KCR Kcr Residential Reit Plc

22 March 2024

KCR Residential REIT plc

("KCR" or the "Company")

Interim Results and Board Changes

KCR Residential REIT plc, the residential REIT group, is pleased to announce its unaudited consolidated results for the six months to 31 December 2023.

The half year to 31 December 2023 has seen continued growth in the business in an operating environment that has been challenging with higher interest rates and continuing cost of living pressure.

Progress continues to be made to transition the business. The strategy, as outlined in last year's annual report, remains unchanged, to:

·    improve the rental revenue from the existing properties;

·    upgrade the overall portfolio quality;

·    explore the development opportunity within the portfolio; and

·    focus on reducing costs.

Revenue growth for the half year has been driven by the work completed over recent years to modernise and improve the standard of the property portfolio and the conversion of the Deanery Court property to the Cristal Apartments operating model which commenced during the June 2022 quarter.

Operational highlights

·    revenue for the half year increased approximately 20% to £946k (2022: £789k), with revenue growth driven predominantly by the conversion of Deanery Court to the Cristal Apartments operating model;

·    a positive operational profit (before separately disclosed items) was generated for the first time in the Group's history without reliance on a positive revaluation movement; and

·    portfolio level occupancy has remained strong over the half year with rental increases continuing to be achieved at renewals / re-letting. As the Cristal Apartments operating model continues to be rolled out, there is now more volatility in occupancy levels within the properties operated on this basis, however notwithstanding this, higher overall rental revenue and gross profit is being generated.

We continue to make progress to create a stable platform that can be successfully scaled up.

Board changes

KCR also announces the appointment of Mr Gordon David Robinson as an independent Non-Executive Director of the Company, effective 1 April 2024. Mr Robinson over the last 35 years has acquired wide ranging exposure across the UK real estate sector and will complement the existing skill set of the Board. Mr Robinson will replace Mr Dominic White, who will be stepping down from his position, on that date, as Non-Executive Director to pursue other business interests.

We welcome Mr Robinson to the Board and look forward to his contributions in assisting the Group to continue on its journey.

We thank Mr White for his efforts over his time at KCR as both Chief Executive and in more recent times as a Non-Executive Director, and wish him well in his future endeavours.

Regulatory Disclosures

The following information is disclosed pursuant to Rule 17 and Schedule Two paragraph (g) of the AIM Rules for Companies in relation to Mr Robinson aged 57

Mr Robinson does not hold any shares in KCR.

This announcement contains inside information for the purposes of the UK Market Abuse Regulation and the Directors of the Company are responsible for the release of this announcement.

Caution regarding forward looking statements

Certain statements in this announcement, are, or may be deemed to be, forward looking statements. Forward looking statements are identified by their use of terms and phrases such as ''believe'', ''could'', "should" ''envisage'', ''estimate'', ''intend'', ''may'', ''plan'', ''potentially'', "expect", ''will'' or the negative of those, variations or comparable expressions, including references to assumptions. These forward-looking statements are not based on historical facts but rather on the Directors' current expectations and assumptions regarding the Company's future growth, results of operations, performance, future capital and other expenditures (including the amount, nature and sources of funding thereof), competitive advantages, business prospects and opportunities. Such forward looking statements reflect the Directors' current beliefs and assumptions and are based on information currently available to the Directors.

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CHAIRMAN'S STATEMENT

KCR Residential REIT Plc ("KCR" or the "Company") and its subsidiaries (together the "Group") operate in the private rented residential investment market. The Company acquires properties that are rented to private tenants and also owns and operates a freehold portfolio of retirement living accommodation where most of the properties have been sold on long leases.

The half year to 31 December 2023 has seen continued growth in the business in an operating environment that has been challenging with higher interest rates and continuing cost of living pressure.  Ongoing inflationary pressure has continued to make cost reductions within the business difficult to achieve, however costs continue to be tightly controlled. Pleasingly we were able to hold costs for the half year  broadly in line with the same period last year.

Fundamentals for UK residential property remain sound notwithstanding the prevailing higher interest rate environment. The Group continues to look for acquisitions on a disciplined basis and, whilst asset prices are attractive, higher debt costs have made it challenging to support both the investment and capital raising that would be required to undertake a transaction. The Group's primary short-term focus is therefore to optimise the performance from the existing assets whilst controlling costs to achieve a cash neutral position.

Progress continues to be made to transition the business. The strategy, as outlined in last year's Annual Report, remains unchanged, to:

· improve the rental revenue from the existing properties;

· upgrade the overall portfolio quality;

· explore the development opportunity within the portfolio; and

· focus on reducing costs.

Revenue growth for the half year has been driven by the work completed over recent years to modernise and improve the standard of the property portfolio and the conversion of the Deanery Court property to the Cristal Apartments operating model which commenced during the June 2022 quarter.

This has been a key driver of revenue growth in the half year, with lease expiries and tenant churn actively managed to optimise rentals achieved. We are continuing to focus on optimising revenue levels from this property and expect to achieve further growth over the rest of this financial year.

Administration expenses during the half year decreased compared to the same period last year, which is considered a good outcome, given underlying increases across most of the cost base. Increases during the half year have been offset by the ongoing focus on cost control over the last twelve months, which has resulted in sufficient reductions in the fixed cost base being achieved.

Inflationary pressure continues to result in higher ongoing costs and we remain actively focussed on managing the cost base to limit the impact on the business. Where possible we will continue to explore avenues to achieve savings by streamlining processes within the day-to-day operation of the business.

Increases to cost of sales reflects the shift to operating under the Cristal Apartments model. Revenue growth has adequately compensated for the direct cost increases associated with more active management of the properties. Once we have achieved a stabilised revenue level, we will seek to achieve reductions in the direct cost base to deliver an improved gross margin.

Whilst the majority of the Group debt remains on fixed rates, the Secure Trust facility is floating rate and consequently the comparatively higher finance costs incurred in the period reflect the effect of interest rate rises. We are exploring avenues to refinance this facility to both reduce the cost of funding and provide some additional capital to support further acquisitions within Heathside.

Within the retirement portfolio, the works program outlined in the 2023 Annual Report, to substantially upgrade the internal and external common parts of a number of the freehold properties, is well advanced with planned works expected to be completed in full this financial year.

For those properties where works have been completed, feedback from residents has been overwhelmingly positive. We reasonably expect the improved aesthetics and upgraded facilities will drive value for the long leaseholders, which benefits the Group via the generation of higher sales commissions if, as expected, capital values are improved.

Within Heathside, where we own 10 of the 37 apartments, we will also directly benefit from improved capital values.

Overall, the work that has been completed over the last couple of years to improve the quality of the portfolio is being reflected via the improved rental income now being generated. This, along with the control of costs, continues to take KCR towards its short term goal of achieving a cash neutral position.

DIRECTOR'S REPORT

We are pleased to report on the progress of the Group in the six-month period to 31 December 2023.

Revenue growth continues to be driven by the work done over the last couple of years to reposition the portfolio via completion of a holistic refurbishment programme to materially lift the standard of the rental product we are offering, and from implementation of the Cristal Apartments operating model.

Operational highlights

· revenue for the half year increased approximately 20% to £946k (2022: £789k), with revenue growth driven predominantly by the conversion of Deanery Court to the Cristal Apartments operating model;

· a positive operational profit (before separately disclosed items) was generated for the first time in the Group's history without reliance on a positive revaluation movement; and

· portfolio level occupancy has remained strong over the half year with rental increases continuing to be achieved at renewals / re-letting. As the Cristal Apartments operating model continues to be rolled out, there is now more volatility in occupancy levels within the properties operated on this basis, however notwithstanding this, higher overall rental revenue and gross profit is being generated.

The ongoing focus on improving operational performance and controlling costs continues to minimise Group cash burn and  is expected to result in further reductions in future cash burn.

We continue to make progress to create a stable platform that can be successfully scaled up.

Property Portfolio

No acquisitions or disposals were completed during the half year.

Planning works for Ladbroke Grove continue to be progressed, with a preferred plan for submission now agreed. As  outlined previously, the tired condition of this property is resulting in increasing repairs and maintenance expenditure which is expected to continue, pending a more holistic refurbishment works programme. Repositioning of the rental product on offer by materially enhancing the quality and presentation of the flats, is considered to drive a material uplift in achievable rentals and capital values.

KCR is continuing to progress development of two operating lines, clearly identifiable by brand, property quality and letting strategy.

1.    Cristal Apartments. Residential apartments, finished to a high modern specification, fully furnished and let on a Walk in Walk Out (WIWO) basis for a frictionless and flexible letting experience. Rental contracts offer flexible terms; and

2.    Osprey Retirement Living. 4* retirement living property rented on flexible letting packages customised to suit tenant needs. All rentals are on assured shorthold tenancies for a minimum period of six months.

1.    Cristal Apartments (WIWO letting strategy)

The repositioning of the Coleherne Road property into a modern, high quality, well presented product reflects the standard the Cristal brand represents. This product has been well received by the market and has been a core driver of revenue growth since refurbishment works were completed.

Successful completion of the conversion of the Deanery Court property in Southampton to the Cristal Apartments model has been the primary driver of rental growth during the half year.

The intention is also to reposition the Ladbroke Grove portfolio as a Cristal branded product once planning outcomes have been finalised. This is expected to result in both improved revenue and a substantive reduction in ongoing repairs and maintenance.

Coleherne Road - this property comprises ten studio and one-bedroom flats. The property has been repositioned to a materially higher standard and a full refurbishment programme has been completed.

Ladbroke Grove - this portfolio comprises 16 one and two bedroom flats in three buildings which remain 100% occupied. The flats have been lightly refurbished as tenants vacate and then re-let in the private rental market. The overall tired condition of the property is reflected in ongoing and increasing repairs and maintenance expenditure. Planning works are being progressed and our intention is to complete a holistic refurbishment programme to reposition this product to the Cristal Apartments operating model.

Deanery Court (Southampton) - this property comprises 27 two bedroom residential apartments and has been converted to the Cristal Apartments operating model. A light refurbishment programme was completed as part of the conversion process. We expect rental growth from this property to continue to be a key driver of revenue growth for the Group over the balance of the 2024 financial year.

2.    Osprey retirement living (4* retirement apartments)

The Osprey portfolio consists of 153 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.

The key asset in the portfolio is the freehold block at Heathside, Golders Green comprising 37 one and two bedroom apartments with 10 (nine as at 31 December 2022) of the apartments owned by the Group and 27 held on a long leasehold basis. The strategy to selectively acquire long leasehold apartments within the block, refurbish them to a high standard and let them on an assured tenancy basis has been successful and has delivered strong rental returns for the Group.

Financial Performance

The half year to 31 December 2023 reflects the outcome of strong revenue growth driven by the works programme that has been completed over the last couple of years and conversion of the Deanery Court property to the Cristal Apartment operating model.

Cost of sales increased during the half primarily due to higher costs associated with operating Deanery Court under the Cristal Apartment model. Administrative expenses were lower against the prior half noting that higher depreciation charges associated with the investment in plant, equipment, fixtures and fittings are being incurred.

·  Revenue for the half year increased by approximately 20% to £946k (2022: £789k)

·  Gross profit as a percentage of revenue reduced to 80.44% (2022: 84.58%) reflecting the higher costs associated with the Cristal Apartments operating model. In absolute terms overall gross profit increased by 14.08% to £761k (2021: £667k).

·  An Operating profit before separately disclosed items of £97k (2022: Loss £31k). Notably this is the first time in the Group's history where an Operating profit before separately disclosed items has been generated without a contribution from revaluations.

·  Operating loss £3k (2022: Loss £184k) after refurbishment costs of £99k primarily relating to the Coleherne Road and Heathside properties.

·  Loss for the period was £291k (2022: £451k) and loss per share was 0.70p (2022: 1.08p).

The value of KCR's property portfolio was up on the comparative period at £25.84m (2022: £24.61m), reflecting an additional acquisition completed during the June 2023 half year and revaluation movements at last balance sheet date. The Group's current assets reduced to £0.73m (2022: £2.16m) reflecting a reduction in cash as a result of funding the acquisition of an additional flat, operating losses and support of ongoing refurbishment work programmes.  Secured bank borrowings remained unchanged at £13.28m (2022: £13.28m).

Total assets reduced marginally to £26.93m (2022: £26.98m) with the reduction in current assets offset by a positive movement in the property portfolio. Net assets per share reduced slightly to 31.72p (2022: 31.74p).

The Group continues to be cashflow negative, however it is continuing to work towards achieving a cash neutral position from improving operating performance from the existing portfolio. Costs continue to be actively managed as we work towards building a stable platform that can be scaled up. At 31 December 2023, the Group had cash balances totalling £0.53m (2022: £1.89m).

Through the period the Company remained a REIT and has complied with REIT rules.  

                                             CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

                                          FOR THE SIX MONTHS ENDED 31 DECEMBER 2023 (unaudited)

                                                   CONSOLIDATED STATEMENT OF FINANCIAL POSITION

                                                                     AT 31 DECEMBER 2023 (unaudited)