CORPORATE GOVERNANCE

CORPORATE GOVERNANCE STATEMENT

(last reviewed: 20 January 2025)

Compliance with the QCA code

During the year to 30 June 2024 KCR Residential REIT plc, while an AIM quoted Company, was operating with four directors and three employees. In September 2018, it adopted the QCA Code 2018 as a basis for reporting. Following the update of the QCA Code in November 2023, the Company is now adopting the revised QCA Code as a basis for reporting. The Board reviews the Company’s Financial Position and Prospects Procedures at least annually and stays abreast of developments in regulations and recognised standards of corporate governance, implementing recommended practices where practicable in order to support the Company’s medium to long-term success. As an example, during the year to 30 June 2024, an additional Independent Non-Executive Director was appointed to the Board, bringing the total to two independent non-executive directors, representing half of the Board, in accordance with the QCA Code.

Given the size of the Company and its tightly controlled operational and risk environment, the Company does not, in all areas, fully comply with the QCA Code principles. Whilst the Directors will continue to work towards compliance, it is considered unlikely that this will be achieved, while the Company remains at its current size, given the small scope of Company operations. The Company will endeavour to comply with the 2023 QCA Code as far as practical and will update the website on an annual basis with commentary on the 2023 QCA Code Principles, including explanations where the Company is departing from the application of a Principle.

The Directors believe that the Company’s approach to governance, taking into account its size, ensures continued effective operation of the board, its committees and their oversight.

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

The Company’s strategy is shaped by the Board of Directors and is set out in its Annual Reports and on the ‘About Us’ section of the Company’s website.

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 increases net asset value for shareholders. The Company acquires or develops blocks of studio, one, two and three-bed apartments that are close to transport links, shopping and leisure facilities, predominantly in London, its surrounds and the South-East.

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;
identifying and acquiring poorly presented properties in our preferred locations that can be repositioned by completing a capital works programme to materially improve the standard of rental product offered; 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 sufficient scale, to pay dividends from cash flow generated by rents and to 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 in which it operates.

Further detail on purpose, strategy and business model (including any key challenges and how these will be addressed) is set out in the Strategic Report contained within the Company’s Annual Report and Accounts.

KCR has two operating lines, clearly identifiable by brand, property quality and letting strategy:

Cristal Apartments; and
Osprey Retirement Living.

Cristal Apartments

Provides professionally managed residential apartments finished to a high modern specification, fully furnished to a high standard and let on a Walk In Walk Out (WIWO) basis. This provides a frictionless and hassle-free rental experience for our tenants.

We have a strong emphasis on meeting the needs of our tenants by providing flexible letting terms, quality services and a seamless process to move in and out of an apartment.

KCR’s objective is to continue to acquire and manage rented residential properties in the UK and operate under the Cristal Apartments brand to generate both income and capital appreciation for its shareholders.

Osprey Retirement Living

Osprey owns and manages 4* retirement living properties that meet the needs and aspirations of the young at heart who value their independence and wish to live full and active lives in comfort and security. A number of apartments are also rented on a flexible basis with optionality on furniture.

The properties all have onsite staff and communal facilities to create a supportive and community atmosphere whilst respecting the rights of residents to live their lives in the privacy of their own home.

Principle 2: 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. Given the small number of employees and limited scope of Company activities, the Executive Director is primarily responsible for ensuring Group activities are consistent with the culture promoted by the Board.

The Board leads by ensuring that decisions taken at a Board level are consistent with sound ethical values and behaviour and supports the ability of the Group to successfully achieve its corporate objectives.

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 also 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. A significant part of the Company's activities is centred upon an open dialogue with shareholders, employees and other stakeholders.

Sound ethical values and behaviours will support the reputation of the Company as a trusted and reputable supplier of rental accommodation and as a manager and operator of retirement accommodation, which is essential in achieving its corporate objectives.

The Board encourages open communication within the Company from staff at all levels. Given the small number of employees and the current size of the Company, the Directors observe culture in their ad hoc interactions with staff and where staff behaviour is inconsistent with the desired corporate culture, support line management implementation of performance management.

Principle 3: Seek to understand and meet shareholder needs and expectations

The Company remains committed to engaging with its shareholders to ensure its strategy and performance are clearly understood. Engagement is also designed in order that the Company develops a good understanding of the needs and expectations of its shareholder base. Feedback from investors is obtained through direct interaction between the 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’s Annual General Meeting in particular offers shareholders the opportunity to meet with the Board and ask any questions they might have.

The Company seeks to communicate with its shareholders on a proactive, timely and transparent basis at all times. Announcements through RNS are as comprehensive as possible. As part of the Company's repositioning, the speed of reporting of the interim and full year results to shareholders has substantially improved.

It is apparent from shareholder 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 accepted and approved by shareholders was dilutive to existing shareholders. Going forward, 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, they will aim to offer all shareholders the opportunity to participate in the offering on a pre-emptive basis.

When will the Company become profitable?

Historically the Company has advised that the Company may become profitable and cash flow positive once it has approximately £50m of investments generating satisfactory rental income. In view of the improved operational performance and cost reductions, it is now considered likely that the Company may become profitable with less than £50m of income generating investments. Executive management is focused on achieving this objective as soon as possible. This is naturally dependent on the availability of suitable transactions and the ability to complete the acquisitions either via raising additional equity capital or debt.

Shareholder liaison is managed though Russell Naylor - russell.naylor@kcrreit.com.

Given the limited scope of the Company’s activity and small number of shareholders the Board does not include granular disclosure on shareholder engagement in the Annual Report.

The Company has a relationship agreement in place with its controlling shareholder.

The Company does not provide quantitative and qualitative reporting on environmental and social matters given the limited scope of the Company’s activity.

Principle 4: Take into account wider stakeholder interests, including social and environmental responsibilities, and their implications for long-term success

The Company currently operates in the UK. Given the relatively simple business model and strategy, the Company is able to easily identify its main stakeholders in the UK as being investors, tenants, and suppliers of services (accountant, nominated adviser, broker, lawyers), employees, directors, third-party property managers, banks and other debt providers and property agents introducing investment opportunities. It is important to the Board that they fully understand their key stakeholders’ needs, interests and expectations. This is achieved through providing various platforms for investor interaction, such as the AGM where shareholders can provide feedback. The Board interacts regularly with its key eternal advisers – accountants, lawyers and its nominated advisor consulting on regulatory and shareholder matters. It is also open to receiving feedback from other stakeholders throughout the year.

The Company is keen to provide its workforce with a safe environment where they can raise concerns in confidence. As such the Company has a whistleblowing policy which can be followed in the event of any concern and which clearly sets out the processes which will be followed and actions which may be taken if a concern is raised.

The Company has an important social responsibility in its role as a landlord of residential housing. We commit to delivering a high standard of 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.

Quantitative and qualitative reporting on environmental and social matters is not included in the Annual Report given the limited scope of the Company’s activity. For the same reason, the Board does not have (and does not intend to introduce) KPI’s relating to environmental or social issues.

The Company’s KPI’s are based on key measures relative to operating performance and the Board considers these to be appropriate for the size and scale of the business.

Stakeholder engagement is primarily managed through the Executive Director, Russell Naylor although individual board members are also available to discuss feedback or concerns of internal and external stakeholders. Any feedback provided is discussed at board meetings and changes to procedures made as appropriate.

Principle 5: Embed effective risk management, internal controls and assurance activities, 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 by identifying and mitigating controllable risks and implementing strategies to minimise the impact of known risks beyond the direct control of management. The Company uses third-party advisers to address specific issues that arise during operations where they bring complementary expertise and experience.

The Board has a risk register which identifies and assesses current and potential future risks to the Company. Each risk is considered by the Board on a proportionate and material basis. Consideration of climate change risks are included in the risk assessment process.

The Board monitors financial controls through the setting and approval of annual budgets and the regular review of management reports.

Key risks and uncertainties are set out in the Strategic Report section of the Annual Report.

The Audit and Risk Committee has responsibility for maintaining the risk register and reviewing both the risks and the Company’s attitude to and appetite for risk and its future risk strategy.

The Audit and Risk Committee reports to and makes recommendations to the Board on risk on a periodic basis. It attends an annual audit review meeting with the Company’s auditors to discuss the auditors’ findings, including their review of risks/potential risks which could affect the Company.

The Board also completes a formal review and assessment of the risk framework on an annual basis.

The Board is of the view that its internal controls with regard to risk identification and assessment are sufficiently robust to manage the identified risks adequately.

The Audit and Risk Committee also considers auditor independence and makes recommendations to the Board, to be put to shareholders for approval at the Company’s AGM on the appointment, re-appointment or removal of the Company’s external auditor.

In considering auditor independence, the Audit and Risk Committee assesses factors that might impact audit objectivity and or give rise to conflicts of interest, such as –

Financial Relationships – whether the auditor or the audit firm has any direct or indirect financial interest in the company;
Non-audit services – what services (if any) are provided by the same audit firm and what is the materiality of the value of any non-audit services provided and whether this could compromise auditor independence.

The auditor also confirms their independence as part of the audit opinion which is included in the Annual Report.

Principle 6: Establish and maintain the board as a well-functioning, balanced team led by the chair

The Board currently comprises four directors of which one is an executive and the other three are non-executives. 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.

The Board is balanced with independent non-executive directors comprising half of the Board. The Directors who are considered to be independent are Gordon Robinson, and James Thornton. Given half of the Board are independent and there is only one executive director, the Board does not consider it necessary to appoint a senior independent director.

In considering director independence, the Board assesses factors such as Legal and regulatory standards, personal relationships and potential for conflict of interest, financial interests, business ties, tenure and participation in key governance roles.

None of the independent Directors receive any remuneration or performance incentives other than their directors fee.

James Thornton has a de-minimis shareholding in the company of an immaterial value which is not considered to impact his independence.

All Directors are required to disclose any conflicts at each board meeting.

Ultimate responsibility for the quality and effectiveness of the Board lies with the chair.

Composition of the Board and consideration of the mix of skill sets is considered periodically to ensure Board remains well functioning.

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 key sub-committees for audit and remuneration are comprised of a majority of independent non-executive Directors and chaired by non-executive Directors.

All of the Directors devote such time to the Company's affairs as is required.

The Company departs from 2023 QCA Code recommendations for all directors to be subject to re-election at the AGM. Size and scale of Company operations together with the existence of a controlling shareholder do not warrant all Directors being put up for re-election each year.

The Company adopts a rotation policy for Directors, and shareholders have the ability to provide feedback on this policy. The Board considers the existing rotation policy adequately allows for Board renewal should shareholders wish this to occur.

The annual report and accounts set out a short biography on each board member. Such biographies clearly describe the relevant experience, skills, and capabilities that each Director brings to the Board. It can be seen from this section of the Annual Report and Accounts that the board contains the necessary mix of experience, skills, and capabilities to adequately inform and oversee the execution of the Company’s strategy for the benefit of the shareholders over the medium to long-term. The annual report and accounts also set out the number of meetings of the Board (and any committees) during the year, together with the attendance record of each Director.

Principle 7: Maintain appropriate governance structures and ensure that individually and collectively 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 are 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. The Company also receives updates from its nominated adviser on regulatory matters, from its legal advisers on legal matters and from its auditors on matters pertaining to accounting regulations.

The Board is committed to high standards of corporate governance that are aligned with and are supportive of the Company’s business purpose. 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 major shareholders.

The Executive Director, Russell Naylor:

• is primarily responsible for developing the Company's strategy in consultation with 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;

• 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; and

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

The Remuneration Committee is comprised of a majority of independent, non-executive Directors and is chaired by Gordon Robinson, Independent Non-Executive Director, and comprises Richard Boon, Gordon Robinson and James Thornton. The Remuneration Committee meets on an ad hoc basis when required.

The Audit and Risk Committee is comprised of a majority of independent, non-executive directors and is chaired by James Thornton, Chairman and Independent Non-Executive Director, and comprises James Thornton, Gordon Robinson, and Richard Boon. Russell Naylor is invited to attend as appropriate. It meets generally quarterly each financial year to consider matters outlined in its Terms of Reference including (but not limited to) –

Financial Reporting
Risk management systems and internal controls
External auditors
Whistleblowing
Fraud
Compliance

The external auditors attend the Audit and Risk Committee meeting to approve the annual accounts and the meeting considers and takes action on any matters raised or recommended 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 (but are not limited to):

• 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; and

• Directors' remuneration.

Principle 8: Evaluate Board performance based on clear and relevant objectives, seeking continual improvement

The Board of KCR comprises:

Name Role Appointed Status

Russell Naylor Chief Executive 06 August 2019 Non-independent

James Thornton Non-Executive Director 06 August 2019* Independent

Richard Boon Non-Executive Director 06 August 2019 Non-independent

Gordon Robinson Non-Executive Director 01 April 2024 Independent

* appointed Chairman 3 November 2020

In accordance with its obligations under the 2023 QCA Code, the Board reviews internally on an annual basis its collective performance, and the performance of its committees and Board members. In reviewing performance, the Board considers factors such as –

How well the Board works together, the diversity of skills and experiences and areas that could be improved.
Director attendance and participation in both board and committee meetings.
Leadership provided by the Chair in managing meetings, encouraging open discussion and feedback from all directors.
Composition of the committees and skill mix of the members to ensure committees are operating efficiently and complying with the charters established.
Audit Committee contribution to input and review of financial statements, engagement with external auditor and timeliness of financial reporting.

The Company departs from the 2023 QCA Code Principle 8 as in view of the size of the Company and its 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 Executive Director, Russell Naylor, have been and will continue to be to grow the Company's asset base and revenue through improving the performance of the existing assets and 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, Russell Naylor will be supported by the Non-Executive Directors advising on matters such as 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 with many of the Company's shareholders and professional advisers.

Succession planning remains an important issue for the Board, and in particular the Chairman. There are no plans to replace any existing Directors or appoint any new Directors in the next 12 months.

Principle 9: Establish a remuneration policy which is supportive of long-term value creation and the company’s purpose, strategy and culture.

The Company departs from 2023 QCA Code Principle 9 insofar as the annual remuneration report is not put to shareholders for an advisory vote and it does not envisage adopting this principle in the foreseeable future. The Company does not consider that the size and scale of its operations and overall remuneration levels warrant adopting this principle.

The Remuneration Committee meets as required to consider remuneration.

Remuneration of the Executive Director (Russell Naylor) includes a pre-agreed deferred consideration payable if / when the Company achieves a cash positive operating position. The Board considers the deferred consideration component is an appropriate incentive at the Company’s current size and stage of development.

If / when the Company achieves a cash positive operating position the Remuneration Committee will review the remuneration of the Executive Director.

No performance-based share schemes are in existence or proposed to be introduced at this stage of the Company’s development.

Total remuneration costs have reduced substantially over the last 5 years as head count has reduced in line with the continuing Company focus on achieving a cash positive operating position.

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

The Company’s 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 (including notices of meetings), and the Company's articles. Following a general meeting, the Company will disclose the outcome of all votes in an RNS announcement.

The Company’s report on its Audit and Risk Committee and on its Remuneration Committee can be found in the Company’s Annual Report and Accounts.

The Board believes that the Company’s Annual Report and Interim Report provide shareholders and key stakeholders with the information necessary for them to make an informed assessment of the Company’s financial position and prospects including any risks known to the Company. Additionally, shareholders are 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.