Highcroft Investments PLC

Interim Report for the six months ended 30 June 2023

Interim management report and statement of directors' responsibilities

Key Highlights:

*Gross rental income decreased 6% to £2,605,000 (2022 £2,775,000)

*Net rental income decreased 8% to £2,335,000 (2022 £2,538,000)

*93% occupancy in the property portfolio (2022 93%) at period end

*100% of Q1 and Q2 rent, and 96% of Q3 rent, due to date, collected

*Total earnings per share 31.9p (2022 124.2p)

*Adjusted earnings per share (see note 7),  decreased 15% to 25.2p (2022 29.5p)

*Property valuation increased by 3.4% to £80,540,000 (December 2022 £77,910,000), a 0.8% decrease on a like-for-like basis

*Net assets per share decreased 0.1% to 1080p (June 2022 1364p, December 2022 1081p)

*Loan to value (see note 11), 33.8% (December 2022 34.9%)

Dear Shareholder

Whilst reporting our half year 2023 results our tenants, their staff and customers, continue to be affected by global and national issues including the conflict in Ukraine, high interest rates and high inflation in the UK.  In this context we are pleased that our results have continued to perform satisfactorily.

Operating environment

The first half of 2023 has seen an economic environment with some of the highest inflation experienced in recent times in the UK and increasing interest rates, mainly being used as a tool to try and curb inflation. These factors have had a negative impact on the overall property market and have led to very low activity in the sector.  Rental growth has been slightly positive although this has mainly been in the industrial and retail warehouse sectors. The office market continues to be under pressure as demand has yet to pick up and yields on these assets are weakening. The next few months are likely to remain challenging as rates remain high and it is likely that activity will only gain momentum once there is confidence in the market that inflation is under control and that interest rates may start to decline.

We are pleased with the first half performance of Highcroft and feel that it is well protected against the negative market environment with a strong portfolio, fixed interest rates and no loan facilities expiring before August 2026.

Management

As previously disclosed, Paul Leaf-Wright took over the role of chief executive from Simon Gill on 1 January 2023 and Simon Gill resigned from the board on 31 March 2023.

On 1 January 2023 Cube Asset Management Limited were also appointed to focus on the asset management functions, primarily asset sourcing, rental negotiations and maintenance together with the development of our new asset at Roche. To date, this new arrangement is working very well, and we have seen good results in the overall management of the portfolio.

Balance sheet

During the first half of the year the Company has been active in management of the asset base.  As previously announced to shareholders we completed the sale of our Llantrisant asset on 13 February 2023. This sale resulted in a net capital profit on the sale of the asset of £1m (with proceeds 16% above the December 2022 valuation) although we did have to reverse the IFRS rent free provision of £138,000, through the income statement, that had been accounted for as income in the past periods. The net uplift to the company is still significant and, as previously disclosed, as the tenant had already vacated, this was an excellent outcome.

In order to ensure that the balance sheet is fully invested, the company has completed two property acquisitions. On 13 April 2023 we completed on the Aberdare property with the new Ipswich asset completing on 25 May 2023. Both these assets are expected to contribute positively to income and asset growth.

We also are pleased to inform shareholders that on our property at Roche, St Austell where we had a vacant piece of land, we have successfully secured a new 15-year lease from DHL to occupy a brand-new 28,000 sq ft warehouse, construction of which commenced in April 2023 and is expected to complete by 30 April 2024. This development, with a total cost of £4.3m will be funded from existing cash resources, and we expect to see an uplift in the valuation above cost on completion. Once complete the company will have an optimally invested balance sheet into a diverse portfolio of assets.

This new warehouse also gives us the opportunity to build a high standard property with an above average EPC rating which will improve Highcroft's weighted average EPC position.

The mid-year valuation of the portfolio resulted in a net downward valuation of £664,000, mainly as a result of the lower valuation of our office assets and in particular the Cardiff property. The Cardiff asset remains vacant, and the valuers have marked it down by £1m. We have been actively looking at solutions for this property both to secure a tenant or to exit the property but given current market conditions this is proving challenging. The remainder of the portfolio saw some uplifts especially where new rental terms have been agreed with occupiers and the generally stable industrial market, offset by reductions on the retail and office assets. The St Austell development asset has been included in the portfolio for the first time and the valuation includes the land value and amounts spent to date. This asset will naturally increase in value as further capital is spent on construction over the next twelve months.

Our gearing has remained constant at £27.2m with no loan maturities before August 2026. This has meant we have been protected against the interest rate rises that the economy has experienced over the past 18 months. We have comfortably met all our debt covenants during the reporting period. We recently completed new property valuations on certain assets held by the bank as security and are pleased to report that these are all in line with the lender's requirements.

Whilst we hold some cash at the balance sheet date this is earmarked, as noted above, for the new development and for dividends. The positive aspect has been that the group has earned a fair interest rate on its cash holding given the higher rates on offer at present.

Income statement

Given that we sold a high yielding asset in Llantrisant and replaced this with two assets a few months later, our total income is lower in the first half than the 2022 first half. This income is also negatively impacted by the reversal of the remaining £138,000 rent free provided on the Llantrisant asset which, in terms of accounting policy, needs to be accounted through the income statement (as opposed to being offset against the capital profit). We do believe that income will thus be higher in the second half as the new assets will contribute for the full 6-month period.

Total expenses have generally been well controlled and are consistent with both our budgets and the prior year.

With a new management structure in place and some of the functions previously performed by the CEO being outsourced to Cube Asset management, there are some expenses now reflecting as property costs as opposed to salaries, which are included in administration costs.

Following the decision at the 2023 AGM to adopt the new remuneration policy there has been a, non-cash, adjustment of £114,000 reflecting the immediate vesting of the remaining shares previously issued under the Highcroft Incentive Plan.

We earned £134,000 interest on cash deposits, however this, together with any intra-group interest, is taxable as residual income and hence the higher-than-normal tax charge.

Dividend

The board is pleased to confirm an interim property income distribution of 23p (2022 23p) per share, payable on 20 October 2023 to shareholders on the register at 22 September 2023 (with an ex-dividend date of 21 September 2023). This dividend is reflective of the steady performance of the company.

Outlook

While the first half performance has been satisfactory, we are optimistic that the asset management and other initiatives that have taken place in this period will lead to an improved performance in the second half.

We, as a board, take a prudent view and monitor the macro-economic situation closely.  We will continue to work with our tenants and support them where we can, whilst at the same time keeping our gearing low and a healthy cash balance to ensure we are well positioned to assess future opportunities.

Statement of principal risks and uncertainties

The directors review principal risks at each board meeting and carried out a mid-year review on 4 September 2023.  They consider that there have been no material changes to the group's principal risks as set out in detail on pages 40 to 43 of the annual report and accounts for the year ended 31 December 2022. The current principal risk areas can be summarised as:

Related parties and related party transactions

During the period Simon Gill a director and shareholder of the business resigned, on 31 March 2023. Paul Leaf-Wright was appointed a director of the business on 1 January 2023. Related party transactions are disclosed in note 12.  There have been no material changes in related party transactions in the period.

Interim management report and statement of directors' responsibilities (continued)

Statement of directors' responsibilities

The directors confirm that, to the best of their knowledge, the half-year report and condensed consolidated set of half-year financial statements have been prepared in accordance with IAS 34. The half-year report and condensed consolidated set of half-year financial statements give a true and fair view of the assets, liabilities, financial position and return of the Group. The half-year report and condensed consolidated set of half-year financial statements include a fair review of the information required by 4.2.7 and 4.2.8 of the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority, namely:  

·      an indication of the important events that have occurred during the first six months of the financial year ending 31 December 2023 and their impact on the condensed consolidated set of half-year financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

·      disclosure of material related party transactions in the first six months of the financial year, and any material changes in the related party transactions described in the last annual report. A list of current directors is maintained on the Highcroft Investments PLC website: www.highcroftplc.com.

By order of the board.

Charles Butler

Chairman
4 September 2023

This announcement contains inside information for the purposes of Article 7 of Regulation (EU) No 596/2014 which is part of UK law by virtue of the European Union (Withdrawal) Act 2018.

For further information, contact:

INDEPENDENT REVIEW REPORT TO HIGHCROFT INVESTMENTS PLC 

Conclusion  

We have been engaged by Highcroft Investments plc ("the Group") to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2023 which comprises the condensed consolidated interim statement of comprehensive income, the condensed consolidated interim statement of financial position, the condensed consolidated interim statement of changes in equity, the condensed consolidated interim statement of cash flows and related notes 1 to 16. 

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2023 is not prepared, in all material respects, in accordance with UK adopted International Accounting Standard 34 and the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.  

Basis for Conclusion  

We conducted our review in accordance with International Standard on Review Engagements (UK) 2410 (Revised), "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.  

As disclosed in note 2, the annual financial statements of the Group are prepared in accordance with UK adopted IFRSs. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with UK adopted International Accounting Standard 34, "Interim Financial Reporting.  

Conclusions Relating to Going Concern  

Based on our review procedures, which are less extensive than those performed in an audit as described in the Basis of Conclusion section of this report, nothing has come to our attention to suggest that management have inappropriately adopted the going concern basis of accounting or that management have identified material uncertainties relating to going concern that are not appropriately disclosed.  

This conclusion is based on the review procedures performed in accordance with ISRE (UK) 2410 (Revised), however future events or conditions may cause the entity to cease to continue as a going concern. 

Responsibilities of directors  

The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.  

In preparing the half-yearly financial report, the directors are responsible for assessing the Group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so.  

Auditor's Responsibilities for the review of the financial information  

In reviewing the half-yearly report, we are responsible for expressing to the Group a conclusion on the condensed set of financial statement in the half-yearly financial report. Our conclusion, including our Conclusions Relating to Going Concern, are based on procedures that are less extensive than audit procedures, as described in the Basis for Conclusion paragraph of this report.  

Mazars LLP 

Chartered Accountants and Statutory Auditor  

30 Old Bailey 

London 

EC4M 7AU 

4 September 2023 

Notes:

The maintenance and integrity of the Highcroft Investments plc's web site is the responsibility of the directors; the work carried out by us does not involve consideration of these matters and, accordingly, we accept no responsibility for any changes that may have occurred to the interim report since it was initially presented on the web site.

Legislation in the United Kingdom governing the preparation and dissemination of financial information may differ from legislation in other jurisdictions.

Condensed consolidated interim statement of comprehensive income (unaudited)

for the six months ended 30 June 2023

The total column represents the statement of comprehensive income as defined in IAS1

Condensed consolidated interim statement of financial position (unaudited)

as at 30 June 2023