Risks and How We Manage Them

Risk 1 - Investment

Poor investment decisions would result in lower income and capital returns. 

 

Mitigation Risk Management

Initial yield of 7-10% to take advantage of the gap between yield and cost of borrowing of circa 3.5%.

Clear strategy on each property to create and deliver value.

All acquisitions require Board approval based on merits of investment and strategy for assets.

Limit exposure to SDLT on acquisitions by acquiring SPV’s where possible.

 

Progress 2015-2016

Market conditions continue to improve across the UK with strong demand for regional assets contributing to an uplift in valuations of our portfolio. Five acquisitions made in the year for £66m increasing rent roll to £13.5m per annum. 

Risk 2 - Tenant

Exposure to tenant administration and poor tenant covenants could result in lower income. 

 

Mitigation Risk Management

Our strategy to invest across different sectors limits our exposure to one particular sector or tenant.

We maintain close relationships with our tenants and work with them on payment plans if they require.

Management monitor arrears on a regular basis and meets with managing agents to agree on any tenant actions.

We apply a leasing strategy to increase weighted average lease length to secure future income stream and limit exposure to voids.

Tenant diversification is high with no tenant making up more than 7% of total rental income. 

 

Progress 2015-2016

Portfolio weighted average lease length has improved to 6.3 years from 4.5 years. Vacancy across the portfolio has remained consistent at 10-11% during the year. A large proportion of that void is due to the pending development plans at Hudson House, York. 

Risk 3 - Financing and Cash Flow

Breach of debt covenants could trigger loan defaults and repayment of facilities putting pressure on surplus cash resources. Economic recovery and change in the Bank of England monetary policy may result in interest rate rises and increased cost of borrowing. Financial regulatory changes under Basel III may require banks to increase their capital base increasing the cost to borrowers. 

 

Mitigation Risk Management

The Group actively engages in close relationships with its key lenders, ensuring transparency when it comes to monitoring the properties secured by debt.

Assets are purchased that generate surplus cash and significant headroom on ICR & LTV Loan Covenants.

Gearing is maintained at a conservative level and hedging minimal in the current interest rate market to ensure we benefit from historically low finance costs. 

 

Progress 2015-2016

The Group’s average maturity of debt has improved to 3.9 years from 2.8 years.

The Group has reduced its average cost of debt to 3.1% from 3.9%. There is plenty of headroom on all debt covenants currently. 

Risk 4 - Economic and Political

Overall economic health of the UK affects our tenants and the profitability of their businesses. Decisions made by Government and Local Councils can have a significant impact on our ability to extract value from our properties.

 

Mitigation Risk Management

Use of consultants and experts when considering planning and development work.

Review tenant profile and sector diversification.

Member of British Property Federation (BPF) keeps us up to date on the impact of all relevant economic and political issues in the real estate industry. 

 

Progress 2015-2016

We have acquired two leisure schemes during the year which has improved our tenant expiry profile and credit ratings of our tenants providing greater security on our recurring income.

Government support for regional development has strengthened the regional property investment market. 

Risk 5 - Accounting, Tax, Legal and Regulatory

Non-compliance as a result of changes to accounting standards, regulatory requirements on a public real estate company and new tax rules. 

 

Mitigation Risk Management

Close involvement of Auditors, Solicitors and NOMAD on key regulatory, accounting and tax issues.

Engagement with BPF on regulatory changes to impact the real estate industry.

 

Progress 2015-2016

FRS102 new accounting standard applied to Company Accounts transition overseen by Auditors. Business Forecasts and Strategy allowing for new corporation tax rates over the next three years and other rules such as BEPS.

Risk 6 - Operational

Business disruption. Without adequate system and controls, our exposure to operational risk and business disruption is increased.

 

Mitigation Risk Management

Insurance cover for loss of rent up to 3 years.

Tight-knit team with systems in place to ensure Executive Team have shared responsibility across all major decisions.

General policy of retaining incumbent Managing Agents on new property acquisitions to avoid awkward transitions and potential loss of income.

Segregation of duties applied to payments processing and bank authorisation.

 

Progress 2015-2016

Five new acquisitions in the year all retained incumbent Managing Agents.

Business Strategy Review by Board during the year to ensure plans in place to deal with key disruption risks.