Kcr Residential Regulatory News (KCR)

9 November 2018

KCR Residential REIT plc

("KCR" or the "Company")

Annual Results for the year ended 30 June 2018

KCR Residential REIT plc (AIM: KCR), the residential real estate investment trust group, is pleased to announce its annual results for the year ended 30 June 2018. A copy of the annual report and accounts will be posted to shareholders shortly, when it will also be available from the Company's website, www.kcrreit.com.

Financial Highlights:

· Assets under management increased 228 per cent to £27.4 million (2017 - £8.4 million)

· Year-end NAV per share of 88.17p, up three per cent since FY 2017 (85.7p)

· Corporate acquisitions during the period totalled £16 million

· Consolidated operating profit up to £251,079 (2017 loss - £1.03 million)

· Revenue lower at £265,936 (2017 - £514,746) but income from recent acquisitions will significantly increase revenue in FY19.

Acquisitions during the period

· Purchase of the Ladbroke Grove portfolio (KCR (Kite) Limited) completed on 29 June with a fair value of investment property at acquisition of £7.3 million. The building is fully let and rental income is up 6.16 per cent in the four months since acquisition;

· Purchase of the 27 flat Deanery Court, Chapel Riverside (Southampton) development completed on 29 June with a fair value of investment property at acquisition of £5.8 million. Final handover took place on 15 October and over 60 per cent of the building is already let or reserved;

· Via a strategic partnership with Inland Homes, two supermarkets that form part of significant newly-built residential developments in Leighton Buzzard and West Drayton were purchased at a fair value of investment property at acquisition of £2.6 million.

Post-period-end, KCR raised £3.1 million through a placing of £901,500 in cash, conversion of £650,000 of convertible loan notes into equity, conversion of a creditor into equity and the payment in shares for a property acquisition from Inland Homes plc (£1.26 million). KCR issued 4,434,570 shares at 70p.

Dominic White, Chief Executive of KCR said: "The Company has made solid progress in scaling the business in 2018, whilst also adding both rental and capital value to its portfolio. The strategic partnership with Inland Homes is also bearing fruit, with two acquisitions completed since joining forces in May and further opportunities through Inland being analysed.

"We continue to examine potential acquisitions that will build value and revenue, with one currently in the latter stages of negotiation. At the same time, we will augment rental income significantly during 2019, having increased the number of rental units and upgraded properties. The Board is encouraged by the recent achievements and looks forward to reporting on further positive developments in the coming months."

Market Abuse Regulation (MAR) Disclosure

The information contained within this announcement is deemed by the Company to constitute inside information for the purposes of the Market Abuse Regulation (EU) No. 596/2014. Upon the publication of this announcement via a Regulatory Information Service, this inside information is now considered to be in the public domain.

Contacts:

Notes to Editors:

KCR's objective is to build a substantial residential property portfolio that generates secure income flow for shareholders through the acquisition of SPVs (Special Purpose Vehicles) with inherent historical capital gains. The Directors intend that the group will acquire, develop and manage residential property assets in Central London and other key residential areas in the UK.

CHAIRMAN'S STATEMENT

Dear shareholder

I am delighted to introduce the fourth Annual Report that KCR Residential REIT plc ("KCR" or the "Company") has presented since its admission to AIM in July 2015.

We have made good strides in building the business, especially with the three transactions completed right at the end of the year. We have further transactions planned that should give us the size necessary to start generating profits from our rental activity. Dominic White has written about our achievements and plans in more detail in his letter.

What we do

As I mentioned last year, and it is worth repeating, KCR and its subsidiaries (together the "Group") operate primarily in the UK private rented residential investment market. We acquire whole blocks of studio, one-and two-bed apartments in major UK cities, close to transport links, that are rented to private tenants.

KCR is both an income and capital growth opportunity for its shareholders. It delivers income return from the collection of rents from tenants and capital return through investment in under-valued property assets that are marked to market value at acquisition.

The team grows income and asset value through building quality improvements, rental increases, physical extensions and repositioning, and where appropriate small-scale refurbishments. In particular, the directors search out residential blocks of apartments held within UK incorporated companies since these provide an opportunity for KCR to capitalise on the tax advantages afforded to UK REITs; in many cases, they generate immediate boosts to net asset value per share on acquisition.

The market in which we operate

The impact on the UK economy of Brexit, and the potential impact for the housing market, is a topic of much debate. Despite uncertainty around Brexit compounding the overall market slowdown, analysis of household income available to buy property indicates that there is further scope for value growth in the most affordable cities. Research from Hometrack reports that, despite the uncertainty, annual UK city house price inflation to the end of August 2018 is running at 3.9 per cent. Combining this with an average UK rental yield of 4.0 per cent reported by PropertyData implies a current average annual total return of 7.9 per cent for rented residential property.

KCR targets a specific segment of residential property. We buy low to mid-price blocks of flats aimed at new entrants and early-stage professionals. This continues to be a very resilient segment of the residential rental market. In general, house prices and rental values continue to rise in that segment. Higher price-band homes, particularly in Central London, which attract much of the press comment, have declined in value - these properties do not fall within KCR's investment strategy.

There continue to be positive economic fundamentals in the residential sector - strong demand and shortage of supply, in particular in the targeted low- to mid-price bands. This type of housing will, in our view, deliver attractive rental and capital value performance across the UK over the medium term.

Financial result

We have had several successes this year, including a series of accretive acquisitions, improvements in portfolio valuations and maintaining high levels of occupancy across the portfolio. To an extent, we have been held back by our planned November 2017 equity raise and move to the Main Market of the London Stock Exchange. Our pitch to investors, to take advantage of the huge residential market opportunity across the major conurbations in the UK, remains the right strategy for the future. Although we attracted interest from several key institutional investors, we, along with other investment vehicles sponsored by managers such as Aviva and Aberdeen Management, did not achieve our goals. This had a material but one-off effect on our finances.

KCR relies on raising capital (both equity and debt) to invest in the residential housing market. While equity markets remain volatile, we have chosen to raise smaller amounts of capital around specific property acquisitions. We have succeeded in this strategy, having raised capital from well-resourced and enthusiastic providers in March 2018 and July 2018. We continue to present an attractive equity opportunity to potential investors. We have a strong pipeline, an experienced and energetic management team, access to transformational deals and a network of enthusiastic supporters.

I look forward to updating you further as we continue to scale up our activities such that KCR generates a profit and can then deliver on its goal of paying regular dividends to shareholders.

M D M DaviesChairman

CHIEF EXECUTIVE'S LETTER

Dear shareholder

I have pleasure in reporting to you on the progress of the Group for the year to 30 June 2018.

KCR's short-term objective is to grow the size of its rented portfolio to deliver an increase in revenue that, together with value increases over time, result in profitability and an ability to pay dividends. At the same time, we focus on growing net asset value per share, another key indicator of a successful property company.

In the period under review, the value of the assets managed has increased by 228 per cent to £27.4 million, the Group reported an operating profit of £251,079, and net asset value per share increased by three per cent to 88.17p.

Property portfolio

Acquisitions during the year

KCR completed three acquisitions (two company purchases and one investment property), with a total value of £16 million, during the period, all on 29 June 2018. Two of the acquisitions, sites at Southampton and Leighton Buzzard/West Drayton, were the first transactions closed after forming a strategic relationship with Inland Homes Plc, which we announced on 31 May 2018. The acquisitions were:

· The purchase of the Ladbroke Grove portfolio (KCR (Kite) Limited) with a fair value of investment property at acquisition of £7.3 million. The portfolio consists of 16 one- and two-bedroom apartments in three buildings, and one stand-alone flat in Harrow Road. Since its acquisition, units have been refurbished as tenants leave and then rented back to the private market. There have been average increases of 10.1 per cent for both renewals and new tenancies. Four newly refurbished units have achieved an average increase in rent of 16.2 per cent.

· The purchase of Deanery Court, Chapel Riverside (Southampton) with a fair value of investment property at acquisition of £5.8 million. The block consists of 27 new-build two-bedroom apartments, each with a view over the River Itchen and a parking space, situated a short walk from the centre of the city. The property has been well received by the rental market. Within two weeks of handover of the building from the developer, nearly two-thirds of the building had been let at rents above our internal forecasts. We expect the remainder of the property to be let in the coming months and for the property value to improve in the short term as the surrounding area continues to be developed.

· Two supermarkets that form part of significant newly built residential buildings in Leighton Buzzard and West Drayton at a fair value of investment property at acquisition of £2.8m (KCR (Cygnet) Limited). The properties are let on 15-year leases, index-linked to inflation, to Sainsbury's and the Co-op respectively, and will deliver a 4.9 per cent net annual income to KCR.

Existing portfolio

In addition, KCR acquired six flats in its freehold Heathside property in North London. KCR now owns seven flats in the block and intends to let these out on assured short-hold tenancies (ASTs) during the year. We benefit from the marriage value in such transactions and the property itself provides high-quality living accommodation for those over the age of 60 who need comfort and convenience but not care. We intend to continue to improve the building and our offer to tenants and leaseholders.

The existing portfolio continues to perform well.

· The block at Coleherne Road (K&C (Coleherne) Limited) has small-sized units (studio and one -bed flats), which continue to be exactly what the rental market is looking for. Occupancy has been maintained at 100 per cent and where there have been renewals, rents have increased at least in line with inflation.

· The Osprey portfolio (K&C (Osprey) Limited) consists of 159 flats and 13 houses / long-leasehold units in seven locations. The portfolio generated lower income from leaseholders' sales, management fees and lease-renewal premium income than in the previous year; however, these income streams are largely outside our control. However, the portfolio continues to grow in value and be a significant medium-term value-adding opportunity as the terms of the long-leasehold apartments shorten. More than one-third of the long leases have durations of 67 years or less.

Development opportunities

Following a Government consultation on delivering more homes by increasing densities on brownfield land, the current administration has expressed an intention to take forward a policy of permitted development for extensions, both upward (adding new floors) and outward (development onto under-utilised areas of existing sites). The Housing White Paper proposes a package of measures in support of this policy. If enacted, this policy change would give KCR the potential to add numerous residential units to its existing buildings and create significant value across its portfolio, particularly on the buildings located in Ladbroke Grove and on the Osprey portfolio.

Financial

Since most of the acquisition activity completed on the last business day of the financial year, it had no impact on revenue in this year's results. Since the year-end, the revenue benefit of these acquisitions is already beginning to be seen.

Revenue in this financial period continued to be driven by the Coleherne and Osprey portfolio assets. Revenue decreased to £265,936 (2017 - £514,746) due to lower income from the Osprey portfolio, as explained above. Run-rate revenue is now significantly greater and will increase further once Southampton has been fully let and our next pipeline acquisition completes.

The Group reports an improved consolidated operating profit of £251,079 (2017 - loss £1,029,215) and a significantly smaller loss before taxation of £67,574 (2017 - loss £1,224,571). As the chairman has reported in his letter, the financial impact of the unsuccessful fundraising damaged our ability to grow in the way that we had anticipated and hoped, but we nevertheless made valuable acquisitions during the year and are planning more during the current financial year.

Total assets at 30 June 2018 increased by 228 per cent to £27.4 million (2017 - £8.4 million). Net assets increased by 92 per cent to £8.69 million (2017 - £4.52 million) and net asset value per share increased by three per cent from to 88.17p (2017 - 85.7p (as adjusted for the 10:1 share consolidation announced in October 2017).

Subsequent events

On 13 July 2018, KCR announced that it had raised £3.1 million through a placing of £901,500 in cash, conversion of £650,000 of convertible loan notes into equity, conversion of a creditor into equity and the payment in shares for a property acquisition from Inland Homes plc (£1.26 million). KCR issued 4,434,570 shares at 70p. Full details of the transaction are reported in the Investors section of the Company's website www.kcrreit.com in the announcement dated 13 July 2018.

On 15 October 2018, the block at Southampton was handed over to KCR. As reported above, we have made rapid strides in letting these most attractive apartments, with 63 per cent either let or reserved as at the date of this report.

Future prospects

During the year, the Group increased the size of its portfolio significantly and continued to add both rental and capital value to its properties. The acquisition of £16 million of property on the last day of the financial year will lead to considerable growth in revenue during the year to 30 June 2019.

The team continues to source investment opportunities that would add significantly to revenue and net asset value per share. KCR is currently in advanced negotiations on one such investment that could increase the portfolio size by more than 55 per cent.

We hope to be able to report further positive developments to you in the coming months.

Dominic A WhiteChief executive

STRATEGIC REPORT

The directors present the strategic report of KCR Residential REIT plc ('KCR' or the 'Company') and its subsidiaries (together, the 'Group') for the year ended 30 June 2018.

PRINCIPAL ACTIVITY

The Group carries on the business of acquiring and managing residential property in the UK for letting to third parties on long and short leases. At the year-end, the Group consisted of the Company, which is a public company limited by shares, and seven subsidiaries.

1. K&C (Coleherne) Limited owns a freehold residential property in Chelsea, London containing ten studio apartments

2. K&C (Osprey) Limited owns the freehold of several retirement properties let on long leases to residents and provides management services in respect of these properties and to third party landlords

3. K&C (Newbury) Limited owns no property and is now effectively dormant. The valuation of the company has been written down to nil via an impairment provision

4. KCR (Kite) Limited owns three freehold residential properties in Ladbroke Grove, London and a flat on Harrow Road

5. KCR (Southampton) Limited owns a freehold block of 27 one- and two-bedroom apartments In Ocean Village, Southampton

6. KCR (Cygnet) Limited owns long leaseholds on two supermarket sites rented out to the Co-op and Sainsbury's

7. K&C REIT Limited (dormant).

GROUP STRATEGY

The directors intend to build a significant presence in the residential letting market, primarily through the acquisition of UK-registered special purpose vehicles that own residential property for letting to third parties.

RESULTS

The Group reports a consolidated operating profit of £251,079 for the year to 30 June 2018 (2017 - loss £1,029,215).

REVIEW OF BUSINESS AND FINANCIAL PERFORMANCE

The Board has reviewed whether the Annual Report, taken as a whole, presents a fair, balanced and understandable summary of the Group's position and prospects, and believes that it provides the information necessary for shareholders to assess the Group's position, performance, and strategy.

As reported in the Chief Executive's letter, most of the acquisition activity was completed on the last business day of the financial year and had no impact on revenue in this year's results. Since the year-end, run-rate revenue has significantly increased and will grow further once Southampton has been fully let and our next pipeline acquisition completes.

Revenue in this financial period continued to be driven by the Coleherne and Osprey portfolio assets. Revenue decreased to £265,936 (2017 - £514,746) due to lower income from the Osprey portfolio.

The Group reports an improved consolidated operating profit of £251,079 (2017 - loss £1,029,215) and a significantly smaller loss before taxation of £67,574 (2017 - loss £1,224,571). The financial impact of the unsuccessful fundraising damaged our ability to grow but we nevertheless made valuable acquisitions during the year and are planning more during the current financial year.

Total assets at 30 June 2018 increased by 228 per cent to £27.4 million. Net assets increased by 92 per cent to £8.69 million and net asset value per share increased by three per cent from to 88.17p.

KEY PERFORMANCE INDICATORS

The directors and management team monitor key performance indicators relevant to each of the subsidiaries to improve Group performance. Management reports to the board if data show significant variances against expected outcomes and proposes mitigation action as necessary.

Examples of the KPIs used to monitor aspects of performance include:

1. At property level

1.1. Vacancy rate in terms of number of units available and potential rental income

Target occupancy of at least 90 per cent achieved

1.2. Outstanding rents as a percentage of rental income

Target debtor balance of less than 10 per cent of rental revenue achieved.

2. At Group level

2.1. Gross assets under management

Target of £20 million of gross assets by 30 June 2018 achieved.

RISKS AND UNCERTAINTIES

The Board regularly reviews the risks to which the Group is exposed and ensures through its meetings and regular reporting that these risks are minimised as far as possible.

The principal risks and uncertainties facing the Group at this stage in its development are:

· Financing and liquidity risk

The Company has an ongoing requirement to fund its activities through the equity markets and in future to obtain finance for property acquisition and management. Although there is no certainty that such funds will be available when needed, the directors regularly focus on developing the Group's capital structure.

· Financial instruments

Details of risks associated with the Group's financial instruments are given in the notes to the financial statements. The directors seek to mitigate these risks in manners appropriate to the risk.

· Valuations

The valuation of the investment property portfolio is inherently subjective as it is made on the basis of assumptions made by the valuer that may not prove to be accurate. The outcome of this judgment is significant to the Group in terms of its investment decisions and results. The directors, who have long experience of property, seek to mitigate this risk by employing independent valuation experts such as Lambert Smith Hampton and Harding Green to review values of the material assets in the portfolio.

INTERNAL CONTROLS AND RISK MANAGEMENT

The directors are responsible for the Group's system of internal control. Although no system of internal control can provide absolute assurance against material misstatement or loss, the Group's system is designed to provide reasonable assurance that problems are identified on a timely basis and dealt with appropriately.

In carrying out their responsibilities, the directors have put in place a framework of controls to ensure as far as possible that (i) ongoing financial performance is monitored in a timely manner, (ii) where required, corrective action is taken and (iii) risk is identified as early as practically possible. The directors have reviewed the effectiveness of internal controls.

The Board, subject to delegated authority, reviews, among other things, capital investment, property sales and purchases, additional borrowing facilities, guarantees and insurance arrangements.

BRIBERY RISK

The Group has adopted an anti-corruption policy and whistle-blowing policy under the Bribery Act 2010. Notwithstanding this, the Group may be held liable for offences under that Act committed by its employees or subcontractors, whether or not the Group or the directors had knowledge of the commission of such offences.

OTHER MATTERS

i. Environmental

The Group understands the importance of operating its business in a manner that minimises any risks to the environment. Its policies seek to ensure that it achieves this goal.

ii. Group employees

The Group considers its employees to be its most valuable assets and ensures that it deals with them fairly and constructively at all times.

iii. Social matters

The Group is aware that it has a responsibility to the communities where it operates and seeks to respect them at all times.

iv. Respect for human rights

The Group always respects the human rights of its stakeholders.

v. Contributions to pension schemes

During the year, the Group made contributions totalling £100,000 to the personal pension scheme of Dominic White. No pension scheme benefits are being accrued by the directors.

FORWARD-LOOKING STATEMENTS

This Annual Report contains certain forward-looking statements that have been made by the directors in good faith based on the information available at the time of the approval of the annual report and financial statements. By their nature, such forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that will or may occur in the future. Actual results may differ from those expressed in such statements.

OUTLOOK

The Group has continued to purchase high-quality assets that will be able to support an increasing income yield. As last year, the Group is currently investigating several potential acquisitions. To achieve these, the Group will be required to raise more capital and it is working closely with funding sources, both equity and debt providers, to achieve this objective.

ON BEHALF OF THE BOARD:

James CaneDirector

DIRECTORS' REPORT

The directors present their report with the financial statements of the Company and the Group for the year ended 30 June 2018.

A review of the business, risks and uncertainties and future developments is included in the Chairman's Letter, the Chief Executive's Letter, the Group Strategic Report and in the notes to the financial statements.

DIVIDENDS

The directors do not recommend payment of a dividend for the year (2017 - £nil).

Political donations

The Group made no political donations during the year (2017 - £nil).

Corporate governance statement

The Board is committed to maintaining high standards of corporate governance.

To the extent applicable, and to the extent able (given the current size and structure of KCR and the board of directors), the Company has adopted the Quoted Companies Alliance Corporate Governance Code. Details of how KCR complies with the Code, the reasons for any non-compliance, and the principles contained in the Code, are set out in the table included on the Company's website, www.kcrreit.com/content/investors/governance.asp.

Audit committee

The audit committee currently comprises Michael Davies, the chairman and James Cane. The committee is responsible for ensuring the financial performance, position and prospects of the Group are properly monitored and reported on, and for meeting the auditor and reviewing their reports relating to accounts and internal controls.

DIRECTORS

The following directors served during the year to 30 June 2018 and up to the date of approval of this Annual Report:

The beneficial interests of the directors holding office at 30 June 2018 in the issued share capital of the Company were as follows:

Included in the total of Oliver Vaughan's Ordinary shares above are 66,500 shares held in the name of Grosmont Investments Limited, a company that he controls.

Included in the total of Dominic White's holdings above are 1,000,000 Restricted Preference shares held in the name of his pension fund, White Amba Pension Scheme.

The beneficial interests of the directors holding office at 9 November 2018 in the issued share capital of the Company were as follows:

SUBSTANTIAL SHAREHOLDINGS

As at 9 November 2018, the directors had been notified that the following shareholders own a disclosable interest of three per cent or more in the Ordinary shares of the Company:

DIRECTORS' REMUNERATION

The directors received the following remuneration during the year:

(1) Timothy Oakley, Christopher James and Patricia Farley resigned from the board of directors on 31 March 2017.

During the previous year, fees of £50,000 plus irrecoverable VAT were paid to White Amba Limited, a company controlled by Dominic White.

During the year, the Group paid DGS Capital Partners LLP, a limited liability partnership of which Michael Davies is a member, fees of £36,000 (net of irrecoverable VAT) (2017 - £36,000).

DIRECTORS' INDEMNITIES AND INSURANCE

The Company has made qualifying third-party indemnity provisions for the benefit of its directors during the year and they remain in force at the date of approval of this Annual Report.

GOING CONCERN

The directors have adopted the going-concern basis in preparing the financial statements.

STATEMENT OF DIRECTORS' RESPONSIBILITIES

The directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations.

Company law requires the directors to prepare financial statements for each financial year. Under that law, the directors have elected to prepare the financial statements in accordance with International Financial Reporting Standards as adopted by the European Union ("IFRS"). 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 Company and the Group and of the profit or loss of the Group for that period. In preparing these financial statements, the directors are required to:

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable the directors to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

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

STATEMENT AS TO DISCLOSURE OF INFORMATION TO THE AUDITOR

So far as the directors are aware, there is no relevant audit information (as defined by Section 418 of the Companies Act 2006) of which the Group's auditor is unaware, and each director has taken all the steps that he or she ought to have taken as a director in order to make himself or herself aware of any relevant audit information and to establish that the Group's auditor is aware of that information.

AUDITOR

The auditor, Moore Stephens LLP, will be proposed for re-appointment at the forthcoming Annual General Meeting.

ON BEHALF OF THE BOARD

Dominic White

Director

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

The financial statements were approved and authorised for issue by the Board of Directors on 9 November 2018 and were signed on its behalf by:

James Cane

Director

CONSOLIDATED STATEMENT OF CASH FLOWS

RECONCILIATION OF LOSS BEFORE TAXATION TO CASH GENERATED FROM / (USED IN) OPERATIONS

NOTES TO THE FINANCIAL STATEMENTS

1) REVENUE

The Group is involved in UK property ownership, management and letting. The directors consider that the Group operates in a single geographical and business segment.

The total revenue of the Group for the year was derived from its principal activities, being the letting to third parties of, and management of, property assets owned by the Group, and, in certain cases, the management of property assets owned by third parties.

2) EMPLOYEES AND DIRECTORS

The directors are considered to be key management personnel.

Certain directors and others have also subscribed for Restricted Preference shares in the Company, further details of which are contained in the notes to the financial statements

3) FINANCE INCOME AND COSTS

4) LOSS BEFORE TAXATION

The loss before taxation is stated after charging:

Separately disclosed items

During the year, the Group incurred significant costs relating to third-party fundraising, which totalled £673,999. It is considered that the size and nature of these costs are such that they should be disclosed on the face of the Consolidated Statement of Comprehensive Income.

On 29 June 2018, the Group acquired KCR (Kite) Limited and KCR (Cygnet) Limited. The costs to the Group of acquiring these entities totalled £318,295. It is considered that the size and nature of these costs are such that they should be disclosed on the face of the Consolidated Statement of Comprehensive Income.

Further information on the gain on bargain purchase and the share-based payments, which are shown on the face of the Consolidated Statement of Comprehensive Income, can be found in the notes to the financial statements.

5) LOSS PER SHARE

Basic loss per share is calculated by dividing the loss attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year.

Fully diluted earnings per share is calculated using the weighted average number of shares adjusted to assume the conversion of all dilutive potential ordinary shares.

In the opinion of the directors, all the outstanding share options are anti-dilutive and, hence, basic and fully diluted loss per share are the same.

During the year, the Ordinary Shares each of nominal value 1p were consolidated into Ordinary Shares each of nominal value 10p. If the share consolidation had taken place at 30 June 2017, the loss per share would have been £0.25.

The net asset value per share of 88.17 pence (2017 - 85.73 pence) is calculated based on the number of Ordinary shares in issue at the year-end. At the year-end, there were 9,857,207 Ordinary shares in issue (2017 - 5,275,181 (52,751,813 pre-consolidation)).

6) INVESTMENT PROPERTIES

The investment properties acquired in the year that are owned by KCR (Kite) Limited and KCR (Cygnet) Limited were procured upon acquisition of subsidiaries. These properties were valued by professionally qualified independent external valuers (Lambert Smith Hampton) at the date of acquisition and were recorded at the values that were attributed to the properties at acquisition date. These properties are included in the financial statements at amounts based upon these valuations.

In July 2018, certain properties were valued again by professionally qualified independent external valuers (Lambert Smith Hampton and Harding Green) in accordance with the Royal Institution of Chartered Surveyors' Appraisal and Valuation Standards 2014 as amended.

In total, 77 per cent by value of the investment properties were independently valued at, or within, three months of the year-end. The remaining properties were valued by the directors at the same valuations as at 30 June 2017. The total valuation of the Group's portfolio was £26,695,000. The fair values used are considered to be level 3 inputs under IFRS13.

The revenue earned by the Group from its investment properties and all direct operating expenses incurred on its investment properties are recorded in the Consolidated Statement of Comprehensive Income.

The total rental income in relation to investment properties for the Group equated to £133,001 (2017 - £154,903). The total rental expenses in relation to investment properties for the Group equated to £50,122 (2017 - £53,101).

7) INVESTMENTS

The Company's investments comprise the following:

Acquisition of KCR (Kite) Limited

On 29 June 2018, the Company acquired the entire issued share capital of KCR (Kite) Limited for £5,276,964, satisfied by cash. In the director's opinion, reinforced by an independent valuation of the properties acquired by Lambert Smith Hampton, the net assets of KCR (Kite) Limited were worth in excess of the amount paid and hence gave rise to gain on bargain purchase.

As the company was acquired on the last business day of the financial year, the Group earned no revenue from it during the financial year to 30 June 2018.

Net assets acquired were as follows:

Acquisition of KCR (Cygnet) Limited

On 29 June 2018, the Company acquired the entire issued share capital of KCR (Cygnet) Limited for total consideration of £1,261,499, satisfied by cash of £1,200 and the issuance of ordinary shares to the value of £1,260,299 on 30 July 2018. In the director's opinion, reinforced by an independent valuation of the properties acquired by Lambert Smith Hampton, the net assets of KCR (Cygnet) Limited were worth in excess of the amount paid and hence gave rise to gain on bargain purchase.

Net assets acquired were as follows:

As the company was acquired on the last business day of the financial year, the Group earned no revenue from it during the financial year to 30 June 2018.

Full-year impact of acquisitions

If these two companies had been acquired by the Group on 1 July 2017 (as opposed to 29 June 2018), the directors estimate, using several assumptions, that the revenue of the Group would have increased to £596,201 (actual - £265,936) and the operating profit to £398,350 (actual - £181,353).

8) TRADE AND OTHER RECEIVABLES

There is no material difference between the fair value of trade and other receivables and their book value.

Amounts owed by group undertakings are repayable on demand.

Other receivables include a loan to a third party of £494,100 carrying interest at 7.5 per cent, which was repaid on 12 September 2018.

9) CASH AND CASH EQUIVALENTS

10) SHARE CAPITAL

At 1 July 2017, the Company had 52,751,813 Ordinary shares of £0.01 in issue and 35,000,000 Restricted preference shares of £0.01 in issue. On 24 October 2017, the Company consolidated the shares into 5,275,182 Ordinary shares of £0.10 each and 3,500,000 Restricted Preference shares of £0.10 each.

On 23 February 2018, the Company issued 74,889 Ordinary shares of £0.10 each. The shares were issued at par.

On 18 March 2018, the Company issued

1) 4,507,136 Ordinary shares of £0.10 each. The shares were issued at a premium of £0.60 per share.

2) 1,000,000 Restricted Preference shares of £0.10 each. The shares were issued at par.

The Restricted Preference shares carry no voting or dividend rights.

1,571,427 of the Ordinary shares issued on 18 March 2018 were issued upon the conversion of convertible loan notes. The effect of the conversion was to increase share capital by £157,143 and increase share premium by £942,856. No loan notes were converted in the prior year.

On a winding up or a return of capital, the holders of the Restricted Preference shares shall rank pari passu with the holders of the Ordinary shares save that, on a distribution of assets, the amount to be paid to the holder shall be limited to the nominal capital paid up or credited as paid up.

11) TRADE AND OTHER PAYABLES

The Group's and Company's exposure to liquidity risk related to trade and other payables is disclosed in the notes to the financial statements.

There is no material difference between the fair value of trade and other payables and their book value.

Amounts owed to group undertakings are repayable on demand.

Other creditors include £6,038,317 owed on the purchase of the investment property within KCR (Southampton) Limited.

12) FINANCIAL LIABILITIES - BORROWINGS

Terms and debt repayment schedule

Details of the principal loans are as follows:

1) At the start of the year, the Company had a 25-year bank loan of £1,592,064 repayable by 300 monthly instalments of £7,528 and a final instalment of £418,811. The loan was secured by a first debenture over all assets and undertakings of the Company, a cross-guarantee from K&C (Coleherne) Limited over the freehold property known as 25 Coleherne Road and a debenture over the assets and undertakings of K&C (Coleherne) Limited. The loan was also secured by a pledge of shares of K&C (Coleherne) Limited. On 29 June 2018, the Company carried out a refinancing and this loan was repaid.

2) On 29 June 2018, the Company took out a new 25-year bank loan of £4,930,000, repayable by 300 monthly instalments of £22,145 and a final instalment of £1,239,328. The loan was secured by a first debenture over all assets and undertakings of the Company, a first legal charge over the freehold properties known as 272 Ladbroke Grove, 282 Ladbroke Grove and 284 Ladbroke Grove and the leasehold premises known as Flat 9 Lomond Court, and a cross-guarantee over the aforementioned properties. The loan was also secured by a cross-guarantee from K&C (Coleherne) Limited over the freehold property known as 25 Coleherne Road and a debenture over the assets and undertakings of K&C (Coleherne) Limited. The loan was also secured by a pledge of shares of K&C (Coleherne) Limited and KCR (Kite) Limited. The rate of interest applicable to the loan is three percentage points above the bank's base rate.

3) A three-year loan of £1,995,000 was entered into during the year. £54,862 of the loan was retained by the lender. The loan is repayable by 36 monthly instalments of £9,144 and a final instalment of £1,940,138. The monthly instalments are interest payments and do not include any capital repayments. Interest is charged at 5.50 per cent. The loan is secured by a fixed and floating charge over all the property and assets of K&C (Osprey) Limited, including the property known as Heathside, 562 Finchley Road.

4) On 29 June 2018, the Group acquired KCR (Cygnet) Limited. On acquisition, the Group took over various assets and liabilities of the subsidiary, which included a loan of £1,300,000 from Metro Bank plc. The loan is repayable in 59 monthly instalments of £7,591 and a final instalment of £1,095,126. The loan is subject to an interest rate of 2.9 per cent above the base lending rate of Metro Bank plc. The loan is secured by a first debenture over the assets and undertakings of KCR (Cygnet) Limited and a first legal charge over the properties known as 400 Stanbridge Road, Leighton Buzzard and Sainsbury's, Drayton Garden Village.

5) On 24 June 2018, the Company entered into a new loan agreement with DGS Capital Partners LLP and others. The loan was for £1,475,000 and is subject to an interest rate of 12 per cent per annum. The loan is to be repaid within 300 days of the initial drawdown date of 29 June 2018, namely on or before 24 April 2019.

6) At the year-end, the Company had issued several six per cent convertible loan notes, the debt element of which totalled £720,138. The convertible loan notes have a redemption date of 30 June 2020. £650,000 (at nominal value) of the convertible loan notes were converted to Ordinary Shares at £0.70 per share on 30 July 2018.

13) SHARE-BASED PAYMENT TRANSACTIONS

During the year ended 30 June 2018, the Company had several share-based payment arrangements in place, which are described below:

Non-executive share options:

Non-executive share options were granted to certain non-executive directors and others on admission to trading on AIM, or subsequently, at £0.10 per share. During the year, the Company made the decision to simplify its share-incentive structure. On 22 February 2018, the Company cancelled the Non-executive share options. The holders of the options were compensated via the issue of 16,652 Ordinary shares.

Restricted Preference shares:

Restricted Preference shares have been granted to certain directors and other senior managers. Upon the achievement by the Group of certain milestones, the Restricted Preference shares may be converted into Ordinary shares at £0.10 each. The milestones and certain terms were amended after the year subsequent to the passing of a resolution at a general meeting held on 30 July 2018. The changes, which are described in full in the circular dated 13 July 2018 on the Company's website, include:

i. An extension of the expiry date from 30 June 2022 to 30 June 2027;

ii. Restricted Preference shares unvested at 30 June 2027 will automatically vest and convert on 1 July 2027 into Ordinary shares;

iii. The 'NAV per share' milestone became an 'NAV per share plus distributions paid' milestone

iv. The achievement of any milestone will result in one-sixth of the total number of Restricted Preference shares held by the individual, and

v. The NAV per share element of each of the six milestones will be rebased to £0.77, £0.85, £0.93, £1.01, £1.09 and £1.17 respectively.

White Amba share options:

Share options had been granted to a company owned by a director of KRC Residential REIT plc, to acquire 10,000,000 Restricted Preference shares at £0.01 per share (post-share consolidation, 1,000,000 Restricted Preference shares at £0.10 per share). The share options did not have any performance criteria attached to them and were available to be exercised at any time from the date of grant to 30 June 2018. The options were exercised during the year.

Founder warrants

On 8 September 2014, warrants were issued to shareholders to subscribe for one Ordinary share at £0.10 per share at any time before 31 December 2018. During the year, the Company made the decision to simplify its share incentive structure. On 22 February 2018, the Company cancelled the Founder warrants. The holders of the warrants were compensated via the issue of 23,850 Ordinary shares.

Allenby warrants

On admission to trading on AIM, the Company granted to Allenby Capital Limited a warrant to acquire Ordinary shares at £0.10 per share, within five years of admission, namely by 3 July 2020. During the year, the Company made the decision to simplify its share incentive structure. On 22 February 2018, the Company cancelled the Allenby warrants. The holders of the warrants were compensated via the issue of 14,887 Ordinary shares.

Warrants

On 24 May 2016, warrants were issued to several potential lenders to the Company to subscribe for one Ordinary share at £0.10 per share at any time before 24 May 2021. During the year, the Company made the decision to simplify its share incentive structure. On 22 February 2018, the Company cancelled the warrants. The holders of the warrants were compensated via the issue of 19,500 Ordinary shares.

The estimated fair value of each share option in issue at 1 July 2017 is as follows:

The fair values were estimated using the Black-Scholes valuation model. The Non-executive share options, Founder warrants, Allenby warrant and Warrants were cancelled in the year. During the year, the White Amba share options were exercised and the holder received 1,000,000 Restricted Preference shares.

The following table lists the inputs to the Black-Scholes model that was used to value the Restricted Preference shares, both those in issue at 1 July 2017 and those issued in the year:

The expected lives of the share options and warrants are based on historical data and current expectations and are not indicative of exercise patterns that may occur. The expected volatility reflects the assumption that the historical volatility of comparator companies over the period similar to the life of the share options is indicative of future trends, which may not necessarily be the actual outcome.

The expense recognised during the year is shown in the following table:

The interests of directors and past directors in Non-Executive share options are as follows:

The directors' interests in Restricted Preference shares at the year-end can be seen in the notes to the financial statements.

14) RELATED PARTIES

During the previous year, fees of £50,000 plus VAT were paid to White Amba Limited, a company controlled by the director, Dominic White.

At 30 June 2017, current liabilities included £100,000 received from a director, Timothy James, and his wife. These monies were reclassified into convertible loan notes and then into Ordinary shares during the year.

During the year, the Group paid DGS Capital Partners LLP, a limited liability partnership in which Michael Davies is a member, fees of £36,000 excluding irrecoverable VAT (2017 - £36,000).

At the date of the statement of financial position, the following directors held Restricted Preference shares:

Included in the total of Mr White's holdings above are 1,000,000 Restricted Preference shares held in the name of his pension fund, White Amba Pension Scheme.

At 9 November 2018, the following directors held Restricted Preference shares:

15) SUBSEQUENT EVENTS

On 30 July 2018, the Group raised £3.1 million through a placing of £901,500 in cash, conversion of £650,000 of convertible loan notes into equity, conversion of a creditor into equity and the payment in shares for a property acquisition from Inland Homes plc (£1.26 million). KCR issued 4,434,570 shares at 70p. Full details of the transaction are reported in the 'Investors' section of the Company's website www.kcrreit.com in the announcement dated 13 July 2018.

On 15 October 2018, the block at Southampton was handed over to KCR. As reported above, the Company has made rapid strides in letting these most attractive apartments, with 63 per cent either let or reserved as at the date of this report.