Town Centre Regulatory News (TOWN)

TOWN CENTRE SECURITIES PLC

('TCS' or the 'Company')

Final results for the year ended 30 June 2020

Resetting and reinvigorating the business for the future

Town Centre Securities PLC, the Leeds, Manchester, Scotland, and London property investment, development and car parking company, today announces its audited final results for the year ended 30 June 2020.

Financial performance

· The Company has applied the IFRS 16 lease accounting standard for the first time which has reduced earnings and NAV by £0.5m. Going forward, the Company will also report Adjusted EPRA Earnings which removes the effect of IFRS 16 (see Finance section)

· Net assets:

o Devaluation of like for like investment portfolio of 6.9% despite a very uncertain market

o The majority of reduction driven by retail and leisure properties as expected

o EPRA net assets per share down 17.4% to 292p (2019: 354p) primarily as a result of the revaluation

· Profits and earnings per share:

o Adjusted EPRA Earnings before tax of £2.6m (2019: £6.4m), driven by an estimated £3.6m COVID-19 impact

o Adjusted EPRA earnings per share of 4.9p (2019: 12.0p)

o EPRA Earnings of £2.1m including the effect of IFRS 16

o Statutory loss before tax £24.2m (2019: loss of £12.5m) and statutory loss per share 45.5p (2019: loss of 23.4p), impacted by the unrealised £26.4m portfolio valuation and impairment movement

· Financing:

o Headroom of over £14.8m at year end based on June 2020 borrowings and valuations. This stands at £13.9m as at 1 September 2020

o Loan to value of 53.2% as at 30 June 2020 (2019: 49.3%), driven by the unrealised valuation movement

o £35.2m of retail asset sales since the year-end improves the pro-forma LTV to 47.9%

· Dividends:

o Final dividend of 1.75p declared, following interim dividend of 3.25p declared at the half-year

o Total dividend for the year of 5.00p, broadly fully covered by earnings (2019: 11.75p)

COVID-19 impact and response

Impact

· Strong first two thirds of the year, with good numbers and progress made against our strategic initiatives

· Estimated £3.6m impact of COVID-19 in the four months from March 2020 to June 2020 driven by:

o £1.2m impact in the property business, primarily bad debt

o £2.0m CitiPark impact due to lost car parking income

o £0.4m ibis Styles hotel impact driven by reduced bookings

· Retail and leisure tenants have been hardest hit as reflected in the June 2020 valuation; these assets have seen valuations drop by 11.8% year on year accounting for £23.0m of the total £26.4m fall in valuation

· Rent receipts remain strong; as at 15 September 2020 of the £13.3m rent, service charge and VAT billed since March £10.9m or 82% has been paid, with a further £0.5m or 4% agreed to be deferred, totalling 86%

· Of the remaining £1.9m, £0.8m has been waived, and on £1.1m no agreement has yet been reached

Response and mitigating actions

· Significant actions taken to mitigate the impact included:

o Closure of over half the car parks at the height of lockdown to minimise overhead costs. All branches now reopen

o Furloughing CitiPark operational branch staff, and some head office colleagues (all staff salary topped up to 100% by TCS)

o All non-essential spending halted

o All capital projects (with the exception of 123 Albion Street) paused

o TCS board took a 20% salary and fees reduction for the six months from April to September

· Our long history of engagement with tenants has ensured equitable solutions have been reached in most instances, and we are now focused on helping them return to normality as quickly as possible

Resetting and reinvigorating the business for the future 

The impact of COVID-19 has been unprecedented and material, and a high degree of uncertainty remains. Consistent with TCS's strategy of focusing on long term performance and navigating the challenges for all stakeholders, the Board is using this moment to reset and reinvigorate the business.

The Board has determined that the Company's overall strategy remains appropriate, however it requires acceleration, particularly with regards to the disposal programme, which will be undertaken in a measured, focused manner. TCS had already delivered on several key initiatives in the first eight months of the year prior to the lockdown and progress against the strategy is detailed below:

Actively managing our assets

Our long-standing strategy of active management and redevelopment, to drive income and capital growth, has continued throughout the crisis:

· Recommencement of refurbishment of Ducie House, Manchester following a pause during lockdown, with completion expected in the autumn. This £2m project is expected to deliver an ongoing post investment yield of over 8.5% delivering quality flexible office space in this vibrant part of Manchester city centre

· Completion of a refurbishment of the common parts of Carver's Warehouse in Manchester. This £0.3m investment has helped increase average rents by over 12% to £18psf with the ERV now at circa £20psf

· CitiPark performance was trending strongly with revenues up 4.7% year on year for the first eight months of the year. Whilst the impact of COVID-19 has been severe for car parking, early indications are that as normality resumes, a good recovery to at least prior levels seems likely

Maximising available capital

A conservative capital structure, with a mix of short and long-term secure financing, has always underpinned our approach:

· Sales and purchases in the year were modest; we sold two assets in Shandwick Place, Edinburgh for £2.5m (3.7% above valuation) and acquired 106b Kilburn High Road, London for £1.7m including costs

· All quarter end and year end bank and debenture covenants have been successfully met and reported

· Following the year end, we have extended our NatWest RCF banking facility at no additional cost. This £33m facility will now expire at the end of April 2022

· Since the year end we have completed £35.2m of retail sales, disposing of two Waitrose stores and an Aldi/Home Bargains in Scotland, and a high street store in Chiswick, London, in total marginally above June 2020 valuation levels

· Sale proceeds initially utilised to reduce bank indebtedness

· CitiPark added over 1,000 new car park spaces with the addition of two new car park management contracts. The largest so far, the Manchester Arena car park, generates management fee income and the opportunity to share in the car park profits without the need for capital investment

Investing in our development pipeline

Our development pipeline, with an estimated GDV of over £600m, is a valuable and strategic point of difference for TCS which we continue to progress and improve. Notably in the past year:

· Our planning consent for Whitehall Road in Leeds to develop a 180,000 sq ft Grade A office space and 513 space multi-storey car park has been implemented and we continue to market the site to secure a pre-let

Acquiring and improving investment assets to diversify our portfolio

We continue to improve investment assets, and will consider new acquisition opportunities that offer the opportunity for both diversification and growth:

· Retail and leisure now accounts for 47% of our portfolio, down from 50% a year ago and 70% in 2016. This diversification over time has been a key contributor in keeping rent collection levels high during the crisis. This reduces to 42% following the recent sales

· The refurbishment of 123 Albion Street, Leeds (previously The Cube), continued during lockdown and has now completed, further reducing exposure to retail and leisure. This net £4m office investment is expected to deliver an ongoing post investment yield of over 8.5%; interest in the space is strong

Commenting on the results, Chairman and Chief Executive Edward Ziff, said:

"The COVID-19 crisis has presented entirely new challenges for the business and for our stakeholders. I have been very reassured by the ability of the business to adapt in such circumstances and by the flexibility and resilience of our tenants and employees.

"The final third of our financial year was especially tough, but I believe the underlying strength of the business, together with our conservative focus on long-term, sustainable performance, as well as recent strategic changes to our portfolio, have enabled us to limit the worst impact of COVID-19.

"We are very disappointed to break our 60-year track record of delivering a maintained or increased dividend although we were pleased to be able to keep our commitment to pay the interim dividend. However, the unpredictable nature of the COVID-19 crisis has made the decision to reduce the full year dividend payment the right one for the business.

"Looking forward, the Board is using this moment to reset and reinvigorate the business; we have determined that the overall strategy remains appropriate but requires acceleration particularly with regards to the disposal programme, as evidenced by the significant sales completed recently. This will affect future earnings and dividend levels, however we believe longer-term we shall emerge as a stronger business and look to the future with confidence."

-Ends-

For further information, please contact:

Town Centre Securities PLC  www.tcs-plc.co.uk / @TCS PLC

Edward Ziff, Chairman and Chief Executive 0113 222 1234

Mark Dilley, Group Finance Director

MHP Communications 020 3128 8572

Reg Hoare / Alistair de Kare-Silver / Florence Mayo tcs@mhpc.com

Chairman and Chief Executive's Statement

Many financial years have ups and downs, but few have seen such contrasting periods as this one. Though we have sought to iron out the peaks and troughs of the property market for many years, the COVID-19 crisis has presented entirely new challenges for the business and for our stakeholders.

The final third of FY20 has been a very challenging time, but I believe that when the going gets tough, the true strengths of a business emerge. We have long prided ourselves on being a conservatively managed business with a focus on long-term, sustainable performance, and a number of strategic moves we have made in recent years have protected us from the worst impacts of COVID-19.

As well as demonstrating the soundness of our strategic direction, I have been very pleased with the ability of the business to adapt in challenging circumstances and impressed by the flexibility and resilience our tenants and employees have demonstrated. The contribution of every single member of the TCS team has been exemplary, and I would like to extend my personal thanks to all.

Performance

It should not be overlooked that we had a strong first two thirds of the year, with good numbers and progress made against our strategic initiatives.

We progressed with redevelopment projects at Ducie House and 123 Albion Street. We also launched Burlington House, our first private rented sector (PRS) development and initial take up was strong. In recognition of the success of that scheme, we were named Apartment Developer of the Year at the North West Residential Property Awards, an excellent achievement and testament to the high standard of the work. We also won two new car park management contracts, including the Manchester Arena car park, building on our successful partnership with John Lewis in Cheltenham.

However, COVID-19 has understandably impacted our financial performance. This is the first year that our financial statements are presented in accordance with IFRS 16, which affects how we account for leases and is further discussed in the financial review. Excluding the effect of IFRS 16, adjusted EPRA earnings were down £3.7m on the prior year to £2.6m. We report a statutory loss for the year, on an IFRS 16 basis, of £24.2m, down £11.7m year on year, largely due to the negative impact the crisis has had on the value of our portfolio, which is down 6.9% year on year, with net asset value also down £32.8m or 17.4% to £155.5m. 

These are clearly disappointing numbers, but with earnings impacted by £3.6m due to COVID-19, and our valuation results significantly better than other companies with less resilient retail portfolios; we are reassured by the resilience of our portfolio and our full compliance with all covenants. With our decision to accelerate asset sales and with significant progress already made post 30 June 2020, I firmly see this as an inflexion point from which we can successfully move forwards.

COVID-19 response

From the onset of the crisis in March, we have ensured informed decision making and close control through weekly Board meetings and separate weekly meetings for myself and our Non-Executive Directors.

Alongside protecting the health and wellbeing of our staff and stakeholders, our main priority has been cash flow management. We have always paid close and careful attention to cash flow and borrowing headroom, and we immediately did everything we could to minimise costs and preserve cash. All non-essential spending was stopped; we closed over half of our car parks; we accessed a number of the Government's support schemes including deferrals of VAT and other taxes and the furlough scheme. Additionally, all Board members agreed to reduce their salary by 20% for six months.

Out of our control has been the significant impact on some segments of our property portfolio, specifically the retail and leisure sector and our car park businesses. Our financial results for the year ending 30 June 2020 have been impacted by COVID-19 by an estimated £3.6m loss to earnings; include providing for £1.7m of rental income and service charge not received in the period, a net reduction to our CitiPark business of £2.0m, and a £0.4m impact to our ibis Styles hotel.

However, the unique nature of our property portfolio as it stands today has given us stability. The significant reduction in our exposure to high street retail, that we have worked towards over the past five to ten years, has proved invaluable during this period, and the crisis has led us to accelerate our strategy of diversifying away from retail and leisure in the portfolio.

The biggest threat to the business lies in the risk of continued reductions in property values, which could threaten banking covenants and future borrowing headroom. We were pleased, however, to have extended our NatWest facility by a further year without additional cost. Total headroom at 30 June 2020 stood at £14.8m.

Despite the crisis, we have decided to press ahead with key refurbishments at 123 Albion Street and Ducie House. These are high quality opportunities and we expect demand for office space will return as the guidance on working from home eases. Our development pipeline is full of similarly exciting opportunities and we envision moving forwards with the next phase of residential property development at Eider House in Manchester when it is prudent to do so.

Our Stakeholders

We approached the crisis with consideration for our key stakeholder groups and the potential long-term impacts our decisions may have on them lie at the heart of our thinking.

We have always sought to work closely with our tenants, building trusting partnerships. Such long-term relationships have been key during this period, allowing us to understand the changing needs of tenants and share their pain where we can. We worked closely with many tenants to agree payment plans during the peak of the crisis and are now helping to ensure the safe and successful reopening of their businesses.

Most tenants have acted responsibly and in good faith in difficult circumstances, however, it has been frustrating that some, such as Boots, have not been so considerate and have taken advantage of legislation put in place for companies who wouldn't otherwise be able to afford their rent. We were also extremely disappointed with JD Sports in relation to the administration of its subsidiary Go Outdoors, a tenant at our Piccadilly Basin site. For a large, profitable and valuable company, their unwillingness to stand by leases they had only recently acquired is unacceptable and reflects very poorly on their senior management. Knowing they were impacted by COVID-19, we made proposals to share the impact. However, with their chosen approach landlords have had to take all the rental pain. We presume they haven't treated their trade suppliers in the same manner, otherwise they would have put their supply chain in jeopardy. There is a presumption in insolvency situations that all creditors should be treated equally. We hope that in light of this the Government will seek to implement legislation to prevent profitable companies acting in this way in the future.

We have been able to support our tenants in part thanks to our strong relationships with our banks and debenture holders. The importance of good stakeholder engagement with our funders has been demonstrated again during this crisis.

I have been particularly proud of the response from our colleagues. The vast majority of our staff transitioned to working from home, and in doing so demonstrated great flexibility and resolve. We chose to furlough 53 staff, predominantly CitiPark branch employees, and I would like to thank those colleagues for their patience and understanding. Making use of the furlough scheme was a necessary step, but I am pleased that during a difficult time for all, we were able to continue to pay all staff 100% of their salaries. We expect a lot from our staff, however we hope we have demonstrated that we are always there to support them when they need it.

I would also like to take this opportunity to thank Lynda Shillaw, who has now left the business as Group Property Director. As a long-standing friend of TCS we wish her and her family well and wish her well in her future. Following Lynda's departure, we have promoted Helen Green to the role of Property Director, and appointed Craig Burrow, previously Director of Leeds at Bruntwood, as Development Director. Both will report to me and as a result of these changes we will not be appointing a Group Property Director.

In line with our long history of being a local business with strong ties to our communities, we were proud to be able to offer free car parking and concessionary hotel accommodation to hardworking NHS staff. We also championed many other initiatives set up by our tenants to support key workers, the elderly and the most vulnerable in the community during the pandemic.

Finally, for our shareholders, we are very disappointed to break a 60-year track record of delivering a maintained or increased dividend. The unpredictable nature of the COVID-19 crisis has made the decision to reduce the final dividend payment for the year unavoidable. We are pleased that we are able to pay a 1.75p final dividend, totalling 5.00p for the full year. However, we recognise that this represents a significant reduction for shareholders.

Outlook

I am extremely grateful to my colleagues and staff, who have done an excellent job in difficult circumstances. With most of our portfolio open and trading again, and staff returning to the office, the business is recovering. It is now time for us to return to business as usual. Our conservative and flexible approach has allowed for our continued operation despite the disruption; however looking forwards, we face an unprecedented level of uncertainty.

The acceleration of our disposal programme, though essential for generating cash, reducing risk and strengthening our foundations, will have an effect on earnings and our dividend levels in the coming years. That said, some of the cash generated from sales will be available to reinvest where it's needed most, and we will do all we can to see a return to previous levels as soon as possible.

There are many reasons to be positive though. Our portfolio is unique and diversified, and our development pipeline continues to be a key differentiator for us. We are not currently committed to any single project but have £600m of development opportunities in the pipeline, with flexibility over when and how these can be delivered.

Overall, I have been very satisfied with our response to an unprecedented situation. Despite the ongoing challenges of COVID-19, I am certain that we remain an excellent long-term investment proposition.

Valuation Summary

For the year to the 30th June 2020 the total portfolio, including development and car parking assets, sales and purchases, declined in value from £394.2m to £372.5m after a net movement of £5.1m of capex, sales and purchases. This represents a decline of 6.9% year on year.

TCS saw the like for like value of its portfolio also fall by 6.9% (£26.6m) after capex of £6.0m. TCS's retail assets bore the brunt of the valuation reductions (£23.0m being 11.8%), reflecting the major shift in both investor sentiment and retail trading conditions. As reported at the half-year TCS experienced only a 1.1% like for like decline in valuation in the first half of the year, and therefore the remaining 5.8% fall has occurred in the second half of the year, with the backdrop of the COVID-19 crisis.

Our development assets increased in value slightly by 2.6%, and our Car Parks increased by 1.3% where a bounce back in customers is being seen as the lockdown eases and long-term alternative uses are identified and progressed. In the year, we sold two assets in Shandwick Place, Edinburgh for £2.5m (3.7% above valuation) and acquired 106b Kilburn High Road, London for £1.7m including costs.

Our main and most complex asset, the Merrion Estate saw a 6.1% decline (after capex) in value year on year from £156.9m to £148.0m. More than a shopping centre, from initial inception, a true mixed-use asset, this comprises of offices including our share of Merrion House, retail space, a hotel and a multi-story car park. The initial yield across the whole Merrion Estate of 6.8% signifies a robust performance against others in the sector where retail assets, particularly shopping centres have fallen by in excess of 20% in value.

The valuation of all of our properties except one are carried out by CBRE and Jones Lang LaSalle. As a result of the COVID-19 crisis both companies have reported that valuations on the majority of our properties are subject to a 'material valuation uncertainty' clause as set out in the RICS Valuation Global Standards.

Sales and Purchases

It had been a relatively quiet year to the 30 June 2020 for sales and purchases. However, as described earlier the COVID-19 crisis has prompted the Board to decide to accelerate the retail and leisure disposal programme. Since 30 June 2020 we have agreed the sale of four properties for a total of £35.2m. The sales were marginally above June 2020 valuations in total, and include two Waitrose stores and an Aldi/Home Bargains in Scotland, and a high street retail store in Chiswick, London.

Our continued commitment to asset recycling is clear. The below table details the £84.1m of disposals since FY17 of which 95% were retail and leisure assets. Acquisitions of £30.6m included only 24% retail and leisure.

Retail and Leisure

The UK retail market has had a tough time over the last 18 months. Structural shifts in consumer behaviour and the shift to multichannel retailing have been accelerated by the impact of COVID-19.

With high streets closed for nearly three months to all but non-essential retailers and office workers staying away from the office, the easing of lockdown in recent weeks has supported footfall improvements. However, despite considerable weekly growth, high street destinations over the summer remain at nearly 50% below 2019 levels with shopping centres slightly ahead of these levels at the half year. Local regional high streets appear to be responsible for driving the recovery of footfall as office workers remain working from home and the feed through to larger urban centres is much slower.

Retail parks have remained more resilient over the entire period, benefiting from schemes anchored by essential retailers, the earlier reopening of homeware retailers as well as being more accessible by car and consisting of more spacious stores, allowing for greater social distancing.

Through a landlord's lens, pressure on valuations, LTVs, rents and leasing models are all being experienced. Despite Government moratoria, codes of conduct, rates relief and other available assistance, some retailers who can afford to rent have chosen not to do so. In addition to a flurry of administrations and CVAs, most tenants are seeking concessions on their leases.

Lockdown continued to hit the retail market in Q2, with yields increasing across all asset classes. Prime UK high street yields moved from 5.25% in March 2020, to 6.25% in June 2020 and prime shopping centre yields now at 6.5%, up from 5.85% in March. Good secondary high street yields for Q2 were up from Q1 to 8.50% and secondary high street yields in Q2 were up from Q1 to 12.0% [1].

From a TCS perspective, total retail and leisure assets fell by £23m or 11.8%. Merrion ex offices delivered an Initial Yield of 7.7% reflecting the skew in tenant mix to supermarket and value retailers. Merrion's value fell by £7.3m or 7.9%. TCS's out of town retail had an initial yield of 6.3% reflecting assets in well placed suburbs and again, a tenant mix of food and value retailers, with value falling £4.0m or 9.5%. Other retail and leisure assets fell by £11.7m or 19.2%, with these more traditional standalone retail units being most significantly impacted.

Our hotels, while both open for key workers, were impacted by COVID-19, seeing values fall £2.7m or 10.5%. While yields have only softened slightly to the 30th June, and the hospitality sector is now slowly starting to recover as lockdown eases; the speed of the recovery of the sector will depend on how quickly both tourists and businesses come back into city centres at something approaching pre-COVID-19 levels.

Regional Offices

Office investment volumes reached £1.3 billion outside of central London in Q1 2020, which was a 24% increase in volumes recorded in Q1 2019, although 15% below the long-term average. 43% of office investment in the UK was outside of central London in Q1 2020[2].

The regional office markets have been quiet since COVID-19. Not many prime assets are trading with a general lack of any new stock coming to market. Investors are set to gauge general sentiment when occupiers return to buildings and restrictions are eased. Yields for prime offices in regional cities held at 4.75% to June 2020.

Every core regional city market has below two years of Grade A supply. The development pipeline is limited and will not alleviate the supply constraints that are present in the market. There is currently 4.48 million sq ft under construction and 56% of this total space in the regional city office market has been pre-let. Nine of the regional office markets have a vacancy rate below 10% which Savills classify as undersupplied. The total vacancy rate across the core regional office markets combined is 7.1% which compares favourably to the long-term average of 10%. Savills has produced vacancy rate forecasts which underline the robust nature of the market.3

Our office portfolio dropped £2.3m or 2.9% over the year, the majority of which was due to a reduction in the value of 123 Albion Street as leases fall away, tenants vacate, and we were able to refurbish. We expect this to recover. The value of TCS's share in Merrion House was unchanged at £34.7m, at an initial yield of 4.49%. Ducie House and 123 Albion Street are currently undergoing major refurbishments and we expect to see a corresponding uptick in value post completion.

Residential

Given the current operating environment and little transactional evidence in Q2, CBRE opted to maintain their benchmark yields at the current level. However, since lockdown restrictions were eased, there are early signs that deals are progressing at pre-lockdown levels, with no significant pricing impact. Prime net yields continue to range from 3.25% to 4.25%. Prime regional centres are now trending stable, but yields may begin to weaken in more secondary locations.

Although there was little activity in Q2, investment into the UK multifamily sector looks poised to make a significant rebound in the second half of 2020. There is a substantial investment pipeline with just over £1.4bn worth of deals currently under offer. This is broadly equivalent to the investment pipeline at the end of 2019, which then translated into £1bn of investment in Q1 2020. Although it's not a certainty all of this will transact, it nonetheless demonstrates the continued strong appetite for the UK multifamily sector. Currently half of the investment pipeline is spread across the prime regional centres. Approximately two-thirds of the investment pipeline are forward funding agreements, with a further 20% accounted for by direct site acquisitions. The lockdown period has also served to demonstrate the relative resilience of the multifamily sector, which has boosted investor appetite. Specifically, multifamily rent collections have been resilient and remained high, averaging 96% in May. This compares with 90% (offices) 82% (logistics) and 63% (retail). Although we may see modest rent falls in 2020, we expect the sector to return to growth in 2021 and outperform. CBRE is currently forecasting total returns of 5% per annum for multifamily over the next five years. This compares with 3% and 2% per annum, for offices and retail respectively. Overall, demand for UK multifamily remains strong. Sentiment is positive and we are seeing early signs of an increasing level of activity as the lockdown restrictions continue to ease.

TCS's residential assets are concentrated in the city centres of Leeds, Manchester, suburban London and Glasgow. Overall, we saw a slight decline in the value of our residential portfolio year on year of -1.3%. This was largely driven by a short-term softening of rents in the Manchester market, reflecting both the impact of COVID and the volume of stock coming into the market in 2021. Rents are expected to return to a 3% per annum growth rate from 2022. Appetite for high quality, centrally located residential sites in Manchester from both tenants and investors remains strong. Our Piccadilly Basin site remains one of the most centrally located and accessible sites in the city and as such, we expect it to outperform the market in the long-term.

Divisional Property Review

Overview

This has been a year of two parts for the business. In the first two thirds of the year, we delivered robust operational performance and made good progress against our strategic initiatives. We continued to actively manage our assets, investing in refurbishment projects including Ducie House in Manchester and 123 Albion Street (formally known as The Cube) in Leeds, both of which offer high quality office space.

We also signed a number of deals with new tenants from a diverse range of sectors, including supermarkets and food and drink outlets, and further expanded our Asian food offering at the Merrion Centre. In addition, we successfully renewed leases with a number of existing tenants in both our retail and office portfolios, including Whittards, OKA, Cotswold, PCSU and K7.

We completed and launched our first PRS product in Manchester, Burlington House. This 91 apartment Simpson Haugh designed building has been a real success as well as a new iconic piece of architecture in the city. Along with our JV partner GMI, we were delighted to be awarded Apartment Developer of the Year at the North West Residential Property Awards.

In the final third of the year, we have clearly been significantly impacted by the disruption caused by COVID-19. This period tested our colleagues, our relationships with our customers and suppliers, and our operational capabilities in the most extreme way imaginable. So far, our performance has proved to be very reassuring, with income collection at 82%, significantly ahead of the majority of our peer group. Overall, the strategy to diversify the portfolio in recent years is proving to be a resilient and sustainable one. We have had to provide for non-payment of £1.2m of rental income.

Impact of COVID-19

Since February, COVID-19 has had a very significant impact on our business. Our focus during this time has been on maximising our capital and managing our cash flow while supporting our tenants and employees and ensuring they can continue to work safely.

While the housing and industrial markets have remained more resilient, the need to work remotely has led to a slowdown in tenants looking for new office space. The retail and leisure sector has been significantly impacted by COVID-19 and just under two thirds of our retail and leisure businesses, including high street shops, hotels, food and beverage outlets, gyms and hotels were closed during the height of the lockdown period. This has impacted rental payments and collection rates in the short and medium term.

We have good relationships with most of our tenants, particularly our smaller tenants, and have held one-on-one discussions to find solutions, such as deferring payments or renegotiating lease terms and we have shared the pain with those most in need of support. As a result, we received or agreed to defer payments for 86% of the rent and service charge due for the period from March to the middle of September. However, a number of our larger tenants have chosen to take advantage of the government limiting the ability of landlords to pursue non-payment of rent. This has resulted in some tenants who could pay choosing not to pay their rent and service charges. This puts pressure on landlords, like TCS, and significant uncertainty remains around the level of rent receipts for the coming quarters.

COVID-19 has put additional significant pressure on retailers and the food and hospitality sectors. We expect this to lead to increasing pressure on rents, lower levels of rental growth and continued lower levels of rent collection. We could also potentially see a shift towards more flexible leases, for example, a combination of fixed and turnover rent. It should be noted that the nature of TCS's retail property portfolio means that we have little exposure to those fashion retailers and department stores who have been most hard hit. However, there remains a considerable degree of uncertainty across the market in relation to the speed at which normal business will resume, rent receipts, rental levels going forward and the ability of tenants to continue trading.

TCS made the decision to put all capital projects on hold, with the exception of 123 Albion Street (which completed in August 20), in order to preserve cash during the height of the crisis. Work has restarted post year end on Ducie House, due to complete this autumn.

Our tenant portfolio

Over the past five years TCS has built an increasingly diverse and mixed-use portfolio with a high quality and diverse tenant base across a range of sectors including retail and leisure, office, hospitality, food and drink and residential property. Through our strategy of diversification, the proportion of retail and leisure assets in the portfolio has reduced to 47% at year end, down from 70% in 2016. Pure retail represents only 35% of the total portfolio and our retail portfolio remains focused on supermarket, discount, and convenience retailing, which typically has higher footfall and is less affected by the growth in internet shopping. As our exposure to retail has been reduced, office space, food and drink and private rented sector (PRS) residential assets have increased share. As a result, we have been insulated to a degree from some of the challenges currently facing the retail sector, but we have been exposed to the challenges faced by our tenants in the food, beverage and leisure sectors and are working through this with them, supporting their recovery. The COVID-19 pandemic has reinforced the need to continue with our strategy of repositioning our portfolio by reducing our retail exposure going forward.

Key tenants include Leeds City Council, Morrisons, Step Change debt charity, Pure Gym and Premier Inn.

Regional focus

TCS has a regionally focused property portfolio, with an emphasis on the northern cities of Leeds and Manchester, which together represented 79% of our portfolio by value at end FY20. Leeds and Manchester are two of the largest conurbations in the UK and have attracted significant investment from both UK and international investors and delivered strong economic growth over the past five years. The regions typically do not see the extreme peaks and troughs in returns seen in the London property market, providing a more stable and less volatile environment through the cycle. As a result, we believe the fundamental longer-term outlook for our Leeds and Manchester assets remains positive. The housing market remains strong but the challenge of rebalancing the UK economy and delivering the critical infrastructure required to drive growth in the regions remains. Devolution deals have an important role to play in rebalancing the economy and Leeds and Manchester have two of the most significant devolution deals of all of the English regions and key roles to play in drawing further investment into big regional cities to attract businesses and create jobs.

Leeds

Active asset management

Merrion Estate

The Merrion Estate has been a key asset in our portfolio for over 55 years and one that we continue to evolve as a unique mixed-use development consisting of retail and leisure, office and car parking assets.

Adjacent to Leeds Arena and very much at the centre of a growing student community from both existing student developments and approximately 3,500 new student beds under construction around the centre, our significant investment and focused asset management activity has materially reinvented the centre, targeting the growing local student population and the Leeds Arena crowds. With various redevelopment opportunities still existing, we believe the Merrion Estate continues to represent a valuable long-term opportunity. During the year we continued to develop the centre:

· The office space is fully let serving a range of smaller and larger tenants including Leeds City Council's headquarters and we work hard to keep tenants on site and build strong relationships.

· Inside the centre, 23% of our space is retail, focused on the more stable food and value sector of the market. 30% of our retail tenants were able to remain open during lockdown including a large Morrisons supermarket and we have supported our tenants during this time, ensuring they are able to operate safely and helping other tenants to get up and running as lockdown eases.

· Outside the centre we have invested significantly to improve the centre's fascia and kerb appeal. This has generated significant interest and led to a raft of new tenants including the Co-op and a variety of food outlets such as Starbucks, Blue Sakura, Dominos, and a number of new Asian food offerings which are popular with the local student population.

Ibis Styles hotel

Due to the direct impact of COVID-19 on the hospitality sector, performance has been weak across our hotel and leisure assets. However, forming part of the Merrion Estate, the hotel is in a key location close to Leeds Infirmary and it has been able to help support the local community by remaining open to key workers at a discounted rate during the lockdown.

As people slowly return to work, the business is starting to attract customers once again and it has expanded its marketing channels to attract corporate bookings to help increase the occupancy rate.

Refurbishing existing investment assets

Grade A space is in short supply in Leeds and Manchester. TCS is spending over £7m on major refurbishments of 123 Albion Street in Leeds and Ducie House in Manchester, and the common parts in Carvers Warehouse. These great city centre locations are well placed to benefit from the lack of available new Grade A stock on the market and we are seeing strong levels of interest in 123 Albion Street where the refurbishment is complete.

123 Albion Street

Acquired in 2018, we have undertaken a net £4m refurbishment of this building which achieved practical completion in August 2020. The building comprises 22,000 sq ft of leisure space on the ground floor, with 50,000 sq ft of good quality office space over three floors. It is located in central Leeds in close proximity to the Merrion Estate and we have had healthy interest for occupancy from the end of this year.

New tenants and lease renewals

At Vicar Lane, we have signed a ten-year lease with income of £75,000 with a new tenant, We are Cow, a leading independent retailer specialising in vintage clothing. This unit has now been fitted out and is trading. We have successfully re-geared a number of our properties during the year. At the Headrow in Leeds we have agreed lease renewals with both Whittard (five years) and Greggs (five years) while in West Park, Harrogate ten‐year lease renewals have been signed with OKA and Cotswold Outdoor. All deals have been at or close to passing rent. 

Manchester

Manchester represents one of the largest UK city regions outside London, with an economy worth £62.8 billion (GVA). This strength has enabled it to establish an outstanding reputation as a competitive place to do business, boasting a diverse and high-quality portfolio of business properties. Talent-hungry companies choose to invest in Manchester because of the people that choose to live, work and study here.

Manchester is a leading European business destination and the most successful UK city for attracting foreign direct investment outside of London. The birthplace of the Industrial Revolution, it continues to be a city which innovates across a variety of sectors. As highlighted in The Data City for the UK's Top Digital Tech Cities - 2020 report, Manchester outperforms all other major UK cities in the fields of AI and data, advanced materials, cyber, construction tech, eCommerce, IoT, MedTech and service design.

Refurbishing existing investment assets

Office space

In Manchester, vacancy rates for grade A office stock are relatively low, and rents have risen steadily over the last five years. With a lack of new build space, the city is also seeing significant growth in refurbished space as these buildings offer an attractive alternative to new developments.

Ducie House

Ducie House is a 33,000 sq ft multi‐tenant office building where we are investing £2.2m in a full refurbishment of the building during the year to create good quality working spaces which can be let on flexible, short-term leases. Due to COVID-19, the refurbishment was paused in the spring, but the work is now due to be completed in October 2020 and we expect to see strong demand as good quality refurbished office space is in short supply.

Carvers Warehouse

During the year we also invested £0.3m improving the common areas in our Carvers Warehouse office building, creating social and break-out space for our tenants. Carvers Warehouse continues to have high occupancy levels and we are working hard to let the remaining suite. Our investment has enabled us to ensure that the asset is consistent with the best refurbished space available locally, pushing rents on from an average of £16psf to £18psf. The tone of the building is now £19-£20psf.

Residential

Housing in the region is in short supply and there are plans to develop a minimum of 25,000 new homes in Manchester over the next 10 years. While there are some risks to the future outlook from COVID-19, the residential market here remains robust with strong investor developer interest for key sites.

Burlington House

Our first dedicated PRS building, Burlington House, in Manchester, was completed and fully occupied by September 2019 and we were pleased to be awarded Insider's North West Apartment Developer of the Year for this development. It has continued to enjoy high levels of occupancy during COVID-19 and we anticipate that this will be a key step towards further PRS developments in the Piccadilly Basin.

Scotland and London

We have had a long-standing presence in Scotland, however following disposals over the past couple of years we have sold the majority of our Edinburgh assets and now focus solely on Retail and Residential assets in Glasgow and its close commuter town of Milngavie.

In London, our investments are in good quality secondary high street locations and primarily consist of retail and residential mixed-use assets.

Refurbishing existing investment assets

We let the ground floor and basement of a property in Bath Street, Glasgow, on a fifteen‐year lease to The Scotch Malt Whisky Society at a headline rent of £30k per annum. The transformational refurbishment has been a great success and the tenant, opened for business in March before unfortunately having to close temporarily as a result of COVID-19.

Acquisitions and disposals

In London, we bought a shop with upper residential space at 106b Kilburn High Street for £1.61m. This was an opportunistic purchase of an asset at an attractive price and yield adjacent to an existing TCS asset.

We continue to look to maximise available capital partly through the disposal of ex‐growth assets. In January 2020 we completed the sale of a retail unit in Shandwick Place in Edinburgh. The 6,000 sq ft unit was empty but let for a remaining eight years to Morrisons, and has been sold for £2m, 5% above valuation, at a yield of 7%.

We continue to explore opportunities to dispose of retail assets at the right price.

Development pipeline

Our development pipeline of over £600m has been built up over time and is a major value creation opportunity for the business, providing TCS with opportunities to support the business and generate long-term value on a case-by-case basis. We take a conservative, long-term approach to development to ensure we do not overcommit ourselves, exploiting opportunities when the timing is right and controlling the pace of development.

In the current uncertain and changing market environment, our focus is capital management and some development projects are therefore under review as we assess the opportunities.

· We were in the planning process for a 50/50 joint venture with Leeds City Council to develop a 136 room Apart‐Hotel on George Street in Leeds. Our original plan was to use shares in the joint venture as security to fund the asset, but in the current environment this has proven unachievable, and therefore we have decided not to proceed.

· Our planning consent for Whitehall Road in Leeds to develop a 180,000 sq ft Grade A office space and 513 space multi-storey car park has been implemented and we continue to market the site to secure a pre-let. We are also reviewing alternative options for the Whitehall Road development site in order to ensure we can maximise value from this prime location.

· We still see long-term value in residential property, particularly prime sites with major transport links, and this will enable us to continue to diversify away from retail. Our Eider House development, our second PRS scheme in Manchester's Piccadilly Basin, meets these criteria and has been granted planning consent. We intend to proceed with this development, but the timing is currently under review.

Over the long-term we believe our development pipeline continues to present material opportunities for TCS.

Divisional CitiPark Review

CitiPark

CitiPark is a strong and profitable standalone business in its own right, and also plays a valuable role in monetising what would otherwise be empty, non‐income producing, development assets in Leeds and Manchester.

Overview

Until the end of February 2020, CitiPark enjoyed a strong year and saw significant year on year improvement in both revenue and profitability. We introduced a number of new initiatives during this period, including launching our own parking app and offering instantly available season tickets to car park users. We have also taken significant steps to expand our car park management services platform, successfully adding two new locations in the past twelve months. An important development for the business was the launch of BaySentry Solutions, our parking enforcement company, which started operations on 1st January 2020.

COVID-19

Since the end of February, COVID-19 has had a very significant adverse effect on our business. Business closures across the commercial, leisure & retail sectors combined with the restrictions on movement during lockdown reduced the use of car parks. The majority of our car parks were closed and we also saw season ticket cancellations. In addition, car parks were not able to benefit from the UK government's business rates relief scheme. This has materially impacted our profitability, leading to profit for FY20 of £2.6m (pre IFRS 16) compared to a profit of £4.4m for FY19. Given the growth expected and seen in the first eight months of the year we estimate COVID-19 to have impacted CitiPark profitability by £2.0m in the year.

We were proactive in taking action to manage the impacts on the business by:

· Implementing cost saving initiatives across the business;

· Making use of the furlough scheme, furloughing approximately 80% of our car park business employees including our hourly paid operations staff;

· Closing our operations in Leeds, Manchester and Watford and making partial closures throughout the rest of our portfolio helping to minimise costs, in particular business rates; and

· Cancelling or suspending non-essential contracts and services wherever possible.

The measures we have taken combined with our strong early start to the year, mean that we have been able to successfully navigate this challenging situation and are well-positioned to benefit as the economy begins to open up. We are starting to see an improvement in business, our branches are now open, and we expect this improvement to accelerate as consumers move away from public transport and companies buy parking spaces for their employees so they can drive to work.

Supporting our stakeholders

During this difficult time, despite the adverse effect on our business from COVID-19, we felt it was important to support the NHS and other key workers, in line with our commitment to contribute positively to our local communities. We therefore offered our services and premises to the NHS, becoming an NHS supplier so we could open car parks and provide 6,500 car parking spaces to be used completely free-of charge as and when needed, worth £80,000.

We also put in place support mechanisms for our employees, including topping up the pay of those staff who were furloughed so they continued to receive their full salaries and providing regular updates and touch points for all our employees. To protect our staff as they return to work, we have conducted new risk assessments for all our car parks and ensured that our employees have access to suitable PPE and hand sanitisers.

Finally, we have been working together with high street retailers and other operators to encourage people back to their offices and businesses, and therefore using our car parking facilities.

Our performance

During the first eight months of the year, CitiPark made good progress and saw strong growth, increasing revenues by 4.7% against the same period in the previous year.

We added over 1,500 parking spaces to our portfolio and following our successful partnership with John Lewis, we took on car park management contracts at two new locations, Victoria Mills, Shipley and the Manchester Arena car park, a prime car park with 978 parking spaces in a flagship location. This went live successfully on 1st April 2020, despite the challenges during this time, and we remain confident on the outlook for this location. Car park management services remain a growth opportunity for the business going forward.

Developing technological solutions

We also continued to focus on technological improvements and progressed various new initiatives during the year:

· developing and launching our own fully integrated CitiPark app, enabling our customers to pre-book parking and other services via their mobile devices, whilst also allowing third party integration (e.g. YPS);

· offering digital season tickets that can be downloaded to mobile phones eliminating the need for a plastic card, and;

· providing mobile pay, scan and pay solutions at all our CitiPark car parks.

We have seen strong take up of these new solutions, recording over 16,900 pre-bookings and over 12,600 mobile payment transactions since launch and issuing over 500 digital season tickets.

In addition, we have developed our own parking management system which utilises ANPR technology and our own app. This system has been introduced at our Ducie Street, Burlington and Victoria Mills car parks during the year and we intend to roll this out more widely across our portfolio in the coming year.

CitiCharge

The business continues to look at developing sustainable and environmentally responsible solutions and we view this as an opportunity to create additional value going forward. Sales of electric cars continue to grow rapidly and as a result, we are seeing increased demand for electric vehicle (EV) charging points. As part of our CitiCharge plan to roll out EV charging points across all our appropriate investment property, we installed EV bays in the car park of our Milngavie retail property during the year. Post year-end we won an order to supply 35 EV chargers to Coventry NHS hospital, a significant contract which also provides us with a potential opportunity for further collaboration on future NHS projects.

BaySentry

In order to deter inconsiderate parking and ensure that there are car parking spaces available for fee-paying customers, we use enforcement services across our car parks, which have previously been contracted to a third-party supplier. We saw an opportunity to reduce our costs and gain an additional income stream by supplying these services ourselves.

BaySentry Solutions Ltd, our parking management company, started operating in January 2020 following receipt of its accreditation from the British Parking Association Approved Operator Scheme. We currently have contracts in place to provide enforcement services and issue Parking Charge Notices (PCNs) at six branches and this will expand further.

Going forward, we shall be able to add our enforcement services to any future car park management contracts agreement tenders in the wider market, often seen as a prerequisite to those looking for an operator.

Yourparkingspace.co.uk (YPS)

YPS is an internet and app-based business that matches customers to available car parking spaces across the UK. It has over 87,000 spaces available to book in over 15,000 different locations. TCS has a stake in YPS, and in line with its original investment agreement, TCS exercised a further share purchase option in the year. Our equity stake at 30 June 2020 stood at 19.9%.

YPS, like all parking businesses, has been impacted by COVID-19. However, it has managed its cash and expenses very carefully, remains in good financial shape and has seen a significant upturn in business in the past few months.

Since the 30th June YPS has concluded a further round of fundraising with a new private equity investor investing cash into the business for the next phase of growth, and becoming a significant lead shareholder. As part of the process TCS executed its final option agreement, and post completion of the transaction will hold 21.7% of the business.

Outlook

The easing of lockdown measures since the middle of June has enabled shops and businesses to reopen and staff to return to work and we have started to see customers returning to our car parks. We expect the business to recover relatively quickly as confidence returns and consumers are encouraged to support local businesses. We have put measures in place to ensure we are able to operate safely and effectively going forward, including phasing out cash as a form of payment across our car parks and implementing new, safe ways of working to protect our staff and customers.

We also continue to look at growth opportunities, including the addition of new management services contracts, the growth of our EV charging platform and further development of our app including the integration of the emissions-based tariffs and the expansion of our BaySentry Solutions business.

FINANCIAL REVIEW

COVID-19 has materially impacted financial performance in FY20 and uncertainty remains. However, the strength of our portfolio has delivered good levels of rent receipts allowing TCS to think strategically about the future. 

EPRA Earnings in the year were £2.1m. This is the first year that the financial statements are presented in accordance with IFRS 16 which effects how we account for leases that we have entered into. For a full explanation of the effect and implications see below. As a result of the changes relating to this standard, we are introducing an additional income statement measure of Adjusted EPRA Earnings which removes the effect of IFRS 16 making the results directly comparable with the prior year's financial statements which have not been restated. Adjusted EPRA Earnings in the year were £2.6m, down £3.7m on the prior year.

COVID-19 has had a material impact on our financial performance, and we estimate a total impact to earnings in the year of £3.6m. We estimate that our Investment Property business has been impacted by £1.2m, primarily as a result of bad debt provisions associated with non-payment of rental income and service charges. The impact to our CitiPark business is £2.0m due to a significant reduction in car parking income with many fixed costs, such as rent and rates. Our ibis Styles hotel has been impacted by £0.4m in the year.

With adjusted EPRA Earnings in the year 59% lower than last year, and with pressure on cashflow and headroom we have had to make the very difficult decision to reduce our dividend for the first time in our history. The unprecedented impact of COVID-19 and the level of uncertainty that has arisen means we believe this is the only responsible action to take for the sake of the long-term prosperity of the Company. The final dividend for the year will be 1.75p per share, giving a full year dividend of 5.00p per share.

The impact of COVID-19 disruption has prompted the Company to revisit it's strategy, and agree to an acceleration of the retail and leisure disposal programme, albeit only at sensible values. Whilst the Board has yet to finalise plans for the use of the disposal proceeds, it is anticipated that TCS will look to reduce borrowing levels further. This, combined with the inevitable gap between asset sales and any asset purchases, will lead to a longer period of reduced earnings which will inevitably lead to a lower level of dividend payment than in recent years.

Income Statement

EPRA Earnings for the year ended 30 June 2020 were £2.1m. Adjusted EPRA Earnings (removing the effect of IFRS 16) were £2.6m down on the prior year profit of £6.4m.

Excluding the estimated impact of COVID-19 on our results, underlying Adjusted EPRA Earnings would have been circa £0.1m down year on year with the key drivers being:

Property (£0.7m) down year on year underlying:

- TCS took the decision not to continue with the planned George Street aparthotel joint venture with Leeds City Council and the income statement reflects a £0.8m provision against the capital expenditure. We are looking for opportunities to recover some of this cost.

- As reported at the half year, TCS benefited from a one off £0.5m dilapidations payment in respect of 123 Albion Street. As expected, the benefit of this increase in Other Income has been offset as a result of the reduction in rental income year on year from the building as it was redeveloped and significantly vacant.

CitiPark £0.2m up year on year underlying:

- This underlying improvement was seen in the first half of the year reflective of the previously strong run rate.

Ibis Styles Hotel £0.3m up year on year underlying:

- One-off costs associated with the change in the restaurant in FY19 meant an expected and significant increase in profitability year on year in FY20, and this was indeed being achieved in the first 8 months of the year.

In addition, Interest costs were £0.05m lower year on year.

Statutory Profit

On a statutory basis the reported loss for the year, on an IFRS 16 basis, was £24.2m, £11.7m worse year on year.

The statutory profit reflects the EPRA Earnings of £2.09m less £26.42m of non-cash valuation and impairment movements plus a £0.17m profit on disposal from Brownsfield Mill, Manchester and two properties in Scotland.

The year on year worsening of £11.7m is due to the valuation write down being £8.31m worse, underlying EPRA earnings being £3.73m worse, disposals improving the result by £0.88 year on year and the introduction of IFRS 16 impacting FY20 by £0.53m (see following IFRS 16 section).

Gross Revenue

Gross revenue was down £4.5m or 14.4% year on year, with key drivers being:

· Property rents impacted by COVID-19 with £1.3m of net incremental bad debt provisions where no agreement has been reached on payment of outstanding rent or where payments have agreed to be deferred but doubt remains over the likelihood of receipt and therefore the income has not been recognised

· CitiPark revenues were materially reduced due to COVID-19 from March through to the end of the year. Whilst some monthly subscription income kept being received, daily receipts were down over 90% with half of the branches being closed for the period. The estimated impact to revenue is £2.3m

· Income for the ibis Styles hotel was impacted by COVID-19 by an estimated £1.0m

· Underlying improvements in income, particularly in CitiPark and the Hotel marginally offset the impact of COVID-19

Property Expense

At a Company level, property expenses excluding the effect of IFRS 16 were down 3.9% or £0.45m year on year. Key drivers of this underlying decrease were:

· Property: operating expenses were £0.47m higher year on year predominantly due to a one off write off of historic service charges now deemed to be irrecoverable

· CitiPark: operating expenses were £0.31m lower year on year primarily as a result of savings initiated as a result of COVID-19 including furlough savings, reduced rates costs where branches were closed, and operational cost savings due to the significantly reduced level of transactions

· Ibis Hotel: operating expenses were £0.62m lower year on year, driven primarily by the response to the COVID-19 crisis. Whilst the hotel operated at all times, supporting key workers, the operation was able to reduce variable operating costs including the furloughing of some staff

· In addition, the implementation of IFRS 16 reduced Property expenses by a further £0.51m with the removal of certain rental expenses partly offset by depreciation of the newly created "right of use" assets

Other / JV Income

Total Other / JV income was up 22.4% or £0.4m year on year. This is explained by two key items:

· Dilapidations income of £0.6m was £0.6m up year on year mainly as a result of the dilapidations payment in respect of 123 Albion Street, Leeds

· Income from joint ventures was down £0.3m year on year driven by the annualisation of the financing agreement in respect of Merrion House, where our share of income is reduced by the effective interest cost

Other Expenses

This cost is due to a one-off provision against capitalised costs associated with the proposed George Street aparthotel joint venture with Leeds City Council. TCS incurred £0.8m of cost associated with getting the building designed and through planning approval. Our intention was to be a long-term partner in the joint venture. However, given the current climate, we have been unable to secure a commitment to use our share in the joint venture as security for debt. Without being able to leverage the asset and with a need for the project to proceed, we have taken the decision to end our involvement and provide against the spend to date. We are working with partners involved in the project to look to hand over the output of our work in return for a financial contribution towards our costs, albeit nothing yet has been agreed.

Administrative Expenses

Administrative costs were £0.7m lower year on year. This includes £0.1m for the last quarter as a result of all the Directors agreeing to a 20% salary and fees cut. There is a further £0.2m saving year on year in bonuses. Further savings arose as a result of significantly reduced spend on advertising, travel, entertaining and other expenditure as a result of our response to COVID-19.

Finance Costs

Excluding the effect of IFRS 16, Finance costs were 0.6% or £0.05m lower year on year. This is due to lower levels of LIBOR year on year.

Balance Sheet

The below table shows the year end balance sheet as reported including the IFRS 16 implementation. In addition, it is shown excluding IFRS 16 to allow for a like for like comparison with the prior year.

Excluding IFRS 16 NAV is £156.0m, down £32.3m or 17.1% year on year. IFRS 16 has the effect of reducing NAV by £0.5m but more significantly materially increases both assets and liabilities reflecting the creation of the "right of use" assets and the corresponding lease liabilities.

All the below commentary in relation to the balance sheet is on a comparable basis to prior year excluding the effect of IFRS 16. See below for detail on the effect of the new standard on the statutory accounts. In addition, in the reported balance sheet we have classified our two Waitrose stores in Milngavie as available for sale with a value of £23.2m. At the 30 June 2020, heads of terms for the sale of these properties has been agreed hence their change in categorisation. These stores were subsequently sold after the year end. For comparability purposes, the numbers in the table above and described below include these properties in Non-Current Assets.

Our total non-current assets (including JVs) of £349.4m (2019: £370.2m) include £317.4m of investment properties (2019: £337.9m) and £31.0m of non-current car parking assets (2019: £30.7m). The Merrion Centre car park is included in the investment property asset value. The car parking assets include £4m (2019: £4m) of goodwill arising on business combinations.

The most significant driver of the decrease in non-current assets year on year is the £26.3m of non-cash valuation movements reflecting a 6.9% like for like reduction. The majority of this reduction has come in the second half of the year, and is significantly affected by the uncertainty due to COVID-19, particularly in relation to retail and leisure assets. At the December 2019 valuation TCS experienced only a 1.2% like for like reduction in value from June 2019.

Although we paused the vast majority of our capital expenditure from March onwards in order to preserve cash during the initial uncertainty of the COVID-19 crisis, across the year we invested a total of £6.0m of capital expenditure in our properties. This included £3.3m as part of the refurbishment of 123 Albion Street, £1.0m as part of the Ducie House refurbishment and £0.6m of improvements in the Merrion Centre. Capital recycling comprised £2.5m of sales and £1.7m of purchases.

Borrowings (excluding IFRS 16):

As in previous years we have total borrowing facilities of £214m. These facilities are comprised of 3 revolving bank facilities and a £106m long term debenture at a fixed rate of 5.375% which expires in 2031.

Two of the three bank facilities expire within twelve months of the year end and are therefore classed as current liabilities in the balance sheet. Since the year end we have already extended our £33m facility with NatWest for a further year on the same terms and margin, and this facility now expires in April 2022.

Our Lloyds Bank facility's initial three-year term expires in June 2021. However the facility allows for two one-year extensions and this is currently in the process of being requested. The Lloyds facility is a £35m revolving credit facility with a further £5m overdraft facility.

Finally, our £35m Handelsbanken facility does not expire until June 2023.

Net Borrowing (excluding finance leases) as at 30 June 2020 was £183.6m. This is £5.8m higher than a year ago driven effectively by the £6.0m capex investment with earnings impacted by the COVID-19 crisis.

Loan to value on this basis is 53.2% up from 48.8% a year ago and 48.5% in December 2019. The driver of the increase being the £26.3m reduction in value of the investment portfolio. On a proforma basis, the addition of the £35.2m of sales since 30 June 2020 improves LTV to 47.9%

IFRS 16

As stated above, these financial statements are presented in accordance with IFRS 16. Under IFRS 16, while total lease related charges over the life of a lease remain unchanged, the lease charges are now characterised as depreciation and financing expenses with higher total expense in the early periods of a lease and lower total expenses in the later periods of the lease. In addition, on the balance sheet, the accounting treatment has the effect of creating new assets on the balance sheet for these "right of use" leased assets, partly offset by a liability reflecting the future obligation to make lease payments. On the balance sheet, as with the income statement, the effect is neutral over the life of the lease but lowers net asset value in the early periods, reversing over time.

The leases effected by the change in accounting treatment reside primarily within the CitiPark segment of our financial results, flowing into the consolidated results.

In the twelve months ended 30 June 2020 the effect of IFRS 16 is as follows:

Income Statement

A net reduction in statutory profit (and EPRA Earnings) of £0.53m, comprising a £1.14m increase in depreciation and a £1.03m increase in interest costs, partly offset by a £1.65m reduction in rental expenses.

Balance Sheet

A net reduction in net assets of £0.53m, comprising a £26.40m increase in non-current assets, offset by a £25.62m increase in financial liabilities and a £1.31m increase in current liabilities.

As a result of these changes we are introducing an additional income statement measure of Adjusted EPRA Earnings which removes the effect of IFRS 16 making the result directly comparable with the prior year's financial statements which have not been restated.

Given the effect on the balance sheet is minimal, accounting for only 0.34% of the total net assets we shall only report on net assets including the IFRS 16 adjustment. However, both non-current assets and liabilities are materially affected, and we shall highlight pre and post IFRS 16 values for clarity and comparison purposes.

Future financial considerations

Future P&L pressure

As highlighted elsewhere in this report, we have not escaped the impact of COVID-19 and changing shopping habits, particularly affecting retail and leisure tenants, and, given the current climate, it is prudent to assume that this risk will continue. We are prudently assuming that over the coming two quarters that rent receipts will continue to be challenged.

As already described, we have made the decision to accelerate our retail disposal programme, and this is likely to put future earnings under pressure. The Board is reviewing options for how the proceeds of such sales could be utilised including debt repayment, asset purchases and share buybacks.

Whilst the reduction in the dividend in the current year is due to the impact of COVID-19, the combination of likely shortfalls in rent receipts over the coming quarters and loss of income due to disposals are likely to lead to continued pressure on our ability to pay a higher covered dividend.

Future balance sheet and covenant pressure

As described in the valuation report, the circumstances relating to COVID-19 have led to our valuers CBRE and JLL including uncertainty clauses as part of their valuations in relation to the majority of our assets. As identified in the risk report, we have highlighted the continued pressure on retail and leisure assets to be a significant risk to the business. Whilst we comfortably met all of our banking and debenture covenants as at 30 June 2020, the revaluation process in December 2020 presents a further risk to loan to value covenants.

Our expectation is that continued asset sales and debt repayments, combined with the strength of our underlying asset base, the Merrion Estate in particular, will ensure we are able to successfully navigate these challenges. The risk however remains significant.

Going concern and headroom

One of the most critical judgements for the Board is the headroom in the Group's debt facilities. This is calculated as the maximum amount that could be borrowed, taking into account the properties secured to the funders and the facilities in place. The total headroom at 30 June 2020 was £14.8m (2019: £26.1m), which was considered to be sufficient to support our going concern conclusion.

Total shareholder return and total property return

Total shareholder return of minus 50.4% (2019: minus 25.0%) was calculated as the total of dividends paid during the financial year of 11.75p (2019: 11.75p) and the movement in the share price between 30 June 2019 (205p) and 30 June 2020 (95p), assuming reinvestment of dividends. This compares with the FTSE All Share REIT index at minus 10.1% (2019: minus 5.2%) for the same period.

Disappointingly TCS has seen its share price come under significant pressure despite the dividend performance over the measured timescales. The Company's share price continues to trade at a significant discount to its NAV, impacting total shareholder return. The long-term twenty-year measure remains positive.

(12 months ending June 2020)

Total Property Return is calculated as the net operating profit and gains / losses from property sales and valuations as a percentage of the opening investment properties.

Total Property Return for the business for the reported 12 months was (2.1%) (2019: 1.3%). This compared to the MSCI/IPD market return of (2.9%) (2019: 3.1%).

Consolidated income statement

for the year ended 30 June 2020

Consolidated statement of comprehensive income

for the year ended 30 June 2020

Consolidated balance sheet

as at 30 June 2020

Consolidated statement of Changes in Equity

as at 30 June 2020

Consolidated cash flow statement

for the year ended 30 June 2020

Audited preliminary results announcements

The financial information for the year ended 30 June 2020 and the year ended 30 June 2019 does not constitute the company's statutory accounts for those years.

Statutory accounts for the year ended 30 June 2019 have been delivered to the Registrar of Companies. The statutory accounts for the year ended 30 June 2020 will be delivered to the Registrar of Companies following the Company's Annual General Meeting.

The auditors' reports on the accounts for 30 June 2020 and 30 June 2019 were unqualified, did not draw attention to any matters by way of emphasis, and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006.

1. Segmental information

All results are derived from activities conducted in the United Kingdom.

The results for the car park activities include the car park at the Merrion Centre. As the value of the car park cannot be separated from the value of the Merrion Centre as a whole, the full value of the Merrion Centre is included within the assets of the property rental business.

The car park results also include car park income from sites that are held for future development. The value of these sites has been determined based on their development value and therefore the total value of these assets has been included within the assets of the property rental business.

The net revenue at the Merrion Centre and development sites for the year ended 30 June 2020, arising from car park operations, was £3,053,000. After allowing for an allocation of administrative expenses, the operating profit at these sites was £2,251,000.

Revenue received within the car park and hotel segments is the only revenue recognised on a contract basis under IFRS 15. All other revenue within the Property segment comes from rental lease agreements.

Other expenses

During the year a provision of £777,000 has been recognised in relation to costs incurred on a project that may not be recoverable. Costs have been incurred over a number of years on the planned George Street aparthotel joint venture however there is some doubt over the future viability of the project, therefore a full provision has been recognised against the costs incurred to date.

There is no difference between basic and diluted earnings per share and EPRA earnings per share.

An interim dividend in respect of the year ended 30 June 2020 of 3.25p per share was paid to shareholders on 26 June 2020. This dividend was paid entirely as a Property Income Distribution (PID).

A final dividend in respect of the year ended 30 June 2020 of 1.75p per share is proposed. This dividend, based on the shares in issue at 22 September 2020, amounts to £0.9m which has not been reflected in these accounts and will be paid on 5 January 2021 to shareholders on the register on 4 December 2020. The entire dividend will be paid as an ordinary dividend.

(b) Freehold and leasehold properties - car park activities

The historical cost of freehold and leasehold properties relating to car park activities is £22,425,000 (2019: £22,425,000).

The Company occupies an office suite in part of the Merrion Centre and also at 6 Duke Street in London. The Directors do not consider this element to be material.

The fair value of the Group's investment and development properties has been determined principally by independent, appropriately qualified external valuers CBRE and Jones Lang LaSalle. The external valuation reports have explicitly mentioned material valuation uncertainty due to Novel Coronavirus (COVID- 19) in their portfolio valuation reports to management for certain properties within the TCS portfolios. The remainder of the portfolio has been valued by the Property Director.

Valuations are performed bi-annually and are performed consistently across the Group's whole portfolio of properties. At each reporting date appropriately qualified employees verify all significant inputs and review computational outputs. The external valuers submit and present summary reports to the Property Director and the Board on the outcome of each valuation round.

Valuations take into account tenure, lease terms and structural condition. The inputs underlying the valuations include market rents or business profitability, incentives offered to tenants, forecast growth rates, market yields and discount rates and selling costs including stamp duty.

The development properties principally comprise land in Leeds and Manchester. These have also been valued by appropriately qualified external valuers Jones Lang LaSalle, taking into account the income from car parking and an assessment of their realisable value in their existing state and condition based on market evidence of comparable transactions.

Property income, values and yields have been set out by category in the table below.

The effect on the total valuation (including development property, car parks and right to use assets) of applying a different yield and a different ERV would be as follows:

Valuation in the Consolidated Financial Statements at an initial yield of 7.4% - £298.5m, Valuation at 5.4% - £375.7m.

Valuation in the Consolidated Financial Statements at a reversionary yield of 8.8% - £303.8m, Valuation at 6.8% - £366.4m.

Property valuations can be reconciled to the carrying value of the properties in the balance sheet as follows:

Leasehold improvements primarily relate to expenditure incurred on the refurbishment of three car parks in Watford that are held under operating leases.

All investment properties measured at fair value in the consolidated balance sheet are categorised as level 3 in the fair value hierarchy as defined in IFRS13 as one or more inputs to the valuation are partly based on unobservable market data. In arriving at their valuation for each property (as in prior years) both the independent valuers and the Property Director have used the actual rent passing and have also formed an opinion as to the two significant unobservable inputs being the market rental for that property and the yield (i.e. the discount rate) which a potential purchaser would apply in arriving at the market value. Both these inputs are arrived at using market comparables for the type, location and condition of the property.

Assets held for sale

As at 30 June 2020, two properties with a total value of £23,199,000 were in the process of being sold and therefore have been classified within current assets as Assets held for sale. The valuation deficit recoginsed through the Income Statement in relation to these properties was £3,471,000.

7. Investments in joint ventures

Investments in joint ventures are broken down as follows:

Investments in joint ventures primarily relate to the Group's interest in Merrion House LLP and Belgravia Living Group Limited.

Merrion House LLP owns a long leasehold interest over a property that is let to the Group's joint venture partner, Leeds City Council ('LCC'). The interest in the joint venture for each partner is an equal 50% share, regardless of the level of overall contributions from each partner. The investment property held within this partnership has been externally valued by CBRE at each reporting date.

The net assets of Merrion House LLP for the current and previous year are as stated below:

The profits of Merrion House LLP for the current and previous year are as stated below:

Belgravia Living Group Limited completed construction of a block of residential apartments in Manchester towards the end of the previous financial year. These apartments have been let to residential tenants during the year. The Group's financial interest in this joint venture is primarily in the form of a loan with a value as at 30 June 2020 of £5.3m (2019: £5.5m).

The assets and liabilities of Belgravia Living Group for the current and previous year are as stated below:

The income and expenses of Belgravia Living Group Limited for the current and previous year are as stated below:

The Group's interest in other joint ventures are not considered to be material.

The joint ventures have no significant contingent liabilities to which the Group is exposed nor has the Group any significant contingent liabilities in relation to its interest in the joint ventures.

A full list of the Group's joint ventures, which are all registered in England and operate in the United Kingdom, is set out as follows:

Authorised

The authorised share capital of the company is 164,879,000 (2019: 164,879,000) ordinary shares of 25p each. The nominal value of authorised share capital is £41,219,750 (2019: £41,219,750).

Issued and fully paid up

The Company has only one type of ordinary share class in issue. All shares have equal entitlement to voting rights and dividend distributions.

The Company has no share option schemes in current operation and there are no unexercised options outstanding at 30 June 2020.