annington annual rep 2019-web - Page 20

Strategic report | Business review
Financial performance
The Group measures KPIs based on the controllable variable drivers of its activities.
The KPIs were revised for the current year and prior year figures are provided for comparison. These are:
Net rental income
£ millions
£ millions
Basis of calculation
Net rental income is calculated as property rental income
less property operating expenses. Property operating
expenses are incurred and not recharged to the tenant.
These exclude site review costs.
This measure is used as an indicator of the returns the Group is achieving. Net rental income has increased £3.9 million or
2% in 2019 and is mainly due to rental income from the MQE which has increased due to the rent uplift from the Site Review
conclusion in December 2017 as well as the addition of the Group’s PRS portfolio.
Property operating
Property operating expenses are incurred and not recharged
to the tenant.
Property operating expenses are measured to track the operating costs of the portfolio. Property operating expenses have
remained consistent year on year.
Adjusted EBITDA is calculated by adjusting the accounting
operating profit/(loss) before financing and tax for:
amortisation, depreciation or impairment (including
other non-cash write downs) of assets (Note 5)
Adjusted EBITDA
revaluation gains/losses on investment properties
in the income statement
profits, losses or impairment items attributable to joint
ventures in the income statement
charges/credits to the income statement arising
from changes to the utilities provision (Note 18)
one-off items (the site review costs shown in the
income statement)
Adjusted EBITDA is used as a proxy for the normalised earnings of the business. This measure is prepared for management
accounts, separate from similar measures that are prepared for covenant compliance. It has remained consistent year on year.
Free cash flow
Free cash flow is calculated as the net increase in cash
and cash equivalents but adding back cash spent on the
purchase of investment properties, as shown in the Investing
cash flows and any dividends (none to date).
This measure is used to assess the cash generated and available to be utilised on discretionary purchases or dividends.
Free cash flow has increased by £28.1 million, being the resultant net effect of the lower cost of borrowing, the prior year
having a significant cash flow effect from the refinancing, changes in working capital balances, lower cash receipts from joint
ventures and lower cash receipts from sales of investment properties.
Net rental yield
The Group generated rental income of
£196.8 million (2018: £193.1 million).
The majority of this was through APL,
where the MQE Portfolio (including
Surplus Estate) generated rental income
of £180.9 million (2018: £178.6 million)
in the year to March 2019. The increase
in rental income is driven largely by the
Rent Review concluded in December
2017, which resulted in a rental uplift. In
the Non-MQE Portfolio, gross rents for
the year to March 2019 have increased
to £15.9 million (2018: £14.3 million),
following the expansion of the Group’s
PRS portfolio.
During the year, 65 investment
properties were sold by the Group
(2018: 121 properties). APL
generated income of £6.2 million
(2018: £27.4 million) through the
external sale of 10 units
(2018: 111 units). A further 55 properties
(2018: 10 properties) in the Non-MQE
Portfolio were sold, resulting in income
of £8.9 million (2018: £2.3 million).
In addition, one development property
was sold from inventory for £0.3 million
(2018: £nil).
The Group has again benefited from
its ability to manage the mix of rentals
and sales strategies to meet the variable
demand for properties on its sites across
the country. The short-term rentals
strategy continues to be used for stock
that is not ready for sale or where sales
rates are slow due to the current market
The results discussed above are
reflective of not only the market, but also
the nature and number of units released
by the MoD and subsequently made
available for sale. Recent years have
seen relatively low levels of releases,
which effectively caps the number of
units available for sale, introducing
volatility in the reported performance.
Unrealised investment property
revaluation gains of £481.2 million were
also recognised in the current financial
year (2018: £481.9 million loss). The
higher valuation is driven by an increase
in the value of the MQE following
changes to inputs to the cash flow
forecast model, which include a revised
release profile following the signing of
the Arbitration Agreement with
the MoD.
Overheads were closely monitored
during the year. The number of staff
employed at 31 March 2019 stood
at 42 (2018: 38). The increase is
reflective of the expansion of the PRS
portfolio, including the Group’s work on
development sites. Now that the Group
is confident of a steady level of releases
in the next few years, the level of future
staffing will be maintained to ensure that
the Group can continue its operations
effectively and will ensure that objectives
are met through a combination of
recruitment and outsourcing.
Net rental yield is calculated as net rental income divided
by the investment properties carrying value.
This measure is used to measure rental yields and, pre-Site Review, is most relevant to the non-MQE portfolio. In 2019 the net
rental yield decreased by 0.2% due to the uplift in the value of the MQE not being matched by a similar uplift in rents (noting
2018 was a fallow year for the rent review) and the timing of when investment properties are available for letting i.e. under
construction or recently finished development.
20 | Annington Limited Annual Report & Accounts 2019
Annington Limited Annual Report & Accounts 2019 | 21


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