The directors present the ir strategic report and the financial statements for the year ended 31 March 2020.
The incorporation of CIFCO Capital Limited and its associated structure are borne out of a necessity to supplement, and ultimately replace, central Government financial support to Babergh and Mid Suffolk District Councils (“the Shareholders”). In order to deliver this, CIFCO Capital Limited was incorporated as a Special Purpose Vehicle (SPV) to invest in commercial assets to generate income. The rationale for commercial assets being targeted is:
Commercial property tends to generate higher income returns
To avoid conflict with the Councils' housing policies as may arise from time to time
Focus on investment in the Eastern Region (but not exclusive to), with the prime purpose of generating income to the Council.
To undertake sustainable long-term investment in commercial opportunities through the investment of an aggregated £100,000,000 representing £50,000,000 investment from each of the two shareholders
To generate short/medium term income to support the revenue gap arising from the reduction in central government funding
To guide future investment decisions, asset management opportunities and the management of the investment fund
To ensure that investment opportunities taken are ethical and fit with the values of the two shareholding Councils
The geographical area targeted for acquisition is made up of those counties that when combined make up the East of England. The principal investment counties that make up the East of England for the purposes of CIFCO Capital Limited are:
Suffolk
Norfolk
Cambridgeshire
Essex
Bedfordshire
Hertfordshire
Investment in assets outside of this region will be considered where good opportunities to add value to the portfolio arise or where market opportunities do not allow for the initial investment to be realised.
The structure is based upon both Councils own wholly owned holding company which has a 50% equal shareholding in the jointly owned investment company limited by shares. Each of the Councils' own companies are a holding/parent company.
Principal risks and uncertainties
The principal risks and uncertainties impacting the entity are: the portfolio fails to realise returns due to its nature, structure or management; asset obsolescence over time; void periods resulting in the fund making a net loss or falling short of Business plan targets.
The arrival of COVID-19, and the subsequent lockdown, effectively put a stop to market transactions in March. The board immediately revised its risk register and looked, in particular, at the income security of pending transactions. As a result, one acquisition was put on hold and one aborted. Moving forward, it is likely that the uncertainty and disruption in the market caused by the COVID-19 pandemic will open up opportunities for investment at good value, but the board will be assessing these opportunities very carefully before proceeding.
Results and performance
The Board has considered some 55 assets during the period. Out of these opportunities, offers were submitted on 13 and 3 assets were acquired.
This has resulted in the investment of some £60m as authorised by our shareholders and the formation of a secure and well-balanced portfolio, in terms of sector, location and tenant covenant
The Portfolio, with a value of £52,490,000, is currently comprised of 14 assets. The company receives £3,3 04 ,1 44 in rental income per annum from these properties, which exceeds the original estimate of £2.8m. This has resulted in the shareholder Councils benefitting from net income after borrowing costs of £1,634,000 in 2019/20.
Analysis based on key performance indicators
Management use a range of measures to monitor and manage the business. The Key Performance Indicators are:
KPI |
Description |
Target |
Actual |
1 |
Net Initial Yield (NIY) Performance against target
|
5.75% |
5.78% |
2 |
Equivalent Yield (EY)
|
6% |
6.41% |
3 |
Progress against 24 Month full investment target to be achieved by April 2021
|
£100M |
£60M |
4 |
Quarterly Rent Arrears Measured by the amount of rent outstanding at the end of the quarter as a percentage of the total rent due that quarter.
|
<5% |
Q1- 0.00% Q2- 1.71% Q3- 6.76% Q4-28.29% |
Rent arrears were below target for the first 2 quarters of the year, they increased in quarter three largely due to a tenant facing financial difficulties. A payment plan was put in place with this tenant and their business was starting to improve with increased payments due in March. This business has subsequently been affected by COVID 19 but is continuing to trade and make regular rent payments. The Board anticipates that KPI 4 will be difficult to meet in the short term due to COVID 19 but aspire to returning to meet this target longer term.
On behalf of the board
The directors present their annual report and financial statements for the year ended 31 March 2020.
The results for the year are set out on page 9.
No ordinary dividends were paid. The directors do not recommend payment of a final dividend.
The directors who held office during the year and up to the date of signature of the financial statements were as follows:
The company's current policy concerning the payment of trade creditors is to follow the CBI's Prompt Payers Code (copies are available from the CBI, Centre Point, 103 New Oxford Street, London WC1A 1DU).
The company's current policy concerning the payment of trade creditors is to:
settle the terms of payment with suppliers when agreeing the terms of each transaction;
ensure that suppliers are made aware of the terms of payment by inclusion of the relevant terms in contracts; and
pay in accordance with the company's contractual and other legal obligations.
Trade creditors of the company at the year end were equivalent to XX day's purchases, based on the average daily amount invoiced by suppliers during the year.
The company manages its cash and borrowing requirements in order to maximise interest income and minimise interest expense, whilst ensuring the company has sufficient liquid resources to meet the operating needs of the business.
The company is exposed to fair value interest rate risk on its fixed rate borrowings. The directors believe the exposure to interest rate risk is minimal given the availability of flexible funding and support from the ultimate shareholders of the business.
Investments of cash surpluses, borrowings and derivative instruments are made through banks and companies which must fulfil credit rating criteria approved by the Board.
Customers are tenants of the Company's investment properties and signed lease agreements are in place for all tenants. Trade receivables are monitored on an ongoing basis and provision is made for doubtful debts where necessary.
The company aims to manage the invested portfolio to maximise the income from the assets and their long term value. The company is in the process of investing the second tranche of investment up to a total of £100m within the next 12-18 months.
The auditor, Ensors Accountants LLP, is deemed to be reappointed under section 487(2) of the Companies Act 2006.
We have audited the financial statements of CIFCO Capital Limited (the 'company') for the year ended 31 March 2020 which comprise the income statement, the statement of financial position, the statement of changes in equity, the statement of cash flows and notes to the financial statements, including a summary of significant accounting policies . The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor's responsibilities for the audit of the financial statements section of our report. We are independent of the company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard , and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Material uncertainty relating to the valuation of investment properties
We draw attention to note 11 in the Financial Statements which indicates that the company could be impacted by the effects of the declaration of the Covid-19 pandemic by the World Health Organisation on 11 March 2020. As stated in note 11, these events and conditions indicate that a material uncertainty exists as to the fair value of the investment property portfolio as at 31 March 2020. Our opinion is not modified in respect of this matter.
Conclusions relating to going concern
We have nothing to report in respect of the following matters in relation to which the ISAs (UK) require us to report to you where:
the directors' use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or
the directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the company’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue .
Other information
The directors are responsible for the other information. The other information comprises the information included in the annual report, other than the financial statements and our auditor’s report thereon. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact.
We have nothing to report in this regard.
Opinions on other matters prescribed by the Companies Act 2006
In our opinion, based on the work undertaken in the course of our audit :
the information given in the strategic report and the directors' r eport for the financial year for which the financial statements are prepared is consistent with the financial statements ; and
the strategic report and the directors' report have been prepared in accordance with applicable legal requirements.
In the light of the knowledge and understanding of the company and its environment obtained in the course of the audit, we have not identifie d material misstatements in the strategic report and the directors' r eport .
We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:
adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us; or
the financial statements are not in agreement with the accounting records and returns; or
certain disclosures of directors' remuneration specified by law are not made; or
we have not received all the information and explanations we require for our audit.
As explained more fully in the directors' r esponsibilities s tatement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the company ' s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the company or to cease operations, or have no realistic alternative but to do so.
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements .
A further description of our responsibilities for the audit of the financial statements is located on the website of the Financial Reporting Council at: http://www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.
This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members, as a body, for our audit work, for this report, or for the opinions we have formed.
The income statement has been prepared on the basis that all operations are continuing operations.
CIFCO Capital Limited is a private company limited by shares incorporated in England and Wales. The registered office is C/O B&Msdc Endeavour House, 8 Russell Road, Ipswich, Suffolk, IP1 2BX.
The financial statements of CIFCO Capital Limited for the year ended 31 March 2020 were authorised for issue by the board of directors on 30 June 2020 and the Statement of Financial Position was signed on the board's behalf by Mr C Haworth.
Investment property, which is property held to earn rentals and/or for capital appreciation, is initially measured at cost and subsequently measured using the fair value model and stated at its fair value at the reporting end date. The surplus or deficit on revaluation is recognised in profit or loss.
IFRS 13 establishes a single source of guidance for all fair value measurements. IFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under IFRS when fair value is required or permitted. The resulting calculations under IFRS 13 affected the principles that the Company uses to assess the fair value, but the assessment of fair value under IFRS 13 has not materially changed the fair values recognised or disclosed. IFRS 13 mainly impacts the disclosures of the Company. It requires specific disclosures about fair value measurements and disclosures of fair values, some of which replace existing disclosure requirements in other standards.
Financial liabilities are recognised on the Statement of Financial Position when the Company becomes party to the contractual provisions of a financial instrument and are initially measured at fair value and carried at their amortised cost. Annual charges to the Finance Charges line in the Income Statement for interest payable are based on the carrying amount of the liability, multiplied by the effective rate of interest for the instrument.
The effective interest rate is the rate that exactly discounts estimated future cash payments over the life of the instrument to the amount at which it was originally recognised.
For most of the borrowings that the Company has, this means that the amount presented in the Statement of Financial Position is the outstanding principal repayable (plus accrued interest), and interest charged to the Income Statement is the amount payable for the year according to the loan agreement.
Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs. Dividends payable on equity instruments are recognised as liabilities once they are no longer at the discretion of the Company.
The tax expense represents the sum of the tax currently payable and deferred tax.
In the current year, certain new and revised Standards and Interpretations have been adopted by the Company. In addition, at the date of authorisation of these financial statements, certain new Standards, Amendments and Interpretations to existing standards have been published by the IASB but are not yet effective, and have not been adopted early by the Company.
Information on new Standards, Amendments and Interpretations that are expected to be relevant to the Company's financial statements is provided below.
In the application of the Company’s accounting policies, the directors are required to make judgements, estimates and assumptions about the carrying amount of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised, if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.
The estimates and assumptions which have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities are outlined below.
Investment properties have been impaired at the year end to accurately reflect the fair value at the balance sheet date. This impairment includes professional fees capitalised on acquisition of these properties.
The average monthly number of persons (including directors) employed by the company during the year was:
The charge for the year can be reconciled to the loss per the income statement as follows:
With the exception of the two properties purchased in January 2020, as at 31 March 2020 the fair values of investment properties were based on valuations performed by Knight Frank LLP, a firm of valuers independent of CIFCO Capital Limited. The independent valuers hold professional qualifications with the Royal Institute of Chartered Surveyors.
On 11 March 2020, the World Health Organisation declared Covid-19 a pandemic. The response of national governments across the globe to mitigate the pandemic has been far reaching both socially and economically leading to an adverse impact on global financial markets including the UK markets.
The Knight Frank valuation as at 31 March 2020 included a material valuation uncertainty, as a result of the COVID-19 pandemic, meaning that less certainty and a higher degree of caution should be attached to their valuation than would normally be the case. Furthermore, the two properties purchased in January 2020, whose cost was determined prior to the COVID-19 pandemic being formally announced, have not been revalued and a similar uncertainty thus attaches to their valuation. Accordingly, as at 31 March 2020, as a result of the adverse impact of the COVID-19 pandemic, a material uncertainty exists in relation to the valuation of investment properties.
Trade receivables disclosed above are classified as loans and receivables and are therefore measured at amortised cost.
The directors consider that the carrying amount of trade and other receivables is approximately equal to their fair value.
No significant receivable balances are impaired at the reporting end date.
Borrowings are classified based on the amounts that are expected to be settled within the next 12 months and after more than 12 months from the reporting date. Borrowings are analysed as follows:
Borrowings are secured on the investment properties of the Company.
Market risk is the risk that changes in market prices, such as interest rates and property prices, will affect the Company 's income or the value of its assets . The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return.
The Company pays interest on long term borrowings. CIFCO Capital Limited has no exposure to fluctuations in interest rates as the rates payable by the Company have been fixed for the full term of the loan agreements.
The Company is exposed to market risks associated with its investment property assets held at fair value .
The Company mitigates its exposure to fluctuations in the market price of investment property by holding a diverse portfolio of assets. The portfolio includes properties located in different geographical areas of the United Kingdom and a mix of retail and manufacturing properties.
The fair value of financial assets and liabilities held at fair value has been estimated using the following fair value hierarchy:
Level 1: The unadjusted quoted price in an active market for identical assets or liabilities that the entity can access at the measurement date.
Level 2: Inputs other than quoted prices included within level 1 that are observable (i.e. developed using market data) for the asset or liability, either directly or indirectly.
Level 3: Inputs are unobservable (i.e. for which market data is unavailable for the asset or liability).
There have been no transfers between categories in the current or preceding period.
The Company holds investment properties at fair value. These are categorised as Level 3 in the above fair value hierarchy .
Deferred revenues are classified based on the amounts that are expected to be settled within the next 12 months and after more than 12 months from the reporting date, as follows:
A and B shares rank pari passu in all respects.
As at 31st March 2019, a share issue remained outstanding in respect of a property purchased in March 2019. The equity funding in relation to this property was recognised as share premium on the issue of share capital during the period. During the year ended 31 March 2020, a bonus issue of shares was made to reduce the share premium account.
Revenue includes income from the lease of investment properties to third parties. Lease terms vary across the property portfolio.
At the reporting end date the company had contracted with tenants for the following minimum lease payments:
No contingent rental income has been recognised.
The C ompany manages its capital to ensure that it will be able to continue as a going concern while maximising the return to stakeholders through the optimisation of the debt and equity balance .
The capital structure of the C ompany consists of debt, cash and cash equivalents and equity comprising share capital, share premium and retained earnings. The C ompany regularly reviews the capital structure and as part of this review considers th e cost of capital and the risks associated with each class of capital.
The Company has a target gearing ratio of 90% determined as the proportion of debt to equity.
The majority of capital introduced to the Company is immediately used for the purchase of investment properties and is therefore considered to be low risk.
During the year the Company entered into the following transactions with related parties:
The following amounts were outstanding at the reporting end date:
Amounts owed to related parties are secured on the Company's investment properties.
No guarantees have been given or received.