SIR.L Regulatory News (SIR)

6 March 2019

Secure Income REIT Plc

(the "Company" or the "Group")

Results for the year ended 31 December 2018

Secure Income REIT Plc (AIM: SIR), the specialist long term income UK REIT, today announces its results for the year ended 31 December 2018.

Highlights

• EPRA NAV per share 

‐ up 8.1% to 400.5p over the year to 31 December 2018

‐ up 130% from placing price at IPO in June 2014

‐ Total Accounting Return of 20.9% per annum over the period since listing in June 2014

• Adjusted EPRA EPS up 8.1% to 14.7p for the year

• Total Accounting Return 11.9%; Total Shareholder Return 8.3%, vs UK REIT sector return of minus 13%

• Fully covered distributions:

‐  currently yielding an annualised 3.9% on 31 December 2018 EPRA NAV

‐  dividends paid in the year up 32.6% and dividends per share up 2.2%

• £436 million acquisition of two off market portfolios:

‐ £212 million hotels portfolio acquisition completed April 2018

‐ £224 million leisure portfolio acquisition completed July 2018

‐ £315.5 million (gross) equity issue and £128.7 million new secured debt facilities

• Portfolio externally valued at a blended net initial yield of 5.1% amounting to £2.3 billion at 31 December 2018:

‐ like for like portfolio valuation up 5.3% over the year

‐ acquisitions valued at 2.4% above gross purchase cost as at 31 December 2018

• 175 Key Operating Assets in defensive sectors producing £125.0 million per annum of passing rent at 31 December 2018, up from £95.7 million per annum at the prior year end:

‐ like for like passing rents up 2.6%

‐ rents on portfolios acquired added £26.8 million per annum to portfolio income

• Weighted average unexpired lease term of 20.9 years with no breaks

• Net Loan To Value ratio further reduced to 43.0%, down from 49.6% at 31 December 2017

• Strong and predictable growth prospects underpinned by fixed uplifts (48% of passing rents) and upwards only RPI-linked reviews (52% of passing rents)

• Management team alignment with shareholders further underpinned by extension to management contract:

‐ management shareholding of 13.4% worth over £170 million at 31 December 2018 EPRA NAV

‐ the Independent Directors have secured the Prestbury Management Team for a longer period by extending the management contract by 3.5 years to expire in December 2025 and simultaneously future management fees are to be reduced and an incentive fee cap introduced

Martin Moore, Non-Executive Chairman of the Company, commented:

"2018 represented another step change in the growth of the Company. Not only did the existing portfolio meet its objectives of delivering capital growth and increasing rental income, we sourced two major off market transactions which met our strict acquisition requirements and which have already made a significant impact on the results of the Group. That our £315.5 million placing to part-fund the investment was so substantially over-subscribed reflects the strong investor appetite we are seeing for stable, long term secure income, particularly against the current global market backdrop. While political and economic uncertainty is elevated and volatility in financial markets on the rise, the fundamentals of our business remain unchanged and we continue to view its prospects with confidence."

For further information on the Company, please contact:

Full Year Results Presentation

Secure Income REIT will be holding a presentation for analysts and investors today at 10.30am at FTI Consulting, 200 Aldersgate, Aldersgate Street, London, EC1A 4HD. If you would like to attend, please contact Alex King on 020 3727 1000, or email SecureIncomeREIT@fticonsulting.com.

The presentation will be on the Company's website www.SecureIncomeREIT.co.uk and a conference call facility will be available. The dial-in details are:

Participants, - Local, United Kingdom: +44 (0)330 336 9126

Confirmation code: 7135026

Webcast link: http://webcasting.brrmedia.co.uk/broadcast/5c6c0869e6e1d92d38f4edca

About Secure Income REIT Plc

Secure Income REIT specialises in generating long term, inflation protected, secure income from real estate investments. Its investment strategy is designed to satisfy investors' growing requirements for high quality, safe, inflation protected income flows.

At 31 December 2018, the Group's investment property portfolio was valued at £2.3 billion, producing £125 million per annum of rental income from long term leases with a weighted average unexpired term to expiry of 20.9 years with no breaks. All rental income is subject to fixed uplifts or RPI upwards only rent reviews. The Group's portfolio comprises key operating assets let to strong businesses in defensive sectors with high barriers to entry. The RPI-linked rent reviews and fixed rental uplifts combine with fixed cost debt to drive healthy dividend growth, creating attractive and predictable returns.

The Company is advised by Prestbury Investments LLP which was adviser to Max Property Group plc until August 2014, when all of the assets of Max Property Group plc were sold to Blackstone Group. Prestbury Investments LLP is a partnership of real estate and finance professionals including Nick Leslau, Mike Brown, Tim Evans, Ben Walford and Sandy Gumm.

The Company's Board is chaired by Martin Moore together with three further independent Directors: Leslie Ferrar, Jonathan Lane and Ian Marcus, as well as three members of the Prestbury Team: Nick Leslau, Mike Brown and Sandy Gumm.

The Company is a UK REIT which floated on the AIM market of the London Stock Exchange in June 2014.

The Company's LEI is 213800M1VI451RU17H40

Further information on Secure Income REIT is available at www.SecureIncomeREIT.co.uk.

Forward looking statements

This document includes forward looking statements which are subject to risks and uncertainties. You are cautioned that forward looking statements are not guarantees of future performance and that if risks and uncertainties materialise, or if the assumptions underlying any of these statements prove incorrect, the actual results of operations and financial condition of the Group may differ materially from those made in, or suggested by, the forward looking statements. Other than in accordance with its legal or regulatory obligations, the Company undertakes no obligation to review, update or confirm expectations or estimates or to release publicly any revisions to any forward looking statements to reflect events that occur or circumstances that arise after the date of this document.

Chairman's Statement

Dear Shareholder,

We are pleased to report the results of the Company for a year that delivered another step change in the growth of the business. In these results we report continued strong growth from the portfolio held throughout the year, together with the positive contribution from our two portfolio acquisitions totalling £435.5 million, part financed by the oversubscribed £315.5 million share placing in March 2018.

Results and financial position

The Group's EPRA NAV at 31 December 2018 was 400.5 pence per share, an increase of 8.1% over the year. Our primary focus remains on overall returns delivered to shareholders including capital and income growth, and performance in this regard was once again satisfying with a Total Accounting Return for the year of 11.9%.

The increase in EPRA NAV per share over the year was driven by a 5.3% like for like valuation increase as a result of rents on the portfolio held throughout the year increasing by 2.6% together with a 12 basis point improvement in the external valuers' assessment of valuation yield on the existing portfolio. The portfolios acquired in the year were valued at 2.4% above their gross purchase cost at the balance sheet date. The blended Net Initial Yield of 5.1% at 31 December 2018 is expected to rise to 5.2% by July 2019 on completion of the next round of annual rental uplifts.

The Group's Adjusted EPRA EPS has increased by 8.1%, to 14.7p in 2018 from 13.6p in 2017, which reflects the positive impact of the two portfolio acquisitions and the increase in like for like passing rents over the year. This growth in earnings has resulted in the substantially increased dividend payments in the year, with the annualised dividend per share of 15.7 pence per share at the end of 2018 showing an increase of 12.4% over the prior year.

The Net Loan To Value ratio at 31 December 2018 was 43.0%, down from 49.6% at the end of 2017 and continuing its downwards trajectory in line with our strategy. Our expectation is that this ratio will continue to fall, with the decline enhanced by any future earnings and dividend accretive acquisitions which would be expected to be financed at lower than the Group's current Net LTV ratio.

Management agreement

The management agreement between the Company and Prestbury Investments LLP ("Prestbury"), entered into when the Company listed, had an eight year term to June 2022 with no renewal rights or extension rights on either side at expiry. In light of the strong historic returns of the Company, the significant increase in its size and the approximately three year term to expiry of the current agreement, the Board sought to secure the services of Prestbury for a longer period and, in doing so, conducted a review to ensure that the terms of the agreement remain appropriate, in particular in ensuring the continued alignment of interests between the Company and Prestbury. The Remuneration Committee engaged specialist independent consultants in AON's compensation practice to assist with the process and make recommendations. Following completion of this review, which included independent benchmarking of shareholder returns against those of the peer group, the Independent Directors and Prestbury have agreed to the following package of amendments which will take effect from 1 April 2019:

· the term of the agreement will be extended by three and a half years, to expire in December 2025;

· advisory fees payable on EPRA NAV above £1.5 billion will reduce from 0.75% per annum to 0.5% per annum;

· incentive fees, save in the case of a sale of at least the majority of the business, will be capped at 5.0% of EPRA NAV, where previously there was no cap, and will continue to be payable in shares in the Company which are subject to lock-in periods; and

· the agreement will be subject to review again in December 2022 and would also be subject to review in the event that the Company proposes to move to the Main Market of the London Stock Exchange.

Net of all advisory and incentive fees, the Company's Total Shareholder Return in 2018 was 8.3% against a UK REIT sector return of minus 13% (according to the FTSE EPRA NAREIT UK index) and over three years its Total Shareholder Return was 66% against minus 10% for the sector. Prestbury is the Company's second largest shareholder, with a 13.4% shareholding worth over £170 million at 31 December 2018 EPRA NAV per share.

Under the AIM Rules for Companies, the Investment Adviser is deemed to be a related party of the Company and the changes to the Investment Advisory Agreement therefore represent a related party transaction pursuant to Rule 13 of the AIM Rules. The Independent Directors consider, having consulted with Stifel Nicolaus Europe Limited, the Company's nominated adviser, that the terms of the revised agreement are fair and reasonable insofar as its shareholders are concerned.

Outlook

2018 proved a challenging environment across the globe for investors with the value of most asset types falling together. Quantitative easing may have supported asset prices across the board for the last decade, but it has also upended the usual relationship between gilts and equities where their value has tended to move in opposite directions. The start of quantitative tightening in the US saw a similar process to QE operating in reverse gear, creating a headache for anyone trying to preserve wealth as diversification between gilts and equities proved unable to provide the usual protection.

This should have been an ideal opportunity for absolute return funds to demonstrate the value of their more exotic uncorrelated trading strategies, but many of these also failed to deliver a positive return. So, with few winners which assets managed to stand their ground? UK commercial property might not seem an obvious candidate given that REITs in aggregate delivered a miserable minus 13% total shareholder return according to the FTSE EPRA NAREIT UK index. This reflected the considerable headwinds facing the retail sector and concerns as to whether London offices are reaching the end of a cycle.

However, well-let property assets bucked the trend. The CBRE long income index for UK commercial property produced a 9.2% return in 2018 with capital growth of 4.4%, whilst Secure Income REIT achieved a total accounting return of 11.9%. Investors judge the prospects for inflation protected long-duration income streams underpinned by high quality tenants to be much more enticing than the property market in general - and we agree.

2019 has so far seen financial markets rebound but most of the risks remain. For now, the US and China edge towards averting a damaging trade war, but without resolving many of their fundamental differences and there is always a chance that a capricious US President may have a change of heart. Meanwhile, global growth is slowing - indeed we think the catalyst for the stock market recovery can be traced back to the Federal Reserve's decision to suspend further interest rate rises in light of increased global economic uncertainty. In turn we have seen Government bond yields fall, with 10 year gilts yielding 1.2%, and continuation of the challenge faced by UK savers to secure a reasonable income return without going materially up the risk curve. At the same time, inflation protection remains eye-wateringly expensive with the gross redemption yield on 20 year inflation-linked gilts at minus 1.8%.

Whilst the ultimate path of Brexit remains unknown, a delay now seems probable albeit a no-deal Brexit is yet to be ruled out either on 29 March or at some later point. Until agreement is reached uncertainty will prevail, which will continue to suppress economic growth and business investment. Assuming an agreement is eventually reached, we would expect any relief rally to be short-lived as the reality of the much more difficult phase of negotiating new trade terms sinks in and the next chapter in the battle for the Tory leadership commences. The turmoil within both the Conservative and Labour parties has the potential to yield unpredictable outcomes, ranging from an early general election to a much larger schism within either party. Although we can't know how events will unfold, we do hold a clear view that uncertainty is likely to persist in the UK well beyond 29 March and quite possibly for a number of years.

In our view this is likely to perpetuate the "lower for longer" interest rate environment in the UK and the search for yield that has helped underpin the demand for well-let index-linked property assets, even if the US resumes its quantitative tightening. This is reflected in the property market with the demand for well-let index-linked property in defensive sectors remaining intensely competitive with the volume of capital seeking deals well in excess of available investment stock. Indeed, it is not unusual to see investors joining a queue of a year or more to get into dedicated institutional long lease funds. This is at the opposite end of the spectrum from the commercial property retail funds where the liquidity concerns relate to getting money out rather than in, especially if another Brexit shock were to provide a repeat of the 2016 redemptions.

Against this backdrop, during 2018 we secured £436 million of properties off the market that were valued at 2.4% over gross purchase costs at the year end, and reduced our Net LTV from 50% to 43% whilst maintaining a valuation yield of 5.1% on a portfolio with a weighted average unexpired lease term of 21 years. 100% of our income has the benefit of contractual uplifts, roughly evenly split between being RPI-linked or fixed at an average growth of 2.8% per annum. This provides a beacon of stability in uncertain times, as an attractive level of income with guaranteed growth and inflation protection.

Our investment adviser, with its 13.4% stake in the Company, is totally aligned with all shareholders and we will only undertake future acquisitions that will enhance the intrinsic value of the business. All past acquisitions have enhanced earnings and dividend per share, reduced leverage and been part funded by non-dilutive equity issues. Whilst we remain ambitious to grow, our first duty is to preserve the value of the business that we have created and capital discipline is of paramount importance in a world where competing buyers are often financially incentivised merely to grow assets under management. Large deals are keenly fought over and rarely attractively priced in a highly competitive market.

Our solution remains only to raise equity in the event that the right deal can be been secured on the right terms. This has avoided any dilution of returns and enabled the portfolio to fully benefit from the growing popularity of well-let alternative assets. There are no signs of this investor appetite slowing. Property investors continue to recycle cash out of the structurally challenged retail sector whilst income investors continue to see the same considerable spread over savings rates and gilts. Despite elevated political and economic uncertainty and the rise in volatility in financial markets, the fundamentals of our business remain unchanged and we continue to view its prospects with confidence.

Martin Moore

Chairman

6 March 2019

Investment Adviser's Report

Prestbury Investments LLP is the investment adviser to Secure Income REIT Plc and is pleased to report on the operations of the Group for the year ended 31 December 2018.

In our reports, we focus on financial measures recommended by the European Public Real Estate Association ("EPRA") to facilitate comparison with other real estate investment companies. In all cases, EPRA measures are reconciled to the main financial information prepared under IFRS and calculations are shown in the supplementary information included with these reports.

Portfolio

Portfolio movements

The portfolio at 31 December 2018 is comprised of 175 properties with secure, long term income and contractual rental uplifts offering inflation protection. Annual passing rent at 31 December 2018 is £125.0 million, up 31% from £95.7 million at 31 December 2017, reflecting both like for like growth and the impact of the net portfolio acquisitions in the year.

Basis of review

The income arising on the portfolio benefits not only from an unusually long weighted average lease length of 20.9 years from 31 December 2018 with no break options, but also from fixed contractual rental uplifts averaging 2.8% per annum and upwards only RPI-linked rent reviews. The portfolio passing rents are subject to review on the following bases:

Lease lengths

The leases are very long with a weighted average lease length of 20.9 years from 31 December 2018 and with no material lease breaks or expiries before 2037.

Defensive qualities

Every property is a Key Operating Asset - one where the operations conducted at the property are integral to the tenant's business, where the tenant has invested heavily in the asset and is strongly motivated to continue to do so. This should ensure added income security. The majority of the rent is secured by tenants or guarantors whose businesses offer global spread and which have performed very well over many years, demonstrating strong defensive qualities.

The portfolio is fully let. All occupational leases are on full repairing and insuring terms, meaning that property running costs are low and there is no material capital expenditure requirement.

Portfolio valuation

The portfolio is valued by qualified external valuers every six months. Movements in portfolio rents and valuation are shown below and are further explained in the following sections.

The movement in valuation in the year comprises:

Yields and unexpired lease terms

* the healthcare yields take no account of any uplift from an outstanding May 2018 open market review on the Ramsay hospitals, which account for 96% of the healthcare rents at 31 December 2018

† the leisure and hotels Running Yields are calculated using the relevant external valuer's assessment of RPI at either 2.5% or 2.6%

Portfolio total rents

The Group's principal lease counterparties, analysed by passing rent as at 31 December 2018, are as follows:

* £6.6 million (2017 £6.3 million) of the Merlin rents are Euro denominated

† like for like excluding property sold during the year

Further information on the principal portfolio tenants and guarantors is given within the portfolio analyses that follow.

Healthcare assets (43% of portfolio value)

The healthcare assets comprise 20 private hospitals: a portfolio of 19 freehold assets located throughout England let to a subsidiary of Ramsay Health Care Limited, the listed Australian healthcare company, and a private psychiatric hospital in central London, held freehold and let to Groupe Sinoué, a French company specialising in mental health.

The Ramsay hospitals are let on full repairing and insuring leases with a term to expiry at 31 December 2018 of 18.4 years without break. The rent increases in May each year by a minimum of a fixed 2.75% per annum throughout the lease term and as a result will increase from £48.2 million to at least £49.5 million on 3 May 2019. The outstanding May 2017 site earnings based rent review on the Ramsay hospitals, which had been subject to determination by an independent expert, was settled during the year and resulted in the Group receiving back-rent of £7.3 million net of costs. In addition, there is an upwards only open market review as at 3 May 2018 and then in May 2022 and every five years thereafter. The May 2018 review remains outstanding and this financial information takes no account of any potential increase in rental income that may arise from it.

The leases on the Ramsay hospitals are all guaranteed by Ramsay Health Care Limited, the listed parent company of one of the top five private hospital operators in the world and a constituent of the ASX 50 index of Australia's largest companies, with a market capitalisation at 5 March 2019 of £6.9 billion.

The London psychiatric hospital is let on a full repairing and insuring lease with a term to expiry at 31 December 2018 of 25.6 years without break. The rent increases in May each year by a fixed 3.0% per annum throughout the lease term and as a result will increase from £2.0 million to £2.1 million on 3 May 2019. The lease is guaranteed by Orpea SA, a leading European operator of nursing homes, post-acute care and psychiatric care, listed on Euronext Paris with a market capitalisation at 5 March 2019 of £3.7 billion.

Leisure assets (36% of portfolio value)

The leisure properties held throughout the year comprise four well known visitor attractions, including two of the UK's top three theme parks, and two hotels. The UK assets are Alton Towers theme park and the Alton Towers hotel, Thorpe Park theme park and Warwick Castle. The German assets are Heide Park theme park (the largest in Northern Germany) and the Heide Park hotel, both located in Soltau, Saxony. These assets are all held freehold and are let to subsidiaries of Merlin Entertainments Plc, the guarantor of the leases. Merlin is a FTSE 250 company with a market capitalisation at 5 March 2019 of £5.7 billion. Measured by the number of visitors, it is Europe's largest and the world's second largest operator of leisure attractions.

The average term to expiry of the Merlin leases is 23.5 years without break and the tenants have two successive rights to renew them for 35 years at the end of each term. The leases are on full repairing and insuring terms. There are upwards only uncapped RPI-linked rent reviews every June throughout the term (based on RPI over the twelve months to April each year) for the UK properties, which in 2018 resulted in a rental increase of 3.4%. The German properties are subject to fixed annual increases of 3.34% every July throughout the term, as a result of which the German rents will increase from £6.6 million to £6.8 million on 29 July 2019 (translated at the 31 December 2018 exchange rate).

During the year, a further 20 leisure assets were acquired in an off market transaction which completed on 2 July 2018. The Key Operating Assets acquired were Manchester Arena, The Brewery events venue on Chiswell Street in the City of London and a portfolio of 18 freehold high street pubs located in England.

Manchester Arena is a strategic eight-acre leasehold site located on top of Manchester Victoria Railway and Metrolink station. It comprises the UK's largest indoor arena by capacity and 160,000 sq ft of additional office and leisure space, together with a 1,000 space multi-storey car park and advertising hoardings. The Arena is let to SMG and SMG Europe Holdings Limited, for a further 26.5 years from 31 December 2018 with annual RPI-linked rent reviews collared between 2% and 5%. SMG is the world's largest venue management company which operates c. 200 venues globally, hosting approximately 30,000 events each year, and it has achieved 25 years of uninterrupted annual EBITDA growth. SMG recently announced that it is to merge with AEG Facilities to create a global venue services company with 310 venues in five continents. The offices and ancillary leisure space are let to tenants including Serco, Manchester City Council, Unison, JCDecaux and go-karting operator TeamSport. The leases on the Manchester site as a whole have an average term to expiry of 17.2 years from 31 December 2018 and produce net passing rent of £5.9 million per annum as at 31 December 2018.

The Brewery on Chiswell Street is a predominantly freehold investment let to a specialist venue operator on a full repairing and insuring lease with a term to expiry of 12.5 years from 31 December 2018. It is the largest catered event space in the City of London and is located within five minutes' walk of the Moorgate entrance to the new Crossrail Station at Liverpool Street. The lease has five-yearly fixed uplifts of 2.5% per annum compounded and passing rent of £3.4 million per annum as at 31 December 2018, with the next uplift to £3.8 million taking effect in in July 2021.

The portfolio of 18 high street pubs is let on individual leases either to or guaranteed by Stonegate Pub Company Limited, one of the UK's largest private managed pub companies. The portfolio produces passing rent of £2.0 million per annum as at 31 December 2018 and has an average unexpired lease term of 21.1 years. Rents are subject to five-yearly RPI-linked increases collared at 1% to 4% per annum compounded, with the next reviews falling due in February 2020. As at 30 September 2018, Stonegate held 725 pubs and bars nationwide, up from 703 in the prior year, and reported like for like turnover up 4.7% to produce a 21% increase in EBITDA to £98.5 million.

Hotel assets (21% of portfolio value)

The hotel assets comprise 129 Travelodge hotels, located in England and Scotland, let to Travelodge Hotels Limited which is the main operating company within the Travelodge group trading in the UK, Ireland and Spain. Travelodge is the UK's second largest budget hotel brand, with 564 hotels and over 42,000 rooms as at 30 June 2018.

54 of the hotels were owned throughout the year. A further 59 were purchased in the £212 million acquisition that completed in April 2018 and the remaining 17 were purchased as part of the £224 million acquisition that completed in July 2018. Two hotels that were not considered core to the portfolio, including one that was acquired in April, were sold in December 2018 for net proceeds of £2.9 million and a gain of £0.2 million over book value.

The average unexpired lease term is 23.4 years from 31 December 2018 with no break clauses. The leases are on full repairing and insuring terms and Travelodge is also responsible for the cost of any headlease rentals and any other amounts owing to the superior landlords of the 55 leasehold properties. There are upwards only uncapped RPI-linked rent reviews every five years throughout the term of each lease, with reviews falling due over a staggered pattern across the portfolio. 18 rent reviews fell due in the year, resulting in an uplift of £0.3 million in passing rent.

Financing

The Group's operations are financed by a combination of cash resources and non-recourse debt finance, where the equity at risk is limited to the net assets within six ring-fenced subgroups. Each sub-group is self-contained, with no cross default provisions between the six of them. In all cases substantial financial covenant headroom has been negotiated into loan terms together with appropriate remedial 'cure' rights.

The Group's Net LTV ratio has reduced from 49.6% to 43.0% over the year and interest cover has increased from 2.0 times to 2.4 times. The Group's gross and net debt at 31 December 2018 is as follows:

* interest cover for this purpose is measured as passing rent divided by annualised interest cost, both as at the balance sheet date

The weighted average interest cost is 4.8% per annum, down from 5.1% per annum at 31 December 2017 following drawing of £128.7 million of new debt facilities which part financed the acquisitions in the year. To reduce uncertainty over the Group's interest cost, rates are fixed or capped as follows, for the term of each loan:

* rate shown is maximum rate; actual rate on the facility in the period from debt drawdown to 31 December 2018 was 2.7%

The weighted average term to maturity of the Group's debt is 5.3 years at 31 December 2018 compared to 6.5 years at 31 December 2017. This reduction is in part attributable to the passing of time to expiry on the 88% of the Group's debt that was in place throughout the year, and in part as a result of the Group's new £128.7 million facilities having five year terms. The reduction in the weighted average term to maturity and the reduction in Net LTV is part of a strategy to afford the Group better access to a wider range of cheaper sources of capital at an earlier date than would be achieved if each new portfolio were financed for the long term at fixed rates.

Key terms of the facilities are as follows:

* £316.8 million of senior and mezzanine Sterling loans secured on UK assets and €71.8 million of senior and mezzanine Euro denominated loans secured on German assets (translated at the year end exchange rate of €1:£0.8846) with all loan tranches cross-collateralised.

† amortisation in each of the years ending October 2021 and October 2022 comprises £3.2 million on the Sterling facility and €0.7 million on the Euro facility.

There have been no defaults or potential defaults in any facility during the year or since the balance sheet date. The extent of headroom on financial covenants at the balance sheet date is analysed in the business review on the following pages.

Business review

The Board monitors the following financial and non-financial key performance indicators which are further commented on in this report.

Key performance indicator - Total Accounting Return

The principal financial outcome that the Board seeks to achieve is attractive growth in shareholder returns. The Board monitors both Total Accounting Return, which is the movement in EPRA NAV per share plus dividends, and Total Shareholder Return, which is the share price movement plus dividends. The principal focus for the Board is on Total Accounting Return as the Total Shareholder Return, while important, is also subject to wider market movements not necessarily related to the Group itself.

In assessing the Group's results and financial position, the Board's primary focus is on financial results, principally Net Asset Value per share and Earnings Per Share, adjusted to conform with the industry standard EPRA guidelines which it considers provide a better comparison with other real estate companies. The Board also considers the financial position and results prepared in accordance with accounting standards, without adjustment.

The movements in net asset value as reported under IFRS and shown in the consolidated balance sheet are as follows:

EPRA NAV takes the balance sheet measure of net asset value and excludes items that are considered to have no relevance to the assessment of long term performance. Consequently, in accordance with the EPRA guidance, to calculate EPRA NAV the Group's reported NAV is adjusted to exclude deferred tax on investment property revaluations relating to the German assets and fair value movements on derivatives, and is also adjusted to include the dilutive impact of any shares to be issued in satisfaction of any incentive fee arising in the year. The latter adjustment arises because, despite any incentive fee being accounted for in the results for a period, basic net asset value per share does not include in the calculation of the number of shares in issue the impact of the shares to be issued in satisfaction of that fee until those shares are actually issued.

The Group's EPRA NAV per share at 31 December 2018 of 400.5 pence represents an 8.1% increase over the year. The 30.1 pence per share uplift, together with dividends of 13.9 pence per share, results in an 11.9% Total Accounting Return over the year.

* adjusted by £10.9 million or 3.7 pence (2017: £11.5 million or 5.0 pence) of Rent Smoothing Adjustments

EPRA NAV is reconciled to the balance sheet net asset value measured in accordance with IFRS in note 24 to the financial information.

The calculation of Total Accounting Return and Total Shareholder Return is included in the Supplementary Information following the Financial Information.

Rent Smoothing Adjustments

Rent Smoothing Adjustments to investment property revaluations arise from the Group's accounting policy, in line with IFRS, to spread the impact of any fixed or minimum rental uplifts evenly over the term of each relevant lease. Consequently, there is a material mismatch between the rental cash flows and reported rental revenues. The adjustments relate to the 48% of portfolio rents that are subject to fixed uplifts and the 5% of rents with minimum uplifts on RPI-linked reviews.

The impact of this accounting treatment is to reflect a receivable, included in the book value of investment property, for the amount of rent included in the income statement ahead of actual cash receipts. This receivable increases over the first half of each lease term then unwinds to zero over the second half of each lease term. In order that the receivable does not overstate the value of the portfolio when included in the book value of the investment properties, any movement in the receivable is offset against property revaluation movements. Since this adjustment increases rental income and reduces property revaluation gains (and vice versa in the second half of each lease term) it does not change the Group's retained earnings or net assets.

The impact over time for each of the rental income flows subject to a Rent Smoothing Adjustment is as follows:

* at the year end Euro conversion rate of €1:£0.8969

The annual impact of this adjustment would only change if there were acquisitions, disposals or lease variations of properties with fixed or minimum RPI-linked rental uplifts. Assuming no change in the portfolio, the adjustment that was recognised on the portfolio during the year and is expected for each of the next three financial years (with the German adjustment translated at the 2018 average Euro conversion rate of €1:£0.8846) is as follows:

Key performance indicator - Adjusted EPRA earnings per share

The Company's intention is to distribute its Adjusted EPRA earnings per share through payment of a fully covered cash dividend, paid quarterly.

The Group's basic and diluted EPS, calculated in accordance with accounting standards, not only include property valuation movements and Rent Smoothing Adjustments but are also required to be calculated on the assumption that any shares issued in settlement of an incentive fee are treated as having been issued on the first day of the year when in fact they are issued some three months after the end of the year in which they have been earned. As a result, basic EPS for 2018 is calculated on the basis that the 4.6 million shares in settlement of the 2017 incentive fee were in issue for the whole year although they were not in fact issued until March 2018, and the calculation for diluted EPS for 2018 also includes the 1.3 million shares not yet issued in settlement of the 2018 incentive fee. These factors have a distorting effect on the reported EPS.

EPRA EPS excludes from basic EPS any investment property revaluations, profits on the sale of investment properties, fair value movements on derivatives and related deferred tax, to give a measure of underlying earnings from core operating activities. Calculations are based on the same share weightings as required for the calculation of basic earnings per share. Adjusted EPRA EPS takes EPRA EPS and removes the effect of Rent Smoothing Adjustments (in order not to artificially flatter Dividend Cover calculations) and any significant non-recurring costs. The measure also excludes any incentive fee and the associated irrecoverable VAT, which is considered to be linked to revaluation movements and therefore best treated consistently with revaluations. The Board considers this measure to be appropriate for comparison of the performance of the Group from year to year and with the peer group.

In calculating Adjusted EPRA EPS, the weighted average number of shares reflects the actual date on which shares are issued so as not to create a mismatch between the basis of calculating Adjusted EPRA EPS and dividends per share paid in the year. That is, since dividends are paid only on shares actually in issue Adjusted EPRA EPS uses the same weighting as dividends actually paid, for consistency.

EPRA EPS and Adjusted EPRA EPS are analysed as follows:

The key components of the Group's earnings are its rental income, administrative expenses and finance costs. An analysis of the Group's rental income is included in the portfolio review earlier in this report and the other items are analysed below.

Adjusted EPRA EPS: administrative expenses

The Group's administrative expenses for the year are the same under accounting standards and the EPRA measure, while Adjusted EPRA EPS excludes the performance linked incentive fees which are payable in shares.

Because VAT cannot be applied to the rents on the Healthcare assets, there is an element of irrecoverable VAT incurred on the Group's running costs which is included within each relevant line item in the table above. The proportion of disallowed VAT on general running costs averaged 42% during the year and was 38% as at 31 December 2018.

As an externally managed business, the majority of the Group's overheads are covered by the advisory fees paid to the Investment Adviser, which in the year amounted to £12.2 million plus VAT totalling £13.3 million (2017: £9.3 million plus VAT totalling £10.1 million). The Investment Adviser then meets office running costs, administrative expenses and remuneration for the whole management and support team.

Advisory fees during the year were calculated on a sliding scale based on the Group's EPRA NAV, payable at:

· 1.25% per annum on EPRA NAV up to £500 million; plus

· 1.0% on EPRA NAV from £500 million to £1 billion; plus

· 0.75% thereafter.

The advisory fees are further explained in note 26 to the financial information.

Since the balance sheet date, the management agreement between the Company and Prestbury has been amended with effect from 1 April 2019 in order to secure the services of Prestbury as Investment Adviser for a longer period. The changes include a reduction in the level of advisory fees payable on EPRA NAV exceeding £1.5 billion from 0.75% per annum to 0.5%, reflecting the significant growth of the size of the Company since the fee arrangements were last reviewed.

The other recurring administrative expenses are principally professional fees, including property valuation, tax compliance and audit fees, which are largely billed directly to subsidiary undertakings. Fees paid to the auditors are disclosed in note 8 to the financial information.

Corporate costs are those costs necessarily incurred as a result of the Company being listed and comprise:

· fees payable to the four Independent Directors amounting to £0.2 million in the year (2017: £0.2 million), with the other three Directors being partners in the Investment Adviser who receive no directors' fees from the Company; and

· other costs of being listed, such as the fees of the nominated adviser required under the AIM Rules, registrars' fees and AIM fees, which totalled £0.3 million (2017: £0.3 million) in the year.

An incentive fee becomes due if total returns to investors over a financial year, as set out in the audited accounts, exceed a compound growth rate of 10% per annum above the EPRA NAV per share the last time any incentive fee was paid. If the threshold return is exceeded, the Investment Adviser receives 20% of any surplus above that priority return to shareholders, with any such fee payable in shares. Any shares received by the Investment Adviser are not permitted to be sold, save in certain limited circumstances, for a period of between 18 and 42 months following the end of the year for which they were earned.

The benchmark EPRA NAV per share for the year ended 31 December 2018 was 394.5 pence. The actual results were in excess of the benchmark so the Investment Adviser has earned a fee of £4.9 million in respect of the year, to be satisfied by the issue of approximately 1.3 million shares, expected to occur in March 2019 and as explained in note 26 to the financial information. The amendments made to the agreement between the Company and the Investment Adviser, effective from 1 April 2019, include the introduction of a cap on incentive fees payable in any year (save in the event of a sale of the majority of the business) of 5.0% of EPRA NAV where previously there was no cap. The terms relating to incentive fees including the requirement that they are paid in shares which are locked in for a period of 18 to 42 months remain unchanged.

Adjusted EPRA EPS: net finance costs

* headlease interest is reclassified against rental income net of property outgoings in Adjusted EPRA EPS

The nature and principal terms of the Group's loan facilities are explained in the Financing section earlier in this report.

Adjusted EPRA EPS: Tax

The Group operates under the UK REIT regime, therefore its rental operations which make up the majority of the Group's earnings are exempt from UK corporation tax, subject to the Group's continuing compliance with the UK REIT rules. The Group is otherwise subject to UK corporation tax.

German tax was charged in the year at an effective rate of 15% (2017: 17%) on realised profits from the Group's German rental operations and the resulting tax charge was £0.3 million (2017: £0.3 million). The balance sheet also includes a deferred tax liability of £11.1 million (2017: £10.2 million) relating to unrealised German capital gains tax on investment properties which would only be crystallised on a sale of those assets. There are currently no plans to sell these assets.

On an IFRS basis, the current tax charge and the movement in deferred tax result in a net tax charge of £1.1 million (2017: £1.7 million). Deferred tax is excluded from Adjusted EPRA EPS as shown in note 11 to the financial information.

Adjusted EPRA EPS: Currency translation

The majority of the Group's assets are located in the UK and the financial information is therefore presented in Sterling. 3.7% (2017: 5.1%) of the Group's EPRA NAV comprises assets and liabilities relating to properties located in Germany, valued in and generating net earnings in Euros. The fact that both assets and liabilities are Euro denominated acts as a partial hedge of currency fluctuations, but the Group remains exposed to currency translation differences on the net results and net assets of these unhedged operations. Foreign currency movements are recognised in the statement of other comprehensive income.

The German properties are valued at €125.5 million as at 31 December 2018, with the Euro denominated secured debt amounting to €71.8 million. The Euro strengthened against Sterling over the year by c. 1% and as a result there was a net currency translation gain of £0.5 million (2017: £1.2 million) on an IFRS basis. The deferred tax liability is excluded from EPRA NAV and as a result a further currency translation gain of £0.1 million arises in the movement in EPRA NAV in relation to the German operations (2017: £0.2 million).

Key performance indicator - Net LTV ratio

The Board structures debt facilities with a view to maintaining a capital structure that will enhance shareholder returns while withstanding varying market conditions. During the year, the Group's Net LTV fell from 49.6% to 43.0%. This reduction reflects the impact of £102.5 million of property valuation uplifts, £4.2 million of scheduled debt amortisation and the new £128.7 million secured loans arranged to part finance the £436 million portfolio acquisitions having a Net LTV of c. 27%, lower than the average for the rest of the portfolio.

Key performance indicator - headroom on debt covenants

The Board's approach to managing the Group's capital structure includes ensuring that the risk of any breach of covenants within secured debt facilities is carefully monitored on a range of scenarios and, to the extent possible, able to be managed. This includes structuring facilities to ring fence the extent to which the Group's assets are at risk, ensuring that levels of headroom over financial covenants are appropriate and maintaining a level of uncommitted cash to apply in curing debt defaults in the event that it is needed.

When evaluating the appropriateness of the level of secured debt, the Board has regard to the unusual nature of the Group's income streams, specifically that all of the occupational leases are significantly longer than conventional leases for UK real estate and that the Group's rental income increases annually, as a result of the annual minimum fixed rental uplifts on 48% of portfolio income, with the additional prospect of increases from the upwards only RPI-linked reviews on the rest of the portfolio. This structure gives rise to a naturally deleveraging debt profile on the assumption of constant valuation yields.

The Board reviews the headroom on all financial covenants at least quarterly. The headroom on key financial covenants at 31 December 2018 is summarised below, together with the net initial valuation yield, the fall in valuation or the fall in rent that would trigger a breach of the relevant covenant at the first test date after the balance sheet date. The results shown in the following table do not include the effects of preventative measures that could be taken with the Group's uncommitted cash balance, which is further explained in the following section.

* assuming RPI-linked rents increase in line with the external valuer's 2.5% RPI assumption as at 31 December 2018

* assuming RPI-linked rents increase in line with the external valuer's 2.5% RPI assumption as at 31 December 2018

Key performance indicator - uncommitted cash

The Board considers that the ability to manage potential debt covenant breaches is an important part of a well implemented leverage strategy. The Group has negotiated headroom on financial covenants considered appropriate to the business and has also obtained certain contractual cure rights, including the ability to inject cash (subject to certain limitations as to the frequency and duration of cash cures) into ring-fenced financing structures in the event of actual or prospective breaches of financial covenants. The Board regularly monitors the Group's levels of uncommitted cash which comprises cash balances outside ring-fenced structures secured to lenders, net of any creditors or other cash commitments at the balance sheet date and excluding any cash required to be retained under the AIFMD regulatory capital rules.

The Group's uncommitted cash was £66.4 million as at 31 December 2018, up from £60.6 million as at 31 December 2017.

Cash flow

Cash secured under credit facilities is represented by rent held in charged accounts between the date of receipt, which is typically in the week before each calendar quarter end, and the date of payment of interest and any debt amortisation, which is typically three to four weeks after the quarter end. Following the debt service payments those surpluses are then released to free cash.

The Group's investment properties are let on full repairing and insuring terms, with each tenant obliged to keep the premises in good and substantial repair and condition, including rebuilding, reinstating, renewing or replacing premises where necessary. Consequently, no unrecovered capital expenditure, property maintenance or insurance costs have been incurred in the year and it is not expected that material costs of that nature will be incurred on the current portfolio. As a result, in the absence of asset purchases or disposals, cash balances should remain relatively stable over time.

The supplementary information included with this financial information includes details of the calculation of the EPRA measures referred to in this report.

Strategic Review

Strategy and investment policy

Against a backdrop of a significant reduction in income security in the UK real estate market, caused by a marked decline in the average term to first tenant lease break or expiry, and mindful of the growing requirement amongst investors for long term, secure income flows, the Board aims to further build on the Group's existing portfolio of Key Operating Assets to create a substantial diversified long term income portfolio providing stable and growing income and capital returns for its shareholders. The Board defines a long term income stream as one with a weighted average term to maturity in excess of 15 years at the time of acquisition, and income security is assessed by reference either to the financial strength of the tenants or to the extent of asset cover provided by way of residual asset value.

The Board believes that the Company offers attractive geared returns from high quality real estate, with financially strong tenants operating with well established brands in industry sectors with strong defensive characteristics. An important characteristic of the portfolio is that assets acquired are Key Operating Assets, meaning they are business critical from the tenant's perspective. In that way, rental security is more certain as the asset in question forms an essential part of the value of the tenant's own business and the tenants are strongly motivated to continue to invest in the assets.

The Board's intention is for the Group to continue to hold a diversified portfolio of long term, secure income streams from real estate investments across a range of property sectors, enhancing prospects for attractive total returns both from the existing portfolio and when appropriate through earnings accretive acquisitions.

The Board believes that it will be able to deliver returns-enhancing deals in the interests of all shareholders. This could include further acquisition opportunities from a range of sources including operating businesses, non-REITs with latent capital gains fettering sale prospects, and opportunities where the Company's shares may be used as currency to unlock value. Acquisitions should be accretive to shareholder returns and will be financed with modest leverage and non-dilutive equity issues.

Key performance indicators

In order to oversee the successful delivery of the investment strategy, the Board monitors the following principal key performance indicators:

· Total Accounting Return and Total Shareholder Return

· Adjusted EPRA EPS

· Net Loan To Value Ratio

· Headroom on debt covenants

· Uncommitted cash

Each of these is reported on in the Investment Adviser's Report on the preceding pages.

Corporate responsibility

In addition to the financial performance indicators, the Board is mindful of its responsibilities to its all of stakeholders, including the wider community.

The Corporate Governance Report includes details of the composition of the Board, including a description of the balance of skills, experience and gender on the Board. As an externally managed business, no Group company has any employees and therefore the Group does not report on gender balance or the gender pay gap, nor on recruitment policies or procedures for employees. The Board has, however, satisfied itself with the appropriateness of the Investment Adviser's approach to fairness and equality in its own operations and has received confirmation from the Investment Adviser that it complies with all relevant laws and regulations.

Both the Company and the Investment Adviser have complied with their responsibilities under the Modern Slavery Act 2015.

The Group has no reportable emissions for the year ended 31 December 2018, as all Group properties are the tenants' responsibility, and the Group has no operational control over them. The Group does not develop properties and all of the physical upkeep of its property assets is the responsibility of its tenants, so we do not report on environmental sustainability in this annual report as the Group does not have direct influence on the sustainability of the assets nor on the tenants in their day to day operations.

Principal risks and uncertainties

The Board considers that the principal risks and uncertainties facing the Group are as follows:

Brexit and political risk

The Board does not consider that Brexit (the departure of the UK from the European Union) presents a risk to the Group in and of itself, largely as the Group is not dependent on access to European markets and is not expected to be directly impacted by changes in regulations or tariffs. The tax treatment of the German assets is considered unlikely to change as a result of Brexit. However, the Board considers that Brexit does potentially weigh on all of the risks described above, principally through the heightened risk of market uncertainty or disruption.

The potential impact of Brexit and political upheaval on our tenants has been assessed. In this respect we take some comfort from the fact that a large majority of passing rents are underpinned by businesses with globally diverse sources of income, not solely dependent on the UK and its trade relations with the rest of the world.

There have been periods of significant political, economic and market uncertainty since the referendum to leave the EU in 2016 and this has at times affected equity, debt, property and foreign exchange markets. Delivery of the Group's growth aspirations depends on access to capital markets. External factors, including market volatility, can have an impact on the ability to implement the growth strategy. Given the Group's long term income profile and the characteristics of its debt where the finance costs are ultimately fixed or capped, such conditions are currently considered unlikely to have a material impact on the status quo for the Group, but are considered to be relevant to the Group's growth aspirations in so far as there is an impact on the availability of debt and equity capital.

Going concern

The Board regularly monitors the Company's and the Group's ability to continue as a going concern. Summaries of the Company's and the Group's liquidity position, compliance with loan covenants and the financial strength of its tenants and guarantors are considered at the quarterly Board meetings and more often if required. Scenarios for the Group's future performance and cash flows, including stress test scenarios, are also considered at least each quarter. Based on this information, the Directors are satisfied that the Company and the Group are able to continue in business for the foreseeable future and therefore have adopted the going concern basis in the preparation of this financial information.

Viability statement

The Board has assessed the prospects of the Group over the five years from the balance sheet date to 31 December 2023, which is the period covered by the Group's longer term financial projections. The Board considers the resilience of projected liquidity, as well as compliance with debt covenants and UK REIT rules, under a range of RPI and property valuation assumptions.

The principal risks and the key assumptions that were relevant to this assessment are as follows:

Based on the work performed, the Board has a reasonable expectation that the Group will be able to continue in business over the five year period of its assessment.

Group Income Statement

All amounts relate to continuing activities.

The notes form part of this financial information.

Group Statement of Other Comprehensive Income

The notes form part of this financial information.

Group Statement of Changes in Equity

The notes form part of this financial information.

Group Balance Sheet

The notes form part of this financial information.

Group Cash Flow Statement