Phoenix Spree D Regulatory News (PSDL)

Phoenix Spree Deutschland Limited 

("Phoenix Spree", or the "Company") 

FINANCIAL RESULTS FOR YEAR ENDED 31 DECEMBER 2018

STRONG PORTFOLIO PERFORMANCE AND FURTHER GROWTH IN BERLIN

Phoenix Spree Deutschland (LSE: PSDL.LN), the UK listed real estate company specialising in Berlin residential property, today announces its full year results for the year ended 31 December 2018.

Robert Hingley, Chairman of Phoenix Spree, commented:

"I am delighted to report that, following an exceptionally strong year in 2017, we have continued this momentum, delivering further increases in rental growth and portfolio value. This performance reflects the active management of our portfolio as well as the continued positive dynamics that characterise the Berlin residential market, where we are now fully focused following the disposal of our Northern German portfolio. Although Berlin residential yield compression has moderated, following a long period of declining property yields, we see significant opportunity to grow the portfolio value through a combination of investment into our existing properties and the acquisition of assets that meet our strict acquisition criteria. We are confident that we will continue to deliver value to shareholders through further rental growth, condominium sales and densification within the existing portfolio."

Financial highlights: increases in rental growth, property values and EPRA NAV

· IFRS NAV per share up 2.3% to €4.05 (£3.64) (31 December 2017: €3.96 (£3.52).  

· EPRA NAV per share up 11.4% to €4.58 (£4.11) (31 December 2017: €4.11 (£3.65).

· Strong like-for-like rental income growth per sqm of 9.0% during the year.

o Contracted net rental income of €17.5 million, (31 December 2017 €18.1 million), reflecting the sale of the Northern German portfolio in April 2018.

o Gross rental income including service charges of €22.7 million (€23.7 million in 2017).

· EPRA total return per share of 13.2% (year to 31 December 2017: 53.0%). 

· Profit before tax €56.4 million (year to 31 December 2017: €138.5 million); year-on-year change reflects lower revaluation increase in 2018 after exceptionally strong gains in 2017.

· Earnings per share €0.46 (31 December 2017: €1.21).

· Net loan to value of 26.1% as at 31 December 2018 (31 December 2017: 32.0%). 

· New debt of €28.8 million signed during 2018. Average debt maturity of 7.7 years, average interest rate reduced to 2.0%. 

· Final dividend per share of €5.15 cents (GBP:4.62p), giving a total dividend per share of €7.50 cents (GBP:6.73p) for year to 31 December 2018 (2017: €7.3 cents (GBP: 6.4p)). 

Operational highlights: Strong portfolio performance

· Like-for-like Portfolio valuation increase of 14.0% in year to 31 December 2018.

o Total Portfolio valued at €645.7 million, an increase of 6.0% in absolute terms over the twelve-month period (31 December 2017: €609.3 million), reflecting the impact of non-Berlin disposals during year. 

o Berlin portfolio valued at €641.8 million, an increase of 21.4% year-on-year (31 December 2017: €528.5 million). 

o Portfolio valuation represents an average value per square metre of €3,527 (31 December 2017: €2,853).

· EPRA Vacancy remains low at 2.8% (31 December 2017 2.9%). 

· Condominium sale completion proceeds up 4.4%, to €9.9 million, achieving an average value per sqm of €4,566.

· Continued active management of the Berlin portfolio with record investment of €7.9 million in renovations and modernisations during 2018.

· New leases on average signed at a 39.7% premium to passing rents and condominium sales completed at a 27.8% premium to the average valuation of Berlin rental properties as at 31 December 2018.

Berlin transition complete: further progress on Berlin acquisitions

· Contracts to acquire 222 units notarised during 2018, representing an aggregate purchase price of €36.3 million and an average value per sqm of €2,390. 

· As at 23 April 2019, contracts to acquire a further 14 units in Berlin have been notarised since the December 2018 year end for a purchase price of €2.4 million, representing a price per sqm of €2,956.

· Disposal of Central and Northern Germany portfolio completed in April 2018 for €73.0 million, a 26% premium to the Jones Lang LaSalle valuation pre-notarisation.

· Since 31 December 2018, all residual non-Berlin assets have been sold, creating a fully-focussed Berlin fund with potential for greater economies of scale.

Positive outlook: Significant embedded value remains within rental Portfolio

· Berlin residential property prices continue to benefit from lack of supply and favourable demographics, driven by strong job creation and population growth.

· Significant reversionary potential underpins future rental growth.

· Potential for further valuation creation through condominium projects and sales.

· Further Berlin acquisitions expected in current financial year. Acquisition prices remain below construction values.

· Substantive review of financing structure in progress. Expected to create further capacity for Portfolio development.

· Active consideration of densification projects, including attic conversions and new building construction on land surrounding buildings already owned by the Company.

For further information, please contact:

CHAIRMAN'S STATEMENT

I am delighted that the Company has continued its growth over the last twelve months, delivering further increases in rental revenues, property values and EPRA NAV after an exceptionally strong set of results in 2017. This performance is underpinned by the continued favourable Berlin residential rental market dynamics. After a long period of rapid property price inflation, yield compression has moderated, although the strong underlying demographic trends remain in place. The Berlin residential market is still characterised by a significant undersupply of available rental property, as well as positive demographic and employment trends.

Berlin transition complete: geographically focussed portfolio

When Phoenix Spree listed on the main market of the London Stock Exchange in June 2015, 53.5% of the properties in the Portfolio were located outside of Berlin. Notwithstanding the solid financial performance of these assets, the Board considered that the Berlin residential market offered superior medium-term scope for further growth in rental and property values. The Company therefore successfully repositioned its geographic focus by divesting properties outside Berlin through a disciplined disposal process, all at a premium to trailing book value.

All remaining non-Berlin assets have been successfully divested following the sale of the Company's remaining Northern Germany assets in the second quarter of 2018 and one residual asset in Baden-Wurttemberg in early 2019. We have simultaneously enlarged our Berlin presence through our strategy of further acquisitions of attractive assets in central Berlin, enhancing the scope for further asset management efficiencies and economies of scale.

Acquiring for growth

Phoenix Spree has continued to add to the Portfolio in 2018 and has completed a further €41.6 million of acquisitions in central Berlin. The Company has a proven record of creating value for shareholders through property acquisitions, having acquired buildings with a combined initial value of €204.1 million from 2015 up to 31 December 2018, while maintaining its disciplined approach.

We are well placed to continue to grow the portfolio and we continue to research attractive acquisition opportunities.

Improving our tenanted accommodation

Some properties acquired can be in a poor state of repair, depending on the level of historical underinvestment by previous owners. The Company takes its responsibilities to its tenants extremely seriously and we have continued to invest in improvements to our properties.

Through a carefully targeted process of investment, we have raised the overall standard of accommodation for our tenants and the environment in areas where our buildings are located. During 2018, the Company invested the highest value yet on improvement programmes, and it is anticipated that this process will continue into 2019.

This improvement in the overall quality of our living accommodation has created significant future embedded value within the Berlin Portfolio, as evidenced by new leases signed at a premium to in-place rents and condominium sales completed at a premium to average rental property valuations.

Partnering with our Property Advisor

Since our introduction to the Stock Exchange in 2015, the Company has benefitted significantly from the expertise of its property advisor, PMM Partners (UK) Limited. It has actively managed and developed the Portfolio, whilst simultaneously sourcing value-enhancing acquisitions, and achieving disposals at a premium to book value. PMM Partners has also overseen the capital structure of the Company as well as its day-to-day interaction with investors and other key stakeholders in our business. These activities have been fundamental to the strong financial performance of Phoenix Spree and its ability to access capital markets.

I am therefore delighted that, following overwhelming shareholder approval at an Extraordinary General Meeting in December 2018, the Company entered into a new property advisory and investor relations agreement with PMM Residential Limited (PMM), a new company within the PMM Group, which will secure its continued expertise as property advisor until at least the end of 2022.

The new agreement will provide greater certainty and stability for shareholders and allow PMM to invest in infrastructure, IT systems and key personnel dedicated to servicing the Company's growing requirements. It will also reduce future management and performance fees paid by the Company and will, therefore, result in significant cost savings compared with the terms of the old property advisor agreement. The Board looks forward to building on our valued relationship with PMM over the coming years to continue our record of strong performance.

In February 2019, the Company announced it had been informed that PMM Partners (UK) Limited and its principals had sold a total of 2,239,361 shares in the Company. The sale of these shares was principally made to satisfy the tax liabilities arising from the December 2017 performance fee which was settled in Phoenix Spree Deutschland (PSD) shares issued to PMM Partners (UK) Limited in May 2018.

Share price and dividend

The 2018 financial year proved difficult for global equity markets in general, as concerns about global growth, the increasing trend towards trade protectionism and Brexit weighed heavily. Against this backdrop, 2018 was a year of consolidation for the Phoenix Spree share price. Notwithstanding this, the shares outperformed the FTSE All-Share index by 5% and the FTSE 350 Real Estate Investment Services sector by 12%.

The Board is pleased to recommend a final dividend of €5.15 cents per share (GBP 4.62 pence per share), taking the full year dividend to €7.50 cents per share (GBP 6.73 pence per share), representing a 3% increase on the 2017 full year Euro-denominated dividend.

Our Better Futures" Corporate Responsibility Plan

The Board recognises the importance of operating with integrity, transparency and clear accountability towards its shareholders, tenants and other key stakeholders. We understand that being a responsible Company, balancing the different interests of our stakeholders and addressing our environmental and social impacts is intrinsically linked to the success and sustainability of our business.

During the past year, the Board and PMM have reviewed how sustainability is managed within our business and considered carefully the views of our stakeholders and business priorities to create our 'Better Futures' Corporate Responsibility ('CR') Plan. This Plan provides a framework to monitor existing activities better, while adding new initiatives to improve our overall sustainability.

Our Corporate Responsibility Plan has four key pillars that have been integrated throughout our business operations: Protecting our Environment; Respecting People; Valuing our Customers and Investing in our Communities. We have established a CR Committee to oversee the implementation of the Better Futures Plan, reporting to the Board and advising on any CR related material issues. Our CR initiatives will be reported in more detail in our 2018 Annual Report and are available on the Company website.

The Board remains fully committed to high standards of corporate governance. It has considered the Main Principles and Provisions of the UK Corporate Governance Code (July 2018) and is pleased to confirm that the Company has complied with the provisions of the Code throughout the year, except in certain instances which are set out in the Corporate Governance Statement within this announcement.

Outlook

In recent years, Berlin property values have benefited from significant yield compression. Although this has moderated, the outlook for the Berlin residential market remains positive. Residential prices remain on average below the cost of construction and demand for property continues to grow, due to the continuing process of urbanisation and population growth. Berlin average monthly rents per square metre remain among the lowest of all major European cities.

The Board believes there is scope for further market rental growth as well as the opportunity to improve rental incomes through our Property Advisor's active asset management strategies, particularly on recently acquired buildings. The reversionary potential that our substantial investment in the Portfolio to date has created should provide a cushion in the event of any market slowdown.

The Board remains confident that the Company will continue to generate growth in rental income and property values during 2019 supported by selected additions to the portfolio and further condominium projects. This, in turn, should deliver further capital growth and dividend income to investors in the current financial year.

REPORT OF THE PROPERTY ADVISOR

 Portfolio Regional Overview as at 31 December 2018

Like-for-like Portfolio value rises by 14% 

On a like-for-like basis, excluding the net impact of acquisitions and disposals, the Portfolio valuation increased by 14.0% during the year ended 31 December 2018 as it continued to benefit from the strong market fundamentals in Berlin.

The total Portfolio was valued at €645.7 million by Jones Lang LaSalle GmbH, the Company's external valuers, an absolute increase of 6.0% over the twelve-month period (31 December 2017: €609.3 million), reflecting the impact of non-Berlin disposals during year. The Portfolio valuation represents an increased average value per square metre of €3,527 (31 December 2017: €2,853) and a gross fully occupied rental yield of 3.0% (31 December 2017: 3.4%).

The Berlin portfolio was valued at €641.8 million, an increase of 21.4% year-on-year (31 December 2017: €528.5 million). This represents an increased average value per square metre of €3,576 (31 December 2017: €3,220).

The principal drivers behind the like-for-like growth in the Portfolio value were:

· a further contraction in market yields, driven by the low interest rate environment;

· strong growth in like-for-like rental income within the Portfolio; 

· the positive impact of the Property Advisor's active asset management strategy;

· continued high levels of investor interest in the Berlin property market; and 

· further development of the condominium market, with single apartment prices in Berlin experiencing another year of double-digit growth.

Rental income - growth trend continues  

Contracted net rental income (excluding service charge revenue) declined by 3.2% to €17.5m (31 December 2017 €18.1m), reflecting the impact of disposal of remaining non-Berlin assets during the financial year. On a like-for-like basis, excluding the effect of acquisitions and disposals, rental income across the Portfolio grew by 9% compared with the prior year. Headline average in-place rent per sqm was €8.6 as at 31 December 2018, compared with €8.1 as at 31 December 2017.

Berlin saw a like-for-like increase in rent per sqm of 6.9%. Average rent per sqm was €8.5, a year-on-year increase of 5.1% compared with 2017, reflecting strong underlying rental growth in the existing portfolio, partially offset by the impact of recent acquisitions, which typically have lower rental values upon takeover.

As at 31 December 2018 the Company's net contracted annualised rental income was €18.0 million. 

Recent letting prices achieve new highs for the Company

The Company enjoyed another strong letting performance in 2018. A total of 284 new leases were signed, representing 12.0% of the average units owned during the period. In the Berlin portfolio, average new letting prices were 5.3% to €11.9 per sqm (2017: €11.3 per sqm).

Portfolio reversionary rental potential remains high

Notwithstanding the growth in rental prices, the Portfolio continues to demonstrate significant reversionary potential, as shown by the premiums achieved on new letting prices when compared to in-place rents. New leases signed during the period in Berlin were agreed, on average, at a 40.4% premium to passing rents.

The Property Advisor believes this reversionary gap should underpin rental growth in the medium term, providing a buffer against any potential slow-down in the rental market.

EPRA vacancy remains low 

Reported vacancy as at 31 December 2018 was 4.4%, down from 6.8% as at 31 December 2017. On an EPRA basis, which adjusts for units undergoing redevelopment or reserved for resale, vacancy was 2.8% as at 31 December 2018, compared with 2.9% as at 31 December 2017.

The Berlin EPRA vacancy rate also remained low at 2.9% (31 December 2017: 2.7%), with the modest increase reflecting a higher vacancy rate on buildings acquired during the year. The higher vacancy rate allows the Company to redevelop and re-let recently acquired apartments.

Portfolio investment reaches new high

The Company remains committed to improving living standards for its tenants and fulfilling its environmental obligations in areas where its properties are located. Depending on the level of historical underinvestment by previous owners, apartment improvements can involve redecoration, heating system and heating plant renewal, new insulation, double glazing, plumbing and flooring, as well as kitchen and bathroom renewal. Communal areas, both indoor and outdoor, are also reviewed for potential improvement where investment has previously been lacking. During 2018, the Company invested €7.9m, its highest sum to date, to further improve the overall quality of its accommodation and surroundings (year to 31 December 2017: €6.7 million).

In the Berlin rental portfolio, €4.5 million was invested in the refurbishment of 189 units representing an average outlay of €354.6 per sqm. The average premium achieved on re-letting these vacant Berlin units was 68.9%. A further €1.9 million was invested in the infrastructure of properties within the Portfolio for items such as heating system upgrades and improvements to indoor and outdoor communal areas. An additional €1.5 million was invested on the development of condominium projects. All these items are recorded in the accounts as capital expenditure.

A further €1.7 million was spent on repairs and maintenance and expensed through the profit and loss account, compared to €1.4 million in 2017. This results in a total renovation and repair investment of €9.6 million.

Financial Results

Net contracted rental income for the year was 3.2% lower at €17.5 million (year to 31 December 2017: €18.1 million). This decrease reflects the sale of the Northern German Portfolio in April 2018, effectively offset by strong like-for-like rent per sqm growth of 7.4%.

The Company has reported a profit before tax for the period to 31 December 2018 of €56.4 million (2017: €138.5 million) which was positively affected by a revaluation gain of €66.1 million (2017: €157.4 million). The revaluation gain was lower than that experienced in 2017 and is primarily due to a moderation in the rate of market yield compression versus the prior year. Reported earnings per share for the period were €0.46 cents (2017: €1.21 cents).

EPRA NAV increases by 11.4% 

Reported EPRA NAV per share rose by 11.4% in the period to €4.58 (£4.11) as at 31 December 2018 (31 December 2017: €4.11 (£3.65)). After taking into account the dividends paid in 2018 of €7.35 cents (GBP: 6.5p), which were paid in June and October 2018, the Euro EPRA NAV total return in the period was 13.2% (2017: 53.0%). 

IFRS NAV per share rose by 2.3% in the period to €4.05 (£3.54) (31 December 2017: €3.96 (£3.52).

Dividend

The Company is pleased to have declared a final dividend of €5.15 cents per share (GBP 4.62 pence per share), (2017: €5.0 cents; (GBP 4.4 pence per share)), which is expected to be paid on or around 27 June 2019 to shareholders on the register at close of business on 7 June 2019, with an ex-dividend date of 6 June 2019. Taking into account the interim dividend paid in October 2018, the dividend for the year to 31 December 2018 is €7.5 cents per share (GBP 6.73 pence per share), (2017: €7.3 cents per share; (GBP 6.4 pence per share)). 

Since listing on the London Stock Market in June 2015, and including the final dividend for 2018, €24.9 million has been returned to Shareholders. The dividend is paid from operating cash flows, including the disposal proceeds from condominium projects and the Company will seek to continue to provide its shareholders with a secure and progressive dividend over the medium term, subject to the distribution requirements for Non-Mainstream Pooled Investments.

Financing

As at 31 December 2018, the Company had gross borrowings of €195.3 million (31 December 2017: €222.3 million) and cash balances of €26.9 million (31 December 2017: €27.2 million) equating to a net debt of €168.4 million (31 December 2017: €195.1 million) and a net loan to value for the Portfolio of 26.1% (31 December 2017: 32.0%).

Nearly all loans are fixed using an interest rate hedge and, as at 31 December 2018, the blended interest rate of all loans across the Portfolio was 2.0%. The average remaining duration of the loan book at 31 December 2018 was 7.7 years (31 December 2017: 8.4 years). By 31 December 2018, all the Company's debt had been refinanced within the previous 24 months.

During the course of 2018, the following ten-year loan facilities were entered into in order to finance newly acquired properties:

· April 2018, €12.0 million facility;

· July 2018, €1.6 million facility, of which €0.3 million remains to be drawn; and

· December 2018, €7.5 million facility of which €0.9 million remained to be drawn at 31 December 2018 and was subsequently drawn in February 2019.

In March 2018, the Company successfully refinanced existing debt within PSPF Ltd. & Co.KG, against the properties based in Berlin. An equity release of €7.8 million, before costs, was obtained on the existing property portfolio, all of which was drawn by 31 December 2018.

Following the disposal of the non-core Central and Northern Germany assets, €40.5 million of the total proceeds of €73 million was used to repay debt, with the remainder being reinvested into the portfolio. Further single property disposals amounting to €4.1 million were also completed during the year with related debt of €3.1 million being repaid.

In November 2018, the Company notarised for disposal the final non-Berlin property for €3.9 million. The transaction completed in January 2019.There was no debt secured against the asset.

The Company is currently undertaking a substantive review of its financing requirements to support its future strategy and will update investors following the conclusion of this exercise.

Acquisitions and disposals

The Company has continued to grow in Berlin with a number of carefully targeted acquisitions in central locations which fulfil its strict acquisition criteria. In total, 222 units (210 residential and 12 commercial) were notarised during 2018 for an aggregate purchase price of €36.3 million, at an average price per sqm of €2,390, and annual fully occupied rent of €1.3 million.

The Company intends to continue with its strategy of acquiring in Berlin and, as at 23 April 2019, a further 14 units in Berlin had been notarised since the December 2018 year end for a purchase price of €2.4 million, representing a value per sqm of €2,956. Acquisitions have been financed using a combination of debt and cash reserves.

In April 2018 the Company completed the sale of its remaining Northern Germany assets for a cash consideration of €73.0 million, representing a 26% premium to the Jones Lang LaSalle pre-notarisation valuation. This portfolio, initially acquired in 2006/2007 for an aggregate purchase price of €38.7 million, consisted of 34 properties located in Bremen, Hannover, Hildesheim, Verden, Delmenhorst, Kiel, Oldenburg, Lüneburg and Lübeck.

Densification projects

Following the significant increase in rental values in recent years, the Property Advisor is in the process of conducting an exercise to examine the financial viability of new construction within the footprint of the existing portfolio. This could involve both attic conversions and new building construction on land surrounding buildings that are already owned by the Company.

So far, 26 buildings have been identified for attic conversion and permission has been granted for 39 new apartments, with a further 35 in planning. Permission is also being sought for the first new build project in the courtyard of a building already owned by the Company with potential to create 23 new units. Preliminary estimates of the gross development cost for all these projects are in the region of €30 million - €35 million. The Board is committed to ensuring that any decision to proceed with new construction or investment in existing assets will be based on the project meeting or exceeding the Company's financial return targets.

Condominium sales

The Company has continued with its strategy of crystallising the latent value within the portfolio through selectively reselling apartment blocks as individual units.

Across the Company's condominium projects, a total of 23 units were notarised for sale in 2018, with an aggregate sales value of €9.0 million, consistent with the strong sales figures in 2017 of €9.1 million. This represents an average value per sqm of €4,490, or €4,466 excluding commercial units and parking. 

Condominium sales proceeds during 2018 represented a 24.2% premium to book value and the average price achieved per sqm for notarised condominiums was a 25.7% premium to the average valuation per sqm for properties in the Berlin portfolio as at 31 December 2018, confirming the potential for valuation creation through apartment privatisation.

These sales constitute a combination of vacant and occupied units and the Property Advisor expects to identify and prepare additional condominium projects for sale, either to tenants, or new buyers during 2019 in order to maintain similar proceeds to previous years.

Market outlook

The trend towards trade protectionism, slowing global growth and an uncertain Brexit outcome have impacted negatively on German GDP forecasts. After averaging 2.1% over the period 2014-2017, Germany's GDP growth slowed to 1.5% in 2018, and the European Commission forecasts this will cool further to 1.1% in 2019, before recovering to 1.7% in 2020. Although headwinds to German economic growth remain, the inherent strength of the German labour market continues, with unemployment levels expected to reduce further (from 5.2% during 2018 to 4.9% in 2019) and employment levels expected to rise.

Berlin's economic growth prospects remain relatively uncorrelated given its comparative under-reliance on manufacturing and skew towards the services sector as a source of job creation. This positive labour market development has been a key driver of Berlin's population growth. Between 2011 and 2017, its population increased by nearly 290,000 and the number of households by almost 200,000. The population is expected to continue to grow. According to the Senate administration, Berlin will require an additional 194,000 apartments by 2030.

Against a backdrop of strong population growth, medium-term demand for residential property will continue to outstrip supply, driven by a combination of high new-build construction costs, lack of available land and a shortage of new build permits. The net effect of this supply-demand imbalance should underpin the rental market and, in turn, create significant future reversionary potential within the Portfolio. This offers potential to improve rental incomes in the event that market rental values stabilise.

With an active market vacancy currently just over 1%, Berlin's regional government has reacted to supply shortage by implementing a growing number of regulatory measures such as:

· the exercise of pre-emptive purchase rights;

· additional designation of protected residential areas to restrict the partitioning and resale of rental blocks as condominiums.

There has recently been a well-documented grass-roots proposal in Berlin for a referendum which proposes to expropriate properties of large Berlin landlords with over 3,000 units under management. The Property Advisor continues to monitor developments in relation to the proposed referendum, but feels that since the Company owns 2,516 units, the outcome of the referendum is unlikely to affect the Portfolio.

The Company's strategy will continue to develop to ensure that it acts in a responsible manner, adhering at all times to relevant regulatory requirements and property laws.

Notwithstanding the fact that yield compression has moderated, the Property Advisor remains confident that the favourable Berlin demographics outlined above offer opportunity to further improve rental incomes and property values. This, combined with carefully selected Portfolio acquisitions and a continuation of selective condominium sales, leaves the Company well placed for the year ahead.

OUR BUSINESS MODEL

Actively Managing the Portfolio

Underpinning our strategy is a business model that involves our Property Advisor's active management of the portfolio of assets. The key stages of this process are; Acquire, Renovate, Optimise, and Reinvest.

ACQUIRE

The Company focuses on apartment buildings that are sometimes poorly maintained. Through significant reinvestment, the apartments are modernised to improve both the standard of accommodation for tenants and the look of the local neighbourhood. We focus on carefully selected central Berlin micro-locations which offer the potential for medium-term value creation through modernisation and renovation. The Company has historically focussed its acquisitions on properties built before 1914 (Altbau). Single properties, packages and portfolios are considered. Since listing on the London Stock Exchange in June 2015 the Company has notarised on properties with an aggregate valuation on acquisition of €206.3 million.

Acquisitions notarised since 2015 stock market listing 

RENOVATE

Buildings acquired may require reinvestment to bring them up to modern standards. It can take several years for the Property Advisor's disciplined active asset management strategies to be fully reflected in the valuation of each acquired building.

The scope for value creation is clearly evidenced in buildings acquired during 2016. Acquisitions that had completed by 31 December 2016 were revalued by Jones Lang LaSalle ("JLL") as at 31 December 2018 at an average 97.2% premium to purchase prices. This compares with growth in the properties acquired before 2016 over the same period of 52.4%. This clearly demonstrates the scope for significant value creation that the Property Advisor can achieve through the selective acquisition and repositioning of Berlin properties.

We place our tenants' interests at the forefront of everything we do. Many of the buildings that we acquire are in poor condition, with a substantial backlog of underinvestment. We therefore seek to improve the standard of accommodation available to tenants through modernisation and renovation of apartments and, where appropriate, their communal areas.

Renovations are carried out sensitively, and we carefully assess each programme of building improvements to ensure that they are justified, avoiding excessive investment which might lead to unaffordable rent increases. Improvements are conducted on a rolling basis across the Portfolio and vary according to the condition of each building and its apartments. Refurbishment of occupied units is only carried out with full agreement from tenants.

Vacant units in poor condition are considered for full renovation and vacant attic space is reviewed for conversion to residential space. Depending on the level of historical under-investment, apartment improvements can involve heating system and boiler upgrades, new insulation, double glazing, new plumbing, kitchen and bathroom renewal, new flooring, and redecoration. Communal areas, both indoor and outdoor, are also reviewed for potential improvement. A single apartment generally costs between €20,000 and €30,000 to renovate, while an entire building renovation might cost up to €2 million.

OPTIMISE

After acquisition, the Property Advisor looks to realign these properties to maximise their potential within the Portfolio.

Realigning rents

For properties considered to be core rental buildings, vacant units are re-let after refurbishment at levels that at all times comply with relevant regulations. Tenant lists are reviewed carefully and, only where appropriate, rent increases are applied for, either where tenants are paying less than the statutory rent level (Mietspiegel), where modernisation has been undertaken (and these costs are allowed to be recouped), or where the lease contains provisions for indexation (Staffel).

Buildings that are re-let typically command a rental premium to in-place rental values. This "reversionary gap" reflects the significant investment in these buildings and their surroundings to bring them up to modern standards.

Berlin reletting premium

Realigning through the creation of new living space

As well as acquiring buildings, the Company is now exploring ways to realign existing buildings within the existing portfolio by identifying opportunities to create new residential space. The substantial increase in rental and property values has created potential densification opportunities which could involve both attic conversions and new building construction on land surrounding buildings already owned by the Company.

REINVEST

The properties within the Portfolio are revalued each year with historical investment being reflected in revised property values. To the extent that additional borrowing can be secured on higher property values, a substantial portion are reinvested by way of acquisitions and improvements in the existing portfolio of buildings. For the year ended 2018, 50% of the rental income has been reinvested into the portfolio.

Buildings that no longer fit the strategic objectives of the Portfolio are considered for sale, either as blocks, or via the condominium strategy. Since listing on the Main Market of the London Stock Exchange in June 2015, the Company has been progressively selling its non-Berlin assets. In aggregate these assets have been sold at an average 23.8% premium to trailing book value and the majority of the proceeds have been reinvested into further improvements in the Berlin portfolio and Berlin acquisitions.

Disposals notarised since 2015 stock market listing 

Creation of condominiums

In addition to its core rental business, the Company also selectively identifies a small number of condominium projects. The Company is committed to operating within the relevant regulatory and planning frameworks at all times during the condominium realignment process.

This strategy is considered where a significant differential exists between the market value of a rental unit within an apartment block and the resale value of a unit as a private apartment, or where there is limited opportunity to generate further value as a rental building. The process involves legally splitting the freeholds in a small number of selected buildings.

The sales comprise a combination of vacant and occupied units and can augment returns to reinvest in the Portfolio on further acquisitions. As at 31 December 2018, 90 units representing proceeds of €26.9 million had completed since condominium sales commenced in mid-2015.

THE CHANGING FACE OF BERLIN

During the past decade, Berlin has developed into one of Europe's most vibrant and dynamic cities. Economic and population growth have substantially outstripped nearly all other European cities. Today, services account for 85% of Berlin's economic output and growth in knowledge-based and future-oriented sectors offer a bright future for Berlin's economy and labour market compared with other European cities which have relied more heavily on manufacturing and exports.

Since 2009, employment has increased by more than 30% in aggregate and this development serves as a solid basis for residential market demand in Phoenix Spree's core Berlin residential market.

Whilst manufacturing accounts for one out of four jobs across Germany as a whole, it plays a subordinated role in Berlin, with only one out of eight employees employed in this sector. Berlin has clearly positioned itself as an innovation hub. As its "new world" economy continues to grow and flourish, the city's inward migration trends increasingly reflect the new skills demanded by the labour market. Employment growth has mainly taken place in services, where more than 200,000 jobs were newly created between 2013 and 2018. Almost half of these new jobs were in three services sectors only. First, professional, scientific and technical services; second, other business services; and third, the information and communications sector.

The changing population and employment demographics are reflected in Phoenix Spree's own tenant structure. Analysis of new tenancies signed during 2018 shows that new tenants attracted to Phoenix Spree's rental proposition are almost exclusively from the services sector, over 39% of new leases signed are by tenants that have relocated either from another German city or from another country and only 18% are native Berliners.

New leases signed in 2018 by tenant occupation

New leases signed in 2018 by place of birth

Despite the significant rental increases seen in Berlin in recent years, rental values remain relatively low by European standards and rent affordability remains high. For Phoenix Spree, analysis of all new leases signed during 2018 shows that the average tenant net income after tax is €43,200 and that the percentage of total rent to income stands at only 26%.

Average monthly rents remain among lowest of all major European cities with the average monthly rent per square metre of €9.8 significantly cheaper than other major European cities.

Monthly rents by European City

Source: Knight Frank

Not only are rents comparatively low, but available household incomes are predicted to rise faster in Berlin than in any other European city over the next 10 years.

Average household income growth (% change 2018-2028)

Source: Knight Frank

CORPORATE RESPONSIBILITY

Phoenix Spree is committed to acting responsibly by balancing the different interests of all our key stakeholders and capturing this within our Company Values and business model.

Our Approach to Corporate Responsibility

We strive to strike a meaningful balance between proving a return to our investors and addressing our social and environmental impacts. We engage with our stakeholders to ensure we understand differing viewpoints and take this into consideration when making business decisions. We believe that this is not only the right way to approach business, but it will help us maintain a commercial advantage and enable us to be a sustainable company that delivers long term success.

Our business focusses on providing homes for people that are both comfortable and affordable. We often acquire properties that are in relatively poor condition and, through significant reinvestment, we modernise the apartments to improve the standard of accommodation for our tenants and improve the look of the local neighbourhood. Providing good customer service to our tenants and improving the sustainability of housing stock through renovation lies at the core of our business.

In 2018, we reviewed how sustainability is managed within our business and aligned these with the views of our stakeholders and business priorities to create our Company Values and our 'Better Futures' Corporate Responsibility (CR) Plan.

Whilst we are pleased with the progress we are making with the dedication of our partners; we look forward to further communication regarding our CR programme in the coming period.

Corporate Responsibility Governance

To ensure the successful delivery of our 'Better Futures' CR Plan within our business, relevant Policies have been created for each of the pillars, a measurement framework established to monitor progress and a structure put in place to ensure robust oversight.

We share the relevant policies with PMM, who in turn have created their own policies that are aligned with ours. We request that PMM periodically verifies that it has acted in accordance with the policies. Where PMM outsources any key functions to other business partners, it has likewise shared the policies with them and requested that they periodically verify that they have acted within the spirit of the relevant policies.

Structurally, PMM has established a CR Task Force that oversees the implementation of the plan across the business. This Task Force reports the progress on the CR Plan, at minimum twice a year, to Phoenix Spree's CR Sub-Committee, who in turn reports into the Company's Board.

For further information, please visit the company's website at www.phoenixspree.com.

PRINCIPAL RISKS AND UNCERTAINTIES

The Board recognises that effective risk evaluation and management needs to be foremost in the strategic planning and the decision-making process. In conjunction with the Property Advisor, key risks and risk mitigation measures are reviewed by the Board on a regular basis and discussed formally during Board meetings.

Directors' report

The Directors are pleased to present their Annual Report and the audited consolidated financial statements for the year ended 31 December 2018.

General information

The Company is a public limited company and incorporated in Jersey, Channel Islands under the Companies (Jersey) Law 1991. The Company was admitted to the premium segment of the Main Market of the London Stock Exchange on 15 June 2015.

The Group's objective is to generate an attractive return for shareholders through the acquisition and active management of high-quality pre-let properties in Germany. The Group is primarily invested in the residential market, supplemented with selective investments in commercial property. The majority of commercial property within the portfolio is located within residential and mixed-use properties.

Dividends

The Directors recommend a final dividend of €5.15 cents (2017: €5.0 cents) per Ordinary Share to be paid on or around 27 June 2019 to ordinary shareholders on the register on 7 June 2019.

The Directors declared a dividend of €5.0 cents per share on 26 April 2018, paid on 29 June 2018 to ordinary shareholders on the register on 8 June 2018 and a further dividend of €2.35 cents per share on 26 September 2018, paid on 19 October 2018 to ordinary shareholders on the register on 5 October 2018.

Directors

The Directors who served during 2018 and to date are as follows:

Directors' indemnities

The Company has made third party indemnity provisions for the benefit of its Directors which were in place throughout the year and remain in force at the date of this report.

Substantial shareholdings

As at 9 April 2019, the Company has received the following notifications under chapter 5 of the Disclosure and Transparency Rules of shareholdings of more than 5% of the Company's share capital:

Requirements of the Listing Rules

The following table provides references to where the information required by the Listing Rule 9.8.4R is disclosed.

Corporate Governance

The Directors have prepared a statement on how the UK Corporate Governance Code has been applied, which is set out on pages 35 to 44.

Financial instruments

Details of the financial risk management objectives and policies followed by the Directors can be found in note 3 to the consolidated financial statements.

Events after the reporting date

· In April 2019, the Company exchanged contracts for the acquisition of one individual property in Berlin for the purchase price of €2.4 million. The property is still awaiting completion.

· The Company had exchanged contracts for the acquisition of one property in Berlin with a purchase price of €2.2 million prior to the balance sheet date, which as at balance sheet date had not yet completed. The purchase completed in January 2019.

· In Q1 2019, the Company exchanged contracts for the sale of one commercial unit and one residential unit in BoxhagenerStraße with an aggregated purchase price of €1.9 million. The sale of these units subsequently completed in April 2019.

· The Company had exchanged contracts for the sale of three condominiums in Berlin with aggregated consideration of €1.1 million prior to the reporting date. The sale of these units subsequently completed in Q1 2019.

· The Company exchanged contracts for the disposal of the last non-Berlin property for the sale price of €3.9 million prior to the reporting date, the sale of this property subsequently completed in January 2019.

· In February 2019, the Company drew down the final €0.9 million portion of the €7.5 million loan with Berliner Sparkasse. €6.6 million of the debt was drawn down in December 2018.

 Auditor

Each of the Directors at the date of approval of this Annual Report has taken all the steps that he or she ought to have taken as a Director in order to make him or herself aware of any relevant audit information and to establish that the Group's auditor is aware of that information. The Directors are not aware of any relevant audit information which has not been disclosed to the auditor.

RSM UK Audit LLP has expressed its willingness to continue in office as auditor and a resolution to reappoint them will be proposed at the forthcoming Annual General Meeting.

Viability Statement

The Directors have assessed the viability of the Group over a three-year period. The Directors have chosen three years because that is the period over which the Group has sufficiently robust forecasts as part of its business plan. The Viability Statement is based on a robust assessment of those risks that would threaten the business model, future performance, solvency or liquidity of the Group. For the purposes of the Viability Statement the Directors have considered, in particular, the impact of the following factors affecting the projections of cash flows for the three-year period ending 31 December 2021:

a) the potential operating cash flow requirement of the Group;

b) seasonal fluctuations in working capital requirements;

c) property vacancy rates;

d) rent arrears and bad debts;

e) capital and administration expenditure (excluding potential acquisitions as set out below) during the period; and

f) condominium sales proceeds.

The Directors recognise that the projections of cash flows do not include the impact of further potential property acquisitions over the three-year period, as these acquisitions are ad hoc and discretionary in nature. In this respect, the Directors complete a formal review of the working capital headroom of the Group for each potential acquisition.

On the basis of the above, and assuming the principal risks are managed or mitigated as expected, the Directors have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the three-year period of their assessment.

Registered office

13-14 Esplanade

St Helier

Jersey

JE1 1EE

Channel Islands

Corporate Governance Statement

This Corporate Governance Statement comprises pages 35 to 44 and forms part of the Directors' Report.

To comply with the UK Listing Regime, the Company must comply with Listing Rule 9.8.6(5) R which requires the Company to apply the main principles of the UK Corporate Governance Code ('the Code') most recently published in July 2018 and report to shareholders how the Company has applied these principles or explain any departures therefrom.

On 16 July 2018, the Financial Reporting Council ('FRC') published the 2018 Code of Corporate Governance. The Code is available for download from the Financial Reporting Council's ('FRC') website www.frc.org.uk.

The Board intends to adopt The AIC Code of Corporate Governance (the AIC Code) for the accounting period beginning 1 January 2019. The Board deems the AIC Code more relevant with respect to the governance of investment companies.

The Board has considered the principles and recommendations of the Code. During the year, the Company has complied with all of the provisions of the Code except as set out below;

· the role of the Chief Executive and Executives of the Board;

· Executive Directors' remuneration;

· the internal audit function;

· the composition of the Audit Committee and Risk Committee (rectified during 2018).

The Board considers that the provisions relating to the chief executive and executive directors' role and remuneration are not relevant to the Company, as the running of PSD's business is outsourced to third parties and there are no executive directors. The objective of the Code to separate the roles of the chairman who manages and provides leadership to the Board, and the running of PSDL, is achieved because the Chairman is independent from the third-party providers.

PSDL does not currently have an internal audit function as the Board believe that it can ensure that PSDL's risk management, governance and internal control processes are operating effectively without this. This is because PSDL's business is conducted by relatively few individuals (through the outsourced service providers) who report to the Board, and its operations are not complex. However, if PSDL increases in size, the appointment of an appropriately qualified and resourced internal audit department will be, and is currently being, considered. Ultimately this role will be widened to encompass reviews of the efficiency of operations and to make recommendations on rationalisation of the business. If established, such internal audit department would report directly to the Audit Committee.

The members of the Audit and Risk Committees have been selected for their experience and expertise in relation to the risks, financial reporting and internal controls relating to PSDL. The members bring specific experience in relation to the property investment sector and externally managed structures which have been found to be invaluable to each Committee in identifying risks and assessing the mitigating controls which have been established.

Board Leadership and Company Purpose

In accordance with the Code's Principles A, B, C, D & E following the changes to its composition in 2018, the Board was considered wholly independent for the year 2018 with no representation of external service providers on the Board. From 7 March 2019 Quentin Spicer was no longer considered to be an Independent Non-executive director due to his length of service exceeding 10 years. The Board, however, consider his detailed knowledge of the company a significant asset and are happy for him to continue as a non-executive director for the coming period. The board assesses the basis on which the Company generates and preserves value over the long-term. Additionally, the board considers and addresses the opportunities and risks to the future success of the Company, along with the sustainability of the Company's business model and how its governance contributes to the delivery of its strategy.

This is achieved by considering the following matters:

· the overall objectives of the Company as described under the sections headed "Our Strategy" & "Business Model" in the Strategic Report, and the strategy for fulfilling those objectives within an appropriate risk framework in light of market conditions prevailing from time to time;

· the appointment of the Property Advisor, administrator and other appropriately skilled service providers and to monitor their effectiveness through regular reports and meetings; and

· the key elements of the Group's performance including NAV and EPRA NAV growth and the payment of dividends.

Further to the above the Board has adopted a Diversity Policy which sets out the Board's approach to diversity in board composition confirming that the Board would make any new appointments on merit taking into consideration gender diversity.

The Company has no direct employees therefore is not required to monitor culture in this respect, however the Board recognises its wider responsibility to demonstrate to shareholders that it is operating responsibly, managing its social and environmental impacts for the benefit of all stakeholders. Following a thorough review of how sustainability is managed within the Company, a "Better Futures" Corporate Responsibility Plan has been developed. This will provide a framework to measure existing activities better while adding new initiatives to improve overall sustainability.

Additionally, the Board is mindful of culture within each of its service providers and stakeholders and where it is not satisfied that policy, practices or behaviours are aligned with the Company's purpose, values and strategy, the Board will seek assurance that management have taken corrective action.

The Board has overall responsibility for maximising the Group's success by directing and supervising the affairs of the business and meeting the appropriate interests of shareholders and relevant stakeholders, while enhancing the value of the Group and also ensuring protection of investors.

Within the Annual Report and Financial Statements, the Directors have set out the Group's investment objective and policy and have reported how the Board and its delegated Committees operate and how the Directors review the risk environment within which the Group operates and set appropriate risk controls. Furthermore, the Board has sought to provide further information to enable shareholders to understand the Group's business and financial performance better. The Board also maintains a formal schedule of matters specifically reserved solely for their decision.

The Chairman shall also be responsible for the promotion of a culture of openness and debate, for ensuring that the Directors receive accurate, timely and clear information and for ensuring that there is adequate time available for the discussion of agenda items at each Board meeting.

The Board believes that the maintenance of good relations with both institutional and retail shareholders is important for the long-term prospects of the Group. The Board receives feedback on the views of shareholders from its corporate broker. Through this process the Board seeks to monitor the views of shareholders and to ensure an effective communication programme. The Board shall seek to utilise stakeholder communication to inform them of the decisions that the Company and Board takes, whether about the products or services it provides, or about its strategic direction, its long-term health, and the society in which it operates. The Board agrees that stakeholder engagement will strengthen the business and promote its long-term success to the benefit of stakeholders and shareholders alike.

The Chair is open to discussions on governance and strategy with major Shareholders and the other Directors shall also be provided the opportunity to attend these meetings

The Board believes that the Annual General Meeting provides an appropriate forum for investors to communicate with the Board and encourages participation.

The Group regularly reviews its shareholder profile. Shareholders may contact the Company directly through the Investor section of the Company's website www.phoenixspree.com.

The Board identifies and manages conflicts of interest, including those resulting from significant shareholdings, and also ensures that the influence of third parties does not compromise or override independent judgement.

If a Board recommendation for a resolution receives 20% or more of votes cast against it, the Company will explain, when announcing voting results, any actions it intends to take to consult shareholders in order to understand the reasons behind the result. No later than six months after the shareholder meeting, the Company will publish an update on the views received from shareholders and any actions taken. The Board will then provide a final summary in the Annual Report and Financial Statements and, if applicable, in the explanatory notes to resolutions at the next shareholder meeting, on the impact the feedback has had on the decisions the Board has taken and any actions or resolutions that are to be proposed.

Where Directors have concerns about the operation of the Board or the management of the Company that cannot be resolved, their concerns are recorded in the Board minutes. On resignation, a non-executive director will also provide a written statement to the Chair, for circulation to the board, if they have any such concerns in connection with resignation.

Division of Responsibilities

In adherence with the Codes Principles F, G, H & I, following the appointment of two new independent Directors in January 2018 and a further appointment in April 2018, the Board comprised five non-executive Directors, one of whom also acts as Chairman of the Company. The Chairman is Robert Hingley, who is considered to be independent for the purposes of Listing Rule 15 and Provision 9 of the Code as he has neither current nor historical employment with the Property Advisor nor any current directorships in any other investment funds managed by the Property Advisor. Listing Rule 15 requires there to be a majority of independent directors on the board as a whole which was not in place until the new appointments. The Chair ensures the Directors receive accurate, timely and clear information.

On 24 January 2018, the Company announced the appointments of two further independent non-executive Directors, Charlotte Valeur and Jonathan Thompson. At the same time, Matthew Northover, a non-independent Director, stepped down from the board to focus on the business of the Property Advisor. Furthermore, on 17 April 2018, Monique O'Keefe was appointed as an independent non-executive Director and chair of the Corporate Responsibility Committee, and both Richard Prosser and Andrew Weaver stepped down from the board.

Charlotte Valeur is the senior independent Non-executive Director. The Board has evaluated her independence and considers Charlotte to remain independent.

The Board considers its current Non-executive Directors to be of sufficient calibre and number for their views to be of sufficient weight and that no individual or small group can dominate the Board's decision-making process. Their qualifications and experience are relevant to their directorships and in their appointments to the Committees where applicable.

Due to his 10-year tenure of service on the Board, Quentin Spicer was deemed to be no longer independent. The Board however considers his detailed knowledge of the company a significant asset and is happy for him to continue as a non-executive director for the coming period.

The Non-executive Directors' terms and conditions of appointment are available for inspection at the

Company's registered office on request and will be available at the forthcoming AGM.

The Directors believe that the Board has an appropriate balance of skills, experience and independence to discharge its duties and provide effective strategic leadership and proper governance of the Company. The Board shall ensure that it conducts its business at all times with only the interests of the Shareholders in mind and independently of any other associations.

Independence of Non-executive Directors

The Code states that the Board should identify in the annual report each non-executive director it considers to be independent and should consider whether there are any relationships or circumstances that are likely to affect a Director's independence. On 7 March 2019 Quentin Spicer was no longer considered as an Independent Non-executive director by the board due to his length of service exceeding 10 years.

The senior independent director is to provide a sounding board for the chair and serve as an intermediary for the other directors and shareholders. Led by the senior independent director, the non-executive directors will meet without the chair present at least annually to appraise the chair's performance, and on other occasions as necessary.

Non-executive Directors' shareholdings

The Board has assessed that the holdings of the Directors are not significant and believes such levels of investment should not raise questions regarding their independence. The Board considers that Directors owning shares in the Company directly aligns them with the interests of the shareholders.

The responsibilities of the chair, senior independent director, board and committees are clear and set out in writing, after they are agreed by the board. They can be found on the Company's website, www.phoenixspree.com.

When considering any new appointments, the board takes into account any other demands on directors' time. Prior to appointment, any significant commitments are disclosed along with an indication of the time involved. Additionally, any external appointments are not undertaken without prior approval of the board. Any reasons for permitting significant appointments will be explained further in this report as and when the time arises.

All directors have access to the advice of the Company Secretary, who is responsible for advising the Board on all governance matters. Both the appointment and removal of the Company Secretary would be a matter for the whole Board.

Composition, succession and evaluation

In adherence with the Codes Principles J, K & L, the Board has established a Nomination and Remuneration Committee which is chaired by Quentin Spicer with Robert Hingley, Charlotte Valeur, Jonathan Thompson and Monique O'Keefe as members.

The Nomination and Remuneration Committee met twice during the year.

As at the year-end there were five Directors, 3 of whom are male and 2 are female. The Directors have agreed that appointments to the Board should be made on the basis of the Group's specific needs based on merit, without reference to age, gender or religious belief. Charlotte Valeur and Jonathan Thompson were appointed to the Board on 24 January 2018 (with Matthew Northover stepping down) and Monique O'Keefe was appointed on 17 April 2018 (with Richard Prosser and Andrew Weaver stepping down).

Re-election

All newly appointed Directors shall stand for election by the shareholders at the next Annual General Meeting following their appointment. There are provisions in the Company's Articles of Association which require Directors to seek re-election on a periodic basis, however, in accordance with the Code all other Directors shall also offer themselves for annual re-election. There is no limit on length of service, nor is there any upper age restriction on Directors. The names of all Directors standing for appointment or reappointment shall be accompanied by sufficient biographical details and the specific reasons why their contribution is, and continues to be, important to the company's long-term sustainable success in order to enable shareholders to make an informed decision.

The Board considers that there is significant benefit to the Group arising from continuity and experience among Directors, and accordingly does not intend to introduce restrictions based on age or tenure. It does, however, believe that shareholders should be given the opportunity to review membership of the Board on a regular basis.

After the most recent appointments, the Board is satisfied that all the Board members standing for re-election should be re-elected as they have the right skills and experience to continue to manage the Group. The Board maintains its right to appoint further members if deemed necessary and considers succession on a regular basis.

The Board has implemented a process of formal evaluation for individual Directors, the Committees and the processes utilised by the Board itself. This is undertaken by the Chair and the Audit Committee.

The Board areas of evaluation include:

· Board composition and quality;

· Overall strategy, performance and risk;

· Shareholder value;

· Governance;

· Board meetings;

· Support and relations with suppliers;

· Personal evaluation;

· Chair's evaluation.

The process of performance evaluation is designed to consider all elements of performance including any perceived shortcomings, training or development needs and unforeseen tasks and responsibilities that have arisen during the year.

The Chairman shall act on the results of the evaluation by recognising the strengths and addressing any weaknesses of the Board. Each Director shall engage with the process and take appropriate action where development needs have been identified.

The Chairman and the Board have agreed to regular externally facilitated board evaluations being undertaken, which shall occur as necessary under the requirements of the Code. Jones Lang LaSalle is the appointed external property valuer, it has no connection either to the Company, or to any of the Directors of the Company.

While no KPIs are set for individual Non-executive Directors, the time, effort and application to the performance of their duties for the Board and Committees is taken into account.

The Board, the Committees and the management process - performance evaluation

In line with the requirements of the Code, the Company has implemented annual performance evaluations of the Board, the Committees and the processes utilised by each forum. The aim of the evaluation is to recognise the strengths and address any weaknesses and consider improvements to the management process. The evaluation is designed to ensure that the Board meets its objectives and effectiveness is maximised.

The evaluations focus on the following issues:

· the frequency of meetings and the business transacted;

· the workload of each forum;

· diversity and how effectively members work together to achieve objectives;

· the timing, level of detail and appropriateness of information put before meetings;

· the reporting process from Committees to the Board and delegation process itself;

· the levels of expertise available within the membership of the Committees and the need for, selection of and the use of external consultants; and

· the effectiveness of internal controls following the review and report of the Audit Committee.

Following the changes to the Board, and if any potential future changes are made, due consideration to the evaluation process will be made.

Audit, risk and internal control

Audit and Risk Committee

Neither Matthew Northover nor Richard Prosser, up to the dates of their resignations, were considered to be independent Members of the Board as a consequence of their relationship with the Property Advisor or the Administrator respectively. However, during the financial year, Jonathan Thompson, an independent Non-executive Director, has been appointed to chair the Audit Committee, and Charlotte Valeur the Risk Committee, meaning that the Company will comply with the Code principles and recommendations on the composition of the Committee in future periods.

On 17 April 2018, Monique O'Keefe joined both the Audit and Risk Committee and the committees split to become a separate Audit Committee and Risk Committee.

Audit Committee

The Audit Committee is chaired by Jonathan Thompson with Quentin Spicer, Charlotte Valeur and Monique O'Keefe as members. The Audit Committee meets no less than three times a year and, if required, meetings can also be attended by the Property Advisor and the external auditor. The Board considers that Jonathan's recent and relevant experience, both in the sector, and in financial reporting, make him suitably qualified to chair the Audit Committee.

In adherence with the Code's Principles M & N, the Audit Committee is responsible for ensuring that the accounting policies of the Company are appropriate and being followed, disclosures provided are clear and for reviewing the half-year and annual financial statements before their submission to the Board. In addition, the Audit Committee is specifically charged under its terms of reference to advise the Board on the terms and scope of the appointment of the auditors, including their remuneration, independence and objectivity and reviewing with the auditors the results and effectiveness of the audit. The Committee reviews and provides advice on whether the content of the annual report and accounts is fair, balanced and understandable and provides the information necessary for Shareholders to assess the Company's performance, business model and strategy.

The Group does not currently have an internal audit function, as the Board believes that it can ensure that the Group's risk management, governance and internal control processes are operating effectively without this. This is because the Group's business is conducted by relatively few individuals (through the outsourced service providers) who report to the Board, and its operations are not complex at present. However, if the Group increases in size or complexity, the appointment of an appropriately qualified and resourced internal audit department will be, and is being, considered. Ultimately this role will be widened to encompass reviews of the efficiency of operations and to make recommendations on rationalisation of the business. Once established, such internal audit department would report directly to the Audit Committee.

The Board is satisfied that the Annual Report and Financial Statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Group's position and performance, business model and strategy.

Risk Committee

The Risk Committee is chaired by Charlotte Valeur with Quentin Spicer, Jonathan Thompson and Monique O'Keefe as members. The Risk Committee meets no less than three times a year and, if required, meetings can also be attended by the Property Advisor.

In adherence with the Code's Principle O, The Risk Committee is responsible for advising the Board on the Company's overall risk appetite, tolerance and strategy. The Risk Committee will also oversee and advise the Board on the current risk assessment processes, ensuring that both qualitative and quantitative metrics are used. Where requested by the Board, the Committee shall review and provide advice on whether the content of the risk management and internal control report, as contained in the annual report, is fair, balanced and understandable and provides the information necessary for Shareholders to assess the Company's performance, business model and strategy.

The Members of both the Audit and Risk Committees have been selected for their experience and expertise in relation to the risks, financial reporting and internal controls relating to the Group. The Members bring specific experience in relation to the property investment sector and externally managed structures which has been found to be invaluable to the Committee in identifying risks and assessing the mitigating controls which have been established.

Remuneration

In adherence with the Code's Principles P Q & R the Board considers that the provisions relating to the Chief Executive and Executive Directors' roles and remuneration are not relevant to the Group, as the running of the Group's business is outsourced to third parties and there are no executive directors. The objective of the Code, to separate the roles of the Chairman who runs the Board, and the running of the Group, is achieved because the Chairman is independent from the third-party providers. The remuneration of the directors and the third-party providers is disclosed and explained in the notes to the financial statements.

Effectiveness

The Company holds a minimum of four Board meetings per year to discuss general management, structure, finance, corporate governance, marketing, risk management, compliance, asset allocation and gearing, contracts and performance. The reports provided by the outsourced providers are the principal source of regular information for the Board enabling it to determine policy and to monitor performance, compliance and controls, which are supplemented by communication and discussions throughout the year. The Board carries out internal evaluations of its effectiveness which are described on page 39 of the annual report. Furthermore, the Board has contracted BoardAlpha to carry out an external review of the Board's effectiveness. The scope of this external effectiveness evaluation is in line with the scope set out on page 39.

Committees of the Board

The terms of reference for the Board Committees are available on the Company website at www.phoenixspree.com.

Property Valuation Committee

The Company has established a Property Valuation Committee. The Property Valuation Committee is responsible for reviewing the property valuations prepared by the valuer and any further matters relating to the valuation of the Portfolio.

During 2018, the Property Valuation Committee's composition changed, following the appointment of the Board's new independent directors. It continued to be chaired by Quentin Spicer, with Charlotte Valeur and Jonathan Thompson joining as members on 24 January 2018. Richard Prosser ceased to be a member of the Property Valuation Committee following his resignation from the Board on 17 April 2018 and Monique O'Keefe and Robert Hingley were both appointed.

The Property Valuation Committee met four times during the year and reported to the Board on its duties, which are to:

· review significant adjustments from the previous property valuation report;

· review the individual valuations of each property;

· receive any commentary from the Property Advisor and/or Directors following the review meeting held with the external valuer;

· register and discuss with the Property Advisor any asset specific issues highlighted by the valuer;

· review material, unexplained movements in the Group's Net Asset Value and to recommend the release of the Net Asset Value announcement following that review;

· review compliance with applicable standards and guidelines including those issued by the Royal Institution of Chartered Surveyors and the UKLA Listing Rules;

· review the findings and any recommendations or statements made by the valuer;

· review at least annually, consider and make recommendations to the Board, in relation to the appointment, remuneration, re-appointment and removal of the Group's valuer. The Committee shall oversee the selection process for a new valuer and if a valuer resigns the Committee shall investigate the issues leading to this and decide whether any action is required;

· consider any further matters relating to the valuation of the properties.

The Committee reported to the Board its findings on the property valuation and the Committee was satisfied with the independent valuation report and values associated with all properties of the Group.

Corporate Social Responsibility Committee

On 17 April 2018, the Company formed a Corporate Social Responsibility Committee. The Corporate Social Responsibility Committee is chaired by Monique O'Keefe with Jonathan Thompson, Charlotte Valeur, Robert Hingley and Quentin Spicer as members. The Corporate Social Responsibility Committee meets no less than three times a year.

The Corporate Social Responsibility Committee is responsible for approving a strategy for discharging the Company's corporate and social responsibilities, overseeing the creation of appropriate policies and supporting measures along with ensuring that the policies are regularly reviewed and updated in line with national and international regulations. Where requested by the Board, the Committee shall review and provide advice on whether the content of the CR report, as contained in the Company's annual report, is fair, balanced and understandable and provides the information necessary for Shareholders to assess the Company's performance, business model and strategy.

Management Engagement Committee

In accordance with the Code, the Management Engagement Committee was established to review the performance of the Property Advisor on an annual basis. It was previously chaired by Robert Hingley, with Richard Prosser and Quentin Spicer as members. On 24 January 2018, the Management Engagement Committee's composition has changed with Robert Hingley remaining as Chair but with Charlotte Valeur and Jonathan Thompson joining as members. Richard Prosser ceased to be a member of the Management Engagement Committee following his resignation from the Board on 17 April 2018 and Monique O'Keefe was appointed.

The Management Engagement Committee met three times during the year and reported to the Board on its duties, which are to:

· monitor and evaluate the Property Advisor's performance and compliance with the terms of the Property Advisory Agreement and, if necessary, provide appropriate guidance, which may include considering the merit of obtaining an independent appraisal of the Property Advisor's services on an annual basis;

· review the terms of the Property Advisory Agreement from time to time to ensure that the terms thereof conform with market and industry practice and remain in the best interests of shareholders and make recommendations to the Board on any variation to the terms of the Property Advisory Agreement which it considers necessary or desirable;

· review and make appropriate recommendations to the Board as to whether the continuing appointment of the Property Advisor is in the best interests of the Group and Shareholders, and the reasons for this recommendation;

· review the level and method of remuneration, the basis on which the performance fees (if any) are calculated and the notice period of the Property Advisor, giving due consideration to the competitive position of the Group against its peer group;

· consider whether the asset and estate management fee should be based on gross assets, net assets or market capitalisation;

· ensure that the basis of any performance fee or performance related element does not encourage excessive risk and that it rewards demonstrably superior performance by the Property Advisor in managing the portfolio against the Group's stated objectives when compared to a suitable benchmark or peer group;

· ensure that a sound system of risk management and internal control is maintained and reviewed annually in order to safeguard shareholders' investment and the Group's assets;

· review, consider and recommend any amendments to the terms of the appointment and remuneration of providers of other services to the Group; and

· consider any points of conflict which may arise between the providers of services to the Group.

The Committee keeps under review the performance of the Property Advisor and the level and terms of the management fee. On 27 November 2018 the Group announced that it had signed a new contract with the Property Advisor, effective from 1 January 2019. Further information on this contract can be seen in note 33 to the Financial Statements, and on http://www.phoenixspree.com. In the opinion of the Directors, the continuing appointment of the Property Advisor on the terms agreed is in the interests of shareholders as a whole. The Performance Period as set out in the previous Property Advisory agreement ended on 30 June 2018. According to the new agreement, the Performance Period starts on the 1 July 2018, ending on 31 December 2020. The Performance Period commences benchmarked from the EPRA Net Asset Value of the Company as at 30 June 2018.

Board and Committee meetings

The table below sets out the number of Board, Audit Committee, Risk Committee, Property Valuation Committee, Management Engagement Committee and Nomination and Remuneration Committee meetings held during the year ended 31 December 2018 and, where appropriate, the number of such meetings attended by each Director.

During the year, there have been several additional ad-hoc meetings which the directors were required to attend. These meetings consisted of material matters relating to the running of the Group.

Information and support for Directors

New Directors receive a full, formal and tailored induction on joining the Board in order to further inform them of the Group's activities and structure.

Upon appointment new Directors are briefed about their responsibilities and duties, together with relevant background information on the Company and assistance and information from representatives of the Investment Advisors and the Administrators.

New Directors are also provided with an opportunity to observe the Board before their appointment and meet representatives of the Property Advisors and Administrators to the Company.

All the Directors comply with mandatory continued professional development requirement and are encouraged to attend industry and other seminars covering issues and developments relevant to investment companies, and Board meetings regularly include agenda items on recent developments in governance and industry issues.

The Chair regularly reviews and agrees with each Director their training and development needs.

All Directors are able to take independent professional advice at the Group's expense in the furtherance of their duties, if necessary.

The Group purchases appropriate insurance in respect of legal action against its Directors and Officers.

Company Secretary

The Company Secretary is responsible for ensuring that Board procedures are followed. Under the guidance of the Chairman, the Secretary ensures that appropriate and timely information flows between the Board, the Committees and to/from the Directors. It facilitates inductions to new Directors and the provision of additional information where required and appropriate.

The Secretary is responsible for advising the Board on governance matters and is available to all Directors for advice and support as required. The Board is presently considering the merit of adopting the AIC code and certain other relevant elements of the UK code of corporate governance.

The Board intends to adopt the AIC Code of Corporate Governance (the AIC Code) for the accounting period beginning 1 January 2019. The Board deems the AIC Code more relevant with respect to the governance of investment companies.

Audit Committee Report

This report provides details of the role of the Committee and the duties it has undertaken during the year under review.

Summary of the role of the Audit Committee

The Audit Committee is responsible for reviewing the half-year and annual financial statements and recommends them to the Board for approval. The role of the Audit Committee includes:

· Monitoring the integrity of the Annual Report and Financial Statements of the Group, covering:

§ formal announcements relating to the Group's financial performance;

§ significant financial reporting issues and judgements;

§ matters raised by the external auditors; and

§ the appropriateness of accounting policies and practices.

· Reviewing and considering the Code and FRC Guidance on Audit Committees.

· Monitoring the quality and effectiveness of the independent external auditors, which includes:

§ meeting regularly to discuss the audit plan and the subsequent audit report;

§ considering the level of fees for both audit and non-audit work;

§ reviewing independence, objectivity, expertise, resources and qualification; and

§ making recommendations to the Board on the appointment, reappointment, replacement and remuneration of the external auditors.

· Reviewing the Group's procedures for prevention, detection and reporting of fraud, bribery and corruption.

· Monitoring and reviewing the internal control and risk management systems of the service providers together with the need for an Internal Audit function.

The Audit Committee's full terms of reference can be obtained from the Company's website www.phoenixspree.com.

Financial reporting

The Audit Committee is responsible for reviewing the half-year and annual financial statements before their submission to the Board. In addition, the Audit Committee is specifically charged under its terms of reference with advising the Board on the terms and scope of the appointment of the auditors, including their remuneration, independence, objectivity and reviewing with the auditors the results and effectiveness of the audit.

Composition of the Audit Committee

The Audit Committee is chaired by Jonathan Thompson with Quentin Spicer, Charlotte Valeur and Monique O'Keefe as members. The qualifications and experience of the members of the Audit and Risk Committee during the financial year are set out in their biographical details on pages 23 and 24. 

Meetings

The Audit Committee is scheduled to meet no less than three times a year and, if required, meetings can also be attended by the Property Advisor, the administrator and the external auditor.

Significant issues related to the financial statements

External audit

Assessing the effectiveness of the external audit process

The Committee satisfied itself as to the effectiveness of the external audit process as follows:

The audit partner

As a new audit firm was appointed in 2014, no additional rotation considerations were required for the current year. This is however the final year cycle for the current audit partner who is subject to mandatory rotation at the end of the 2018 Financial Statement audit process. Following completion of the audit the Committee assessed the partner's performance against expectations and found this to be satisfactory.

The audit team

Continuity of personnel was reviewed and found to be satisfactory. To supplement the Committee's necessarily limited exposure to junior members of the audit team, feedback was sought on the performance of the external audit team, in particular as regards their understanding of the business, technical competence and attitude.

The audit plan

The scope of the audit was reviewed and debated by the Committee with the auditors prior to work being commenced. This was done in the light of both the auditors' and the Committee's assessment of the key risks. The auditors explained materiality thresholds used in determining their audit scope and the Committee confirmed that these were in accordance with normal audit practice.

The generality of the audit plan document was assessed and found to be satisfactory. Arrangements to identify, report and manage conflicts of interest were satisfactory.

The Committee also considered whether it wished to commission further audit work to be conducted beyond which the auditor considered necessary for the expression of their opinions on the Group accounts and concluded that it did not.

Matters arising from the audit

These were promptly and effectively communicated and addressed as appropriate. The robustness and perceptiveness of the auditors in their handling of the key accounting and audit judgements were seen as appropriate. The detailed report received from the auditors following completion of their work gave comfort as to the diligence of execution of that work.

Added value

In appraising the overall performance of the auditors, the Committee considered whether they had provided useful feedback arising from their work additional to their statutory responsibilities and concluded that they had.

Independence

In addition to receiving the auditors' formal confirmation of their independence, the Committee considered whether this was demonstrated through their general approach and attitude and were satisfied that this was the case.

Audit fees

The level of audit fees was reviewed to ensure that it was sufficient for the work necessary but not excessive. In particular, changes in fees from the previous year were considered in relation to changes in the Group and in risk assessments.

Audit tendering

The Committee considered whether the audit appointment should be put out to tender. In doing so, it considered both the performance of the current auditors and the likely costs and potential benefits of change.

Following the above, the Audit Committee has recommended to the Board that RSM UK Audit LLP is reappointed.

Going forward, the Committee will continue to keep the audit appointment under review, having regard for the new EU requirements for audit tendering.

Group policy on the provision of non-audit services by the auditor

The Committee has an established policy for the commission of non-audit work from the Group's auditor.

The external auditor is excluded from providing non-audit services to the Group where the objectives of such assignments are inconsistent with the objectives of the audit. Additionally, no work is awarded to the auditor which would result in an element of self-review, either during the work or via the audit itself.

The Committee will continue to approve all non-audit fees prior to the work commencing and review the non-audit fees in aggregate for the year.

Risk management and internal control

The Committee reviews the adequacy and effectiveness of the Group's (and its service providers') internal financial controls and internal control and risk management systems and review and approves the statements to be included in the Annual Report concerning internal controls and risk management.

The Committee is also responsible for oversight and advice to the Board on the current risk exposures and future risk strategy of the Group.

The Directors have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity. The result of this review, the potential impact of each type of risk identified and the mitigation reasons put in place are set out in the 'Principal Risks and Uncertainties' section of the Annual Report on pages 25 to 30. The Directors do not consider that there are any significant problems facing the business in the coming year.

Internal audit

The Group does not currently have an internal audit function, as the Board believes that it can ensure that the Group's risk management, governance and internal control processes are operating effectively without this. This is because the Group's business is conducted by relatively few individuals (through the outsourced service providers) who report to the Board, and its operations are not complex at present. However, if the Group increases in size, the appointment of an appropriately qualified and resourced internal audit department will be considered.

Directors' Remuneration Report

Introduction

This report is on the activities of the Nomination and Remuneration Committee. The information provided in this part of the Directors' Report is not subject to audit, except where stated.

Remuneration policy

During 2018, the Nomination and Remuneration Committee comprised four non-executive directors and the Chairman and is chaired by Quentin Spicer, with Robert Hingley, Monique O'Keefe, Charlotte Valeur and Jonathan Thompson as members. Andrew Weaver ceased to be a member of the Nomination and Remuneration Committee following his resignation from the Board on 17 April 2018.

The Group's policy is that the remuneration of the Directors should reflect the experience of the Board as a whole, the time commitment required, and be fair and comparable with that of other similar companies. Furthermore, the level of remuneration should be sufficient to attract and retain the Directors needed to oversee the Group properly and to reflect its specific circumstances. There were no changes to the policy during the year and it is intended that this policy will continue to apply for the year ending 31 December 2019.

Duties

The Committee was responsible for setting the Directors' remuneration levels, in conjunction with the Chairman and with consideration of the following:

· levels of Directors' remuneration should reflect the time commitment and responsibilities of the role;

· non-executive Directors' remuneration should not include share options or other performance-related elements;

· careful consideration should be given to what compensation commitments entail in the event of early termination of a Director's appointment;

· notice of contract periods should be set at one year or less;

· no Director should be involved in deciding his or her own remuneration;

· independent judgement and discretion should be exercised when authorising remuneration outcomes, taking account of company and individual performance and wider circumstances.

The Committee is also responsible for judging where to position the Group relative to other companies in relation to the level of Directors' remuneration, but using such comparisons with caution in view of the risk of increased remuneration with no corresponding improvement in performance; and considering and making the appropriate recommendations to the Board with regard to the need to appoint external remuneration consultants.

The terms of reference of the Nomination and Remuneration Committee can be obtained from the Company's website www.phoenixspree.com.

For the years ended 31 December 2018 and 31 December 2017 Directors' fees were as follows:

\* Total director fees for 2018 in the table above reconciles to the directors' fees in note 8 when converted from EUR to GBP at an average rate of EUR/GBP 1.119

During 2018, additional attention was required from the Directors over and above their normal duties with respect to a significant transaction that was considered but not pursued. It was agreed by the committee that additional remuneration, of an amount up to or equal to the annual salary of each Director, could be expensed to the Group. Details of the additional remuneration payable to the Directors are disclosed above and within note 12 to the consolidated financial statements.

During 2018, Richard Prosser was a Director of Estera Fund Administrators (Jersey) Limited, the Group's Administrator. The remuneration of Estera is disclosed in Note 33.

During 2018, Andrew Weaver was a Partner in Appleby's, the Group's Jersey Legal Advisor. The remuneration of Appleby's is disclosed in Note 33.

During 2018, Matthew Northover was a Partner in PMM Partners Ltd., the Group's Property Advisor. The remuneration of PMM Partners Ltd. is disclosed in Note 33.

Directors' Responsibilities

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

Jersey company law requires the Directors to prepare financial statements for each financial year, in accordance with generally accepted accounting principles. The Directors are required under the Listing Rules of the Financial Conduct Authority to prepare the financial statements in accordance with International Financial Reporting Standards ('IFRS'), as adopted by the European Union ('EU').

The financial statements are required by law and IFRS as adopted by EU to present fairly the financial position of the Group.

Under Jersey company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and of the profit or loss of the Group for that period.

In preparing the financial statements, the Directors are required to:

· select suitable accounting policies and then apply them consistently;

· make judgements and estimates that are reasonable and prudent;

· state whether they have been prepared in accordance with IFRS as adopted by the EU;

· prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the Company will continue in business.

The Directors are responsible for keeping proper accounting records, which disclose with reasonable accuracy at any time the financial position of the Group and to enable them to ensure that the financial statements comply with the Companies (Jersey) Law 1991. They are also responsible for safeguarding the assets of the Group and the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors confirm that these financial statements comply with these requirements.

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

Directors' Responsibility Statement

The Directors confirm that to the best of their knowledge:

· the consolidated financial statements, prepared in accordance with the applicable set of accounting standards (as detailed above) and Company Law, give a true and fair view of the assets, liabilities, financial position and profit and loss of the issuer and the undertakings included in the consolidation taken as a whole;

· the management report includes a fair review of the development and performance of the business and the position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties they face, as well as the business model and strategy of the Group; and

· the Annual Report and consolidated financial statements, as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Group's position, performance, business model and strategy.