Results for the year ended 30 June 2024

THE INFORMATION CONTAINED IN THIS ANNOUNCEMENT IS RESTRICTED AND IS NOT FOR PUBLICATION, RELEASE OR DISTRIBUTION IN THE UNITED STATES OF AMERICA, ANY MEMBER STATE OF THE EUROPEAN ECONOMIC AREA, CANADA, AUSTRALIA, JAPAN OR THE REPUBLIC OF SOUTH AFRICA.

2 October 2024

ALTERNATIVE INCOME REIT PLC

(the "Company" or the "Group")

Annual Report and Financial Statements for the year ended 30 June 2024

The Board of Directors of Alternative Income REIT PLC (ticker: AIRE), the owner of a diversified portfolio of UK commercial property assets predominantly let on long leases with index-linked reviews, is pleased to announce its annual report and financial statements for the year ended 30 June 2024.

Financial Highlights

At 30 June

For the year ended 30 June

Financial Highlights Overview

·    The NAV decrease to 80.90 pence per share ("pps") was primarily due to the £4.3 million (-4.0%) reduction in the fair value of the investment properties, which were impacted by an upward yield movement across the wider UK real estate sector, driven primarily by rises in interest rates and inflation during the year.

·    Dividends in respect of the year totalled 5.9pps, which was in line with the Board's 2024 target annual dividend, and are a 3.5% increase when compared to the previous year target dividend of 5.7pps.

·    Dividend yield decreased by 0.4% despite an increase in the target dividend for the year. This was due to the total dividend being less that the preceding year. Based on target dividends only, the dividend yield increased marginally from 8.8% to 8.9%.

·    Profit before tax of £2.4 million, equivalent to 2.93pps is after a £2.9 million valuation reduction in the property portfolio.

·    Loan to GAV of 37.7% and interest cover ratio of 611.3% gives significant headroom on the lender's loan to value covenant of 60% and interest cover covenant of 250%, respectively. The loan matures on 20 October 2025 and is fixed at a weighted average interest cost of 3.19%.

Operational Overview

At the Group's year end of 30 June 2024:

·    The Group's property portfolio had a fair value of £102.7 million across 19 properties (2023: £107.0 million across 19 properties).

·    The EPRA Net Initial Yield ^A ('NIY') was 6.9% (2023: 6.6%).

·    95.8% of the Group's income is inflation linked to Retail Price Index ('RPI') or Consumer Price Index ('CPI').

·    The assets were fully let at both the current and previous year end.

·    The weighted average unexpired lease term ('WAULT') was:

-     16.5 years to the earlier of break and expiry (2023: 17.0 years) and

-     18.4 years to expiry (2023: 18.9 years).

Income and expense during the year

·    Rent recognised was £7.4 million (2023: £8.1 million), of which £0.1 million was accrued debtors for the combination of rental smoothing of minimum uplifts and rent-free periods (2023: accrued debtors of £0.4 million).

·    A total of 11 rent reviews took place during the year, which resulted in a combined rental uplift of £294,000, which represents a 4.3% increase on contracted rent across the portfolio.

Property transactions during the year

·    In the year two property transactions were completed. The first was the sale of Mercure Hotel in Glasgow which was disposed of on 8 August 2023 for £7.5 million at a 7.9% premium to its fair value. Part of the net proceeds of sale, totalling £5.3 million, were reinvested in the Virgin Active in Streatham on 18 December 2023.

Events after the reporting period

·    On 8 August 2024, the Board declared an interim dividend for the quarter ended 30 June 2024 of 1.625pps. As a result, the dividend target of 5.9pps for the year ended 30 June 2024 was met. This dividend was paid on 30 August 2024 to shareholders on the register at 16 August 2024. The ex-dividend date was 15 August 2024.

·    By 30 September 2024, the Group had collected 100% of rent for the four rental quarters of the financial year being reported. 

Proposed changes to the Company's Investment Policy

·    The current Investment Policy originated in 2017 at the launch of the Company and contains detailed and, at time, highly restrictive requirements. In light of this, and following significant changes to property markets, the Board believes that changing the Investment Policy will better place the Company to deliver added value to shareholders. Further explanation of the proposed changes is included in the Chairman's Statement below.

^A Alternative Performance Measure, please see below for further details.

Simon Bennett, non-executive chairman of Alternative Income REIT plc, comments:

"The period under review was characterised by high inflation, low rental growth and rising interest rates. This has proved to be somewhat of a mixed blessing for the Group. From an income standpoint the economic environment has seen our portfolio continuing to perform well, benefitting from long dated and high yielding leases with index-linked rental increases. 96.0% of the portfolio's income stream is reviewed periodically. In the coming financial year, approximately 46.5% of the Group's income will be subject to rent reviews, 36.0% as annual index-linked rent reviews and the remaining 10.4% being periodic 5 yearly index-linked rent reviews. During the past financial year, a total of 11 rent reviews took place, which resulted in a combined rental uplift of £0.3 million, which represents a 4.3% increase on contracted rent across the portfolio on a like for like basis.

On the other hand, the portfolio suffered a relatively modest reduction of £4.3 million, when compared with the Group's peers (2023: £10.9 million reductions in value) and at 30 June 2024 was valued at £102.7 million (30 June 2023: £107.0 million). 

I am pleased to report the sale of the Group's hotel in Glasgow was achieved at a 7.9% premium to its book value as at 30 June 2023 and the acquisition of Virgin Active, Streatham in December 2023 for £5.1 million.

During this financial year, the Company declared four interim dividends totalling 5.9pps (2023: 6.045pps, which included 0.345pps of non-rental income) which was in line with the previously announced dividend target of 5.9pps (2023: 5.7pps), representing a 3.5% increase on the previous year target. I am pleased to report that these dividends were covered by cash earnings.

The recent announcement by the Bank of England to reduce interest rates together with the recent fall in inflation, might mark the bottom of the property market. Accordingly, the Board remains confident that the Company is well-positioned for the future, with a resilient portfolio well-placed to continue to provide secure, index-linked income with the potential for capital growth."

ENQUIRIES

The Company's LEI is 213800MPBIJS12Q88F71.

Further information on Alternative Income REIT PLC is available at www.alternativeincomereit.com¹

1      Neither the content of the Company's website, nor the content of any website accessible from hyperlinks on its website or any other website, is incorporated into, or forms part of, this announcement nor, unless previously published on a Regulatory Information Service, should any such content be relied upon in reaching a decision as to whether or not to acquire, continue to hold, or dispose of, securities in the Company.

NOTES

Alternative Income REIT PLC aims to generate a sustainable, secure and attractive income return for shareholders from a diversified portfolio of UK property investments, predominately in alternative and specialist sectors. The majority of the assets in the Group's portfolio are let on long leases which contain index-linked rent review provisions.

The Company's Investment Adviser is Martley Capital Real Estate Investment Management Limited ("Martley Capital"). Martley Capital is a full-service real estate investment management platform whose activities cover real estate investing, lending, asset management and fund management. It has over 40 employees across five offices in the UK and Europe. The team manages assets with a value of circa £900 million across 19 mandates (at 30 June 2024).

Chairman's Statement

Overview

I am pleased to present the annual audited results of Alternative Income REIT plc (the 'Company') together with its subsidiaries (the 'Group') for the financial year ended 30 June 2024.

The wider market for the year under review was characterised by high inflation, low rental growth and rising interest rates. This has proved to be somewhat of a mixed blessing for the Group. From an income standpoint, the economic environment has seen our portfolio continuing to perform well, benefitting from its long dated and high yielding leases with index-linked rental increases. On the other hand, the portfolio suffered a relatively modest reduction of £4.3 million (2023: £10.9 million reduction), including the property transactions throughout the year, and at 30 June 2024 was valued at £102.7 million (2023: £107.0 million). On a like-for-like basis, the value of the Group's properties reduced from £100.1m to £97.6 million.

The portfolio should continue to perform relatively well during a period of higher inflation, as 95.8% of its rental income is subject to index-linked reviews and 32.3% of rental income is not subject to any cap on rental increases. During the financial year, a total of 11 rent reviews took place, which resulted in a combined rental uplift of £294,000, which represents a 4.3% increase on contracted rent across the portfolio.

During the year two property transactions were completed. The first was the sale of Mercure Hotel in Glasgow which was sold on 8 August 2023 for £7.5 million at a 7.9% premium to its fair value. The second was the purchase of Virgin Active in Streatham purchased on 18 December 2023 for £5.3 million. The Investment Advisor has been actively seeking a further property in order to invest the remaining proceeds.

The Board continues to keep costs under control and the Group also benefits from both a low overhead base and fixed borrowing costs until 20 October 2025. Together with the active asset management initiatives being undertaken, the Board considers that the portfolio will continue to deliver an attractive yield as a result of its secure and growing rental income. These factors, together with the recent fall in the rate of inflation and the resulting cut in UK interest rates will undoubtedly improve the sentiment towards the property market.  

At the year end, the portfolio has a slightly increased net initial yield of 7.1% compared to the previous year end of 6.6% and a WAULT to the first break of 16.5 years and 18.4 years to expiry (2023: 17.0 and 18.9 years, respectively).

Financing

The Group has fully utilised its £41.0 million loan facility with Canada Life Investments throughout the year. The weighted average interest cost of the facility is 3.19% and it is repayable on 20 October 2025. There are currently no penalties projected for repaying the Group's loan facility, given the corresponding gilt rate is lower than the contracted rate of interest. 

Whilst the refinancing is some time in the future, the Board have recently commenced an interview process to find a suitable debt adviser, with the relevant expertise and proven accessibility to potential lenders, to assist with the refinancing. The Board is confident that the requisite refinancing will be achieved prior to the loan's due date.

Dividends and Earnings

During this financial year, the Company declared four interim dividends totalling 5.9pps (2023: 5.7pps), with the total dividends declared for 2023 being 6.045pps, which included 0.345pps relating to monies received following the successful settlement of a historic legal case), which was in line with the previously announced dividend target of 5.9pps (2023: 5.7pps), representing a 3.5% increase on the previous year. I am pleased to report that these dividends were covered by cash earnings.

As set out in Note 8 to the consolidated financial statements, these dividends were covered by the Group's Adjusted EPS (representing cash) of 5.99pps (2023: 6.43pps). Furthermore, Note 9 sets out all dividends paid and payable in the year. All dividends were paid as Property Income Distributions ('PIDs').

Historically the Board has paid dividends in four instalments each financial year. The Board intends to continue with this practice by making dividend payments in November, February, May and August each year. In order to do this, all dividends need to be declared and paid as interim dividends. The Board, however, recognises that this precludes shareholders from having the opportunity to vote on a final dividend. Recognising this, and although not required to do so, Resolution 8 in the AGM notice gives shareholders the opportunity to vote on this dividend policy.

Discount

The discount of the share price to NAV at 30 June 2024 narrowed to 18.4% from 23.1% at the previous year end. The Board monitors the discount level throughout the year and has the authority to both issue and buy back shares. Although these powers have not been used to date, the Board believes these authorities are important powers for it to have available, if required, and therefore recommends that shareholders vote in favour of their continuance at the forthcoming AGM.

Change of Investment Adviser

During the year, the Board undertook a review of the Group's investment advisory arrangements. This review included proposals from a number of select third party investment managers with the relevant property expertise. Following this review, in February 2024 the Board approved the appointment of Martley Capital Real Estate Investment Management Ltd ('Martley Capital') as the Group's Investment Adviser, with the appointment effective on 15 March 2024. Martley Capital Group (of which Martley Capital is a subsidiary) launched in December 2023 as a new venture, whereby key members of the previous advisory team at M7 Real Estate continue to service the Group as part of the Martley Capital team. The appointment of Martley Capital was by way of a deed of novation of the Group's investment advisory agreement (and subsequent minor changes thereto) leaving the parties on substantially the same terms and at an unchanged fee.

Proposed Changes to the Company's Investment Policy

The current Investment Policy originated in 2017 at the launch of the Company, and contains detailed and, at times, highly restrictive requirements. Many of these restrictions were required to differentiate the Company's Investment Policy from that of other investment vehicles managed by the Company's former investment manager. The Board believes that in light of this, and following significant changes to the property markets since launch, that the Company will be better placed to deliver added value to shareholders with a changed Investment Policy which better serves the Company's Investment Objective of generating predictable income returns whilst maintaining capital values by means of investment in a diversified UK portfolio.

The principal changes to the Investment Policy include a reduction in the minimum WAULT of the portfolio from 18 to 10 years, a reduction in the percentage of leases required to be linked to inflation from 85% to 75% of gross passing rent, and a reduction in the requirement for properties to be in non-traditional sectors (and thus in alternative and specialist sectors) from 70% to at least 50%. At the same time, the Board has taken the opportunity to simplify the language used in the Investment Policy, to make it far easier to understand.

The proposed changes to modernise the Investment Policy should provide the Investment Adviser with additional flexibility to invest in attractive opportunities, without changing the Company's core nature and objective.

Therefore, the Company will be proposing an ordinary resolution at its AGM on 12 November 2024 to seek permission from shareholders to change the Company's Investment Policy. The proposed changes to the Company's Investment Policy are set out in more detail in the Notice of Meeting dated 1 October 2024 and sent to shareholders with the Annual Report and Financial Statements. An explanation of both the current and proposed Investment Policy is set out in the Notice of Meeting. The Board believes that the changes are in the best interests of the Company and shareholders as a whole and it is unanimous in recommending that shareholders should vote in favour of all resolutions, as the Directors will in respect of their own beneficial holdings.

AGM

The Company will hold its AGM at 10am on Tuesday 12 November 2024 at the offices of Panmure Liberum, Ropemaker Place, Level 12, 25 Ropemaker Street, London EC2Y 9LY. As usual, the Investment Adviser will give a presentation on the Group prior to proceeding with the business of the AGM.

I always welcome engagement with shareholders, and they should be aware that if they are unable to attend in person, they can submit questions to the Board by emailing the Company Secretary at [email protected] or by writing to me at the Group's registered office, namely, Alternative Income REIT plc, The Scalpel 18th Floor, 52 Lime Street, London EC3M 7AF.

Outlook

The recent announcement by the Bank of England to reduce interest rates together with the recent fall in the rate of inflation might mark the bottom of the property market and will undoubtedly improve investor sentiment towards the sector. The Group's index-linked portfolio, with its properties let on predominantly long dates and high yielding leases, has continued to perform relatively well, when compared with its peer group. In the coming financial year, approximately 46.5% of the Group's income will be subject to rent reviews (36.0% as annual index-linked rent reviews and the remaining 10.4% being periodic five yearly index-linked rent reviews). Together with the active asset management initiatives being undertaken, the Board considers that the portfolio will continue to deliver an attractive yield as a result of its secure and growing rental income.

I would like to take this opportunity to thank my colleagues on the Board, the Investment Adviser, the Company Secretary and our other advisers and service providers, who have provided professional support and services to the Group during this financial year. The Group has a good team, to whom a large proportion of the Company's success can be attributed.

Simon Bennett

Chairman

1 October 2024

Business Model and Strategy

Business Model

Alternative Income REIT plc is a real estate investment trust listed on the closed-ended investment funds category of the Official List of the Financial Conduct Authority ('FCA') and traded on the Main Market of the London Stock Exchange. As part of its business model and strategy, the Group has maintained and intends to maintain its UK REIT status.

The Company is governed by a Board of non-executive directors (the 'Board') and has no employees. The Board is responsible for determining the Company's investment objective and investment policy. Like many other REITs and investment companies, the day-to-day management and administration of the Company is outsourced by the Board to third party providers, including Martley Capital as investment adviser, Langham Hall Fund Management LLP as AIFM and Hanway Advisory Limited as Company Secretary.

Proposed changes to the Investment Policy and Investment Objective

Shareholder approval is being sought at the forthcoming Annual General Meeting, under ordinary Resolution 10, to change the Company's Investment Policy. The proposal is explained in the Notice of Meeting which is included within the Annual Report.

The current investment objective and policy is set out below. The minor change to the investment objective of "in" to "predominantly within the" alternative and specialist sectors, is shown below, and does not require shareholder approval.

Investment Objective

The investment objective of the Group is to generate a secure and predictable income return, sustainable in real terms, whilst at least maintaining capital values, in real terms, through investment in a diversified portfolio of UK properties, predominantly within the alternative and specialist sectors.

Investment Policy

In order to achieve the investment objective, the Group invests in freehold and long leasehold properties across the whole spectrum of the UK property sector, but with a focus on alternative and specialist real estate sectors. Examples of alternative and specialist real estate sectors include, but are not limited to, leisure, hotels, healthcare, education, logistics, automotive, supported living and student accommodation.

In the event of a breach of the investment policy or the investment restrictions set out below, the Alternative Investment Fund Manager ('AIFM'), as advised by the Investment Adviser, shall inform the Board upon becoming aware of the same and, if the Board considers the breach to be material, notification will be made to a Regulatory Information Service and the AIFM, as advised by the Investment Adviser, will look to resolve the breach.

Any material change to the investment policy or investment restrictions of the Group may only be made with the prior approval of shareholders.

Investment Strategy

The Group focuses on properties which can deliver a secure income and preserve capital value, with an attractive entry yield. The Group has an emphasis on alternative and specialist property sectors to access the attractive value and capital preservation qualities which such sectors currently offer.

The Group will supplement this core strategy with active asset management initiatives for certain properties.

Subject at all times to the AIFM's (as advised by the Investment Adviser) assessment of their appeal and specific asset investment opportunities, permitted sectors include, but are not limited to the following: Healthcare; Leisure; Hotels and serviced apartments; Education; Automotive; Car parks; Residential; Supported living; Student accommodation; Logistics; Storage; Communications; Supermarkets; and, subject to the limitations on traditional sector exposures below, Offices; Shopping centres; Retail and Retail Warehouses; and Industrial.

The Group is not permitted to invest in land assets, including development land which does not have a development agreement attached, agriculture or timber.

The focus will be to invest in properties to construct a portfolio with the following minimum targets:

·      a WAULT, at the time of investment, in excess of 18 years;

·      at least 85% of the gross passing rent will have leases with rent reviews linked to inflation (RPI or CPI) at the time of investment;

·      investment in properties which typically have a value, at the time of investment, of between £2 million and £30 million;

·      at least 70% of the properties will be in non-traditional sectors;

·      less than 30% of the properties will be in the traditional sectors of Retail, Industrial and Offices; and

·      over 90% of properties will be freehold or very long leasehold (over 100 years).

Once GAV is £250 million or greater, future investments will be made to target a portfolio with at least 80% of the properties in non-traditional sectors and less than 20% of the properties in traditional sectors.

Whilst each acquisition will be made on a case-by-case basis, it is expected that properties will typically offer the following characteristics:

·      existing tenants with strong business fundamentals and profitable operations in those locations;

·      depth of tenant/operator demand;

·      alternative use value;

·      current passing rent close to or below rental value; and

·      long-term demand drivers, including demographics, use of technology or built-for-purpose real estate.

The Group may invest in commercial properties or portfolios of commercial property assets which, in addition, include ancillary or secondary utilisations.

The Group does not intend to spend any more than 5% of the NAV in any rolling 12-month period on (a) the refurbishment of previously occupied space within the existing Portfolio, or (b) the refurbishment of new properties acquired with vacant units.

The Group may invest in corporate and other entities that hold property and the Group may also invest in conjunction with third party investors.

Investment Restrictions

The Group will invest and manage its assets with the objective of spreading risk through the above investment restrictions.

When the measure of GAV is used to calculate the restrictions relating to (i) the value of a single property and (ii) the value of assets in any sub-sector in one geographical region, it will reflect an assumption that the Group has drawdown borrowings such that these borrowings are equal to 30% of GAV.

Borrowings

The Group has utilised borrowings to enhance returns over the medium term. Borrowings have been utilised on a limited recourse basis for each investment on all or part of the total portfolio and will not exceed 40% of GAV (measured at drawdown) of each relevant investment or of the portfolio.

Dividend Policy

It is the directors' intention to pay dividends in line with the Company's investment objective with interim dividends payable by four instalments quarterly in November, February, May and August in respect of each financial year to June. Additionally, the dividend policy allows for the payment of further interim dividends should compliance with the REIT rules require.

 Key Performance Indicators

EPRA Performance Measures

Detailed below is a summary table showing the EPRA performance measures (which are all alternative performance measures) in the Group.

EPRA NNNAV (the EPRA NAV adjusted to include the fair value of hedging instruments, financial debt and deferred taxes) is equal to EPRA NAV as there are no adjusting items. As such this measure has not been presented.

1    The reconciliation of this APM is set out in the EPRA Performance Measures Calculations section following the Notes to the Consolidated Financial Statements.

2    The reconciliation of this APM is set out in Note 8 of the Notes to the Consolidated Financial Statements.

Investment Adviser's Report

Introduction

Both the UK and global real estate markets are showing signs of a much brighter 2024 after a tough year for the wider market in 2023, which was marked by persistent inflation, rising borrowing costs and shaky consumer confidence. Yields are stabilising, activity is picking up steadily and interest rates have started to fall.

Market Outlook

UK Economic Outlook

The UK economy is finding its footing in 2024 after a robust post-pandemic recovery. Though the initial surge has subsided, the short recession of late 2023 seems to be over and a more stable period is taking hold. The slowdown in GDP growth is expected to level off, with gradual improvement expected throughout the remainder of the year. Political stability in the UK could further bolster economic growth following the Labour Party's win of the General Election with a sizeable majority. Consequential changes to the Government's policies will likely have implications for the UK economy, and thus real estate. Additionally, inflation, while still relatively high, is projected to continue its decline and it is expected to settle at more manageable levels.

The cost-of-living crisis continues to cast a shadow, with consumers remaining cautious about spending despite some recent signs of improvement. This could lead to stagnant, or even slightly declining, retail sales in the coming months. To maintain profitability, businesses may still consider cost-cutting measures, potentially impacting employment levels and making unemployment a bigger concern in the latter half of 2024.

Curbing inflation remains a key priority, but there are positive developments in this regard. High inflation rates have subsided over the past year, falling to 2.0% (CPI, June 2024), bringing inflation in line with the Bank of England's long-term target. The Bank's aggressive interest rate hikes in 2023, culminating in the 14th consecutive increase to 5.25% in August 2023, are credited with helping to cool domestic demand and influence import prices, ultimately bringing inflation under control.

Financial markets were betting on a rate cut by the Bank of England, which materialised in August 2024 when rates were cut by 0.25% to 5%, with Capital Economics predicting a further drop to 3% by the end of 2025. However, the Bank faces a balancing act: to curb inflation without restraining economic growth. The modest 0.7% growth in the first four months of 2024 underscores the importance of finding the right balance. Stalling economic activity could lead to adverse long-term consequences, including a reduction in business investment, higher long-term unemployment and a decline in key sectors.

UK Real Estate Outlook

Despite a difficult global real estate market, with declining values for the past two years, prime yields have remained steady in the first half of 2024. This suggests most markets may be nearing the bottom of the cycle, prompting cautious investor re-entry.

Previous forecasts for steeper interest rate hikes (up to 5.75%) have been overshadowed by strong expectations for further rate cuts in 2024 and 2025. This shift in sentiment, along with a more optimistic outlook, could make real estate a highly attractive investment proposition. However, several risks remain unaddressed, including borrowers facing stricter lending conditions, and structural challenges persisting. An additional factor to consider is the growing availability of distressed assets. Banks are increasingly taking ownership of properties where long-term borrowers have defaulted. This presents a significant opportunity for global capital seeking to diversify through UK real estate.

Investors are seizing the moment to reposition assets to align with changing occupier demand. This comes as the gap between asking prices and offers narrows. UK Investment volume in Q2 2024 surged 11% compared to an already strong Q1, reaching £11.1bn. As market conditions strengthen, we can expect activity to pick up further. However, the focus for 2024 is likely to remain on generating and securing stable income, rather than chasing capital appreciation.

Tough economic conditions further emphasise the importance of sustainability, quality, location and flexibility for attracting tenants. These factors remain crucial for occupiers who are still focused on complying with regulations, retaining staff and minimising operational costs. This focus, coupled with limited supply due to rising construction and borrowing costs, is contributing to a rise in nominal rental prices across most sectors.

The MSCI UK Monthly Capital Value Index continued its downward trend in Q2 2024. While office values saw slight declines, retail and industrial sectors showed more resilience. As economic stability appears likely on the horizon, this decline could signal the beginning of a cyclical buying opportunity as new properties become available later this year.

Rising temperatures are driving renewed focus on physical climate risks from both investors and occupiers. This has led to a growing appreciation for the value of sustainable features in buildings. Investors and occupiers are increasingly interested in accurate measurement of these "green" features and how they translate to improved energy efficiency, ultimately impacting the corporate bottom line. As a result, we can expect stricter regulations, including mandatory disclosure of net zero transition plans.

Portfolio Activity During the Year

The following asset management initiatives were undertaken during the year:

·     Rent Reviews: A total of 11 rent reviews took place during the year with a combined uplift of £294,000, representing 4.3% increase in contracted rent across the portfolio.

·     Transactions: The sale of the Mercure Hotel in Glasgow completed on 8 August 2023 for £7.5 million at a 7.9% premium to its fair value. On 18 December 2023, the acquisition of Virgin Active, Ockley Road, Streatham was completed for a cost of £5.3 million.

NAV Movements

Valuation

At 30 June 2024 the Group owned 19 assets (2023: 19 assets) and the portfolio was valued at £102.7 million (2023: £107.0 million).

Summary by Sector at 30 June 2024

Summary by Geographical Area at 30 June 2024

The table below illustrates the weighting of the Group's contracted rental income, based on the type of rent review associated with each lease.

% of Passing Rent by Rent Review Type

% of Passing Rent by Review Frequency

% of Passing Rent by Cap Band

Property Portfolio at 30 June 2024

Top Ten Tenants at 30 June 2024

*The WAULT calculations includes an additional 3 years reflecting a landlord's option to extend until 31 May 2044.

**This WAULT calculation, which considers income solely from the top 10 tenants, differs from the portfolio-wide WAULT of 16.5 years.

Tenancy Schedule

*Ground rents less than £150 per annum.

Environmental, Social and Governance Report

The Group recognises that Environmental, Social and Governance ('ESG') matters are of utmost importance to sustainable investment and a focus for the business and investor community. The Group is committed to understanding how best to consider ESG factors in all facets of its business, from business strategy to investment decisions and company operations.

In order to meet investors' expectations, the Group and its advisers adopt both financial and non-financial strategies to drive long-term value with an innovative yet disciplined and conscientious approach to ESG in respect of the property portfolio management including but not limited to:

Environmental

·      A proactive approach to procurement of Energy Performance Certificate ('EPC') reassessments ahead of Minimum Energy Efficiency Standards 2023, maintaining quarterly reviews of EPC schedules, identification of opportunities to improve energy efficiency, and working closely with tenants who occupy under full repairing and insuring leases.

·      Ongoing environmental reviews and audits as part of regular due diligence, including regular asset inspections to avoid any breach in environmental legislation.

·      Responsible refurbishment in respect of all works to assets with consideration of the best approach to improving the EPC rating against potential spend, liaising with tenants in respect of any fit-out or alterations to reuse existing materials where feasible to reduce waste.

·      Leverage technology for data management being used to monitor and drive efficiency.

Social

·      Commitment to occupier engagement.

·      Encourage improvements to each asset such as installing defibrillators & electrical charging points.

·      Provision of regular training and awareness to all managers on issues, such as wellbeing and mental health.

Governance

·      Client checks being completed on all tenants as well as new suppliers and contractors.

·      Regular tenant engagement and inspections to ensure assets are used as agreed within leases.

·      Effective tracking of legislative requirements to assess and monitor risks and opportunities.

The Group is limited in its ability to influence ESG factors for the properties because the properties are fully let on commercial full repairing leases in accordance with the Group's strategy to hold long leases.

Diversity

As an externally managed business, the Company does not have any employees or office space. As such, the Group does not operate a diversity policy with regards to any administrative, management and supervisory functions. A description of the Board's policy on director diversity can be found in the Corporate Governance Report of the Annual Report.

Employees

The Group has no employees and accordingly no requirement to report separately in this area as the management of the portfolio has been delegated to the AIFM and Investment Adviser.

The AIFM and Investment Adviser are equal opportunities employers who respect and seek to empower each individual and the diverse cultures, perspectives, skills and experiences within their workforce.

Human Rights

The Group is not within the scope of the Modern Slavery Act 2015 because it has not exceeded the turnover threshold and therefore no further disclosure is required in this regard.

Business Relationships

As well as the critical day-to-day portfolio management, the Group has service providers that ensure the smooth running of the Group's activities. The Group's key service providers are listed in the Annual Report, and the Management Engagement Committee annually review the effectiveness and performance of these service providers, taking into account any feedback received.

The Group, AIFM and Investment Adviser and other third-party service providers maintain high standards of business conduct by acting in a collaborative and responsible manner with all business partners that protects the reputation of the Group as a whole.

Greenhouse Gas Emissions

As an investment company, the Group's own direct environmental impact is minimal and greenhouse gas ('GHG') emissions are negligible. The GHG emissions in relation to the Group's property portfolio is disclosed below.

The Group has followed UK Government environmental reporting guidelines and used the UK Government 2023 greenhouse gas reporting conversion factors for company reporting to identify and report relevant GHG emissions over which it has Operational Control (where data is available) for the 12-month period to 30 June 2024.

An independent consultancy specialising in the application of sustainability in commercial real estate was appointed to calculate the GHG statement and provide verification on the approach used.

Scopes

GHG emissions have been reported against the following 'Scopes', as defined by the GHG Protocol and where relevant:

Scope 1 (not relevant to AIRE): Direct emissions from owned vehicles, controlled boilers and fugitive emissions from air conditioning systems under landlord control.

Scope 2: Indirect emissions from electricity purchased by the Company and consumed within real estate assets owned by the Company.

Scope 3: Indirect emissions from electricity and gas purchased/consumed within AIRE assets, by tenants, where the tenant is counterparty to the energy supply.

Statement of GHG emissions

The table below sets out the emissions per sector and for the Group overall in the year ended 30 June 2024. The approach taken follows guidance provided by the GHG Reporting Guidelines (BEIS, 2019) and EPRA Best Practice Recommendations of Sustainability Reporting 2017.

*Like-for-like requires 24 months of data for the current and previous reporting year (July 2022 - June 2024). Both assets provided 24 months of data there like-for-like calculations were possible.

Statement of Energy Usage

The table below sets out the energy use per sector and for the Group overall. The approach follows guidance provided by the GHG Reporting Guidelines (DESNZ, 2024) and the EPRA Best Practice Recommendations on Sustainability Reporting 2017.

Intensity Ratios

In addition to reporting relevant absolute GHG emissions (per scope and per sector), the Group has chosen to report intensity ratios, where appropriate. An intensity measure is reported for assets within the like-for-like portfolio, where:

-     No major renovation or refurbishment has taken place i.e. affecting more than 50% of the building by area or number of occupants

-     Occupancy is at least 75%

-     At least 24 months data is available

-     Emissions reported relate to an indoor area

Whilst no landlord meters reflect the above criteria for an intensity metric, the Group has applied an intensity figure for one asset, Pocket Nook, where the landlord procures the energy and directly recharges this to the tenant. An intensity metric has not been produced for Droitwich Spa retail park on the basis that the landlord-controlled meter does not reflect the above criteria (emissions reported relate to an indoor area).

No normalisation factors have been considered for this annual report.

Assurance Statement

The Group's GHG emissions have been calculated and verified by an independent third-party in accordance with the principles of ISO 14064. A full copy of the methodology used, including scope, source or data and conversion factors, is available on request.

Property Portfolio ESG activity

During the year ended 30 June 2024, the Group has worked closely with its tenants to encourage improvements in ESG activities within the property portfolio.

Three new EPC's have been carried out; Premier Inn, Camberley fell from B34 to B38; Petrogas, Crawley improved from C56 to B32; Pure Gym, London improved from C54 to B43. The improvements are mainly as a result of tenant's internal refurbishment works.  

Following inspections by EPC assessors, works have been identified at seven properties to improve EPC levels in the year to 30 June 2024 including new LED lighting, replacement of an oil-fired boiler, solar panels and installation of secondary glazing. The costs of these enhancements will be borne by the occupiers.

In the histogram above, the highest EPC rating of E applies to Unit 14 Provincial Park, Sheffield where the tenant is considering the cost efficiency of replacing their oil-fired boiler to electric. The G rating applied to the Mercure Hotel, Glasgow, which was sold in the year. The remaining properties in the portfolio have an EPC rating of D or above. More than half of the portfolio, at 55.6%, fall between A and B.

Section 172(1) statement

The following disclosure describes how the directors have had regard to the matters set out in section 172(1)(a) to (f) of the Companies Act 2006, in promoting the success of the Company for the benefit of members as a whole.

This section describes how the Board has regard to the likely consequences of any decision in the long term, the need to foster the Company's business relationships with suppliers, customers and others, the desirability of the Company maintaining a reputation for high standards of business conduct, and the need to act fairly as between members of the Company. The Company does not have any employees and therefore s172(1)(b) is not applicable to the Company. The impact of the Company's operations on the community and the environment is set out more fully in the Environmental, Social and Governance section above.

Principal Decisions

Principal decisions are those that have a material impact to the Group and its key stakeholders. In taking these decisions, the directors considered their duties under section 172 of the Act.

Change of Investment Adviser

As detailed in the Chairman's Statement, during the year the Board undertook a review of the Group's investment advisory arrangements and appointed Martley Capital as the Group's Investment Adviser effective on 15 March 2024. Key members of the previous Investment Adviser transferred to Martley Capital and continue to service the Group. The impact for the Company, and thus for shareholders, was considered together with the impact on the staff of the investment adviser.

Dividend and Dividend Policy

Given the Company's Investment Objective, dividends are a key matter for the Board to consider and have a material impact on shareholders, as a key stakeholder. During the year the Company declared four interim dividends totalling 5.9pps (2023: 5.7pps, with the total dividends declared for 2023 being 6.045pps, which included 0.345pps relating to monies received following the successful settlement of a historic legal case), which was in line with the previously announced dividend target of 5.9pps (2023: 5.7pps), representing a 3.5% increase on the previous year.

As last year, the Board paid four interim dividends at quarterly intervals to ensure shareholders received a steady stream of income on a timely basis. However, this dividend policy prevents there being an opportunity for shareholders to vote on a final dividend. Consequently, the Board are again giving shareholders the opportunity to vote on the dividend policy of the Company.

Property Transactions

In the year two property transactions were completed. The first was the sale of Mercure Hotel in Glasgow which was disposed of on 8 August 2023 for £7.5 million and part of the net proceeds of sale, totalling £5.3 million, were re-invested in the Virgin Active in Streatham.

Principal Risks and Uncertainties

The Group's assets consist of UK commercial property. Its principal risks are therefore related to the commercial property market in general, but also to the particular circumstances of the individual properties and the tenants within the properties.

The Board has overall responsibility for reviewing the effectiveness of the system of risk management and internal control which is operated by the AIFM and, where appropriate, the Investment Adviser. The Group's ongoing risk management process is designed to identify, evaluate and mitigate the risks the Group faces.

Twice each year, the Board undertakes a risk review with the assistance of the Audit Committee, to assess the adequacy and effectiveness of the AIFM's, and where appropriate the Investment Adviser's, risk management and internal control systems.

The Board has carried out a robust assessment of the principal and emerging risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity.

An analysis of the principal risks and uncertainties is set out in the table below. This does not purport to be exhaustive as some risks are not yet known and some risks are currently not deemed material but could turn out to be material in the future.

Emerging Risks

The Board takes account of and considers emerging risks as part of its risk management assessment.

Going Concern

The Group has considered its cash flows, financial position, liquidity position and borrowing facilities.

The Group's unrestricted cash balance at the year end was £3.3 million (2023: £3.5 million). The Group had borrowings of £41 million under a loan facility repayable on 20 October 2025 (the 'Loan'), but no capital commitments or contingent liabilities. 

The Group is permitted to utilise up to 40% of GAV measured at drawdown with a Loan to GAV of 37.7% at 30 June 2024. Therefore, the Group had headroom against its borrowing covenant. The lender's loan to value covenant of 60% is significantly higher than the Group's Loan to GAV. In addition, if agreed by the current lender, two properties not secured against the Loan and valued at £8.55 million are available as additional security for the Loan.

The Loan also has a lender's interest cover covenant of 250%. At 30 June 2024 the Group's interest cover ratio was 611.3%, giving significant headroom. A 'severe but plausible downside' scenario has been projected. While rent collections have been strong, this scenario projects rent deferrals and write-offs for tenants with difficulty paying rents from operational cash flows. In this scenario the Group still has adequate headroom against the interest cover covenant and positive cash balances. Further detail of the assumptions made in assessing the adoption of Group's going concern basis can be found in Note 2.4.

The Group benefits from a secure, diversified income stream from leases which are not overly reliant on any one tenant or sector, with the Group generating net cash flows from operating activities for the year being reported of £4.0 million. As a result, the directors believe that the Group is well placed to manage its financing and other business risks.

The going concern statement is based on the reporting requirement that the Group and the Company has adequate resources to continue in operational existence for the foreseeable future, being a period of at least twelve months from the date of these financial statements. In addition to looking ahead for the twelve months, the Board has undertaken steps to ensure that it can have a reasonable expectation that the Group will be able to refinance its borrowings which become repayable shortly after this twelve-month period, and this is explained both below and in the Viability Statement which follows.

The Board has commenced its debt refinancing plan. As part of this, the Board has undertaken an interview process with a number of debt advisers with the expertise, knowledge, and demonstrable potential lender accessibility to secure refinancing for the Group. Following this, the Board has a reasonable expectation to believe that the Group can refinance its debt by 20 October 2025 at an aggregate finance cost and on terms acceptable to the Board, taking into account the investment objective of the Company.

Consequently, the Board is satisfied that the Group and the Company has adequate resources to continue in operational existence for the foreseeable future, and is of the opinion that the going concern basis adopted in the preparation of the financial statements is appropriate.

Viability Statement

In accordance with provision 30 of the UK Code, the Board has assessed the prospects of the Group over a period longer than the twelve months required by the 'Going Concern' provisions.

The Board has considered the nature of the Group's assets and liabilities and associated cash flows and has determined that three years, from the balance sheet date up to 30 June 2027, is an appropriate and realistic timescale over which the performance of the Group can be forecast with a degree of accuracy. Even though the Group's contractual income extends beyond three years, the Board considers this period (the 'Period') to be appropriate, given:

·      A major proportion of the leases contain an annual, three- or five-year rent review pattern and therefore three years allow for the forecasts to include the reversion arising from most rent reviews;

·      It is the period over which the Group's medium-term business plan and cash flows are based; and

·      It is often factors beyond the Board's control, such as market uncertainty, that reduce the reliability of forecasting over a longer period.

In performing its viability review, the Board considers the Group's cash flows (noting that the Group's property portfolio had a WAULT to break of 16.5 years and a WAULT to expiry of 18.4 years at 30 June 2024, representing a secure income stream for the Period), future dividends and dividend cover, REIT compliance and relevant key financial ratios over the Period. The Board carried out a thorough review of the Group's business model, including future performance, liquidity and banking covenant tests for the Period and with various debt finance cost scenarios based on refinancing the £41 million debt (see below) in full at its maturity. The Board has assessed the extent of any operational disruption; potential curtailment of rental receipts; potential liquidity and working capital shortfalls; and diminished demand for the Group's assets going forward, in adopting a going concern preparation basis and in assessing the Group's longer-term viability.

These assessments are subject to sensitivity analysis, which involves flexing a number of key assumptions and judgements included in the financial projections:

·      Tenant default;

·      Dividend payments;

·      Financing and refinancing; and

·      Property portfolio valuation movements.

Specifically with respect to the Group's borrowings:

·      covenants - at 30 June 2024, the asset valuations and rental income of the properties secured to Canada Life would need to fall by 17.4% and 46.0%, respectively, before breaching the Loan to Value and Income Cover Cash Trap covenants; and

·      the Board has commenced its debt refinancing plan given that the Group's borrowings are due to be repaid on 20 October 2025. As part of this, the Board has undertaken an interview process with a number of  debt advisers  with the expertise, knowledge and demonstrable potential lender accessibility to secure refinancing for the Group. Following these discussions, the Board has a reasonable expectation to believe that the Group can refinance its debt by 20 October 2025 at an aggregate finance cost and on terms acceptable to the Board, taking into account the investment objective of the Company.

Based on the prudent assumptions within the Group's forecasts including refinancing of the debt, rent deferrals, tenant default, void rates and property valuation movements, the Board has a reasonable expectation that for the Period:

·    all current and future loan covenants will be complied with throughout the Period;

·      REIT tests will similarly be complied with; and

·      the Group and the Company will be able to continue in operation and meet its liabilities as they fall due over the Period.

Board Approval of the Strategic Report

The Strategic Report has been approved and signed on behalf of the Board by:

Simon Bennett

Chairman

1 October 2024

Statement of Directors' Responsibilities

in respect of the Annual Report and the Consolidated Financial Statements

The directors are responsible for preparing the Annual Report and the Group and parent Company Financial Statements in accordance with applicable law and regulations.

Company law requires the directors to prepare Group and parent Company financial statements for each financial year. Under that law they are required to prepare the Group financial statements in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and in accordance with the UK adopted international accounting standards. The directors have elected to prepare the parent Company financial statements in accordance with UK accounting standards, including FRS 101 Reduced Disclosure Framework and applicable law.

Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and parent Company and of their profit or loss for that period. In preparing each of the Group and parent Company financial statements, the directors are required to:

·      select suitable accounting policies and then apply them consistently;

·      make judgements and estimates that are reasonable, relevant, reliable and prudent;

·    for the Group financial statements, state whether they have been prepared in accordance with Companies Act 2006 and in accordance with UK adopted international accounting standards;

·      for the parent Company financial statements, state whether applicable UK accounting standards have been followed, subject to any material departures disclosed and explained in the parent Company financial statements;

·      assess the Group and parent Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and

·      use the going concern basis of accounting unless they either intend to liquidate the Group or the parent Company, or to cease operations, or have no realistic alternative but to do so.

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group's and the parent Company's transactions and disclose with reasonable accuracy at any time the financial position of the Group and the parent Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and the parent Company and to prevent and detect fraud and other irregularities.

Under applicable law and regulations, the directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that complies with that law and those regulations.

The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

We confirm that to the best of our knowledge:

·      the Consolidated Financial Statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole;

·      the Strategic Report and Directors' Report include a fair review of the development and performance of the business and the position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and

·      that the Annual Report and the Consolidated Financial Statements, 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.

On behalf of the Board

Simon Bennett

Chairman

1 October 2024

The accompanying notes 1 to 20 form part of these Consolidated Financial Statements.

The Consolidated Financial Statements were approved by the Board of directors on 1 October 2024 and were signed on its behalf by:

Simon Bennett

Chairman

Company number: 10727886