SIR.L Regulatory News (SIR)

10 September 2020

Secure Income REIT Plc

(the "Company" or the "Group")

Results for the six months ended 30 June 2020

Secure Income REIT Plc (AIM: SIR) (the "Company" or the "Group"), the specialist long term income UK REIT, today announces its results for the six months ended 30 June 2020.

This has been an extraordinary period for the Company and the economy. Almost every one of our tenants was producing record breaking results up to the point of the pandemic, in turn driving our strong performance which met an abrupt but hopefully temporary period of disruption. With the exception of our healthcare portfolio tenants who remained trading throughout the pandemic, two thirds of our tenants had to shut down their operations across the world as a result of Covid-19 related lockdowns and restrictions, including the assets owned by our Group. This has created unprecedented trading challenges for our leisure and hotel tenants who earned zero revenue for over half our reporting period. Our strong financial position and experienced external management team have, however, enabled us to take a proactive approach to provide support where needed, with the aim that affected businesses will be better placed to resume their growth trajectory once the effects of the pandemic diminish. In turn, we hope that this will also shore up the value of our assets and better position the Company for growth.

Whilst there is still considerable uncertainty resulting from the unknown future impact of Covid-19, the Company has a robust balance sheet with some £220 million of uncommitted and unfettered cash, well structured non-recourse debt, excellent real estate and leases which are very difficult to replicate. Our Investment Adviser remains as committed and aligned as ever to restoring the prospects of our shareholders.

Highlights

• Balance sheet strength and liquidity has enabled the Company to support certain of its tenants through the Covid-19 pandemic without compromising on its resilience and while paying a quarterly cash dividend throughout

• Like for like portfolio valuation was down 6.0% to £1.96 billion in the period:

‐ Budget hotel valuations adversely impacted by the Travelodge CVA account for 79% of the net decline in property valuation, with budget hotel values down by 20.3%

‐ Leisure asset valuations down 5.5%

‐ Healthcare asset valuations up by 2.8%

• Results reflect temporary rent concessions to support our leisure tenants and granted to Travelodge by way of its CVA:

‐ Under current arrangements, total rents will revert to their previously contracted levels within 16 months

‐ Travelodge rents are reduced by a total of £22.9 million over the period from 1 April 2020 to 31 December 2021, of which £4.8 million relates to cash flows in the period to 30 June 2020; 119 of the 123 hotel leases now include a landlord only break right exercisable at any time up to 20 November 2020

‐ Merlin rents of £17.8 million for June and September 2020 have been deferred for collection in September 2021, with rental cash flows returning to their previously contracted levels at the December 2020 collection date

‐ Stonegate pubs were granted a £1.1 million six month rent free period from April to September 2020 in exchange for strengthened lease alienation provisions and lease extensions to a 25 year term

‐ Healthcare rents (34% of passing rents before concessions) have continued to be received on time, in full, with no concessions

• Adjusted EPRA EPS of 5.1 pence per share after the full earnings impact of the rent concessions granted, which are reflected in this measure on a cash flow basis

• The Group's 20.8 year Weighted Average Unexpired Lease Term remains one of the longest in the UK public real estate sector

• Total Accounting Return of -8.1% in the period reflects a 43.0 pence per share fall in EPRA NTA net of 8.4 pence per share of dividend payments

• Neither the Company nor the Investment Adviser has requested or received any form of Covid-19 Government support

• The Management Team's alignment with all shareholders remains very strong, with an interest of 12.4% in the Company worth £155 million at 30 June 2020 EPRA NTA

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

"There is no doubt that Covid-19 has created very challenging conditions for the Company. Whilst our Key Operating Assets are in less cyclical sectors with high barriers to entry, the impact of the lockdown and sharply curtailed international travel has hit leisure and hotel businesses particularly hard across the globe. Having taken action in 2019 to further reduce the Company's leverage and maintain a much enhanced liquidity buffer, the Company was able to provide appropriate assistance to those tenants who needed it to protect shareholder value while maintaining the payment of quarterly dividends, without the Company having had any recourse to Government financial support or tax deferrals.

Negative real interest rates continue to pose a challenge for investors to protect their savings against inflation. This environment sets the investment case for long-dated inflation-linked rental income, including for Secure Income REIT, albeit one which has been interrupted by the impact of Covid-19. We retain the balance sheet flexibility to respond to further challenges, and the Board and our Management Team remain energised and fully aligned with our shareholders. Beyond the current disruption lies significant potential for recovery and the resumption of the strong performance seen from flotation in 2014 up to February of this year."

For further information on the Company, please contact:

Interim Results Presentation

Secure Income REIT will be holding a presentation for analysts and investors today at 9am. If you would like to attend, please contact FTI Consulting 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:

Webcast link: https://webcasting.brrmedia.co.uk/broadcast/5f3e4654b14d87262643a166

About Secure Income REIT Plc

Secure Income REIT Plc ("SIR") is a specialist UK REIT, investing in real estate assets that provide long term rental income with inflation protection.

The Company owns a £1.96 billion portfolio at the 30 June 2020 independent external valuation. With net assets of £1.25 billion and some £220 million of Uncommitted Cash held at 30 June 2020, the Company has been well positioned to provide support to its tenants through the Covid-19 pandemic while maintaining its strong financial discipline and balance sheet strength.

SIR has a highly experienced board, chaired by Martin Moore, and is advised by Prestbury Investment Partners Limited. Prestbury is owned and managed by Nick Leslau, Mike Brown, Tim Evans, Sandy Gumm and Ben Walford, a team with a long-standing and successful track record in real estate investment and asset management and, with an investment worth £155 million in the Company (at 30 June 2020 EPRA NTA), very close alignment with the interests of SIR shareholders.

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,

There is no doubt that Covid-19 has created very challenging conditions for the Company. Whilst our Key Operating Assets are in less cyclical sectors with high barriers to entry, the impact of the lockdown and sharply curtailed international travel has hit leisure and hotel businesses particularly hard across the globe. Having taken action in 2019 to further reduce the Company's leverage and maintain a much enhanced liquidity buffer, the Company was able to provide appropriate assistance to those tenants who needed it while maintaining the payment of quarterly dividends, without the Company having had any recourse to Government financial support or tax deferrals.

The impact of the rent concessions and the current investment market conditions on the Group for the six month period to 30 June 2020 has, disappointingly, ended our unbroken record of delivering strong Total Accounting Returns, rising net assets and falling leverage. However, the concessions granted to our tenants are all temporary, with the full rent roll due to return to its original contractual level within the next 16 months. We have the balance sheet resilience to provide further support to our tenants should it become necessary and we remain in close dialogue with all of them while they gradually restore their businesses.

Results and financial position

The Group's net asset value per share at 30 June 2020 reported under IFRS was 383.9 pence, down 10.5% from 428.8 pence at 31 December 2019. Using the industry standard EPRA measures for ease of comparison with other quoted real estate businesses, the Group's EPRA NTA per share at 30 June 2020 was 386.4 pence, down 10.0% since 31 December 2019.

The Total Accounting Return for the period was minus 8.1%, with the negative return for the period principally attributable to the effects of the rent concessions and the impact of the pandemic on the investment market at the date of valuation.

As explained in more detail in the Investment Adviser's Report, 79% of the fall in property valuation is attributable to the Travelodge Hotels. The full effect of the rent concessions granted as at 30 June 2020 has been taken into account in these results, and no further concessions have been granted since that date. We note that the 30 June 2020 valuation date falls after the effective date of the Travelodge CVA and after the other rent concessions had been agreed with tenants, but before the UK Government permitted the commencement of the release of the lockdown measures for those businesses.

The impact on the Group's reported earnings of the support provided to our tenants is, unfortunately, rather complicated by the requirements of accounting standards which, broadly, mean that we must spread the impact of rent reductions over the whole remaining term of the leases. As those leases are unusually long, this means that rent reductions that are material over the concession period when cash flow is reduced (1 April 2020 to 31 December 2021) must be spread evenly in the income statement over the full term remaining on those leases, which is over 22 years on average. The impact on the income statement reported under the IFRS rules is therefore relatively modest. We believe that shareholders and other users of these reports are best served by an earnings measure that much more closely reflects the cash flow earnings of the business, so we retain our focus, as we always have done, on Adjusted EPRA Earnings which remove these rent smoothing effects. These adjustments are explained in the Investment Adviser's Report which follows this report.

The reduction in earnings and our changed income profile over the short term led the Board to carefully reconsider the Company's dividend policy. Historically, since we commenced payment of dividends four years ago, we have paid out all of the Company's Adjusted EPRA EPS in cash each quarter, which has resulted in dividends per share increasing year on year, consistent with our inflation protected rental income stream which has also grown every year. Having regard to the temporary nature of the rent concessions, the significant unfettered cash held by the Company, our headroom on debt covenants and the status of the easing of the lockdowns in the UK and elsewhere, we have continued to pay dividends at the levels that would have been achieved absent the rent concessions, as explained in more detail in the Investment Adviser's report. That decision remains subject to our continuing reassessment of those crucial factors underpinning the appropriateness of maintaining the dividend payments.

The share price on 30 June 2020 was 270.0 pence per share, a discount of 30% to the EPRA NTA at that date. Since we last reported results to shareholders in March 2020, Board members and the Management Team invested a further £556,000 in shares purchased in the market, adding to their already significant holding. Share buy-backs by the Company have been considered, but to date have not been deemed a prudent use of the Company's liquidity buffer given the resulting increase in the Company's leverage, an increase which is currently considered inappropriate at this time of heightened uncertainty.

Outlook

The easing of restrictions has allowed over 90% of our leisure and hotel assets to reopen in the short period since our tenants were permitted to do so, which is expected to rise to 95% by 1 October 2020. Whilst the future path of the pandemic remains uncertain, the UK Government has made it clear that it is keen to avoid the cost and disruption of a second national lockdown, instead imposing travel quarantines and local restrictions. In the meantime, the Bank of England's base rate stands at an historic low of 0.1%, ten year gilts yield little more at just 0.2% and, with widespread dividend cuts across the quoted universe, it has become increasingly difficult for savers to earn a satisfactory income return. At over 100% of GDP, the high level of UK Government debt is likely to usher in an era of financial repression, where interest rates are kept below the rate of inflation for a protracted period in order to reduce the real value of the debt; a policy that worked successfully over some two decades after World War Two.

Negative real interest rates pose a challenge for investors to protect their savings against inflation. This environment underpins the investment case for long-dated inflation-linked rental income, including for Secure Income REIT, albeit one which has been interrupted by the impact of Covid-19. We retain the balance sheet flexibility to respond to further challenges, and the Board and our Management Team remain energised and fully aligned with our shareholders. Beyond the current disruption lies significant potential for recovery and the resumption of the strong performance seen from flotation in 2014 up to February of this year.

Martin Moore

Chairman

10 September 2020

Investment Adviser's Report

Prestbury Investment Partners Limited, the investment adviser to Secure Income REIT Plc, presents its report on the operations of the Group for the six months ended 30 June 2020. Also included with these reports, following the interim financial statements, is Supplementary Information which includes calculations of the various performance measures referred to in this report.

The results presented in these interim financial statements reflect the significant impact of the Covid-19 pandemic, including the effects of the assistance provided by the Group to a number of its tenants operating in the leisure and budget hotel sectors. This support, and the general market uncertainty which has arisen during the pandemic, has continued into the second half of the year. The path of the pandemic and the shape of any recovery in the UK and global economies remain uncertain. With the easing of restrictions we are starting to see business activity return gradually, whilst the Group's robust balance sheet and its strong liquidity position should provide further flexibility in meeting further challenges or indeed opportunities.

Tenant support provided

The tenants of the Group's healthcare assets, which account for 34% of passing rent before concessions and 39% of investment properties by value at 30 June 2020, remained trading throughout the UK lockdown and beyond. No support from the Company has been requested nor concessions required for those tenants. However, the sudden, forced closure of all of the Group's leisure assets and the majority of its budget hotels created intense operational and liquidity pressures on certain tenants.

No additional support measures have been provided since the Company announced a summary of concessions in place on 24 June 2020:

· Merlin Entertainments Limited took prudent action in April to significantly bolster its liquidity position, and part of the package of measures taken by Merlin was an open and constructive discussion and then agreement with the Company to reschedule certain rental payments. Deferrals of rent were agreed ahead of the rent payment date, deferring amounts due in June 2020 and September 2020 amounting to £17.8 million in total before reverting to the full amounts due from December 2020. Payment of the deferred rent is due in full in September 2021.

· Travelodge Hotels Limited was unable to come to suitable bilateral agreements for rent concessions with its many landlords and launched a Company Voluntary Arrangement ("CVA") which was approved by its creditors on 19 June 2020. As a consequence of the CVA, rent of £14.4 million has been foregone by the Group this year of which £4.8 million relates to the period ended 30 June 2020, and £8.6 million is foregone in 2021, after which rents return to the levels originally contracted. Certain other lease amendments are also now in effect, including landlord only break options which are in place on 119 of the Group's 123 Travelodge leases, allowing a break option exercisable before 20 November 2020 at no cost to the Company on 114 leases (representing 83% of the hotels passing rent) and before 31 December 2021 at no cost on the remaining five leases (5% of the hotels passing rent). Unusually for a CVA, Travelodge did not disclaim any of its leases, preferring to keep its entire trading estate intact - perhaps a reflection of the fact that the business had been performing well ahead of the pandemic, with a strong five year track record of profits growth and sector outperformance in its key metric of revenue per available room.

· A six month rent free period has been agreed in respect of the Stonegate pubs portfolio from 1 April 2020, a total reduction of £1.1 million of which £0.5 million relates to the period ended 30 June 2020, in consideration for extending lease terms from 19.6 to 25.0 years and strengthening the lease alienation clauses.

The accounting policies for rent concessions are explained in the Financial Review section of this Investment Adviser's Report and in note 2 to the interim financial statements.

The impact of these concessions on the Group's rental cash flows for the 2020 and 2021 financial years is set out below, assuming that there are no changes in the composition of the portfolio or further variations to any of the leases.

The impact on Adjusted EPRA EPS has a slightly different profile over 2020, because of the deferral of the rents due from Merlin for June 2020 are rents receivable in advance, therefore only seven days' of that amount due relates to earnings in the first half of the year. The impact on Adjusted EPRA earnings, assuming that there are no changes in the composition of the portfolio or further variations to any of the leases, is:

Costs of £0.7 million (0.2 pence per share) have also been charged to the income statement in the six months to 30 June 2020.

These concessions are designed in each case to give the tenants the breathing space needed to assist with the recovery of their businesses and to support the Company's return to its growth trajectory. Under current arrangements, all rents arising from the Group's property portfolio are contracted to revert to their original contractual levels by 1 January 2022 at the latest.

Rent collections

Tenants accounting for 41% of the Group's passing rents before concessions have not entered into any rent concession agreements. All rents due from them have been collected on time and nothing is outstanding from them at 30 June 2020 or at the date of this report. 34% of the pre concession passing rents are currently subject to rent deferral (32%) or a rent free period (2%) so no rent was due from those tenants at 30 June 2020 or currently. The vast majority of the balance relates to Travelodge, which has abided by its revised payment terms since its CVA and no amounts were due from them at 30 June 2020 or have been overdue from them since. One tenant accounting for less than 0.2% of the passing rents before concessions has been able to reopen following the easing of lockdown restrictions but has been unable to reach agreement on revised payment terms. As at 30 June 2020 £30,000 was owing from them and at the date of this report £75,000 is past due.

The portfolio

The Group held 161 properties at 30 June 2020 (no change since 31 December 2019) with passing rent before temporary concessions of £111.8 million, up from £110.7 million at 31 December 2019.

Portfolio valuation

The portfolio is valued by qualified independent external valuers every six months and there was a 6.0% net decrease in valuation over the six month period. The most material movement was a 20.3% reduction in the valuation of the budget hotels, reflecting the impact of the CVA rent reductions and an increase in the blended Topped Up Net Initial Yield from 5.5% to 6.9%.

The movement in valuation in the period comprises:

The leisure and budget hotels valuations as at 30 June 2020 have been reported by the independent external valuers as being subject to material valuation uncertainty in light of Covid-19. Based on the provisions of the Royal Institution of Chartered Surveyors guidelines in force at that time, this was the case for the majority of property valuations in the UK as at that date where properties had been forced to close. The healthcare assets, which account for 39% of assets at independent valuation, are not subject to the material valuation uncertainty proviso. Material valuation uncertainty does not mean that the valuations cannot be relied upon, but that less certainty can be attached to them than would otherwise be the case.

In the case of the budget hotels portfolio, the date of the valuation was after the date of approval of the CVA but prior to the expiry of the CVA challenge period. That challenge period subsequently expired without any successful challenge being mounted, but was a relevant factor at the valuation date.

Further details of valuations are given in note 10 to the interim financial statements.

In reaching their assessment of market values, the independent external valuers had all details of the rent concessions that have been agreed, and no additional concessions have been agreed since the valuation date. The valuations therefore take into account the full effect of the concessions agreed to date and also recognise that under the terms of all of the concessions, rental income returns to its previously contracted levels by, at the latest, 1 January 2022.

Yields

* Topped Up Net Initial Yield ignores the temporary rent concessions. The healthcare valuation and yields take no account of any uplift from an outstanding May 2018 open market review on the Ramsay hospitals; the Ramsay rents account for 94% of the healthcare rents at 30 June 2020

† the leisure and budget hotels Running Yields are calculated using the independent external valuers' estimates of RPI averaging 2.5% per annum

The growth in like for like passing rent before concessions was 1.0% over the period and follows the completion of reviews on 65% of portfolio rents in the period and also the expiry of the car park lease at Manchester Arena, where the previous passing rent was £1.3 million per annum and where the new car park operator had been unable to fully reopen the car park in the period as a result of the lockdown restrictions.

Basis of rent reviews

While the rents on three of the portfolios have been subject to deferrals or reductions in the short term, on the basis of the concessions granted to date all rental cash flows are contracted to revert to their originally contracted terms by, at latest, 1 January 2022. Considering that medium to longer term trajectory and the expected reversion to originally contracted terms, the income arising on the portfolio benefits from fixed contractual rental uplifts which average 2.8% per annum on 42% of the income and upwards only RPI-linked rent reviews on the remaining 58%. 68% of the rent is subject to annual review.

Temporary rent concessions have been agreed with both Merlin Entertainments Limited and Travelodge Hotels Limited, where in each case the leases include upward only RPI-linked rent review provisions (in the case of Merlin, on the UK assets only). The terms of the concessions are such that the contractual provisions relating to the rent reviews continue throughout the relevant concession period, with any rental increases that arise being payable at the end of that period, which is September 2021 in the case of Merlin and January 2022 for Travelodge. Consequently, the Group retains the potential to capture any RPI-linked rental uplifts.

Lease lengths

The leases on the Group's portfolio are very long, with a Weighted Average Unexpired Lease Term of 20.8 years without tenant break from 30 June 2020. Only 2% of the Group's leases expire within 16.9 years of the balance sheet date.

The increase in the Weighted average Unexpired Lease Term of the Leisure assets is attributable to the extensions of the Pubs leases to a term of 25.0 years as at 30 June 2020, which was negotiated in exchange for a six month rent reduction (£1.1 million of cash flow).

No material vacancies or landlord costs

The portfolio is fully let. All occupational leases are on full repairing and insuring ("FRI") terms, meaning that property running costs are low and there is no material capital expenditure requirement. There is one small income stream that arises from an operating agreement rather than an FRI lease, which currently accounts for a negligible percentage of the Group's income.

Portfolio total rents before temporary concessions

The Group's principal lease counterparties, analysed by contracted rent before temporary concessions, are as follows:

* £6.9 million (31 December 2019: £6.5 million) of the Merlin rents are Euro denominated

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

Leisure assets (41% of portfolio value)

The leisure properties comprise four well known visitor attractions let to subsidiaries of Merlin Entertainments Limited together with 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 and Scotland.

The Merlin assets include two of the UK's top three theme parks, Alton Towers and Thorpe Park, together with the Alton Towers hotel and Warwick Castle. The German assets operated by Merlin are Heide Park theme park in Soltau, Saxony, which is the largest in Northern Germany, and its adjacent hotel. These assets are held freehold and are let to subsidiaries of Merlin Entertainments Limited, which owns all of Merlin's operating businesses and which is the guarantor of all lease obligations for these assets. Measured by the number of visitors, Merlin is Europe's largest operator of leisure attractions and the second largest in the world behind Disney.

The average term to expiry of the Merlin leases is 22.0 years without break from 30 June 2020 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 year to April) for the UK properties, which in 2020 resulted in a rental increase of 1.5%. 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 increased from £6.9 million to £7.2 million on 29 July 2020 (translated at the 30 June 2020 exchange rate).

By mutual agreement in advance of the June rent due date, rents receivable for the June 2020 and September 2020 quarters have been deferred for payment in September 2021, timed to coincide with the tenant's expectation of their peak liquidity position. Among their other measures to meet the challenges of the pandemic, the Merlin group took action to access the capital markets by way of a €500 million bond issue (upsized from €400 million), which was announced on 24 April 2020, and acted to further strengthen its liquidity position by drawing available debt facilities in full, managing their cash flows and resource allocation, and striking rent deferral deals with certain of its other landlords. The lease guarantor is the owner of the Merlin group's entire international operations, some of which remained open throughout the pandemic but most of which were subject to local lockdowns and restrictions at varying times. Heide Park reopened on 25 May 2020 and Alton Towers, Thorpe Park and Warwick Castle on 4 July 2020.

Manchester Arena is a strategic site of eight acres, held long leasehold and located above Manchester Victoria Railway and Metrolink station. It comprises the UK's largest indoor arena by capacity, some 160,000 sq ft of office and leisure space, a multi-storey car park with approximately 1,000 spaces, and advertising hoardings. The leases on the Manchester site as a whole have an average term to expiry of 19.0 years from 30 June 2020 and produce passing rent, net of head rent, of £5.2 million per annum at that date.

The Arena is let on a full repairing and insuring lease to SMG and SMG Europe Holdings Limited, both wholly owned subsidiaries of ASM Global, the world's largest venue management company. The lease term is 25.0 years unexpired without break from 30 June 2020 and rent is reviewed annually every June in line with RPI collared between 2% and 5%, which in 2020 resulted in a rental increase of 2.0%. While the Arena remains closed given the current restrictions on large gatherings, ASM Global operates over 322 venues in 21 countries with pro forma annualised revenues for 2019 estimated at some $500 million. The offices and ancillary leisure space at Manchester Arena are let to tenants including Serco, Citipark, Unison, JCDecaux and go-karting operator TeamSport, all of which are now open for business and the majority of which remained so throughout the lockdown.

The Brewery on Chiswell Street is a predominantly freehold investment let to a specialist venue operator on a full repairing and insuring lease. 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 term to expiry is 36.0 years without break from 30 June 2020. The lease terms include five-yearly fixed uplifts of 2.5% per annum compounded and the passing rent is £3.4 million per annum as at 30 June 2020. The next rental uplift to £3.8 million will take effect in July 2021. The venue has been closed since commencement of the lockdown given the current restrictions on large gatherings but we understand that, under current government guidance, the venue is expected to reopen on 1 October 2020.

The portfolio of 18 high street pubs produces passing rent before temporary concessions of £2.2 million per annum as at 30 June 2020 and the leases have an average term to expiry from that date of 25.0 years without break. Rents are subject to five-yearly RPI-linked increases collared between 1% and 4% per annum compounded. The rent reviews in February 2020 resulted in an increase in passing rent of £0.2 million per annum (13.2% or 2.5% per annum compounded). Prior to 30 June 2020, a six month rent free period was exchanged for improved alienation provisions within the leases and a lease extension which increased the term to expiry without break for these assets by five and a half years. While the pubs owned by the Group closed at commencement of the UK lockdown, all have since reopened.

The pubs are let on individual full repairing and insuring leases either to, or guaranteed by, Stonegate Pub Company Limited. Stonegate acquired Ei Group Plc in a £1.3 billion acquisition which completed in March 2020. The combined group is the largest pub company in the UK, with 4,749 pubs as at 12 April 2020, 88% by value of which are held freehold by Stonegate.

Healthcare assets (39% of portfolio value)

The healthcare assets are 11 freehold private hospitals located throughout England and 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 care.

The Ramsay hospitals are let on full repairing and insuring leases with a term to expiry at 30 June 2020 of 16.9 years without break. The rents increase in May each year by a minimum of a fixed 2.75% per annum throughout the lease term. Following the May 2020 fixed uplifts, the rents on the hospitals portfolio increased from £33.5 million to £34.4 million. In addition, there is an upwards only open market review within each lease as at 3 May 2018 and then in May 2022 and every five years thereafter. The May 2018 open market review remains outstanding as it is subject to a formal arbitration process which is ongoing, but which has been delayed as a result of the practical limitations on the arbitrator's inspection of the hospitals during the Covid-19 pandemic. These interim financial statements take 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 8 September 2020 (and using the exchange rate on that date) of £8.3 billion.

The London psychiatric hospital is let on a full repairing and insuring lease with a term to expiry at 30 June 2020 of 24.1 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 increased from £2.1 million to £2.2 million in May 2020. 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 8 September 2020 (and using the exchange rate on that date) of £5.8 billion.

Budget hotel assets (20% of portfolio value)

At 30 June 2020, the Group owned 123 Travelodge hotels in England, Wales and Scotland with contracted rent before temporary concessions of £28.3 million. The properties are 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 589 hotels and over 45,000 rooms as at 30 June 2020.

Unlike the consensual agreements with our leisure tenants, Travelodge's shareholders adopted a very different approach to resolving the immediate liquidity challenges brought about by the UK lockdown, ultimately resulting in a combative and hard fought CVA which was approved by Travelodge creditors on 19 June 2020.

As a consequence of the CVA, £14.4 million of rent has been foregone this year of which £4.8 million relates to the six months ended 30 June 2020, and £8.6 million has been foregone for 2021, after which rents are due to return to the levels originally contracted for the period from 1 January 2022. The rent owed by Travelodge from 1 July to 31 December 2020 totals £4.6 million, of which £1.6 million is receivable quarterly in advance as has always been the case in the Travelodge leases, and the balance is payable monthly in advance. The total amount receivable in 2021 is £19.7 million, of which £3.3 million is receivable quarterly in advance and £16.4 million monthly in advance. From 1 January 2022 all rents are receivable quarterly in advance.

It is typical for companies undergoing a CVA to hand back leases on properties they no longer wish to operate, but Travelodge has opted to retain the whole of its portfolio, subject to landlord only break options on certain of their hotels. It is uncommon in a CVA to see rents reverting to their originally contracted levels following a rent concession period. We believe that these unusual features reflect Travelodge management's faith in the quality of their business before the pandemic struck, with a strong five year performance track record and a leading position within the UK budget hotels market.

Certain other lease amendments are also now in effect, including landlord only break options which are available on 119 of the Group's 123 Travelodge leases, exercisable at no cost before 20 November 2020 on 114 leases (representing 83% of the hotels by passing rent before concessions) and before 31 December 2021 on the remaining five leases (5% of the hotels by passing rent before concessions). The majority by number of Travelodge's property owners were granted these landlord only break options. Travelodge has since announced that, through a combination of hotels not granted termination rights and those where landlords opted to extend leases and therefore forego their break options, they had by 2 September 2020 secured hotels representing some two thirds of their 2019 UK EBITDA, with nearly three months left of the break option period.

Travelodge is a major brand with very high levels of brand recognition and a management team that has proved its competence with its strong pre-pandemic performance track record. Against the background of a still challenging environment, we continue to conduct extensive analysis as to whether the prospects for the Group are better served by retaining the current lease arrangements, entering into a possible lease restructure with the existing tenant or selling part or all of the hotels portfolio. The Board and Management Team consider that the landlord break rights provide optionality for the Group and continue to evaluate how best to maximise any value arising from them. Any conclusions drawn from that process would be expected to have been reached before the first option expiry date of 20 November 2020.

Travelodge reported on 26 August that all of their hotels had reopened by mid August, following the lifting of restrictions on 4 July 2020.

The average term to expiry of the Travelodge leases is 21.9 years from 30 June 2020 with no tenant break clauses. While the CVA terms introduced a lease extension option, exercisable by 28 August 2020, which could have extended the weighted average term to expiry of the Group's Travelodge portfolio by 2.8 years, had those options been exercised the landlord break options would have been terminated. The Board's assessment was that the small marginal valuation benefit of the lease extension was outweighed by the greater optionality of the landlord lease break option, and therefore the extension options were allowed to lapse.

The leases are on full repairing and insuring terms and Travelodge is also responsible for the cost of any headlease payments and other amounts owing to the freeholders of the 52 leasehold properties. The CVA did not compromise the FRI basis of the leases. 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. There were no scheduled rent reviews in the six months to 30 June 2020. Reviews on 22% of the rents, at their contracted levels before any temporary concessions, take place in the second half of 2020, with a further 24% in 2021, 39% in 2022, 10% in 2023 and 5% in 2024. Any uplifts arising in the period from 1 April 2020 to 31 December 2021 will become payable following the end of the rent concession period in January 2022.

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 subgroup is self-contained, with no cross-default provisions or cross collateralisation between the six of them. In all cases, substantial financial covenant headroom was negotiated into loan terms at their inception, together with appropriate remedial cure rights where cash can be diverted to a security group in order to maintain covenant compliance if and when necessary.

Where the Company has agreed rent concessions, in each case this has been with the consent of the relevant lenders. In certain cases this has also included covenant waivers during the concession period. Save for the waivers, the terms of the various loan agreements remain unchanged.

The Group's total gross debt increased by £1.0 million in the six month period, being a reduction of £1.7 million by way of scheduled loan repayments and £1.5 million repaid out of the net proceeds of non-core hotels sold in 2019, offset by £4.2 million of foreign currency translation movements on the Group's Euro denominated debt. Net debt has increased by £27.0 million, broadly equivalent to the dividends paid in the period out of the Group's cash resources.

The Group's Net Loan To Value ratio increased from 31.9% to 35.3% over the period.

* free cash within secured facilities is released to the parent company after each quarterly interest payment date for as long as all loan covenants are complied with, increasing the balance of unfettered cash within the Group.

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 period end exchange rate of €1:£0.91) 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.

The Board ensures that interest rate risk is managed by either fixing or capping rates over the term of each loan. As at 30 June 2020, 92% of the Group's borrowings were fixed rate facilities. The weighted average interest rate payable in the period remained the same as in 2019 at 4.9% per annum.

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

Financial review

In this report, we focus on various financial measures recommended by the European Public Real Estate Association ("EPRA") to facilitate comparison with other real estate investment companies. The calculation of the EPRA measures and their reconciliation to the interim financial statements prepared under IFRS is presented in the Supplementary Information which follows the financial statements.

New EPRA guidelines which became effective on 1 January 2020 have been applied and comparative figures have been provided on a consistent basis. The new EPRA guidelines set out three measures of Net Asset Value, including EPRA Net Tangible Assets ("EPRA NTA"), each of which is disclosed and reconciled to the interim financial statements in note 19 and in the Supplementary Information. In this report we highlight EPRA NTA as the most meaningful measure of long term performance.

The Board monitors the following key performance indicators, which are further commented on in this report.

Dividend policy

The Company's dividend policy since listing was to distribute Adjusted EPRA earnings by way of a fully covered cash dividend, paid quarterly. This has served the Company well and enabled it to distribute increasing dividends in line with the geared increases in net rental income, driven by the combination of annual fixed and RPI rental uplifts together with largely fixed debt costs and stable and predictable administrative expenses.

Following completion of the sale of a portfolio of eight private hospitals in August 2019, the Board concluded that the significant cash surplus raised at that time would be partially deployed in topping up the dividends to make up for the yield on the sold hospitals for as long as the surplus cash remained undeployed. The surplus was at that time earmarked for:

i) acquisitions, giving the Company the ability to move quickly to take advantage of opportunities; and/or

ii) special dividends or capital returns; and/or

iii) reserves for application to debt to ride out economic shocks arising from external sources.

The pandemic was not known about at that time, but its effects have heightened the importance of the cash reserve for external shocks.

The support provided to certain of the Group's tenants to alleviate their Covid-19 related business shutdowns has resulted in a temporary reduction in the net cash flows of the Group, in turn reducing the level of covered dividend that would be payable under the terms of the original dividend policy.

The effects of the pandemic on the Group's net income and the heightened uncertainty during this period prompted a review by the Board of the prudent and appropriate dividend policy to apply in the circumstances. The materially higher than usual liquidity buffer held by the Company following the sale of the private hospital portfolio affords significant flexibility, not only in supporting the Group's tenants but also in providing appropriate returns to shareholders without putting at risk the strength of the balance sheet. With the Company's liquidity buffer directed in the main to supporting tenants and ensuring that the balance sheet remains robust during such uncertain times, the Board concluded that the element of the dividend relating to the topping up of income on the sold hospitals should be discontinued. The basis of dividend payment therefore reverts to the 'core' dividend as guided with he 2019 annual results announcement, without the previous top slice of the hospitals net income top-up. This equates to a quarterly dividend of 3.65 pence per share payable in each of the last two quarters of 2020 and the first two quarters of 2021, increasing to 3.95 pence per share in the third quarter of 2021.

The analysis of the core and top-up dividends paid to date is as follows:

Ahead of the declaration of the dividend for the third quarter of 2020, the Board concluded that it is appropriate to continue to pay dividends at a level that recognises that the rent concessions granted are temporary, using some of the surplus liquidity to fund the dividend in excess of the Group's Adjusted EPRA Earnings. For as long as uncertainty remains elevated, given the unknown future path of the pandemic, uncertainties about consumer behaviour and the performance of the economy, and the possibility of another national lockdown or widespread local lockdowns, the dividend policy remains under review. The importance of the dividend to many investors is acknowledged and is carefully considered in any evaluation of the appropriateness of declaring a dividend in the context of the conditions prevailing at that time.

Impact of rent concessions on KPIs and IFRS financial statements

Recognising the Group's long term relationships with its tenants, and the very sudden and extensive impact on them of the pandemic and subsequent lockdown imposed in the UK and elsewhere, the Company provided support to certain of its tenants, as summarised at the start of this report where we also highlight the materially altered cash flow profile of the Group's rental income.

In simple terms, the IFRS accounting standards applicable to the Group require that a landlord assesses the rental income to be earned over the whole term of a lease (to the earlier of a reasonably certain tenant break option or expiry), and then spreads the aggregate income evenly over that whole term. The gross income assessed is, broadly, the income that is contractually certain. Consequently, the Group's leases with fixed or fixed minimum uplifts (which equate to 48% of the Group's entire contracted pre-concession passing rent) require a 'smoothing' adjustment to reflect the mismatch between the rents actually receivable and those recognised in the income statement. This effect is explained in more detail in the Supplementary Information which follows the interim financial statements. The remaining 52% of the Group's rental income which is subject to RPI-linked or open market reviews is not subject to a smoothing adjustment. The accounting policies set out in note 2 to the interim financial statements are consistent with these principles.

Applying these accounting policies and principles to the Group's income following the agreement of the rent concessions has affected the Group's IFRS income in each case as follows:

· The rent deferral on the Merlin assets does not change the total lease income over the life of the lease. It merely changes the timing of receipt, therefore there is no change to the IFRS income that would otherwise have been reported in the period. The rents deferred are held as an asset on the balance sheet, separate from and not valued as part of the investment properties. The carrying value of the rent receivable will be reassessed at each balance sheet date and it is held at 30 June 2020 at its face value of £8.9 million as it is considered to be recoverable in full.

· The reductions in rent receivable from Travelodge following their CVA reduce the Group's cash flows over the period 1 April 2020 to 31 December 2021, with the original contractual rents receivable (and any accrued RPI uplifts arising in the concession period) due to be restored from 1 January 2022. While the cash flow impact is temporary, it has the effect of reducing the total rents receivable over the life of the leases and this impact must be spread over the remaining lease term, which on a weighted average basis is 21.9 years. The effect of spreading a total £23 million reduction in rents over an unexpired term of 21.9 years on average results in rental income reported in the income statement being higher than cash rents receivable during the concession period and lower than cash rents receivable thereafter. Rents reported in the IFRS income statement for the six months ended 30 June 2020 are £4.6 million higher than the rents on a cash basis. The mismatch for the whole of 2020 is expected to be £13.7 million, then £7.4 million in 2021. From the start of 2022 it will unwind, with cash rents higher than the reported income by £1.1 million per annum through to the end of the term of each lease.

· The six month rent free period granted to Stonegate on the pubs portfolio in consideration for extending lease terms to 25.0 years and strengthening the lease alienation provisions is treated in a similar way to the Travelodge rent reduction. Rents reported in the income statement for the six months ended 30 June 2020 are £0.6 million higher than the rents on a cash basis, and the mismatch for the whole of 2020 is expected to be £1.1 million. From the start of 2021 it will unwind, with cash rents higher than the income reported in the income statement by £47,000 per annum through to the end of the term of the leases.

The Group has, from the time of its listing six years ago, had a high proportion of income with fixed rental increases over very long lease terms. The requirements to spread rents over the whole of any lease has always created a mismatch between cash rents receivable and rental income reported under IFRS. That mismatch was a major contributing factor to the adoption by the company of its Adjusted EPRA earnings measure. This measure is further explained under the "Adjusted EPRA earnings per share" heading later in this report and in the Supplementary Information which follows the interim financial statements. In order to calculate Adjusted EPRA earnings on a basis consistent with the Group's definition of the measure and prior reporting periods, the cash and income mismatches arising as a result of the rent concessions are taken into account in Adjusted EPRA earnings in order to give a clearer calculation of dividend cover on a basis that more closely reflects the Group's actual cash flows.

Key performance indicator - Total Accounting Return

In measuring progress towards the Board's objective to deliver attractive and sustainable shareholder returns, both Total Accounting Return (the movement in EPRA NTA per share plus dividends) and Total Shareholder Return (the share price movement plus dividends) are monitored. The principal focus for the Board is on Total Accounting Return as the Total Shareholder Return, while important, is also subject to wider market fluctuations not necessarily related to the Group itself.

* including £9.8 million or 3.0 pence (2019: £5.5 million or 1.7 pence) of Rent Smoothing Adjustments

The industry standard EPRA NTA measure takes IFRS net asset value and excludes items that are considered to have no relevance to the assessment of long term performance. Consistent with the EPRA Guidance, which requires an assessment of the likelihood of investment properties being sold, the Group's reported IFRS NAV is adjusted to exclude 50% of the deferred tax on investment property revaluations (in this case relating to the German assets) and all of the fair value movements on derivatives. EPRA NTA and EPRA NTA per share is reconciled to net asset value measured in accordance with IFRS in note 19 to the interim financial statements.

The Group's EPRA NTA per share at 30 June 2020 was 386.4 pence, down 10.0% since 31 December 2019. The 43.0 pence per share reduction, together with dividends of 8.4 pence per share, results in a Total Accounting Return over the period of minus 8.1%.

The analysis of movements in the Group's EPRA NTA and EPRA NTA per share is as follows:

* adjusted by £9.8 million or 3.0 pence per share (2019: £5.5 million or 1.7 pence per share) of Rent Smoothing Adjustments

The analysis of the investment property revaluation in the period is presented in the Portfolio section of this report.

The Total Shareholder Return is calculated as:

Key performance indicator - Adjusted EPRA earnings per share

The calculation of basic EPS under IFRS, as reported in the interim financial statements, is shown below.

The reduction in IFRS earnings before revaluations and profits on sale in the first half of 2020 compared with the same period in 2019 is attributable to the Covid-19 rent reductions for the period, together with the impact of the disposal of eight private hospitals which were owned throughout the period to 30 June 2019 but sold in the second half of that year, and which contributed 1.4 pence per share of rental income net of financing costs in the six months ended 30 June 2019.

The IFRS earnings measure includes unrealised property revaluations, gains and losses on property disposals and certain other factors which are considered to distort an assessment of underlying long term performance and which are therefore excluded from the EPRA measure of earnings. EPRA earnings and EPRA earnings per share are presented in this report and the calculation of these measures is presented in note 9 to the interim financial statements.

The EPRA measures are presented in a way that is consistent with other public European real estate companies applying the EPRA Guidance. However, the Board has considered how best to show the underlying performance of the business taking account of some unusual features that are specific to the Group and material to its results. These are the Rent Smoothing Adjustments, arising from the required smoothing of fixed uplifts over the Group's very long leases, and the impact of non-cash incentive fee payments in periods where those are earned, including the impact of the timing of the share issues relating to those payments. The Group's basic and diluted EPS, calculated in accordance with IFRS, must 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, regardless of when they are actually issued.

A further measure, Adjusted EPRA Earnings, is therefore presented, both for comparison of the performance of the Group from year to year and with its peer group, and to avoid distortions which would result in unreliable measures of Dividend Cover.

Adjusted EPRA EPS is derived from EPRA EPS by:

· removing from rental income the Rent Smoothing Adjustments and any deferred rents;

· excluding any significant non-recurring costs;

· excluding the charge for any incentive fee, on the basis that it is a non-cash payment and considered to be linked to revaluation movements and therefore best treated consistently with revaluations; and

· calculating the weighted average number of shares to reflect the actual dates on which shares are issued.

Adjusted EPRA EPS is reconciled to basic EPS in note 9 to the interim financial statements. The table below shows the analysis of the Adjusted EPRA earnings in the period in order to demonstrate where the adjusting items take effect.

An analysis of the Group's rental income is included in the portfolio review earlier in this report and the other components of earnings are analysed below.

Adjusted EPRA earnings per share - property outgoings

The Group's property outgoings comprise:

On an IFRS basis, the interest charge and leasehold property revaluation elements of the head rents are classified as finance costs and property revaluation movements respectively, while head rents recovered from tenants are classified as revenue.

The costs of capital projects are expensed if they relate to feasibility studies for projects that have not commenced and are not certain to commence, or where the expenditure is not reflected in the independent valuation of the underlying property.

Adjusted EPRA earnings per share - administrative expenses

The Group's administrative expenses for the period are the same under IFRS and the EPRA measure.

As an externally managed business, the majority of the Group's overheads are covered by the advisory fees paid to the Investment Adviser, which meets office running costs, administrative expenses and remuneration for the whole management and support team out of those fees. The basis of calculating the advisory fees is explained in note 20 to the interim financial statements. The advisory fee for the period amounted to £6.7 million plus irrecoverable VAT of £0.4 million (six months to 30 June 2019: £6.8 million plus irrecoverable VAT of £0.5 million).

The fees are calculated on a reducing scale based on the Group's EPRA NAV. The Remuneration Committee concluded in March 2020 that, in order for the calculation of the fees to remain consistent with the way that those fees have been calculated since the Company's listing, the fees would continue to be calculated on the basis of EPRA NAV originally in place. As that basis is set out in the EPRA Guidance previously issued in 2016, we refer to that measure in these statements as "2016 basis EPRA NAV" and this differs from the calculation of EPRA net assets in the rest of this report which is based on the latest guidance. The calculation of 2016 basis EPRA NAV is set out in note 20 to the interim financial statements.

· 1.25% per annum on 2016 basis EPRA NAV up to £500 million; plus

· 1.0% on 2016 basis EPRA NAV from £500 million to £1 billion; plus

· 0.75% on 2016 basis EPRA NAV from £1 billion to £1.5 billion: plus

· 0.5% thereafter.

Had the fees been calculated on the basis of EPRA NTA the results would not have been materially different.

In February 2020 the Independent Directors approved a proposal made by the Investment Adviser to exclude the surplus cash on the hospitals portfolio disposal in August 2019 from the advisory fee calculation to the extent that it has not been:

· deployed in topping up dividends (£9.0 million cumulatively to 30 June 2020);

· invested in acquisitions (none invested to 30 June 2020);

· used for liability management (none used to 30 June 2020); or

· returned to shareholders other than by way of dividend top-up (none to 30 June 2020).

The current annualised saving as a result of this change is estimated at £1.1 million excluding irrecoverable VAT and £0.3 million of saving is reflected in the income statement for the six months ended 30 June 2020. The balance of the surplus cash at 30 June 2020 was £149.4 million.

The management contract between the Company and the Investment Adviser has a term through to December 2025 and will be subject to its next review in the ordinary course by the Remuneration Committee in December 2022. There are no renewal rights or payments at the time of expiry. Any payments triggered by a change of control of the Company are limited to four times the most recent quarterly fee at the time any such change occurs which is the maximum amount payable on any form of termination of the contract.

The other recurring administrative expenses are principally professional fees which include the costs of independent external property valuations, external trustee and administration costs, tax compliance fees and audit fees.

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 £0.1 million in the period (2019: £0.1 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 together total £0.2 million (six months to 30 June 2019: £0.2 million) in the period.

If the Total Accounting Return to investors over a financial year as set out in the audited accounts exceeds a compound growth rate of 10% per annum above the 2016 basis EPRA NAV per share the last time any incentive fee was paid, the Investment Adviser earns an incentive fee amounting to 20% of any surplus above that priority return to shareholders, subject to a cap of 5% of 2016 basis EPRA NAV (other than in the event of a sale of the business, where an incentive fee would not be capped). Any such fee is payable in shares which 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.

In order to make a reasonable assessment of whether or not such a fee is likely to be payable in respect of the 2020 financial year, the Board has estimated the 2016 basis EPRA NAV of the Group at 31 December 2020 on the basis of the assumptions set out in note 20 to the interim financial statements. On the basis of that assessment no fee would be payable for the 2020 financial year and as a result no fee is accrued at 30 June 2020 (30 June 2019: £nil). In order for an incentive fee to be earned in respect of the 2020 financial year, the 2016 basis EPRA NAV at 31 December 2020 plus dividends paid during the year would need to total 477.5 pence per share.

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 administrative expenses averaged 21% during the period and was 40% as at 30 June 2020, with the increase attributable to the higher current weighting of healthcare income following the agreement of rent concessions in the leisure and hotels portfolios.

Adjusted EPRA EPS: net finance costs

* headlease interest is reclassified against property outgoings in Adjusted EPRA EPS to better reflect the nature of these costs.

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 is a UK Group REIT, so 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 on any net income not arising from its rental operations.

German corporation tax is payable on the Group's German rental operations at an effective tax rate in the period of 8% (six months to 30 June 2019: 15%), resulting in a current tax charge of £0.2 million (six months to 30 June 2019: £0.2 million). The balance sheet includes a deferred tax liability of £11.9 million (31 December 2019: £11.8 million) relating to unrealised German capital gains tax on the German properties, which would only be crystallised on a sale of those assets. There are no plans at present to sell these assets, so the deferred tax is not currently expected to be crystallised.

On an IFRS basis, there is a current tax charge of £0.1 million (six months to 30 June 2019: £0.2 million) and a £0.1 million deferred tax credit (six months to 30 June 2019: £0.7 million charge), which results in a net tax charge of £nil (six months to 30 June 2019: £0.9 million). Deferred tax is excluded from Adjusted EPRA EPS as shown in note 9 to the interim financial statements.

Adjusted EPRA EPS - currency translation

84% by value of the Group's property assets are located in the UK and the interim financial statements are therefore presented in Sterling. 3.6% (31 December 2019: 3.1%) of the Group's EPRA NTA comprises assets and liabilities relating to properties located in Germany, valued in and generating net earnings in Euros. Exposure to currency fluctuations is partially hedged through assets, liabilities, rental income and interest costs being Euro denominated. 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 €128.2 million as at 30 June 2020 (31 December 2019: €129.7 million), with the Euro denominated secured debt amounting to €71.8 million (31 December 2019: €71.8 million). The Euro strengthened against Sterling over the period by c. 7% and as a result there was a net currency translation gain of £2.6 million (six months to 30 June 2019: £nil) on an IFRS basis. Half of the deferred tax liability is excluded from EPRA NTA and as a result a further currency translation gain of £0.3 million arises in the movement in EPRA NTA in relation to the German operations (six months to 30 June 2019: loss of £0.3 million).

Key performance indicator - Net Loan To Value ratio

The Board structures debt facilities with a view to maintaining a capital structure that will enhance shareholder returns while withstanding a range of market conditions. During the period, the Group's Net LTV increased from 31.9% to 35.3% which reflects the fall in property valuations in the period. While the Net LTV ratio is one indicator of borrowing risk it is not the complete picture and the Board always considers it in conjunction with a wider assessment of headroom and financial covenants within debt facilities and the security of portfolio rental income. Those factors are addressed in the following sections.

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 managed. This includes monitoring and stress testing the covenant tests for current and future periods on the basis of a realistic range of scenarios and potential outcomes. The options available to the Board to manage any risk of covenant breach are then considered. The Board's approach to prudent capital management starts with 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 set at appropriate levels and then 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 UK real estate leases and that the Group's contracted rental income streams feature fixed or RPI-linked uplifts with just over two thirds of the contracted portfolio rents subject to annual review and the remainder subject to three or five yearly reviews. This structure gives rise, under more normal conditions, to predictable improvements in interest cover over time and a naturally deleveraging debt profile on the assumption of constant valuation yields. It has also provided the flexibility and the relatively good visibility over future cash inflows to allow for the various rent concessions granted to tenants needing support following the impact of the pandemic.

The Board reviews the headroom on all financial covenants at least quarterly and more often as required, including stress tested scenarios. The headroom on key financial covenants at 30 June 2020 is summarised below, including the Topped Up Net Initial 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, before any preventative or remedial actions were taken. Defensive actions could include deploying the Group's significant Uncommitted Cash of £219.6 million as at 30 June 2020 and which is further explained in the following section.

It is a feature of the Company's debt financing structure that significant headroom was built in at the outset, to act as a "shock absorber" in cases where tenant difficulty or property investment market disruption puts pressure on those covenants. In the cases of leisure and hotels facilities where the effects of the pandemic have manifested themselves, the headroom over covenant levels has reduced since those reported for 31 December 2019, however in all cases headroom has still been preserved. While the credit facilities include various cash cure rights in the event needed to avoid covenants being breached, no cash cures have been implemented to date.

In each case where concessions have been granted, lender consent was required and was granted by the lenders without penalty or cost, other than the modest costs of their legal fees. Temporary covenant waivers or adjustments were requested and granted on two facilities; on those and one further facility, where the rental income arising on assets subject to rent concessions was or will be insufficient to cover the finance costs payable during the rent concession period, the Company will finance those costs from its centrally held, unsecured free cash surplus. That amounted to £0.9 million in the six months to 30 June 2020 and a further £10.8 million is expected to be funded in the remainder of 2020, with nothing expected to be required for 2021. On the basis of concessions currently operational, no additional funding of uncovered interest costs is expected to be required.

Key performance indicator - Uncommitted Cash

The ability to prevent or mitigate debt covenant breaches is an important part of the Board's leverage strategy. Headroom considered appropriate to the business and to each underlying portfolio individually has been negotiated on all financial covenants together with certain contractual cure rights, including the ability to inject cash (subject to some 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 level of Uncommitted Cash, which is cash freely available to the Group, net of any creditors or other commitments.

The Group's Uncommitted Cash as at 30 June 2020 was £219.6 million (31 December 2019: £234.2 million). The level of Uncommitted Cash retained is assessed regularly in the light of property market and wider economic conditions and outlook. At present, the Board's assessment is that at a time of heightened uncertainty, largely but not solely related to the pandemic, the retention of a significant liquidity buffer remains appropriate.

Cash flow

The business is structured to provide an efficient flow through of net income to the payment of dividends. Rents are in the ordinary course predictable, financing costs are in the main fixed and the majority of operating costs are represented by the advisory fees which are transparently calculated relative to the Group's net assets.

The rent concessions granted in the period have reduced the cash flow from operating activities by £5.3 million in rent reductions, and £8.9 million in deferral of rents due from Merlin which should reverse in September 2021. Costs of £0.5 million relating to the rent concessions have been paid in the period.

The cash balance comprises:

The Group's investment properties are in the vast majority of cases 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 material unrecovered capital expenditure, property maintenance or insurance costs have been incurred in the period and it is not currently expected that material costs of that nature will be incurred on the portfolio as it stands at 30 June 2020.

Nick Leslau

Chairman, Prestbury Investment Partners Limited

10 September 2020

Principal Risks and Uncertainties

The Board's responsibilities for risk management include assessing the principal risks facing the Group and how they may be mitigated, including the consideration of matters that may threaten the performance of the Group, its business model or its viability. These responsibilities are summarised on page 47 of the 2019 annual report. Following the approval of the annual report on 12 March 2020, the impact of the Covid-19 pandemic has become significantly more far reaching, including the adverse economic impact of lockdowns and other restrictions in the UK and elsewhere. This is not to diminish the very distressing impact of the loss of lives and other social burdens of the pandemic.

From the start of the lockdown period, Board updates attended by all Directors and by all Management Team members were held weekly to ensure that there was regular, thorough and timely engagement with the issues arising. Weekly meetings continued through to the end of June, since when they have been held monthly in addition to the scheduled quarterly Board meetings. The safety and wellbeing of the Board and of the Investment Adviser's staff and suppliers was given very early attention, with the Investment Adviser moving to remote working on 17 March 2020, ahead of the national lockdown which commenced the following week. Following a detailed risk assessment, the Investment Adviser's office reopened on 3 August 2020 and a phased return of staff to office based working commenced at that time.

The Group's risk register is reviewed at least annually and more often as circumstances require. Given the current elevated risks following the pandemic, the risk register, which was most recently reviewed in connection with the publication of the annual report in March 2020, has been updated. The Board considers that the impact of the pandemic and potential future globally disruptive events on this scale are overarching risks which heighten certain of the specific risks facing the business. We have previously identified Brexit and climate risks within that category of overarching risk. We have added pandemic disruption to our overarching risks and have increased the risk rating of each of our principal risks, as all are impacted by the consequences of the virus and the response of governments and public health bodies to it.

The Board considers that the principal risks and uncertainties facing the Group over the medium to long term are as follows:

There are certain overarching risks where the direct impact on the Group's operations is limited, but which the Board considers to be relevant to most of the major risk areas identified. These are:

· the risks of extensive economic and social disruption, including from a pandemic;

· disruption from the terms of the departure of the UK from the European Union following the end of the current transition period (generally referred to as Brexit risk); and

· climate risk including the risks and costs of decarbonisation.

These are not classified as direct risks in their own right, but as general risks affecting many of the specific risk factors faced by the Group and which are also kept under review.

Global economic and social disruption: Pandemic risk

The Board and Management Team of the Company and those of the Group's major tenants have operated through various cycles of economic boom and bust, through varying degrees of political stability and have dealt with deep recessions and periods of great disruption. However, the global reach, sudden onset and extensive impact of the spread of Covid-19 is in a class of its own in its scale and unpredictability. While the full force of the lockdowns has been felt by our tenants in the leisure and hotels sectors, this has been mitigated, from the Company's perspective, through its significant weighting in healthcare assets which account for just over one third of the Group's annualised rents before Covid-related concessions. The Company's Uncommitted Cash balance, which is significantly larger than the level held historically, remains available to deal with further threats arising. While the path of the virus, of consumer behaviour in the face of it and of the related recession cannot be known, the experience of the Board and Management Team members is being brought to bear on every aspect of the Company's risk profile.

Brexit risk

The Board does not consider that Brexit 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 (the only non-UK assets held which represent 5.2% of the Group's gross assets at the balance sheet date) is considered unlikely to change as a result of Brexit, although the terms of access to non-UK financial markets may be of relevance in any future equity and debt issues.

Nevertheless, 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 and in particular on how the Group's tenants are affected. 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 and 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.

Climate risk

As the Company has very limited direct impact on the environment, this risk is not one where the Company can take steps to make a material impact. However, in assessing the strength of the credit quality of our tenants and of potential tenants, we take climate risk into account. This forms an integral part of the way that we consider how any assets that we are considering for acquisition meet the criteria for 'defensive business sectors' set out in the Company's business model.

Independent Review Report

Introduction

We have been engaged by the Company to review the condensed financial statements included within this interim report for the six months to 30 June 2020 which comprise the Group Income Statement, the Group Statement of Other Comprehensive Income, the Group Statement of Changes in Equity, the Group Balance Sheet, the Group Cash Flow Statement and the related notes.

We have read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed financial statements.

Directors' responsibilities

The interim report, including the financial information contained therein, is the responsibility of and has been approved by the Directors. The Directors are responsible for preparing the interim report in accordance with the rules of the London Stock Exchange for companies trading securities on the Alternative Investment Market ("AIM"). Those rules require that the interim report be presented and prepared in a form consistent with that which will be adopted in the Company's annual accounts having regard to the accounting standards applicable to such annual accounts.

As disclosed in note 2, the annual financial statements of the Group will be prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union. The condensed financial statements included in this interim report have been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting" as adopted by the European Union.

Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed financial statements in the interim report based on our review.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity", issued by the Financial Reporting Council for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Emphasis of matter: property valuations

We draw your attention to the disclosures made in note 10 to the condensed financial statements. As described in the note, as a result of the impact of the outbreak of the Novel Coronavirus on the market, the Group's independent external property valuers have advised that less certainty, and a higher degree of caution, should be attached to their valuations of the leisure and budget hotel properties, which comprise 61% of the total investment property portfolio by value, than would normally be the case. Our review report is not modified in respect of this matter.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed financial statements in the interim report for the six months to 30 June 2020 are not prepared, in all material respects, in accordance with International Accounting Standard 34, as adopted by the European Union, and the rules of the London Stock Exchange for companies trading securities on AIM.

Use of our report

Our report has been prepared in accordance with the terms of our engagement to assist the Company in meeting the requirements of the rules of the London Stock Exchange for companies trading securities on AIM and for no other purpose. No person is entitled to rely on this report unless such a person is a person entitled to rely upon this report by virtue of and for the purpose of our terms of engagement or has been expressly authorised to do so by our prior written consent. Save as above, we do not accept responsibility for this report to any other person or for any other purpose and we hereby expressly disclaim any and all such liability.

BDO LLP

Chartered Accountants and Registered Auditors

London, United Kingdom

10 September 2020

BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).

Group Income Statement

All amounts relate to continuing activities.

Group Statement of Other Comprehensive Income

The notes form part of these condensed financial statements.

Group Statement of Changes in Equity

The notes form part of these condensed financial statements.

Group Balance Sheet