RDI.L Regulatory News (RDI)

THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION

FOR IMMEDIATE RELEASE

 ("RDI" or the "Company" or the "Group")

(Registration number 010534V)

LSE share code: RDI

JSE share code: RPL

ISIN: IM00BH3JLY32

LEI: 2138006NHZUMMRYQ1745

PRELIMINARY RESULTS FOR THE YEAR ENDED 31 AUGUST 2020

TRANSFORMATIVE YEAR DELIVERING HIGHER QUALITY PORTFOLIO AND STRENGTHENED BALANCE SHEET

RDI, the income focused UK REIT, which has a primary listing on the London Stock Exchange and a secondary listing on the Johannesburg Stock Exchange, today announces its results for the year ended 31 August 2020.

These results reflect the success the Company has achieved in progressing its strategic initiatives set out approximately 18 months ago, namely a substantial reduction in retail exposure, a lower leverage capital structure and a more focussed allocation of capital. Despite the significant impact on valuations and earnings, particularly with respect to our operating assets as a result of COVID-19, the Company is now in a far stronger position with retail exposure limited to 10.1 per cent of the pro forma portfolio and pro forma leverage reduced to 32.6 per cent.

Separately, the Company has today announced that Mike Watters will be retiring in December 2020. Stephen Oakenfull, Deputy CEO will take over as CEO and will join the Board later today.

Includes certain non-IFRS performance measures which are explained and reconciled to IFRS in the Alternative Performance Measures table.

(1) Net rental income from continuing operations, excluding the European segment which has been classified as a discontinued operation.

(2) LTV of 46.7 per cent, adjusted to reflect transactions between 31 August 2020 and the date of the announcement (31 August 2019: 46.8 per cent)

Material progress on strategic repositioning

· £371.4 million of largely retail disposals exchanged or completed at an average 3.5 per cent discount to the last reported value 

· Pro forma retail exposure reduced to 10.1 per cent (31 August 2019: 28.1 per cent)

· Pro forma LTV reduced to 32.6 per cent (31 August 2019: 42.0 per cent)

· High quality Distribution, Industrial and Office portfolios now comprise 56.5 per cent of portfolio on a pro forma basis

· Cash and available facilities has increased to approximately £240.0 million post year end

· Dividend reinstated at 5.0 pence per share, with dividend cover of 1.4 times

Robust operational performance

· EPRA occupancy increased to 98.8 per cent (31 August 2019: 95.9 per cent)

· 121 leasing events completed during the year, 5.1 per cent (£0.8 million) above ERV

· Like-for-like net rental income declined 23.5 per cent reflecting a reduction in income from operational assets, continued CVA activity in the retail sector and a deterioration in collection rates

· Like-for-like net rental income excluding operational assets declined 5.3 per cent

· All properties including Hotels and London Serviced Offices reopened

· London Serviced Office portfolio delivered a resilient performance despite the COVID-19 restrictions with EBITDA of £8.5 million

· Early signs of a moderate recovery in Hotel portfolio occupancy and room rates, prior to new lockdown measures

COVID-19 trading update and financial position 

· Like-for-like valuation decline of 9.8 per cent, weighted toward the second half of the financial year

· Average rent collection rate of 91.9 per cent, of rents demanded between March and September

· Disciplined measures to reduce asset related operating costs

· Committed capital expenditure limited to £2.3 million

CEO Succession

· Mike Watters will retire and step down from the Board as an Executive Director during December 2020

· Stephen Oakenfull to succeed Mike Watters as CEO and will join the Board later today

Gavin Tipper, Chairman, commented:

"The substantial efforts that have been successfully undertaken over the past 18 months, against an extremely challenging background, have delivered a streamlined, higher quality portfolio together with a strong balance sheet. While there is work to be done in shaping the future trajectory of the portfolio, the Company is well positioned for growth and we are pleased, therefore, to be able to reinstate the dividend."

Mike Watters, Chief Executive, commented:

"Credit is due to the team at RDI for the transactions they have been able to complete in the current market conditions, in particular since the year end, which have brought pro forma retail exposure and LTV down substantially to 10.1 per cent and 32.6 per cent respectively. While conditions remain challenging for the Company's operating assets, we believe that the types of assets we hold should be quick to recover once the market turns a corner. Following this period of consolidation, the strength of the repositioned portfolio, the ultimate recovery of our operating assets and £240 million of liquidity provide strong drivers to rebuild income on a sustainable basis."

Results presentation, webcast and conference call

A webcast for analysts and investors will take place on Thursday 5 November 2020 at 9.00 a.m. (UK time) / 11.00 a.m. (SA time). The webcast can be accessed via the homepage of the Company's website: www.rdireit.com.

Conference call dial-in numbers and access code

For further information, please contact:

The person responsible for arranging the release of this announcement on behalf of the Company is Lisa Hibberd, Company Secretary.

Disclaimer

This release includes statements that are forward looking in nature. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of RDI REIT P.L.C. to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Any information contained in this release on the price at which shares or other securities in RDI REIT P.L.C. have been bought or sold in the past, or on the yield on such shares or other securities, should not be relied upon as a guide to future performance.

CHIEF EXECUTIVE'S REPORT

2020 is a year which will not be easily forgotten. The full impact of the COVID-19 pandemic is yet to be determined but has already had profound social and economic impacts. We have seen pre-existing consumer and occupational trends being accelerated, highlighting the importance of capital allocation and alignment to the structural changes taking place across our markets.

Roughly 18 months ago, we set out a number of strategic initiatives to reposition the Company. Despite the challenging economic backdrop, through this repositioning the Company is in a substantially stronger position as a result of the progress made in the following areas:

· Reduction in retail exposure: At the end of the 2018 financial year, retail assets represented 45 per cent of the Group's portfolio. A reduction in retail exposure to 20 per cent was targeted through the disposal of the German retail portfolio and certain smaller UK assets. The majority of the German portfolio has been sold or contracted for sale during the course of the 2020 financial year. In addition, the recent disposal of the UK Retail Parks portfolio has reduced retail exposure on a pro forma basis to 10.1 per cent of the portfolio. A full exit from all retail assets is now being targeted;

· Lower leverage capital structure: An LTV ratio of between 30 - 40 per cent was targeted to strengthen the balance sheet, provide greater financial flexibility and more consistent shareholder returns across real estate cycles. The success of the disposals programme has supported a significant reduction in debt and an increase in cash and available facilities. Notwithstanding the impact of lower valuations, pro forma LTV has been reduced from 47.3 per cent in 2018 to 32.6 per cent; and

· Focused capital allocation: In order to deliver a simplified investor proposition, a more strategic approach to capital allocation was set out with a focus on fewer sectors backed by occupational demand. Over a two year period, £389.2 million of largely retail disposals have been realised or exchanged, delivering wholesale change to the composition of the portfolio. The reduction in retail and the ongoing exit from Germany have enhanced the quality of the portfolio and simplified the business. Looking forward, we will capitalise on the strength of the existing Distribution, Industrial and Office portfolios and review options on the hotel portfolio, including the potential to realise value from the portfolio once economic and trading conditions improve.

COVID-19

The significant progress achieved during such an extraordinary period required rapid decision making and support from our stakeholders. I would like to take the opportunity to thank all our stakeholders, including my RDI colleagues, advisers, occupiers, clients, lenders and shareholders for their continued commitment, support and co-operation. Our response to COVID-19 has been wide ranging and is covered in more detail throughout this report. New restrictions annouced for November 2020 will likely delay the timeline for recover further.

Capital allocation

While there are clearly a number of macro-economic and political risks ahead, the Company is now well positioned to be both defensive in the short term and to take advantage of opportunities should they arise from this period of uncertainty. Following a period of significant portfolio rationalisation, future capital allocation will be disciplined and target occupier-led strategies that can be clearly communicated to our shareholders.

Further to our recent retail disposals, we will now target a full exit from the limited number of remaining retail assets. The Hotel portfolio has increased to 26.5 per cent of the Group portfolio as a result of disposal activity rather than a strategic decision to increase absolute exposure to the sector. As part of the ongoing repositioning of the portfolio, strategic options are being actively considered for the Hotel portfolio in medium term. Given the quality of the portfolio and our expectation of a recovery in the trading performance, a near term exit is not expected to deliver best value to shareholders.

Earnings and dividend

We were net sellers of assets during the year as part of our strategy to reduce our retail exposure and strengthen the balance sheet. As has been communicated to shareholders, the longer-term benefits of a higher quality, more streamlined portfolio together with lower levels of leverage will result in lower earnings in the short term.

COVID-19 had a material impact on underlying earnings which decreased by 41.5 per cent to £26.2 million (31 August 2019 (excl. Aviva): £44.8 million). Underlying earnings per share decreased to 6.9 pence per share (31 August 2019 (excl. Aviva): 11.8 pence per share).

Following the decision not to declare an interim dividend, the Board has declared a dividend in respect of the full year of 5.0 pence per share (31 August 2019: 10.0 pence per share). The dividend reflects a 72.5 per cent pay-out ratio on underlying earnings and in line with the Company's UK REIT distribution obligations. The decision to reinstate dividend payments follows the significant improvement in the Group's cash, liquidity and leverage position. 

Balance sheet and financing

EPRA NAV decreased by 18.3 per cent to 151.5 pence per share (31 August 2019: 185.5 pence per share), largely as a result of a like-for-like portfolio valuation decline of 9.8 per cent for the full year.

As expected, valuation movements varied significantly between sectors. The overall like-for-like valuation decline was heavily impacted by the retail sector and the Group's operating assets in the second half of the year. With pro forma retail exposure now 10.1 per cent, exposure to the structural risks in this sector have been significantly reduced. The valuation impact on the Hotels and London Serviced Office portfolios is temporary, in our view, with a recovery largely linked to a return to economic growth. Distribution and Industrial values were broadly flat with the sector remaining well supported. The portfolio repositioning has increased the pro forma weighting to this sector to 26.6 per cent.

The Group's share of net debt reduced by £122.0 million to £544.6 million (31 August 2019: £666.6 million). Adjusting for transactions exchanged or completed post year end, pro forma LTV reduced to 32.6 per cent (31 August 2019 pro forma: 42.0 per cent) supported by the strategic disposal programme and higher cash balances of £70.2 million (31 August 2019: £33.9 million). Since the balance sheet date, the Group's cash position has been significantly enhanced following disposals exchanged or completed post year end and now stands at approximately £131 million. In addition, the Group's revolving credit facility has headroom of £114 million which, subject to financial covenants, provides total cash and available facilities of approximately £240 million.

Progressive sustainability and social responsibility performance

As a Company we have made significant progress in implementing our Sustainability & Social Responsibility objectives. A Gold rating was achieved for the second year running from EPRA sBPR and we improved our GRESB Real Estate assessment score, highlighting our commitment to our environmental, social and governance ("ESG") agenda.

The health, safety and welfare of our staff, contractors and communities remains at the forefront of the Group's Sustainability & Social Responsibility strategy, and we are ensuring that this continues, notwithstanding the disruption and challenges related to COVID-19.

Looking forward, ESG will be embedded in our overall investment and capital allocation decisions as it becomes increasingly important in attracting and retaining successful occupiers. Commitment to the Company's Sustainability & Social Responsibility objectives has also now been included in the performance objectives of the executive management team, creating a link to remuneration.

Changes to the Board

During the year, the size of the Board reduced from eleven to seven directors.

Robert Orr, an independent non-executive, resigned in October 2019, due to external work commitments. Marc Wainer retired at the January 2020 AGM, leaving Pieter Prinsloo as the sole representative of Redefine Properties. Stephen Oakenfull and Adrian Horsburgh, the Deputy CEO and Property Director respectively, stepped down from the Board at the AGM, but retained all of their executive responsibilities.

These changes restored the balance of independent and non-independent Directors, aligned the composition of the Board with the requirements of the 2018 UK Corporate Governance Code (the "Code") and improved the level of female representation.

In June 2020, our longstanding major shareholder, Redefine Properties, agreed the sale of its 29.4 per cent shareholding in the Company to controlled affiliates of the Starwood Capital Group ("Starwood"). Following completion of the sale, Pieter Prinsloo of Redefine Properties stepped down from the Board, and was replaced by Matthew Parrott of Starwood, on 22 July 2020. The Board looks forward to a productive relationship with Starwood.

Following todays' announcement, I will retire in December 2020 at which point Stephen Oakenfull will take over the role of CEO. He will re-join the Board later today.

Outlook and strategy

The actions we have taken over the last 18 months have repositioned the Company entirely. There is further work to be done, including rebuilding income returns across our operating assets, but the strength of the balance sheet and significant cash resources on hand have created a strong platform from which to focus on the future and growth opportunities. In a world with ever increasing complexity, we look forward to getting back to basics - a simplified business backed by a strong balance sheet and disciplined capital allocation.

While there are many obvious uncertainties related to the economic impacts from COVID-19 and the UK's exit from the European Union, the risks and opportunities related to structural changes in consumer habits, environmental change and technology are likely to have a far more significant and lasting impact on real estate markets. The wholesale repositioning of our portfolio has delivered a significant realignment toward sectors and assets that are likely to benefit from these changes.

Our immediate focus remains on completing the disposal of the residual retail assets in the UK and Germany and the ongoing streamlining of the business to focus both capital and management time.

Longer term, the Company's balance sheet and cash position provide a strong platform to capitalise on opportunities that may arise. Following a period of consolidation, the strength of the repositioned portfolio, the ultimate recovery of our operating assets and the £240 million of firepower available, provide a strong platform upon which to rebuild income on a sustainable basis.

Mike Watters

Chief Executive Officer

5 November 2020

OPERATING REVIEW

COVID-19

The onset of the COVID-19 pandemic has posed many challenges across the business. Our focus has been on the welfare, safety and security of our stakeholders, and on ensuring that asset values are protected, revenues are carefully managed and costs are minimised. The actions we have taken have been wide ranging, from ensuring the safety of our own staff and customers to active engagement with our shareholders and lenders.

Our approach to rent collection has been on a case-by-case basis with financial assistance or payment plans being provided to those occupiers most in need. We have engaged openly with occupiers across our portfolio and sought to arrive at solutions which are fair and reflect occupiers' individual circumstances but which also protect broader stakeholder value, including that of our shareholders and lenders.

The following section provides details of the performance of each sector, together with the actions that have been taken to protect value and support a strong recovery. In general, there has been a steady recovery in activity across the portfolio, however we remain conscious that the re-introduction of new measures to curb the spread of the pandemic may prolong the recovery in certain sectors.

Cash, liquidity and banking covenants

Disposals during the year and post year end have reduced pro forma leverage to 32.6 per cent (31 August 2019: 42.0 per cent) with cash and available facilities increasing to approximately £240.0 million, subject to financial covenants. Covenant waivers have been extended on a number of facilities, particularly where these relate to operational assets experiencing income disruption related to COVID-19.

Capital expenditure

All non-essential capital expenditure was postponed in the second half of the year. Ongoing essential maintenance and, in particular, expenditure related to security, health and safety requirements, continued as usual. The Group's current cash position allows greater flexibility, however capital commitments remain low and are typically focused on secured letting and value accretive opportunities. Previously committed or essential capital expenditure over the next twelve months is limited to approximately £2.3 million.

Rent collection

Rent collection across the portfolio varied significantly, with both overall and individual sector collection rates were typically in line with comparable industry figures, where available. Since the onset of the pandemic to September, the adjusted weighted average collection rates for the Group has been 91.9 per cent.

(1) Annualised gross rental income as at 31 August 2020. Rent collection percentages relate to the rent demanded and due.

(2) Rent collection, adjusted for certain tenants which have indicated they are paying monthly and have paid one third of quarterly rent demanded

(3) Rent collection typically reflects payments made monthly in advance

(4) Rent concessions agreed for all hotels for second six months of the financial year. Full rent received for the six months to 29 February 2020

Distribution and Industrial

The Distribution and Industrial portfolio has proved resilient reaching 98.8 per cent occupancy (31 August 2019: 93.7 per cent) following the letting of Unit 1B at Link 9, Bicester. The sharp increase in online sales to 28.1 per cent in August (source: ONS) has created additional demand for storage and logistics which has supported the sector. The level of online sales is expected to fall back following the initial COVID-19 impact, however the medium term trajectory is expected to remain well above pre COVID-19 levels of roughly 20 per cent, indicating a step change in online sales and an acceleration of change in consumer habits. Rent collection has remained strong, averaging over 95.5 per cent from March through to September.

Offices

In general rent collection across the London and Regional Office portfolios has been in line with sector averages. Approximately 36 per cent of the rent roll is from the UK Government or utility related companies. Certain smaller tenants have been provided with financial assistance in the form of rent deferrals or rent-free periods, but this has been limited.

London Serviced Offices

The London Serviced Office portfolio comprises four assets managed by Office Space in Town ("OSIT"). All four assets were re-opened in June following a three month closure in line with the UK Government's work from home guidance. In order to support clients through this period, a 50 per cent reduction in licence fees was offered for April and May. This was subsequently reduced to 25 per cent through to July and returned to full rates in August. Collection of licence fees billed remained at over 98 per cent throughout the second half of the year. Service income, which typically reflects about 10 per cent of EBITDA, has been nominal in the second half of the year.

The London Serviced Office portfolio typically has an EBITDA to total revenue margin of approximately 60 per cent. The anticipated net EBITDA (before head rents) for the current financial year was approximately £10.5 million (Group share: £8.4 million) prior to the onset of COVID-19. The outturn for the year was £8.5 million, reflecting a relatively resilient performance given the circumstances. The most significant underlying operating costs are, inter alia, business rates, staff costs, utilities, sales and marketing and management fees. A high proportion of these costs are variable which allowed for a material reduction in the underlying operating costs while the offices remained closed.

UK Retail

While the retail sector provided many challenges during the year, our exposure has been significantly reduced. Looking forward, the risk related to ongoing weakness in many parts of the retail sector has now been minimised with a full exit from our remaining retail assets targeted.

Collection rates varied considerably depending on the nature of the assets and the exposure to different retail categories. The UK Retail Parks portfolio delivered a stronger performance, partly due to the accessibility of the assets but also a reflection of the higher proportion of food, DIY, homewares and convenience retailers which have proved more resilient. Shopping centres, with a higher proportion of leisure and fashion, were hardest hit.

Despite many individual stores being closed from March through to June, all assets remained open through the period to support essential retailers where required. Co-ordination and support across the retail portfolio has been critical to the re-opening of retail units in a safe and responsible manner.

Hotels

The UK Hotel portfolio comprises 18 assets, including 13 assets managed by the Company's associate, RBH Hotel Group Limited ("RBH"). The remaining five assets are let to Travelodge UK Holdings Limited ("Travelodge").

Of the 13 assets managed by RBH, eight were closed following UK Government guidelines. Initially, five hotels were let to local authorities at discounted rates to accommodate NHS key workers and the homeless, however this was subsequently reduced to three due to spare capacity. A significant amount of work was carried out to reduce operating and overhead costs while the hotels remained closed. A high proportion of the managed hotels operating costs are variable which, together with the various UK Government support packages, including the 12 month business rates holiday and the Coronavirus Job Retention Scheme, helped to facilitate a temporary but significant reduction in the cost base.

RDI provided support and financial assistance to RBH during the second half of the year to bridge certain short term cash flow requirements totalling £3.9 million. All the RBH managed hotels re-opened during June and July. Occupancy across the RBH managed portfolio has seen a steady improvement in recent months from 15.2 per cent in April to 46.9 per cent at the end of August, although new lockdown restrictions announced for November 2020 are likely to reverse this trend and further delay the timeline for recovery.

Rents associated with the RBH managed hotels are paid quarterly in arrears. As previously announced, no rental payments were received during the second half of the financial year.

Travelodge portfolio

The Travelodge CVA came into effect in June 2020. The five assets let to Travelodge had a pre-CVA passing rent of £2.5 million p.a. (Group share: £2.1 million p.a.). Under the terms of the CVA, and assuming no rent reviews, the Group's share of rent has and will be reduced by:

· £0.5 million for the financial year ending 31 August 2020;

· £0.9 million for the financial year ending 31 August 2021; and

· £0.3 million for the financial year ending 31 August 2022.

Following 31 December 2021, rents will revert to the full contractual position assuming RDI does not utilise its sole right, within the terms of the CVA, to break the lease on our Travelodge Hotel in Slough. All outstanding payments have recently been received in full, in accordance with the CVA. 

Portfolio overview and capital allocation

The 2020 financial year has seen a substantial repositioning of the portfolio in line with our strategy of reducing exposure to the retail sector and having a narrower, more clearly defined capital allocation strategy.

Retail exposure, including transactions post year end, has been reduced to 10.1 per cent on a pro forma basis, below our previous target of 20 per cent. A full exit from all retail exposure is now being targeted with the majority of remaining retail assets subject to disposal processes.

The Distribution and Industrial and Office portfolios now comprise 56.5 per cent of the portfolio on a pro forma basis, which is expected to rise as a result of further disposals in the retail sector and future focused capital allocation and investment decisions.

A consequence of recent disposal activity has been an increase in weighting to the Hotel portfolio which now stands at 26.5 per cent. We remain confident that limited service hotels will prove resilient and early to benefit from a recovery in the sector. However, in addition to managing the hotel portfolio through a period of recovery, options to realise value will be actively considered in order to focus the Company's capital and management resources on the industrial and office sectors.

Portfolio summary

(1) Annualised gross rental income for the London Serviced Office portfolio included as EBITDA net of management fees.

(2) Annualised gross rental income for UK Hotels reflects rents collected on the RBH managed hotels during the year.

(3) Reversionary yields for London Serviced Offices and RBH managed hotels reflect management expectations of the underlying EBITDAs for the 2021 financial year

(4) Excluding the RBH managed hotels and London Serviced Office portfolios. Relevant operational metrics disclosed separately

Leasing activity

Despite the impact of COVID-19, it has been an active period with 121 lease events reflecting £16.0 million of annualised gross rental income being concluded. This represents a 27.9 per cent, or £3.4 million, increase in gross rental income on units subject to lease events and was 5.1 per cent ahead of ERV.

Portfolio occupancy increased to 98.8 per cent (31 August 2019: 95.9 per cent), supported by the letting of 288,753 sqft at Link 9, Bicester in two separate transactions.

· 13 leases were renewed on break or expiry and 52 new leases and lease regears were signed in the year, accounting for total gross rental income of £9.8 million (previous gross rental income £6.9 million), 1.1 per cent (£0.1 million) above ERV;

· The new leases include lettings on previously vacant space totalling 183,722 sq ft across ten units, generating an additional £1.5 million in gross rental income including the letting of unit 1b to Arrival at Link 9, Bicester;

· 54 rent reviews were completed including indexed or fixed uplifts on £6.2 million of gross rental income, 9.4 per cent above the previous passing rent and 12.4 per cent above ERV; and

· Seven units were vacated in the period totalling 22,537 sq ft. Previous gross rental income on the units vacated was £0.2 million.

Valuation overview

The overall portfolio value declined 9.6 per cent across the year on a constant currency and like-for-like basis, impacted most significantly by ongoing pressure on UK Retail assets and, in the second half of the year, the impact of COVID-19 restrictions on the Group's UK Hotel and London Serviced Office portfolios. Our expectation is that the impact on hotels and serviced offices is likely to be largely cyclical with a recovery in operating metrics and investment markets linked to the removal of travel restrictions and stronger economic activity. Excluding UK Hotels and London Serviced Offices, like-for-like topped-up net rental income increased £2.2 million, or 5.1 per cent, largely due to successful letting activity and an increase in occupancy to 98.8 per cent.

Distribution and Industrial values were largely unchanged on a like-for-like basis, which excludes Link 9, Bicester that is shown as an acquisition during the year. Link 9, Bicester delivered a yield on total development cost of 7.5 per cent and has been revalued to a 6.6 per cent topped-up initial yield.

The London Serviced Office portfolio declined 9.2 per cent, in the main reflecting lower occupancies and revenues in the second half of the year. The London Office portfolio was relatively resilient with all four assets supported by redevelopment opportunities and comparatively low capital values per sq ft. Regional Offices now represent less than 2.0 per cent of the portfolio. The material reduction in regional office values in percentage terms was almost entirely attributable to increased vacancy at Plymouth.

The Hotels portfolio suffered a 14.0 per cent reduction in values as a result of the significant COVID-19 related impact on underlying trading performances and the near term outlook while travel restrictions continue to apply. The Travelodge portfolio reflects both the impact of the CVA terms and higher yields being applied to the Travelodge covenant.

UK Shopping Centre values continue to have little investment market support with COVID-19 resulting in a further acceleration of online retailing and abrupt impacts on footfall and trading since March. Exposure to UK shopping centres is now limited to two assets representing less than 5 per cent of the Group's portfolio. UK Retail Parks were sold post year end for £156.9 million, a 3.0 per cent discount to the 29 February 2020 valuation.

The German retail portfolio value increased marginally on a like-for-like basis, excluding the disposal of the Schloss-Strassen Center in Berlin during the year for €65.5 million (29 February 2020: €78.1 million). 

(1) Market value adjusted to reflect lease liabilities and lease incentives.

(2) Includes the effect of capital expenditure, amortisation of head leases, tenant lease incentives and foreign currency translation where applicable.

(3) The letting of unit 1a at Link 9, Bicester is included in annualised topped-up net rental income movements as it was reflected as a vacancy as at 31 August 2019.

Capital expenditure

Capital expenditure during the year totalled £5.7 million with works on Ingolstadt now substantially complete. Notwithstanding the planning activity across all four of our Greater London offices, at this stage no material capital commitments have been made in respect of these redevelopment opportunities, most of which are medium to long term in nature. Committed capital expenditure at the year end was limited to £2.3 million.

Disposal activity

Disposals totalling £131.9 million were completed during the year and a further £239.5 million has been exchanged or completed post year end, including the disposal of the UK Retail Parks portfolio for £156.9 million. 

Bahnhof Altona, Hamburg was exchanged for sale in September 2019 and, while the terms of the original sales contract remain binding, the timing of completion remains uncertain following the previously announced pre-emption right in favour of the City of Hamburg. Further details are provided below.

(1) Joint ventures at proportionate share.

(2) Topped-up EPRA NIY, based on the sales price.

Park Place, Leeds

Park Place was sold for £9.0 million, a 2.3 per cent premium to the last reported market value, reflecting a net initial yield of 5.9 per cent. The disposal follows a lease regear to the Department for Works and Pensions on a new ten-year lease with limited further upside anticipated in either rental or capital values.

Albion Street, Derby

The sale of Albion Street completed for £2.5 million, in line with the last reported market value, reflecting a net initial yield of 10.5 per cent.

Kaiserslautern and Waldkraiburg, Germany

The portfolio of two retail warehouses held in a joint venture with Menora Mivtachim, was sold for €20.4 million (Group share: €10.6 million), a 9.1 per cent premium to the last reported market value.

Waterside Court, Leeds

Waterside Court, Leeds sold for £6.5 million, reflecting a topped-up net initial yield of 5.8 per cent and a 37.2 per cent premium to the last reported market value. The 35,966 sq ft office is fully let to the Secretary of State until July 2029 following a lease regear completed in July 2019.

Omnibus, Reigate

The Omnibus office building in Reigate was sold for £14.9 million, reflecting a discount of 6.3 per cent to the last reported market value. The 62,756 sq ft regional office had an occupancy rate of 55.1 per cent.

Leipzig, Germany

The food-anchored, mixed-use asset was sold for a price of €7.9 million (£6.8 million), reflecting an 8.1% discount to the 31 August 2019 market value.

OBI Retail Warehouse portfolio, Germany

The sale of the portfolio, comprising three DIY retail warehouses, for €34.2 million (Group share: €22.8 million), reflects a 3.5 per cent discount to 31 August 2019 market value.

Two of the properties, Herzogenrath and Schwandorf, were 75 per cent held by RDI with a minority partner holding the residual 25 per cent. A third property, in Huckelhoven, was held in joint venture with Menora Mivtachim. The portfolio was sold by way of a corporate sale of various special purpose vehicle interests and included the transfer of existing debt facilities with outstanding balances of €19.5 million (Group share: €13.1 million).

The portfolio is let principally to OBI, one of Germany's leading DIY retailers, which makes up 89.5 per cent of the rental income. The average WAULT across the portfolio is 4.7 years with all leases subject to escalations of between 60 and 75 per cent of CPI.

Schloss-Strassen Center, Berlin

The Primark and Rewe anchored shopping centre was sold at the end of the year for gross consideration of €65.5 million, reflecting a net initial yield of 5.8 per cent. The disposal included the transfer of the associated €62.0 million bank facility with a maturity date of 31 March 2021.

The Schloss-Strassen Center is an 18,600 sqm retail centre located on the main retail pitch in the Steglitz-Zehlendorf area in South West Berlin and is integrally linked to the underground transport network. The centre produced net rental income of approximately €4.7 million p.a. (£4.2 million p.a.) and is anchored by Primark and Rewe, with other key tenants including Contipark, Smyths Toys and Fitness First.

Bahnhof Altona Center, Hamburg

As previously announced, contracts were exchanged in September 2019 for the sale of the Bahnhof Center for €91.0 million, reflecting a 2.5 per cent premium to the 31 August 2019 market value. While the position with regard to the City of Hamburg's statutory pre-emption right is ongoing, the terms of the original sales contract remain binding whether the asset is acquired by the original purchaser or the City of Hamburg. RDI will continue to benefit from the income returns while the pre-emption position is resolved and until the disposal is completed.

Disposals post year end

UK Retail Parks portfolio

As announced on 7 September 2020, the UK Retail Parks portfolio was exchanged for sale for a gross consideration of £156.9 million, reflecting a topped-up net initial yield of 7.5 per cent and a 3.0 per cent discount to book value. The disposal completed on 30 October 2020. As at 29 February 2020, and as last reported, the portfolio had gross annualised rental income of £12.5 million, a WAULT of 7.3 years and occupancy of 98.4 per cent.

Sustainability

The Group's sustainability performance was reviewed with nine key objectives set for 2020, including both new and ongoing objectives. Despite the COVID-19 related challenges, solid progress has been made implementing our annual objectives across the resilient assets, investment and governance pillars. Good quality data and robust reporting processes are key for driving our journey towards a low carbon portfolio and to achieving the Group's energy target.

During the year, our green building certified portfolio, which includes SKA, BREEAM In-Use and BREEAM New Construction, was improved upon. St. Dunstan's, Monument and Little Britain, St Pauls both having both achieved 'Very Good' BREEAM In-Use ratings.

UK Distribution and Industrial

(21.2 per cent of the portfolio)

Our distribution and industrial strategy is focused on an in-depth understanding of occupational demand and trends linked to changing consumer habits and the impact on supply chains and logistics networks. Our portfolio is typically "standard warehousing" units of under 200,000 sq ft linked to key transport networks and strong demographics, in order to capture a broad base of occupier demand, including third party logistics, distribution and manufacturing.

Following the disposals exchanged or completed post year end, the Distribution and Industrial portfolio has increased to 26.6 per cent of the pro forma portfolio.

Occupancy within the portfolio increased to 98.8 per cent (31 August 2019: 93.7 per cent) following the letting of Unit 1B at Link 9, Bicester with topped-up net rental income across the portfolio increasing by £2.8 million or 23.1 per cent.

The second letting at Bicester delivers on the original business plan of growing our exposure to the distribution sector at attractive entry prices by taking on well researched letting risk. The scheme, which is now fully let, has delivered a yield on total development cost of 7.5 per cent.

Key asset management initiatives and leasing activity in the year

· Link 9, Bicester - Unit 1A and 1B totalling 288,000 sq ft were let to Arrival for 15 year terms in two separate transactions. The aggregate contracted gross rent of £2.3 million p.a. was 18.2 per cent ahead of ERV and subject to the higher of open market rental value or RPI capped and collared at 2 per cent and 4 per cent.

· Camino Park, Crawley - a rent review was agreed at £0.6 million, 60.0 per cent ahead of the previous passing rent

· Southwood Business Park, Farnborough - five new leases or lease renewals were signed totalling £0.7 million, 9.1 per cent above the previous passing rent and 8.6 per cent above ERV

UK Offices

(23.8 per cent of the portfolio)

Our office strategy is focused on higher yielding assets in Greater London, located in areas benefiting from infrastructure investment and opportunities to add value through repositioning or planning gain. Short to medium term income returns combined with identifiable asset management opportunities and relatively low capital values per sq ft, aim to deliver non-cyclical, income led total returns. This, combined with our serviced office platform, provides the ability to meet the rapidly changing demands of office occupiers requiring flexible lease terms together with the provision of high-quality services.

(1) Annualised gross rental income for the London Serviced Office portfolio included as EBITDA net of management fees.

(2) Reversionary yield for the London Serviced Office portfolio reflects management expectations of the underlying EBITDAs for the 2021 financial year.

(3) Excluding London Serviced Office portfolio. Relevant operational metrics disclosed separately.

London Serviced Office ("LSO") portfolio

Following COVID-19 related restrictions, the LSO portfolio was closed to clients from April and re-opened in June. During this period of restricted access, clients were offered discounted licence fees, however services and support which could be delivered remotely were continued wherever possible. Licence fees reverted to full contracted rates from August.

Although occupancy and therefore licence fee revenue has reduced, performance to date has been more resilient than otherwise anticipated and has outperformed the wider flexible office market. Occupancy across the full year averaged 86.8 per cent (31 August 2019: 94.0 per cent) falling to 76.0 per cent at the end of August 2020. Viewings and sales have showed steady improvement in recent months, however the impact of the renewed restrictions announced in September is yet to be determined.

EBITDA was 22.0 per cent lower than last year, almost entirely related to the second half of the year following the impact of UK Government guidelines and restrictions. Service income related to meeting rooms, conferencing and catering, which typically represents approximately 10 per cent of EBITDA, has been nominal in the second half of the financial year with a recovery likely to coincide with a relaxation of social distancing measures.

Despite the anticipated increase in vacancy rates across the London office market, the impact of COVID-19 has highlighted the importance of flexibility, both in terms of working practices and occupiers' need to adjust their space requirements quickly and efficiently in response to business cycles. We continue to see evidence of smaller and mid-size firms seeking flexible lease terms and high-quality services which allow them to focus on their core business, both at the office and remotely. Equally, there is increased demand from larger corporates for flexibility and turn-key solutions for larger elements of their office requirement. Without underestimating the impact of the current economic conditions and the likelihood of lower aggregate demand in the short term, the longer term support for dedicated office space with flexible lease terms and high levels of support services remains intact.

(1) Includes the impact of discounted licence fees from April 2020 to July 2020.

Greater London and regional offices

The Group's office exposure has been rationalised over recent years and is now predominately focused on assets in Greater London delivering short to medium term income returns with clearly identifiable opportunities to enhance value through planning gain or asset repositioning.

Occupancy within the portfolio remained high at 96.7 per cent (31 August 2019: 97.9 per cent) with annualised gross rental income increasing by £0.6 million following lettings at Charing Cross Road and Canbury Park, Kingston.

Following the successful planning process to extend the overall area at Charing Cross Road by approximately 40 per cent to 56,576 sq ft, there have been numerous unsolicited approaches to acquire the building. Given a potential window of continued strong demand for this specific investment location, a marketing process has commenced to test market pricing. Given the current strength of the Group's balance sheet and the positive long term outlook for the location, all options are being kept open, including extending existing leases for shorter periods.

Key asset management initiatives and leasing activity in the year

· Newington House, Southwark, London - feasibility and planning work continues to be progressed with the potential to deliver a material mixed-use regeneration scheme, in partnership with a consortium of three neighbouring landowners, in an area of London benefitting from significant infrastructure and capital investment.

· Canbury Park, Kingston - the remaining 12,545 sq ft of vacant office space was let to Interval International for £0.3 million p.a., marginally below ERV.

· Charing Cross Road, London - a short-term letting of the previously vacant basement space was completed for £0.3 million p.a., in line with ERV.

UK Hotels

(26.5 per cent of the portfolio)

The second half of the financial year has been exceptionally challenging for the hotel sector with COVID-19 related restrictions impacting occupancy and revenue from late February onwards. Decisive management action together with various UK Government support packages, including the twelve month rates holiday until March 2021 and the Coronavirus Job Retention Scheme, have served to limit operating costs within the RBH managed hotel portfolio during a period of limited revenue.

RBH managed hotels

The majority of RBH managed hotels were closed from late March, however, a limited number remained open and operational throughout the period in order to accommodate key workers and the homeless. The Southampton Holiday Inn Express also benefited from June to September by accommodating various ECB staff, media and security teams in connection with international cricket events at the Ageas Bowl.

All hotels re-opened from July and, on average, have experienced steady increases in demand and bookings. Hotels in Greater London continue to experience lower levels of demand relative to regional hotels, largely a result of travel restrictions and a slower return to work given the relatively higher reliance on public transport.

Average occupancy levels across the year were 54.6 per cent (31 August 2019: 84.8 per cent). Occupancy dropped to a low point of 15.2 per cent in April and has since climbed steadily to 46.9 per cent in August. Room rates, on average, were 15.7 per cent lower than the comparable period last year. Current room rates are approximately 35 per cent lower than the 2019 average but have also shown steady increases from the low point in April. As noted elsewhere, rents for the RBH managed portfolio are paid quarterly in arrears. Full rental payments were received for the first half of the year, but no rental payments were received in the second half of the year.

At this stage there is not sufficient clarity to provide reliable income expectations for the portfolio, especially considering new lockdown measures announced for November 2020. However, we remain confident that the assets are well positioned to capture renewed demand when economic activity recovers. The budget hotel sector is expected to have a quicker recovery relative to mid-market hotels as individuals and corporates seek more cost-effective options.

Underlying EBITDA for the 2021 financial year has been forecast at £9.6 million, an increase of 6.7 per cent on the prior year, reflecting the anticipated period for recovery.

Travelodge CVA

Following the Travelodge CVA in June 2020, rental payments have now resumed with the current level of rent reflecting 41 per cent of the previous £2.5 million p.a. position. Rents will revert to the full contractual position from December 2021 albeit the Slough Travelodge remains subject to a landlord break option up to December 2021.

Under the terms of the CVA, landlords were given the right to terminate leases for certain categories by giving notice prior to 19 November 2020. Landlords were also given the option to extend the term of leases in return for foregoing the landlord's ability to terminate the leases. This option was taken up on three of the four assets subject to these rights. One asset, as a result of its CVA classification, was not subject to these terms given the original terms of the lease were unchanged as part of the CVA process.

(1) Annualised gross rental income and related metrics for the RBH Managed portfolio reflects rents collected during the year

(2) Reversionary yields for the RBH managed portfolio reflects management expectations of underlying EBITDAs for the 2021 financial year

(3) Excluding RBH managed hotels portfolio. Relevant operational metrics disclosed separately. Travelodge, Slough did not contribute to the WAULT calculation as at 31 August 2020 given there was no rent under the CVA terms

UK Retail

(18.0 per cent of the portfolio)

The UK retail sector continues to experience a tough trading environment, as a result of the impact of COVID-19 and the acceleration of online retailing and structural changes in consumer habits. Within this context, the disposal of the UK Retail Parks portfolio for £156.9 million representing a 3.0 per cent discount to the 29 February 2020 valuation was a considerable success. The disposal and the pricing achieved, was largely due to the asset management of the portfolio and the positioning of the assets to more resilient parts of the sector including food, discount and convenience retailers. At the year end, the portfolio was almost fully occupied with occupancy at 99.6 per cent (31 August 2019: 97.8 per cent). Retail exposure in the UK is now limited to two assets representing 5.7 per cent of the pro forma portfolio with a view to a full exit from the sector.

Europe

(10.5 per cent of the portfolio)

Germany has typically experienced less severe COVID-19 restrictions than the UK and, prior to the recently announced lockdown for November 2020, had seen a relatively quick return to more normalised activity levels. Notwithstanding this, the strategic decision to exit our German retail portfolio is supported by a notable deterioration in the strength of the occupational market and a corresponding change in the depth and pricing within the investment market.

Further progress was made with the disposal programme, with the Schloss-Strassen Center in Berlin being sold for €66.5 million. Four assets valued at €45.9 million remain subject to disposal and are all at various stages of negotiation. Certain assets are subject to completion of asset management initiatives in order to maximise the disposal proceeds.

Occupancy across the European portfolio remained high at 98.5 per cent (31 August 2019: 99.1 per cent) with like-for-like topped-up net rental income up marginally in constant currency terms.

(1) Includes Bahnhof, Altona, Hamburg which is subject to an exchange of contracts for sale.

FINANCIAL REVIEW

Overview

It has been a year of two distinct halves. The first six months to 29 February 2020 saw the Group's earnings track very much in line with expectations. Then, subsequent to events on 11 March 2020, when the World Health Organisation recognised the outbreak of COVID-19 as a global pandemic, there was a swift and significant shift. The second half of the year has been characterised by significant market uncertainty and extremely challenging trading conditions has impacted on the Group's financial performance, both from an earnings and valuation perspective. At the date of this announcement, the full impact of the COVID-19 pandemic including timelines to a full recovery, remain unclear.

At a corporate level, the focus since the outbreak has been to improve liquidity and operational flexibility to ensure the Group could withstand an extended period of disruption, whilst continuing a rigorous focus on strategic priorities of reducing leverage and exposure to the retail sector. As a result, the balance sheet is well positioned, with reduced leverage and increased liquidity. Cash on hand and undrawn committed facilities increased to approximately £240 million following completion of the sale of the UK Retail Park portfolio post year end.

Revaluation losses of £126.1 million contributed to an EPRA NAV decline of 18.3 per cent to 151.5 pence per share at 31 August 2020 (31 August 2019: 185.5 pence per share). The Group recorded an IFRS loss of £103.8 million for the year driven by valuation declines.

The Group's key recurring earnings metric, underlying earnings, decreased by 47.0 per cent to £26.2 million (31 August 2019: £49.4 million). Removing the contribution from the Aviva financed UK Shopping Centres portfolio from the 2019 comparative, underlying earnings per share decreased by 41.5 per cent from 11.8 pence to 6.9 pence.

Loan to value at 31 August 2020 was 46.7 per cent. Pro forma loan to value (reflecting transactions exchanged or completed post year end) decreased notably to 32.6 per cent and the weighted average cost of debt of 3.0 per cent, remained broadly in line with that of 31 August 2019. Interest cover reduced below target to 2.7 times, as a result of the material impact of COVID-19 on net rental income in the second half of the year.

Performance against strategic financial targets

(1) LTV adjusted for transactions completed between the balance sheet date and the date of results announcement.

(2) The EPRA cost ratio at 31 August 2020 excludes the provision for tenant lease incentives of £1.4 million as this was a prudent 'worst- case' impairment assumption in light of COVID-19 uncertainties.

On a like-for-like basis, net rental income fell by 23.5 per cent, the combined result of lower earnings since the outbreak of COVID-19 (particularly in respect of the Group's Hotel and London Serviced Offices portfolios), prudent bad debt assumptions applied in light of the ongoing uncertainty and a continuation of CVA activity in the retail sector.

Despite the significant decline in asset valuations, pro forma LTV improved to 32.6 per cent due to disposal activity prior to and just after the reporting date.

Interest cover, which has been adjusted to remove the impact of adopting IFRS 16, fell below target in the second half of the year, as a result of reduced income and the bad debt assumptions referenced above.

The EPRA cost ratio stands at 22.4 per cent. Excluding non-recurring transaction costs of £0.7 million, the ratio would have declined to 21.1 per cent. These ratios compare to 17.8 per cent and 15.7 per cent as reported in our Interim results and are again reflective of the material impact of COVID-19 on the Group's key performance metrics during the second half of the financial year. Although strict cost control measures were put in place, the reduction in net rental income far outweighed the cost savings achieved. This deterioration is expected to be temporary in nature.

Acquisitions

During the year ended 31 August 2019, the Group acquired a 13.5 acre land interest in Bicester, Oxfordshire and entered into a forward funded development agreement for the construction of two distribution units. Construction of the second unit reached practical completion in December 2019, at which time the Group made its final payment of £10.3 million (excluding transaction costs).

Disposals

European portfolio

During the year, the Group progressed the disposal of the European portfolio, which is classified as a disposal group held for sale, albeit transactional activity slowed in the second half due to market dislocation caused by COVID-19. As a result, disposal of the remaining properties, that remain subject to contract, may take longer than originally anticipated.

On 17 September 2019, the Group exchanged contracts for the disposal of Altona Shopping Centre, Hamburg for €91.0 million, €2.2 million above market value at 31 August 2019. The City of Hamburg triggered its pre-emptive right over the property once contracts had been exchanged and negotiations between the buyer and the City have been ongoing. Although the contract remains legally binding, control is not deemed to have transferred from the Group at the reporting date and the property has not been derecognised.

On 27 December 2019, the Group completed on the sale of two German retail warehouses at Waldkraiburg and Kaiserslautern (held in joint venture) for a total consideration of €20.4 million (Group share - €10.6 million).

On 15 January 2020, the Group exchanged contracts on another retail property at Leipzig for consideration of €7.9 million. The transaction completed on 3 April 2020.

On 5 March 2020, the Group exchanged contracts for the sale of three properties at Schwandorf, Herzogenrath and Hucklehoven (Huckelhoven held in a joint venture), for a gross consideration of €34.2 million. The transaction subsequently completed on 17 March 2020.

On 31 August 2020, the Group disposed of the Schloss-Strassen Center, Berlin for a gross consideration of €65.5 million. On the date of sale, the carrying value of the investment property was €78.1 million. As the transaction was structured as a corporate disposal, the bank facility (€62.0 million), which was due to mature in March 2021, was also transferred on completion. Net proceeds were received on 2 September 2020, after the reporting date.

UK portfolio

Four mature asset sales, previously targeted for sale, completed during the year. The Group's high street retail asset in Derby and three regional offices located in Reigate and Leeds were sold for a gross consideration of £32.9 million.

After the reporting date, the Group exchanged on the sale of six UK retail parks for a gross consideration of £156.9 million. The transaction subsequently completed on 30 October 2020. This transaction is a significant milestone in the ongoing repositioning of the Company's portfolio and reflects a pro forma reduction in UK retail exposure to 5.3 per cent.

Presentation of financial information

The Board reviews information and reports presented on a proportionately consolidated basis, which includes the Group's share of interests in joint ventures. To align with how the Group is managed, this financial review has been presented on the same basis.

Discontinued operation

Effective 1 March 2019, the Group determined that the co-ordinated sale of the European portfolio met the criteria of a disposal group held for sale and constituted a discontinued operation. To comply with the presentation requirements of a discontinued operation under IFRS, the post-tax profit/loss of the Europe segment has been presented separately in the income statement, in addition to separating the cash flows of the segment under the relevant activities in the statement of cash flows.

Aviva financed UK Shopping Centre Portfolio ("Aviva Portfolio")

Given the significance of the derecognition of these four UK shopping centres in April 2019 and to aid comparability, this financial review presents the comparative income statement and cash flow for the year ended 31 August 2019 including and excluding the Aviva Portfolio. Commentary focuses, where relevant, on financial information excluding the Aviva Portfolio.

IFRS 16 'Leases' ("IFRS 16")

On 1 September 2019, the Group adopted IFRS 16, the new leasing standard. Under the previous standard, operating lease payments were charged to the income statement as a rental expense on a straight-line basis. On transition to IFRS 16, the Group recognised lease liabilities in relation to its operating leases (measured at the present value of future remaining lease payments at the date of transition) and corresponding right-of-use ("ROU") assets. Lease liabilities and ROU assets of £42.7 million, in relation to the Groups' leasehold interests in investment property were recognised on transition. There has been no impact to the Groups' net assets or earnings at 1 September 2019 and the standard has been adopted using the simplified method, meaning the comparative reporting period has not been restated. For the year ended 31 August 2020, the Group has subsequently measured the lease liabilities by increasing the carrying value to reflect the effective interest cost in each lease obligation (recognised as a finance cost in the income statement) and then reducing the carrying value to reflect head rent payments. Head rent payments are no longer recognised as a rental expense. While rental expense has decreased, underlying finance costs have increased by a corresponding amount and therefore there has been no overall change to underlying earnings. Differences in the total income statement charge as a result of recognising the effective interest costs on the lease liabilities, are presented as a Company specific adjustment in reconciling underlying earnings to IFRS. For the year ended 31 August 2020, this amounted to less than £0.1 million (including both continuing and discontinued operations). Certain performance measures, such as the interest cover ratio, have also been adjusted for comparability.

Reassessment of the Group's contracts with customers

The Group has reassessed certain contractual arrangements across both the UK and German portfolios and concluded that it acts in the capacity of principal in respect of service charge and service fees recharged. Service charges and service fee income have therefore been grossed up from the recoverable service charge and service fee expenditure in the financial statements with gross service charge income and service fee income now included in revenue. The Group's revised accounting policy is set out in Note 2.4 'Accounting policies'. Comparative revenues (revenue, rental income and other operating income) and related expenses have been restated to gross up service charge income and service fee income in the income statement in line with the current year presentation. There has been no impact on IFRS profit or loss, net asset value or cashflows as a result of these restatements. In addition, there has been no impact on the key performance metrics of the Group nor the presentation of this financial review.

Interest in joint ventures previously not recognised

As is required by the equity method of accounting, the Esplanade joint venture was carried at £nil in the Group's financial statements at 31 August 2019 as cumulative losses to date had exceeded the cost of the Group's investment, primarily due to the negative mark-to-market on the joint venture's derivative. At 31 August 2020, the share of these losses no longer exceeded the Group's net investment in the Esplanade and as a result the Group has recognised its share of profits by way of reversal of previous impairment charges taken against loans made to the joint venture.

Alternative performance measures

The Board uses a number of financial measures to assess and monitor the Group's performance and position, most notable of which are underlying earnings and EPRA best practice metrics. Although a number of these are industry standard metrics, they are not defined under IFRS and are therefore considered alternative performance measures. This financial review discloses alternative performance measures alongside IFRS to align with the manner in which the business is managed and its performance is assessed. Detailed disclosures of alternative performance measures including, where applicable, reconciliation to IFRS follows this financial review.

Underlying earnings from discontinued operation (Europe segment)

The above income statement tables are not presented in line with the requirements of IFRS. The tables segment the IFRS income statement in order to illustrate underlying earnings and EPRA earnings, both key alternative performance measures. A full reconciliation from IFRS (loss)/profit attributable to equity holders of the parent is set out in Note 31 to these consolidated financial statements.

Net rental income, excluding the Aviva Portfolio, decreased by £19.7 million or 27.5 per cent, primarily as a result of targeted disposals during the year. the impact of COVID-19 on revenue and increased provisions for bad and doubtful debts. The Group's operational portfolio's, being UK Hotels and London Serviced Offices, were the primary contributors to the reduction in net income.

Six month rent concessions were agreed for all RBH managed UK hotels, which has largely contributed to the £11.8 million reduction relative to prior year. Net rental income from the Travelodge portfolio decreased by £0.5 million as a result of CVA arrangements approved by its creditors on 19 June 2020.

Net rental income from the London Serviced Offices portfolio decreased by £1.8 million due to a reduction in licence fee income during lockdown but offset in part by lower variable costs.

Across all sectors, prudent assumptions have been applied in respect of bad and doubtful debts and tenant lease incentives, which increased the rental expense by £2.6 million relative to the prior year. Disposal activity from continuing operations has further reduced net rental income by £2.5 million.

Administrative costs have fallen in the main due to lower staff costs relative to the comparative year. The average employee head count has reduced following the wind-down of the Group's European operations.

As discussed earlier, net finance costs increased, primarily, following the transition to IFRS 16.

Tax and other includes the performance of the Groups associate interest in RBH Hotels Group Limited, which recorded a loss of £0.4 million for the year ended 31 August 2020, relative to a profit of £0.9 million in the prior year.

Non-controlling interests reflects the share of income attributable to minority shareholders within the UK Hotels and London Serviced Offices portfolios. The decrease of £3.0 million relative to prior year is in line with the reduction in operating earnings of those portfolios following the outbreak of COVID-19.

The decrease of £1.4 million in underlying earnings from the discontinued European portfolio follows continued disposal activity, which reduced net rental income by £1.7 million and which is offset by reduced finance costs on settlement or derecognition of secured debt facilities following disposals.

Like-for-like net rental income analysis

(1) Includes provisions for tenant lease incentives of £1.4 million at 31 August 2020

(2) Head rents payable under operating leases, were previously treated as a rental expense. These payments are now reclassified as lease liability payments under IFRS 16. While comparatives are not required to be restated for IFRS reporting purposes, the prior period expense has been separated out in the like-for-like disclosure for comparability.

Like-for-like income in the UK Commercial portfolio decreased 9.1 per cent or £2.5 million, the primary contributor being a reduction in licence fee income from the London Serviced Office portfolio, following lockdown restrictions.

The decrease of 59.1 per cent in UK Hotels net rental income follows rent concessions extended to all RBH managed UK Hotels for the second half of the year, together with a reduction in the annual rent received in the first half. Like-for-like income from the Travelodge portfolio decreased by 22.2 per cent, the result of the CVA arrangements.

UK Retail like-for-like income decreased 11.2 per cent, largely attributable to bad and doubtful debts. Rental income was further impacted by CVA activity, most notably Debenham's at West Orchards, Coventry and Monsoon at St George's, Harrow.

In local currency terms, the European portfolio's like-for-like net rental income decreased 0.5 per cent, following increased service charge costs at Berlin (included within like-for-like as disposed of on 31 August 2020), in addition to increased bad and doubtful debt provisions across the residual portfolio. In Sterling terms, income fell 1.7 per cent, reflecting the stronger average GBP/EUR exchange rate during the year.

(1) Market value adjusted to reflect lease liabilities (incl. adoption of IFRS 16) and lease incentives. Includes both investment property and property held for sale.

EPRA net asset value decreased 18.3 per cent to 151.5 pence per share. This was primarily as a result of valuation declines of £126.1 million across the Group's portfolio and net losses on disposals of £14.3 million. A marginally weaker Euro at the balance sheet date reduced net asset value by £2.1 million.

EPRA issued updated best practice guidelines in 2019 which become effective for accounting periods beginning on or after 1 January 2020. The most significant change proposed was in respect to the calculation of net asset value. Although not applicable to the Group this year, we have presented these measures early alongside the existing best practice measure set out above. Full reconciliation and disclosure of these new measures, along with their 2019 compratives is provided in Note 32.

(1) Valuation includes the effect of capital expenditure, amortisation of head leases, tenant lease incentives and foreign currency translation where applicable.

At the latest valuation date, a number of material uncertainty clauses were adopted by the Group's valuers in their reports, with some real estate markets experiencing significantly lower levels of transactional activity and liquidity as a result of COVID-19.

UK Commercial valuations decreased by 4.4 per cent during the year, mainly the result of a weaker performance from the London Serviced Offices, where valuations declined by 9.2 per cent or £15.1 million.

The UK Hotels portfolio valuation decreased by 14.0 per cent. The Group's RBH managed hotels reduced by 14.5 per cent due to uncertainties over the forecast trading performance of the underlying operational business' during the continued disruption period and the timelines for full recovery. The recent valuation uplifts in the Travelodge portfolio as a result of fixed rent reviews have been mitigated by the impact of the CVA arrangements agreed in the second half, with valuation declines of 10.2 per cent for the full year.

The downward valuation in UK Retail of £46.2 million was driven by valuation losses of 36.5 per cent across the two remaining UK Shopping Centres, with the structural change in retail trends having been accelerated during COVID-19. The UK Retail Parks portfolio was valued in line with the gross sales price of the assets, which was contracted after the reporting date.

In local currency terms, the European portfolio valuations increased 1.7 per cent primarily as a result of the valuation uplift on the Hamburg shopping centre to reflect the contracted sales price, €2.2 million above the comparative valuation. In Sterling terms, a 0.6 per cent decrease in value was recorded due the weakness of the Euro at 31 August 2020 relative to 31 August 2019.

Debt and gearing

(1) Pro forma LTV adjusted for transactions completed between the balance sheet date and the date of result announcement.

(2) Pro forma calculated as net rental income over net finance expense, excluding IFRS 16 transitional adjustments.

Net debt decreased by £122.0 million during the year, principally due to proceeds from property disposals and the deferral of the interim dividend, less the consideration paid to acquire the second distribution unit at Bicester in December 2019.

Adjusting for properties exchanged for sale and contracts which exchanged since 31 August 2020, the Group's pro forma loan to value has reduced to 32.6 per cent, a very positive outcome in the context of the significant valuation declines.

With no material refinancing activity during the year, the Group's weighted average debt maturity reduced to 3.0 years. A £13.1 million facility held with Santander (secured over three RBH managed hotels), which was due to mature in July 2020 has been extended to March 2021 while refinancing negotiations progress.

There was a slight increase in the weighted average cost of debt since 31 August 2019 to 3.0 per cent, as a result of the settlement of European portfolio facilities on disposals, which had a relatively lower cost of debt compared with the UK debt facilities.

Cash and undrawn committed facilities at 31 August 2020 were £84.2 million (31 August 2019: £53.9 million), with capital commitments of £2.3 million (31 August 2019: £16.4 million).

Covenants

Since the onset of COVID-19, the Group has negotiated covenant waivers and amortisation holidays for the majority of the Group's facilities given the likely impact on, in particular, interest cover. At the last reported dates, covenant waivers remained in place on 89.0 per cent of debt subject to financial covenants and, subject to any further extensions agreed, expire between 15 October 2020 and 31 December 2021.

During the period to 31 August 2020, covenant waivers mitigated events of default on facilities totalling £204.9 million, secured over the Group's UK Hotels and UK Shopping Centres.

Cash flow

Operating cash flows are aligned to the Group's underlying earnings and are a key metric for assessing dividend cover. The overall net cash inflow reflects both net disposals in excess of acquisitions and debt repayments, in addition to a deferral of the first-half dividend payment to ensure sufficient liquidity during the period of disruption. Cash flows from the Aviva Portfolio have been excluded from the prior year for comparability purposes.

Going concern

Due to the significant and ongoing uncertainties faced, the Board has placed particular focus on the appropriateness of adopting the going concern basis in preparing the Group's consolidated financial statements for the year ended 31 August 2020.

In light of the significantly improved liquidity and gearing position of the Group, the Directors have concluded that in reasonably possible adverse scenarios, there remain adequate resources and mitigants to continue in operational existence for a period of not less than 18 months from the date of approval of these financial statements.

The Directors therefore concluded it appropriate to adopt the going concern basis of accounting in preparing the Group's financial statements.

Attention is drawn to Note 2.2 of the financial statements for further details surrounding the conclusion reached.

Dividend

The Board concluded alongside its interim results in May 2020 not to declare a first half dividend, and to prioritise maintaining liquidity and operational flexibility as it entered a period of significant uncertainty. The Board committed to review this position prior to releasing full year results and to restart dividends as soon as it was considered prudent to do so.

During the second half of the year, the Board continued to closely monitor the impact of COVID-19 on the business, its cashflows and the wider economic and capital markets environment. While the full impact of the pandemic remains uncertain, the Group's balance sheet is healthy and the Group's cash and available facilities have significantly improved.

After careful consideration of the potential downside risks, the Directors have concluded that it would be prudent to reinstate dividend payments. As such, the Board has declared a dividend of 5.0 pence per share for the full year ended 31 August 2020. The cash dividend will be paid as a Property Income Distribution (PID) on 22 December 2020, to shareholders on the register at 4 December 2020.

This dividend represents a 72.5 per cent pay-out ratio on underlying earnings, below the Group's target of 90-95 per cent, but in line with its REIT obligations. The Board recognises the importance of dividends to its shareholders, but is cognisant of meeting its obligations whilst maintaining a conservative pay-out ratio in light of the unpredictable and challenging environment faced.

Donald Grant

Chief Financial Officer

5 November 2020

EPRA disclosures

The following is a summary of the EPRA performance measures included in the Group's results, which are a set of standard disclosures for the property industry as defined by the EPRA Best Practice Recommendations.

(1) Presented as EPRA occupancy rate (the inverse of vacancy rate) in the operating review.

Other EPRA investment property reporting

Accounting basis

Refer to accounting policies adopted in relation to the Group's property portfolio in Note 2 of the financial statements.

Valuation information

Refer to Note 13 of the financial statements for valuation information.

Investment and development assets

Refer to the operating review for detailed disclosure on the Group's sub-portfolio metrics and further information on the Group's significant development projects during the year ended 31 August 2020.

Capital expenditure analysis

Refer to other information for detailed disclosure on the Group's capital expenditure during the year ended 31 August 2020.

Other Alternative Performance Measures

An alternative performance measure (APM) is a financial measure of historical or future financial performance, position or cash flows of an entity which is not a financial measure defined or specified in IFRS. APMs are presented to provide a balanced view and useful information to the readers of the Group's results and are consistent with industry standards. The Group has considered the European Securities and Markets Authority (ESMA) 'Guidelines on Alternative Performance Measures' in disclosing additional information on its APMs.

All APMs are prepared on a proportionate basis to align with how the Group is managed. Further discussion of these measures can be found in the financial review. The table below summarises the additional non-EPRA APMs included in these results.

(1) Pro forma adjusted to 32.6 per cent to reflect transactions between the balance sheet date and date of result announcement. (31 August 2019: 42.0 per cent).

(2) Pro forma calculated as net rental income over net underlying finance expense and excluding IFRS 16 transitional adjustments for the year ended 31 August 2020.

Statement of Directors' responsibilities

The statement of Directors' responsibilities has been prepared in relation to the Group's Annual Report 2020. Certain parts of the Annual Report are not included in this announcement.

We confirm to the best of our knowledge:

· the Group financial statements, which have been prepared in accordance with IFRS, give a true and fair view of the assets, liabilities, financial position and loss of the Group; and

· the strategic report includes a fair review of the development and performance of the business and the position of the Group.

Signed on behalf of the Board on 5 November 2020

Consolidated Income Statement

for the year ended 31 August 2020

(1) The Group transitioned to IFRS 16 'Leases' effective 1 September 2019 and has applied the modified retrospective approach. In accordance with the standard the Group's financial results for the prior year have therefore not been restated. Refer to Note 2.1 Statement of Compliance.

(2) Comparative revenues (revenue, rental income and other operating income) and related expenses have been restated to gross up service charge income and service fee income where the Group acts as principal in providing the service. Refer to 2.2 Basis of Preparation.

(3) Included in (loss)/profit from discontinued operation is the Group's share of post-tax loss from joint ventures of £0.1 million (31 August 2019: post-tax profit £0.9 million). Refer to Note 14.

(4) For both years ended 31 August 2020 and 31 August 2019, contingently issuable shares have an anti-dilutive effect on IFRS earnings per share due to the loss incurred by the Group in those years. Therefore, for IFRS purposes the weighted and dilutive weighted average number of shares are 380.3 million (31 August 2019: 380.1 million).

The accompanying notes form an integral part of these consolidated financial statements.

Consolidated Statement of Comprehensive Income

for the year ended 31 August 2020

The accompanying notes form an integral part of these consolidated financial statements.

Consolidated BALANCE SHEET

as at 31 August 2020

(1) The comparative balance sheet has been represented to split out finance lease liabilities previously included in loans and borrowings. Refer to Note 2.2 Basis of Preparation.

The accompanying notes form an integral part of these consolidated financial statements.

The consolidated financial statements were approved by the Board of Directors on 5 November 2020 and were signed on its behalf by:

Mike Watters Donald Grant

Chief Executive Officer Chief Financial Officer

Consolidated Statement of Changes In Equity

for the year ended 31 August 2020