WSP Wynnstay Properties Plc

WYNNSTAY PROPERTIES PLC

INTRODUCTION TO WYNNSTAY

A distinctive approach to commercial property investment primarily for private investors

Wynnstay is an AIM listed property investment and development business. Its principal shareholders are private investors wishing to invest in a portfolio of good quality secondary commercial properties for medium to long-term capital and income growth. The portfolio is currently focused on industrial, including trade counter, units.

Strategy

Wynnstay aims to achieve capital appreciation and generate rising dividend income for shareholders from a diversified and resilient commercial property portfolio in Central and Southern England, with diversity and resilience being reflected in the location, number and nature of the properties, and the mix of lease terms, tenants and uses.

For location, the focus is on areas where there is strong occupational demand and often limited supply. Modest rents generally provide opportunity for further rental growth over time as rent reviews and new lettings are concluded and high levels of occupancy can be maintained.  While many tenants have been in occupation for a considerable time, voids can be managed and re-lettings achieved successfully. The relatively small lot sizes of our assets also appeal, when marketed for sale, to a wide range of investors.

The majority of properties are multi-let, resulting in a number of individual tenancies in most locations, reducing exposure to any single tenant and risk of loss of rental income in the case of defaults and voids.

Leases are mainly for terms of five years or more with short-term agreements of two years or less typically avoided, and usually with upward only rent reviews based on market rates. Flexibility in addressing tenant needs and requirements generally mean that the terms agreed result in a mutually beneficial outcome for both parties.

Tenants comprise a broad spread of occupiers, also reducing risk exposure: national and local government, international businesses, national trading chains and regional and local businesses. Uses include manufacturing and services; storage and distribution; and trade counter and out-of-town retail.

Active direct management and close engagement and constructive business relationships with tenants, together with refurbishment and selective development over time, underpin capital value and increase income.

Managed for shareholders

The portfolio is directly, rather than externally, managed. Finance is largely outsourced to an external provider to meet specific needs. All report to the Board, the majority of whom are non-executive directors.

Management remuneration comprises salary and, where appropriate, a cash bonus. Wynnstay does not offer incentive schemes, such as share plans, share options or share bonuses.

As a result, both management and the Board are focused on Wynnstay's performance for the benefit of shareholders, operational costs are closely controlled, and dilution of shareholders' investment and potential conflicts of interest are minimised.

Incremental growth

The portfolio has been built incrementally, with opportunities being taken to dispose of assets as and when the time is appropriate and to reinvest in assets that offer better long-term returns.

This is achieved gradually over time, without the need for deal-driven activity in pursuit of corporate or portfolio expansion.

Funding

Wynnstay adopts a prudent, pragmatic approach to funding. Investments are funded in part by retained profits and recycling capital receipts from disposals and in part from borrowings, the majority at a fixed rate and held at a modest loan-to-value level, from an experienced and supportive property lender. This provides security at times of uncertainty in debt markets.

Valuation

Properties are valued on a cautious basis, based upon professional advice from expert external valuers, recognising that commercial property is a cyclical market that can exhibit significant upward and downward movements and that steadiness and progression over the medium and long-term are most likely to be in shareholders' interests.

Wynnstay on AIM

Wynnstay's shares were quoted on its AIM introduction in 1995 at a mid-market price of 150p. On the day prior to the approval of this report, the mid-market price was 675p, an increase of 450%. The dividend paid in 1995 was 4p per share. The dividend paid and proposed for the current year will be 25.5p per share, an increase of nearly 540%.

Performance

Wynnstay's distinctive approach has delivered on its strategy over both the medium and long term. Shareholders have benefitted from substantial increases in net asset value per share and dividends as the portfolio and its management have delivered strong results.

Corporate Performance over five years

In assessing the performance of the portfolio, several key measures are used.

In addition to the overall property income and portfolio value, underlying growth in both property income and value from those properties held in the portfolio throughout the previous five years are assessed.

Like-for-like underlying rental income and portfolio value growth demonstrate the ability to acquire and retain properties that are attractive to existing and new tenants, to manage them well and to grow average rents over time thus increasing income and capital value.

On this analysis, the core portfolio has performed very well over five years, delivering rental income growth of 18.9% and portfolio value growth of 27.8%.

Occupancy and rent collections are also key performance measures for the portfolio. Occupancy demonstrates the ability to retain tenants at renewal and to let vacant premises when tenants do not renew which, in turn, underpin rental income and shareholders' dividends as well as capital value. Ensuring that rents are collected is essential to ensure that the portfolio delivers the best results for shareholders and shareholders' dividends are protected.  Wynnstay's excellent record of rental collections and occupancy has been maintained at or very close to 100% over the past five years.

The weighted average unexpired lease term of the portfolio as a whole provides guidance on the anticipated continuity of rental income in future years. Most leases are for five years and some (but not all) longer leases, such as for ten years, may contain a break clause after five years. Typically, over the past five years, our weighted average unexpired lease term has been between 2.8 and 3.6 years to lease break and between 4.1 and 4.8 years to lease expiry.

Our passing (i.e. current) rental income relative to the estimated rental value for the portfolio used by our valuers in the annual valuation gives an indication of the potential additional income that may be realisable, depending on market conditions, when rent reviews fall due or when properties become vacant and are offered for reletting. Over the past five years, this has typically demonstrated a % reversionary income potential in the range of 8% to 12%.

Share Price Performance

Wynnstay is quoted on AIM, and therefore is not a constituent of the FTSE 350 Real Estate Investment Trusts Index, which contains a good cross-section of quoted property companies of various forms, all much larger than Wynnstay. Wynnstay's share price relative to the FTSE 350 Real Estate Investment Trusts Index is shown in the chart below. Wynnstay's share price has substantially outperformed the index over the ten-year period.

Source: W H Ireland Limited

Wynnstay's share price has also substantially outperformed the market indices for the leading AIM companies and for other much larger companies within the main market in the FTSE-350 index as shown in the chart below.

Source: W H Ireland Limited

WYNNSTAY PROPERTIES PLC

CHAIRMAN'S STATEMENT

I am pleased to report to shareholders on another active year at Wynnstay during which we have made significant changes in the portfolio, with three acquisitions and one disposal, and have completed our Board succession plans by welcoming our new Managing Director, Chris Betts, and our two new non-executive directors, Hugh Ford and Ross Owen.

This has been a successful year for Wynnstay's financial performance and thus for you as shareholders who have seen further increases in net asset value and in dividends and thus in total accounting return.

Wynnstay's overall financial performance in the financial year, compared to the prior year, is summarised in the following overview table.  The table should be read in conjunction with the following commentary and the financial statements.

Overview of Financial Performance:  2024 vs. 2023

*   Annual Rental Income is shown in note 2 of the Financial Statements and Underlying Rental Income is the like-for-like income from properties held in the portfolio throughout both years.

^†     Excludes £27,000 of non-recurring costs incurred in 2024 (2023: £81,000) relating to new Board appointments.

^►  Total accounting return is calculated by combining movements in net asset value and dividends for the period expressed as a percentage
      of the opening net asset value per share.

Commentary on Financial Performance in 2024

Rental income for the financial year increased by 10.3% compared to the previous year to £2,541,000 (2023: £2,304,000).  This increase reflects the acquisition early in the year of Riverdale Industrial Estate, Tonbridge and, towards the end of the year, of units at Wildmere Industrial Estate in Banbury and at the IO Centre in Stevenage, as well as the outcome of several successful rent reviews and new lettings within the existing portfolio.

Other property income of £58,000 (2023: £8,000) comprised a dilapidations settlement with the outgoing tenant at our Hertford property, which we sold during the year, and service charge related management fees.

Net property income rose to £1,790,000 (2023: £1,497,000) reflecting the higher property income noted above and the overall property costs of £138,000 (2023: £96,000) and administrative costs of £671,000 (2023: £719,000) in the financial year compared to the prior year in which significant management succession costs were incurred.

Operating income benefitted from the sale of the Hertford property which realised a net profit after costs of £282,000 (2023: nil) and after the fair value adjustment arising from the annual revaluation, was £2,069,000 (2023: £1,842,000).

Earnings per share rose by 19.2% to 50.3p per share.

As a result of the fair value adjustment arising from the valuation, to which I refer below, the profit on disposal of Hertford and the positive income generation in the business, the net asset value per share rose by 2.3% to 1,136p per share (2023: 1,110p).

The Board considers the outcome of the financial year to be very satisfactory.

Managing Director's Review

Our Managing Director, Chris Betts, has prepared a separate review which follows this statement. This provides detail on the transactions mentioned above, management activity in the portfolio over the year, succession and operational changes introduced in the management of the business. 

Valuation

Our Independent Valuers, BNP Paribas Real Estate, undertook the annual revaluation as at 25 March 2024 valuing the Company's portfolio at £43,915,000 (2023: £39,320,000). This represents a 11.7% increase of £4,595,000 on the valuation as at 25 March 2023 and primarily reflects the transactions in the year already mentioned above as well as the benefits of the active management of the portfolio reported in the Managing Director's Review.

The annual valuation is undertaken under accounting standards for use in our financial statements in accordance with RICS Global Standards and values each property as a separate asset on the basis of a sale of that property in the open market. Therefore, the valuation does not take account of any additional value that might be realised if the portfolio were to be offered on the open market or any other special factors that may be relevant in the case of individual potential purchasers, such as sales to other property investors, existing tenants or adjoining owners.

Finance, Borrowings and Gearing

Wynnstay remains in a strong financial position, with a low loan-to-value ratio under our secured facilities of 24.7 % (2023: 25.3%).

At the year-end, we held cash of £0.4 million (2023: £3.3 million) and our borrowings were £10.843 million (2023: £9.951 million). The reduction in cash held and the increase in our borrowing compared to the prior year resulted from the acquisitions mentioned above. We drew down £950,000 under our revolving credit facility to fund in the short-term part of the acquisition costs.

The interest rate under our fixed term facility is fixed at 3.61% until December 2026. In addition to our available cash balance and positive cash flow from our property activities, just over £4 million of our £5m revolving credit facility remained undrawn at the year-end.

Dividend

Over recent years we have sought to pursue a progressive dividend policy that aims to provide shareholders with a rising income commensurate with Wynnstay's underlying growth and finances.

In the light of the satisfactory results for the year, the Board recommends a final dividend of 16.0p per share (2023:

15.0p). An interim dividend of 9.5p per share (2023: 9.0p) was paid in December 2023. Hence, the total dividend for this year of 25.5p per share (2023: 24.0p) represents an increase of 6.3% on the prior year.

Over the past five years, dividends have increased by 70.0% from 15.0p to 25.5p, although it should be noted that the level of dividend paid in 2020 was affected by the uncertainty resulting from the outbreak of the Covid-19 pandemic.

Subject to shareholder approval, the final dividend will be paid on 26 July 2024 to shareholders on the register at the close of business on 21 June 2024.

Wynnstay's Financial Performance in the longer-term

In the Annual Report two years ago, we introduced a new section, entitled Introduction to Wynnstay. This describes Wynnstay's distinctive approach to commercial property investment primarily for private shareholders and provides information both on the Company's performance and its share price performance over time.

The section has been retained and further updated in this report to provide additional information on the Company's performance. It highlights Wynnstay's continued strength over time across a range of measures. It has also been expanded to explain the principal measures that we use in assessing the performance of the Company and the portfolio. 

I encourage all shareholders to read this explanation of Wynnstay's rationale and performance on pages 5 to 9 of this report.

Key points to which I would draw shareholders attention are illustrated on Page 6 of this report. Wynnstay has delivered cumulative growth over five years in total accounting return (net asset value and dividends) of 54.2% and Wynnstay's share price has substantially outperformed established market indices.  In managing the portfolio, we have achieved substantial underlying growth in rental income and portfolio value and maintained a consistent record of full occupancy and rent collections.

The Board

I am pleased to report that our two new Non-executive Directors, Hugh Ford and Ross Owen, have settled in well and have made valuable contributions to our Board discussions.

We were delighted to welcome Chris Betts to the Board in September.  He established himself quickly and actively in his new role on which he reports in his Managing Director's Review.

Shareholder Matters

I have reported in recent years on the liquidity and marketability of Wynnstay shares.

Wynnstay has a small, and rather unusual, share register on which there are under 250 accounts, a significant number of which are connected through family relationships, with private investors rather than funds or institutions as shareholders. In the main, they are long-term investors with some holdings having passed from generation to generation since the company was founded in 1886. These long-term investors provide stability and continuity within

the shareholder base.

As a result of this relatively small shareholder base the volume and proportion of Wynnstay shares traded in the market is less than for many quoted companies with larger share registers and more dispersed holdings. Fewer Wynnstay shares tend to be available to trade and then only usually in modest quantities and with a sizeable "spread" between the bid and offer price. Shares are typically traded at a significant discount to the net asset value per share. However, both these features are also seen in other, much larger, quoted property companies. As already noted above, Wynnstay's share price has continued substantially to outperform the comparative real estate sector.

At the Annual General Meeting in 2022, shareholders gave Wynnstay authority to purchase its own shares so that the Company can act as a purchaser in the market where it is appropriate, and in the interests of shareholders generally, to do so. Other quoted property and investment companies, as well as other quoted companies, use share buybacks on a routine basis to enhance earnings and net asset value per share. Where shares are bought back dividends cease to be payable, thus conserving cash in the business and benefitting continuing shareholders and with the present intention being to hold any shares bought back in treasury so that they are available for reissue where there is market demand for shares or to facilitate individual property acquisitions.

The volume of shares traded in the past two years has been relatively small and the market has generally been able to absorb most of the shares offered. The authority has so far been used once, to acquire 15,000 Ordinary Shares at 710p in September 2022. The Board keeps the position under review and may exercise the authority when shares are available in the market and it is in the interests of shareholders generally to do so.

We also consider that Wynnstay's future development would be assisted if authority continued to be granted by shareholders, as has been the case for many years, to issue a limited number of shares without first offering them to existing shareholders. This gives Wynnstay flexibility, for instance, to issue shares for small fundraisings which might support a larger acquisition and allow the issue of shares as part consideration on individual property acquisitions to vendors, where the vendors wish to retain an interest in a broader portfolio of assets in a quoted company. Bringing in new investors with an interest in commercial property and in Wynnstay's distinctive approach to the share register would broaden the shareholder base and support its future development.

Outlook

At this time last year, I noted that the UK had entered a further period of uncertainty as a result of external international events, changes in government administration, inflation levels not seen for forty years and rapid successive increases in interest rates.

This uncertainty continued throughout the past year with recent events in the Middle East and the continued war in Ukraine affecting trade and the economic climate in many countries and, in the UK as well as other countries, forthcoming elections taking place in 2024.  However, inflation in the UK has fallen from the very high levels seen in mid 2023, real earnings are increasing and the employment data remains strong.  While forecasts show little growth in the economy and continuing concerns about the level of public debt and the impacts of high taxation, the prospects of serious recession appear to have receded. Over recent months interest rates which, at one point, were forecast to reach 7% are now forecast to fall gradually over the next year to eighteen months.

Despite these uncertainties, Wynnstay's business has prospered. We are confident that our focused, stable and well-let portfolio can continue to deliver growth of capital and income for shareholders in the medium and long-term. The main risks to continued growth are economic and political, such as significant disruption caused by events beyond our control or the UK economy suffering a significant downturn, whether resulting from our own circumstances in the UK or international events, or domestic political upheaval any of which can affect the ability or willingness of businesses to invest or of consumers to spend.

The commercial property market is very sensitive to changes in the economic outlook and, in particular, to interest rates.  This can result in strong, sometimes extreme, swings in both optimism and pessimism, which can affect asset values and market sentiment towards quoted property investments. Wynnstay has always adopted a cautious and realistic approach in managing and developing our portfolio and in valuing our assets. This has served shareholders well over a long period of time.

Despite the uncertainties in the UK and elsewhere, the Board remains optimistic about the future of Wynnstay's business.

Colleagues and Advisers

Our Managing Director, Chris Betts, and our finance and company secretarial colleagues have continued to work effectively to deliver for shareholders. I would like to thank them, as well as my colleagues on the Board and our professional advisers, for their support over the year.

Shareholding Enquiries

From time to time we receive enquiries from shareholders with questions about their shareholdings or about buying or selling Wynnstay shares or transferring them, typically to relatives.

All enquiries about shareholdings, including changes of address and bank details and about such transfers of shares, should be directed to our Registrars, Link Group, whose details are on page 2.

As regards buying or selling shares, this can be carried out by registering the holding online with our Registrars, Link Group, via their secure share portal www.signalshares.com, which also enables shareholdings to be managed quickly and easily. Shares can, of course, also be bought and sold in the usual way through a stockbroker or an online platform.

Annual General Meeting

The AGM provides an important and valued opportunity for the Board to engage with shareholders.

Our AGM this year will be held at 2.30pm on Tuesday 16 July 2024 at the Royal Automobile Club, 89 Pall Mall, London SW1Y 5HS. The Notice of Meeting is to be found at the end of this Annual Report.

I urge all shareholders to complete and return their proxy forms so that their votes on the resolutions being put to the meeting can be counted.

Shareholders who have registered for Link services online can also benefit from the ability to cast their proxy votes electronically, rather than by post. Shareholders not already registered for Link services online will need their investor code, which can be found on their share certificate or dividend tax voucher, in order to register.

To maximise shareholder engagement, shareholders who are unable to attend the AGM are encouraged to submit in

writing those questions that they might have wished to ask in person at the meeting. Questions should be emailed to company.secretary@wynnstayproperties.co.uk at least 48 hours in advance of the AGM. You will receive a written response and, if there are common themes raised by a number of shareholders, we aim to provide a summary for all shareholders, grouping themes and topics together where appropriate, on the Company's website following the AGM.

Finally, on behalf of the Board, I would like to thank all shareholders, whether they have held shares for many years or have recently acquired shares, for their interest in and support for Wynnstay.

Philip Collins

Chairman

11 June 2024

WYNNSTAY PROPERTIES PLC

MANAGING DIRECTOR'S REVIEW

I am pleased to make my first annual report to shareholders as Managing Director on Wynnstay's operational activity. The past year has seen changes both to the composition of the Company's portfolio and Board but the underlying approach and focus on the delivery of attractive shareholder returns remains.

Portfolio Composition

In addition to the previously reported purchase of Riverdale Industrial Estate, Tonbridge for £2.35 million in May 2023, two further properties were purchased in January 2024 as a package at a combined price of £2.525 million.

The larger property comprises a pair of trade-counter warehouse units totaling 13,140 sq ft on the Wildmere Industrial Estate in Banbury.  These are let to a national and a regional trade counter business and currently produce a total annual rent of £103,425.  The net initial yield from the investment is 6%, which on current market rental evidence is anticipated to rise to around 7% after a lease renewal or reletting in 2025 and a rent review in 2026.

The second property is located on the iO Centre, off Gunnels Wood Road in Stevenage.  It is a 999-year leasehold interest in a mid-terrace trade-counter warehouse unit of 5,750 sq ft that is let to a national trade counter business.  The current rent of £57,530 per annum provides a net initial yield of 6%, which is anticipated to rise to 7.2% on lease renewal or reletting in 2026.

Both properties are in well-established and highly accessible industrial warehouse locations.  They are the same sort of relatively small and flexible units that comprise most Wynnstay properties and which are attractive to a wide range of businesses.  In many locations in central and southern England, the overall stock of such property is not rising in line with demand and in many cases is being diminished, which increases the scope for rental growth.  These acquisitions complement the geographic spread of the portfolio.

As reported in our Interim Statement, the Hertford property was sold with vacant possession in October 2023 for £910,000 generating a profit after tax and costs over the investment value as at March 2023 of £282,000.  The buyer is a regional motor trade business, and their offer reflected the scarcity of opportunities for owner-occupiers. This opportunistic sale represents the culmination of the gradual divestment from a once-larger historic Wynnstay holding of older, less flexible buildings which have more limited market appeal.  In this case, we were also able to secure a substantial dilapidations settlement from the former tenant.

As a result of these transactions, the portfolio now comprises 84 leasing units in 17 geographic locations.

Portfolio Activity

The number of lease events over the year is only a little down on that of the previous 12 months. There have been four completed rent reviews including three outstanding from 2022 to the same tenant at Tonbridge that were concluded at a rate confirming the market rental anticipated on acquisition.

Three leases were renewed with current tenants. The most notable was a large unit at Aylesford, where the rent increased by a third and was significantly ahead of the market rent assumed in the March 2023 valuation. The other two renewals were at Heathfield. At Aylesford, we were also able to take advantage of a previous tenant's desire to assign their lease to secure a more valuable longer-term new letting.

We have achieved four other new lettings to replace tenants who have vacated. All were at rents noticeably in excess of the estimated rental value used by the valuers in the March 2023 valuation. 

Following the retirement of a tenant at Uckfield, we were able to quickly agree terms for a new open market letting which completed in August 2023. The lease of a unit in Hailsham was forfeited in May 2023 in the face of mounting rent arrears, which we have subsequently recovered in full. Remarketing brought several expressions of interest, and a new lease was completed in December. Securing the letting required expenditure on an updated planning permission for use of the premises and repair and redecoration of the roof and elevations.

At Liphook a tenant opted not to renew their lease in December and a new letting was completed in March 2024 with additional rental income from the mezzanine floor installed by a former tenant. Two tenants at Aylesford exercised break clauses during the year. In one case it was possible to complete a new letting immediately after the break date so that a void did not occur. The other unit remained vacant at year-end although an acceptable offer had been received and the letting has since been completed.

Consequently, the vacancy rate across the portfolio at year-end was extremely low representing approximately 0.75% both by floor area and market rent.

In a similar vein, rental collection has been very strong with only three instances in the year of rent remaining outstanding 30 days after the due date. In all cases the arrears have been received with the result that there were no bad debts.

Property Valuation

Over most of the year the commercial property market reflected caution and some trading difficulties for many businesses alongside continued high interest rates that have impacted negatively on valuations. The final quarter saw some market stabilisation and improved optimism, especially regarding the interest rate environment. Nonetheless, a weaker investment market overall has resulted in a softening of valuation yields compared to last year of approximately 25bp across the portfolio.

However, the impact of this yield shift on the valuation was more than offset by rental growth in our portfolio and our active asset management. Wynnstay's like-for-like rental income increased by 3.0% and the current estimated rental value used by our valuers increased by 5.5% over the year. This reflects the strength of the industrial sector as a whole and the benefit of Wynnstay's diverse and well-let portfolio in that sector. As a result, on a like-for-like basis, the portfolio value rose by 0.5% to £38,915,000 and, with the three properties acquired during the year, the total value of the portfolio rose to £43,915,000 (2023: £39,320,000).

Management

As described in my Interim Report, an eight-week handover period with Paul Williams last summer enabled a smooth succession as I was able to familiarise myself with the portfolio, historical background, current issues and management processes.  There was ample opportunity for him to pass on his intimate knowledge acquired over a long period of time.  The result was confidence that Wynnstay would maintain business as usual following my appointment in September.

One particular theme that I have been able to follow up is the implementation of a property management system to complement the new accounting software introduced at the beginning of 2023. This was set-up with the software supplier over the winter and went live at the start of the new financial year. The system integrates with the accounting software and operates in real time, enabling efficient monitoring and availability of data regarding invoicing, rent collection and lease events.  Risk is mitigated both in terms of mistakes, but also business continuity.

We have also purchased valuation software that will enable direct prospective performance analysis of the portfolio and its constituent properties and testing of different scenarios for changed tenancies, capital expenditure, sales and purchases and so on.  The package will also enable direct valuation and analysis of prospective purchases alongside advice that may be received from professional advisors.

Future

Last year's Report outlined the impact of the Minimum Energy Efficiency Standards legislation. Whilst there is currently some uncertainty over the timetable for minimum EPC ratings for properties, there is no doubt that improvements will continue to be required.  We are continually monitoring the opportunities to carry these out, ideally in conjunction with our tenants.  Often these can be changes to heating and lighting equipment that are of modest cost. However, increasingly, we may need to look at the insulation of the building fabric alongside energy generators such as PV panels.

Such considerations run parallel to assessment of the need to maintain, refurbish and upgrade our buildings generally, especially where this will result in increased rental income and enhance capital value. This forms part of our renewed focus on assessing the performance potential of the portfolio following my appointment. My initial review of the portfolio has been favourable for the reasons outlined elsewhere in this report, but further disposals may be identified as we consider whether capital may be better employed in alternative investments, improving existing assets or pursuing development opportunities within the portfolio.

Chris Betts

Managing Director

11 June 2024

WYNNSTAY PROPERTIES PLC

STATEMENT OF COMPREHENSIVE INCOME FOR YEAR ENDED 25 MARCH 2024

The Company has no items of other comprehensive income.