Ediston Property Investment : Interim Financial Statements to 30 September 2023

Company No. 09090446

Ediston Property Investment Company plc

INTERIM RESULTS

30 SEPTEMBER 2023

Ediston Property Investment Company plc (LSE: EPIC) (the 'Company') announces its interim results for the six months period ended 30 September 2023.

Key points for the six months to 30 September 2023

• On 29 September 2023, the Company sold its entire property portfolio to RI UK 1 Limited, a wholly owned subsidiary of Realty Income Corporation (the "Disposal"). As a result, at the reporting date, the Company had no property assets and therefore, no property valuation was carried out at the period end.
• Share price total return over the half year of 23.1%, including payment of dividends.
• NAV per share on 30 September 2023 of 71.37 pence (31 March 2023: 80.44 pence), a decrease of 11.3% over the period.
• NAV total return (including dividends) for six months of (8.3%).
• Dividends totalling 2.50 pence per share (5.00 pence per share annualised) paid in the half year.

The Board published a circular on 20 December 2023 setting out the recommended proposal for a members' voluntary liquidation of the Company. The circular also contains the notice of the general meeting of the Company to be held at the offices of Dickson Minto W.S., Dashwood House, 69 Old Broad Street, London EC2M 1QS at 10.00 a.m. on 11 January 2024 at which shareholders will be asked to vote upon the resolution.

Key Performance Indicators

	Six months ended	Six months ended	Year ended 30
	30 September	31 March	September 2022
	2023	2023	(audited)
EPRA NAV per share	71.4p	80.4p	94.9p
NAV total return	(8.3)%	(12.6)%	11.5%
Share price total return	23.1%	(5.5)%	(2.3)%
Average discount of share price to NAV	(14.72)%	(21.0)%	(17.9)%
EPRA Vacancy Rate	N/A	6.7%	6.5%

Net Asset Value

The unaudited NAV of the Company on 30 September 2023 was £150.83 million, or 71.37 pence per share (31 March 2023: £170.00 million or 80.44 pence per share).

	Pence per	£ million
	share
NAV at 31 March 2023	80.44	170.00
Capital expenditure	(1.74)	(3.68)
Disposal of investments	(4.67)	(9.88)
Disposal transaction costs	(1.63)	(3.44)
Income earned	3.35	7.09
Expenses & finance costs	(1.88)	(3.98)
Dividends paid	(2.50)	(5.28)
NAV at 30 September 2023	71.37	150.83

The NAV attributable to the ordinary shares has been calculated under International Financial Reporting Standards ('IFRS'); the EPRA NAV is not reported separately in this update as it is the same as the IFRS NAV.

The NAV does not include a provision for any accrued monthly dividend.

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CHAIRMAN'S STATEMENT

INTRODUCTION

Since the Company's Interim Results statement for the six months to 31 March 2023, the Board has completed the strategic review announced on 16 March 2023. Alongside that work, the portfolio continued to be managed with skill by our Investment Manager, delivering a number of value accretive asset management initiatives. This is summarised in the Investment Manager's report together with some more detailed market commentary.

The Board published its conclusion from the strategic review in a Circular dated 8 September 2023. The Board believed it was in the best interests of shareholders as a whole to dispose of the Company's two subsidiaries that owned the entirety of the Company's property portfolio. Terms were negotiated with a buyer and a sale and purchase agreement was entered into with completion subject to shareholder approval. The sale proposal was put to shareholders at a General Meeting held on 26 September 2023. 92.58% of the votes cast were in favour of the Board's recommendation. Shareholders owning 57.77% of the share register voted.

On 29 September 2023, the Company sold the entirety of the property portfolio to RI UK 1 Limited, a wholly owned subsidiary of Realty Income Corporation. The total headline consideration was £200.8 million prior to agreed and customary deductions.

The Board has since investigated whether there were any corporate opportunities that had merit against the option of returning cash to shareholders via a members' voluntary liquidation. No appropriate opportunity has been identified. Accordingly, the Board has convened a general meeting, to be held on 11 January 2024, at which shareholders will be asked to approve the Company entering into a members' voluntary liquidation. A circular, containing further details of the members' voluntary liquidation and the notice of the general meeting, was published by the Company on 20 December 2023.

Given the timing of the Disposal and anticipated liquidation, the Board believed it was in the best interests of shareholders to extend the Company's reporting period to 31 March 2024 from 30 September 2023, the date at which the full year report and accounts would normally have been prepared. These financial statements have been prepared in compliance with the listing rules, which require the Board to publish an additional set of interim statements due to the extended accounting period.

BACKGROUND TO THE STRATEGIC REVIEW

The Company was launched in October 2014, and since then has been successful in its objective of providing Shareholders with an attractive level of income, paying monthly dividends to investors on an uninterrupted basis over its nine-year life.

However, the Board recognised from the outset that the Company needed to grow its equity base if it was to achieve its long- term investment goals. Its founding shareholders invested with the expectation that this would happen. As the Company emerged from the pandemic the Board was determined to look for opportunities to achieve this goal and secure the long-term viability of the Company. The Board therefore carried out an internal strategic review in the summer of 2021 and decided that the Company should be entirely focussed on retail warehousing.

Although the switch in the investment strategy was well received by shareholders and the market, with the discount narrowing, the ability to execute the growth part of the strategy continued to be frustrated by the discount to NAV at which the ordinary shares traded. With no prospect of the Company growing organically over the short to medium term, the Board was acutely aware that this was a major concern to its larger shareholders. Low levels of liquidity in the ordinary shares impact on share price; a small market capitalisation limits the ability of larger investors to achieve their desired quantum of investment commitment, creating the risk of stock overhangs; constraints on the ability to diversify across larger schemes in the retail warehouse market due to the relatively small size of the Company impact on risk and return; and cost inefficiencies from operating a subscale company detract from performance.

The Board carefully evaluated whether the benefits of the status quo as a specialist REIT with a very capable investment manager, a clear investment proposition and a share rating better than many of its peers within the REIT sector outweighed the costs of the continued operation of the Company in its current form and size. The Board concluded the weight of the Company's size related issues would have a material ongoing adverse effect on shareholder value if the Company was unable to grow. It was against this backdrop that the Board, after consultation with the Company's largest shareholder, announced the strategic review on 16 March 2023.

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The Board considered merger proposals from a number of counterparties alongside other proposals such as share and cash offers for the Company and the disposal of the entirety of its property portfolio as part of the strategic review. The Board concluded that realising the Company's assets and putting the Company in a position to return cash to shareholders represented the best means of maximising shareholder value. This culminated in the sale of the Company's subsidiaries to Realty Income Corporation.

The principal benefits of a portfolio disposal and return of cash to Shareholders were assessed as:

• the implied exit value per Ordinary Share (after wind up costs) may be materially higher than the share price of a merged vehicle, and was, in any event, more readily ascertainable than the latter;
• investors that believed the UK commercial real estate sub-sector was close to the bottom had the option to reinvest their cash proceeds into other REITs of their choice at a discount greater than the exit discount from the Company;
• shareholders who were concerned about further falls in property values and the sustainability of dividends would have a full exit from the sector; and
• shareholders who wished to exit the Company because it no longer met their liquidity or investment screens could do so without destabilising the Share price.

FINANCIAL COMMENTARY ON THE TRANSACTION WITH REALTY

The portfolio and its valuation

The property portfolio comprised 11 well-let and operational, convenience led retail warehouse assets located across the UK and let off affordable rents. The property portfolio has been assembled by the Investment Manager since the Company's launch on 28 October 2014. The 1.18 million sq. ft. portfolio was let to a diversified base of 64 tenants occupying 108 units. The aggregate contracted market rent was approximately £16.4 million per annum.

The valuation of the property portfolio on 15 August 2023 was £207.25 million, an interim valuation struck for the 8 September 2023 Class 1 transaction circular. This was marginally down from the valuation on 30 June 2023 of £208.4 million but did include the benefit of capital expenditure during the period.

The Board evaluated the price offered by Realty, an approximate 5% discount to the 15 August 2023 valuation adjusting the total headline consideration for deductions such as unexpired rent free periods. In doing so it took independent advice from one of the leading firms active in the retail warehouse investment market. An important part of the Board's considerations was the market backdrop of falling valuations and advice that the value was likely to fall further given the level at which transactions were being agreed in the market at the time.

The Board also considered whether a gradual sale of assets in an organised wind down of activities against a disposal of the entire property portfolio would generate a better outcome. It is important to note that the independent valuation of the property portfolio is based on the aggregate of individual property valuations and is not a value for the realisation of the entire property portfolio at any moment in time. Although the valuation in respect of the parts was slightly higher than the consideration offered by the purchaser for the whole, the Board accepted the recommendation from its advisers that a gradual sale could leave shareholders facing a shrinking market capitalisation and increasingly illiquid ordinary shares. In addition, any gain from selling the parts over the whole could be eroded very quickly by the higher costs per ordinary share of continuing to run the Company for an unknown period, potentially culminating in a forced sale of the final assets.

Subsequent market data confirmed that the advice given to the Board was correct. The MSCI monthly index for September, October and November has recorded sector capital value declines of 1.6%, 0.65% and 1.93%, respectively. Since the sale with Realty was signed retail warehouse values have therefore declined by 4%, and market commentators expect further declines by the year end. If this reduction in market value was applied to the Company's 15 August 2023 valuation the value of the portfolio would now be below the total headline consideration of £200.8 million.

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Debt

The subsidiaries were sold to Realty without the Company's debt facilities in place. Utilising the strong relationship the Investment Manager has with Aviva, the Board was able to novate the facilities from the subsidiaries to the Company prior to the Disposal having occurred. The debt facilities were then cash collateralised in an account controlled by Aviva. The rationale for doing this was that the Company was able to benefit from the delta of approximately 2.35% (on an annualised basis) between the interest paid to Aviva and the interest received on the cash deposit. Cumulatively, this will enable the Company to generate income, net of interest costs, of approximately £660,000 over the period from the end of September 2023 to liquidation in relation to the principal loan balance of £111.1 million (assuming the Company enters into members' voluntary liquidation on 11 January 2024 and the Company either repays or novates the debt facilities shortly prior to this).

The Company has served on Aviva notice to prepay the amounts outstanding under the Debt Facilities on 5 January 2024, four business days in advance of the proposed members' voluntary liquidation. The Company is currently in discussions with its Investment Manager and Aviva with a view to novating the debt facilities to Ediston Capital Limited, a related party of Ediston Investment Services Limited, in advance of the prepayment date. The Company will be reimbursed by the Investment Manager for any costs incurred in bringing the novation into effect and will be entitled to receive a share of the difference between the interest received and the interest paid on the amounts drawn under the debt facilities for a short period following liquidation. In any event, it is expected the debt facilities will either be prepaid or novated to Ediston Capital Limited and the Company will be released in full from all obligations in respect of the debt facilities prior to the members' voluntary liquidation becoming effective.

Dividends

The Board has paid dividends to shareholders at the monthly equivalent of 0.4167 pence per share during the accounting period and maintained that post the period end. The Board believed that this would be welcomed by shareholders as capital from the sale could not be returned immediately. It is also important to note the Company is obliged to distribute its rental income to maintain its REIT tax status. Although the Company lost its REIT status on the Disposal of its assets, the tax advice was that the accumulated undistributed property income would have to be distributed as income on liquidation if not distributed earlier. The monthly dividend announced on 14 December 2023 utilises all the undistributed property income and is now expected to be the last dividend paid by the Company (assuming the Company enters into members' voluntary liquidation on 11 January 2024).

This monthly dividend of 0.4167 pence per share equates to an annualised dividend level of 5.00 pence per share and is unchanged from the previous dividend declared on 1 November 2023.

Impact of the sale on the Company's Net Assets

The September circular reported that the Disposal would result in estimated net assets per share on completion of approximately 72 pence per share. This included the benefit of the dividend payments that were due to be made. Due to the uncertainty relating to the final costs of the Disposal and subsequent liquidation, this was expressed as an estimate. I can report as at the date of this accounting statement, the NAV per share as at liquidation is expected to be no less than 70.21 pence. When dividends paid since the Disposal are added back, shareholders are expected to receive a minimum of 71.88 pence per share, materially in line with the estimation of 72 pence per share made at the time of the Disposal. This represents a discount of 10.8% to the reported NAV on 30 June 2023.

This NAV comparison has its limitations as an assessment of the price achieved for two reasons. Firstly, the 30 June NAV is stated without an accrual for potential Disposal and liquidation costs. The 72 pence reflects actual Disposal and liquidation costs. Secondly, the market has deteriorated since June and, together with capital expenditure, the NAV at the date of Disposal would have been lower than the 30 June NAV.

The 71.88 pence per share represents a 17.5% premium to the share price of 61.2 pence as at 15 March 2023 (the closing price immediately prior to the Strategic Review Announcement). REIT share prices have rallied since the transaction date, possibly in anticipation of more corporate events in the sector as well as hope that the interest rate cycle has peaked. However, as at the end of November 2023, the average discount to published net asset values across the sector was approximately 20%. Based on the 30 June 2023 NAV, before factoring in valuation falls, a 20% discount would put the share price at around 65 pence.

LIQUIDATION

The Board published a circular on 20 December setting out the recommended proposal for a members' voluntary liquidation of the Company. The circular also contains the notice of the general meeting of the Company to be held at the offices of Dickson Minto W.S., Dashwood House, 69 Old Broad Street, London EC2M 1QS at 10.00 a.m. on 11 January 2024 at which shareholders will be asked to vote upon the resolution.

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Shortly thereafter, if the resolution is approved, shareholders should receive an initial distribution of no less than 69.0p per share, with the balance to be retained by the liquidators to meet current, future and contingent liabilities of the Company, including any outstanding costs and expenses of the liquidation itself and potential tax liabilities. Once the liquidators have satisfied all the claims of creditors of the Company and paid the costs and expenses of the liquidation and obtained tax clearance for pre- and post-liquidation periods from HMRC, it is expected the liquidators will make a final distribution to shareholders of any residual cash. The final distribution, if any, will be at a time to be determined solely by the liquidators, but would be expected in the region of six to nine months.

It was hoped that the general meeting could have occurred before the year end. However, Realty has used the entirety of the period to 7 December 2023 specified in the sale and purchase agreement to approve the completion accounts. The Board deemed it was not practical to hold a general meeting over the holiday period.

Full details on the liquidation proposal are set out in the 20 December 2023 circular and shareholders are referred to this document which sets out the actions required.

CONCLUSION

On the assumption that the recommended voluntary liquidation is approved, this will be my final statement as Company chairman.

The Board would have much preferred the Company to continue in existence and grow to a size where it could operate as a dominant player in the retail warehouse sector. However, the Board has listened to its shareholders and enacted a process which it believes has culminated in the optimum outcome for maximising shareholder value against a range of potential alternatives. For those shareholders who did wish to continue, and there was a minority that did, the status quo may not have been possible if a takeover or merger approach had been received from a third party. The Board therefore considered that shareholder interests were best protected by the Board controlling events via a strategic review. This gave it the time to explore a wide range of options.

I would like to take this opportunity of thanking our Investment Manager for bringing their considerable property expertise to the management of the Company's portfolio and affairs. Throughout the strategic review process and the sale to Realty, the Ediston team has conducted itself in a highly professional manner. I would also like to thank our other advisors for their service to the Company, a number of whom have been engaged since the flotation.

I also want to express the Board's gratitude to the support many of our shareholders, large and small, have given to the Company over the years. The feedback on those relationships has always been very good and I would single out Calum Bruce from Ediston for the way he has managed this and, in the process, made my job so much easier.

Finally, I would like to thank my fellow Board members for their hard work and commitment to the Company including those who have retired.

It has been a privilege to work with so many talented and committed people across all the facets of a real estate investment trust.

William Hill

Chairman

21 December 2023

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INVESTMENT MANAGER'S REVIEW

INTRODUCTION

The reporting period was dominated by stubbornly high inflation and rising interest rates, although by the end of the period it appeared that rates had peaked, and inflation was starting to fall.

The economic events caused the property investment market to adopt a 'wait-and-see' approach, with investors looking for stability before committing to either buying or selling properties. This led to investment volumes being below long-term averages.

The impact on the property portfolio at the start of the period was for valuations to fall, leading to a NAV decline as reported as at 31 March 2023, albeit values increased as at 30 June 2023, with completed asset management initiatives contributing to the rise.

During the final quarter of the reporting period, property values started to fall, as the lack of investment activity continued to influence the market. However, during the three months to 30 September 2023, retail warehousing remained attractive for investors.

Again, completing asset management transactions helped to reduce declines in the value of the property portfolio and a pipeline of asset management deals helped improve the pricing prospects of the portfolio.

NAV COMPOSITION

Following the strategic review and the results of the general meeting of 26 September 2023, the Company completed the sale of the entirety of the property portfolio before the interim period end.

In advance of the intended voluntary liquidation of the Company, the cash proceeds from the Disposal have been added to the Company's existing cash resources. Apart from a small amount held in a current account for operating expenses, the remainder of the cash has been held in interest bearing accounts. £113 million is placed in a blocked account as security for the debt facilities that were successfully novated to the Company from the Company's subsidiaries. The blended rate on the debt is 2.91% and the interest rates obtained in the interest-bearing accounts range from 5.26% - 5.40%.

With the blocked account presented as a debtor in the Statement of Financial Position offsetting the debt, the NAV of 71.37p, following the payment of the dividend on the 29 September 2023, is largely represented by the cash held in the interest-bearing accounts.

ASSET MANAGEMENT

On 29 September 2023, the Company sold its entire property portfolio to RI UK 1 Limited, a wholly owned subsidiary of Realty Income Corporation. As a result, at the reporting date, the Company had no property assets, and therefore, no property valuation was carried out at the period end.

However, during the six month period from 1 April 2023 until the assets were sold, the Investment Manager intensively asset managed the portfolio and completed 11 asset management opportunities, across six different assets.

These deals secured £1.01 million of income per annum at an average of 10.5% ahead of the independent valuer's ERV. These deals proved the reversionary potential of the property portfolio.

SUMMARY & OUTLOOK

Against the backdrop of the strategic review, the property portfolio continued to perform well on an operational basis, with the investment manager driving forward not only asset management deals but also with the sale process to ensure that the value to shareholders was maximised.

Whilst retail warehouse values are expected to dip in the short term, the medium-to-long term outlook should be more positive. The sub-sector remains attractive to investors and the occupational market is robust, underpinned by low supply levels and tenants who want to do deals, for the right assets in the right locations.

The stabilisation of interest rates, even if they remain higher for longer, is important as it should give the investment market more confidence and result in an increase in investment volumes, and hopefully rising values.

Finally, this is likely to be Ediston's last formal communication with shareholders so I would like to take the opportunity to thank all our investors who have supported us over the years. Since we launched the Company in 2014, as well as the many positives, we have also experienced several challenges including referendums, elections, a global pandemic, and economic uncertainties.

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We have always done our best to ensure that we communicated with our investors, whether the news was good or bad, as we firmly believe that is an important thing to do.

I have enjoyed our many meetings and conversations over the years, and our time managing the Company on your behalf.

Calum Bruce

Investment Manager

21 December 2023

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STATEMENT OF PRINCIPAL AND EMERGING RISKS AND UNCERTAINTIES

The risks, and the way in which they are managed, are described in more detail under the heading 'Principal and emerging risks' within the Strategic Report in the Group's Annual Report and Accounts for the year ended 30 September 2022.

On 16 March 2023, the Board announced a strategic review of the options available to the Company to maximise value for shareholders. The Board appointed Investec Bank plc ('Investec') as Lead Financial Adviser and Dickson Minto as Joint Financial Adviser who assisted the Company with the Strategic Review. As a result of this, on 29 September 2023, the Company sold its entire property portfolio to RI UK 1 Limited, a wholly owned subsidiary of Realty Income Corporation. This has had some impact on the principal and emerging risks and uncertainties previously disclosed, and this is set out below.

The Board regularly reviews the principal and emerging risks and uncertainties faced by the Company together with the mitigating actions it has established to manage the risks. These are set out within the Strategic Report contained within the Annual Report for the year ended 30 September 2022 and comprise the following risk headings:

• Investment strategy and performance;
• Premium and discount level;
• Financial;
• Regulatory;
• Operational; and
• Economic, governmental and exogenous.

Those risks remained relevant throughout the reporting period although some are no longer relevant now that the Disposal has taken place.

During the period, the Board was also focused on the strategic future of the Company and then the execution risk arising from the outcome of the strategic review, including ensuring that shareholder interests were always being considered. These risks were actively managed through much more regular Board meetings and communication with shareholders as well as the appointment of advisers for support in key areas.

Since the reporting period end, we have been very focused on managing the counterparty and interest rate risks arising from the significant cash balances we now hold post the Disposal.

DIRECTORS' RESPONSIBLIITIES

Directors' Responsibility Statement

The Directors are responsible for preparing the interim Financial Report in accordance with applicable law and regulations. The Directors confirm that to the best of their knowledge:

• the condensed set of interim financial statements within the interim Financial Report has been prepared in accordance with IAS 34 'Interim Financial Reporting' of the UK-adopted IFRS; and
• the Interim Board Report (constituting the Chairman's statement and Investment Manager's Report) includes a fair review of the information required by rules 4.2.7R of the Disclosure Guidance and Transparency Rules (being an indication of important events that have occurred during the financial period and their impact on the condensed set of financial statements and a description of the principal risks and uncertainties for the remaining financial period until 31 March 2024) and 4.2.8R (being related party transactions that have taken place during the financial period and that have materially affected the financial position of the Company during that period; and any changes in the related party transactions described in the last Annual Report that could so do).

These interim financial statements are unaudited and have not been subject to review by the audit firm.

On behalf of the Board,

William Hill

Chairman

21 December 2023

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Financial Statements

Condensed Consolidated Statement of Comprehensive Income For the financial period ended 30 September 2023 (unaudited)

Notes

Revenue

Six months

ended 30

Year ended

Six months ended 30 September 2023

September

Twelve months ended 30 September 2023

30 September

2022

2022

(unaudited)*

(unaudited)

(unaudited)*

(audited)

Revenue

Capital

Total

Total

Revenue

Capital

Total

Total

£'000

£'000

£'000

£'000

£'000

£'000

£'000

£'000

Rental income		7,042	-	7,042	7,948	14,680	-	14,680	16,426
Other income		46	-	46	-	189	-	189	-
Total revenue		7,088	-	7,088	7,948	14,869	-	14,869	16,426
Unrealised gain on revaluation of			-	-
investment properties		-			4,404	-	-	-	15,920
Loss on sale of investment			(17,387)	(17,387)
properties realised	8	-	(5,957)	-	(46,126)	(46,126)	(3,014)
Total income		7,088	(17,387)	(10,299)	6,395	14,869	(46,126)	(31,257)	29,332
Expenditure
Investment management fees	5	(792)	-	(792)	(869)	(1,501)	-	(1,501)	(1,703)
Other expenses		(1,421)	-	(1,421)	(1,366)	(2,941)	-	(2,941)	(3,212)
Total expenditure		(2,213)	-	(2,213)	(2,235)	(4,442)	-	(4,442)	(4,915)
Movement in expected credit losses		57	-	57	-	(6)	-	(6)	51
Profit/(loss) before finance costs and
taxation		4,932	(17,387)	(12,455)	4,160	10,421	(46,126)	(35,705)	24,468
Net finance costs
Interest receivable		743	-	743	20	910	-	910	22
Interest payable		(2,176)	-	(2,176)	(1,462)	(4,277)	-	(4,277)	(3,003)
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