CRC.L Regulatory News (CRC)

18 July 2022

Circle Property Plc

("Circle", the "Company" or the "Group")

Final Results for the year ended 31 March 2022

Continued delivery of strategy to deliver shareholder returns

Circle Property Plc (AIM: CRC), which invests in, develops and actively manages well-located regional office assets, is pleased to announce final results for the year ended 31 March 2022.

John Arnold, Chief Executive of Circle Property Plc, said:

"Good progress has been made with our disposal strategy during the year. Four properties were sold for an aggregate price of £62 million, £3 million above the aggregate March 2021 valuation. We have now successfully disposed of c.50% of our portfolio by value.

This momentum has continued following the financial year end with the sale of 720 Aztec West in May 2022, £0.32 million ahead of its March 2022 valuation. The proceeds of these disposals were predominantly used to reduce gearing and consequently we are now debt free.

"We remain focused on actively managing our assets and returning capital to shareholders in the most tax efficient manner. There remains a shortage of high-quality, well-located regional offices and we therefore remain confident that the appetite for our assets is set to continue."

 Financial Highlights: Strategy delivering strong returns

· 5.54% increase in like for like growth in property portfolio value from 31 March 2021.

· 2.60% increase in Net Asset Value ("NAV") per share to £2.81 (31 March 2021: £2.74).

· Earnings per share of 15p (31 March 2021: loss of 9p).

· Profit before tax of £5.8 million reflecting a combination of operational profit and revaluation gains (31 March 2021: loss of £2.7 million).

· Proposed final dividend of 3.5p per share for the year ended 31 March 2022 (31 March 2021: 4p per share) which together with the interim dividend of 3.5p per share, brings the total annual dividend to 7p per share (31 March 2021: 6.5p per share).

Operational Highlights: Active portfolio management and disposal programme to extract maximum value for our assets

· Four properties sold during the year at an aggregate price of £62 million (£3 million or 5% above the aggregate March 2021 valuation)

o  Compass Conference Centre, Milton Keynes: £34.5 million

o  135 Aztec West, Bristol: £3.96 million

o  141 Moorgate, London: £3.56 million

o  One Castle Park, Bristol: £20 million

· 80.2% of total portfolio is let and income producing

· High-spec, modern fit-outs undertaken at Concorde Park, Maidenhead and 36 Great Charles Street, Birmingham to improve sustainability attributes and letting attractiveness

· Development project: Refurbishment of K3 Kents Hill, Milton Keynes underway, with a pre-let agreed (ahead of completion of works) with Kuehne + Nagel for the whole property

Post year-end

· In May, the sale of 720 Aztec West for £2.52 million (14.5% increase on the March 2022 valuation of £2.2 million)

· In June, the Company repaid the amount outstanding under its debt facility in full and is now debt free, with a net cash balance of £5.8m

Outlook

· Confident in continuing to deliver our strategy of divestment and maximising total returns

· Anticipate disposing of the balance of the portfolio within the next 18-24 months at aggregate prices expected to show a triple net NAV of no less than £2.75 per share

· The Board remains committed to maximising returns and delivering value to Shareholders, and expects a minimum of two returns of capital will be made to shareholders, the first of which is expected to occur by March 2023.

The annual report and accounts for the year ended 31 March 2022 and the Notice of AGM are expected to be posted to shareholders on 20 July 2022 and will be available on the Company's website: www.circleproperty.co.uk, shortly.

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the UK version of the EU Market Abuse Regulation (2014/596) which is part of UK law by virtue of the European Union (Withdrawal) Act 2018, as amended and supplemented from time to time.

Enquiries:

Chairman's Statement

The Group's regional office portfolio continues to show its resilience. Our assets are selected for their strong locations, asset management potential and letting prospects. This strategy has continued to serve us well, delivering significant returns for shareholders since IPO.

Since the Board took the strategic decision to break up the portfolio and return the capital proceeds to shareholders, the Board is pleased to see the market recognise the underlying value inherent in Circle's property portfolio as evidenced by the material uplift in share price. This decision was not taken lightly given the strong financial and operational performance of the Company since IPO but was ultimately made in the best interests of shareholders.

Notwithstanding this change in strategy, active management continues unabated throughout the portfolio, with refurbishment and lettings adding value prior to individual sales.

We continue to reduce arrears, through negotiations with our tenants with whom we maintain close contact. The office continues to play an essential role for businesses, evidenced by tenants returning post the impacts of COVID-19.

Our de-gearing has been completed with the Group's loan facility having been repaid in full on 22 June 2022. Based on the performance during the year and the positive progress made by the Company, the Board recommends a final dividend of 3.5p, bringing the total dividend for the year to 7p, an increase of 8% on last year.

I would like to thank the Circle Property team for their hard work throughout the year. With our team's expertise in maximising returns from our portfolio from within the regional commercial market, we remain confident of continuing to deliver on our strategy of divestment and total returns.

Chief Executive's Statement

Our regional office portfolio has performed well in the period, with like-for like valuations up 5.54%. As increasing numbers of workers have returned to the office, the importance of having a place to meet and collaborate is clear. As an internally managed company, we take pride in our tenant relationships and the benefits of this model have been particularly apparent during the last few years with the global pandemic.

Following the Board's decision to wind-down the portfolio and return the proceeds to shareholders in an orderly manner, good progress has been made with the disposals programme, extracting maximum value for our assets.

At the start of the year in April 2021, we owned 15 properties at a total value of £132.15 million and by the year end, four properties had been sold at an aggregate price of £62 million (£3 million above the aggregate March 2021 valuation). At the current rate of sale, we anticipate selling the whole portfolio within the next 18 to 24 months at aggregate prices which we expect to show a triple net NAV of no less than £2.75 per share.

In many instances, sales prices (both achieved and projected) continue to be enhanced by lettings and lease renewals. For example, K3 Kents Hill in Milton Keynes, currently undergoing a £2.2 million refurbishment where Kuehne + Nagel have signed an agreement to lease the entire property of 13,200 sq ft at a rent of £316,000 per annum on a ten-year lease without break. The rent achieved creates a new benchmark at Kents Hill Business Park, which will be reflected in the valuation of buildings K1 and K2. Formal sales marketing of Kents Hill Park will commence in advance of completion of the building works.

During the year we also sold One Castle Park, Bristol, for £20 million (a 3.9% increase on the 31 March 2021 valuation) and sold 135 Aztec West, Bristol for £3.961 million, a 62% increase (post refurbishment cost) on the 31 March 2021 valuation of £1.55 million. The proceeds of these were largely used to reduce the Company's gearing.

Following our financial year end, we also exchanged contracts on the sale of 720 Aztec West for £2.52 million, an uplift on the 31 March 2022 valuation of £2.2 million.

As the disposal programme continues, the Board will be returning capital to shareholders in the most tax efficient manner. It is envisaged that this will be done in a minimum of two tranches.

Director

Circle Property Plc

Notes to the consolidated financial statements

for the year ended 31 March 2022

1 General information

These financial statements are for Circle Property Plc ("the Company") and its subsidiary undertakings (together referred to as the "Group"). Notes in respect of the Company's subsidiary undertakings are outlined in note 24.

The Company's shares are admitted to trading on AIM, a market operated by the London Stock Exchange plc. The Company is domiciled and registered in Jersey, Channel Islands. On 28 February 2022, the address of its registered office was changed from 3rd Floor, Standard Bank House, 47-49 La Motte Street, St Helier, Jersey, JE2 4SZ to Oak Group (Jersey) Limited, 3rd Floor, IFC5, Castle Street, St Helier, Jersey, JE2 3BY.

The nature of the Company's operations and its principal activities are that of commercial property investment in the UK.

2 Principal accounting policies

The Group financial statements show a true and fair view and have been prepared in accordance with International Financial Reporting Standards as adopted by the UK (IFRS) and the Companies (Jersey) Law 1991. The financial statements have been prepared in pound sterling, which is the Group's functional currency, and under the historic cost convention as modified by the revaluation of investment property.

Going concern

On 14 February 2022 the Group announced the disposal of Kents Hill Park Conference Centre and provided an update on its future strategy whereby it would make targeted property sales, whilst investing in and actively managing the remainder of the property portfolio, over an extended period of two to three years. The proceeds of the future disposals were to be utilised to continue to reduce borrowings with the remaining proceeds to be returned to shareholders in an orderly and efficient manner.

Due to the Group's intention to pursue this revised strategy, the financial statements have been prepared on a basis other than going concern.

In preparing the financial statements on an alternate basis, the Board has continued to apply the requirements of IFRS taking into account that the Group is not intended to continue as a going concern in the foreseeable future.

This has resulted in a reclassification of investment properties and associated lease incentive assets that are expected to be disposed of in the year ending 31 March 2023 as current assets in accordance with IAS 1. There has been no impact on the measurement of assets and liabilities as at 31 March 2022. No additional provisions have been recognised as at 31 March 2022 in relation to the costs expected to be incurred in winding down the Group's operations.

Notwithstanding the Board's intention that the Group will not continue for the foreseeable future, at 31 March 2022, the Group's financial statements disclosed a net current asset position with an available cash balance of £25.3 million. The balance of the Group's loan facility with NatWest and HSBC at that date was £21.4m with a final repayment date of 13 February 2023.

Following the disposal of 720 Aztec West in May 2022 the proceeds, net of costs, were fully utilised to partially repay the loan facility resulting in an outstanding facility balance of £19 million.

Having considered the best use of the Group's available cash balance the Directors resolved to fully repay the remaining balance of the loan facility thus saving future interest costs, commitment fees and compliance costs associated with the facility. On 22 June the loan facility was repaid in full.

The remainder of the property portfolio continues to be actively managed with strong rental collections and the timely recovery of any arrears. In assessing the Group's ability to continue operating, the Group's cash forecasts have been modelled based on the circumstances of each tenant on an individual basis and all envisaged development expenditure has been accounted for. Rental collections continue to be monitored on a monthly basis with payment plans agreed for the collection of overdue amounts.

Basis of consolidation

The financial statements incorporate the financial statements of the Company and its subsidiaries, as outlined in note 24.

Subsidiaries are all entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has variable returns from, its involvement with the entity and has the ability to affect those returns through its power over the entity. Intragroup balances and any unrealised gains and losses arising from intragroup transactions are eliminated in preparing the financial statements.

The results of subsidiaries acquired during the year are included from the effective date of acquisition, being the date on which the Group obtains control. They are deconsolidated on the date that control ceases.

If the consideration transferred for the acquisition of a subsidiary is less than the fair value of the assets and liabilities acquired, the difference is recognised as negative goodwill and is reflected directly in the Consolidated Statement of Comprehensive Income.

Acquisition-related costs are expensed as incurred.

Adoption of new and revised IFRSs

New and amended standards and interpretations

The Group has adopted all new standards, amendments to standards and interpretations which came in to effect for the Group's accounting period starting on 1 April 2021. These changes have not had a significant impact on the preparation of these financial statements.

New Accounting Requirements not yet adopted

A number of new standards, amendments to standards and interpretations are effective for annual periods beginning after 1 January 2022 and have not been early adopted in preparing these financial statements. None of these are expected to have a material effect on the financial statements of the Group.

Estimates and judgements

The preparation of the consolidated financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the amounts reported for assets and liabilities as at the reporting date and the amounts reported for revenue and expenses during the period. The nature of the estimation means that actual outcomes could differ from those estimates. Estimates and judgements are continually evaluated and are based on experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Revisions to accounting estimates are recognised prospectively.

Significant judgements

Going concern

In assessing the appropriate basis for the preparation of the financial statements the Directors concluded that the Board's commitment to the revised disposal strategy, following its approval at the General Meeting in March 2022, means that the Group has no realistic alternative but to pursue this strategy which will ultimately result in the Group being wound up and therefore the non-going concern basis of preparation has been adopted.

Determination of presentation of current and non-current assets

When preparing the financial statements on a basis other than a going concern the Directors have assessed the anticipated timing of the disposal of the remainder of the property portfolio. The assessment has been based on the level of continued active management required in respect of each property and the stage of the sale process for properties which are currently being marketed for sale. Based on this assessment, investment properties which are expected to be disposed of within 12 months of the year end have been classified as current assets along with the lease incentives recognised thereon.

Significant estimates

Long term employee benefit

As disclosed in note 27 to the financial statements the Group has recognised a liability in respect of the incentive payment payable to the Executive Directors on completion of the disposal programme. In measuring the fair value of the liability the Board has considered the anticipated timing of each disposal with the expected gain/loss on each disposal being measured using a range between 10% under and 10% over the 31 March 2022 independent valuation. The weighted average of these measurements has been adjusted to present value using a discount rate of 2.74%.

Fair value of investment property

Investments in property are inherently difficult to value due to the individual nature of each property. As a result, valuations are subject to substantial uncertainty. There is no assurance that the estimates resulting from the valuation process will reflect the actual sales price even where such sales occur shortly after the valuation date. The Directors employed professional valuers Savills (UK) Limited ("Savills") to perform valuations of the investment property using Royal Institute of Chartered Surveyors ("RICS") valuation standards as at 31 March 2022. In arriving at their estimate of market value the valuers used their market knowledge and professional judgement and did not rely solely on comparable historical transactions. There is an inherent degree of uncertainty when using professional judgement in estimating the market values of investment property. 

The significant methods and assumptions used by the valuers in estimating the fair value of investment property are set out in note 12.

Revenue recognition

Rental income from operating leases is recognised in profit or loss on a straight-line basis over the term of the lease. The term of the lease is the full lease period where there is a reasonable expectation at the inception of the lease that the tenant will not utilise the lease break clause. Lease incentives granted are spread evenly over the term of the lease with the lease incentive recognised as a receivable at the year end.

Deferred income

Where tenant invoices relate to a period after the Group's year-end deferred income is recognised for the difference between revenue recognised and amounts billed for that contract.

Property service charges

Service charges and other such receipts arising from expenses recharged to tenants are as stated in Notes 4 and 5. Notwithstanding that the funds are held on behalf of the occupiers, the ultimate risk for paying and recovering these costs rests with the Group.

Administrative fees, listing costs and other expenses

Administrative and other expenses are recognised in profit or loss in the period in which they are incurred.

Finance income and finance costs

Finance income comprises bank interest income. Finance costs predominantly comprises of interest expense on borrowings. Finance income and finance costs are recognised on an effective interest rate basis.

Employee benefits

In accordance with IAS 19 'Employee Benefits' the cost of providing employee benefits is recognised in the period in which the benefit is earned by the employee, rather than when it is paid or payable. 

Investment property

Property that is held for long-term rental yields or for capital appreciation or both, is classified as investment property in accordance with IAS 40 'Investment Property'.

Investment properties, including properties under development, are initially recognised at cost, being the fair value of consideration given, including associated transaction costs. Any subsequent qualifying capital expenditure incurred in improving investment properties is capitalised in the period in which the expenditure is incurred and included in the book cost of the properties.

After initial recognition, investment properties are measured at fair value, with unrealised gains and losses recognised in profit or loss. The fair value is based on valuations provided by Savills at the reporting date using recognised valuation techniques.

An investment property shall be derecognised on disposal or at a time that no benefit is expected from future use or disposal. Any gain or loss is determined as the difference between the net disposal proceeds and the carrying amount and is recognised in profit or loss.

Recognition and derecognition occurs on the completion of a sale between a willing buyer and a willing seller. Any investment properties which meet the criteria of IFRS5 at the year end are disclosed as properties held for sale and stated at fair value. At 31 March 2022, there was one property classified as held for sale (2021: none).

At 31 March 2022, the property 720 Aztec West, met the IFRS 5 criteria stated below:

Ÿ Management is committed to a plan to sell

Ÿ The asset is available for immediate sale

Ÿ An active programme to locate a buyer is initiated

Ÿ The sale is highly probable, within 12 months of classification as held for sale

Ÿ The asset is being actively marketed for sale at a sales price reasonable in relation to its fair value

Ÿ Actions required to complete the plan indicate that it is unlikely that plan will be significantly changed or withdrawn

Assets held for sale are derecognised when significant risks and rewards attached to the asset have transferred from the group which is on completion of contracts.

None of the Group's other investment properties met all of the above criteria at 31 March 2022 and accordingly continue to be classified as investment properties.

In accordance with IAS 40 'Investment Property' property that is being constructed or developed for future use as investment property is classified as investment property during its construction or development. At 31 March 2022 and 31 March 2021 there were no properties under construction or development.

Technique used for valuing investment properties

The traditional method converts anticipated future cash flow benefits in the form of rental income into present value. This approach requires careful estimation of future benefits and application of investor yield or return requirements. One approach to value the property on this basis is to capitalise net rental income on the basis of an Initial Yield, generally referred to as the 'All Risks Yield' approach or 'Net Initial Yield' approach.

These fair values are based on comparable market prices where possible, adjusted if necessary, for any difference in the nature, location or condition of the specific assets and factors not included in net rental income such as vacancies and lease incentives.

The fair value of investment properties is measured based on each property's highest and best use from a market participant's perspective and considers the potential uses of the property that are physically possible, legally permissible and financially feasible.

Leases

Operating leases

Properties leased out under operating leases, where the Group is the lessor, are included in investment property in the consolidated statement of financial position. Please refer to revenue recognition for the discussion of recognition of rental income.

Group as lessee

The Group leases office space under contracts made for fixed periods. 

These leases are recognised as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the Group.

Right of use assets

Right of use assets are the Group's right to use an asset over the life of asset lease. The asset is calculated as the initial amount of the lease liability, plus any lease payments made to the lessor before the lease commencement date, plus any initial direct costs incurred, minus any lease incentives received. Depreciation of a right-of-use asset is on a straight-line basis over the term useful life of the asset lease.

Lease liabilities

The lease liability is initially measured at the present value of outstanding lease payments, discounted using the Group's incremental borrowing rate.

The lease liability is measured at amortised cost using the effective interest method and is remeasured when there is a change in future lease payments arising from a change in an index or rate or if the Group changes its assessment of whether it will exercise a purchase, extension or termination option. A corresponding adjustment is made to the carrying amount of the right-of use asset with any excess over the carrying amount of the asset being recognised in profit or loss. The Group recognises the lease payments associated with these leases as an expense on a straight-line basis over the lease term.

Lease payments are allocated between principal and finance cost. The finance cost is charged to profit or loss over the lease period.

Cash and cash equivalents

Cash and cash equivalents comprise cash balances and call deposits with original maturities of 3 months or less. These are carried at cost, which in the opinion of the Directors is a reasonable approximation of fair value.

Trade and other receivables

Trade and other receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, trade and other and receivables are measured at amortised cost using the effective interest method, less any impairment losses. Trade and other receivables are derecognised where the rights to receive cash flows have expired and substantially all risks and rewards of the asset have been transferred.

Trade and other payables

Trade and other payables are not interest bearing and are recognised initially at fair value. Subsequent to initial recognition trade and other payables are measured at amortised cost which approximates their fair value.

Loan borrowings

Loan borrowings are recorded initially at fair value, net of direct issue costs incurred. Loan borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised, within finance costs, in the statement of comprehensive income over the term of the borrowings using the effective interest rate method.

The Group derecognises a financial liability when the obligation under the liability is discharged, cancelled or expired.

Impairment

The Group recognises expected credit loss ("ECL") on financial assets measured at amortised cost. The Group measures loss allowance as an amount equal to the lifetime ECL, except for bank balances for which credit risk (i.e. risk of default occurring over the expected life of the financial instrument) has not increased significantly since initial recognition.

An impairment loss is calculated as the difference between an asset's carrying amount and the present value of the estimated future cash flows discounted at the asset's original effective interest rate. Losses are recognised in profit or loss and reflected in an allowance account. When the Group considers that there are no realistic prospects of recovery of the asset, the relevant amounts are written off. If the amount of impairment loss subsequently decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, then the previously recognised impairment loss is reversed through profit or loss.

Taxation

The Company, Circle Property Unit Trust ("CPUT") and Circle Property (Milton Keynes) Limited ("CPMK") are registered in Jersey, Channel Islands. The Company and CPMK are taxed at the Jersey company standard rate of 0%. CPUT is not subject to tax in Jersey.

The Group pays UK corporation tax on its net rental income and realised chargeable gains at a rate of 19%. On 24 March 2020 CPUT made a transparency election under paragraph 8 of Schedule 5AAA TCGA with the effect of property disposals being taxed on the Company and chargeable to UK corporation tax by reference to the higher of the April 2019 valuation or historic cost.

With effect from 6 April 2023, the current tax rate of 19% will increased to 25%. Consideration was taken by management when calculating the deferred tax on chargeable gains and losses as disclosed in note 10.

Deferred taxation

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit.

The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in profit or loss, except when it relates to items charged or credited directly to other comprehensive income, in which case the deferred tax is also dealt with in other comprehensive income.

Stated capital

Ordinary share capital is classified as equity. Dividends are recognised as a liability in the year in which they are approved.

Treasury shares

Treasury shares are ordinary shares of the Company held for the purpose of awarding shares in the Circle Property Long Term Incentive Plan ("LTIP"). The shares are recorded at cost and are deducted from equity.

Share based payments

The Group has applied the requirements of IFRS 2 "Share-Based Payment" to share options granted under the LTIP as disclosed in note 22.

Provisions

Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the Group expects some or all of a provision to be reimbursed, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the statement of comprehensive income net of any reimbursement. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as a borrowing cost.

3 Operating segments

The Group has adopted IFRS 8 "Operating segments" which requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly reviewed by the Chief Operating Decision Maker ("CODM") to allocate resources to the segments and to assess their performance. For the purposes of IFRS 8 the CODM takes the form of the two executive Directors of the Company. The financial information used for decision making purposes is based on the Group's financial statements.

The CODM considers that there is only one geographical segment, which is the United Kingdom, and one reporting segment, which is investment in commercial property. Therefore, no segmental reporting is required.

4 Revenue

5 Property expenses

6 Administrative expenses

7 Employees and Directors' Remuneration

8 Finance income

9 Finance costs

10 Taxation

A reconciliation of the current tax charge applicable to the results at the statutory income tax rate to the charge for the year is as follows: