Annual Report and Financial Statements2019
Annual Results to 31 March 2020
Simon Perkins
CEO
Giles Salmon
CFO
Tom Elliott
Property Director
Management teamReview of the year 3
Financial review 6
Portfolio review 12
Market review 18
Outlook 24
Appendix 25
Annual Results to 31 March 2020
The only REIT specialising in the office, industrial and logistics markets of the South East and London.
MCKAY / JUNE 2020 02
MCKAY / JUNE 2020 03
Delivery of development programme
Releasing portfolio income potential
Enhancing scope for future growth
• 135 Theale Logistics Park (134,430 sq ft) completed
• Concludes active period of development and major refurbishment
• Since 2014 Capital Raise: £106.7m cap-ex, delivering ERV growth of 84.7%
• 16.4% increase in rents received (gross) to £25.2m, driving increase in profits
• 4.1% increase in contracted rents to £28.3m pa, from lettings and rent reviews
• Outperformance of MSCI Monthly Index
– 3.2% increase in ERV to £34.9mpa (MSCI: -0.3%)
– 5.7% increase in portfolio value to £510.0m, with 0.0% movement on cost (MSCI: -4.8%)
– 4.7% total portfolio return (MSCI: -0.1%)
• 23.3% (£6.6m pa) remaining reversion
• New loan facility adding £55.0m of additional headroom
• With sale proceeds from 30 Lombard St, EC3, c£100.0m for investment
Strong operational performance from delivery of key strategic priorities
Adjusted profit up 5.0% to £9.7mNAV/share (EPRA) up 0.9% to 329pps
Dividend • Final: 4.4pps, down 40.5% (March 2019: 7.4pps)
• Full year: 7.2pps, down 29.4% (March 2019: 10.2pps)
04 MCKAY / JUNE 2020
Navigating Covid-19 Resilient characteristics and continued application of strategy
Wholly invested in the office, industrial and logistics sectors• No retail/leisure/hospitality exposure
• Good quality assets: £96.9m cap-ex over 5yrs on refurb/dev
• Positive supply/demand characteristics
Strong rent collection for Q1 March Qtr from diverse occupier base• 73% cash collected
• 95% collected or agreed
• No reliance on a single business sector
No major capex• Minimal development and refurb exposure
• No on-site contractual development risk
Strong balance sheet• Earliest loan renewals 2024
• £51.0m undrawn facilities for investment
Scope for growth• c£100.0m for investment post disposal of 30 Lombard St, EC3
(est. Q3/2020)
9
McKay Securities Plc Annual Report and Financial Statements 2020
McKay Securities Plc Annual Report and Financial Statements 2020
8
Buy
Mon
itor p
oten
tial in
vestment p
roperties and acquire assets
that
mee
t ide
ntifi
ed criteria
to add value through sustainable
refu
rbis
hment,
developm
ent and management.
Actively manage our assets in-house and deliver outstanding
customer service in order to attract and retain occupiers,
support business growth and maxim
ise returns.
Manage
Sell
Dispose of m
ature assets to recycle capital
to be reinvested into new properties and projects.
Develop
Refurbish and develop our propertie
s to c
reat
e
environmentally sustainable and healthy b
uildin
gs w
here
peo
ple
and businesses can thrive and enhance/deliv
er port
folio
retu
rns.
Business Model
Land and buildingsWe focus on quality office, industrial and logistics business space within the established markets of the South East and London.
RelationshipsOur geographical focus and in-house management capabilities enable us to build strong relationships and work in partnership with our occupiers and local supply chains.
Our teamOur experienced team are experts in their field and know the South East and London markets intimately.
Respected brandWe take pride in everything we do and have developed a reputation for quality, innovation, sustainability, ambition and growth.
Financial flexibilityStrong banking relationships and a robust balance sheet allow flexibility to invest in the portfolio throughout the cycle.
Our mission is to develop, refurbish and manage commercial property: working in partnership with occupiers to deliver quality, innovation and growth. We provide the very best environment for our customers to thrive and businesses to grow.
Key resources
Completing our development programme
Achieving portfolio income potential
Enhancing scope for future growth
Strategic priorities
What we do
01 0302
Value creation We generate value by operating an effective and established business model that delivers sustainable, long-term returns.
See more on page [00]
Read more about why our stakeholders matter and how we have engaged with them on page [00]
OccupiersWe offer our occupiers choice, flexibility, quality and sustainable/energy efficient business space.
InvestorsWe aim to deliver attractive and sustainable returns to shareholders.
CommunitiesWe are committed to playing our part in the local community and supporting causes that will benefit from our experience..
EmployeesWe aim to support and engage our employees by providing a working environment that promotes health, wellbeing and development.
SuppliersSuppliers play a fundamental role in delivering our vision and we value close relationships.
Environment
Low carbon, resource efficient and healthy buildings
Social
A customer focused and flexible landlord
Governance
A progressive and transparent business
44%reduction in carbon emissions since 2015/16
94%tenants likely to recommend McKay as a landlord
4th successive year of GRESB Green Star Award
• Updated ESG strategy in place April 2019
• All developments achieving at least BREEAM Excellent
• EPCs: 99.5% E or above
• 29 targets: 86% achieved
ESG: New strategy in place“The right choice for a sustainable business”
MCKAY / JUNE 2020 05
9 Greyfriars Road, Reading (38,490 sq ft)
• Short-listed for sustainable development project of the year, Thames Valley Property Week
• BREEAM Outstanding
06
Financial highlightsStrategy delivering next step change
329pps
EPRA NAVMarch 2020
Up 0.9%March 2019: 326pps
37.6%
LTV March 2020
March 2019: 33.3%
Final dividend per share
4.4p2020
Total for year 7.2p (2019: 10.2p), down 29.4%
MCKAY / JUNE 2020 06
Adjusted profitMarch 2020
Up 5.0%March 2019: £9.27m
£9.73m
MCKAY / JUNE 2020 07
Rent collection March 2020 Quarter
Collection Analysis Rent Demanded (£m)
Rent % Collected (cumulative)
Tenants % No. of Tenants
Paid within 7 working days 2.88 53% 59% 107
Paying monthly within 7 working days 0.45 9% 15% 27
Collected within 7 working days 3.33 62% 62% 74% 134
Paid after 7 working days 0.17 3% 7% 11
Paying monthly after 7 working days 0.43 8% 1% 2
Collected after 7 working days 0.60 11% 73% 8% 13
Paying monthly (O/S) 0.37 7% 1% 2
Agreed but not monthly (O/S) 0.82 15% 8% 14
Agreed (O/S) 1.19 22% 95% 9% 16
In discussions 0.26 5% 8% 15
No communicaton 0.01 0% 1% 2
Not agreed (O/S) 0.27 5% 100% 9% 17
Target 5.38 100% 100% 180
Cash Flow
Total Paid 3.91 73%
Total Cash Outstanding 1.47 27%
Total demanded 5.38 100%
MCKAY / JUNE 2020 08
NAV (EPRA) pps
March 2019
0
50
00
50
00
50
00
March2020
326p329p
Valuationgain
0
Adjustedprofit
Profit on disposal
Dividend IFRS 2 adjDeferred tax adj
IFRS 16 adj
2
10
5
(10)(2)
3
329up 0.9%
pps
09 MCKAY / JUNE 2020
Gross rental income
0
2
4
6
8
10
3/2014 3/2015 3/2016 3/2017 3/2018 3/2019 3/2020£
mill
ion
Sustained growth in rental income driving profit
0
5
10
15
20
25
30
35
40
3/2014 3/2015 3/2016 3/2017 3/2018 3/2019 3/2020 ERV
£ m
illio
n
ERV: £34.9m pa
Contracted: £28.3m pa
Adj profit before tax
• £25.2m: up 16.4% • 71.4% increase since 3/2014
• £9.7m: up 5.0%• 286% increase since 3/2014
Full year dividend:
2020: 7.2pps
2019: 10.2pps
2018: 10.0pps
2017: 9.0pps
2016: 8.8pps
EPS (EPRA): 10.6 pence, up 20.3%
EPS (adj diluted): 10.3 pence, up 5.2%
%
March 2019
Grossrents
Interest Netproperty costs
Admin March 2020
£ m
illio
n
9.73(0.47)
9.27
3.56
(2.31)
(0.32)
Adjusted profit before tax 5.0
%
MCKAY / JUNE 2020 10
Up
MCKAY / JUNE 2020 11
Improved loan facilities and increased headroom from refinancing
1. LTV: Net debt as a % of portfolio value
50
100
150
200
250
£ m
illio
n
March 2019 March 20200
165
65 65
Drawn
Fixed Total
facilities
Drawn
Fixed Total
facilities
190 194
245
LTV 33.3%
WACD: weighted average cost of debt, at current rates
WACD 3.3%
LTV 37.6%
WACD 3.3%
2.8%
fully drawn cost of debt
• Portfolio growth enabling increase in loan facilities
• April 2019: A new £180m RCF (club) signed, and three bilateral loans of £125m repaid
• Total facilities up £55m to £245m
• Earliest facility renewal 2024
• WACD fully drawn 2.8% (at March 2020 rates)
• Provides c£100m for acquisitions / portfolio cap ex post disposal of 30 Lombard St
• LTV1: 37.6% (March 2019: 33.3%) : c28% post disposal of 30 Lombard St, EC3 (est. Q3/2020)
Heading
Poyle
Croydon
Redhill
Crawley
Leatherhead
Folkestone
Newbury BracknellTheale
FleetFarnborough
Woking
Maidenhead
Banbury
Reading
Weybridge
Windsor Staines
WimbledonBrentford
12 Office Industrial Other
Sector1 No. £m (March 20) % by value
South East Offices 17 267.3 52
South East Industrial/logistics 8 92.4 18
South East (total) 25 359.7 70
London Offices 4 125.8 25
Other 4 24.5 5
33 510.0 100
Occupancy: 92.6% exc dev (March 2019: 91.0%)
• Excellent road/rail communications
• Established centres
• Internally managed
• Reading HQ = Local knowledge
Our portfolioRegional strength & sector diversity
1. At 31 March 2020
MCKAY / JUNE 2020
13
Substantial income potential remaining
Contracted rent
£34.9m pa
March 2020
Developmentvoid
Portfolio void
Renewal/
review
£1.5m pa
£2.5m pa
£2.6m pa
… 23% (£6.6 million pa) reversionary potential
ACQUISITION TIMELINE£73 million of acquisitions since 2014 Capital raising
January 2014
Acquisition:Crown Square,Woking
Headline:£6.0m
Yield:9.3% initial
March 2014
Acquisition:Ashcombe House,Leatherhead
Headline:£4.4m
Yield:7.4% initial
April 2014
Acquisition:The Mille,Brentford
Headline:£19.3m
Yield:7.7% initial
May 2014
Acquisition:9 Greyfriars Road,Reading
Headline:£5.8m
Yield:Vacant
September 2014
Acquisition:Station Plaza,Theale
Headline:£8.4m
Yield:10.1% initial
October 2014
Acquisition:The Planets,Woking
Headline:£8.8m
Yield:6.9% initial
April 2015
Acquisition:Brunel Road,Theale
Headline:£
Yield:%
2014JAN
2015JAN
FEB
MAR
APR
FEB
MAR
APR
MAY
JUN
JUL
AUG
SEP
OCT
NOV
DEC
July 2014
Acquisition:Gainsborough House,Windsor
Headline:£6.9m
Yield:7.1% initial
MCKAY / JUNE 2020 13
£28.3m pa
Yield
6.4% reversion
5.2% initial
ERV
Speculative redevelopment of 1980s warehouse adjacent to junction 12, M4, delivering a 39% increase in floor area and 100% increase in ERV
• 134,430 sq ft high quality distribution/logistics unit
• Completed shortly after year end
• ERV: £1.5m pa
• Marketing on-going
Completing the development programme135 Theale Logistics Park
14 MCKAY / JUNE 2020
Positive letting progress• 22 open market lettings• £1.3m pa combined rent• 1.4% ahead of ERV
Significant rent reviews• 10 reviews completed• £2.3m pa agreed, 4.1% ahead of ERV• 13.9% uplift over passing• £0.2m backdated income
80% tenant retention• In-house management / strong relationships• 12 lease renewals• £0.9m pa• 12.0% uplift over passing
5 AcreFolkestone
Sopwith DriveWeybridge
1 Castle LaneSW1
Including:
15 MCKAY / JUNE 2020
Releasing portfolio potentialIncome generation from proactive asset management
30 Lombard Street, EC3• Conditional sale contracts exchanged Dec 2019
• Sale completion est. Q3/2020
• 4.16% disposal yield
• Headline price £76.5m (c£65m net)
• Scheme completed in January 2019
• 15 year lease to St James’s Place plc, at a £3.4m pa (net)
Station Plaza, Theale• 3 office buildings, totalling 41,420 sq ft
• Purchased 2014 at 10.1% yield
• Lease expired July 2019
• Sold to owner occupier for £8.2m, 32.7% ahead of book value
Planets, Woking• Sale contracts exchanged to residential developer
• Application recommended for approval at March 2020 planning committee, but refused. Appeal under consideration.
• Potential for uplift over book value
16 MCKAY / JUNE 2020 30 Lombard St, EC3
Disciplined capital recycling Supporting future growth
• 161 opportunities analysed
• 25 assets inspected
• 1 acquisition – Rivergate, Newbury• £15.5m purchase price, 7.5% NIY
• 61,385 sq ft recently refurbished
• Fully let – 8.8 yrs to expiry
• Low rents of £21.40 psf
• £51m headroom
• Increasing to c£100m post Lombard Street sale (est. Q3/2020)
17 MCKAY / JUNE 2020
Acquisitions and funds for investmentSupporting future growth
MCKAY / JUNE 2020 18
Investment market• Low transaction volumes:
sector variations
• Still weight of money
• Few forced sellers so far
Occupier market• Office relocation decisions on hold
• Regear opportunities for existing landlords
• Ind/warehouse demand picking up
Valuations• Subject to required RICS materiality clause
Key issues to be determined• Rent collection
• Extent of homeworking
• Office occupation density
• Potential for decentralisation
• Pace of economic recovery
18 MCKAY / JUNE 2020
Covid-19 Market Review
Occupiers want…
• Ease of occupation
• Lower cost solution
• Connectivity
• Minimal capital expenditure
• Flexibility
• Customer service
McKay offers…
• Short form leases
• Car parking
• Low rise buildings
• Average office rent £28psf
• Fibre enabled
• Fitted out – accelerated occupation
• Flexible lease terms
• Directly managed by McKay
Covid-19: Office trendsMaking the case for South East offices more attractive
19 MCKAY / JUNE 2020
MCKAY / JUNE 2020 20
J11
GATWICKAIRPORT
READING
PADDINGTON
HEATHROWAIRPORT
THAMES
J10
J4
J8
J6
J3
J12
J15
J18
J10
J7
J12
LONDON
BRACKNELL
WINDSOR
WOKINGHAM
GUILDFORD
WOKING
STAINES SUNBURY
UXBRIDGE
CHERTSEY
FLEET
HOOK
CAMBERLEY
BASINGSTOKE
NEWBURY
THEALE
FARNBOROUGHAIRPORT
SLOUGH
HIGH WYCOMBE
MARLOW
M25
M25
M23
M26
M20
M25
M25
M40
A322A331A339
A31
A404
A205
A4074
A3
A3
A3
M1 M11
M4
M3
M4A4
A4
A33A23
A40
WATERLOO
UP TO £160 PSF
UP TO £100 PSF
UP TO £55 PSF
UP TO £52 PSF
UP TO £41PSF
Total Occupation Cost (PSF)
£58.00 (PSF)READING TC
NEWBURY
£36.00 (PSF)
BASINGSTOKE
£41.00 (PSF)
BRACKNELL
£42.00 (PSF)
WOKING
£51.00 (PSF)
STAINES
£52.00 (PSF)
BRENTFORD
£45.00 (PSF)WINDSOR
£52.00 (PSF)
MAIDENHEAD
£53.00 (PSF)
HIGH WYCOMBE
£38.00 (PSF)
SLOUGH
£54.00 (PSF)
WATFORD
£53.00 (PSF)
WEST END
£159 .00(PSF)
HAMMERSMITH
£86.00 (PSF)
Covid-19: McKay office locationsDe-centralisation: cost savings and ease of access
CROYDON
£46.00 (PSF)
CRAWLEY
£42.00 (PSF)
REDHILL
£42.00 (PSF)
£55.00 (PSF)UXBRIDGE
20 MCKAY / JUNE 2020 Source: Rare
MCKAY / JUNE 2020 21 MCKAY / JUNE 2020 21 Source: BNP Paribas
South East Office DemandStable demand
Q1/2020• Named demand
• 2.8m sq ft (Q1/2019: 2.8m sq ft)
• 2019 lettings• Below 5yr average
• Brexit impact
Post Covid-19• Named demand steady
• Deals on hold
• Drivers of demand• 4.5m sq ft lease events over
next 3 yrs (667 events)
• Obsolescence
0
1
2
3
4
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Q1
sq
ft (m
illio
n)5 year average
2015–2020 = 2m
Lettings > 80,000 sq ft
Named demand (Q1)Q1 Lettings
Office lettings
MCKAY / JUNE 2020 22
Total supply
6.8m sq ft / 7.3% (March 2019: 7.6%)
New supply
1.7m sq ft / 1.8% (March 2019: 1.9%)
90% of centres with <5% supply (new)
Development/refurbishment caution post Covid-19
South East Office SupplyConstrained supply and pipeline post Covid-19 44
reduction in total supply
since 3/14
%
Source: BNP Paribas1. Includes refurbishment for 2019 onwards
0
2
4
6
8
10
12
14
16
18
20
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
1,800,000
2,000,000
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Spec Development (sq ft) Refurbishments (sq ft) Number of Schemes
Speculative development and comprehensive refurbishments
South East industrial and logistics market
5.0 0.9
… supporting our speculative redevelopment at Theale
years
sq ft
million
5.9%
5yr average lettings vacancy rate lowest of all regions
supply on the market
Source: Savills
23 MCKAY / JUNE 2020
OutlookRobust strategy supported by resilient markets
Full impact of Covid-19 to be seen
McKay insulated by structural under-supply in key sectors
Potential impact from occupier failure and rental default
Positive letting prospects for 135 Theale Logistics Park
Substantial 23.3% portfolio reversion
Well positioned to benefit from future market investment opportunities
MCKAY / JUNE 2020 24
Appendix
Cashflow and debt 26Financial summary 27Total shareholder return 28Use of funds 29Rental value movement 30Capital value movement 3 1Contact information 32Occupier and sector analysis 33
25 MCKAY / JUNE 2020
Cashflow and debt£’
milli
on
165.0
Drawn debtMarch 2019
Dividendpaid
Disposalproceeds
16.9
16.4
CapexAcquisitionMovement in cash
194.0
Drawn debtMarch 2020
9.6
(8.1)(5.8)
MCKAY / JUNE 2020 26
MCKAY / JUNE 2020 27
Financial summary
Balance sheet March 2020
Portfolio value 1 £510.00m
Drawn debt £194.00m
NAV/share 328 pps
NAV/share – EPRA 2 329 pps
NNNAV/share – EPRA 2 327 pps
LTV 3 38%
Gearing – NAV 4 63%
March 2020
Dividend/share (Final) 4.4pps
Dividend/share (Total) 7.2pps
Income statement March 2020
Adjusted profit before tax £9.73m
Profit before tax – IFRS £9.49m
EPS (EPRA) 10.6pps
1. Valuation movement (%) before allowing for cap-ex incurred during the period
2. Calculated in accordance with EPRA guidelines3. LTV: net debt as a % of portfolio value4. Debt as a percentage of EPRA adjusted net assets
March 2019 Change
£9.27m 5.0%
£13.19m -28.1%
8.8pps 20.3%
March 2019 Change
£482.70m 5.7%
£165.00m 17.6%
331 pps -0.9%
326 pps 0.9%
326 pps 0.3%
33%
53%
March 2019 Change
7.4pps -40.5%
10.2pps -29.4%
Sept 2019 Change
333 pps -1.5%
333 pps -1.2%
332 pps -1.5%
Total shareholder return
Source: Thomson Reuters
50
100
150
200
250
300
£
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
TSR (%) 1 yr 5 yr 10 yr
• McKay -22 -15 88
• FTSE 350 REI -15 -14 78
• FTSE All Share -19 3 54
MCKAY / JUNE 2020 28
Use of funds
0
50
£’ m
illio
n
2015 2016 2017 2018 2019 2020
65
50
Drawn debt £m 91.5 116.0 136.0 147.0 165.0 194.0
LTV % 26 29 32 32 33 38
£79m acquisitions
£107m capital expenditure
£76m disposals
£ 32m swap cancellation cost
Post 2014 Capital Raise1
MCKAY / JUNE 2020 291. £87.6m capital raise in Feb 2014 to capitalise on market recovery
30 MCKAY / JUNE 2020
Rental value movement
1. MSCI Monthly Index by relevant sector. London = MSCI City sector
2. MSCI Monthly Index (All property)3. Theale Logistics Park
12 months to 31st March 2020
London offices
South East offices
Total offices
South East industrial/logistics
Other
Total (excluding developments)
Developments3
Total portfolio (like for like)
Disposals
Acquisitions
Total (overall)
12 month movement
MSCI1
movement
1.6%
0.9%
1.6%
3.4%
–
-0.3%2
-0.3%
-0.3%
1.0%
3.0%
2.5%
2.9%
1.4%
2.5%
0.0%
2.4%
3.2%
2020 portfolio ERV £m pa
2019 portfolio ERV £m pa
7.08
19.13
26.21
3.85
1.15
31.21
1.48
32.69
1.14
–
33.83
7.15
19.72
26.87
3.96
1.17
32.00
1.48
33.48
–
1.43
34.91
31 MCKAY / JUNE 2020
Capital value movement
1. Valuation movements (%) after allowing for cap-ex incurred during the period
2. MSCI Monthly Index by relevant sector. London = MSCI City sector
3. MSCI Monthly Index (All property)4. Theale Logistics Park
12 months to 31st March 2020
London offices
South East offices
Total offices
South East industrial/logistics
Other
Total (excluding developments)
Developments4
Total portfolio (like for like)
Disposals
Acquisitions
Total (overall)
Valuation yields
Initial
Initial (topped up)
Reversion
Equivalent
12 month1 movement
MSCI2
movement
1.1%
-0.2%
-0.8%
2.4%
–
-4.8%3
-4.8%
-4.8%
3.7%
-4.3%
-1.8%
3.3%
-1.2%
-1.1%
18.4%
-0.2%
0.0%
2020 portfolio valuation £m
2019 portfolio valuation £m
120.80
255.70
376.50
65.65
24.55
466.70
9.80
476.50
6.20
–
482.70
4.1%
5.3%
6.6%
5.7%
125.80
249.70
375.50
68.35
24.55
468.40
24.00
492.40
–
17.60
510.00
4.0%
5.2%
6.4%
5.7%
MCKAY / JUNE 2020 32
Occupier and sector analysis
Sector Number of tenants Av. contracted rent (£psf) Occupancy (by ERV) Capital value (£psf)
South East offices 124 27.20 90.0% 365
South East industrial 42 9.70 96.4% 182
South East total 166 91.0%
London offices 18 49.40 96.9% 936
Other 4 7.40 100% 210
Total (exc dev) 188 22.80 92.6% 358
Dev 0 0 0 179
Total (inc dev) 188 22.80 88.6% 342
Financial & Business Services
ICT
Retail, Distribution & Transport
Real Estate, Construction & Engineering
Manufacturing & Pharmaceuticals
Public Sector
Other
% (by ERV)
35
17
14
10
5
3
16
Portfolio occupier analysis (by sector)
Contact information
33 MCKAY / JUNE 2020
Simon PerkinsChief Executive
Joined in 2000 after 10 years with Arlington Securities plc. Appointed CEO in 2003.
email: [email protected]
Address: McKay Securities Plc 20 Greyfriars Road Reading Berkshire RG1 1NL
tel: 0118 950 2333
fax: 0118 939 1393
Website: www.mckaysecurities.plc.uk
June 2020
Giles SalmonChief Financial Officer
Joined in 2011, from BAA Lynton. Appointed Finance Director in August 2011.
email: [email protected]
Tom ElliottProperty Director
Joined in 2016 after 11 years with Land Securities plc. Appointed Property Director in April 2017.
email: [email protected]