18 September 2020

KCR Residential REIT plc

("KCR" or the "Company")

Annual Results for the year ended 30 June 2020

KCR Residential REIT plc, the residential REIT group, announces its annual results for the year ended 30 June 2020.

Contacts:

Notes to Editors:

KCR's objective is to build a substantial residential property portfolio that generates secure income flow for shareholders. The Directors intend that the group will acquire, develop and manage residential property assets in a number of jurisdictions including the UK.

CHAIRMAN'S LETTER

Dear Shareholder

I am pleased to introduce the 2020 Annual Report for KCR Residential REIT plc ("KCR" or the "Company").

During the financial year under review we have been transitioning the business by reducing management and operating costs and modernising and lifting the standard of the property portfolio. 

The year started with the completion, following overwhelming support from shareholders, of the corporate transaction with Torchlight Fund LP ("Torchlight") that was announced in July (RNS 12 July 2019 - Subscription and Strategic Agreement) and closed on 6 August 2019. The introduction of a significant new shareholder, Torchlight, was a major step forward for KCR and its ability to create shareholder value.  It delivered immediate access to equity capital to restructure the balance sheet through the repayment of a number of expensive outstanding loans and assisted in the ability to pursue refinancing of the portfolio debt on more favourable terms. 

The transaction has given strength and support to the balance sheet enabling the Company to focus attention on maximising the performance of the existing portfolio, while systems and processes are upgraded, to establish a strong operating base ready to support portfolio growth. 

The Coronavirus has had a global negative impact on demand, supply chains, stock markets and consumer and business confidence.  The economic impact is now being felt by companies and families.  This has the potential to negatively impact the occupancy level and rentals that can be achieved in KCR's portfolio.  However, at the accounts issue date, KCR has maintained a high occupancy and rental collection level of more than 95% and rents overall have continued to increase. 

There is greater supply of studio, one- and two- bed flats in the letting market which has increased letting times from less than one week to up to three weeks in our London portfolio.  However, there continues to be strong tenant demand in all the Company's locations. UK residential rented property remains fundamentally under-supplied and KCR continues to target studio, one and two- bed units, that are in high demand and relatively short supply.

While it was envisaged that the Torchlight transaction would result in a move into international residential property markets, given global economic conditions, this expansion has been postponed.  The geographic strategy is to focus for the time being on the UK market and the opportunities that are certain to arise in the coming year.

KCR's objective continues to be to grow the size of its residential portfolio to deliver an increase in revenue that results over time in both profitability and an ability to pay dividends. At the same time, we focus on growing net asset value per share.

Michael Davies
Chairman

17 September 2020

CHIEF EXECUTIVE'S LETTER

Dear Shareholder

I have pleasure in reporting to you on the progress of the Group for the year to 30 June 2020.

This has been a difficult year in the UK with COVID-19 clearly being the major challenge in the second half to June 2020.  Fortunately, we were well prepared for the challenge following the balance sheet restructuring delivered by the transaction with Torchlight, portfolio refinancing with Hodge Bank, and the major efforts made to reduce operating costs within the business. The business remains cash negative however focus is on achieving a break even position over the next 18 months from a combination of ongoing cost management and enhanced operational performance from the existing assets.

This has been the first year of transition for KCR whereby the team size and costs have been reduced to better align with the size of the portfolio. The balance sheet has been restructured and debt costs have been reduced.  The focus now is on the existing portfolio to improve its overall quality, thereby increasing rental and capital values and reducing running costs.  Overall, we are part way through the transition process to create a stable platform that can be successfully scaled-up.

A detailed review of existing assets has been completed and we have taken significant steps to "right size" the cost base.  Solid progress has been made, with substantial further improvements expected during the current full year to June 2021. The majority of the restructuring costs have been incurred and expensed during the current financial year and first half of the current year will reflect the reductions made to date.

Property portfolio

Property transactions during the year

KCR acquired two one-bed apartments at its Heathside, Golders Green retirement property during the year.  This is explained in more detail below (see 4* retirement living property). 

Existing portfolio

A bottom-up review of the existing portfolio has been completed.  KCR now has a performance enhancement focus whereby it is committing to more substantive capital expenditure (capex) to positively reposition its portfolio.  Whilst this will result in a higher spend per flat in the near term than has been undertaken in the past, much of the historical capex has been deferred maintenance expenditure resulting from underinvestment by previous owners.  These improvements will have a positive impact on rental and capital values.  KCR is focused on modernising and lifting the property standard so that minimal maintenance spend is required over the next five years.  Repositioned, better quality assets will move into a higher rental bracket with better quality tenant profiles, which we expect will enhance rental and capital returns.

KCR is in the process of creating two operating lines which will be clearly identified by a) operating brands and b) letting strategies.   

1.   Residential apartments, developed to a high modern specification, furnished and let on a Walk-In-Walk-Out (WIWO) basis (utilities, internet, furniture, council tax included in the rental payment) for a frictionless and flexible letting experience.  Rental contracts may be from a week to multi-year.

2.   4* retirement living property rented on the same basis as above, with optionality on furniture.  Rental contracts to be assured shorthold tenancies (six months and up).

1.     Residential property (WIWO letting strategy)

·    The property at Coleherne Road, held within K&C (Coleherne) Limited, which comprises ten studio and one-bedroom flats, continues to be in demand for letting given its prime location. As part of the investment into the current portfolio, KCR has started a whole-building refurbishment of the property including double-glazing, air conditioning, digital lock systems, modern interior designed apartments and furniture, to bring the property to a significantly higher standard.  Works are expected to complete in Q1 2021 with the property being fully income producing by 30 June 2021.  We expect a significant increase in gross rental income and significantly reduced operating and maintenance costs on an ongoing basis.

·    The Ladbroke Grove portfolio (owned by KCR (Kite) Limited) that consists of 16 one- and two-bedroom flats in three buildings, and one stand-alone flat in Harrow Road, continues to be fully let.  Units have been lightly refurbished as tenants leave and are relet in the private market.  The Company's intention is to undertake a whole building refurbishment of the Ladbroke Grove assets once the Coleherne Road property works have completed and it is fully let.

·    The Southampton block of 27 residential units at Deanery Court, Chapel Riverside (owned by KCR (Southampton) Limited) continues to be fully occupied.  Rental demand has remained strong, particularly from potential occupiers requesting a WIWO strategy.  Since the property was constructed in 2018 there is no capital investment required at the property.  The letting strategy will be adjusted to implement the WIWO strategy.

2.     4* retirement living property

The Osprey portfolio (K&C (Osprey) Limited) consists of 159 flats and 13 houses let on long leases in six locations, together with an estate consisting of 30 freehold cottages in Marlborough where Osprey delivers estate management and sales services.

For a second year, the portfolio generated higher income from sales commissions from leaseholders' sales, management fees and lease-renewal premium income than in the previous year. The portfolio has held its value and is expected to provide a medium-term value boost opportunity as the terms of the long-leasehold flats shorten and positive asset management initiatives continue. 

The key asset in the portfolio representing 68% of the Osprey portfolio value is the freehold block at Heathside, Golders Green, where 29 of the 37 residential units are held long leasehold.  The strategy continues to be selectively acquire long-leasehold units in the block, subject to pricing, refurbish the units to a high level and let them in the open market subject to assured shorthold tenancies.  This strategy is having good success; six of the eight acquired units are let, each at higher rental levels than the previous letting.  The remaining two units are expected to be let by the end of September shortly after refurbishment works are complete.

The Company has been investigating the potential to enhance value through redevelopment and roof extensions at four of the seven sites.  Following discussions with planning authorities, the proposals are likely to be positively received. KCR is proceeding with building structure and economic viability analysis before moving to the planning application stage. Until a planning approval has been received, any increase in value from these planning gains will not be included in the Company's accounts.

Financial

Following completion of the capital raise with Torchlight in August last year the balance sheet has been stabilised.  The corporate operating costs have been significantly reduced with the executive and operations team having reduced from seven to three.  Non-essential services have been cancelled.  The post-Torchlight transaction restructuring costs have been expensed in the profit and loss statement to June 2020. The first half of the current financial year is expected to reflect the outcomes flowing from the significant cost savings made to date with further improvement targeted during the course of the current financial year. 

This year's financial statements are impacted by a number of one-off costs relating to the Torchlight transaction, cancellation of the preference shares scheme, restructuring the balance sheet, portfolio debt refinancing, and personnel costs relating to restructure of the business. Following this investment of time and capital, the recurring corporate and property operating costs are now significantly lower than they have been at any time in KCR's history.

Further details regarding the financial performance of the Group can be found in the Strategic Report.

Refinancing

On 12 February 2020 KCR successfully completed a £7.9m refinancing of its Coleherne Road, Ladbroke Grove and Lomond Court portfolios, all assets in London. The refinancing, which has a 25-year term and a five year fixed rate, is interest only and is secured on the refinanced assets. The interest rate on loans relating to these properties moved from 3.75% p.a. to 3.5% p.a. This transaction delivered £2.9m of free capital to KCR post repayment of the existing bank facility.  

This refinancing delivered liquidity to the Company that has enabled the first phase of the refurbishment investment programme to be initiated and the acquisition of more units at Heathside to be completed. It also provided working capital to the Group.

Prospects

Although the business continues to be cashflow negative, it is so at a significantly reduced rate and the gap to break-even is the smallest since KCR's admission to AIM.

The transaction with Torchlight that completed in August 2019 is, we believe, the most significant event for KCR since the IPO. It enabled the restructuring of the balance sheet, provided a solid base for refinancing the portfolio with Hodge Bank, and has helped to refocus the Group on optimising its existing portfolio and its systems and processes at a greatly reduced cost level.  The Company will soon be ready to scale its portfolio.

We continue to be excited about the potential for the Company to grow from a solid operating base, and in particular are pleased by the significant progress made this year towards Group profitability.

Dominic White
Chief executive

17 September 2020

GROUP STRATEGIC REPORT

The directors present the strategic report of KCR Residential REIT plc ('KCR' or the 'Company') and its subsidiaries (together, the 'Group') for the year ended 30 June 2020. 

PRINCIPAL ACTIVITY

The Group carries on the business of acquiring, developing and managing residential property predominantly for letting to third parties on long and short leases.  At the year-end, the Group consisted of the Company, which is a public company limited by shares, and its wholly owned subsidiaries:

1.           K&C (Coleherne) Limited owns a freehold residential property in Chelsea, London containing ten studio flats

2.           K&C (Osprey) Limited owns eight freehold apartments and the freehold of several retirement properties let on long leases to residents and provides management services in respect of these properties and to third-party landlords

3.           KCR (Kite) Limited owns three freehold residential properties in Ladbroke Grove, London (16 flats) and a flat on Harrow Road

4.           KCR (Southampton) Limited owns a long leasehold block of 27 two-bedroom apartments at Chapel Riverside, Southampton. The lease is a 999 lease for which the company pays a peppercorn rent

5.           K&C (Newbury) Limited owns no property and is now effectively dormant.  The valuation of the company has been written down to nil.

GROUP STRATEGY

The directors intend to build a significant presence in the residential letting market, primarily through the acquisition of land with planning permission that will be developed into residential property and the acquisition of existing residential property. Assets are predominantly acquired with the purpose of letting to third parties.

RESULTS

The Group reports a consolidated operating loss of £3,079,531 for the year to 30 June 2020 (2019 - £3,014,023). 

REVIEW OF BUSINESS AND FINANCIAL PERFORMANCE

The Board has reviewed whether the Annual Report, taken as a whole, presents a fair, balanced and understandable summary of the Group's position and prospects, and believes that it provides the information necessary for shareholders to assess the Group's position, performance, and strategy.

In reporting financial information, KCR presents alternative performance measures, "APMs", which are not defined or specified under the requirements of IFRS.  For example, portfolio occupancy and rent collection percentage.  The Company believes that these APMs, which are not considered to be a substitute for or superior to IFRS measures, provide stakeholders with additional helpful information on the performance of the business.  The Board reminds readers that these APMs are not GAAP measures, are not intended as a substitute for those measures, and that other companies may use different measures.

Revenue in this financial year increased to £1,035,816 (2019 - £777,827).  Portfolio occupancy and rent collection remained above 95% for the whole period and in the majority of cases rental levels increased as units were re-let.  Overall revenue was increased despite the Coleherne Road property being progressively vacated in the last quarter in preparation for refurbishment works. 

A large part of the year's operating loss (£2,054,883) is attributable to transition and refinancing costs and non-cash items relating to share-based payment charges. The Group therefore reports the operating loss both before and after non-cash and separately disclosed items. The Group's operating loss before non-cash and separately disclosed items was £1,024,648 (2019 - £878,213 loss). The operating loss was £3,079,531 (2019 - £3,014,023 loss). The loss before taxation was £3,560,818 (2019 - £3,737,372 loss). 

Total assets at 30 June 2020 increased to £25.2 million (2019 - £24.1 million).  Investments valuations fell slightly overall (£331,000) mainly following a reduction in the Southampton property valuation from £6.40 million to £5.83 million due to a change in the building's holding strategy.  The prior valuation methodology assumed an incremental sell-down of the building on a flat by flat and vacant possession basis. The current strategy is, as outlined above, to hold the property for the long term on a rental basis.

Net assets increased to £12.14 million (2019 - £9.58 million) and net asset value per share decreased to 44.03p (2019 - 60.67p), predominantly due to the capital raised and new shares issued in August 2019.

Upon completion of the Torchlight transaction, the Group entered into an option agreement to grant Torchlight an option to subscribe for a further 50,000,000 new Ordinary Shares during the Option Period (up to 6 August 2022). Torchlight could subscribe for the shares at a price per share of:

•      for any notice of exercise served on the Company on any date up to and including 31 December 2019, the Issue Price; and

•      for any notice of exercise served on the Company from 1 January 2020 until the end of the Option Period, the higher of (i) the price per Option Share which is equivalent to 95 per cent. of the 30-Day VWAP for the Ordinary Shares and (ii) the par value of each Ordinary Share.

The Option is only exercisable by Torchlight during the Option Period and if the Option is not exercised prior to the expiry of the Option Period, it will lapse. Any exercise of the Option by Torchlight shall be for not less than 2,000,000 Option Shares.

KEY PERFORMANCE INDICATORS

The directors and management team monitor key performance indicators relevant to each of the subsidiaries to improve Group performance.  Management reports to the board if data show significant variances against expected outcomes and proposes mitigation action as necessary.

Examples of the KPIs used to monitor aspects of performance include:

1. At property level

1.1.      Vacancy rate in terms of number of units available and potential rental income

Target occupancy of at least 90 per cent achieved

1.2.      Outstanding rents as a percentage of rental income

Target debtor balance of less than 10 per cent of rental revenue achieved.

2.   At Group level

2.1.      Gross assets under management

The target of £40 million of gross assets by 30 June 2020 was not achieved.  However, the restructuring of the business following an investment by Torchlight Fund LP, which started in August 2019, has significantly improved the prospects of profitable growth for the Company over the next 12 months.

Near term focus is on reducing costs, enhancing revenue and growing the business to achieve a cash break even position to provide a stable base to grow from. Solid progress in this respect is being made.

 RISKS AND UNCERTAINTIES

The Board regularly reviews the risks to which the Group is exposed and ensures through its meetings and regular reporting that these risks are minimised as far as possible.

The principal risks and uncertainties facing the Group at this stage in its development are:

·           Financing and liquidity risk

The Company has an ongoing requirement to fund its activities through the equity markets and in future to obtain finance for property acquisition and development. Although there is no certainty that such funds will be available when needed, the Company has plans in place with KCR's new Capital Partner regarding ongoing funding, and, the directors continue to focus on developing the Group's capital structure.

·           Financial instruments

Details of risks associated with the Group's financial instruments are given in note 21 to the financial statements.  The directors seek to mitigate these risks in manners appropriate to the risk.

·           Valuations

The valuation of the investment property portfolio is inherently subjective as it is made on the basis of assumptions made by the valuer that may not prove to be accurate. The outcome of this judgment is significant to the Group in terms of its investment decisions and results.  The directors, who have long experience of property, seek to mitigate this risk by employing independent valuation experts such as Lambert Smith Hampton to review values of the assets in the portfolio.

·           Brexit

The negative impact arising from the uncertainty about Brexit which has been impacting the UK property market has improved following the election outcome.  The board believes that the Company operates in a sector of the market, and with the advantage of REIT status, such that it will be able to build market share, income and net asset per share value over the coming years.

·       COVID-19

   In January 2020, an outbreak of a novel coronavirus, now classified as COVID-19, was detected in China's Hubei province. During the following months, COVID-19 has spread steadily throughout the World and on 11 March 2020, The World Health Organisation ("WHO") declared the outbreak a global pandemic. The impact of COVID-19 is widespread and continues to cause economic disruption. Governments in the UK and elsewhere around the world have taken drastic and unprecedented measures which include compulsory business closures and tight restrictions on movement of people and on their activities.

Whilst it is too early to assess the impact of the COVID-19 pandemic and the UK Government's lockdown and other measures on the Group, to date COVID-19 has not materially impacted Group operations, with minimal impact on rent collections during the lockdown period. Only a minimal number of tenants were in rent arrears at the balance sheet date and up to the date of this report.

The main risks that the Board have identified in relation to the pandemic are the potential income reduction and bad debts as tenants have difficulty in maintaining rent payments and potential voids within the portfolio arising from tenant failures.

The actions taken to mitigate the risks are summarised below:

·      The Group undertakes credit checks on prospective new tenants to assess credit risk. The checks include verification of income levels and capacity to pay, as well as checks of rental references. Any arrears are actively managed.

·      The Group has completed periodic monitoring of apartment usage for short let operators. Monitoring included car park usage (Southampton), power, water and gas readings as a proxy for occupancy. The purpose of this was to enable the directors to form a view as to the underlying occupancy profile of the short let operators as a proxy for their ability to continue to meet rent. Our sampling / testing has suggested an implied underlying occupancy rate of 80% or better which suggests adequate capacity for the short let operators to meet rent.

·      Recent re-lettings in both Ladbroke Grove and Southampton suggests there is also solid underlying demand in both catchments for rental properties so we would reasonably expect to be able to re-let in the event that a short let operator failed and defaulted on their rental obligations.

Due to the uncertainty and unprecedented nature of the challenges posed by COVID-19 the Directors continue to monitor this situation closely.

Directors' duty to promote the success of the Company under Section 172 Companies Act 2006

Section 172 (1) of the Companies Act 2006 requires Directors to act in the way they consider, in good faith, would be most likely to promote the success of the Company for the benefit of shareholders as a whole, and in doing so having regard to a diverse group of stakeholders.

The Directors continue to have regard to the impact of decisions made on all stakeholders and are aware of their responsibilities to promote the success of the Company, in accordance with section 172 of the Companies Act 2006.

We aim to work responsibly with our stakeholders and outline below the key Board decisions made during the 2020 financial year:

FORWARD-LOOKING STATEMENTS

This Annual Report contains certain forward-looking statements that have been made by the directors in good faith based on the information available at the time of the approval of the Annual Report and financial statements.  By their nature, such forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that will or may occur in the future.  Actual results may differ from those expressed in such statements.

OUTLOOK

Whilst the near-term focus remains on reducing costs and improving the operations performance of the existing assets, the Group is continuing to investigate the purchase of residential property assets that will be able to support an increasing income yield. To achieve these, the Group may be required to raise more capital and it is working closely with funding sources, both equity and debt providers, to achieve this objective.

ON BEHALF OF THE BOARD:

Dominic White
Director

17 September 2020

CORPORATE GOVERNANCE STATEMENT

Introduction

During the year to 30 June 2020 KCR Residential REIT plc, while an AIM Listed company, was a Family Office operating with five directors and three employees. In September 2018 it adopted the QCA code but with such a tightly controlled operational and risk environment was not able to, in all areas, fully comply with the principles. During the current year the directors will continue to update the website to comply as far as possible with the following QCA code principles, noting areas where the small scope of operations limits their ability to fully comply:

Principle 1: Establish a strategy and business model which promote long-term value for shareholders

The Company's objective is to build a substantial property portfolio predominantly in the residential sector that generates both secure income flow from rents and increasing net asset value for shareholders. The Company acquires or develops blocks of studio, one-and two-bed apartments that are close to transport links, shopping and leisure, mostly in London, its surrounds and the South East. These blocks are focused on attracting tenants seeking affordable rental accommodation.

The Company brings its property corporate finance expertise to the identification and execution of these acquisitions.

The Company looks to acquire properties at below market value to improve yield on cost and enhance net asset value. It aims to achieve this through acquisition strategies including:

·       using the REIT's inherent tax advantages; acquiring properties in corporate structures with embedded capital appreciation and deferred tax liabilities which are reduced to zero as the corporate becomes part of the REIT group, and

·       acquiring permitted land, funding the development process and retaining the developer's profit.

Over the medium to long term, the Company expects rental and property values to increase in line with inflation. These increases coupled with new acquisitions are designed to enable the Company, once it has reached scale, to pay dividends from cash flow generated by rents and deliver net asset value increases through positive property revaluations. Active asset management of the properties may also deliver value increases.   The Company as a REIT is required to distribute 90 per cent of its rental profits.

It is the Company's paramount intention to conduct its activities in a professional and responsible manner for the benefit of its shareholders, its employees, and the communities where it operates.

Further detail on the key challenges that the Board addresses are set out under Risks and Uncertainties in the Strategic Report.

Principle 2: Seek to understand and meet shareholder needs and expectations

In August 2019, a major equity re-capitalisation brought in £4.05m of capital and a substantial new shareholder, Torchlight Fund LP. This transaction was designed to stabilise and re-position the Company so that it can move forward in a way that all existing and new shareholders may benefit from future uplifts to profitability and increases in net asset value.

The Company remains committed to engaging with its shareholders to ensure its strategy and performance are clearly understood. Feedback from investors is obtained through direct interaction between the CEO and Executive Director and shareholders following the Company's full and half year results and certain other ad hoc meetings between executive management and shareholders that take place during the year.

The Company seeks to communicate with its shareholders on a timely and transparent basis at all times. Announcements through RNS are as comprehensive as possible. Digital communications platforms such as Vox Markets are used from time to time to communicate via video and podcast. Use of these platforms is limited to senior executives such as the CEO and only once appropriate media training has been completed. As part of the Company's repositioning, the intention is to improve the speed of reporting of the interim and full year results to shareholders.

The chief executive, Dominic White, attends and presents at investor forums from time to time, as well as holding discussions with analysts, shareholders and investment managers.

It is apparent from such interaction that shareholders have several concerns, including:

·           How do the directors propose to expand operations without dilution to existing shareholdings?

Since property companies are capital-intensive, the Company will raise equity over time to fund the acquisition of new properties. Torchlight Fund LP exercising its option rights as approved by shareholders will be dilutive to existing shareholders with this dilution having already being accepted and approved by shareholders. The board will aim to maximise the issuance price of any additional equity offerings such that issuances are accretive or, if that is not possible, offer all shareholders the opportunity to participate in the offering on an equal access.

·           When will the Company become profitable?

             Based on current overheads and interest forecasts, the Company may become profitable and cash flow positive once it has approximately £50m of investments generating satisfactory rental income. Executive management is focused on achieving this objective as soon as possible. This is naturally dependent on the availability of suitable transactions and the ability to complete the acquisitions either via raising additional equity capital or debt.

Shareholder liaison is managed by Dominic White (info@kcrreit.com).

Principle 3: Take into account wider stakeholder and social responsibilities and their implications for long-term success

The Company currently operates in the UK. It identifies the main stakeholders in the UK as being investors, tenants, and suppliers of services (accountant, nomad, broker, lawyers), employees, directors, third-party property managers, banks and other debt providers and property agents introducing investment opportunities.

The Company has an important social responsibility in its role as a landlord of residential housing. We commit to delivering great service to our tenants, which includes providing safe and high-quality residential units, at market prices, managed in a professional way.

Treating all our stakeholders well, and in particular our key customers - our tenants, is key to growing a sustainable business that will have long-term success.

Principle 4: Embed effective risk management, considering both opportunities and threats, throughout the organisation

The board is responsible for setting the risk framework within which the Company operates and ensuring that suitable risk-management controls and reporting structures are in place throughout the group.

The board seeks to minimise risk in the management of its operations. The Company uses third- party advisors to address specific issues that arise during operations where they bring complementary expertise and experience.

Principle 5: Maintain the board as a well-functioning, balanced team led by the chair

The Board comprises a balance of independent and non-independent directors with collective, specific and complementary skills that enable the Company to manage and direct its affairs in a professional manner, with embedded corporate governance procedures that are fit for purpose.

Full Board meetings are generally held on a quarterly basis and all necessary documentation is provided to the board in advance, so that they can understand the issues under review and make well- considered decisions. During the year, between full Board meetings, the Board convenes whenever necessary to consider and if appropriate approve the execution and completion by executive management of key matters that fall within the Board's defined remit as set out below.

The Board has audit and remuneration sub-committees that are chaired by non-executive directors.

All of the directors devote such time to the Company's affairs as the board considers appropriate.

Throughout the 2019 year, the sole non-executive director was Michael Davies who was regarded as Independent by the Board and shareholders. Following the Torchlight Transaction, which completed on 6 August 2019, two Torchlight directors Russell Naylor (executive director in charge of finance) and Richard Boon joined the Board. Richard Boon is regarded as a non-independent non-executive director. James Thornton also joined the Board at that time as an independent non-executive director.

During 2019, each of Michael Davies, Dominic White, James Cane, Timothy James, Oliver Vaughan attended all 6 Board meetings in person or by conference call as permitted by the company's articles. 

During 2020, 7 Board meetings were held, attended by all current directors.

The involvement of non-executive directors varies month by month but is estimated at 3-10 days a month.

Principle 6: Ensure that between them the directors have the necessary up-to-date experience, skills and capabilities 

The Board maintains up-to-date skills, knowledge and experience to enable it to direct and manage the Company's operations, finances and its interface with investors, the public markets and its other stakeholders.

The Board takes great care to appoint managers and staff with the appropriate skills and experience, and is aware of the importance of encouraging diversity among its workforce.

The Board works as a team and regularly reviews its procedures and composition.

The relevant experience and skills of the current directors is set out in detail in the Circular relating to the Torchlight Transaction. Each director is involved in other organisations which keep their professional skills sharpened and up to date. In due course the details as they pertain to the directors will be added to the website but is included in the Circular of 12 July 2019.  

Principle 7: Evaluate Board performance based on clear and relevant objectives, seeking continual improvement

Following the transaction approved by the directors of KCR as at 31 July 2019, the Board of KCR now comprises:

In accordance with its obligations under the QCA code the Board will review internally its collective performance, and the performance of its committees and Board members. At this stage of its evolution and in view of the size of the Board, the Directors do not believe that it is practical to undertake an external or a wide-ranging evaluation of the performance of Board members.

The primary tasks of the chief executive, Dominic White, have been and will continue to be to grow the Company's asset base and revenue through the delivery of additional assets to the portfolio. This has included developing capital and asset partnerships and finding ways to raise appropriately priced and structured debt finance to support transactions and equity capital in an uncertain equity market. He is a key point of contact for the capital markets.

In these tasks he will be supported by Russell Naylor, Executive Director, who is additionally responsible for internal financial controls, financial management, capital planning and overseeing the preparation of financial reports to shareholders.

The primary task of the Chairman, Michael Davies, has been to ensure that the Board has performed its role correctly, that governance is adhered to, and that the Company works towards delivering value to shareholders in accordance with the Company's strategy. He is also a point of contact with many of the Company's shareholders and professional advisers.

Succession planning remains an important issue for the Board, and in particular the Chairman.

Principle 8: Promote a corporate culture that is based on ethical values and behaviours

The Board strives to promote a corporate culture based on sound ethical values and behaviours.

The Company has adopted a code for directors' and employees' dealings in securities, which is appropriate for a company whose securities are traded on AIM. The code is in accordance with the requirements of the Market Abuse Regulation that came into effect in 2016.

The Board is also aware that the tone and culture it sets will greatly impact all aspects of the Company and the way that employees behave, as well as the achievement of corporate objectives. A significant part of the Company's activities is centred upon an open dialogue with shareholders, employees and other stakeholders. Therefore, the importance of sound ethical values and behaviours is crucial to the ability of the Company to successfully achieve its corporate objectives.

Principle 9: Maintain governance structures and processes that are fit for purpose and support good decision-making by the Board

The Board is committed to high standards of corporate governance. No system of internal control can completely eliminate the risk of process or individual failures. To an extent the corporate governance structures which the Company is able to operate are limited by the size of the executive management team and the small number of executive directors, which is itself dictated by the current size of the Company's operations. Within this limitation necessitated by the current small size of the business, the Board is dedicated to having strong internal control systems in place to enable it to maintain the highest possible standards of governance and probity.

The chairman, Michael Davies:

·              leads the Board and is primarily responsible for the effective working of the Board;

·              in consultation with the Board, ensures good corporate governance and sets clear expectations with regards to Company culture, values and behaviour;

·              sets the Board's agenda and ensures that all Directors are encouraged to participate fully in the activities and decision-making process of the Board;

·              takes responsibility for relationships with the Company's professional advisers and major shareholders.

The chief executive, Dominic White:

·              is primarily responsible for developing the Company's strategy in consultation with the Executive Director and the Board, for its implementation and for the operational management of the business;

·              is primarily responsible for new projects and expansion;

·              runs the Company on a day-to-day basis;

·              implements the decisions of the Board;

·              monitors, reviews and manages key risks;

·               is the Company's primary spokesperson, communicating with external audiences, such as investors, analysts and the media.

The executive director, Russell Naylor:

·              works with the CEO to develop and execute the Company's strategy;

·              is primarily responsible for the systems of financial controls in operation for the Company and each of its subsidiaries;

·              is primarily responsible for all financial management and financial planning matters;

·              monitors, reviews and manages key risks as they relate to financial impact;

·              implements the financial and internal control decisions of the Board.

On 28 October 2019 the Group established a Remuneration Committee chaired by Michael Davies, Chairman and Independent Director, and comprises Michael Davies and Richard Boon, Non-Independent Non-Executive Director, which meets on an ad hoc basis when required.   

Until 28 October 2019 the Audit committee comprised Michael Davies, the Chairman. From 28 October 2019 the Audit and Risk Committee is chaired by James Thornton, Independent Non-Executive Director and comprises James Thornton and Michael Davies. Russell Naylor is invited to attend as appropriate. The Audit and Risk committee is comprised of independent directors. It normally meets twice each financial year to consider the interim and final results. In the latter case, the auditors are present and the meeting considers and takes action on any matters raised by the auditors arising from their audit.

The chair of each of the Committees may invite executive management and Board members to attend any meeting.

Matters reserved for the Board include:

·              Vision and strategy

·              Review of budgets, asset plans and trading results

·              Approving financial statements

·              Financing strategy, including debt strategy

·              Business planning relating to acquisitions, divestments and major refurbishments not already agreed in the strategy and asset plans

·              Capital expenditure in excess of agreed budgets

·              Corporate governance and compliance

·              Risk management and internal controls

·              Appointments and succession plans at senior management level

·              Directors' remuneration

Principle 10: Communicate how the Company is governed and is performing by maintaining a dialogue with shareholders and other relevant stakeholders

The company website sets out the principal approach of the Company to governance. It contains all relevant documents and information for shareholders, including all RNS announcements, Financial Reports, Shareholder Circulars, and the Company's articles.

Shareholders are additionally encouraged to participate at the AGM, to ensure that there is a high level of accountability and identification with the Group's strategy and goals.

Audit Committee Report

The Executive Director Finance and the Chair of the Audit Committee met to plan the audit with the external auditor and to discuss the materiality to be used in the audit and the expected key issues to be covered. Progress of the audit was discussed with the external auditor before the year-end Audit Committee. 

At the completion of the audit, the auditor presented its Planning document and the Audit Completion Report to the Audit Committee before the Financial Statements were presented for Board approval.

The discussions enabled the auditor to explain the proposed work and its outcome and the Non-Executive Directors to raise any issues. It is considered that the process worked well and the audit did not raise any material issues therefore the auditors were able to issue their audit report in the usual form.

Remuneration Committee Report

During 2020, the Remuneration Committee met to review salaries and restricted preference share grants.

It is the Company's policy that the remuneration of Directors should be commensurate with the services provided by them to the Company and should take account of published data on reasonable market comparables, where available. During the financial year, the Directors accepted reduced remuneration in line with the Company's strategy to control costs. Details of the Directors' remuneration are set out in the Directors' Report on page 20.

RPS were all cancelled in conjunction with the Torchlight transaction.

REPORT OF THE DIRECTORS

The directors present their report with the financial statements of the Company and the Group for the year ended 30 June 2020.

A review of the business, risks and uncertainties and future developments is included in the Chairman's Letter, the Chief Executive's Letter, the Group Strategic Report, and in note 21 to the financial statements.

DIVIDENDS

The directors do not recommend payment of a dividend for the year (2019 - £nil).

Political donations

The Group made no political donations during the year (2019 - £nil).

DIRECTORS

The following directors served during the year to 30 June 2020 and up to the date of approval of this Annual Report:

The beneficial interests of the directors holding office at 30 June 2020 in the issued share capital of the Company were as follows:

The beneficial interests of the directors holding office at 17 September 2020 in the issued share capital of the Company were as follows:

SUBSTANTIAL SHAREHOLDINGS

As at 17 September 2020, the directors had been notified that the following shareholders owned a disclosable interest of three per cent or more in the Ordinary shares of the Company:

DIRECTORS' REMUNERATION

The directors have received the following remuneration for their services during the year:

In addition, during the year, the Group were charged fees of £43,200 by DGS Capital Partners LLP, a limited liability partnership of which Michael Davies is a member (2019 - £43,200) (including irrecoverable VAT) for making available the services of Michael Davies to the Group.

* The remuneration paid to Russell Naylor consisted of fees of £44,000 charged by Naylor Partners, a business in which Russell Naylor is a Director (2019 - £nil) and the remuneration paid to Richard Boon consisted of fees of £18,130 (2019 - £nil) charged by Artefact Partners, a business in which Richard Boon is a Director.

During the year, the capital structure of the company was reviewed and the decision was taken to terminate the Restricted Preference shares. As a result, a number of Restricted Preference shares were converted to Ordinary shares and the remaining Restricted Preference shares were gifted to the Company and subsequently cancelled. A number of directors held Restricted Preference shares. The total gain made by the directors upon the conversion of Restricted Preference shares to Ordinary shares was £450,910 (2019 - £484,000). The gain has been calculated as the market value of the Ordinary shares at the date of conversion, less the nominal value of the Restricted Preference shares. However, the loss made by the directors as a result of gifting a number of Restricted Preference shares to the Company was £721,493 (2019 - £nil).

INTERNAL CONTROLS AND RISK MANAGEMENT

The directors are responsible for the Group's system of internal control.  Although no system of internal control can provide absolute assurance against material misstatement or loss, the Group's system is designed to provide reasonable assurance that problems are identified on a timely basis and dealt with appropriately.