT Limited
and its subsidiaries (the ‘group’) for the year ended 31 December
2018 which comprise the Consolidated Statement of Comprehensive
Income, Consolidated Statement of Financial Position, Consolidated
Statement of Changes in Equity and Consolidated Statement of Cash
Flows 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 Financial Reporting Standards (IFRSs) as adopted by the
European Union.

•

the Directors’ confirmation set out on page 64 in the annual
report that they have carried out a robust assessment of the
principal risks facing the group, including those that would
threaten its business model, future performance, solvency or
liquidity;

the Directors’ statement set out on page 63 in the financial
statements about whether the Directors considered it
appropriate to adopt the going concern basis of accounting
in preparing the financial statements and the Directors’
identification of any material uncertainties to the group’s ability
to continue to do so over a period of at least twelve months from
the date of approval of the financial statements;

In our opinion:

• whether the Directors’ statement relating to going concern

the financial statements give a true and fair view of the state of
the group’s affairs as at 31 December 2018 and of the group’s
profit for the year then ended;

required under the Listing Rules in accordance with Listing Rule
9.8.6R(3) is materially inconsistent with our knowledge obtained
in the audit; or

•

the financial statements have been properly prepared in
accordance with IFRSs as adopted by the European Union; and

•

the financial statements have been prepared in accordance with
the requirements of the Companies (Guernsey) Law 2008 (the
“Law”) and Article 4 of the IAS Regulation.

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 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 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 principal risks, going
concern and viability statement
We have nothing to report in respect of the following information
in the annual report, in relation to which the ISAs (UK) require us
to report to you whether we have anything material to add or draw
attention to:

•

the disclosures in the annual report set out on pages 49 to 52
that describe the principal risks and explain how they are being
managed or mitigated;

the Directors’ explanation set out on page 64 in the annual
report as to how they have assessed the prospects of the group,
over what period they have done so and why they consider that
period to be appropriate, and their statement as to whether
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 of their assessment, including any related
disclosures drawing attention to any necessary qualifications or
assumptions.

Key audit matters
Key audit matters are those matters that, in our professional
judgment, were of most significance in our audit of the group
financial statements of the current period and include the most
significant assessed risks of material misstatement (whether or not
due to fraud) that we identified. These matters included 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 group financial statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these matters.

Valuation of investment properties held by
the group

Risk of material misstatement

This is detailed in the Audit Committee report on pages 79 to 81; the
significant accounting judgements and estimates on pages 96 to 98;
significant accounting policies on pages 98 to 102 and note 14 to the
financial statements on pages 107 to 109.

The group owns or controls through a portfolio of Special Purpose
Vehicles (SPVs) a portfolio of investment properties which include
industrial, office and retail. The total value of the portfolio at
31 December 2018 was £718.4m (2017: £737.3m). These properties
are diversified across the UK with a wide geographical spread.

Corporate Governance 58 - 90Annual Report and Accountsfor the year ended 31 December 2018Independent Auditor’s Report to the Members of Regional REIT Limited (continued)

The Directors’ assessment of the value of the investment properties
at the year end date, is considered a key audit matter due to
the magnitude of the total amount, the potential impact of the
movement in value on the reported results, and the subjectivity and
complexity of the valuation process.

An overview of the scope of our audit
Our audit scope covered 100% of group revenue, group profit and
total group assets, and was performed to the materiality levels set
out above. The key audit matters were auditing as noted above.

Other information
The other information comprises the information included in the
annual report set out on pages 1 to 84, 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 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 the other information, we are required to
report that fact. We have nothing to report in this regard.

In this context, we also have nothing to report in regard to our
responsibility to specifically address the following items in the other
information and to report as uncorrected material misstatements of
the other information where we conclude that those items meet the
following conditions:

•

Fair, balanced and understandable set out on page 67 – the
statement given by the Directors that they consider the annual
report and financial statements taken as a whole is fair, balanced
and understandable and provides the information necessary for
Shareholders to assess the group’s performance, business model
and strategy, is materially inconsistent with our knowledge
obtained in the audit; or

Audit committee reporting set out on pages 79 to 81 – the
section describing the work of the audit committee does not
appropriately address matters communicated by us to the audit
committee; or

• Directors’ statement of compliance with the AIC Code set
out on pages 68 to 74 – the parts of the Directors’ statement
required under the Listing Rules relating to the Company’s
compliance with the AIC Code containing provisions specified for
review by the auditor in accordance with Listing Rule 9.8.10R(2)
do not properly disclose a departure from a relevant provision of
the AIC Code.

The valuation is carried out by external valuers, Jones Lang LaSalle
and Cushman & Wakefield in line with the methodology set out in
note 14.

Audit approach adopted

We audited the independent valuations of investment properties
to ensure they had been prepared on a consistent basis for all
properties and in accordance with RICs standards and are considered
to be appropriate and correctly recorded in the financial statements
in line with Accounting Standards. We assessed both external
valuers qualifications and expertise and considered their terms of
engagement, we also considered their objectivity and any other
existing relationships with the group and concluded that there was no
evidence that either valuers’ objectivity had been compromised

We reviewed the top 20 properties by value, along with considering
those additional properties where the valuation moved by more
than £500,000 or where the current tenant profile seemed to
contradict the movement in valuation. We discussed and challenged
the valuation of these large properties and significant movements
with the property manager and valuer, who demonstrated a detailed
knowledge of each property, the geographical location, the tenant
status and the overall asset desirability.

We audited the additions and disposals made in the year and agreed
a sample of these to completion statements, we also confirmed the
appropriate funds were transacted through the group’s bank accounts.
Where disposals were materially higher than the prior period
valuation, we challenged the valuer to understand the reasons for
these movements and the resultant profit on disposal.

We tested the inputs used by the valuer and ensured these reflected
the correct inputs for a sample of properties.

We tested ownership for a sample of properties by reference to land
registry documents.

Key observations

We concluded that the fair values of the investment properties being
adopted by the group were appropriate.

Our application of materiality
When establishing our overall audit strategy, we set certain thresholds
which help us to determine the nature, timing and extent of our audit
procedures. When evaluating whether the effects of misstatements,
both individually and on the financial statements as a whole, could
reasonably influence the economic decisions of the users we take into
account the qualitative nature and the size of the misstatements.
During planning materiality for the group financial statements as a
whole was calculated as £8m, which was not significantly changed
during the course of our audit. We agreed with the Audit Committee
that we would report to them all unadjusted differences in excess of
£150,000, as well as differences below that threshold that, in our view,
warranted reporting on qualitative grounds.

Corporate Governance 58 - 90Annual Report and Accountsfor the year ended 31 December 2018Independent Auditor’s Report to the Members of Regional REIT Limited (continued)

A further description of our responsibilities for the audit of the
financial statements is included in the appendix to this auditor’s
report. This description, which is located on page 89, forms part of our
auditor’s report.

Other matters which we are required to address
Following the recommendation of the audit committee, we were
appointed by the audit committee on 6 November 2015 to audit
the financial statements for the year ending 31 December 2015 and
subsequent financial periods.

The period of total uninterrupted engagement is four years, covering
the years ending 31 December 2015 to 31 December 2018.

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 our report
This report is made solely to the Company’s members, as a body, in
accordance with Section 262 of the Law. Our audit work has been
undertaken so that we might state to the Company’s members those
matters we are required to state to them in an auditor’s report and for
no other purpose. To the fullest extent permitted by Law, we do not
accept or assume responsibility to anyone other than the Company
and the Company’s members as a body, for our audit work, for this
report, or for the opinions we have formed.

RSM UK Audit LLP, Auditor
Chartered Accountants
25 Farringdon Street
London
EC4A 4AB

27 March 2019

Matters on which we are required to report
by exception
We have nothing to report in respect of the following matters in
relation to which the Law requires us to report to you if, in our
opinion:

•

proper accounting records have not been kept by the parent
company; or

the parent company financial statements are not in agreement
with the accounting records; or

• we have failed to obtain all the information and explanations
which, to the best knowledge and belief, are necessary for the
purposes of our audit.

Responsibilities of Directors
As explained more fully in the Directors’ responsibilities statement set
out on page 67, 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.

As part of our audit, we will consider the susceptibility of the
group and parent company to fraud and other irregularities, taking
account of the business and control environment established and
maintained by the Directors, as well as the nature of transactions,
assets and liabilities recorded in the accounting records. Owing to
the inherent limitations of an audit, there is an unavoidable risk
that some material misstatements of the financial statements
may not be detected, even though the audit is properly planned
and performed in accordance with the ISAs. However, the principal
responsibility for ensuring that the financial statements are free from
material misstatement, whether caused by fraud or error, rests with
management who should not rely on the audit to discharge those
functions.

Corporate Governance 58 - 90Annual Report and Accountsfor the year ended 31 December 2018Appendix: Auditor’s responsibilities for the audit of the financial Statements

We communicate with those charged with governance regarding,
among other matters, the planned scope and timing of the audit and
significant audit findings, including any significant deficiencies in
internal control that we identify during our audit.

We also provide those charged with governance with a statement
that we have complied with relevant ethical requirements regarding
independence, including the FRC’s Ethical Standard as applied
to listed public interest entities, and communicate with them all
relationships and other matters that may reasonably be thought to
bear on our independence, and where applicable, related safeguards.

From the matters communicated with those charged with
governance, we determine those matters that were of most
significance in the audit of the consolidated financial statements
of the current period and are therefore the key audit matters. We
describe these matters in our auditor’s report unless law or regulation
precludes public disclosure about the matter or when, in extremely
rare circumstances, we determine that a matter should not be
communicated in our report because the adverse consequences
of doing so would reasonably be expected to outweigh the public
interest benefits of such communication.

As part of an audit in accordance with ISAs (UK), we exercise
professional judgment and maintain professional scepticism
throughout the audit. We also:

•

Identify and assess the risks of material misstatement of the
financial statements, whether due to fraud or error, design
and perform audit procedures responsive to those risks, and
obtain audit evidence that is sufficient and appropriate to
provide a basis for our opinion. The risk of not detecting a
material misstatement resulting from fraud is higher than for
one resulting from error as fraud may involve collusion, forgery,
intentional omissions, misrepresentations, or the override of
internal control.

• Obtain an understanding of internal control relevant to the audit
in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the group’s internal control.

•

Evaluate the appropriateness of accounting policies used and the
reasonableness of accounting estimates and related disclosures
made by the Directors.

Conclude on the appropriateness of the Directors’ use of the
going concern basis of accounting and, based on the audit
evidence obtained, whether a material uncertainty exists related
to events or conditions that may cast significant doubt on the
group’s ability to continue as a going concern. If we conclude
that a material uncertainty exists, we are required to draw
attention in our auditor’s report to the related disclosures in
the financial statements or, if such disclosures are inadequate,
to modify our opinion. Our conclusions are based on the
audit evidence obtained up to the date of our auditor’s report.
However, future events or conditions may cause the group to
cease to continue as a going concern.

Evaluate the overall presentation, structure and content of the
financial statements, including the disclosures, and whether the
financial statements represent the underlying transactions and
events in a manner that achieves fair presentation.

• Obtain sufficient appropriate audit evidence regarding the

financial information of the entities or business activities within
the group to express an opinion on the consolidated financial
statements. We are responsible for the direction, supervision and
performance of the group audit. We remain solely responsible for
our audit opinion.

Corporate Governance 58 - 90Annual Report and Accountsfor the year ended 31 December 2018Property Name: 800 Aztec West, Bristol
Sector: Office

Consolidated Statement of Comprehensive Income
For the year ended 31 December 2018

Year ended
31 December
2018
£’000

Notes

Year ended
31 December
2017
(restated)
£’000

Continuing Operations

Revenue

Rental income

Property costs

Net rental income

Administrative and other expenses

Operating profit before gains and losses on property assets and other investments

Gain on disposal of investment properties

Change in fair value of investment properties

Operating profit

Finance income

Finance expense

Impairment of goodwill

Net movement in fair value of derivative financial instruments

Profit before tax

Taxation

Total comprehensive income for the year (attributable to owners of the parent company)

Total comprehensive income arises from continuing operations.

Earnings per share – basic

Earnings per share – diluted

The notes below are an integral part of these consolidated financial statements.

74,019

(19,644)

54,375

(17,586)

36,789

23,127

23,881

83,797

268

(15,983)

(557)

415

67,940

(567)

67,373

18.1p

61,610

(15,763)

45,847

(9,429)

36,418

1,234

5,893

43,545

215

(14,728)

(557)

217

28,692

(1,632)

27,060

9.1p

Financial Statements 91 - 130Annual Report and Accountsfor the year ended 31 December 2018Consolidated Statement of Financial Position
As at 31 December 2018

Notes

31 December
2018
£’000

31 December
2017
£’000

Assets

Non-current assets

Investment properties

Goodwill

Non-current receivables on tenant loan

Current assets

Trade and other receivables

Cash and cash equivalents

Total assets

Liabilities

Current liabilities

Trade and other payables

Deferred income

Taxation liabilities

Bank and loan borrowings

Zero dividend preference shares

Non-current liabilities

Bank and loan borrowings

Zero dividend preference shares

Retail eligible bonds

Derivative financial instruments

Total liabilities

Net assets

Equity

Stated capital

Retained earnings

Total equity attributable to owners of the parent

Net asset value per share – basic

Net asset value per share – diluted

The notes below are an integral part of these consolidated financial statements.

17b

718,375

1,115

1,396

720,886

22,163

104,823

126,986

847,872

(30,663)

(11,043)

(1,763)

(400)

(39,816)

(83,685)

(285,199)

–

(49,136)

(337)

(334,672)

(418,357)

429,515

370,316

59,199

429,515

115.2p

737,330

1,672

1,926

740,928

21,947

44,640

66,587

807,515

(26,941)

(12,667)

(2,636)

(400)

–

(42,644)

(333,981)

(37,239)

–

(752)

(371,972)

(414,616)

392,899

370,318

22,581

392,899

105.4p

105.1p

These consolidated group financial statements were approved by the Board of Directors and authorised for issue on 27 March 2019 and signed
on its behalf by:

Kevin McGrath
Chairman and Independent Non-Executive Director

27 March 2019

Financial Statements 91 - 130Annual Report and Accountsfor the year ended 31 December 2018
Consolidated Statement of Changes in Equity
For the year ended 31 December 2018

Balance at 1 January 2018

Total comprehensive income

Share based payments

Share issue costs

Dividends paid

Balance at 31 December 2018

For the year ended December 2017

Balance at 1 January 2017

Total comprehensive income

Share based payments

Issue of share capital

Share issue costs

Dividends paid

Balance at 31 December 2017

Notes

Attributable to owners of the parent company

Stated
capital
£’000

370,318

–

(2)

–

370,316

Retained
earnings
£’000

22,581

67,373

(930)

–

(29,825)

59,199

Attributable to owners of the parent company

Stated
capital
£’000

274,217

–

98,687

(2,586)

–

370,318

Retained
earnings
£’000

17,518

27,060

814

–

(22,811)

22,581

Total
£’000

392,899

67,373

(930)

(2)

(29,825)

429,515

Total
£’000

291,735

27,060

814

98,687

(2,586)

(22,811)

392,899

The notes below are an integral part of these consolidated financial statements.

Financial Statements 91 - 130Annual Report and Accountsfor the year ended 31 December 2018Consolidated Statement of Cash Flows
For the year ended 31 December 2018

Cash flows from operating activities

Profit for the year before taxation

– Change in fair value of investment properties

– Change in fair value of financial derivative instruments

– Gain on disposal of investment properties

Impairment of goodwill

Finance income

Finance expense

Share based payments

Increase in trade and other receivables

Increase in trade and other payables

Decrease in deferred income

Cash generated from operations

Financial income

Finance costs

Taxation paid

Net cash flow generated from operating activities

Investing activities

Purchase of investment properties

Sale of investment properties

Interest received

Acquisition of subsidiaries, net of cash acquired

Net cash flow generated from/(used in) investing activities

Financing activities

Proceeds from the issue of shares

Share issue costs

Dividends paid

Net costs paid on the disposal of derivatives

Bank borrowings advanced

Bank borrowings repaid

Bank borrowing costs paid

Proceeds from Bond issue

Bond issue costs paid

Net cash flow (used in)/generated from financing activities

Net increase in cash and cash equivalents

Cash and cash equivalents at the start of the year

Cash and cash equivalents at the end of the year

The notes below are an integral part of these consolidated financial statements.

Year ended
31 December
2018
£’000

Year ended
31 December
2017
£’000

67,940

(23,881)

(415)

(23,127)

557

(268)

15,983

(930)

(7)

5,323

(2,358)

38,817

250

(12,173)

(1,467)

25,427

(48,675)

149,276

220

(32,629)

68,192

–

(1,190)

(29,429)

–

50,959

(101,506)

(1,345)

50,000

(925)

(33,436)

60,183

44,640

104,823

28,692

(5,893)

(217)

(1,234)

557

(215)

14,728

814

(5,479)

8,617

(119)

40,251

988

(10,155)

(236)

30,848

(25,188)

16,921

(51,866)

(60,108)

72,654

(1,398)

(23,321)

(441)

179,540

(165,619)

(3,714)

–

57,701

28,441

16,199

44,640

Financial Statements 91 - 130Annual Report and Accountsfor the year ended 31 December 2018Notes to the Consolidated Financial Statements
For the year ended 31 December 2018

Corporate information

The Group’s consolidated financial statements for the year ended 31 December 2018 comprise the results of the Company and its subsidiaries
(together constituting “the Group”) and were approved by the Board and authorised for issue on 27 March 2019.

The Company is a company limited by shares incorporated in Guernsey under The Companies (Guernsey) Law, 2008, as amended (the “Law”).
The Company’s Ordinary Shares are admitted to the Official List of the UK Listing Authority (“UKLA”), a division of the Financial Conduct
Authority (“FCA”), and traded on the London Stock Exchange (“LSE”).

The Company was incorporated on 22 June 2015 and is registered with the Guernsey Financial Services Commission as a Registered Closed-
Ended Collective Investment Scheme pursuant to The Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended, and the
Registered Collective Investment Schemes Rules 2015.

The Company did not begin trading until 6 November 2015 when the shares were admitted to trading on the LSE.

The nature of the Group’s operations and its principal activities are set out in the Strategic Report on pages 10 to 57.

The address of the registered office is Mont Crevelt House, Bulwer Avenue, St. Sampson, Guernsey GY2 4LH.

Basis of preparation

The Group’s Consolidated financial statements have been prepared on a going concern basis in accordance with the Disclosure Guidance and
Transparency Rules of the FCA and with International Financial Reporting Standards (“IFRS”) and IFRS Interpretation Committee (“IFRIC”) as issued
by the IASB and as adopted by the European Union (“EU”), in accordance with Article 4 of the IAS Regulations and the Law.

The Group’s consolidated financial statements have been prepared on a historical cost basis, as modified for the Group’s investment properties and
certain financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss.

Comparative information in the Group’s Consolidated Statement of Comprehensive Income for revenue income and property costs have been
restated due to the adoption of IFRS 15 ‘Revenue from contracts with customers’. Details are given in note 2.4, note 5 and note 6. There is no overall
impact on net rental income.

2.1.

Functional and presentation currency

The financial information is presented in Pounds Sterling which is also the functional currency, and all values are rounded to the nearest
thousand (£’000) pound, except where otherwise indicated.

2.2.

Going concern

The assessments of going concern are prepared in accordance with the FRC Guidance issued September 2014.

The Directors have carefully considered areas of potential financial risk and have reviewed cash flow forecasts. The Regional REIT ZDP PLC zero
dividend preference shares matured on 9 January 2019 and, as detailed in note 36 on page 130, zero dividend preference shareholders were
paid after the year end. No material uncertainties have been detected which would influence the Group’s ability to continue as a going concern
for a period of not less than 12 months. The Directors have satisfied themselves that the Group has adequate financial resources to continue in
operational existence for the foreseeable future.

Accordingly, the Board of Directors continue to adopt the going concern basis in preparing the financial statements.

2.3.

Business combinations

At the time of acquisition, the Group considers whether each acquisition represents the acquisition of a business or the acquisition of an
asset. For an acquisition of a business where an integrated set of activities are acquired in addition to the property, the Group accounts for the
acquisition as a business combination under IFRS 3 Business Combinations (“IFRS 3”).

Where such acquisitions are not judged to be the acquisition of a business they are not treated as business combinations. Rather, the cost to
acquire the corporate entity is allocated between the identifiable assets and liabilities of the entity based upon their relative fair values at the
acquisition date. Accordingly, no goodwill or additional deferred tax arises.

Financial Statements 91 - 130Annual Report and Accountsfor the year ended 31 December 2018Notes to the Consolidated Financial Statements (continued)
For the year ended 31 December 2018

Basis of preparation (continued)

2.4.

New standards, amendments and interpretations

New standards, amendments to standards and interpretations which came into effect for accounting periods starting on or after 1 January
2018 have had an impact on the financial statements as follows:

IFRS 9, ‘Financial Instruments’, effective for annual periods beginning on or after 1 January 2018. The Group now applies an expected credit
loss model when calculating impairment losses on its trade and other receivables. Rental guarantees included with trade and other receivables
are classified as a financial asset and valued at fair value.

A review of comparative figures has taken place and it has been determined that the accounting policy change has not had a material impact
on the impairment of debtors at 31 December 2017.

IFRS 15, ‘Revenue from contracts with customers’, is effective for accounting periods beginning on or after 1 January 2018. Income arising
from renting a property is not within the scope of this standard and the accounting treatment is unchanged. Income arising from expenses
recharged to tenants is now recognised in net rental income as the Directors consider that the Group acts as principal in this respect. Rental
income and property costs have been grossed up for recoverable service charge income and expenditure and comparative figures have been
updated.

This has resulted in an increase in rental income of £9,216,000 and a corresponding increase in non-recoverable property costs of £9,216,000
for the year ended 31 December 2017. As a result there has been no impact to the profit position for the year ended 31 December 2017 and no
changes to opening reserves at 1 January 2017.

2.5.

New standards, amendments and interpretations effective for future accounting periods

A number of new standards, amendments to standards and interpretations are effective for periods beginning on or after 1 January 2019, and
have not been applied in preparing these financial statements. These are:

IFRS 16, ‘Leases’, is effective for accounting periods beginning on or after 1 January 2019. Under IFRS 16, most leased assets are capitalised as
“right-to-use-assets” by recognising the present value of the lease payments as an asset and a financial liability representing the obligation to
make future lease payments. This is a significant change for the lessee, however, IFRS 16 substantially carries forward existing lessor accounting
from IAS 17.

As detailed in note 33, the Group has a number of operating leases concerning the long-term lease of land associated with its long leasehold
investment properties. At 31 December 2018, there was £50,614,000 ground rent committed under these leases. Under IFRS16, the Group
will recognise the right-to-use-asset (classified as an investment property) in the Consolidated Statement of Financial Position and this
will be valued at fair value. Changes in fair value will be recognised in the Consolidated Statement of Comprehensive Income. In addition, a
financial liability will be recognised in the Consolidated Statement of Financial Position which will be valued at the present value of future lease
payments. Lease payments (also known as ground rent) which are currently recognised within non-recoverable property costs will instead
reduce the financial liability and any further changes to the value of the financial liability will be recognised as finance costs. Under IFRS16,
comparative information is not required to be restated upon adoption if the “modified retrospective” approach is applied.

The Directors anticipate that the value of the right to use asset and the financial liability at 31 December 2018 are £7,614,000 and £7,614,000
respectively so the overall impact on net assets will be negligible. The overall impact on profits will also be negligible. However, instead of costs
of approximately £618,000 per annum being recognised in non-recoverable property costs, equivalent amounts will instead be recognised
within unrealised gains and finance costs.

Significant accounting judgements, estimates and assumptions

The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the reported
amounts of revenues, expenses, assets and liabilities and the disclosure of contingent liabilities at the reporting date. However, uncertainty
about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or
liability affected in future periods.

Financial Statements 91 - 130Annual Report and Accountsfor the year ended 31 December 2018Notes to the Consolidated Financial Statements (continued)
For the year ended 31 December 2018

Significant accounting judgements, estimates and assumptions (continued)

3.1.

Critical accounting estimates and assumptions

The principal estimates that may be material to the carrying amount of assets and liabilities are as follows:

3.1.1.

Valuation of investment property

The fair value of investment property, which has a carrying value at the reporting date of £718,375,000 (31 December 2017: £737,330,000), is
determined by independent property valuation experts to be the estimated amount for which a property should exchange on the date of the
valuation in an arm’s length transaction. Properties have been valued on an individual basis. The valuation experts use recognised valuation
techniques applying the principles of both IAS 40 and IFRS 13.

The valuations have been prepared in accordance with the Royal Institution of Chartered Surveyors (“RICS”) Valuation – Professional Standards
January 2014 (the “Red Book”). Factors reflected include current market conditions, annual rentals, lease lengths and location. The significant
methods and assumptions used by valuers in estimating the fair value of investment property are set out in note 14.

In relation to Brexit, the ongoing negotiations with regards to the terms of the UK’s exit from the EU has meant that property market
uncertainty has increased. The independent property valuation experts are comfortable that, despite the property market uncertainty, there is
sufficient transactional market evidence at the reporting date to support the fair value of investment property.

3.1.2.

Fair valuation of interest rate derivatives

In accordance with IAS 39, the Group values its interest rate derivatives at fair value. The fair values are estimated by the respective
counterparties with revaluation occurring on a quarterly basis. The counterparties will use a number of assumptions in determining the fair
values, including estimations over future interest rates and therefore future cash flows. The fair value represents the net present value of the
difference between the cash flows produced by the contracted rate and the valuation rate. The carrying value of the derivatives at the reporting
date was £337,000 (31 December 2017: £752,000). The significant methods and assumptions used in estimating the fair value of the interest
rate derivatives are set out in note 26.

3.1.3.

Estimated impairment of goodwill

The Group tests annually whether goodwill has suffered any impairment. The recoverable amounts of cash generating units have been
determined based on value-in-use calculations. These calculations require the use of estimates. The carrying value of the goodwill at the
reporting date was £1,115,000 (31 December 2017: £1,672,000).

3.2.

Critical judgements in applying the Group’s accounting policies

In the process of applying the Group’s accounting policies, management has made the following judgements, which have the most significant
effect on the amounts recognised in the financial statements:

3.2.1. Operating lease contracts – the Group as lessor

The Group has acquired investment properties that are subject to commercial property leases with tenants. The Group has determined, based
on an evaluation of the terms and conditions of the arrangements, particularly the duration of the lease terms and minimum lease payments,
that it retains all of the significant risks and rewards of ownership of these properties and so accounts for the leases as operating leases.

3.2.2.

Performance Fee

The Asset Manager and the Investment Manager are each entitled to 50% of the Performance Fee. The fee is calculated at a rate of 15% of the
Total Shareholder Return in excess of the Hurdle rate of 8% per annum for the relevant Performance Period. Total Shareholder Return for any
Performance Period consists of the sum of any increase or decrease in EPRA NAV per Ordinary Share and the total dividends per Ordinary Share
declared in the Performance Period.

A Performance Fee is only payable in respect of a Performance Period where the EPRA NAV per Ordinary Share exceeds the High-water Mark
which is equal to the greater of the highest year-end EPRA NAV Ordinary Share in any previous Performance Period or the Placing Price (100p
per Ordinary Share). The Performance Fee is calculated initially on 31 December 2018, and annually thereafter. Full details of the Managers’
Performance Fee are given on pages 183 to 185 of the IPO Prospectus.

Financial Statements 91 - 130Annual Report and Accountsfor the year ended 31 December 2018Notes to the Consolidated Financial Statements (continued)
For the year ended 31 December 2018

Significant accounting judgements, estimates and assumptions (continued)

3.3.

Consolidation of entities in which the Group holds less than 50%

Management considered that up until 9 November 2018, the Group had de facto control of View Castle Limited (previously known as
Credential Investment Holdings Limited), and its 27 subsidiaries (the “Credential Sub Group”) by virtue of the amended and restated Call
Option Agreement dated 3 November 2015. Following a restructure of the Credential Sub Group, the majority of properties held within the
Credential Sub Group were transferred into two new SPVs with two additional properties to be transferred into these SPVs at a later date. A
new call option was entered into dated 9 November 2018 with View Castle Limited and 5 of its subsidiaries (the “View Castle Group”). As per
the previous amended and restated Call Option Agreement, under this new option the Group may acquire any of the properties held by the
View Castle Group for a nominal consideration. Despite having no equity holding, the Group controls the View Castle Group as the option
agreement means that the Group is exposed to, and has rights to, variable returns from its involvement with the View Castle Group through its
power to control. The View Castle Group has a deficiency of shareholders’ funds and for this reason the non-controlling interest in the Group’s
results for the year and in the net assets of the Group are nil. There is no recourse to the non-controlling interest. Further details are disclosed in
note 15.

3.4.

Acquisitions of subsidiary companies

During the year, the Group has made two purchases of subsidiary companies which own investment properties. For each acquisition, the
Directors consider whether the acquisition met the definition of the acquisition of a business or the acquisition of a group of assets and
liabilities.

A business is defined in IFRS 3 as an integrated set of activities and assets that is capable of being conducted and managed for the purpose
of providing a return in the form of dividends, lower costs or other economic benefits directly to investors or other owners, members or
participants. Furthermore, a business consists of inputs and processes applied to those inputs that have the ability to create outputs.

The companies acquired in the year have comprised portfolios of investment properties and existing leases with multiple tenants over varying
periods, with little in the way of processes acquired. It has therefore concluded in each case that the acquisitions did not meet the criteria for
the acquisition of a business as outlined IFRS 3 above.

Summary of significant accounting policies

The accounting policies adopted in this report are consistent with those applied in the financial statements for the year ended 31 December
2017 and have been consistently applied for the year ended 31 December 2018. There are no significant changes arising from accounting
standards adopted, effective for the first time this year, as summarised in note 2.4. As detailed in note 2.4 rental income and property expenses
have been grossed up for service charge income and expenditure; however, there is no overall impact on profits or assets of the Group.

4.1.

Basis of consolidation

The consolidated financial statements comprise the financial statements of the Company and its subsidiaries, as at the date of the Statement
of Financial Position.

4.2.

Subsidiaries

Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an entity when the Group is
exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power
over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the
date that control ceases.

The Group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a
subsidiary is the fair values of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued
by the Group. Identifiable assets and liabilities acquired and contingent liabilities assumed in a business combination are measured initially
at their fair values at the acquisition date. The Group recognises any non-controlling interest in the acquiree on an acquisition-by-acquisition
basis, either at fair value or at the non-controlling interest’s proportionate share of the recognised amounts of acquiree’s identifiable net assets.
Acquisition-related costs are expensed as incurred.

Any contingent consideration to be transferred by the Group is recognised at fair value at the acquisition date. Subsequent changes to the fair
value of the contingent consideration is recognised in profit or loss. Contingent consideration that is classified as equity is not re-measured,
and its subsequent settlement is accounted for within equity.

For acquisitions of subsidiaries not meeting the definition of a business, the Group allocates the cost between the individual identifiable assets
and liabilities in the Group based on their relative fair values at the date of acquisition. Such transactions or events do not give rise to goodwill.

Inter-company transactions, balances and unrealised gains and losses on transactions between Group companies are eliminated in full. When
necessary, amounts reported by subsidiaries have been adjusted to conform to the Group’s accounting policies.

Financial Statements 91 - 130Annual Report and Accountsfor the year ended 31 December 2018Notes to the Consolidated Financial Statements (continued)
For the year ended 31 December 2018

4.2.

Summary of significant accounting policies (continued)

Subsidiaries (continued)

The excess of the consideration transferred, and the amount of any non-controlling interest in the acquiree over the fair value of the
identifiable net assets acquired, is recognised as goodwill.

4.2.1. Disposal of subsidiaries

When the Group ceases to have control over an entity, any retained interest in the entity is re-measured to its fair value at the date when
control is lost, with the change in the carrying amount recognised in profit or loss. The fair value is the initial carrying amount for the purposes
of subsequently accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously
recognised in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets
or liabilities. This may mean that amounts previously recognised in other comprehensive income are reclassified to profit or loss.

4.3.

Segmental information

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief
operating decision-maker is the person or group that allocates resources to and assesses the performance of the operating segments of an
entity. The Group has determined that its chief operating decision-maker is the Board of Directors.

After a review of the information provided for management purposes, it was determined that the Group has one operating segment and
therefore segmental information is not disclosed in these consolidated financial statements.

4.4.

Investment property

Investment property comprises freehold or leasehold properties that are held to earn rentals or for capital appreciation, or both, rather than for
sale in the ordinary course of business or for use in production or administrative functions.

Investment property is recognised, usually, on legal completion, when the risks and rewards of ownership have been transferred and is measured
initially at cost including transaction costs. Transaction costs include transfer taxes, professional fees for legal services and other costs incurred
in order to bring the property to the condition necessary for it to be capable of being utilised in the manner intended. Subsequent to initial
recognition investment property is stated at fair value. Gains or losses arising from changes in the fair values are included in the Group’s
Consolidated Statement of Comprehensive Income in the period in which they arise under IAS 40, ‘Investment Property’.

Additions to investment property include costs of a capital nature only. Expenditure is classified as capital when it results in identifiable future
economic benefits, which are expected to accrue to the Group. All other property expenditure is charged in the Group’s Consolidated Statement
of Comprehensive Income as incurred.

Investment properties cease to be recognised when they have been disposed of or withdrawn permanently from use and no future economic
benefit is expected. The difference between the net disposal proceeds and the carrying amount of the asset (being the fair value at the start of the
financial year) would result in either gains or losses at the retirement or disposal of investment property. Any gains or losses are recognised in the
Group’s Consolidated Statement of Comprehensive Income in the period of retirement or disposal.

4.5.

Goodwill

Goodwill arises on the acquisition of subsidiaries and represents the excess of the consideration transferred over the Group’s interest in the fair
value of the net identifiable assets, liabilities and contingent liabilities of the acquiree plus the amount of the non-controlling interest of the
acquiree.

For the purpose of impairment testing, goodwill acquired in a business combination is allocated to each of the subsidiaries, or groups of
subsidiaries, that is expected to benefit from the synergies of the combination. Each subsidiary or group of subsidiaries, to which the goodwill is
allocated, represents the lowest level within the entity at which the goodwill is monitored for internal management purposes.

Goodwill impairment reviews are undertaken annually, or more frequently if events or changes in circumstances indicate a potential
impairment. The carrying value of goodwill is compared to the recoverable amount, which is the higher of value in use and the fair value less
costs of disposal. Any impairment is recognised immediately as an expense and is not subsequently reversed.

4.6.

Derivative financial instruments

Derivative financial instruments, comprising interest rate caps and swaps for hedging purposes, are initially recognised at fair value at
acquisition and are subsequently measured at fair value being the estimated amount that the Group would receive or pay to sell or transfer
the agreement at the period end date, taking into account current interest rate expectations and the current credit rating of the lender and its
counterparties. The gain or loss at each fair value remeasurement date is recognised in the Group’s Consolidated Statement of Comprehensive
Income.

Financial Statements 91 - 130Annual Report and Accountsfor the year ended 31 December 2018Notes to the Consolidated Financial Statements (continued)
For the year ended 31 December 2018

Summary of significant accounting policies (continued)

4.6

Derivative financial instruments (continued)

The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data is available to measure fair value,
maximising the use of relevant observable inputs and minimising the use of unobservable inputs significant to the fair value measurement as a
whole.

4.7.

Financial assets

The Group classifies its financial assets as at fair value through profit or loss or at amortised cost, depending on the purpose for which the asset
was acquired. Currently the Group does not have any financial assets which it has classified at fair value through profit or loss.

Assets held at amortised cost arise principally from the provision of goods and services (e.g. trade receivables), but also incorporate other
financial assets where the objective is to hold these assets in order to collect contractual cash flows which comprise the payment of principal
and interest. They are initially recognised at fair value plus transaction costs that are directly attributable to their acquisition or issue and are
subsequently carried at amortised cost being the effective interest rate method, less provision for impairment.

The Group’s financial assets comprise ‘trade and other receivables’, ‘tenant loan’, ‘surrender premium’ and ‘cash and cash equivalents’.

The tenant loan relates to a loan made to a tenant which is subject to interest. The amount receivable has been recognised at amortised cost
using the effective interest method.

The lease surrender receivable relates to a lease surrender payment which has been received in instalments. The amount receivable has been
recognised at amortised cost using the effective interest method.

4.8.

Trade and other receivables

Trade and other receivables are recognised initially at fair value and subsequently carried at amortised cost less provision for impairment.
Where the time value of money is material, receivables are carried at amortised cost using the effective interest method. Impairment
provisions are recognised based on the expected credit loss model detailed within IFRS 9.

The Group recognises a loss allowance for expected credit losses (ECL) on trade receivables. The loss allowance is based on lifetime expected
credit losses. The amount of expected credit losses is updated at each reporting date to reflect changes in credit risk since initial recognition.
The expected credit losses on these financial assets are estimated based on the Group’s historical credit loss experience, adjusted for factors
that are specific to the debtors, general economic conditions and an assessment of both the current as well as the forecast direction of
conditions at the reporting date. Impaired balances are reported net, however, impairment provisions are recorded within a separate provision
account with the loss being recognised within administration costs within the Consolidated Statement of Comprehensive Income. On
confirmation that the trade receivable will not be collectable the gross carrying value of the asset is written off against the associated provision.

Lease premiums and other lease incentives provided to tenants are recognised as an asset and amortised over the period from date of lease
commencement to termination date.

4.9.

Cash and cash equivalents

Cash and cash equivalents include cash in hand and deposits held at banks with original maturities of three months or less. Cash also includes
amounts held in restricted accounts that are unavailable for everyday use.

4.10.

Trade payables

Trade payables are initially recognised at their fair value; being at their invoiced value inclusive of any VAT that may be applicable. Payables are
subsequently measured at amortised cost using the effective interest method.

4.11.

Bank and other borrowings

All bank and other borrowings (comprising bank loans and retail eligible bonds) are initially recognised at cost net of attributable transaction
costs. Any attributable transaction costs relating to the issue of the bank borrowings are amortised through the Group’s Statement of
Comprehensive Income over the life of the debt instrument on a straight-line basis. After initial recognition, all bank and other borrowings are
measured at amortised cost, using the effective interest method.

4.12.

Zero Dividend Preference Shares

Zero Dividend Preference Shares (“ZDP shares”) are recognised as liabilities in the Group’s Consolidated Statement of Financial Position in
accordance with IAS 32 Financial Instruments: Presentation. After initial recognition, these liabilities are measured at amortised cost, which
represents the value the liability is recognised at initial recognition, plus the accrued entitlement to the date of these financial statements.

100

Financial Statements 91 - 130Annual Report and Accountsfor the year ended 31 December 2018Notes to the Consolidated Financial Statements (continued)
For the year ended 31 December 2018

Summary of significant accounting policies (continued)

4.13.

Dividends payable to Shareholders

Equity dividends are recognised when paid.

4.14.

Rental income

Rental income arising from operating leases on investment property is accounted for on a straight-line basis over the lease terms and is
included in gross rental income in the Group’s Consolidated Statement of Comprehensive Income. Initial direct costs incurred in negotiating
and arranging an operating lease are added to the carrying amount of the lease asset and are recognised as an expense over the lease term on
the same basis as the lease income.

For leases which contain fixed or minimum uplifts, the rental income arising from such uplifts is recognised on a straight-line basis over the
lease term.

Tenant lease incentives are recognised as a reduction of rental revenue on a straight-line basis over the term of the lease. The lease term is
the non-cancellable period of the lease together with any further term for which the tenant has the option to continue the lease where, at the
inception of the lease, the Directors are reasonably certain that the tenant will exercise that option.

Surrender premiums received from tenants to terminate leases or surrender premises are recognised in the Group’s Statement of
Comprehensive Income when the right to receive them arises.

When the Group is acting as an agent, the commission, rather than gross income, is recorded as revenue.

Income arising from expenses recharged to tenants is recognised in the year in which the compensation becomes receivable. Service charges
and other similar receipts are included in net rental income gross of the related costs as the Directors consider the Group acts as principal in
this respect.

4.15.

Property costs

Non-recoverable property costs contain service and management charges related to empty properties and ground rents charges.

Service and management charges are recognised in the accounting period in which the services are rendered.

Recoverable service charges and other similar costs are recognised in the accounting period in which the services are rendered.

Ground rents are payments made under operating leases associated with the ownership of long leasehold investment properties. Payments
made under these operating leases are expensed in the Consolidated Statement of Comprehensive Income over the term of the lease on a
straight-line basis. Future commitments under these operating leases are detailed in note 33.

4.16.

Interest income

Interest income is recognised as interest accrues on cash balances held by the Group. Interest charged to a tenant on any overdue rental
income is also recognised within interest income.

4.17.

Dividend income

Dividend income is recognised when the right to receive payment is established.

4.18.

Finance costs

Interest costs are expensed in the period in which they occur. Arrangement fees, that an entity incurs in connection with bank and other
borrowings, are amortised over the term of the loan.

4.19.

Taxation

As the Company is managed and controlled in the UK, it is considered to be tax resident in the UK.

The tax currently payable is based on the taxable profit for the period. Taxable profit differs from net profit as reported in the Consolidated
Statement of Comprehensive Income because it excludes items of income or expense that are taxable or deductible in other years and it further
excludes items that are never taxable or deductible. The Group’s liability for current and deferred tax is calculated using tax rates that have
been enacted or substantively enacted at the date of the Statement of Financial Position.

The Group elected to be treated as a UK REIT with effect from 7 November 2015. The UK REIT rules exempt the profits of the Group’s UK
property rental business from UK Corporation Tax. Gains on UK properties are also exempt from tax, provided that they are not held for trading
or sold in the three years after completion of development. The Group is otherwise subject to UK Corporation Tax.

101

Financial Statements 91 - 130Annual Report and Accountsfor the year ended 31 December 2018Notes to the Consolidated Financial Statements (continued)
For the year ended 31 December 2018

Summary of significant accounting policies (continued)

4.19.

Taxation (continued)

There are a small number of entities within the Group which fall outside the REIT rules and are subject to UK taxes on profits and property
gains.

4.20. Deferred tax

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the
financial statements and the corresponding tax bases used in the computation of taxable profit. The amount of deferred tax provided is based
on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates that are expected to apply
in the period when the liability is settled or the asset is realised based on tax rates (and tax laws) enacted or substantively enacted at the
date of the Statement of Financial Position. A deferred tax asset is recognised only to the extent that it is probable that future profits will be
available for offset.

Deferred tax has been recognised on the unrealised property valuation gains of properties owned by Group entities which fall outside of the
REIT tax rules.

The current rate of UK Corporation Tax is 19%. Reductions in UK Corporation Tax have been enacted, reducing the rate to and 18% with effect
from 1 April 2020. It has been enacted that the rate will be further reduced to 17% from 1 April 2020.

4.21.

Stated capital

Stated capital represents the consideration received by the Company for the issue of Ordinary Shares. Ordinary Shares are classed as equity.

4.22.

Share based payments

The Group has entered into Performance Fee arrangements with the Asset Manager and Investment Manager which depend on the growth in
the net asset value of the Group exceeding a Hurdle Rate of return over a Performance Period. The fee will be partly settled in cash and partly
in equity and the equity portion is therefore a share–based payment arrangement. The fair value of the obligation is measured at each reporting
period, and the cost recognised as an expense. The part of the obligation to be settled in shares is credited to equity reserves. If circumstances
change and the fee is no longer settled by the issue of shares then the amounts previously credited to Equity reserves are reversed.

In accordance with the FCA’s Listing Rule 15.4.11, the Company cannot issue shares for cash at a price below the NAV per share without
Shareholder approval. The Company does not have Shareholder approval to do this and any such issue would in any event be dilutive.
Accordingly, the Management Agreements have been amended to clarify that, in this situation, the Performance Fee will be paid entirely in
cash but 50% of that amount will be used to acquire shares in the market on behalf of the Managers within a 20 business day period on an
instruction to do so. On this occasion the shares will be paid for entirely in cash and be acquired from the date of publication of the preliminary
2018 annual results. These amendments were made to preserve the underlying commercial intention that the Managers should normally
receive 50% of the Performance Fee in shares.

Rental income

Year ended
31 December
2018
£’000

54,107

7,968

11,944

74,019

Year ended
31 December
2017
(restated)
£’000

44,505

7,844

9,261

61,610

Rental income – freehold property

Rental income – long leasehold property

Recoverable service charge income and other similar items

Total

Comparative figures have been updated as detailed in note 2.4

102

Financial Statements 91 - 130Annual Report and Accountsfor the year ended 31 December 2018Notes to the Consolidated Financial Statements (continued)
For the year ended 31 December 2018

Non-recoverable property costs

Operating lease expenses

Other property expenses and irrecoverable costs

Recoverable service charge income and other similar costs

Total

Year ended
31 December
2018
£’000

618

7,082

11,944

19,644

Year ended
31 December
2017
(restated)
£’000

563

5,939

9,261

15,763

Non-recoverable property costs represent direct operating expenses which arise on investment properties that generate rental income.

Comparative figures have been updated as detailed in note 2.4

Administrative and other expenses

Investment management fees

Property management fees

Performance fees

Asset management fees

Directors’ remuneration (see note 8)

Administration fees

Legal and professional fees

Marketing and promotion

Other administrative costs (including bad debts)

Bank charges

VAT recoverable for previous periods

Total

Year ended
31 December
2018
£’000

Year ended
31 December
2017
£’000

2,405

2,264

7,046

2,405

235

663

1,714

595

172

–

17,586

1,732

1,972

1,610

1,739

190

702

1,493

689

(794)

9,429

VAT recoverable for previous periods represents amounts recovered following the Company’s VAT registration in 2018.

The number of persons employed by the Group in the year was six, being the Directors, whose remuneration is set out in note 8.

Services provided by the Company’s auditor and its associates

The Group has obtained the following services from the Company’s auditor and its associates:

Audit of the consolidated and parent company financial statements

Audit related services in respect of the half year financial statements

Audit of the subsidiaries for their respective periods of account

Fees associated with share issue

Total

103

Year ended
31 December
2018
£’000

Year ended
31 December
2017
£’000

171

–

275

140

108

348

Financial Statements 91 - 130Annual Report and Accountsfor the year ended 31 December 2018Notes to the Consolidated Financial Statements (continued)
For the year ended 31 December 2018

Directors’ remuneration

Key management comprises the Directors of the Company. A summary of the Directors’ emoluments is set out in the Directors’ Remuneration
Report.

Year ended
31 December
2018
£’000

216

235

Year ended
31 December
2018
£’000

224

268

Year ended
31 December
2018
£’000

11,267

2,430

1,172

147

–

906

15,983

Year ended
31 December
2018
£’000

1,983

(1,416)

567

Year ended
31 December
2017
£’000

170

190

Year ended
31 December
2017
£’000

190

215

Year ended
31 December
2017
£’000

9,550

1,769

722

114

605

1,968

–

14,728

Year ended
31 December
2017
£’000

208

1,424

1,632

Directors’ fees

Employer’s National Insurance contributions

Total

Finance income

Interest income

Unwinding of the discount on financial assets

Total

10.

Finance expense

Interest payable on bank borrowings

Accrued capital entitlement on ZDP shares

Amortisation of loan arrangement fees

Amortisation of ZDP share acquisition costs

Break costs associated with refinancing

Loan arrangement fees recognised early due to refinancing

Bond interest

Bond issue costs amortised

Total

11.

Taxation

Corporation tax charge

(Decrease)/increase in deferred tax creditor

Total

104

Financial Statements 91 - 130Annual Report and Accountsfor the year ended 31 December 2018Notes to the Consolidated Financial Statements (continued)
For the year ended 31 December 2018

11.

Taxation (continued)

The current tax charge is reduced by the UK REIT tax exemptions. The tax charge for the year can be reconciled to the profit in the Statement of
Comprehensive Income as follows:

Profit before taxation

UK corporation tax rate

Theoretical tax at UK corporation tax rate

Effects of:

Revaluation gain on investment properties

Adjustments to tax charge in respect of previous periods

Permanent differences

Profits from the tax exempt business

Deferred tax movement

Total

Year ended
31 December
2018
£’000

67,940

19.00%

12,909

(4,537)

1,592

(8,006)

(1,416)

567

Year ended
31 December
2017
£’000

28,692

19.25%

5,523

(1,134)

–

461

(4,642)

1,424

1,632

Permanent differences are the differences between an entity’s taxable profits and its results as stated in the financial statements. These arise
because certain types of income and expenditure are non-taxable or disallowable, or because certain tax charges or allowances have no
corresponding amount in the financial statements.

The Group elected to be treated as a UK REIT with effect from 7 November 2015. The UK REIT rules exempt the profits of the Group’s UK
property rental business from corporation tax. Gains on UK properties are also exempt from tax, provided they are not held for trading or sold
in the three years after completion of development. The Group is otherwise subject to UK corporation tax and UK income tax.

As a REIT, Regional REIT Ltd is required to pay Property Income Distributions equal to at least 90% of the Group’s exempted net income. To
retain UK REIT status, there are a number of conditions to be met in respect of the principal company of the Group, the Group’s qualifying
activity and its balance of business. The Group continues to meet these conditions.

UK corporation tax and UK income tax arise on entities which form part of the Group consolidated accounts but do not form part of the REIT
group.

Due to the Group’s REIT status and its intention to continue meeting the conditions required to obtain approval in the foreseeable future, no
provision has been made for deferred tax on any capital gains or losses arising on the revaluation or disposal of investments held by entities
within the REIT group.

No deferred tax asset has been recognised in respect of losses carried forward due to the unpredictability of future taxable profits.

12.

Earnings per share

Earnings per share (“EPS”) amounts are calculated by dividing profits for the year attributable to ordinary equity holders of the Company by the
weighted average number of Ordinary Shares in issue during the year. As there were dilutive instruments outstanding at 31 December 2018,
both basic and diluted earnings per share are disclosed below.

Dilutive instruments relate to the partial settlement of the Performance Fee by the issue of Ordinary Shares. As detailed in note 35, a
Performance Fee for the period from commencement of trading to 31 December 2017 was recognised in the financial statements. An estimate
was made of the number of shares that would be issued based on the EPRA NAV at 31 December 2017. It should be noted that the Performance
Fee period is from 6 November 2015 to 31 December 2018 and the number of shares to be issued to settle the fee charge will be based on the
EPRA NAV as at 31 December 2018.

105

Financial Statements 91 - 130Annual Report and Accountsfor the year ended 31 December 2018Notes to the Consolidated Financial Statements (continued)
For the year ended 31 December 2018

12.

Earnings per share (continued)

The calculation of basic and diluted earnings per share is based on the following:

Year ended
31 December
2018
£’000

Year ended
31 December
2017
£’000

67,373

27,060

(23,881)

(459)

(23,127)

557

(1,416)

1,416

430

20,892

7,046

27,938

(5,893)

(407)

(1,234)

557

1,424

–

2,507

24,014

1,610

25,624

372,821,136

296,807,647

–

875,752

372,821,136

297,683,399

18.1p

5.6p

7.5p

9.1p

8.1p

8.6p

Calculation of Earnings per share

Net profit attributable to Ordinary Shareholders

Adjustments to remove:

Changes in value of investment properties

Changes in fair value of interest rate derivatives and financial assets

Gain on disposal of investment property

Impairment of goodwill

Deferred tax charge

Income tax charge on disposal profits

Close out costs on borrowings and derivatives

EPRA Net profit attributable to Ordinary Shareholders

Add performance fee

Company specific adjusted earnings figure

Weighted average number of Ordinary Shares

Dilutive instruments

Adjusted weighted average number of Ordinary Shares

Earnings per share – basic

Earnings per share – diluted

EPRA Earnings per share – basic

EPRA Earnings per share – diluted

Company specific adjusted earnings per share – basic

Company specific adjusted earnings per share – diluted

106

Financial Statements 91 - 130Annual Report and Accountsfor the year ended 31 December 2018Notes to the Consolidated Financial Statements (continued)
For the year ended 31 December 2018

13.

Dividends

Dividend of 2.45 (2017: 2.40) pence per Ordinary Share
for the period 1 October 2017 – 31 December 2017

Dividend of 1.85 (2017: 1.80) pence per Ordinary Share

for the period 1 January 2018 – 31 March 2018

Dividend of 1.85 (2017: 1.80) pence per Ordinary Share

for the period 1 April 2018 – 30 June 2018

Dividend of 1.85 (2017: 1.80) pence per Ordinary Share

for the period 1 July 2018 – 30 September 2018

Year ended
31 December
2018
£’000

Year ended
31 December
2017
£’000

9,134

6,897

6,581

5,410

29,825

22,811

On 22 February 2018, the Company announced a dividend of 2.45 pence per share in respect of the period 1 October 2017 to 31 December
2017. The dividend payment was made on 12 April 2018 to shareholders on the register as at 2 March 2018.

On 17 May 2018, the Company announced a dividend of 1.85 pence per share in respect of the period 1 January 2018 to 31 March 2018. The
dividend payment was made on 13 July 2018 to shareholders on the register as at 25 May 2018.

On 31 August 2018, the Company announced a dividend of 1.85 pence per share in respect of the period 1 April 2018 to 30 June 2018. The
dividend payment was made on 15 October 2018 to shareholders on the register as at 14 September 2018.

On 15 November 2018, the Company announced a dividend of 1.85 pence per share in respect of the period 1 July 2018 to 30 September 2018.
The dividend payment was made on 21 December 2018 to shareholders on the register as at 22 November 2018.

On 21 February 2019, the Company announced a dividend of 2.50 pence per share in respect of the period 1 October 2018 to 31 December
2018. The dividend will be paid on 11 April 2019 to shareholders on the register as at 1 March 2019. The financial statements do not reflect this
dividend.

The Board intends to peruse a progressive dividend policy and continue to pay quarterly dividends.

14.

Investment properties

In accordance with International Accounting Standard, IAS 40, ‘Investment Property’, investment property has been independently valued at
fair value by Cushman & Wakefield and Jones Lang LaSalle, Chartered Surveyors who are both accredited independent valuers with recognised
and relevant professional qualifications and with recent experience in the locations and categories of the investment properties being valued.
The valuations have been prepared in accordance with the Red Book and incorporate the recommendations of the International Valuation
Standards Committee which are consistent with the principles set out in IFRS 13.

The valuations are the ultimate responsibility of the Directors. Accordingly, the critical assumptions used in establishing the independent
valuation are reviewed by the Board.

All corporate acquisitions during the year have been treated as properties purchased rather than business combinations.

107

Financial Statements 91 - 130Annual Report and Accountsfor the year ended 31 December 2018Notes to the Consolidated Financial Statements (continued)
For the year ended 31 December 2018

14.

Investment properties (continued)

Group

Movement in investment properties for the year ended
31 December 2018

Valuation at 1 January 2018

Property additions – acquisitions

Property additions – subsequent expenditure

Property disposals

Gain/(loss) on the disposal of investment properties

Change in fair value during the year

Valuation at 31 December 2018

Freehold
Property
£’000

636,600

76,334

6,735

(142,505)

23,856

24,000

625,020

The net book value of properties disposed of during the year amounted to £126,149,000.

Movement in investment properties for the year ended
31 December 2017

Valuation at 1 January 2017

Property additions – acquisitions

Property additions – subsequent expenditure

Property disposals

Gain/(loss) on the disposal of investment properties

Change in fair value during the period

Valuation at 31 December 2017

424,310

212,332

12,444

(16,921)

1,234

3,201

636,600

The net book value of properties disposed of during the year amounted to £15,687,000.

The historic cost of the properties is £675,808,000 (31 December 2017: £628,723,000).

The following table provides the fair value measurement hierarchy for investment property:

Long Leasehold
Property
£’000

100,730

–

244

(6,771)

(729)

(119)

93,355

78,115

18,994

929

–

2,692

100,730

Total
£’000

737,330

76,334

6,979

(149,276)

23,127

23,881

718,375

502,425

231,326

13,373

(16,921)

1,234

5,893

737,330

Date of valuation:

31 December 2018

31 December 2017

The hierarchy levels are defined in note 26.

Total
£’000

718,375

737,330

Quoted
active prices
(level 1)
£’000

–

Significant
observable inputs
(level 2)
£’000

Significant
unobservable inputs
(level 3)
£’000

–

718,375

737,330

108

Financial Statements 91 - 130Annual Report and Accountsfor the year ended 31 December 2018Notes to the Consolidated Financial Statements (continued)
For the year ended 31 December 2018

14.

Investment properties (continued)

It has been determined that the entire investment properties portfolio should be classified under the level 3 category. The table below shows the
movement in the year on the level 3 category:

Balance at the start of the year

Assets transferred from level 2

Additions

Disposals

Gain on the disposal of investment properties

Change in fair value during the year

Balance at the end of the year

Year ended
31 December
2018
£’000

Year ended
31 December
2017
£’000

737,330

–

83,313

(149,276)

23,127

23,881

718,375

–

502,425

244,699

(16,921)

1,234

5,893

737,330

The determination of the fair value of the investment properties held by each consolidated subsidiary requires unobservable inputs, such
as the use of the estimated future cash flows from investment properties, which take into consideration lettings, tenants’ profiles, future
revenue streams, capital values of fixtures and fittings, plant and machinery, any environmental matters and the overall repair and condition
of the property, and discount rates applicable to those assets. Future revenue streams comprise contracted rent (passing rent) and Estimated
Rental Value (“ERV”) after the contract period. In calculating ERV, the potential impact of future lease incentives to be granted to secure new
contracts is taken into consideration. All these estimates are based on local market conditions existing at the reporting date.

Techniques used for valuing investment properties

The following descriptions and definitions relate to valuation techniques and key observable inputs made in determining the fair values:

Valuation technique: market comparable method

Under the market comparable method (or market approach), a property fair value is estimated based on comparable transactions in the market.

Observable input: market rental

The rent at which space could be let in the market conditions prevailing at the date of valuation range: £1,500–£3,092,226 per annum (2017:
£2,860–£3,092,125 per annum).

Observable input: rental growth

The estimated average increase in rent is based on both market estimations and contractual agreements.

Observable input: net initial yield

The initial net income from a property at the date of purchase, expressed as a percentage of the gross purchase price including the costs of purchase
range: 0.00%–26.98% (2017: 0.00%–29.23%).

As set out within the significant accounting estimates and judgements above, the Group’s property portfolio valuation is open to judgement and is
inherently subjective by nature, and actual values can only be determined in a sales transaction.

109

Financial Statements 91 - 130Annual Report and Accountsfor the year ended 31 December 2018Notes to the Consolidated Financial Statements (continued)
For the year ended 31 December 2018

15.

Investment in subsidiaries

List of subsidiaries which are 100% owned and controlled by the Group

Blythswood House LLP

Regional Commercial MIDCO Limited

RR Aspect Court Limited

RR Bristol Ltd

RR Eureka SARL

RR Hounds Gate Limited

RR Rainbow (Aylesbury) Limited

RR Rainbow (North) Limited

RR Rainbow (South) Limited

RR Range Limited

RR Sea Dundee Limited

RR Sea Hannover St. Limited

RR Sea Lamont I Ltd

RR Sea Lamont II Ltd

RR Sea Lamont III Ltd

RR Sea St. Helens Limited

RR Sea Stafford Limited

RR Sea Strand Limited

RR Sea TAPP Limited

RR Sea TOPP Bletchley Limited

RR Sea TOPP I Limited

RR Skylar Limited

RR UK (Central) Limited

RR UK (Cheshunt) Limited

RR UK (Port Solent) Limited

RR UK (South) Limited

RR Wing Portfolio Limited

Country of
incorporation

United Kingdom

Jersey

Luxembourg

Jersey

United Kingdom

Jersey

United Kingdom

Guernsey

Jersey

Regional REIT ZDP PLC (in liquidation)

United Kingdom

Tay Properties Limited

TCP Arbos Limited

TCP Channel Limited

Tosca Chandlers Ford Limited

Tosca Churchill Way Limited

Tosca Garnet Limited

Tosca Glasgow II Limited

Tosca Midlands Limited

Tosca North East Limited

Tosca North West Limited

Tosca Rosalind Ltd

Jersey

United Kingdom

Jersey

110

Ownership
%

100%

Financial Statements 91 - 130Annual Report and Accountsfor the year ended 31 December 2018Notes to the Consolidated Financial Statements (continued)
For the year ended 31 December 2018

15.

Investment in subsidiaries (continued)

List of subsidiaries which are 100% owned and controlled by the Group (continued)

Country of
incorporation

Ownership
%

Tosca Scotland Limited

RR Star Limited

Tosca South West Limited

Tosca Swansea Limited

Tosca Thorpe Park Limited

Tosca UK CP II Limited

Tosca UK CP Limited

Tosca Victory House Limited

Tosca Winsford Limited

Toscafund Bennett House Limited

Toscafund Bishopgate Street Limited

Toscafund Blythswood Limited

Toscafund Brand Street Limited

Toscafund Chancellor Court Limited

Toscafund Crompton Way Limited

Toscafund Espedair Limited

Toscafund Fairfax House Limited

Toscafund Glasgow Limited

Toscafund Harvest Limited

Toscafund Milburn House Limited

Toscafund Minton Place Limited

Toscafund Newstead Court Limited

Toscafund North Esplanade Limited

Toscafund Portland Street Limited

Toscafund Sheldon Court Limited

Toscafund South Gyle Limited

Toscafund St Georges House Limited

Toscafund St James Court Limited

Toscafund Strathclyde BP Limited

Toscafund Wallington Limited

Toscafund Welton Road Limited

Toscafund Westminster House Limited

Jersey

100%

All of the above entities have been included in the Group’s consolidated financial statements.

By virtue of an Amended and Restated Call Option Agreement dated 3 November 2015, the Directors consider that the Group had control of
View Castle Limited (previously Credential Investment Holdings Limited) and its 27 subsidiaries (the “Credential Group”).

Under this option, the Group has the ability to acquire any of the properties held by the Credential Group by issuing an option notice for a
nominal consideration of £1. The recipient of the option notice will be obliged to convey its title within one month after receipt of the option
notice.

Despite having no equity holding, the Group controls the Credential Group as the option agreement has the effect that the Group is exposed
to, and has rights to, variable returns from its involvement with the Credential Group through its power to control.

111

Financial Statements 91 - 130Annual Report and Accountsfor the year ended 31 December 2018Notes to the Consolidated Financial Statements (continued)
For the year ended 31 December 2018

15.

Investment in subsidiaries (continued)

The companies which make up the View Castle Group are as follows:

List of subsidiaries that are controlled by the Group:

Country of
incorporation

Ownership
%

Castlestream Limited

Caststop Limited

Credential (Baillieston) Limited

Credential (Greenock) Limited

Credential (Peterborough) Limited (in liquidation)

Credential (Wardpark North) Limited

Credential (Wardpark South) Limited

Credential Bath Street Limited

Credential Charing Cross Limited

Credential Estates Limited

Credential Muirhouse Limited (in liquidation)

Credential Residential Finance Limited

Credential SHOP Limited (in liquidation)

Credential Tay House Limited

Douglas Shelf Seven Limited (in liquidation)

Dumbarton Road Limited (in liquidation)

Hamiltonhill Estates Limited

Lilybank Church Limited

Lilybank Terrace Limited

London & Scottish Property Management Limited (in liquidation)

Old Mill Studios Limited

Old Rutherglen Road Limited

Rocket Unit Trust

Squeeze Newco (Elmbank) Limited

Squeeze Newco 2 Limited

Stock Residential Lettings Limited

The Legal Services Centre Limited

View Castle (Properties) Limited

View Castle (Milton Keynes) Limited

View Castle Limited

United Kingdom

Jersey

United Kingdom

100%

All of the above entities have been included in the Group’s consolidated financial statements up to 31 December 2018.

On 9 November 2018, the Credential Group was restructured. All but two properties held within the Credential Group were transferred into
View Castle (Properties) Limited and View Castle (Milton Keynes) Limited, both subsidiaries of View Castle Limited, with the two outstanding
properties to be transferred at a later date. The entities from which the properties were transferred are to be placed into liquidation in 2019.

An updated call option was put in place to include View Castle (Properties) Limited and View Castle (Milton Keynes) Limited.

112

Financial Statements 91 - 130Annual Report and Accountsfor the year ended 31 December 2018Notes to the Consolidated Financial Statements (continued)
For the year ended 31 December 2018

15.

Investment in subsidiaries (continued)

Business Combinations

There have been no new business combinations entered into in the financial year.

During the year, there were two subsidiary company acquisitions that took place in order for the Group to acquire the investment property
owned by that company. These acquisitions have not been treated as a business combination. For further details see note 3.4. The fair
value of investment properties acquired through the purchase of subsidiary companies totalled £36,300,000. Total consideration paid was
£33,740,000. The assets and liabilities of the companies acquired included the investment properties, mentioned above, net current liabilities
totalling £600,000 (principally comprising debtors, cash, creditors and deferred income) and bank borrowings of £1,960,000.

16.

Goodwill

Group

At start of year

Impairment

At end of year

31 December
2018
£’000

1,672

(557)

1,115

31 December
2017
£’000

2,229

(557)

1,672

Goodwill arises on the acquisition of subsidiaries and represents the excess of the consideration transferred, the amount of any non-controlling
interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the identifiable
net assets acquired. If the total of consideration transferred, non-controlling interest recognised and previously held interest measured at fair
value is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised directly
in the Group’s Statement of Comprehensive Income.

Goodwill impairment reviews are undertaken annually or more frequently if events or changes in circumstances indicate a potential
impairment. The goodwill is compared to the recoverable amount, which is the higher of value in use and the fair value less costs of disposal.
Any impairment is recognised immediately as an expense and is not subsequently reversed. The impairment review is based on group pre-tax
cash flow projections of cost savings of the Group as a whole as a single cash generating unit, using a discount factor of 4.8%, which is based
on the borrowing margins currently available. If a reasonable change occurs in a key assumption, the recoverable amount of goodwill would
still be expected to be equal to the carrying value. The impairment review was conducted over a five-year period, which is predominately
derived from the borrowings facility terms, and will result in a nil terminal value.

17.

Non-current receivables

17a. Non-current receivables on lease surrender premium

At start of year

Movement in year

Unwinding of discount

At end of year

Asset due within 1 year

Asset due after 1 year

31 December
2018
£’000

31 December
2017
£’000

206

(250)

–

1,004

(988)

190

206

–

206

In May 2014, the tenant of one of the subsidiaries (Blythswood House) surrendered their lease resulting in a lease surrender premium to be
paid by the tenant in equal instalments over four years with the final instalment paid in the quarter ending 31 March 2018. The amount due
was recognised initially at fair value and subsequently recorded at amortised cost using the effective interest method. The unwinding of the
discount is included in finance income.

113

Financial Statements 91 - 130Annual Report and Accountsfor the year ended 31 December 2018Notes to the Consolidated Financial Statements (continued)
For the year ended 31 December 2018

17.

Non-current receivables (continued)

17b. Non-current receivables on tenant loans

At start of year

Amounts loaned in the year

At end of year

Asset due within 1 year

Asset due after 1 year

31 December
2018
£’000

31 December
2017
£’000

1,926

–

1,926

530

1,396

1,926

–

1,926

–

1,926

During 2016, the Group entered into a loan agreement with a tenant for £1,926,000. The loan is subject to interest of 4% above the base rate
of the Bank of Scotland and is repayable in instalments over ten years.

18.

Trade and other receivables

Gross amount receivable from tenants

Less provision for impairment

Net amount receivable from tenants

Current receivables – surrender premium (note 17a)

Current receivables – tenant loans (note 17b)

Other receivables

Prepayments

31 December
2018
£’000

31 December
2017
£’000

7,294

(1,115)

6,179

–

530

3,256

12,198

22,163

8,171

(1,033)

7,138

206

–

4,715

9,888

21,947

The maximum exposure to credit risk at the reporting date is the carrying value of the amounts disclosed above. The Group does not hold any
collateral as security.

The aged analysis of trade receivables that are past due but not impaired was as follows:

< 30 days

30-60 days

> 60 days

Less provision for impairment

The Directors consider the fair value of receivables equals their carrying amount.

114

31 December
2018
£’000

31 December
2017
£’000

3,974

720

2,600

7,294

(1,115)

6,179

6,926

859

1,959

9,744

(1,033)

8,711

Financial Statements 91 - 130Annual Report and Accountsfor the year ended 31 December 2018Notes to the Consolidated Financial Statements (continued)
For the year ended 31 December 2018

18.

Trade and other receivables (continued)

The table above shows the aged analysis of trade receivables included in the table above which are past due but not impaired. These relate to
tenants for whom there is no recent history of default.

Provision for impairment of trade receivables movement as follows:

At start of year

Provision for impairment in the year

Upon acquisition of subsidiary companies

Receivables written off as uncollectable

Unused provision reversed

At end of year

Other categories within trade and other receivables do not include impaired assets.

19.

Cash and cash equivalents

Group

Cash held at bank

Restricted cash held at bank

At end of year

31 December
2018
£’000

31 December
2017
£’000

1,033

928

–

(452)

(394)

1,115

258

607

225

–

(57)

1,033

31 December
2018
£’000

79,616

25,207

104,823

31 December
2017
£’000

33,433

11,207

44,640

Restricted cash balances of the Group comprise:
•

£20,259,000 (2017: £2,499,000) of funds held in blocked bank accounts which are controlled by one of the Group’s lenders and are
released to free cash once certain loan conditions are met. The restricted funds arose on net proceeds from investment property disposals
and were released after the year end.
£2,780,000 (2017 £4,198,000) of funds which represent service charge income received from tenants for settlement of future service
charge expenditure.
£900,000 (2017: £2,144,000) of funds which represent tenants’ rental deposits.
£1,268,000 (2017: £1,957,000) of funds held in blocked bank accounts which are controlled by one of the Group’s lenders and are released
to free cash once certain conditions are met. The restricted funds arose on net proceeds held in relation to rental guarantees given by the
seller of properties purchased by the Group. These funds can only be withheld by the lender and used to repay outstanding loans in the
event of a default. £1,256,000 of this balance will be released to free cash before 31 March 2019.
£0 (2017: £409,000) of funds held in blocked rent accounts which are controlled by one of the Group’s lenders and will be released to free
cash post year end without restriction.

•

•
•

•

All restricted cash balances will be available before 31 March 2019.

115

Financial Statements 91 - 130Annual Report and Accountsfor the year ended 31 December 2018Notes to the Consolidated Financial Statements (continued)
For the year ended 31 December 2018

20.

Trade and other payables

Withholding tax due on dividends paid

Trade payables

Other payables

Value added tax

Accruals of incidental costs for fund raise and acquisitions

Accruals

At end of year

Other payables principally includes rent deposits held and service charge costs.

21.

Deferred income

Deferred rental income represents rent received in advance from tenants.

22.

Taxation liabilities

Income tax

Deferred tax

The movement on deferred tax liability is shown below:

At start of year

Deferred tax on the valuation of investment properties

At end of year

31 December
2018
£’000

31 December
2017
£’000

1,302

2,462

9,905

939

16,028

30,663

906

3,739

9,493

298

2,593

9,912

26,941

31 December
2018
£’000

31 December
2017
£’000

1,129

634

1,763

2,050

(1,416)

634

586

2,050

2,636

626

1,424

2,050

116

Financial Statements 91 - 130Annual Report and Accountsfor the year ended 31 December 2018Notes to the Consolidated Financial Statements (continued)
For the year ended 31 December 2018

23.

Bank and loan borrowings

Bank borrowings are secured by charges over individual investment properties held by certain asset-holding subsidiaries. The banks also hold
charges over the shares of certain subsidiaries and any intermediary holding companies of those subsidiaries. Any associated fees in arranging
the bank borrowings unamortised as at the year end are offset against amounts drawn on the facilities as shown in the table below:

Bank borrowings drawn at start of year

Bank borrowings drawn

Bank borrowings repaid

Bank borrowings drawn at end of year

Less: unamortised costs at start of year

Less: loan issue costs incurred in the year

Add: loan issue costs amortised in the year

At end of year

Maturity of bank borrowings

Repayable within 1 year

Repayable between 1 to 2 years

Repayable between 2 to 5 years

Repayable after more than 5 years

Unamortised loan issue costs

31 December
2018
£’000

31 December
2017
£’000

339,074

52,919

(101,506)

290,487

(4,693)

(1,367)

1,172

285,599

400

88,687

201,000

(4,888)

285,599

220,060

284,633

(165,619)

339,074

(2,618)

(4,765)

2,690

334,381

400

65,400

108,274

165,000

(4,693)

334,381

As detailed in notes 24 and 25 the Group also has 30,000,000 ZDP shares in issue and £50,000,000 Retail Eligible Bond in issue.

The table below lists the Group’s borrowings.

Original
Facility
£’000

Outstanding
Debt*
£’000 Maturity Date

Gross Loan
to Value**
%

Dec ‘28

Dec ‘21

Nov ‘22

38.8

45.9

51.4

36.7

Annual Interest Rate

% Amortisation

3.37 Fixed

none

2.00 over 3mth £ LIBOR MP

2.15 over 3mth £ LIBOR MP

Dec ‘27

45.4

3.28 Fixed MP

Jan ‘19

Aug ‘24

n/a

6.50 Fixed

none

4.50 Fixed

none

Lender

Scottish Widows Ltd

Royal Bank of Scotland

HSBC

Santander UK

Scottish Widows Ltd. &
Aviva Investors Real Estate
Finance

Total bank borrowings

ZDP shares

Retail Eligible Bond

Total

36,000

26,458

19,003

44,026

165,000

290,487

39,879

50,000

380,366

36,000

26,458

19,003

44,026

165,000

290,487

39,820

50,000

380,307

LIBOR = London Interbank Offered Rate (Sterling)
MP = Mandatory prepayment

* Before unamortised debt issue costs
** Based upon Cushman & Wakefield and Jones Lang LaSalle property valuations

117

Financial Statements 91 - 130Annual Report and Accountsfor the year ended 31 December 2018Notes to the Consolidated Financial Statements (continued)
For the year ended 31 December 2018

23.

Bank and loan borrowings (continued)

The weighted average term to maturity of the Group’s debt at the period end was 6.4 years (31 December 2017: 6.0 years). The weighted
average interest rate payable by the Group on its debt portfolio, excluding hedging costs, as at the period end was 3.7% (31 December 2017:
3.7%).

The Group weighted average interest rate, including the ZDP shares, Retail Eligible Bond and hedging costs at the period end amounted to
3.8% per annum (31 December 2017: 3.8% per annum).

The Group has been in compliance with all of the financial covenants relating to the above facilities as applicable throughout the year covered
by these consolidated financial statements. Each facility has distinct covenants which generally include: historic interest cover, projected
interest cover, loan to value cover, and debt service cover. A breach of agreed covenant levels would typically result in an event of default of the
respective facility, giving the lender the right, but not the obligation, to declare the loan immediately due and payable. Where a loan is repaid in
these circumstances early repayment fees will apply, which are generally based on a percentage of the loan repaid or calculated with reference
to the interest income foregone by the lenders as a result of the repayment.

As shown in note 26, the Group uses a combination of interest rate swaps and fixed rate bearing loans to hedge against interest rate risks. The
Group’s exposure to interest rate volatility is minimal.

24.

Zero dividend preference shares

At start of year

Fair value arising on the acquisition of subsidiaries

Acquisition costs

Amortisation of acquisition costs

Accrued capital entitlement

At end of year

31 December
2018
£’000

37,239

–

147

2,430

39,816

31 December
2017
£’000

–

35,620

(264)

114

1,769

37,239

The Group entity Regional REIT ZDP PLC, has 30,000,000 zero dividend preference shares (“ZDP shares”) in issue. The ZDP shares were
originally issued at 100 pence per share. The ZDP shares have an entitlement to receive a fixed cash amount on 9 January 2019, being the
maturity date, but do not receive any dividends or income distributions. Additional capital accrues to the ZDP shares on a daily basis at a rate
equivalent to 6.5% per annum, resulting in a final capital entitlement of 132.9 pence per share. The ZDP shares are listed on the London Stock
Exchange (LSE: RGLZ). As detailed in note 36, the repayment of the Regional REIT ZDP Plc 6.5% ZDP shares in full took place after the year end.

During the period, the Group accrued £2,430,000 (31 December 2017: £1,769,000) of capital payable. The total amount repayable at maturity
will be £39,879,269.

The ZDP shares do not carry the right to vote at general meetings of Regional REIT ZDP PLC, although they carry the right to vote as a class on
certain proposals which would be likely to materially affect their position. In the event of a winding-up of Regional REIT ZDP PLC, the capital
entitlement of the ZDP shares will rank ahead of Ordinary Shares but behind other creditors of Regional REIT ZDP PLC.

25.

Retail Eligible Bonds

During the year, the Company launched £50,000,000 4.5% Retail eligible bonds with a maturity date of 6 August 2024. The Bonds are listed
on the London Stock Exchange ORB platform.

Bonds issued in the period

Issue costs

Amortisation of issue costs

At end of year

118

31 December
2018
£’000

31 December
2017
£’000

50,000

(925)

49,136

–

Financial Statements 91 - 130Annual Report and Accountsfor the year ended 31 December 2018Notes to the Consolidated Financial Statements (continued)
For the year ended 31 December 2018

26.

Derivative financial instruments

Interest rate caps and swaps are in place to mitigate the interest rate risk that arises as a result of entering into variable rate borrowings.

Fair value at start of year

Fair value of derivative financial instruments arising on the acquisition of subsidiaries

Net costs of disposing of derivative financial instruments

Revaluation in the year

Fair value at end of year

31 December
2018
£’000

31 December
2017
£’000

(752)

–

415

(337)

(1,513)

103

441

217

(752)

The calculation of fair value of interest rate caps and swaps is based on the following calculation: the notional amount multiplied by the difference
between the swap rate and the current market rate and then multiplied by the number of years remaining on the contract and discounted.

The table below details the hedging and swap notional amounts and rates against the details of the Group’s loan facilities:

Lender

Scottish Widows Ltd

Royal Bank of
Scotland

HSBC

Santander UK

Scottish Widows Ltd.
& Aviva Investors Real
Estate Finance

Total

Original Facility
£’000

Outstanding Debt

£’000 Maturity Date

Annual Interest rate
%

Notional Amount
£’000

36,000

26,458

19,003

44,026

36,000

26,458

19,003

44,026

Dec ‘28

Dec ‘21

Nov ‘22

3.37 Fixed

n/a

2.00 over 3mth £ LIBOR

Swap 13,229
Cap 13,229

2.15 over 3mth £ LIBOR

nil

2.15 over 3mth £ LIBOR

Swap 35,350
Cap 35,350

Rate
%

n/a

1.32
1.32

n/a

1.605
1.605

165,000

290,487

165,000

290,487

Dec ‘27

3.38 Fixed

n/a

LIBOR = London Interbank Offered Rate (Sterling)

As at 31 December 2018, the swap notional arrangements were £48.58m (31 December 2017: £35.35m).

The Group weighted average effective interest rate was 3.5% (31 December 2017: 3.5%) inclusive of hedging costs but excluding the ZDP.

The maximum exposure to credit risk at the reporting date is the fair value of the derivative liabilities.

It is the Group’s target to hedge at least 90% of the total debt portfolio using interest rate derivatives and fixed-rate facilities. As at the year
end, the total proportion of hedged debt equated to 102.6% (31 December 2017: 88.5%), as shown below. The over hedged position has arisen
due to debt repayments during 2018.

Total bank borrowings

Notional value of interest rate caps and swaps

Value of fixed rate debts

Proportion of hedged debt

119

31 December
2018
£’000

290,487

97,158

201,000

298,158

102.6%

31 December
2017
£’000

339,074

70,700

230,000

300,700

88.7%

Financial Statements 91 - 130Annual Report and Accountsfor the year ended 31 December 2018Notes to the Consolidated Financial Statements (continued)
For the year ended 31 December 2018

26.

Derivative financial instruments (continued)

Fair value hierarchy

The following table provides the fair value measurement hierarchy for interest rate derivatives.

The different levels are defined as follows.

Level 1: Quoted (unadjusted) market prices in active markets for identical assets or liabilities.

Level 2: Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly
observable.

Level 3: Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable.

For assets and liabilities that are recognised in the consolidated financial statements on a recurring basis, the Group determines whether
transfers have occurred between levels in the hierarchy by reassessing categorisation at the end of each reporting period.

Interest rate derivatives

31 December 2018

31 December 2017

Total
£’000

(337)

(752)

Quoted
active prices
(level 1)
£’000

–

Significant
observable inputs
(level 2)
£’000

Significant
unobservable inputs
(level 3)
£’000

(337)

(752)

–

The fair value of these contracts is recorded in the Consolidated Statement of Financial Position and is determined by forming an expectation
that interest rates will exceed strike rates and discounting these future cash flows at the prevailing market rates as at the year end.

There have been no transfers between levels during the year.

The Group has not adopted hedge accounting.

27.

Stated capital

Stated capital represents the consideration received by the Company for the issue of Ordinary Shares.

Group

Issued and fully paid shares of no par value

At start of the year

Shares issued 24/03/2017

Shares issued 21/12/2017

Share issue costs

At end of the year

Number of shares in issue

At start of the year

Shares issued 24/03/2017

Shares issued 21/12/2017

At end of the year

31 December
2018
£’000

31 December
2017
£’000

370,318

–

(2)

370,316

372,821,136

–

372,821,136

274,217

25,687

73,000

(2,586)

370,318

274,217,264

26,326,644

72,277,228

372,821,136

120

Financial Statements 91 - 130Annual Report and Accountsfor the year ended 31 December 2018Notes to the Consolidated Financial Statements (continued)
For the year ended 31 December 2018

28.

Net asset value per share (NAV)

Basic NAV per share is calculated by dividing the net assets in the Statement of Financial Position attributable to ordinary equity holders of the
parent by the number of Ordinary Shares outstanding at the end of the year.

As there were dilutive instruments outstanding at 31 December 2017, both basic and diluted earnings per share are disclosed below.

Dilutive instruments relate to the partial settlement of the Performance Fee by the future issue of Ordinary Shares. As detailed in note 35, a
Performance Fee for the period from commencement of trading to 31 December 2017 was recognised in the financial statements. An estimate
was made of the number of shares that would be issued based on the EPRA NAV at 31 December 2017. It should be noted that the first
Performance Fee charge runs for the period from 6 November 2015 to 31 December 2018 and the shares issued to settle the charge will be
based on the diluted EPRA NAV as at 31 December 2018.

At 31 December 2017, only 50% of the Performance Fee was recognised within accruals and as there was the intention to pay the remainder of
the fee through the issue of shares, dilutive instruments were outstanding at that date.

EPRA NAV is a key performance measure used in the real estate industry which highlights the fair value of net assets on an ongoing long-term
basis. Assets and liabilities that are not expected to crystallise in normal circumstances such as the fair value of derivatives and deferred taxes
on property valuation surpluses are therefore excluded.

Net asset values have been calculated as follows:

Group

Net asset value per Consolidated Statement of Financial Position

Adjustment for calculating EPRA net assets:

Derivative financial instruments

Deferred tax liability

EPRA net assets

Number of Ordinary Shares in issue

Dilutive instruments

Adjusted number of Ordinary Shares

Net asset value per share – basic

Net asset value per share – diluted

EPRA net asset value per share – basic

EPRA net asset value per share – diluted

31 December
2018
£’000

429,515

337

634

430,486

372,821,136

–

31 December
2017
£’000

392,899

752

2,050

395,701

372,821,136

875,752

372,821,136

373,696,888

115.2p

115.5p

105.4p

105.1p

106.1p

105.9p

121

Financial Statements 91 - 130Annual Report and Accountsfor the year ended 31 December 2018Notes to the Consolidated Financial Statements (continued)
For the year ended 31 December 2018

29.

Notes to the Statement of Cash Flows

29.1. Non-cash transactions

The Group has accounted for the following non-cash transactions:

•

During the year ended 31 December 2018, the reversal of share-based payment adjustments made in previous years as it has now been
determined that the Performance Fees will be fully paid by cash. (see note 35)
During the year ended 31 December 2017, the value of Performance Fees expensed within the Group where Ordinary Shares will be issued
for the consideration prior to the subsequent reversal of that transaction.

29.2.

Reconciliation of changes in liabilities to cash flows arising from financing activities

31 December 2018

Balance at 1 January 2018

Changes from financing cash flows:

Bank and Bond borrowings advanced

Bank borrowings repaid

Bank and Bond borrowing costs paid

Total changes from financing cash flows

Arising from subsidiary acquisitions

Costs from subsidiary acquisitions

Amortisation of issue costs

Accrued capital entitlement

Change in fair value

Total other changes

Balance at 31 December 2018

Balances are included in the Statement of
Financial Position as follows:

Current liabilities

Non-current liabilities

Balance at 31 December 2018

Bank loans and
borrowings
£’000

Zero dividend
preference
shares
£’000

Retail Eligible
Bonds
£’000

Derivative
financial
instruments
£’000

334,381

37,239

–

752

50,959

(101,506)

(1,345)

(51,892)

1,960

(22)

1,172

–

3,110

285,599

400

285,199

285,599

–

147

2,430

2,577

39,816

–

39,816

50,000

–

(925)

49,075

–

49,136

–

49,136

–

(415)

337

–

337

Total
£’000

372,372

100,959

(101,506)

(2,270)

(2, 817)

1,960

(22)

1,380

2,430

(415)

5,333

374,888

40,216

334,672

374, 888

122

Financial Statements 91 - 130Annual Report and Accountsfor the year ended 31 December 2018
Notes to the Consolidated Financial Statements (continued)
For the year ended 31 December 2018

29.

Notes to the Statement of Cash Flows (continued)

29.2

Reconciliation of changes in liabilities to cash flows arising from financing activities (continued)

31 December 2017

Balance at 1 January 2017

Changes from financing cash flows:

Net costs paid on the disposal of
derivatives

Bank borrowings advanced

Bank borrowings repaid

Bank borrowing costs paid

Total changes from financing cash flows

Arising from subsidiary acquisitions

Costs of subsidiary acquisitions allocated

Amortisation of issue costs

Accrued capital entitlement

Change in fair value

Total other changes

Balance at 31 December 2017

Balances are included in the Statement of
Financial Position as follows:

Current liabilities

Non-current liabilities

Balance at 31 December 2017

Bank loans and
borrowings
£’000

217,442

–

179,540

(165,619)

(3,714)

10,207

105,093

(1,051)

2,690

–

106,732

334,381

400

333,981

334,381

Derivative
financial
instruments
£’000

1,513

Total
£’000

218,955

(441)

–

(441)

(103)

–

(217)

(320)

752

–

752

179,540

(165,619)

(3,714)

9,766

140,610

(1,315)

2,804

1,769

(217)

143,651

372,372

400

371,972

372,372

Zero dividend
preference
shares
£’000

Retail Eligible
Bonds
£’000

–

35,620

(264)

114

1,769

–

37,239

–

37,239

123

Financial Statements 91 - 130Annual Report and Accountsfor the year ended 31 December 2018Notes to the Consolidated Financial Statements (continued)
For the year ended 31 December 2018

30.

Financial risk management

30.1.

Financial instruments

The Group’s principal financial assets and liabilities are those that arise directly from its operations: trade and other receivables, trade and other
payables and cash and cash equivalents. The Group’s other principal financial liabilities are bank and other loan borrowings, amounts due to
Zero Dividend Preference Shareholders and interest rate derivatives, the main purpose of which is to finance the acquisition and development
of the Group’s investment property portfolio.

Set out below is a comparison by class of the carrying amounts and fair value of the Group’s financial instruments that are carried in the
financial statements:

Group

Financial assets – measured at amortised cost

Trade and other receivables

Cash and short-term deposits

Financial liabilities – measured at amortised cost

Trade and other payables

Bank and loan borrowings

Zero dividend preference shares

Retail Eligible Bonds

Financial liabilities – measured at fair value through profit or loss

Interest rate derivatives

30.2.

Risk management

31 December 2018

31 December 2017

Book value
£’000

Fair value
£’000

Book value
£’000

Fair value
£’000

11,891

104,823

11,891

104,823

13,985

44,640

13,985

44,640

(29,361)

(26,035)

(285,599)

(334,381)

(39,816)

(49,136)

(39,150)

(50,038)

(37,239)

(38,550)

–

(337)

(752)

The Group is exposed to market risk (including interest rate risk), credit risk and liquidity risk. The Board of Directors oversees the management of these
risks. The Board of Directors reviews and agrees policies for managing each of these risks that are summarised below.

30.3. Market risk

Market risk is the risk that the fair values of financial instruments will fluctuate because of changes in market prices. The financial instruments
held by the Group that are affected by market risk are principally the Group’s bank balances along with a number of interest rate swaps entered
into to mitigate interest rate risk.

The Group’s interest rate risk arises from long term borrowings issued at variable rates, which expose the Group to cash flow interest rate risk.
Borrowings issued at fixed rates expose the Group to fair value interest rate risk. The Group manages its cash flow interest rate risk by using
floating to fixed interest rate swaps, interest rate caps and interest rate swaptions. Interest rate swaps have the economic effect of converting
borrowings from floating rates to fixed rates. Interest rate caps limit the exposure to a known level.

If interest rates were to increase by the following rates, this would increase the annual interest charge to the Group and thus reduce profits and
net assets as follows:

Interest rate increase

0.00%

0.25%

0.50%

0.75%

1.00%

Increase to the annual interest charge

31 December
2018
£’000

31 December
2017
£’000

–

102

307

409

–

184

368

552

737

124

Financial Statements 91 - 130Annual Report and Accountsfor the year ended 31 December 2018Notes to the Consolidated Financial Statements (continued)
For the year ended 31 December 2018

30.

Financial risk management (continued)

30.4. Credit risk

Credit risk is the risk that a counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial
loss. The Group is exposed to credit risk from both its leasing activities and financing activities, including deposits with banks and financial
institutions. Credit risk is mitigated by tenants being required to pay rentals in advance under their lease obligations. The credit quality of the
tenant is assessed based on an extensive credit rating scorecard at the time of entering into a lease agreement.

Outstanding trade receivables are regularly monitored. The maximum exposure to credit risk at the reporting date is the carrying value of each
class of financial asset.

30.5. Credit risk related to trade receivables

Trade receivables, primarily tenant rentals, are presented in the Group’s Statement of Financial Position net of provisions for impairment. Credit
risk is primarily managed by requiring tenants to pay rentals in advance and performing tests around strength of covenant prior to acquisition.
Any trade receivables past due as at the year end were received shortly after the year end.

30.6. Credit risk related to financial instruments and cash deposits

One of the principal credit risks of the Group arises with the banks and financial institutions. The Board of Directors believes that the credit risk
on short-term deposits and current account cash balances are limited because the counterparties are banks, who are committed lenders to the
Group, with high credit ratings assigned by international credit-rating agencies.

The list of bankers for the Group, with their latest Fitch credit ratings, was as follows:

Bankers

Barclays

Fitch Ratings

A+ Rating Watch Negative

Royal Bank of Scotland

A+ Rating Watch Negative

Santander UK

HSBC

Aviva

Scottish Widows*

A+ Rating Watch Negative

AA- Rating Watch Negative

A+ Stable

* rating relates to parent entity – Lloyds Banking Group plc

30.7.

Liquidity risk

Liquidity risk arises from the Group’s management of working capital and, going forward, the finance charges and principal repayments on
its borrowings. It is the risk that the Group will encounter difficulty in meeting its financial obligations as they fall due, as the majority of the
Group’s assets are investment properties and are therefore not readily realisable. The Group’s objective is to ensure it has sufficient available
funds for its operations and to fund its capital expenditure. This is achieved by continuous monitoring of forecast and actual cash flows by
management.

125

Financial Statements 91 - 130Annual Report and Accountsfor the year ended 31 December 2018Notes to the Consolidated Financial Statements (continued)
For the year ended 31 December 2018

30.

Financial risk management (continued)

30.7

Liquidity risk (continued)

The table below summarises the maturity profile of the Group’s financial liabilities based on contractual undiscounted payments:

Group at 31 December 2018

Trade and other payables

Bank borrowings

Interest rate derivatives

Zero Dividend Preference Shares

Retail eligible bonds

Group at 31 December 2017

Trade and other payables

Bank borrowings

Interest rate derivatives

Zero Dividend Preference Shares

31.

Capital management

Within
1 year
£’000

(29,361)

(8,926)

(264)

(39,879)

(2,250)

(80,680)

Within
1 year
£’000

(26,035)

(12,019)

(242)

–

(38,296)

Between
1 to 2 years
£’000

–

(8,959)

(244)

–

(2,250)

(11,453)

Between
1 to 2 years
£’000

–

(75,599)

(242)

(39,879)

(115,720)

Between
2 to 5 years
£’000

–

After
5 years
£’000

–

(113,026)

(228,717)

(418)

–

(6,750)

(120,194)

Between
2 to 5 years
£’000

–

(52,250)

(280,967)

After
5 years
£’000

–

(131,712)

(191,793)

(700)

–

(132,412)

(191,793)

Total
£’000

(29,361)

(359,628)

(926)

(39,879)

(63,500)

(493,294)

Total
£’000

(26,035)

(411,123)

(1,184)

(39,879)

(478,221)

The primary objective of the Group’s capital management is to ensure that it remains a going concern and continues to qualify for UK REIT
status.

The Group’s capital is represented by reserves and bank borrowings. The Board, with the assistance of the Investment and Asset Managers,
monitors and reviews the Group’s capital so as to promote the long-term success of the business, facilitate expansion, deliver a quarterly
dividend distribution and to maintain sustainable returns for Shareholders.

The Group’s policy on borrowings is as follows: the level of borrowing will be on a prudent basis for the asset class, and will seek to achieve a
low cost of funds, while maintaining flexibility in the underlying security requirements, and the structure of both the portfolio and of Regional
REIT.

Based on current market conditions, the Board will target Group net borrowings of 40% of Investment Property Values at any time. However,
the Board may modify the Group’s borrowing policy (including the level of gearing) from time to time in light of then-current economic
conditions, relative costs of debt and equity capital, fair value of the Company’s assets, growth and acquisition opportunities or other factors
the Board deems appropriate. The Group’s net borrowings may not exceed 50 per cent. of the Investment Property Values at any time without
the prior approval of Ordinary Shareholders in a General Meeting.

The optimal debt financing structure for the Group will have consideration for the key metrics including: fixed or floating interest rate charged,
debt type, maturity profile, substitution rights, covenant and security requirements, lender type, diversity, and the lender’s knowledge and
relationship with the property sector.

126

Financial Statements 91 - 130Annual Report and Accountsfor the year ended 31 December 2018Notes to the Consolidated Financial Statements (continued)
For the year ended 31 December 2018

32.

Operating leases

The future minimum lease payments receivable under non-cancellable operating leases in respect of the Group’s property portfolio are as
follows:

Group

Receivable within 1 year

Receivable between 1–2 years

Receivable between 2–5 years

Receivable after 5 years

31 December
2018
£’000

31 December
2017
£’000

38,109

37,365

106,408

275,529

457,411

49,621

38,678

66,437

47,979

202,715

The Group has in excess of 889 operating leases. The number of years remaining on these operating leases varies between 1 and 80 years. The
amounts disclosed above represent total rental income receivable up to the next lease break point on each lease. If a tenant wishes to end a
lease prior to the break point a surrender premium will be charged to cover the shortfall in rental income received.

33.

Operating lease commitments

The Group’s operating lease commitments at the year end were spread across 13 separate operating leases with the two largest leases at
Basingstoke and Witham making up 41% of the balance.

Total commitments on operating leases in respect of land and buildings are as follows:

Group

Payable within 1 year

Payable between 1–2 years

Payable between 2–5 years

Payable after 5 years

31 December
2018
£’000

31 December
2017
£’000

618

1,854

51,337

54,427

471

1,414

36,001

38,357

34.

Segmental information

After a review of the information provided for management purposes during the current year, it was determined that the Group has one
operating segment and therefore segmental information is not disclosed in these consolidated financial statements.

127

Financial Statements 91 - 130Annual Report and Accountsfor the year ended 31 December 2018Notes to the Consolidated Financial Statements (continued)
For the year ended 31 December 2018

35.

Transactions with related parties

Transactions with the Directors

Directors’ remuneration is disclosed within the Remuneration Report and note 8 to the financial statements. Directors’ beneficial interests in
the Ordinary Shares of the Company are disclosed within the Directors’ Report. During the year, the following dividends were received by the
Directors (and their spouses or minor children) on the holdings:

Kevin McGrath

William Eason

Daniel Taylor

Stephen Inglis

Frances Daley

Timothy Bee

Total

Year ended
31 December
2018
£’000

Year ended
31 December
2017
£’000

142

–

Transactions with the Asset Manager, London & Scottish Investments Limited and the Property Manager, London & Scottish
Property Asset Management Limited

Stephen Inglis is a non-executive Director of Regional REIT Limited, as well as being the Chief Executive Officer of London & Scottish
Investments Limited (“LSI”) and a director of London & Scottish Property Asset Management Limited. The former company has been
contracted to act as the Asset Manager of the Group and the latter as the Property Manager.

In consideration for the provision of services provided, the Asset Manager is entitled in each financial year (or part thereof) to 50% of an annual
management fee on a scaled rate of 1.1% of the EPRA net asset value, reducing to 0.9% on net assets over £500,000,000. The fee shall be
payable in cash quarterly in arrears.

In respect of each portfolio property, the Asset Manager has procured and shall, with the Company in future, procure that London & Scottish
Property Asset Management Limited is appointed as the Property Manager. A property management fee of 4% per annum is charged by the
Property Manager on a quarterly basis: 31 March, 30 June, 30 September, and 31 December, based upon the gross rental yield. Gross rental
yield means the rents due under the property’s lease for the peaceful enjoyment of the property, including any value paid in respect of rental
renunciations but excluding any sums paid in connection with service charges or insurance costs.

The Asset Manager is also entitled to a Performance Fee. Details of the Performance Fee are given below.

The following tables show the fees charged in the year and the amount outstanding at the end of the year:

Asset management fees charged*

Property management fees charged*

Performance fees charged

Total

Total fees outstanding *

* Including irrecoverable VAT charged where appropriate

128

Year ended
31 December
2018
£’000

2,405

2,264

3,523

8,192

31 December
2018
£’000

5,263

Year ended
31 December
2017
£’000

1,739

1,972

814

4,525

31 December
2017
£’000

1,882

Financial Statements 91 - 130Annual Report and Accountsfor the year ended 31 December 2018Notes to the Consolidated Financial Statements (continued)
For the year ended 31 December 2018

35.

Transactions with related parties (continued)

Transactions with the Investment Manager, Toscafund Asset Management LLP

Martin McKay was a non-executive Director of the Company and the Chief Financial Officer of Toscafund Asset Management LLP until 7 July
2017. With effect from that date he was replaced on the Board by Tim Bee, Chief Legal Counsel of Toscafund Asset Management LLP. Toscafund
Asset Management LLP has been contracted as the Investment Manager of the Group.

In consideration for the provision of services provided, the Investment Manager is entitled in each financial year (or part thereof) to 50% of an
annual management fee on a scaled rate of 1.1% of the EPRA net asset value, reducing to 0.9% on net assets over £500,000,000. The fee is
payable in cash quarterly in arrears.

The Investment Manager is also entitled to a Performance Fee. Details of the Performance Fee are given below.

The following tables show the fees charged in the year and the amount outstanding at the end of the year:

Investment management fees charged

Performance fees charged

Total

Total fees outstanding

Performance Fee

Year ended
31 December
2018
£’000

2,405

3,523

5,928

31 December
2018
£’000

5,044

Year ended
31 December
2017
£’000

1,732

814

2,546

31 December
2017
£’000

1,378

The Asset Manager and the Investment Manager are each entitled to 50% of a Performance Fee. The fee is calculated at a rate of 15% of the Total
Shareholder Return in excess of the Hurdle Rate of 8% per annum for the relevant performance period. Total Shareholder Return for any financial year
consists of the sum of any increase or decrease in EPRA NAV per Ordinary Share and the total dividends per Ordinary Share declared in the financial
year. A Performance Fee is only payable in respect of a performance period where the EPRA NAV per Ordinary Share exceeds the High-water mark
which is equal to the greater of the highest year-end EPRA NAV Ordinary Share in any previous performance period or the Placing price (100p per
Ordinary Share). The Performance Fee is calculated initially on 31 December 2018, and annually thereafter. Full details of the Managers’ Performance
Fee are given on pages 183 to 185 of the IPO Prospectus.

The Performance Fee for the first Performance Period, 6 November 2015 to 31 December 2018, is payable 50% in cash, and 50% in Ordinary Shares.
The shares are to be issued at the prevailing price per Ordinary Share at the date of issue and are to be locked-in for one year.

In accordance with the FCA’s Listing Rule 15.4.11, the Company cannot issue shares for cash at a price below the NAV per share without Shareholder
approval. The Company does not have Shareholder approval to do this and any such issue would in any event be dilutive. Accordingly, the Management
Agreements have been amended to clarify that, in this situation, the Performance Fee will be paid entirely in cash but 50% of that amount will be used
to acquire shares in the market on behalf of the Managers within a 20 business day period on an instruction to do so. On this occasion the shares will be
paid for entirely in cash and be acquired from the date of publication of the preliminary 2018 annual results. These amendments were made to preserve
the underlying commercial intention that the Managers should normally receive 50% of the Performance Fee in shares.

The Performance Fees for subsequent years are payable 34% in cash and 66% in Ordinary Shares, again at the prevailing price per share, with 50% of
the shares locked-in for one year and 50% of the shares locked-in for two years.

Based on the EPRA NAV of the Group as at 31 December 2018, the Performance Fee liability, for the period from commencement of trading to
31 December 2018 was estimated at £8,905,000 (31 December 2017: £1,859,000). This fee has been accrued in the consolidated financial statements.

In the comparative period, it was assumed that market conditions would prevail so that the future payment of the Performance Fee charge would be
met 50% by cash and 50% by the issue of shares. Therefore, at 31 December 2017, 50% of the fee was accrued as a liability totalling £930,000 and the
50% of the fee, payable by the issue of Ordinary Shares was reflected as a share based payment in the Consolidated Statement of Changes in Equity.

129

Financial Statements 91 - 130Annual Report and Accountsfor the year ended 31 December 2018Notes to the Consolidated Financial Statements (continued)
For the year ended 31 December 2018

36.

Subsequent events

On 10 January 2019, the Company announced the repayment of the Regional REIT ZDP Plc 6.5% ZDP shares in full totalling £39.9m. This
resulted in a reduction in the weighted average cost of borrowing (including hedging costs) from c. 3.8% to c. 3.5%. Regional REIT ZDP Plc has
now been placed into liquidation.

On 4 February 2019, the Company announced the acquisition of Norfolk House in Birmingham for £20m, with a net initial yield of 7.92%. The
building is 98.75% occupied with a net income of c. £1.69m

130

Financial Statements 91 - 130Annual Report and Accountsfor the year ended 31 December 2018EPRA Performance Measures

The Group is a member of the European Public Real Estate Association (“EPRA”).

EPRA have developed and defined the following performance measures to give transparency, comparability and relevant of financial reporting
across entities which may use different accounting standards. The Group is pleased to disclose the following measures which are calculated in
accordance with EPRA guidance:

EPRA
Performance
Measure

Definition

EPRA EARNINGS

Earnings from operational
activities.

EPRA Performance
Measure

EPRA Earnings

EPRA Earnings per share (basic)

EPRA Earnings per share (diluted)

31 December
2018

31 December
2017

£20,892,000

£24,014,000

5.6p

8.1p

Company
Adjusted Earnings

Company Specific Earnings
Measure which adds back the
Performance Fee charged in
the accounts

Adjusted Earnings

£27,938,000

£25,624,000

EPRA Earnings per share (basic)

EPRA Earnings per share (diluted)

7.5p

8.6p

EPRA NAV

EPRA NNNAV

EPRA NET INITIAL
YIELD

EPRA ‘TOPPED-
UP’ NIY

Net Asset Value adjusted
to include properties and
other investment interest
at fair value and to exclude
certain items not expected
to crystallise in a long-term
investment property business
model.

EPRA NAV adjusted to include
the fair values of (i) financial
instruments, (ii) debt and (iii)
deferred taxes.

Annualised rental income based
on the cash rents passing at the
balance sheet date, less non-
recoverable property operating
expenses, divided by the market
value of the property with
(estimated) purchasers’ costs.

This measure incorporates an
adjustment to the ERA NIY
in respect of the expiration
of rent-free-periods (or other
unexpired lease incentives such
as discounted rent periods and
stepped rents)

EPRA Net Asset Value

£430,486,000

£395,701,000

EPRA NAV per share (diluted)

115.5p

105.9p

EPRA NNNAV

EPAR NNNAV per share (diluted)

£427,966,000

£391,588,000

115.1p

104.8p

EPRA Net Initial Yield

6.5%

EPRA ‘Topped-up’ Net Initial Yield

6.6%

131

Additional Information 131 - 142Annual Report and Accountsfor the year ended 31 December 2018EPRA Performance Measures (continued)

EPRA
Performance
Measure

Definition

EPRA VACANCY
RATE

Estimated Market Rental Value
(ERV) of vacancy space divided
by ERV of the whole portfolio

EPRA Performance
Measure

EPRA Vacancy Rate

31 December
2018

31 December
2017

10.6%

11.8%

EPRA COSTS
RATIO

Administrative & operating
costs (including & excluding
costs of direct vacancy divided
by gross rental income

EPRA Costs Ratio

EPRA Costs Ratio
(excluding direct vacancy costs)

40.1%

29.9%

29.7%

19.0%

EPRA 2018 Awards

O
S

R O V

W
A

Notes to the calculation of EPRA performance measures

EPRA earnings

For calculations, please refer to note 12 to the financial statements.

EPRA NAV

NAV per the financial statements

Effect of dilutive instruments

Diluted NAV

Fair value of derivative financial instruments

Deferred tax liability

EPRA NAV

Dilutive number of shares

EPRA NAV per share

132

31 December
2018
£’000

429,515

–

429,515

337

634

430,486

372,821,136

115.5p

31 December
2017
£’000

392,899

–

392,899

752

2,050

395,701

373,696,888

105.9p

Additional Information 131 - 142Annual Report and Accountsfor the year ended 31 December 2018

EPRA Performance Measures (continued)

EPRA NNNAV

EPRA NAV

Fair value of derivative financial instruments

Adjustment for the fair value of debt:

Bank and loan borrowings

Zero Dividend Preference Shares

Retail eligible bonds

Deferred tax liability

EPRA NNNAV

Dilutive number of shares

EPRA NAV per share

EPRA Net Initial Yield

Calculated as the value of investment properties divided by annualised net rents:

Investment properties

Annualised cash passing rental income

Property outgoings

Annualised net rents

Add notional rent expiration of rent free periods or other lease incentives

Topped-up net annualised rent

EPRA NIY

EPRA topped up NIY

EPRA Vacancy Rate

Estimated Market Rental Value (ERV) of vacant space

Estimated Market Rental value (ERV) of whole portfolio

EPRA Vacancy Rate

133

31 December
2018
£’000

430,486

(337)

–

666

(902)

(634)

429,279

372,821,136

115.5p

31 December
2018
£’000

718,375

54,710

(4,650)

50,060

443

50,503

6.5%

6.6%

31 December
2018
£’000

7,128

67,042

10.6%

31 December
2017
£’000

395,701

(752)

–

(1,311)

–

(2,050)

391,588

373,696,888

104.8p

31 December
2017
£’000

765,288

57,011

(4,468)

52,543

639

53,182

6.5%

6.6%

31 December
2017
£’000

8,247

70,034

11.8%

Additional Information 131 - 142Annual Report and Accountsfor the year ended 31 December 2018EPRA Performance Measures (continued)

EPRA Cost Ratios

Operating costs

Less ground rent

Less recoverable service charge income and other similar costs

Add administrative and other expenses

EPRA costs (including direct vacancy costs)

Direct vacancy costs

EPRA costs (excluding direct vacancy costs)

Gross rental income

Less recoverable service charge income and other similar items

Less ground rent

Gross rental income less ground rents

EPRA Cost Ratio (including direct vacancy costs)

EPRA Cost Ratio (excluding direct vacancy costs)

31 December
2018
£’000

31 December
2017
£’000

19,644

(662)

(11,944)

17,586

24,624

(6,240)

18,384

74,019

(11,944)

(661)

61,414

40.1%

29.9%

15,763

(563)

(9,261)

9,429

15,368

(5,522)

9,846

61,610

(9,261)

(563)

51,786

29.7%

19.0%

It should be noted that the EPRA Costs in the above calculations include the performance fee cost for the period of £7,046,000 (year ended
31 December 2017: £1,610,000). The EPRA cost ratio excluding the Performance Fee from costs would be as follows:

EPRA Cost Ratio (including direct vacancy costs)

EPRA Cost Ratio (excluding direct vacancy costs)

28.6%

18.5%

26.6%

15.9%

The Group has not capitalised any overhead or operating expenses in the accounting years disclosed above – LSI to confirm

Property Related Capital Expenditure Analysis

Acquisitions

Subsequent capital expenditure

Total capital expenditure

31 December
2018
£’000

76,334

6,979

83,313

31 December
2017
£’000

231,326

13,373

244,699

Acquisitions – this represents the purchase cost of investment properties and associated incidental purchase expenses such as stamp duty land
tax, legal fees, agents’ fees, valuations and surveys.

Subsequent capital expenditure – this represents capital expenditure which has taken place post the initial acquisition of an investment
property.

134

Additional Information 131 - 142Annual Report and Accountsfor the year ended 31 December 2018Glossary of Terms

AIC – Association of Investment Companies. A trade body for closed-
end investment companies (www.theaic.co.uk)

AIF – Alternative Investment Fund.

AIFMD – Alternative Investment Fund Managers Directive. Issued by
the European Parliament in 2012 and 2013, the Directive requires
the Company to appoint an Alternative Investment Fund Manager
(AIFM). The Board of Directors of a closed-ended investment
company nevertheless remains fully responsible for all aspects of the
Company’s strategy, operations and compliance with regulations.

AIFM – Alternative Investment Fund Manager. The entity which
ensures the Company complies with the AIFMD. The Company’s AIFM
is Toscafund Asset Management LLP.

Board – the Board of Directors of the Company.

Break Option – a clause in a lease which provides the landlord or
tenant with an ability to terminate the lease before its contractual
expiry date.

Capex – Capital expenditure relates to spend used by the organisation
to maintain or upgrade physical assets.

Company – Regional REIT Limited (Company Number 60527).

Contracted Rent – annualised rent, adjusting for the inclusion of rent-
free periods and rental guarantees. See also Passing Rent.

Core property – stable income properties with low risk.

Core Plus property – growth and income properties with the ability to
increase cash flows through asset management initiatives.

Directors – the Directors of the Company whose names are set out on
page 58 and 59.

EPC – Energy Performance Certificate.

EPRA Cost Ratio – ratio of overheads and operating expenses against
gross rental income. Net overheads and operating expenses relate to
all administrative and operating expenses including the share of joint
ventures’ overheads and operating expenses, net of any service fees,
recharges or other income specifically intended to cover overhead
and property expenses.

EPRA – European Public Real Estate Association, a real estate industry
body, which has issued Best Practice Recommendations to provide
consistency and transparency in real estate financial reporting across
Europe.

EPRA Earnings – profit after taxation excluding investments and
development property revaluations and gains/losses on disposals,
changes in the fair value of financial instruments and associated
close-out costs and their related taxation.

EPRA Net Asset Value (EPRA NAV) – IFRS assets excluding the mark-
to-market on effective cash flow hedges and related debt instruments
and deferred taxation revaluations.

EPRA Total Return – The movement in EPRA NAV plus the dividend
distributions paid during the period expressed as a percentage of the
EPRA NAV at the beginning of the period.

135

EPRA Vacancy Rate – occupancy expressed as a percentage being the
ERV of vacant space divided by ERV of the whole portfolio. Vacancy
Rate should only be calculated for all completed properties, but
excluding those properties which are under development.

Equivalent Yield – weighted average of the initial yield and
reversionary yield, representing the return that a property will
produce based on the occupancy data of the tenant leases.

Estimated Rental Value (ERV) or Market Rent (MR) – external valuers’
opinion as to what the open market rental value of the property is
on the valuation date and which could reasonably be expected to be
the rent obtainable on a new letting of that property on the valuation
date.

External Valuer – independent external valuer of a property. The
Company’s External Valuers are Cushman & Wakefield and Jones Lang
LaSalle.

Fair Value Adjustment – accounting adjustment to change the book
value of an asset or liability to its market value.

Gross Asset Value – the aggregate value of the total assets of the
Company as determined in accordance with the accounting principles
adopted by the Company from time to time.

Gross Property Assets – investment properties encompassing the
entire property portfolio of freehold and leasehold assets.

Gross Rental Income – accounting based rental income under IFRS.
When the Group provides lease incentives to its tenants the lease
incentives are recognised over the lease term on a straight-line basis
in accordance with IFRS. Gross rental income is the cash Passing Rent
as adjusted for the spreading of these incentives.

Gross Loan-to-Value (LTV) Ratio – (Borrowings)/(Investment
Properties Value), expressed as percentage.

Group – Regional REIT Limited and its subsidiaries.

IAS – an international accounting standard established by the
International Accounting Standards Board.

IPO – Initial Public Offering. The Company’s admission to the London
Stock Exchange was on 6 November 2015.

Lease – legally binding contract between a landlord and a tenant
which sets out the basis on which the tenant is permitted to occupy a
property, including the lease length.

Lease Incentive – payment used to encourage a tenant to take on a
new lease, for example a landlord paying a tenant a sum of money to
contribute to the cost of a tenant’s fit-out of a property or by allowing
a rent free period.

Lease Re-gear – renegotiation of a lease during the term and often
linked to another lease event, for example a Break Option or Rent
Review.

Lease Renewal – renegotiation of a lease with the existing tenant at
its contractual expiry.

Additional Information 131 - 142Annual Report and Accountsfor the year ended 31 December 2018Glossary of Terms (continued)

Lease Surrender – agreement whereby the landlord and tenant bring
a lease to an end other than by contractual expiry or the exercise
of a Break Option. This will frequently involve the negotiation of a
surrender premium by one party to the other.

Mark-to-Market (MTM) – difference between the book value of an
asset or liability and its market value.

Manager – the Company’s external Asset and Property Manager is
London & Scottish Investments Limited. Its external Investment
Manager is Toscafund Asset Management LLP.

Reversion – expected increase in rent estimated by the Company’s
External Valuers, where the passing rent is below the ERV. The
increases to rent arise on rent reviews and lettings.

Reversionary Yield – anticipated yield, excluding lease expiry, to
which the Net Initial Yield will rise (or fall) once the rent reaches the
Estimated Rental Value. ERV/Investment Properties Value expressed
as a percentage.

Shares – Ordinary Shares issued by the Company.

Shareholder – a holder of Shares in the Company.

Net Asset Value (NAV) (or Shareholders’ Funds) – the value of the
investments and other assets of an investment company, plus cash
and debtors, less borrowings and any other creditors. It represents the
underlying value of an investment company at a point in time.

Triple Net Initial Yield (NNNIY) – (Annualised current passing rent net
of property related taxes, building insurance, and maintenance costs
(the three “nets”))/(Investment Properties Value).

Net Debt – Total cash and cash equivalents less short and long term
debt.

Net Gearing – (Borrowings – cash and cash equivalents)/(Total Issued
Shares + Retained Earnings).

Weighted Average Unexpired Lease Term (WAULT) – is the average
lease term remaining to first break, or expiry, across the portfolio
weighted by contracted rental income (including rent-frees). The
calculation excludes residential leases and development properties
where relevant.

Net Initial Yield – (Annualised current passing rent less non-
recoverable property expenses, such as empty rates)/(Investment
Properties Value). This phrase is regularly used for Triple Net Initial
Yield (NNNIY).

Net Loan-to-Value (LTV) Ratio – (Borrowings – less cash)/(Investment
Properties Value) expressed as percentage.

Weighted Average Debt to Maturity (WAD) – each tranche of Group
debt is multiplied by the remaining period to its maturity and the
result is divided by total Group debt in issue at the period end.

Weighted Average Effective Interest Rate – the Group’s loan interest
and hedging derivative costs per annum divided by total Group debt
in issue at the period end.

Ordinary Resolution – a resolution passed by more than 50 per cent.
Majority in accordance with the Companies Law.

Yield Compression – occurs when the net equivalent yield of a
property decreases, measured in basis points.

Occupancy Percentage – percentage of the total area of all properties
and units currently let to tenants.

Over Rented – when the Contracted Rent is higher than the ERV.

Passing Rent – the rent that is payable at any particular time, allowing
for lease incentives. This phrase is often used for Contracted Rent.

Property Income Distributions (PIDs) – profits from property related
business distributed to Shareholders which are subject to tax in the
hands of the Shareholders as property income. PIDs are normally
paid net of withholding tax, currently at 20%, which the REIT pays
to the tax authorities on behalf of the Shareholder. Certain types of
Shareholder (i.e., pension funds) are tax exempt and receive PIDs
without withholding tax. Property companies also pay out normal
dividends, called non-PIDs, which are treated as not subject to
withholding tax.

Prospectus – the Company’s prospectus issued on 5 December 2017.

REIT – a qualifying entity which has elected to be treated as Real
Estate Investment Trust for tax purposes. In the UK such entities must
be listed on a recognised stock exchange, must be predominantly
engaged in property investments activities and must meet certain
ongoing qualifications as set out under section 705 E of the Finance
Act 2013.

Rent Review – periodic review of rent during the term of a lease, as
provided for within a lease agreement.

136

Additional Information 131 - 142Annual Report and Accountsfor the year ended 31 December 2018AIFMD Disclosure

The Alternative Investment Fund Managers’ Directive (“AIFMD”), requires certain information to be made available to investors in Alternative
Investment Funds (“AIFs”) before they invest and requires that material changes to this information be disclosed in the annual report of each
AIF. Those disclosures that are required to be made pre-investment are included within the Initial Public Offering (“IPO”) Prospectus, which can
be found on the Group’s website at: www.regionalreit.com. There have been no material changes to the disclosures contained within the IPO
document since its publication on 3 November 2015.

Management Agreement
With effect from 6 November 2015, the Company appointed London & Scottish Investments Limited (“LSI”) as Asset Manager and Toscafund
Asset Management LLP (“Toscafund” or the “AIFM”) as Investment Manager. LSI and Toscafund each receive half of an annual management fee
on a scaled rate of 1.1 % of the European Public Real Estate Association net asset value up to £500m and 0.9% above £500m. A Performance
Fee will also be paid to LSI and Toscafund.

The Investment Management Agreement between the Company and Toscafund (the “Management Agreement”) may be terminated by either
party giving 12 months’ written notice. No additional compensation is payable to the AIFM on the termination of this agreement other than
the fees payable during the notice period.

Toscafund was authorised as an Alternative Investment Fund Manager (“AIFM”), by the UK’s Financial Conduct Authority on 21 July 2014. The
AIFM has implemented a remuneration policy (the “Policy”), which is effective as of 21 July 2014. The aggregate amount of remuneration in
respect of the Company of senior management and members of staff of the AIFM whose actions have a material impact on the risk profile of
the Regional REIT Limited during the period 1 January 2018 to 31 December 2018 was £3,027,376 (2017: £1,864,542).

Continuing appointment of the AIFM
The Board continually reviews the performance of the AIFM and LSI. The Board, through its Audit Committee and Management Engagement
and Remuneration Committee (the “Committees”), has considered the performance of the AIFM and the terms of its engagement. It is the
opinion of the Board that the continuing appointment of the AIFM on the terms agreed is in the interests of Shareholders as a whole. This is
because of the good performance of the Group and because the remuneration of the AIFM is fair both in absolute terms and compared to
that of managers of similar investment companies. The Board believe that by calculating the management fee on the basis of EPRA NAV, the
interests of the AIFM are closely aligned with those of the Shareholders.

Risk management by the AIFM
The AIFM has established and maintains a permanent and independent risk management function to ensure that there is a comprehensive
and effective risk management policy in place and to monitor compliance with risk limits. The risk policy applicable to the Group covers the
risks associated with the management of the investment portfolio and the AIFM reviews and approves the adequacy and effectiveness of the
policy on at least an annual basis, including the risk management processes and controls and limits for each risk area. The AIFM sets risk limits
that take into account the risk profile of the Group’s investment portfolio, as well as its investment objectives and strategy. The AIFM monitors
the risk limits, including leverage, and periodically assesses the portfolio’s sensitivity to key risks. The AIFM reviews risk limit reports at regular
meetings of its risk committee.

Principal risks and uncertainties
The Board considers that the following are the principal risks associated with investing in the Group: investment risk, market risk, liquidity risk
and credit risk. An explanation of these risks and how they are managed and the policy and practice with respect to financial instruments are
contained in note 30 on pages 124 to 126 of the Financial Statements.

137

Additional Information 131 - 142Annual Report and Accountsfor the year ended 31 December 2018AIFMD Disclosure (continued)

Leverage
Leverage is defined in the AIFMD as any method by which the Group increases its exposure, whether through borrowing of cash or securities, or
leverage embedded in derivative positions or by any other means. The Group has entered into five separate banking facilities during the period,
drawing on £339.1m of secured debt. All available debt facilities have been fully drawn.

Leverage has been measured in terms of the Group’s exposure, and is expressed as a ratio of net asset value. The AIFMD requires this ratio
to be calculated in accordance with both the Gross Method and the Commitment Method. Details of these methods of calculation can be
found by referring to the AIFMD. In summary, these methods express leverage as a ratio of the exposure of debt, non-sterling currency,
equity or currency hedging and derivatives exposure against the net asset value. The principal difference between the two methods is that the
Commitment Method enables derivative instruments to be netted off to reflect hedging arrangements and the exposure is effectively reduced,
while the Gross Method aggregates the exposure.

The AIFMD introduced a requirement for the AIFM to set maximum levels of leverage for the Group. The Company’s AIFM has set a maximum
limit of 400 for both the Gross and Commitment Methods of calculating leverage.

At 31 December 2018, this gives the following figures:

Leverage Exposure

Gross Method

Commitment Method

Maximum

Actual

400

190

400

214

In accordance with the AIFMD, any changes to the maximum level of leverage set by the Group will be communicated via the Group’s website
to the Shareholders.

138

Additional Information 131 - 142Annual Report and Accountsfor the year ended 31 December 2018Company Information

Directors
Kevin McGrath (Chairman and Independent Non-Executive Director)

William Eason (Senior Independent Non-Executive Director, Management Engagement and Remuneration Committee Chairman)

Daniel Taylor (Independent Non-Executive Director)

Frances Daley (Independent Non-Executive Director, Audit Committee Chairman)

Stephen Inglis (Non-Executive Director)

Timothy Bee (Non-Executive Director)

Public Relations
Buchanan Communications Limited
107 Cheapside
London
EC2V 6DN

Valuers
Cushman & Wakefield Debenham
Tie Leung Limited (trading as
Cushman & Wakefield)
125 Old Broad Street
London
EC2N 2BQ

Jones Lang LaSalle
30 Warwick Street
London
W1B 5NH

Regional REIT Limited;
ISIN:
GG00BYV2ZQ34

SEDOL:
BYV2ZQ3

Legal Entity Identifier:
549300D8G4NKLRIKBX73

Company Website
www.regionalreit.com

Company Secretary
Link Company Matters Limited
Beaufort House
51 New North Road
Exeter
Devon
EX4 4EP

Registered office
Regional REIT Limited
Mont Crevelt House
Bulwer Avenue
St. Sampson
Guernsey
GY2 4LH

Asset Manager
London & Scottish Investments Limited
Venlaw
349 Bath Street
Glasgow
G2 4AA

Investment Manager
Toscafund Asset Management LLP
7th Floor
90 Long Acre
London
WC2E 9RA

Financial Adviser and Joint Broker
Peel Hunt LLP
Moor House
120 London Wall
London
EC2Y 5ET

Joint Broker
Cenkos Securities plc
6.7.8 Tokenhouse Yard
London
EC2R 7AS

Legal Adviser to the Company
Macfarlanes LLP
20 Cursitor Street
London
EC4A 1LT

Administrator
Jupiter Fund Services Limited
Mont Crevelt House,
Bulwer Avenue,
St. Sampson,
Guernsey
GY2 4LH

Sub-Administrator
Link Alternative Fund Administrators
Limited
Beaufort House
51 New North Road
Exeter
Devon
EX4 4EP

Auditor
RSM UK Audit LLP
25 Farringdon Street
London
EC4A 4AB

Registrar
Link Market Services (Guernsey) Limited
The Registry
34 Beckenham Road
Beckenham
Kent
BR3 4TU

Depositary
Estera Depositary (UK) Limited
Innovation Centre
Northern Ireland Science Park
Queens Road
Belfast
County Antrim
BT3 9DT

139

Additional Information 131 - 142Annual Report and Accountsfor the year ended 31 December 2018Forthcoming Events

Q1 2019 Trading Update, AGM Statement and Dividend Announcement

2019 Annual General Meeting

Q2 2019 Dividend Announcement

2019 Interim Results Announcement

Q3 2019 Trading Update and Dividend Announcement

Note: all future dates are provisional and subject to change.

23 May 2019

29 August 2019

10 September 2019

14 November 2019

140

Additional Information 131 - 142Annual Report and Accountsfor the year ended 31 December 2018Shareholder Information

Share Register Enquiries:
Phone: 0871 664 0300

Calls cost 12p per minute plus your provider’s access charge. If outside the United Kingdom call +44 371 664 0300. Calls outside the UK will be
charged at applicable international rate. Lines are open between 09:00 and 17:30 Monday to Friday (excluding public holidays in England and
Wales). For shareholder enquiries please email shareholderenquiries@linkgroup.co.uk.

141

Additional Information 131 - 142Annual Report and Accountsfor the year ended 31 December 2018Dividend History

Period

Announcement
Date

Ex-Date

Record Date

Payment Date

Q4 2018

21 February 2019

28 February 2019

1 March 2019

11 April 2019

Q3 2018

15 November 2018

22 November 2018

23 November 2018

21 December 2018

Q2 2018

31 August 2018

13 September 2018

14 September 2018

15 October 2018

Q1 2018

17 May 2018

24 May 2018

25 May 2018

13 July 2018

Q4 2017

22 February 2018

1 March 2018

2 March 2018

12 April 2017

Q3 2017

14 November 2017

23 November 2017

24 November 2017

22 December 2017

Q2 2017

31 August 2017

7 September 2017

8 September 2017

13 October 2017

Q1 2017

25 May 2017

8 June 2017

9 June 2017

14 July 2017

Q4 2016

23 February 2017

2 March 2017

3 March 2017

13 April 2017

Q3 2016

17 November 2016

24 November 2016

25 November 2016

22 December 2016

Q2 2016

1 September 2016

8 September 2016

9 September 2016

7 October 2016

Q1 2016

27 May 2016

9 June 2016

10 June 2016

8 July 2016

Full Year
2015

7 March 2016

17 March 2016

18 March 2016

15 April 2016

Total Dividend
Pence per share (pps)

2.50pps
of which PID: 2.50pps

1.85pps
of which PID: 1.85pps

2.45pps
of which PID: 2.205pps
of which non-PID: 0.245pps

1.80pps
of which PID: 1.62pps
of which non-PID:0.18pps

1.80pps
of which PID: 1.08pps
of which non-PID: 0.72pps

1.80pps
of which PID: 1.26pps
of which non-PID: 0.54pps

2.40pps
of which PID: 2.1600pps
of which non-PID: 0.2400pps

1.75pps
of which PID: 1.6345pps
of which non-PID: 0.1155pps

1.75pps
of which PID: 1.5013pps
of which non-PID: 0.2487pps

1.75pps
of which PID: 1.3579pps
of which non-PID: 0.3921pps

1.00pps
of which PID: 0.6572pps
of which non-PID: 0.3428pps

142

Additional Information 131 - 142Annual Report and Accountsfor the year ended 31 December 2018Notes

143

Annual Report and Accountsfor the year ended 31 December 2018Notes

144

Annual Report and Accountsfor the year ended 31 December 2018Share Price Performance

RGL LN EquityFTSE All Share Index140701201301108090100PenceTotal Returns since inception(Gross dividends reinvested)FTSE EPRA NAREIT UK IndexSource: Bloomberg Data5 Nov20155 Mar20165 Jul20165 Nov20165 Jul20185 Mar20175 Nov20185 Jul20175 Nov20175 Mar20185 Mar2019Mont Crevelt House, Bulwer Avenue, St. Sampson, Guernsey GY2 4LHwww.regionalreit.com