Sale of three assets for £77 million

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Tritax Big Box is the only Real Estate Investment Trust dedicated to investing in very large logistics facilities in the UK. We own, manage and develop some of the UK’s most sought-after Big Boxes.

Our Big Boxes are strategically important to our tenants as they offer efficiency savings and are increasingly fulfilling e-commerce retail sales. Our tenants include some of the biggest names in retail, logistics, consumer products and automotive.

We aim to provide a secure and growing income for our Shareholders, together with capital appreciation. Our ambition is to be the UK’s pre-eminent owner of Big Boxes.

£3.94bn
7.0p
9% pa

Our Business Model

We own and manage high-quality Big Box logistics assets across the UK, using the Manager’s experience and expertise to assemble and grow a well-diversified asset portfolio, while prudently applying leverage to increase returns.

 

 

 

The inputs to our business model

We use the following resources to create value for Shareholders and other stakeholders:

Financial capital
We are funded by Shareholders’ equity, third-party debt and recycled funds

Physical assets
We have an outstanding portfolio of UK Big Box logistics assets, as well as strategically located land for pre-let development

Relationships
We build mutually beneficial relationships with our Customers and draw on the Manager’s extensive contacts with key players across the subsector

Human capital
We have an experienced Board of Directors and a Manager with a high-calibre, consistent, knowledgeable and forward-thinking team The Manager provides expertise in assembling a high-quality, diversified and low-risk portfolio, as well as relationship building, buying for value and speed and certainty of execution

The value we add

Sourcing investments

The starting point for value creation is sourcing our investments. This relies on the Manager’s extensive agency, developer and tenant contacts, built up over many years. The Manager also develops relationships with asset owners, learning of their triggers to sell. These relationships and knowledge allow us to source most investments off market, so we can buy at attractive prices. In a market where personnel changes are common, the consistency of the Manager’s team helps us to maintain our relationships and work on longer-term deals.

The Manager’s expertise enables us to move fast, rapidly assessing opportunities, making decisions, performing thorough due diligence and completing transactions. We have never withdrawn a contract after agreeing terms and believe that our reputation is unrivalled in our market. This speed and certainty of execution makes us the obvious choice for asset owners looking to sell Big Boxes and can help us achieve better prices.

Buying and selling for value

We have a clear Investment Policy but we are also pragmatic. We may buy smaller assets in locations where larger ones are not available, helping us to diversify by geography and building size and spreading lot-size risk. We may also buy assets with shorter leases, where we see an opportunity to add value such as by regearing the lease or reletting. Creating value requires capital discipline and patience, and we discount numerous opportunities that do not offer value for money or meet our stringent criteria.

Our intention is to hold most assets for the long term but we may sell if we have unlocked value and delivered the asset’s business plan, and we have the potential to reinvest the proceeds in a more attractive opportunity.

Funding developments

The Manager’s relationships with developers enables us to invest in forward funded developments, through which we fund the construction of a Big Box which has been pre-let to a specific Customer. This results in lower transaction costs and enables us to source brand new buildings for institutional tenants on long leases.

We can also acquire land which is suitable for pre-let forward funded developments. We do not invest in any speculative developments (ie those which are not pre-let).

Asset management

The assets we buy are usually strategically important to our Customers. We work with them to maximise their operational effectiveness, for example by extending buildings or adding mezzanine floors. This encourages them to sign longer leases, increasing our revenue security and capital values. Whilst recognising that only a limited part of our portfolio is categorised as Value Add assets within our investment pillars, where we buy properties with the potential to add value, we look to turn them into Foundation assets through asset management.

Delivering returns

By acquiring high-quality properties with excellent tenants and carefully managing our assets, we aim to deliver a robust, low-risk and growing rental stream, which supports a progressive target dividend. Our asset selection and management add value to our investments, allowing Shareholders to benefit from attractive total returns.

As our portfolio grows, we benefit from economies of scale, increased diversification by geography, tenant and building size, a larger list of contacts and a deeper pool of available capital, helping us to source further investments off market. A larger portfolio also gives us greater insight into market developments, more control over the evidence for rent reviews and lease renewals, and greater potential to create multi-asset initiatives with the same tenant.

Buying assets directly incurs total costs of approximately 6.78%, of which SDLT is approximately 5.00%. Standard sale costs are c.1.75%. This means that frictional costs – the total standard costs of selling an asset and reinvesting the proceeds – are c.8.53%. Our actual transaction costs are typically lower, as where possible we reduce SDLT by buying the special purpose vehicle which owns the asset. Even so, frictional costs influence investment returns, particularly in times of lower capital growth. Our portfolio is weighted towards Foundation assets because they do not need to be regularly traded. This reduces our frictional costs, which supports our returns.

In addition, our REIT status protects the value we create for Shareholders, as we are not subject to corporation tax on profits and gains in respect of our qualifying property rental business. We also pay dividends that qualify as a property income distribution (PID) where possible, which offers tax advantages for certain UK investors.

The outputs from our business model
Our business model primarily creates value for our Shareholders and Customers.

For Shareholders
We aim to deliver an attractive total return to Shareholders, underpinned by progressive annual dividends and net asset value growth.

We are targeting:

7.0 pence annual dividend for 2020

9%+ per annum a total return over the medium term

For Customers
Our Customers benefit from occupying Big Box logistics assets which are strategically important to their businesses, helping them to achieve cost savings and economies of scale, and to fulfil their rapidly growing e-commerce businesses.

Our investment strategy

Central to delivering the Group’s objective of driving Shareholder returns is capitalising on the Manager’s deep understanding of the Big Box sub-sector. It is this knowledge and experience that will allow the Company to exploit value from the favourable dynamics that this sector presents.

The Company’s primary focus is creating growing and sustainable income through buying well – quality assets that are attractively priced that will protect and grow capital value over the medium term. Where appropriate, performance will be further underpinned by proactive asset management and exploiting market anomalies.

More specifically, the Company seeks to deliver its objective by positioning business behind three key themes and investing accordingly:

71%

The quality and sustainability of our rental income underpins our business. Foundation assets provide our core, low-risk income. They are usually let on long leases to tenants with excellent covenant strength. The buildings are typically new or modern and in prime locations, and the leases have regular upward-only rent reviews, often either fixed or linked to inflation indices.

 

13%

These assets are typically let to tenants with strong financial covenants and offer the chance to grow the assets’ capital value or rental income, through lease engineering or improvements to the property. We do this using our asset management capabilities and understanding of tenant requirements. These assets are usually highly re-lettable.

 

5%

These are fundamentally sound assets in good locations, but let to tenants we perceive to be undervalued at the time of purchase and which have the potential to improve their financial strength, such as early stage e-retailers or other companies with growth prospects. These assets offer value enhancement through yield compression.

 

11%

These are opportunities in strategic land which we will invest in with a view to securing pre-let forward funded developments. The land we acquire will usually have the benefit of outline B8 planning consent over at least part of the site in order to minimise risk. This approach allows us to own the ultimate investments in locations which might otherwise attract yields lower than we want to pay. It can also deliver enhanced returns whilst controlling risk by avoiding speculative development. Aggregate land purchases, including costs associated with site preparation, are limited to 10% of net asset value calculated at the point of purchase

Our Properties includes details on all assets in our Portfolio. A table with the summary details on each asset is also available at Portfolio Summary.

Our Management

Board of Directors

The Board is responsible for leading and controlling the Company and has overall authority for the management and conduct of the Company’s business, strategy and development.

The Board is also responsible for ensuring the maintenance of a sound system of internal control and risk management (including financial, operational and compliance controls) and for reviewing the overall effectiveness of systems in place as well as for the approval of any changes to the capital, corporate and/or management structure of the Company.

Sir Richard Jewson

Susanne Given

Aubrey Adams

Richard Laing

Alastair Hughes

Karen Whitworth

The Manager

The Company’s Manager is Tritax Management LLP and is part of the Tritax Group, the leading real estate fund management house. Since 1995, the Tritax Group has acquired and developed approximately £6 billion of commercial property assets across multiple sectors including Big Box assets, industrial properties, office, retail and hotels.

As at 31 March 2019, the Tritax Group had total assets under management with an acquisition value of approximately £4.5 billion (including the Company), consisting of over 38.4 million sq ft  of real estate assets. Tritax has a particular specialisation in the acquisition and management of logistics property portfolios, including Tritax Eurobox plc which invests in Continental European logistics real estate assets.

Tritax is headquartered in London with over 30 professionals. It is authorised and regulated by the FCA.

Colin Godfrey

James Dunlop

Henry Franklin

Petrina Austin

Bjorn Hobart

Ed Plumley

Mark Shaw

Frankie Whitehead

Frankie-Whitehead

Hana Beard

Hana Beard

Charlie Withers

Responsible Business

We understand that our responsibility to society is broader than simply generating financial returns for Shareholders.

Our Manager’s Corporate Social Responsibility Committee are responsible for driving forward our objectives and will be updating and building on our approach to Environmental, Social and Governance (ESG) matters.

We will be updating this page with further policies, strategies and snapshots of our progress.

Environmental

Our Manager undertakes a formal “Green Property Review” of assets that begins pre-acquisition.  A detailed review of environmental and building surveys, combined with physical inspections forms the “Green Action Plan” for each property. These initiatives are progressed with the Occupiers.

We report and review EPC and BREEAM ratings demonstrating improvements, with an aim of managing a portfolio of ratings ‘D’ and above and minimum BREAAM ‘Very Good’ for new builds.

EPCs on all properties

An Energy Performance Certificate (EPC) is a key measure of an asset’s energy efficiency. An EPC is required by law whenever a building is bought, sold or rented, and grades the property from A (most efficient) to G (least efficient). Under the Minimum Energy Efficiency Standards, it is unlawful as of 1 April 2018 for landlords to grant a new lease on an asset with an EPC rating below E.

The EPC rating is a key part of our review of potential asset purchases. We also look at material environmental risks, such as flood and storm risk, connectivity and circulation, and planning requirements. In addition, we commission an environmental survey that includes the sites’ previous uses, so we can assess the risk of possible site contamination and any past remediation, with a view to implementing clean-up plans.

As at 31 December 2019, our portfolio (by gross internal area) is rated as follows:

 

 

 

Very Good

The Building Research Establishment Environmental Assessment Methodology (BREEAM) is a voluntary sustainability measure. It has six ratings, ranging from Unclassified to Outstanding. We expect a minimum of a Very Good rating for our pre-let forward-funded developments, which represents advanced good practice and puts the buildings in the top quartile of new builds.

 

Case study

When we acquired the B&Q, Worksop asset, our Green Property Review identified the opportunity to install roof-mounted PV panels. B&Q’s in-house Sustainability team decided to proceed with the project and supplement this with the installation of a biomass boiler at the same time.

We worked collaboratively with the Customer to quickly progress the necessary reports and consents, ensuring the installation of the equipment was not detrimental to the building fabric and that it did not limit the potential for future expansion. The biomass boiler uses waste wood, such as redundant pallets, to supply the main office with heat and hot water. It takes priority over the existing gas heating system, which remains in place as a back-up.

Following completion of the works in 2018, we commissioned a new EPC rating and were delighted that in January this year the grading improved from “E” to “A”, a level of grading usually associated with a new build property.

Social

Our social approach involves focusing on positive relationships with Customers and responding to issues that affect them and their local communities. We are reviewing charity proposals that will best serve these communities and involve our Customers.

One such proposal is to support and partner with the charity Schoolreaders. Schoolreaders encourages children to take more interest in reading and books. This is achieved through volunteers listening to children read on a one-to-one basis. Schoolreaders works in areas where we have assets and offers a simple and effective approach to improve literacy rates among schoolchildren. This is in responce to literacy rates among children in the UK being below Government expectations.

Many of our Customers are engaged in productive and positive initiatives with their local communities: our approach will build on this and look to develop our positive relationships to collaboratively engage local communities.

Governance

Our Manager’s Corporate Social Responsibility Committee brings together the enthusiasm and expertise of different people from across the business. Our joint aim is to further integrate ESG related matters into all areas of the business. The Committee will oversee this process.

Whilst we don’t have any employees, the Manager has policies included in the Employee Handbook covering their Equal Opportunities Policy, Disability Discrimination Policy, Health and Safety Policy, Data-Protection Policy and their Whistle-Blowing Policy. Our Slavery and Human Trafficking Statement can be found in the Governance section below.

Modern Slavery Act Disclosure

Our Slavery and Human Trafficking Statement 2019
We are committed to maintaining the highest standards of ethical behaviour and expect the same of our business partners. The use of slavery and human trafficking is unacceptable and entirely incompatible with our ethics as a business. We believe that all efforts should be made to eliminate it from our supply chains.

We recognise that real estate and construction are sectors that are highly ranked in terms of being prone to exploitation. This statement details the steps taken this financial year to address and combat the risks of slavery and human trafficking in the Company’s business and supply chains, and the steps the Company intends to take in the next financial year.

Download file to access our Modern Slavery Statement for the financial year ending 31 December 2019 which is made pursuant to section 54(1) of the Modern Slavery Act 2015 and has been approved by the Company’s Board of Directors on 27 February 2020.

Sir Richard Jewson KCVO, JP, Chairman

Corporate Governance

Since its inception in December 2013, the Company has undergone substantial growth and in June 2015 was included in the FTSE 250 Index.

The Board believes that strong corporate governance is integral to the Company’s success and its continued growth and development. Good governance provides the structure for an open, informed and transparent environment to allow good decisions to be made.

Corporate Governance reports

The Role and Duties of the Board

The Board is responsible for promoting the long-term sustainable success of the Company, working towards strategic objectives and generating value for Shareholders and other stakeholders. The Board determines the Company’s Investment Objectives and Investment Policy with the Manager and has overall responsibility for the Company’s activities including reviewing investment activity, performance, business conduct and strategy as well as developing and complying with the principles of good corporate governance. The operational aspects of running the Company are delegated to the Manager, however the Board has reserved the following matters for its consideration:

 

  • Reviewing and approving Board composition and powers, including the appointment of Directors;
  • Approving and implementing the Company’s strategy;
  • Approving the budget, financial plans and Annual and Interim financial reports;
  • Approving the dividend policy;
  • Reviewing the property valuations and valuations of its interest rate derivatives;
  • Overseeing treasury functions and managing the Company’s capital structure;
  • Reviewing and monitoring the Manager’s ongoing compliance with the Company’s Investment Objectives and Investment Policy;
  • Overseeing the services provided by the Manager and, in conjunction with the Manager, the Company’s principal service providers;
  • Reviewing and approving all compliance and governance matters.

Board Committees

Audit & Risk Committee
The Audit & Risk Committee consists of Richard Laing who Chairs the Committee, Aubrey Adams, Susanne Given, and Karen Whitworth. The Audit & Risk Committee’s role is to oversee the Company’s financial reporting process including the risk management and internal financial controls that are in place within the Manager, the valuation of the property portfolio, the Group’s compliance with accepted accounting standards and other regulatory requirements as well as the activities of the auditors.

Management Engagement Committee
The Management Engagement Committee consists of Susanne Given who Chairs the Committee, Sir Richard Jewson, Aubrey Adams, Richard Laing, Alastair Hughes and Karen Whitworth. The Management Engagement Committee’s role is to review the performance of the Manager and the Company’s other main service providers over the year and to recommend any providers for re-tender to the Board. The Committee is also responsible for overseeing any amendments to the Investment Management Agreement between the Company and the Manager.

Nomination Committee
The Nomination Committee consists of Sir Richard Jewson who Chairs the committee, Aubrey Adams, Alastair Hughes and Karen Whitworth. The Committee’s role is to review the size, structure and composition of the Board; to ensure that the Board has the right mix of skills, experience and knowledge to enable the Company to fulfil its strategic objectives. The Committee is also responsible for making recommendations for new appointments to the Board and for reviewing the performance and terms of engagement for the existing Directors.

Terms of Reference

Modern Slavery Act Disclosure

Our Slavery and Human Trafficking Statement 2019
We are committed to maintaining the highest standards of ethical behaviour and expect the same of our business partners. The use of slavery and human trafficking is unacceptable and entirely incompatible with our ethics as a business. We believe that all efforts should be made to eliminate it from our supply chains.

We recognise that real estate and construction are sectors that are highly ranked in terms of being prone to exploitation. This statement details the steps taken this financial year to address and combat the risks of slavery and human trafficking in the Company’s business and supply chains, and the steps the Company intends to take in the next financial year.

Download file to access our Modern Slavery Statement for the financial year ending 31 December 2019 which is made pursuant to section 54(1) of the Modern Slavery Act 2015 and has been approved by the Company’s Board of Directors on 27 February 2020.

Sir Richard Jewson KCVO, JP, Chairman

Principal Risks and Uncertainties

We aim to operate in a low-risk environment, focusing on a single subsector of the UK real estate market to deliver an attractive, growing and secure income for Shareholders, together with the opportunity for capital appreciation. The Board recognises that effective risk management is key to the Group’s success. Risk management ensures a defined approach to decision making that decreases uncertainty surrounding anticipated outcomes, balanced against the objective of creating value for Shareholders.

Our principal risks and uncertainties are set out below. They have the potential to affect materially our business, either favourably or unfavourably. Some risks may currently be unknown, while others that we currently regard as immaterial and have therefore not been included here, may turn out to be material in the future.

Property Risks

Tenant default – the risk around one or more of our tenants defaulting
Probability: Moderate 
Impact: Medium
The default of one or more of our tenants would immediately reduce revenue from the relevant asset(s). If the tenant cannot remedy the default and we have to evict the tenant, there may be a continuing reduction in revenues until we are able to find a suitable replacement tenant, which may affect our ability to pay dividends to Shareholders. The circumstances around COVID-19 have led to certain sectors including retail being negatively impacted, this will impact the financial strength of some of our Customers.

Our investment policy limits our exposure to any one tenant to 20% of gross assets or, where tenants are members of the FTSE, up to 30% each for two such tenants. This prevents significant exposure to a single retailer. To mitigate geographical shifts in tenants’ focus, we invest in assets in a range of locations, with easy access to large ports and key motorway junctions. Before investing, we undertake thorough due diligence, particularly over the strength of the underlying covenant and the group of the covenants. We select assets with strong property fundamentals (good location, modern design, sound fabric), which should be attractive to other tenants if the current tenant fails. We continually monitor and keep the strength of our tenant covenant’s under review. In addition, we focus on assets let to tenants with strong financial covenant strength, and assets that are strategically important to the tenant’s business. Our maximum exposure to any one tenant (calculated by contracted rental income) is less than 19% as at 31 December 2019. Please refer to Appendix 1 for our full list of tenants and our exposure to them by income.

Portfolio strategy – The ability of the Company to execute on its strategy and deliver performance
Probability: Slight

Impact: Medium
An adverse change in the performance of our property portfolio may lead to lower returns for Shareholders or a breach of our banking covenants. Market conditions may lead to a reduction in the revenues we earn from our property assets, which may affect our ability to pay dividends to Shareholders. A severe fall in values may result in a fall in our NAV as well as a need to sell assets to repay our loan commitments.

The Group is focused on a single sector of the commercial property market, the property portfolio is 98% let, with long unexpired weighted average lease terms and an institutional-grade tenant base. All the leases contain upward-only rent reviews, which are either fixed, RPI/CPI linked or at open market value. These factors help support our asset values and overall portfolio performance. We undertake ongoing reviews of asset performance along with a review over the balance of our portfolio, split between Foundation, Value Add, Growth and Land as well as considerations over covenant, location and building type. Our asset performance is continually appraised and where we feel like the assets are mature in terms of performance, they are ear-marked for potential disposal. We constantly monitor our covenant headroom on LTV and interest cover. This headroom is currently substantial. The Company has an LTV policy of borrowing up to 40% against gross asset values.

Competition for investment in the Big Box sector – with increasing competition in the investment market this may restrict our ability to grow the portfolio
Probability: Slight
Impact: Low

Competitors in the sector may be better placed to secure property acquisitions, as they may have greater financial resources, thereby partly restricting the ability to grow our NAV, further diversify the portfolio and add additional liquidity to our shares. Post the effects of COVID-19, logistics assets are arguably even more sought after than before and therefore competition is likely to increase for the most prime assets.

We have extensive contacts in the sector and often benefit from off-market transactions. We also maintain close relationships with a number of investors and developers in the sector, giving us the best possible opportunity to secure future acquisitions. We are not exclusively reliant on acquisitions to grow the portfolio. Our leases contain upward-only rent review clauses and we have a number of current asset management initiatives within the portfolio, which means we can generate additional income and value from the existing portfolio. Since the Tritax Symmetry acquisition, we now own and control one of the largest development land banks in the UK. This acquisition significantly reduces the risk that competition will impact our ability to grow.

Performance of the UK retail sector and the continued growth of online retail
Probability: Moderate
Impact: Medium
Our focus on the Big Box sector means we directly rely on the distribution requirements of UK retailers and manufacturers. Insolvencies and CVA’s among the larger retailers and online retailers could affect our revenues and property valuations. The probability of retailers defaulting has increased post COVID-19, however a greater proportion of sales are being made online, these orders are fulfilled via the assets that we invest in.

The diversity of our institutional-grade tenant base means the impact of default of any one of our tenants is low-moderate. In addition to our due diligence on tenants before an acquisition or letting, we regularly review the performance of the retail sector, the position of our tenants against their competitors and, in particular, the financial performance of our tenants. We have also increasingly been diversifying our tenant exposure to various sub-sectors of the retail sector i.e. online, food, homeware, fashion, other. Our fashion retail exposure is c 7%. Whilst retailers are vacating units on the high-street, this is partly as a result of increasing e-commerce spending, which generally speaking is positive for our assets.

Execution of Development business plan – there may be a higher degree of risk within our development portfolio.
Probability: Moderate
Impact: Medium
Our development activities are likely to involve a higher degree of risk than is associated with standing assets. This could include general construction risks, delays in the development or the development not being completed, cost overruns or developer/ contractor default. If any of the risks associated with our developments materialise, this could affect the value of these assets or result in a delay to lease commencement. The development plans are likely to be impacted in the short term post COVID-19, with possible delays to planning hearings and occupiers delaying decision making processes.

Only four of the Company’s current portfolio of 61 assets are either pre-let or forward funded development assets, and another four are speculative developments by the TSL Group, representing 14.1% of the value of our portfolio. 91% of these assets are pre-let to institutional-grade tenants. Any risk of investment into forward funded projects is minimal, as the developer takes on a significant amount of construction risk and the risk of cost over-runs. Our appetite for speculative development is low and we have a limit of 5% of GAV exposed to speculative developments within our Investment Policy. Having acquired the development expertise of db Symmetry in an eight-year contract from February 2019, the risk of cost overruns is mitigated by our experienced development team which includes a thorough procurement and tender process on all contracts. We undertake thorough covenant analysis and ongoing review of our contractors and secure guarantees in relation to build contracts where possible.

Land purchases – The purchase of land or options over land may involve a higher degree of risk than that associated with existing and built investments or development activities. Land purchases may or may not have existing planning consent: they may also require further financial investment to prepare and ready the development. There is also a risk that the site may not attract a tenant to sign a lease.
Probability: Moderate
Impact: Low
The inability to obtain planning consent means that the land would have to be held or sold prior to any development. The value of the land may be reduced due to the refusal of planning consent and the costs incurred to that date could be significant and may be irrecoverable, this would reduce the Company NAV. This also applies to options over land, any costs in respect of the option or associated planning costs may have to be written off. If the Company fails to attract a suitable pre-let it cannot proceed with the development of a big box. This would impact on the future development profit and revenues the Company could make from the land and failure to secure a pre-let may have a negative effect on the valuation.

The Company may choose to develop a smaller scale building on a speculative basis if it makes sense to do so.

The land may be subject to an environmental risk which requires significant investment to remediate prior to commencing the development works.

The costs associated with developing land may fluctuate over the course of the development due to market conditions.

The purchase of land is subject to a maximum level of 15% of GAV, at the time of purchase. The Company can also only undertake limited speculative development of buildings, subject to a maximum level of 5% of GAV (included within the 15% land holding restriction above), although it can undertake land preparation works but we will continue to seek a pre-let prior to commencing the vertical construction of a larger scale big box.

Following the acquisition of Tritax Symmetry, this has provided us with access to one of the UK’s largest strategic land portfolios held via direct land holdings and options over land. The Tritax Symmetry assets have been subject to due diligence, but prior to the exercise of land draw down under an option agreement, the Company will carry out extensive due diligence to limit exposure to environmental risks and other hazards. The Company also undertakes due diligence over the surrounding power and highways infrastructure, the surrounding environment and the state of the market to assess the viability of the scheme ahead of acquiring the options over land. The Company takes expert advice from local planning specialists over the likelihood of timing over achieving planning consent.

Financial Risks

Variable rate debt – Our use of floating rate debt will expose the business to underlying interest rate movements
Probability: Slight 
Impact: Rare
Interest on some of our debt facilities is payable based on a margin over LIBOR. Any adverse movements in LIBOR could impact our profitability and ability to pay dividends to Shareholders. However, noting the recent economic shock triggered by COVID-19, the Bank of England exercised an emergency interest rate cut. Interest rates are therefore at the lowest levels on record.

The Company has entered into interest rate derivatives to hedge our direct exposure to movements in LIBOR. These derivatives cap our exposure to LIBOR rises and have terms coterminous with the loans. We aim, where reasonable, to minimise the level of unhedged debt with LIBOR exposure, by taking out hedging instruments with a view to keeping variable rate debt approximately 90%+ hedged. As at 31 December 2019, 63% of the Group’s borrowings were fixed rate loans.

Debt financing and liquidity – A lack of debt funding at appropriate rates may restrict our ability to grow and deliver attractive returns
Probability: Negligible

Impact: Medium

Without sufficient debt funding, we may be unable to pursue suitable investment opportunities in line with our investment objectives. If we cannot source debt funding at appropriate rates, either to increase the level of debt or re-finance existing debt, this may impair our ability to maintain our targeted dividend level and deliver attractive returns to Shareholders.

The Group has diversified sources of long-term unsecured borrowings in the form of £500 million in Public Bonds and £400 million in Unsecured Private Loan Notes. We also have £550 million of bank finance available split across two revolving credit facilities. This helps keep lending terms competitive. This access to multiple debt markets should enable the Group to raise future liquidity in a more efficient and effective manner via an unsecured platform whilst at competitive rates. The Board keeps our liquidity and gearing levels under review. We have headroom of £367.5 million of undrawn debt commitments, within our credit facility at 30 June 2020.

We must be able to operate within our banking covenants
Probability: Slight

Impact: Low
If we were unable to operate within our banking covenants, this could lead to default and our bank funding being recalled. This may result in us selling assets to repay loan commitments, or be forced to sell assets, possibly resulting in a fall in NAV.

We continually monitor our banking covenant compliance, to ensure we have sufficient headroom and to give us early warning of any issues that may arise. We have an LTV policy of up to 40%, with LTV and Gearing covenants substantially higher than this. We enter into interest rate caps to mitigate the risk of interest rate rises. We operate with a predominantly fixed rate debt platform. This will mitigate the effect on the Group from interest rate rises. We invest in assets let to institutional-grade tenants and we also seek to maintain a long WAULT, which should reduce the volatility in our property values.

Corporate Risk

We rely on the continuance of the Manager
Probability: Slight

Impact: Medium
We continue to rely on the Manager’s services and its reputation in the property market. As a result, the Company’s performance will, to a large extent, be underpinned by the Manager’s abilities in the property market and its ability to asset manage and develop its property portfolio. Termination of the Investment Management Agreement would severely affect the Company’s ability to effectively manage its operations and may have a negative impact on the share price of the Company.

The IMA continues on a rolling basis, with either party having the right to terminate the Investment Management Agreement by giving at least 24 months’ notice. There are provisions allowing the parties to terminate without notice in certain circumstances, including material breach and/or loss of key personnel. The Management Engagement Committee regularly reviews and monitors the Manager’s performance. In addition, the Board meets regularly with the Manager, to ensure it maintains a positive working relationship. The Investment Management Agreement was amended during 2017; see the Management Engagement Committee Report.

Taxation Risk

UK REIT status – We are a UK REIT and have a tax-efficient corporate structure, which is advantageous for UK Shareholders. Any change to our tax status or in UK tax legislation could affect our ability to achieve our investment objectives and provide favourable returns to Shareholders.
Probability: Slight

Impact: Low
If the Company fails to remain a REIT for UK tax purposes, our property profits and gains will be subject to UK corporation tax.

The Board is ultimately responsible for ensuring we adhere to the UK REIT regime. It monitors the REIT compliance reports provided by:

  • the Manager on potential transactions;
  • the Administrator on asset levels; and
  • our Registrar and broker on shareholdings.

The Board has also engaged third-party tax advisers to help monitor REIT compliance requirements.

Political Risk

Disruptive Brexit
Probability: Moderate

Impact: Low
The UK has triggered Article 50, left the EU in January 2020, and is within the transition period from January 2020 to December 2020. Economic volatility is not a new risk for the Group; however, until the terms of Brexit become clearer the exact outcome on the business is difficult to predict at this stage.

The Group operates with a focus in the UK Big Box market which has a supply shortage against current levels of demand, which, along with the structural shift to online retailing will assist in supporting portfolio performance. We have regular engagement with key occupiers to understand how Brexit is affecting their businesses and whether this is affecting their need for logistics space. The Group is currently well positioned with long and secure leases and a diverse blue chip tenant line up, with a focus on tenants with financial strength, which are well positioned to withstand any uncertainty in the UK economy. We have a low appetite for speculative development.

Other Risk

Severe economic downturn
Probability: Severe
Impact: Low
A severe downturn in the economy could impact a number of the Groups tenants, contractors, and service providers, which could mean a loss of rent income and disruption to operations. The probability of this is deemed severe as we have recently experienced a global pandemic.

A severe economic downturn could be caused by civil unrest, terrorism or a pandemic. On 23 March 2020 the COVID-19 pandemic caused the UK Government to place the UK into lockdown and issue significant support to the UK economy. All evidence points to a severe technical recession.