CORPORATE GOVERNANCE STATEMENT

Introduction

During the year to 30 June 2021 KCR Residential REIT plc, while an AIM Listed Company, was operating initially with four 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 have continued 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 could 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. 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 executive directors hold discussions with analysts, shareholders and investment managers from time to time.

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 £30m 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. Executive management are also focussed on continuing to reduce costs and optimise the performance from the existing assets such that a profitable position can be achieved from a lower level of investment.

Shareholder liaison is managed by Dominic White and Russell Naylor (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 currently chaired by the Independent Non-Executive Chairman.

All of the directors devote such time to the Company's affairs as the board considers appropriate. The involvement of non-executive directors varies month by month but is estimated at 3-5 days a month.

On 3 November 2020 Michael Davies stepped down as Chairman and James Thornton, an Independent Non-Executive Director of KCR, became the Non-Executive Chairman of the board. KCR believes that a reduced board of four members is appropriate for a business of its size and is in line with its efforts to reduce operating costs, assisting with its drive to profitability. As a result of these changes, the Company has only one Independent Non-Executive Director. The Company acknowledges the recommendations of the QCA Corporate Governance Code, which it has adopted, and it is intended at the appropriate time to seek appointment of a further Independent Non-Executive Director.  

During 2021, 4 Board meetings were held, attended by all current directors.

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 under About Us/The Board on the Company's website. Each director is involved in other organisations which keep their professional skills sharpened and up to date.

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:

*appointed Chairman on 3 November 2020

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 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, James Thornton is 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 for the Company's shareholders and with its 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 centered 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, James Thornton:

·              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 its 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 closely 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.

The Remuneration Committee, since November 2020, is now chaired by James Thornton, Chairman and Independent Non-Executive Director, and comprises James Thornton and Richard Boon, Non-Independent Non-Executive Director. The Remuneration Committee meets on an ad hoc basis when required.   

The Audit and Risk Committee is chaired by James Thornton, Chairman and Independent Non-Executive Director and comprises James Thornton and, since April 2021, Richard Boon. Russell Naylor is invited to attend as appropriate. It meets at least 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

BDO rotated audit partners during the year, following good governance in respect of the length of time of involvement of the previous audit partner. The Executive Director and the Chair of the Audit Committee met in advance of the 2021 year end to plan the audit with the new external statutory auditor and to discuss the materiality to be used in the audit and the expected key issues to be covered. Progress of the 2021 audit was discussed with the external auditor before the year-end Audit Committee meeting. 

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 2021, the Remuneration Committee met to review and approve salaries.

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 comparable Groups, 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 18.