Annual Report & Accounts for year ended 31 ...

        17 April 2019

STANDARD LIFE INVESTMENTS PROPERTY INCOME TRUST LIMITED

RESULTS IN RESPECT OF THE YEAR ENDED 31 DECEMBER 2018

Financial Highlights
- NAV total return of 9.6% in the year, due to strategic overweight position in industrial sector. Over ten years the Company has produced a NAV total return of 187.0% compared with the AIC Property Direct Sector average of 159.9%.

- Share price total return in the year was -8.3%  compared to the total return on the FTSE All-Share REIT Index of -12.4% and the FTSE All-Share Index of -9.5%. Over ten years the Company has delivered a share price total return of 214.0% compared with the total return on the FTSE All-Share REIT Index of 115.0% and the FTSE All-Share Index of 138.4% highlighting consistent long term performance of the Company’s shares.

- Loan to value of 24.4% at year-end, one of the lowest in the peer group and the wider REIT sector.

- Since 1 January 2018 to date £10.2 million of shares were issued under the Company’s blocklisting facility for investment into the portfolio. 

- The dividend yield on the Company’s share price as at 31 December 2018 stood at 5.9% which compares favourably to the FTSE All-Share REIT Index (4.7%) and FTSE All-Share Index (4.5%) at the same date.

- Overall, the Company, with a market capitalisation of £329 million as at 31 December 2018, has a secure and growing balance sheet, significant financial resources and a portfolio of outperforming assets that continues to underpin an attractive dividend for shareholders.
 

Property Highlights
- As at 31 December 2018, the portfolio was valued at £499.1 million (2017: £433.2 million).

- Property total return for the period was 8.5%, significantly ahead of the IPD Quarterly version of Monthly Index total return of 6.8%. The income return of 5.0% from the portfolio continued to outperform the comparative benchmark figure of 4.6% with a capital return of 3.3% in excess of the benchmark return of 2.1%.

- A number of successful asset management initiatives, contributing to income and capital values, completed during the year including:

        - 13 new lettings generating £2.65 million per annum of income

        - 8 lease renegotiations/rent reviews securing longer term income of £1.58 million per annum

- Occupancy rate of 94.1% (2017: 92.3%) as successful asset management initiatives and strategic sales reduced the number of void units in the portfolio.

- Positive rent collection rates of 98% within 21 days highlighting the continued strength of tenant covenants in an environment where income will be the key component of returns going forward.

- In 2018, the Company was the winner of the active property category in the AJ Bell Fund and Investment Trust Awards and was also the FT Adviser Property Fund of the Year.

 

PERFORMANCE SUMMARY

Earnings & Dividends			31 December 2018	31 December 2017
EPRA earnings per share (p) (excluding capital items & swap movements)*			4.22	4.99
Dividends declared per ordinary share (p)			4.76	4.76
Dividend cover (%)			89	104
Dividend yield (%)**			5.9	5.1
FTSE All-Share Real Estate Investment Trusts Index Yield (%)			4.7	3.6
FTSE All-Share Index Yield (%)			4.5	3.4
Ongoing Charges***
As a % of average net assets including direct property costs			2.0	1.7
As a % of average net assets excluding direct property costs			1.1	1.2

Capital Values & Gearing		31 December 2018	31 December 2017	Change %
Total Assets (£million)		512.2	468.8	9.3
Net asset value per share (p) (note 20)		91.0	87.6	3.9
Ordinary Share Price (p)		81.1	93.25	(13.0)
(Discount)/Premium to NAV (%)		(10.9)	6.4
Loan to value (%)â€		24.4	18.0

Total Return		1 year % return	3 year % return	5 year % return
NAV‡		9.6	28.7	86.7
Share Price‡		(8.3)	11.6	53.2
FTSE All-Share Real Estate Investment Trusts Index		(12.4)	(8.6)	25.1
FTSE All-Share Index		(9.5)	19.5	22.1

Property Returns & Statistics (%)			31 December 2018	31 December 2017
Property income return			5.0	6.3
IPD benchmark income return			4.6	4.8
Property total return			8.5	12.1
IPD benchmark total return			6.8	10.5
Void rate			5.9	7.5

* Calculated as profit for the period before tax (excluding capital items & swaps breakage costs) divided by weighted average number of shares in issue in the period.
** Based on an annual dividend of 4.76p and the share price at 31 December 2018.
*** Calculated as investment manager fees, auditor’s fees, directors’ fees and other administrative expenses divided by the average NAV for the year.
† Calculated as bank borrowings less all cash (including cash held at solicitors) as a percentage of the open market value of the property portfolio as at the end of each year.
‡ Assumes re-investment of dividends excluding transaction costs.

Sources: Aberdeen Standard Investments, Investment Property Databank (“IPD”)
 

Chairman’s Statement

It is pleasing to report that your Company has continued to deliver both strong portfolio and NAV returns in 2018. These returns have been driven by a portfolio that is strategically weighted to the outperforming industrial sector, with low exposure to the struggling retail sector. In addition, a number of investment and letting transactions have been completed that have added value and increased occupancy levels.

Background
Since the referendum result in June 2016 to leave the European Union and the inconclusive result of the general election in 2017, the UK has been mired in political uncertainty unlike that seen for a generation. This uncertainty is now having direct economic implications with a number of companies triggering Brexit contingency plans or cutting back on planned investment into the UK. Combined with concerns over an escalating US/China trade war, UK GDP growth has been muted with 1.4% GDP growth in 2018, a trend that is expected to continue into 2019.

Against such an uncertain economic environment, the UK commercial real estate market has delivered positive, albeit, slowing returns. The Company’s benchmark (Quarterly version of IPD Monthly Index Funds) produced a total return of 6.8% in 2018, with the long-expected decline in capital values starting to bite in the second half of the year.

However, even given this, capital growth over 2018 was a respectable 2.1% driven by the outperforming industrial sector which produced strong capital growth of 11.8%. The office sector delivered capital growth of 2.5% as overseas money still sought prime office assets both in the City of London and, increasingly, elsewhere in the UK. These returns were partially offset by a 5.8% fall in capital values in the retail sector which is still coming to terms with the growing presence of online retailers and a number of high profile company voluntary arrangements that resulted in both store closures and reduced rents, a trend that looks likely to continue.

Income returns continued to be the main contributor to the overall positive performance of the real estate sector, with the IPD benchmark producing an income return of 4.6% in 2018 with rental growth of 0.7% being delivered, again mainly driven by industrials.

Positive Portfolio and Corporate Performance
Your Company has continued to perform well in the year. The portfolio total return was 8.5%, significantly above the benchmark return. The portfolio delivered capital growth of 3.3%, boosted by its 52% weighting to the industrial sector compared to a benchmark weighting of 28%. In addition, the Company’s low 9% weighting to the retail sector also helped deliver positive relative performance given the benchmark weighting of 32%. The portfolio also continued to produce an attractive income return of 5.0%, again above that of the benchmark income return. This positive portfolio performance, combined with the flexibility to use its debt facilities opportunistically during the year while maintaining a relatively conservative level of gearing, helped the Company achieve a NAV total return of 9.6%.

For the majority of the year the Company’s shares traded at a premium to NAV. This allowed the Company to issue 11 million new shares under its blocklisting authority, all at significant premia to underlying NAV, raising net proceeds of £10.2million. The Company’s share price fell towards the end of the year as sentiment towards commercial property unsurprisingly turned negative given the well-publicised travails of the retail sector. This resulted in the Company’s shares falling to a 10.9% discount to NAV at the year end and a shareholder total return for the year of -8.3% compared with the total return on the FTSE All-Share REIT and FTSE All-Share Indices of -12.4% and -9.5% respectively. Since the year end, however, the shares have recovered and as at 31 March 2019 stood at 90.1p, a 1% discount to NAV.

Over the longer term the Company has also delivered good NAV and shareholder performance with NAV and share price total returns over ten years of 187% and 214% respectively. By comparison, the FTSE All-Share REIT Index returned 115% and the FTSE All-Share Index returned 138% over the same period.

Dividends
Dividends totalling 4.76p were paid to shareholders in the year. This represents a yield of 5.9% based on the share price at 31 December 2018 and compares favourably to the yield on the FTSE All-Share REIT and FTSE All- Share Indices (4.7% and 4.5% respectively).

Dividend cover was 89% for the year as void levels increased and the Company’s revolving credit facility (“RCF”) remained largely unutilised for the majority of the year. This equates to EPRA earnings per share of 4.22p in 2018. However, the letting of the Company’s largest void in December and the sale of the second largest void in September resulted in the void rate falling to 5.9% as at 31 December 2018 (31 December 2017: -7.7%). In addition, the purchase of Hagley Road in November 2018, financed mainly through the use of the RCF, should result in improved dividend cover going forward, all other things remaining equal. The importance to shareholders of the attractive level of dividend paid by the Company is recognised by the Board and the preservation and potential growth in dividend cover is a key priority in the medium term.

The Company’s current policy is to pay four interim dividends quarterly, in March, May, August and November.

Board Changes
Sally-Ann Farnon has indicated she will stand down following the AGM to be held in June. Sally-Ann has been a valuable member of the Board and Chair of the Audit Committee during her tenure and her insight and knowledge will be sorely missed. Mike Balfour, a qualified Chartered Accountant, will Chair the Audit Committee upon Sally-Ann’s departure, and Huw Evans will assume the role of Senior Independent Director.

I am pleased that Jill May joined the Board on 12 March 2019. Jill has an impressive background and has significant experience of capital markets which will prove invaluable as the business

Outlook
The outlook for the next 12 months is clouded by the ongoing Brexit negotiations and whether the UK leaves the EU with or without a deal or, indeed, leaves at all. The outcome of this debate will, to a huge extent, determine whether business investment and confidence starts to pick up and sentiment starts to improve, or investment is held back and GDP growth remains muted. Based on leaving the EU with a deal, our Investment Manager forecasts GDP growth of 1.0% in 2019.

The commercial real estate market is not immune to the Brexit-related uncertainty. While the real estate fundamentals are strong – comparatively high yields compared with other asset classes, prudent leverage, limited development and lower than average vacancy rates – uncertainty is reducing liquidity and visibility of pricing in most areas of the market. The principal exception to this is assets with long, secure income streams, which remain highly sought after and in short supply.

Against such a background the Board believes the Company is well positioned to continue delivering value. While secondary assets are inherently more volatile in nature, the Company’s portfolio is well diversified by region and sector. The portfolio has a deliberate bias towards the industrial sector which our Investment Manager forecasts will continue to be the strongest performing sector over the next three years and a significantly underweight position to retail which is forecast to be the worst performer. With income likely to be the main driver of returns in the medium term, it is important to highlight the Company’s strong income profile. This is underpinned by a strong and diverse tenant base and an active Investment Manager with a proven track record of reducing voids and risk through successful investment and letting activity. Finally, the Company continues to have a solid balance sheet, which has been strengthened over the last 12 months by NAV accretive share issues, and prudent but flexible gearing which has been used to capture opportunities that have arisen with firepower remaining should further opportunities be identified. Taking all these factors together, I believe your Company has a sound base on which to continue producing the strong absolute and relative performance delivered over the last decade.


Robert Peto
Chairman
17 April 2019
                                               

STRATEGIC OVERVIEW

Objective
The objective of the Group is to provide shareholders with an attractive level of income together with the prospect of income and capital growth.

Investment Policy and Business Model
The Board intends to achieve the investment objective by investing in a diversified portfolio of UK commercial properties. The majority of the portfolio will be invested in direct holdings within the three main commercial property sectors of retail, office and industrial although the Group may also invest in other commercial property such as hotels, nursing homes and student housing. Investment in property development and investment in co-investment vehicles, where there is more than one investor, is permitted up to a maximum of 10% of the property portfolio.

In order to manage risk, without compromising flexibility, the Board applies the following restrictions to the property portfolio, in normal market conditions:

• No property will be greater by value than 15% of total assets.
• No tenant (excluding the Government) will be responsible for more than 20% of the Group’s rent roll.
• Gearing, calculated as borrowings as a percentage of gross assets, will not exceed 65%. The Board’s current intention is that the Group’s loan to value ratio (calculated as borrowings less all cash as a proportion of property portfolio valuation) will not exceed 45%.

As part of its strategy, the Board has contractually delegated the management of the property portfolio, and other services, to Aberdeen Standard Fund Managers Limited (“the Investment Manager”). The Investment Manager was appointed in place of Standard Life Investments (Corporate Funds) Limited on 10 December 2018 following the merger of Standard Life plc and Aberdeen Asset Management PLC in August 2017. The Investment Manager was appointed on identical terms to the arrangements previously in place with Standard Life Investments (Corporate Funds) Limited, and there have been no changes to the way the investment management services are provided to the Group.

Strategy
Each year the Board undertakes a strategic review, with the help of its Investment Manager and other advisers.

The overall intention is to continue to distribute an attractive income return alongside growth in the NAV and a good overall total return relative to the peer group.

At property level, it is intended that the Group remains primarily invested in the commercial sector, while keeping a watching brief on other classes such as student accommodation and care homes. The Group is principally invested in office, industrial and retail properties and intends to remain so.

The Board’s preference is to buy into good, but not necessarily prime locations, where it perceives there will be good continuing tenant demand, and to seek out properties where the asset management skills of the Investment Manager can be used to beneficial effect. The Board will continue to have very careful regard to tenant profiles.

As part of this investment strategy, the Group recognises that tenants are a key stakeholder and aims to foster a culture whereby the experience of tenants is seen as paramount to the future success of the Group. The Investment Manager works closely with tenants to understand their needs through regular communication and visits to properties.

Where required, and in consultation with tenants, the Group refurbishes and manages the owned assets to improve the tenants’ experience, including consideration of Health & Safety and environmental factors, with the aim being to generate greater tenant satisfaction and retention and hence lower voids, higher rental values and stronger returns.

The Board continues to seek out opportunities for further, controlled growth in the Group. During 2018 and up to 31 March 2019, the Group raised an additional £10.2 million through new share issues, as detailed in the Chairman’s Statement.

The Group continues to maintain a tax efficient structure, having migrated its tax residence to the UK and becoming a UK REIT on 1 January 2015.

The Board
As at 31 December 2018, the Board consisted of a non- executive Chairman and four non-executive Directors. The names and biographies of those directors who held office at 31 December 2018 and at the date of this announcement will appear in the published annual report and indicate their range of property, investment, commercial and financial experience. There is also a commitment to achieve the proper levels of diversity.

To assist the Board with orderly succession, the Board announced the appointment of Jill May as an additional non-executive Director with effect from 12 March 2019, subsequent to the financial year end. A resolution to elect Jill May as a Director will be proposed to shareholders at the Annual General Meeting (“AGM”) on 13 June 2019. Sally-Ann Farnon will step down from the Board following the conclusion of the 2019 AGM.

Key Performance Indicators
The Board meets quarterly and at each meeting reviews performance against a number of key measures which are considered to be alternative performance measures (“APMs”). These APMs are in line with recognised industry performance measures both in the Real Estate and Investment Trust industry and help to assess the overall performance of the portfolio and the wider Group:

Property income and total return against the Quarterly Version of the IPD Balanced Monthly Funds Index (“the Index”).

The Index provides a benchmark for the performance of the Group’s property portfolio and enables the Board to assess how the portfolio is performing relative to the market. A comparison is made of the Group’s property returns against the Index over a variety of time periods (quarter, annual, three years and five years).

Property voids.
Property voids are unlet properties. The Board reviews the level of property voids within the Group’s portfolio on a quarterly basis and compares the level to the market average, as measured by the IPD. The Board seeks to ensure that, when a property becomes void, the Investment Manager gives proper priority to seeking a new tenant to maintain income.

Rent collection dates.
The Board assesses rent collection by reviewing the percentage of rents collected within 21 days of each quarter end.

Net asset value total return.
The net asset value (“NAV”) total return reflects both the net asset value growth of the Group and also the dividends paid to shareholders. The Board regards this as the best overall measure of value delivered to shareholders. The Board assesses the NAV total return of the Group over various time periods (quarter, annual, three years, five years) and compares the Group’s returns to those of its peer group of listed, closed-ended property investment companies.

Premium or discount of the share price to net asset value.
The Board closely monitors the premium or discount of the share price to the NAV and believes that a key driver to the level of the premium or discount is the Group’s long-term investment performance. However, there can be short-term volatility in the premium or discount and the Board takes powers at each Annual General Meeting (“AGM”) to enable it to issue or buy back shares with a view to limiting this volatility.

Dividend per share and dividend cover.
A key objective of the Group is to provide an attractive, sustainable level of income to shareholders and the Board reviews, at each Board meeting, the level of dividend per share and the dividend cover, in conjunction with detailed financial forecasts, to ensure that this objective is being met and is sustainable.

The Board considers the performance measures both over various time periods and against similar funds.

A record of these measures is disclosed in the Financial and Property Highlights, Chairman’s Statement and Investment Manager’s Report.

Principal Risks and Uncertainties
The Board ensures that proper consideration of risk is undertaken in all aspects of the Group’s business on a regular basis. During the year, the Board carried out an assessment of the risk profile of the Group, including consideration of risk appetite, risk tolerance and risk strategy. The Board regularly reviews the principal and emerging risks of the Group, seeking assurance that these risks are appropriately rated and ensuring that appropriate risk mitigation is in place.

The Group’s assets consist of direct investments in UK commercial property. Its principal risks are therefore related to the commercial property market in general, but also the particular circumstances of the properties in which it is invested, and their tenants. The Board and Investment Manager seek to mitigate these risks through a strong initial due diligence process, continual review of the portfolio and active asset management initiatives. All of the properties in the portfolio are insured, providing protection against risks to the properties and also protection in case of injury to third parties in relation to the properties.

The Board has also identified a number of other specific risks that are reviewed at each Board meeting. These are as follows:

The Group and its objectives become unattractive to investors, leading to widening of the discount.
This risk is mitigated through regular contact with shareholders, a regular review of share price performance and the level of the discount or premium at which the shares trade to net asset value and regular meetings with the Group’s broker to discuss these points and address any issues that arise.

Net revenue falls such that the Group cannot sustain its level of dividend, for example due to tenant failure or inability to let properties.
This risk is mitigated through regular review of forecast dividend cover and of tenant mix, risk and profile. Due diligence work on potential tenants is undertaken before entering into new lease arrangements and tenants are kept under constant review through regular contact and various reports both from the managing agents and the Investment Manager’s own reporting process. Contingency plans are put in place at units that have tenants that are believed to be in financial trouble. The Group subscribes to the Investment Property Databank Iris Report which updates the credit and risk ranking of the tenants and income stream, and compares it to the rest of the UK real estate market. An emerging risk in the year was the poor performance of the retail sector due to a number of high profile administrations and store closures in this sector. The Group has partially mitigated this risk by having an underweight position to the retail sector with only 9.3% exposure to this sector against the benchmark weighting of 31.6%.

Uncertainty or change in the macroeconomic environment results in property becoming an undesirable asset class, causing a decline in property values.
This risk is managed through regular reporting from, and discussion with, the Investment Manager and other advisers. Macroeconomic conditions form part of the decision making process for purchases and sales of properties and for sector allocation decisions.

Macroeconomic uncertainty continued to be an emerging risk during 2018, particularly in relation to the UK’s decision to leave the EU (“Brexit”). The initial economic implications of Brexit and the effect on the property market is considered further in the Chairman's Statement and Investment Manager’s Report. The outcome and potential impact of Brexit is still unclear at the time of writing. However, the Board continues to closely monitor the potential effect of this on property values, tenants and also the impact of any resultant regulatory changes that may impact the Group.

Breach of loan covenants.
This risk is mitigated by the Investment Manager monitoring the loan covenants on a regular basis and providing a quarterly certificate to the bank confirming compliance with the covenants. Compliance is also reviewed by the Board each quarter and there is regular dialogue between the Investment Manager and the bank on Group activity and performance.

Loss on financial instruments.
The Group has entered into an interest rate swap arrangement. This swap instrument is valued and monitored on a daily basis by the counterparty bank. The Investment Manager checks the valuation of the swap instrument internally to ensure it is accurate. In addition, the credit rating of the bank that the swap is taken out with is assessed regularly.

Other risks faced by the Group include the following:

• Strategic – incorrect strategy, including sector and property allocation and use of gearing, could all lead to a poor return for shareholders.
• Tax efficiency – the structure of the Group or changes to legislation could result in the Group no longer being a tax efficient investment vehicle for shareholders.
•  Regulatory – breach of regulatory rules could lead to the suspension of the Group’s Stock Exchange Listing, financial penalties or a qualified audit report.
•  Financial – inadequate controls by the Investment Manager or third party service providers could lead to misappropriation of assets. Inappropriate accounting policies or failure to comply with accounting standards could lead to misreporting or breaches of regulations.
•  Operational – failure of the Investment Manager’s accounting systems or disruption to the Investment Manager’s business, or that of third party service providers, could lead to an inability to provide accurate reporting and monitoring, leading to loss of shareholder confidence.
•  Economic – inflation or deflation, economic recessions and movements in interest rates could affect property valuations and also bank borrowings.

The merger of Standard Life plc and Aberdeen Asset Management PLC creates additional operational risk for the Group. The Group appointed Aberdeen Standard Fund Managers Limited as its alternative investment fund manager (“AIFM”) in December 2018. The appointment is on identical terms to the arrangements previously in place with Standard Life Investments (Corporate Funds) Limited. There have been no changes so far to the way the Investment Manager provides its services to the Group but the Board is keeping under close review any potential implications for the Group arising from the merger and the integration process.

The Board seeks to mitigate and manage all risks through continual review, policy setting and enforcement of contractual obligations. It also regularly monitors the investment environment and the management of the Group’s property portfolio, levels of gearing and the overall structure of the Group.

Social, Community and Employee Responsibilities
The Group has no direct social, community or employee responsibilities. The Group has no employees and accordingly no requirement to separately report in this area as the management of the portfolio has been delegated to the Investment Manager. In light of the nature of the Group’s business there are no relevant human rights issues and hence there is no requirement for a human rights policy. The Board does, however, closely monitor the policies of its suppliers to ensure that proper provision is in place.

Environmental, Social and Governance policy
The Investment Manager acquires, develops and manages properties on behalf of the Group. It is recognised that these activities have both direct and indirect environmental and social impacts. The Board has adopted the Investment Manager’s own Environmental, Social and Governance Policy (“ESG”) and associated operational procedures and is committed to environmental management in all phases of the investment process.

The Investment Manager has identified four ESG megatrends that are highly relevant for real estate investment now and in the future: Environment & Climate Change, Governance & Engagement, Population & Urban Living and Technology & Connectivity. The identification of risks and opportunities for the Group in relation to each of the megatrends is embedded throughout the investment process and at all levels – from Group-level strategic planning to asset underwriting and individual asset ESG action plans.

To facilitate this, the Investment Manager works in partnership with contractors, suppliers, tenants and consultants seeking continuous improvements in ESG performance and conducting regular reviews.

The Group was awarded a Green Star ranking from the Global Real Estate Sustainability Benchmark 2018 (“GRESB”) and improved its score by 11% compared with 2017. A Green Star is awarded to entities that perform well in both categories of the GRESB assessment: Management & Policies and Implementation & Measurement.

Following the disclosure of ESG performance against the European Public Real Estate Association (“EPRA”) Sustainability Best Practice Reporting guidelines in the 2017 Annual Report, the Group received both Gold and Most Improved awards from EPRA. These awards recognise the Group’s strong commitment to ESG and transparency.

Health & Safety
Alongside these environmental principles the Group has a Health & Safety policy which demonstrates commitment to providing safe and secure buildings that promote a healthy working/customer experience that supports a healthy lifestyle. The Group, through the Investment Manager, manages and controls Health & Safety risks systematically as any other critical business activity using technologically advanced systems and environmentally protective materials and equipment. The aim is to achieve a Health & Safety performance the Group can be proud of and allow the Group to earn the confidence and trust of tenants, customers, employees, shareholders and society at large.

The Grenfell Tower fire in 2017 highlighted the absolute requirement for positive and proactive Health & Safety practices. The Group, as part of ongoing management and due diligence processes, reviews the Health & Safety and cladding systems at each of its properties and has received advice that they are fully compliant.

Viability Statement
The board continually considers the prospects for the Company over the longer term. Based on the Company’s current financial position, its operating model, and the diversified constituents of its portfolio, as well as the strong initial due diligence processes, the continued review of the portfolio and the active asset management initiatives, the Board believes that the Company has a sound basis upon which to continue to deliver returns over the longer term.

In terms of viability, the Board has considered the nature of the Group’s assets and liabilities and associated cash flows and has determined that five years is the maximum timescale over which the performance of the Group can be forecast with a material degree of accuracy and so is an appropriate period over which to consider the Group’s viability.

In assessing the Group’s viability and prospects, the Board has carried out thorough reviews of the following:

• Detailed NAV, cash resources and income forecasts, prepared by the Investment Manager, for a five year period under both normal and stressed conditions;
• The Group’s ability to pay its operational expenses, bank interest and dividends over a five year period;
•  Future debt repayment dates and debt covenants, in particular those in relation to LTV and interest cover. The Company’s two debt facilities are due to expire in 2023 and the Board is not aware of any reason why it would not be able to renew the loan facilities at that date or repay the loan if preferred; and
•  The valuation and liquidity of the Group’s property portfolio, the Investment Manager’s portfolio strategy for the future and the market outlook.

The Board has also carried out a robust assessment of the principal risks faced by the Group, including the potential impact of Brexit. The Board takes any potential risks to the ongoing success of the Group, and its ability to perform, very seriously and works hard to ensure that risks are kept to a minimum at all times.

Based on the results of the analysis outlined above, the Board has a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the five year period of its assessment.

Approval of Strategic Report
The Strategic Report comprises the Financial and Portfolio Highlights, Performance Summary, Chairman’s Statement, Strategic Overview and Investment Manager’s Report. The Strategic Report was approved by the Board and signed on its behalf by:

Robert Peto, Chairman
17 April 2019
 

INVESTMENT MANAGER’S REPORT

UK Real Estate Market
According to the IPD Quarterly Index for UK Commercial Property, the 12-month All Property total return to the end of December 2018 was 6.8% compared with 10.5% for 2017. Whilst 2018 was a weaker year for UK real estate, returns remained favourable in comparison to other asset classes. On-going uncertainties surrounding Brexit and the wider economy have caused investors to be more cautious and after a sustained period of strong returns (8.2% per annum annualised over the last 10 years), real estate is generally regarded as being at a late stage in the cycle albeit supported by continuing low interest rates and low yields from other asset classes.

The industrial sector continued to be the stand-out performer in the UK real estate market with a total return of 16.7%. Despite IPD data suggesting that rental growth is beginning to moderate the necessary drivers are still in place to support further rental growth for the sector, with vacancy rates remaining exceptionally low and interest in available space healthy.

The long-term structural challenges facing the retail sector are now being reflected across the market as retailers struggle to cope with changing shopping habits, higher costs and weaker consumer spending.

Retail failures and CVA’s (Company Voluntary Arrangements) over the year, including a number of well-known high street names and casual dining operators, hit the headlines and caused investment sentiment to weaken. This is now weighing on performance with retail valuations falling. The divergence between the best and worst assets in the sector has widened and is likely to continue. The retail sector as a whole had a total return of -0.7% and a capital decline of 5.8% over 2018. It is expected that the sector will see further capital falls in 2019 with continued distress amongst retailers and poor investor sentiment.

The office sector provided a total return of 6.6% according to IPD with Central London offices having held up better than many forecasters expected given Brexit uncertainty and its perceived threat to tenant demand. The sector continues to benefit from relatively low supply with conversion to residential taking out a lot of poorer second rate accommodation.

During the year the IPD “other” sector continued to outperform the wider market. As the name suggests the sector is made up from a number of asset types in the wider “alternatives” category, such as leisure, data centres, and hotels.

Performance
There are a number of ways to look at the Company’s performance. The portfolio level performance provides a direct comparison to the benchmark, and is therefore the easiest way to compare performance to the wider property market. The portfolio performance, to a large extent, drives the NAV total return which we believe is the best overall measure as it encompasses all the costs of the Company as well as the impact of gearing and is within the control of the Board and Investment Manager. Finally, the share price return and yield which amounts to the share price total return is an important measure for shareholders.

Building up these elements, we start with the portfolio level performance. We measure that against the Quarterly version of the IPD Monthly Index Funds. SLIPIT’s size is below the average fund against the benchmark (£499 million against a benchmark median of £732 million), and has a smaller average asset size of £8.5 million v £17.8 million, but is one of the most active portfolios with net investment in the top 10% of the index.

The NAV total return is a better measure of performance for investors as it takes into account all of the costs of running the Company, investing in the properties, and their upkeep/improvement, as well as the impact of gearing. The table below shows the NAV total return over various time periods compared to the AIC peer group and open ended property funds for a comparison against alternative ways of investing in UK property.

The final table shows the share price total return performance, which of course may be the most relevant measure to an investor. Towards the end of the reporting period and into early 2019 we saw a greater level of volatility in the share price as the wider equity market reacted to the increased Brexit tension.

Over the majority of the year the Company’s shares traded at a premium to NAV with the average premium for the year being 3.7%. However, over December 2018 the shares moved to a discount. The volatility appears to have been as part of the wider market stress with Brexit concerns coming to the fore, and especially impacting property stocks. By the end of March the share price had stabilised around NAV.

NAV Total Returns to 31 December 2018	1 year (%)	3 year (%)	5 year (%)	10 year (%)
Standard Life Investments Property Income Trust	9.6	28.7	86.7	187.0
AIC Property Direct - UK sector (weighted average)	5.8	22.2	66.5	159.9
Investment Association Open Ended Commercial Property Funds sector	3.9	12.4	35.5	74.3
Company's ranking in AIC Property Direct sector	4	2	1	2
Source: AIC, Aberdeen Standard Investments

Share Price Total Returns to December 2018		1 year (%)	3 year (%)	5 year (%)	10 year (%)
Standard Life Investments Property Income Trust		-8.3	11.6	53.2	214.0
FTSE All-Share Index		-9.5	19.5	22.1	138.4
FTSE All-Share REIT Index		-12.4	-8.6	25.1	115.0
AIC Property Direct  - UK sector (weighted average)		-1.6	10.2	34.6	234.0

Source: AIC, Aberdeen Standard Investments
 

Valuation
The property portfolio was valued on a quarterly basis by Knight Frank LLP throughout the year. The portfolio was valued at £499.1 million as at 31 December 2018 with cash of £8.3 million, which compares with £433.2 million and £14.3 million respectively 12 months earlier. The Company also drew down £20 million of debt during the year from the revolving credit facility (£nil drawn as at 31 December 2017).

Investment Strategy
The Board and Investment Manager remains focused on delivering an attractive level of income to shareholders, but also seeks to provide investors with a reasonable total return. We aim to meet these objectives by investing in assets that we believe will meet the company’s objectives. The Investment Manager takes an active approach to asset management to help drive value and the security of future income streams.

Our investment decisions start with a top down analysis so that we concentrate on investing into and holding investments in the sectors that we believe have the strongest fundamentals. This analysis led us to go overweight industrial/underweight retail several years ago. Within the broad strategic overview of the top down approach all investment decisions are then made on a bottom up basis. Every property is unique, and we base buy/hold/sell decisions on how we believe that asset is going to perform, and whether it will meet our investment requirements. No asset is sacred, we aim to sell assets that we believe have peaked in their individual investment cycle, or which have too much risk compared to the potential returns.

When investing in new opportunities we take a long term approach. We aim to acquire assets that will meet the needs of current and future occupiers, and that are located in areas that are vibrant and will remain relevant. Although we will buy assets with a small amount of vacancy, or which require some capital expenditure to reposition, we do not generally look to undertake major refurbishment or any speculative development as that would be detrimental to meeting our income aims.

Over the last few years the Company has undertaken a significant number of investment transactions, as we have reduced risk at an asset level, and also increased the weighting to industrial and alternatives, whilst reducing exposure to retail. With market uncertainty around Brexit, and anticipated lower returns over the coming couple of years, we anticipate lower levels of turnover.

Purchases
During the reporting period the Company completed eight purchases for a total sum of £87.9 million (including purchase costs):

Timbmet, Shellingford: The Company acquired a 200,000 sq ft distribution facility for £11.5 million by way of a sale and leaseback to provide a 25 year lease with an initial yield of 6.5%. The property is located between Oxford and Swindon and provides the tenant with cost effective accommodation with good access to the national motorway network.

Grand National Retail Park, Aintree: The name is a bit misleading on this purchase as it is in fact a leisure scheme with a PureGym, Premier Inn hotel, KFC, and Toby Carvery. The property is located adjacent to the racecourse, and the purchase price of £6.125 million reflected a yield of 6.8%.

Flamingo Flowers, Sandy: The Company acquired a 125,000 sq ft industrial facility used for the preparation and distribution of cut flowers for £6 million. The property is let for a further 19 years, with indexation, and is let at a rent of £3.17 per sq ft providing an initial yield of 6.25%. The location is adjacent to a junction of the A1, just 35 miles north of the M25.

15 Basinghall Street, London: The Company acquired a City office building where 20% of the income is derived from two retail units, and two of the five office floors are vacant. The property is located close to Bank Tube station, and offers asset management opportunities. The purchase price of £12.15m reflected an initial yield of 7% with a rental guarantee on the vacant space.

Building 3300, Birmingham Business Park: The Company increased its exposure to the “other” sector with the purchase of a data centre with a very large power supply on the outskirts of Birmingham. The property was acquired by way of a sale and leaseback with a 20 year lease (tenant break in year 14 and two rights to renew for a further 10 years) and benefits from annual indexed rental increases. The purchase price of £12.2 million reflected an initial yield of 5.75%.

Shield Engineering, Burton Latimer: An industrial unit used for high end aluminium moulding located close to Kettering. The property was acquired by way of a sale and leaseback on a 20 year lease with indexation for £8.1 million, reflecting an initial yield of 7.15%.

Speedy Hire, Cambuslang: The Company purchased a logistics unit of 61,200 sq ft with a low site cover of 26% close to Junction 2A of the M74, providing easy access to Glasgow and the Scottish motorway network. The purchase price of £5.03 million reflected an initial yield of 5.9%. The property is let to Speedy Hire for a further 5 years, and the lease has an outstanding rent review – upon settlement we expect the running yield to increase to 7%.

54 Hagley Road, Birmingham: Towards the end of the year the Company acquired its largest asset, a multi let office, for £23.75 million (an initial yield of 7.6%). The property has 18 tenants and is let at relatively low rents. We are going to invest in additional amenities for the building, and a new tram stop is due to be built outside the building in the next couple of years, further enhancing its connectivity – we believe these items give good scope for rental growth in the future.

Sales
The Company completed the sale of four assets in the reporting period for a total of £44.9 million.

Elstree Tower, Borehamwood: The Company sold the single let office for £20 million (valuation £18 million). The property was let to the single largest tenant in the portfolio, with a tenant break in 2020 and the potential need for significant capex. The sale enabled the Company to reduce future void and capex risk whilst realising a profit.

Bathgate Retail Park, Bathgate: A small edge of town centre retail park let to three good tenants but with short leases, and concern over future occupancy. The property was sold for £5.3 million.

Charter Court, Slough: Multi let office with some vacancy and need for significant capex on lease expiry. The sale price of £13.25 million reflected a yield of 6.4% and was ahead of valuation.

Broadgate, Oldham: The Company sold a 100,000 sq ft industrial unit that had been vacant for over 18 months for £6.3 million. The sale price reflected the expected valuation on a letting, and enabled the Company to exit its largest void at a profit.

Asset Management
We pride ourselves in taking an active approach to managing our assets to protect and enhance income streams and maximise value. We believe we have a very experienced and capable asset management team that is integrated with the fund management team. We try to have a principal to principal relationship with tenants, and strive to ensure we provide occupiers with accommodation that is relevant and meets their needs. We believe in investing in our assets throughout their life so that depreciation is minimised, and tenants’ needs can be satisfied. This is particularly important in offices, where the quality and style of accommodation is important for companies in how they present themselves to staff and customers. We seek to provide an environment that engages with the people working there, as we believe that is the best way to maximise occupancy and therefore income.

During the course of 2018 we completed 13 new lettings, securing £2.65 million per annum in rent, and restructured eight leases to secure longer income on £1.58 million of rent. At the end of the year the occupancy level was 94.1%, an improvement on the 92.3% a year before.

It is not surprising that the continued uncertainty of Brexit has impacted on tenants’ decision making – letting transactions are taking longer and tenants are seeking more flexibility and only making commitments when they absolutely have to. The retail occupational market is very thin, with only discount retailers taking space; the office market  has perhaps been surprisingly resilient (we are certainly encouraged by viewing levels on the vacant accommodation we have); and the industrial/ logistics demand has generally remained robust, but certainly should not be taken for granted.

At the year end the Company had a vacancy rate of 5.9% in the portfolio. We are not complacent about any of our voids as although we often manage to increase the rent from previous lease levels, the cost of having properties vacant impacts earnings

Debt
The Company has two debt facilities from The Royal Bank of Scotland plc; a £110 million term loan, which is due to expire in April 2023, and a revolving credit facility (RCF) of £35 million, which also expires in April 2023.

As at the date of this report, £20 million of the RCF was drawn.

The Company’s LTV as at 31 December 2018 was 24.4% (with a bank covenant limit of 60%). The all in cost of the term loan at that date was 2.7%.The term loan has an interest rate swap for the full amount, which at the reporting date held a negative value of £0.8 million.

Outlook and Future Strategy

The uncertainty around Brexit is continuing to affect sentiment and in the fourth quarter it was noticeable that investors were taking an increasingly cautious approach to the market. Sector performance is increasingly polarised with the appreciation in the industrial sector and assets with long secure income streams struggling to off-set the continued decline in retail for most balanced funds.

The uncertainty around the near-term political outlook means that the first half of 2019, will see limited investment and occupational activity. In our base case forecasts, assuming a smooth withdrawal from the EU can be achieved, we expect a more normal market in the second half of the year. There is a considerable weight of money still looking to access UK real estate, however it is waiting for more certainty before committing.

Our three year annualised forecast is for low single digit returns, with industrials continuing to outperform other sectors and retail remaining as the laggard. A commonly asked question is when will retail be back to fair value/desirable to invest in again? Not yet, is the simple answer; the changes in the sector are structural, not cyclical, and valuations have not yet fully reflected this. Equally, one has to wonder how long industrials can continue to out-perform? For the foreseeable future is the answer, although they are now expensive to buy, with most of the future growth being factored into the purchase price. It has got to the stage where caution is required to invest in the industrial sector to ensure the assets will perform in line with the purchase assumptions – it is a sector that is now priced at a level where it is better to own them than have to buy them.

Income will now be the main component of returns, and in the low interest rate environment anticipated for the next few years, the elevated yield from real estate will remain a key driver of investment demand.

We continue to focus on asset management initiatives with the aim of preserving income and capital which are increasingly important in a late cycle environment. The Company’s strategy is to invest in good quality assets in good locations that meet tenants’ needs as this should provide a sustainable income stream.

STATEMENT OF DIRECTORS’ RESPONSIBILITIES

The Directors are responsible for preparing the Annual Report and the Group Consolidated Financial Statements for each year which give a true and fair view, in accordance with the applicable Guernsey law and those International Financial Reporting Standards (“IFRSs”) as adopted by the European Union.

In preparing those Consolidated Financial Statements, the Directors are required to:

• select suitable accounting policies in accordance with IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors and then apply them consistently;
• make judgement and estimates that are reasonable and prudent;
• present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;
• provide additional disclosures when compliance with the specific requirements in IFRSs as adopted by the European Union is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group’s financial position and financial performance;
• state that the Group has complied with IFRSs as adopted by the European Union, subject to any material departures disclosed and explained in the Group Consolidated Financial Statements; and
• prepare the Group Consolidated Financial Statements on a going concern basis unless it is inappropriate to presume that the Group will continue in business.

The Directors confirm that they have complied with the above requirements in preparing the Consolidated Financial Statements.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group’s transactions and disclose with reasonable accuracy at any time, the financial position of the Group and to enable them to ensure that the Financial Statements comply with The Companies (Guernsey) Law, 2008. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud, error and non-compliance with law and regulations.

The maintenance and integrity of the Company’s website is the responsibility of the Directors; the work carried out by the auditors does not involve considerations of these matters and, accordingly, the auditors accept no responsibility for any change that may have occurred to the Consolidated Financial Statements since they were initially presented on the website. Legislation in Guernsey governing the preparation and dissemination of the consolidated financial statements may differ from legislation in other jurisdictions.

Responsibility Statement of the Directors in respect of the Consolidated Annual Report under the Disclosure and Transparency Rules

The Directors each confirm to the best of their knowledge that:

• the Consolidated Financial Statements, prepared in accordance with IFRSs as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group; and
• the management report, which is incorporated into the Strategic Report, Directors’ Report and Investment Manager’s Report, includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that they face.

Statement under the UK Corporate Governance Code

The Directors each confirm to the best of their knowledge and belief that the Annual Report and Consolidated Financial Statements taken as a whole are fair, balanced and understandable and provide the information necessary to assess the Group’s performance, business model and strategy.

Approved by the Board on

17 April 2019
Robert Peto
Chairman
 

FINANCIAL STATEMENTS

Consolidated Statement of Comprehensive Income
for the year ended 31 December 2018	Notes		2018 £	2017 £
Rental income			27,773,205	28,526,725
Service charge income			1,665,737	1,553,410
Surrender premium			-	14,688
Valuation gain from investment properties	7		12,057,044	23,174,903
Gain/(Loss) on disposal of investment properties			1,861,161	(138,237)
Investment management fees	4		(3,381,779)	(3,136,218)
Valuers fees	4		(91,396)	(71,844)
Auditor’s fees	4		(78,500)	(74,500)
Director’s fees and subsistence	21		(202,298)	(194,011)
Service charge expenditure			(1,665,737)	(1,553,410)
Other direct property expenses			(3,154,578)	(1,848,130)
Other administration expenses			(426,768)	(434,466)
Operating profit			34,356,091	45,818,910
Finance income	5		58,411	2,752
Finance costs	5		(3,468,125)	(3,356,428)
Profit for the year before taxation			30,946,377	42,465,234
Taxation
Tax charge			-	-
Profit for the period, net of tax			30,946,377	42,465,234
Other Comprehensive Income
Net change in fair value of the swaps reclassified to profit and loss	14		-	-
Valuation gain on cash flow hedge	14		1,440,836	1,317,743
Total other comprehensive surplus			1,440,836	1,317,743
Total comprehensive gain for the period, net of tax			32,387,213	43,782,977
Earnings per share			2018 (p)	2017 (p)
Basic and diluted earnings per share	18		7.68	10.91
EPRA earnings per share	18		4.22	4.99

All items in the above Consolidated Statement of Comprehensive Income derive from continuing operations.

The notes below are an integral part of these Consolidation Financial Statements.
 

Consolidated Balance Sheet
as at 31 December 2018
ASSETS	Notes		2018 £	2017 £
Non-current assets
Investment properties	7		495,245,556	404,252,083
Lease incentives	7		2,896,409	3,657,917
Rent deposits held on behalf of tenants			840,633	995,942
			498,982,598	408,905,942
Current assets
Investment properties held for sale	8		-	25,300,000
Trade and other receivables	10		4,939,071	20,256,944
Cash and Cash equivalents	11		8,264,972	14,334,504
			13,204,043	59,891,448
Total Assets			512,186,641	468,797,390
LIABILITIES
Current liabilities
Trade and other payables	12		11,906,363	10,451,289
Interest rate swap	14		451,714	887,699
			12,358,077	11,338,988
Non-current liabilities
Bank borrowings	13		129,249,402	109,107,044
Interest rate swap	14		352,249	1,357,100
Rent deposits due to tenants			840,633	995,942
			130,442,284	111,460,086
Total liabilities			142,800,361	122,799,074
Net assets			369,386,280	345,998,316
EQUITY			2018 £	2017 £
Capital and reserves attributable to Company’s equity holders
Share capital	16		227,431,057	217,194,412
Retained earnings	17		6,156,881	8,364,603
Capital reserves	17		37,959,970	22,600,929
Other distributable reserves	17		97,838,372	97,838,372
Total equity			369,386,280	345,998,316
Approved by the Board on 17 April 2019 and signed on its behalf by: Robert Peto, Chairman The notes below are an integral part of these Consolidation Financial Statements.

Consolidated Statement of Changes in Equity
for the year ended 31 December 2018		Share Capital	Retained earnings	Capital reserves	Other Distributable Reserves	Total equity
	Notes	£	£	£	£	£
Opening balance 1 January 2018		217,194,412	8,364,603	22,600,929	97,838,372	345,998,316
Profit for the year		-	30,946,377	-	-	30,946,377
Other comprehensive income		-	-	1,440,836	-	1,440,836
Total comprehensive income for the period		-	30,946,377	1,440,836	-	32,387,213
Ordinary shares issued net of issue costs	16	10,236,645	-	-	-	10,236,645
Dividends paid	19	-	(19,235,894)	-	-	(19,235,894)
Valuation gain from investment properties	7	-	(12,057,044)	12,057,044	-	-
Gain on disposal of investment properties	7	-	(1,861,161)	1,861,161	-	-
Balance at 31 December 2018		227,431,057	6,156,881	37,959,970	97,838,372	369,386,280
The notes below are an integral part of these Consolidation Financial Statements. Consolidated Statement of Changes in Equity
for the year ended 31 December 2017		Share Capital	Retained earnings	Capital reserves	Other Distributable Reserves	Total equity
	Notes	£	£	£	£	£
Opening balance 1 January 2017		204,820,219	7,532,448	(1,753,480)	97,838,372	308,437,559
Profit for the year		-	42,465,234	-	-	42,465,234
Other comprehensive income		-	-	1,317,743	-	1,317,743
Total comprehensive income for the period		-	42,465,234	1,317,743	-	43,782,977
Ordinary shares issued net of issue costs	16	12,374,193	-	-	-	12,374,193
Dividends paid	19	-	(18,596,413)	-	-	(18,596,413)
Valuation gain from investment properties	7	-	(23,174,903)	23,174,903	-	-
Loss on disposal of investment properties	7	-	138,237	(138,237)	-	-
Balance at 31 December 2017		217,194,412	8,364,603	22,600,929	97,838,372	345,998,316

The notes below are an integral part of these Consolidation Financial Statements.

Consolidated Cash Flow Statement
for the year ended 31 December 2018
Cash flows from operating activities	Notes		2018 £	2017 £
Profit for the year before taxation			30,946,377	42,465,234
Movement in lease incentives			(735,921)	(114,820)
Movement in trade and other receivables			16,441,217	(18,529,129)
Movement in trade and other payables			1,243,386	1,726,346
Finance costs	5		3,524,503	3,356,428
Finance income	5		(58,411)	(2,752)
Valuation gain from investment properties	7		(12,057,044)	(23,174,903)
(Gain)/Loss on disposal of investment properties	7		(1,861,161)	138,237
Net cash inflow from operating activities			37,442,946	5,864,641
Cash flows from investing activities
Interest received	5		58,411	2,752
Purchase of investment properties	7		(64,023,051)	(50,012,676)
Additions through business acquisition	7		(23,913,188)	-
Capital expenditure on investment properties	7		(8,170,795)	(2,187,601)
Net proceeds from disposal of investment properties	7		44,861,161	72,086,763
Net cash (outflow)/inflow from investing activities			(51,187,462)	19,889,238
Cash flows from financing activities
Proceeds on issue of ordinary shares	16		10,314,000	12,467,700
Transaction costs of issue of shares	16		(77,355)	(93,507)
Bank borrowing	13		20,000,000	-
Repayment of RCF	13		-	(15,000,000)
Bank borrowing arrangement costs	13		(52,490)	(55,000)
Interest paid on bank borrowing	5		(2,546,435)	(2,089,843)
Payments on interest rate swap	5		(726,842)	(1,106,369)
Dividends paid to the Company’s shareholders	19		(19,235,894)	(18,596,413)
Net cash inflow/(outflow) from financing activities			7,674,984	(24,473,432)
Net (decrease)/increase in cash and cash equivalents			(6,069,532)	1,280,447
Cash and cash equivalents at beginning of year	11		14,334,504	13,054,057
Cash and cash equivalents at end of year	11		8,264,972	14,334,504

The notes below are an integral part of these Consolidation Financial Statements.
 

Notes to the Consolidated Financial Statements for the year ended 31 December 2018

1 General Information
Standard Life Investment Property Income Trust Limited (“the Company”) and its subsidiaries (together “the Group”) carries on the business of property investment through a portfolio of freehold and leasehold investment properties located in the United Kingdom. The Company is a limited liability company incorporated in Guernsey, Channel Islands. The Company has its listing on the London Stock Exchange.

The address of the registered office is Trafalgar Court, Les Banques, St Peter Port, Guernsey.

These audited Consolidated Financial Statements were approved for issue by the Board of Directors on 17 April 2019.

2 Accounting Policies
2.1 Basis of preparation
The audited Consolidated Financial Statements of the Group have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (“IFRS”), and all applicable requirements of The Companies (Guernsey) Law, 2008. The audited Consolidated Financial Statements of the Group have been prepared under the historical cost convention as modified by the measurement of investment property and derivative financial instruments at fair value. The Consolidated Financial Statements are presented in pounds sterling and all values are not rounded except when otherwise indicated.

Changes in accounting policy and disclosure
The accounting policies adopted are consistent with those in the previous financial year. The following amendments to existing standards and interpretations were effective for the year, but were either not applicable to or did not have a material impact on the Group:

• Annual Improvements to IFRS Standards 2014-2016 Cycle – Amendments to IFRS 1 - Deletion of short-term exemptions for first-time adopters
• Annual Improvements to IFRS Standards 2014-2016 Cycle – Amendments to IAS 28 - Clarification that measuring investees at fair value through profit or loss is an investment-by-investment choice
• Amendments to IFRS 2: Classification and Measurement of Share-based Payment Transactions
• Amendments to IFRS 4: Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts
• Amendments to IAS 40: Transfers of Investment Property
• IFRIC 22 Foreign Currency Transactions and Advance Consideration

New standards and interpretations applied
The following new and amended standards in issue are adopted by the EU and have been applied by the Group:

• IFRS 9 Financial Instruments (effective 1 January 2018)
• IFRS 15 Revenue from Contracts with Customers (effective 1 January 2018)

IFRS 9 – Financial Instruments
In July 2014, the IASB published the final version of IFRS 9 ‘Financial Instruments’ which replaces the existing guidance in IAS 39 ‘Financial Instruments: Recognition and Measurement’. The IFRS 9 requirements represent a change from the existing requirements in IAS 39 in respect of financial assets.

The standard contains two primary measurement categories for financial assets: amortised cost and fair value. A financial asset would be measured at amortised cost if it is held within a business model whose objective is to hold assets in order to collect contractual cash flows, and the asset’s contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal outstanding. All other financial assets would be measured at fair value.

The standard eliminates the existing IAS 39 categories of held to-maturity, available-for-sale and loans and receivables.

For financial liabilities, IFRS 9 largely carries forward without substantive amendment the guidance on classification and measurement from IAS 39. The main change is that, in cases where the fair value option is taken for financial liabilities, the part of a fair value change due to an entity’s own credit risk is recorded in other comprehensive income rather than in profit or loss.

The standard introduces new requirements for hedge accounting that align hedge accounting more closely with risk management and establishes a more principles-based approach to hedge accounting. The standard also adds new requirements to address the impairment of financial assets and means that a loss event will no longer need to occur before an impairment allowance is recognised. There has been no financial impact of the new standard to the group.

IFRS 15 – Revenue from Contracts with Customers
IFRS 15 specifies how and when an entity should recognise revenue from contracts and enhances the nature of revenue disclosures.

The Group notes lease contracts within the scope of IAS 17 ‘Leases’ are excluded from the scope of IFRS 15. Rental income derived from operating leases is therefore outwith the scope of IFRS 15.

The Group has a non-rental revenue stream of service charge income, which is within scope of the standard (see note 2.3 L for further details). Service charge income is shown on the face of the Consolidated Income Statement as a result of implementing the standard. Comparative figures have been included accordingly. There has been no financial impact of the new standard to the Group.

New standards, amendments and interpretation not yet effective

IFRS 16 – Leases
IFRS 16 ‘Leases’ replaces IAS 17 ‘Leases’ and is effective for annual periods beginning on or after 1 January 2019. The key changes are the lessee and lessor accounting models are no longer symmetrical.

The Group will not make any adjustments to the recognition of leases, where it acts as lessor in the lease agreement.

The Group has made an assessment of the leases, where the Group acts as intermediate lessor in the lease agreement, and does not anticipate that this standard will have any material impact on the Group’s financial statements as presented for the current year.

There are a number of other changes to Accounting Standards from 2019 onwards but no material impact is expected.

2.2 Significant accounting judgements, estimates and assumptions

The preparation of the Group’s Financial Statements requires management to make judgements, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities, at the reporting date. However, uncertainties about these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amount of the asset or liability affected in the future periods. The most significant estimates and judgements are set out below.

Fair value of investment properties
Investment properties are stated at fair value as at the Balance Sheet date. Gains or losses arising from changes in fair values are included in the Consolidated Statement of Comprehensive Income in the year in which they arise. The fair value of investment properties is determined by external real estate valuation experts using recognised valuation techniques. The fair values are determined having regard to any recent real estate transactions where available, with similar characteristics and locations to those of the Group’s assets.

In most cases however, the determination of the fair value of investment properties requires the use of valuation models which use a number of judgements and assumptions. The only model used was the income capitalisation method. Under the income capitalisation method, a property’s fair value is judged based on the normalised net operating income generated by the property, which is divided by the capitalisation rate (discounted by the investor’s rate of return). Under the income capitalisation method, over (above market rent) and under-rent situations are separately capitalised (discounted).

The sensitivity analysis in note 7 details the decrease in the valuation of investment properties if equivalent yield increases by 25 basis points or rental rates (ERV) decreases by 5%.

Fair value of financial instruments
When the fair value of financial assets and financial liabilities recorded in the Consolidated Balance Sheet cannot be derived from active markets, they are determined using a variety of valuation techniques that include the use of mathematical models. The input to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgement is required in establishing fair value. The judgements include considerations of liquidity and model inputs such as credit risk (both own and counterparty’s), correlation and volatility.

Changes in assumptions about these factors could affect the reported fair value of financial instruments. The models are calibrated regularly and tested for validity using prices from any observable current market transactions in the same instrument (without modification or repackaging) or based on any available observable market data.

The valuation of interest rate swaps used in the Balance Sheet is provided by The Royal Bank of Scotland plc. These values are validated by comparison to internally generated valuations prepared using the fair value principles outlined above.

The sensitivity analysis in note 7 details the increase and decrease in the valuation of interest rate swaps if market rate interest rates had been 100 basis points higher and 100 basis points lower.

Business combinations
During the year ended 31 December 2018, the Group acquired subsidiaries that own real estate. At the time of acquisition, the Group considers whether each acquisition represents the acquisition of a business or the acquisition of an asset. The Group accounts for an acquisition as a business combination where an integrated set of activities is acquired in addition of the property. More specifically, consideration is made of the extent to which significant processes are acquired and, in particular, the extent of services provided by the subsidiaries. The Group assessed the acquisition of Hagley Road Limited, a Jersey Limited Company, as detailed in note 9, as a purchase of a business because the strategic management function and associated processes were purchased along with the investment properties.

When the acquisition of subsidiaries does not represent a business, it is accounted for as an acquisition of a group of assets and liabilities. The cost of the acquisition is allocated to the assets and liabilities acquired based upon their relative fair values, and no goodwill or deferred tax is recognised.

2.3 Summary of significant accounting policies
A Basis of consolidation
The audited Consolidated Financial Statements comprise the financial statements of Standard Life Investments Property Income Trust Limited and its material wholly owned subsidiary undertakings.

Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with subsidiaries and has the ability to affect those returns through its power over the subsidiary.

Specifically, the Group controls a subsidiary if, and only if, it has:

• Power over the subsidiary (i.e. existing rights that give it the current ability to direct the relevant activities of the subsidiary)
•  Exposure, or rights, to variable returns from its involvement with the subsidiary
•  The ability to use its power over the subsidiary to affect its returns

The Group assesses whether or not it controls a subsidiary if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary.

Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated statement of other comprehensive income from the date the Group gains control until the date when the Group ceases to control the subsidiary.

The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. All intra-group balances, transactions and unrealised gains and losses resulting from intra-group transactions are eliminated in full.

B Functional and presentation currency
Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The Consolidated Financial Statements are presented in pound sterling, which is also the Company’s functional currency.

C Revenue Recognition
Revenue is recognised as follows;

i) Bank interest
Bank interest income is recognised on an accruals basis.

ii) Rental income
Rental income from operating leases is net of sales taxes and value added tax (“VAT”) recognised on a straight line basis over the lease term including lease agreements with stepped rent increases. The initial direct costs incurred in negotiating and arranging an operating lease are recognised as an expense over the lease term on the same basis as the lease income. The cost of any lease incentives provided are recognised over the lease term, on a straight line basis as a reduction of rental income. The resulting asset is reflected as a receivable in the Consolidated Balance Sheet. The valuation of investment properties is reduced by the total of the unamortised lease incentive balances. Any remaining lease incentive balances in respect of properties disposed of are included in the calculation of the profit or loss arising at disposal.

Contingent rents, being those payments that are not fixed at the inception of the lease, for example increases arising on rent reviews, are recorded as income in periods when they are earned. Rent reviews which remain outstanding at the year end are recognised as income, based on estimates, when it is reasonable to assume that they will be received.

The surrender premiums received for the year ended 2018 were £nil (2017: £14,688) as detailed in the Statement of Comprehensive Income and related to a tenant break during the year.

iii) Property disposals
Where revenue is obtained by the sale of properties, it is recognised once the sale transaction has been completed, regardless of when contracts have been exchanged.

D Expenditure
All expenses are accounted for on an accruals basis. The investment management and administration fees, finance and all other revenue expenses are charged through the Consolidated Statement of Comprehensive Income as and when incurred. The Group also incurs capital expenditure which can result in movements in the capital value of the investment properties. The movements in capital expenditure are reflected in the Statement of Comprehensive Income as a valuation gain/(loss). In 2018, there were no non-income producing properties (2017: nil).

E Taxation
Current income tax assets and liabilities are measured at the amount expected to be recovered from or paid to taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the reporting date. Current income tax relating to items recognised directly in other comprehensive income or in equity is recognised in other comprehensive income and in equity respectively, and not in the income statement. Positions taken in tax returns with respect to situations in which applicable tax regulations are subject to interpretation, if any, are reviewed periodically and provisions are established where appropriate.

The Group recognises liabilities for current taxes based on estimates of whether additional taxes will be due. When the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income and deferred tax provisions in the period in which the determination is made.

Deferred income tax is provided using the liability method on all temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax assets are recognised only to the extent that it is probable that taxable profit will be available against which deductible temporary differences, carried forward tax credits or tax losses can be utilised. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities. In determining the expected manner of realisation of an asset the Directors consider that the Group will recover the value of investment property through sale. Deferred income tax relating to items recognised directly in equity is recognised in equity and not in profit or loss.

F Investment property
Investment properties comprise completed property and property under construction or re-development that is held to earn rentals or for capital appreciation or both. Property held under a lease is classified as investment property when the definition of an investment property is met.

Investment properties are measured initially at cost including transaction costs. Transaction costs include transfer taxes, professional fees for legal services and initial leasing commissions to bring the property to the condition necessary for it to be capable of operating. The carrying amount also includes the cost of replacing part of an existing investment property at the time that cost is incurred if the recognition criteria are met.

Subsequent to initial recognition, investment properties are stated at fair value. Fair value is based upon the market valuation of the properties as provided by the external valuers as described in note 2.2. Gains or losses arising from changes in the fair values are included in the Consolidated Statement of Comprehensive Income in the year in which they arise. For the purposes of these financial statements, in order to avoid double counting, the assessed fair value is:

i) Reduced by the carrying amount of any accrued income resulting from the spreading of lease incentives and/or minimum lease payments.
ii) Increased by the carrying amount of any liability to the superior leaseholder or freeholder (for properties held by the Group under operating leases) that has been recognised in the Balance Sheet as a finance lease obligation.

Acquisitions of investment properties are considered to have taken place on completion of contracts.

Investment properties are derecognised when it has been disposed of or permanently withdrawn from use and no future economic benefit is expected from its disposal. Any gains or losses on the retirement or disposal of investment properties are recognised in the Consolidated Statement of Comprehensive Income in the year of retirement or disposal.

Gains or losses on the disposal of investment properties are determined as the difference between net disposal proceeds and the carrying value of the asset in the previous full period financial statements.

G Investment properties held for sale
Non-current assets (and disposal groups) classified as held for sale are measured at the lower of carrying amount and fair value.

Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset (or disposal group) is available for immediate sale in its present condition. Management must be committed to the sale which should be expected to qualify for recognition as a completed sale within one year from the date of classification.

When the Group is committed to a sale plan involving loss of control of a subsidiary, all of the assets and liabilities of that subsidiary (i.e. disposal group) are classified as held for sale when the criteria described above are met, regardless of whether the Group will retain a non-controlling interest in its former subsidiary after the sale.

H Trade and other receivables
Trade receivables are recognised and carried at the lower of their original invoiced value and recoverable amount. Where the time value of money is material, receivables are carried at amortised cost. A provision for impairment of trade receivables is calculated through the expected credit loss method in accordance with IFRS 9. As part of this expected credit loss process the following is taken into account: Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments (more than 30 days overdue) are considered indicators that the trade receivable is impaired. The carrying amount of the asset is reduced through use of an allowance account, and the amount of the loss is recognised in the Consolidated Statement of Comprehensive Income in other direct property expenses

I Cash and cash equivalents
Cash and cash equivalents are defined as cash in hand, demand deposits, and other short-term highly liquid investments readily convertible within three months or less to known amounts of cash and subject to insignificant risk of changes in value.

J Borrowings and interest expense
All loans and borrowings are initially recognised at the fair value of the consideration received, less issue costs where applicable. After initial recognition, all interest-bearing loans and borrowings are subsequently measured at amortised cost. Amortised cost is calculated by taking into account any discount or premium on settlement. Borrowing costs are recognised within finance costs in the Consolidated Statement of Comprehensive Income as incurred.

K Accounting for derivative financial instruments and hedging activities

Interest rate swaps are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedging transactions. The Group also documents its assessment both at hedge inception and on an ongoing basis of whether the derivatives that are used in hedging transactions are highly effective in off-setting changes in fair values or cash flows of hedged items. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognised in other comprehensive income in the Consolidated Statement of Comprehensive Income.

The gains or losses relating to the ineffective portion are recognised in operating profit in the Consolidated Statement of Comprehensive Income. Amounts taken to equity are transferred to profit or loss when the hedged transaction affects profit or loss, such as when the hedged financial income or financial expenses are recognised.

When a derivative is held as an economic hedge for a period beyond 12 months after the end of the reporting period, the derivative is classification as non-current consistent with the classification of the underlying item. A derivative instrument that is a designated and effective hedging instrument is classification consistent with the classification of the underlying hedged item.

L Service charge
The Group has appointed a managing agent to deal with the service charge at the investment properties. Under IFRS 15 the Group acts as the principal for the collection of service charge income and the associated expenditure. As a result the Consolidated Statement of Comprehensive Income includes both the gross service charge received in the year and the expenditure associated with the service charge. Other direct property expenses include the service charge expense incurred by the Group on its vacant properties.

M Other financial liabilities
Trade and other payables are recognised and carried at invoiced value as they are considered to have payment terms of 30 days or less and are not interest bearing. The balance of trade and other payables are considered to meet the definition of an accrual and have been expensed through the Income Statement or Balance Sheet depending on classification. VAT payable at the Balance Sheet date will be settled within 31 days of the Balance Sheet date with Her Majesty’s Revenue and Customs (“HMRC”) and deferred rental income is rent that has been billed to tenants but relates to the period after the Balance Sheet date. Rent deposits recognised in note 12 are those that are due within one year as a result of upcoming tenant expiries.

3 Financial Risk Management
The Group’s principal financial liabilities are loans and borrowings. The main purpose of the Group’s loans and borrowings is to finance the acquisition and development of the Group’s property portfolio. The Group has rent and other receivables, trade and other payables and cash and short-term deposits that arise directly from its operations.

The Group is exposed to market risk (including interest rate risk and real estate risk), credit risk, capital risk and liquidity risk. The Group is not exposed to currency risk or price risk. The Group is engaged in a single segment of business, being property investment in one geographical area, the United Kingdom. Therefore the Group only engages in one form of currency being pound sterling. The Group currently invests in direct non-listed property and is therefore not exposed to price risk.

The Board of Directors reviews and agrees policies for managing each of these risks which are summarised below.

Market risk
Market risk is the risk that the fair values of financial instruments will fluctuate because of changes in market prices. The financial instruments held by the Group that are affected by market risk are principally the interest rate swap.

i) Interest Rate risk
The Group invests cash balances with RBS and Citibank. These balances expose the Group to cash flow interest rate risk as the Group’s income and operating cash flows will be affected by movements in the market rate of interest. There is considered to be no fair value interest rate risk in regard to these balances.

The bank borrowings as described in note 13 also expose the Group to cash flow interest rate risk. The Group’s policy is to manage its cash flow interest rate risk using interest rate swaps, in which the Group has agreed to exchange the difference between fixed and floating interest amounts based on a notional principal amount (see note 14). The Group has £110 million of fixed rate borrowings that have been fixed via an interest rate swap (see note 14). At the year end the Group had also utilised £20 million of its revolving credit facility the interest rate on which is fixed for the length of time the RCF is utilised.

The bank borrowings are carried at amortised cost and the Group considers this to be a close approximation to fair value. The fair value of the bank borrowings is affected by changes in the market interest rate. The fair value of the interest rate swap is exposed to changes in the market interest rate as their fair value is calculated as the present value of the estimated future cash flows under the agreements. The accounting policy for recognising the fair value movements in the interest rate swaps is described in note 2.2.

Trade and other receivables and trade and other payables are interest free and have settlement dates within one year and therefore are not considered to present a fair value interest rate risk.

The tables below set out the carrying amount of the Group’s financial instruments excluding the amortisation of borrowing costs as outlined in note13. Bank borrowings have been fixed due to an interest rate swap and is detailed further in note 14:

At 31 December 2018				Fixed Rate	Variable Rate	Interest Rate
				£	£	£
Cash and cash equivalents				-	8,264,972	0.020%
Bank borrowings				130,000,000	-	2.650%
At 31 December 2017				Fixed Rate	Variable Rate	Interest Rate
				£	£	£
Cash and cash equivalents				-	14,334,504	0.020%
Bank borrowings				110,000,000	-	2.725%

At 31 December 2018, if market rate interest rates had been 100 basis points higher with all other variables held constant, the profit for the year would have been £117,350 lower (2017: £143,345 higher) as a result of the higher interest income on cash and cash equivalents off set by the higher interest expense on the RCF. Other Comprehensive Income and the Capital Reserve would have been £3,136,020 higher (2017: £5,604,283 higher) as a result of an increase in the fair value of the derivative designated as a cash flow hedge of floating rate borrowings

At 31 December 2018, if market rate interest rates had been 100 basis points lower with all other variables held constant, the profit for the year would have been £117,350 higher (2017: £143,345 lower) as a result of the lower interest income on cash and cash equivalents off set by the lower interest expense on the RCF. Other Comprehensive Income and the Capital Reserve would have been £4,985,212 lower (2017: £5,941,013 lower) as a result of a decrease in the fair value of the derivative designated as a cash flow hedge of floating rate borrowings.

ii) Real estate risk
The Group has identified the following risks associated with the real estate portfolio:
a) The cost of the development schemes may increase if there are delays in the planning process. The Group uses advisers who are experts in the specific planning requirements in the scheme’s location in order to reduce the risks that may arise in the planning process.

b) A major tenant may become insolvent causing a significant loss of rental income and a reduction in the value of the associated property. To reduce this risk, the Group reviews the financial status of all prospective tenants and decides on the appropriate level of security required via rental deposits or guarantees.

c) The exposure of the fair values of the portfolio to market and occupier fundamentals. The Group aims to manage such risks by taking an active approach to asset management (working with tenants to extend leases and minimise voids), capturing profit (selling when the property has delivered a return to the Group that the Group believes has been maximised and the proceeds can be reinvested into more attractive opportunities) and identifying new investments (generally at yields that are accretive to the revenue account and where the Group believes there will be greater investment demand in the medium term).

Credit risk
Credit risk is the risk that a counterparty will be unable to meet a commitment that it has entered into with the Group. In the event of default by an occupational tenant, the Group will suffer a rental income shortfall and incur additional related costs. The Investment Manager regularly reviews reports produced by Dun and Bradstreet and other sources, including the IPD IRIS report, to be able to assess the credit worthiness of the Group’s tenants and aims to ensure that there are no excessive concentrations of credit risk and that the impact of default by a tenant is minimised. In addition to this, the terms of the Group’s bank borrowings require that the largest tenant accounts for less than 20% of the Group’s total rental income, that the five largest tenants account for less than 50% of the Group’s total rental income and that the ten largest tenants account for less than 75% of the Group’s total rental income. The maximum credit risk from the tenant arrears of the Group at the financial year end was £2,937,105 (2017: £1,421,341) as detailed in note 10. Rental deposits are placed in separate bank accounts and are therefore assessed to have low credit risk.

With respect to credit risk arising from other financial assets of the Group, which comprise cash and cash equivalents, the Group’s exposure to credit risk arises from default of the counterparty bank with a maximum exposure equal to the carrying value of these instruments. As at 31 December 2018 £5,709,167 (2017: £6,969,884) was placed on deposit with The Royal Bank of Scotland plc (“RBS”), £2,555,805 (2017: £7,364,620) was held with Citibank. The credit risk associated with the cash deposits placed with RBS is mitigated by virtue of the Group having a right to off-set the balance deposited against the amount borrowed from RBS should RBS be unable to return the deposits for any reason. Citibank is rated A-1 Stable by Standard & Poor’s and P-2 Stable by Moody’s. RBS is rated A-2 Stable by Standard & Poor’s and P-2 by Moody’s.

Liquidity risk
Liquidity risk is the risk that the Group will encounter difficulties in realising assets or otherwise raising funds to meet financial commitments. The investment properties in which the Group invests are not traded in an organised public market and may be illiquid.

As a result, the Group may not be able to liquidate its investments in these properties quickly at an amount close to their fair value in order to meet its liquidity requirements.

The following table summarises the maturity profile of the Group’s financial liabilities based on contractual undiscounted payments.

The disclosed amounts for interest-bearing loans and interest rate swaps in the below table are the estimated net undiscounted cash flows.

The Group’s liquidity position is regularly monitored by management and is reviewed quarterly by the Board of Directors.

Year ended 31 December 2018		On demand	12 months	1 to 5 years	> 5 years	Total
		£	£	£	£	£
Interest-bearing loans		-	22,435,855	117,792,177	-	140,228,032
Interest rate swaps		-	599,907	1,949,698	-	2,549,605
Trade and other payables		4,322,483	-	-	-	4,322,483
Rental deposits due to tenants		-	660,926	549,525	291,108	1,501,599
		4,322,483	23,696,688	120,291,400	291,108	148,601,679
Year ended 31 December 2017		On demand	12 months	1 to 5 years	> 5 years	Total
		£	£	£	£	£
Interest-bearing loans		-	2,085,600	8,342,400	110,521,400	120,949,400
Interest rate swaps		-	911,900	3,647,600	227,975	4,787,475
Trade and other payables		3,245,930	-	-	-	3,245,930
Rental deposits due to tenants		-	586,189	395,688	600,254	1,582,131
		3,245,930	3,583,689	12,385,688	111,349,629	130,564,936

Capital risk
The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.

In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares, increase or decrease borrowings or sell assets to reduce debt.

The Group monitors capital on the basis of the gearing ratio. This ratio is calculated as total borrowings divided by gross assets and has a limit of 65% set by the Articles of Association of the Company. Gross assets are calculated as non-current and current assets, as shown in the Consolidated Balance Sheet.

The gearing ratios at 31 December 2018 and at 31 December 2017 were as follows:

At 31 December 2018					2018 £	2017 £
Total borrowings (excluding unamortised arrangement fees)					130,000,000	110,000,000
Gross assets					512,186,641	468,797,390
Gearing ratio (must not exceed 65%)					25.38%	23.5%

Fair values
Set out below is a comparison by class of the carrying amounts and fair value of the Group’s financial instruments that are carried in the financial statements.

			Carrying Amount		Fair Value
			2018	2017	2018	2017
Financial assets			£	£	£	£
Cash and cash equivalents			8,264,972	14,334,504	8,264,972	14,334,504
Trade and other receivables			4,939,071	20,256,944	4,939,071	20,256,944
Financial liabilities
Bank borrowings			129,249,402	109,107,044	130,055,982	111,678,649
Interest rate swaps			803,963	2,244,799	803,963	2,244,799
Trade and other payables			5,824,041	4,828,061	5,824,041	4,828,061

The fair value of the financial assets and liabilities are included at an estimate of the price that would be received to sell a financial asset or paid to transfer a financial liability in an orderly transaction between market participants at the measurement date. The following methods and assumptions were used to estimate the fair value:

• Cash and cash equivalents, trade and other receivables and trade and other payables are the same as fair value due to the short-term maturities of these instruments.
• The fair value of bank borrowings is estimated by discounting future cash flows using rates currently available for debt on similar terms and remaining maturities. The fair value approximates their carrying values gross of unamortised transaction costs. This is considered as being valued at level 2 of the fair value hierarchy and has not changed level since 31 December 2017.
• The fair value of rental deposit liabilities is the same as the current value as the monies owed are held in separate bank accounts.
• The fair value of the interest rate swap contract is estimated by discounting expected future cash flows using current market interest rates and yield curve over the remaining term of the instrument. This is considered as being valued at level 2 of the fair value hierarchy and has not changed level since 31 December 2016.

The following table shows an analysis of the fair values of financial instruments recognised in the Balance Sheet by the level of the fair value hierarchy*:

*Explanation of the fair value hierarchy:

Level 1 Quoted (unadjusted) market prices in active markets for identical assets or liabilities.
Level 2 Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable.
Level 3 Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable.
 

Year ended 31 December 2018			Level 1	Level 2	Level 3	Total fair value
Interest rate swap			-	803,963	-	803,963
Year ended 31 December 2017			Level 1	Level 2	Level 3	Total fair value
Interest rate swap			-	2,244,799	-	2,244,799

4 Fees
Investment management fees
Under the terms of the Investment Management Agreement between the Investment Manager and the Company (“the IMA”), the Investment Manager is entitled to 0.75% of total assets up to £200 million; 0.70% of total assets between £200 million and £300 million; and 0.65% of total assets in excess of £300 million. The total fees charged for the year amounted to £3,381,779 (2017: £3,136,218). The amount due and payable at the year end amounted to £875,512 excluding VAT (2017: £807,005 excluding VAT).

Administration, secretarial and registrar fees
On 19 December 2003 Northern Trust International Fund Administration Services (Guernsey) Limited (“Northern Trust”) was appointed administrator, secretary and registrar to the Group. Northern Trust is entitled to an annual fee, payable quarterly in arrears, of £65,000. Northern Trust is also entitled to reimbursement of reasonable out of pocket expenses. Total fees and expenses charged for the year amounted to £65,000 (2017: £65,000). The amount due and payable at the year end amounted to £16,250 (2017:£16,250).

Valuers’ fee
Knight Frank LLP (“the Valuers”), external international real estate consultants, were appointed as valuers in respect of the assets comprising the property portfolio. The total valuation fees charged for the year amounted to £91,396 (2017: £71,844) of which minimum fees of £2,500 per property (2017: £2,500) were incurred due for new properties added to the portfolio. The amount due and payable at the year end amounted to £20,356 excluding VAT (2017: £37,158 excluding VAT).

The annual fee is equal to 0.017 percent of the aggregate value of the property portfolio paid quarterly.

Auditor’s fee
At the year end date Ernst & Young LLP continued as independent auditor of the Group. The audit fees for the year amounted to £78,500 (2017: £74,500) and relate to audit services provided for the 2018 financial year. Ernst & Young LLP also did not provide any non-audit services in the year (2017: nil).

5 Finance Income and Costs

					2018	2017
					£	£
Interest income on cash and cash equivalents					58,411	2,752
Finance income					58,411	2,752
Interest expense on bank borrowings					2,546,435	2,089,843
Payments on interest rate swap					726,842	1,106,369
Amortisation of arrangement costs (see note 13)					194,848	160,216
Finance costs					3,468,125	3,356,428

Of the finance costs above, £555,692 of the interest expense on bank borrowings and £113,800 of payments on interest rate swaps were accruals at 31 December 2018 and are included in Trade and other payables.

6 Taxation
UK REIT Status
The Group migrated tax residence to the UK and elected to be treated as a UK REIT with effect from 1 January 2015. As a UK REIT, the income profits of the Group’s UK property rental business are exempt from corporation tax as are any gains it makes from the disposal of its properties, provided they are not held for trading or sold within three years of completion of development. The Group is otherwise subject to UK corporation tax at the prevailing rate.

As the principal company of the REIT, the Company is required to distribute at least 90% of the income profits of the Group’s UK property rental business. There are a number of other conditions that also require to be met by the Company and the Group to maintain REIT tax status. These conditions were met in the period and the Board intends to conduct the Group’s affairs such that these conditions continue to be met for the foreseeable future. Accordingly, deferred tax is no longer recognised on temporary differences relating to the property rental business.

The Company and its Guernsey subsidiary have obtained exempt company status in Guernsey so that they are exempt from Guernsey taxation on income arising outside Guernsey and bank interest receivable in Guernsey.

A reconciliation between the tax charge and the product of accounting profit multiplied by the applicable tax rate for the year ended 31 December 2018 and 2017 is, as follows:

					2018	2017
					£	£
Surplus before tax					30,946,377	42,465,234
Tax calculated at UK statutory corporation tax rate of 19% (2017: 19.25%)					5,879,812	8,174,558
UK REIT exemption on net income					(3,235,353)	(3,864,098)
Valuation (gain) in respect of investment properties not subject to tax					(2,644,459)	(4,461,169)
Excess management expenses not utilised					-	150,709
Current income tax charge					-	-

7 Investment Properties

	UK	UK	UK	UK
	Industrial	Office	Retail	Other	Total
	2018	2018	2018	2018	2018
	£	£	£	£	£
Market value at 1 January	213,135,000	150,450,000	69,625,000	-	433,210,000
Sector reallocation	-	-	(12,650,000)	12,650,000	-
Purchase of investment properties	32,038,597	12,740,385	(1,650)	19,245,719	64,023,051
Additions through business acquisition	-	23,913,188	-	-	23,913,188
Capital expenditure on investment properties	2,648,041	5,242,632	408	279,714	8,170,795
Opening market value of disposed investment properties	(5,600,000)	(32,100,000)	(5,300,000)	-	(43,000,000)
Valuation gain from investment properties	16,233,616	(586,989)	(5,113,656)	1,524,073	12,057,044
Movement in lease incentives receivable	694,746	(29,216)	(30,102)	100,494	735,922
Market value at 31 December	259,150,000	159,630,000	46,530,000	33,800,000	499,110,000
Adjustment for lease incentives	(1,787,864)	(1,153,339)	(304,908)	(618,333)	(3,864,444)
Carrying value at 31 December	257,362,136	158,476,661	46,225,092	33,181,667	495,245,556

The valuations were performed by Knight Frank LLP, accredited external valuers with recognised and relevant professional qualifications and recent experience of the location and category of the investment properties being valued. The valuation model in accordance with Royal Institute of Chartered Surveyors (‘RICS’) requirements on disclosure for Regulated Purpose Valuations has been applied (RICS Valuation – Professional Standards January 2014 published by the Royal Institution of Chartered Surveyors – revised April 2015). These valuation models are consistent with the principles in IFRS 13. The market value provided by Knight Frank at the year end was £499,110,000 (2017: £433,210,000) however an adjustment has been made for lease incentives of £3,864,444 (2017: £3,657,917) that are already accounted for as an asset and included in non-current (£2,896,409) and current assets (£968,035). Valuation gains and losses from investment properties are recognised in the Consolidated Statement of Comprehensive Income for the period and are attributable to changes in unrealised gains or losses relating to investment properties held at the end of the reporting period. The purchase of Hagley Road for £23.9 million was accomplished through the acquisition of the shares of a Jersey Limited Company (see note 9). During the year one asset whose main purpose is leisure was reclassified from Retail to the Other sector in line with IPD guidelines. Further details on acquisitions and disposals are given in the Investment Manager’s report.

	UK	UK	UK
	Industrial	Office	Retail	Total
	2017	2017	2017	2017
	£	£	£	£
Market value at 1 January	181,735,000	150,475,000	97,735,000	429,945,000
Purchase of investment properties	15,767,982	34,244,694	-	50,012,676
Capital expenditure on investment properties	1,500,705	547,156	139,740	2,187,601
Opening market value of disposed investment properties	(1,975,000)	(39,700,000)	(30,550,000)	(72,225,000)
Valuation gain from investment properties	15,734,294	5,217,229	2,223,380	23,174,903
Movement in lease incentives receivable	372,019	(334,079)	76,880	114,820
Market value at 31 December	213,135,000	150,450,000	69,625,000	433,210,000
Investment properties recognised as held for sale	-	(20,000,000)	(5,300,000)	(25,300,000)
Market value net of held for sale at 31 December	213,135,000	130,450,000	64,325,000	407,910,000
Adjustment for lease incentives	(1,093,118)	(1,711,950)	(852,849)	(3,657,917)
Carrying value at 31 December	212,041,882	128,738,050	63,472,151	404,252,083

In the consolidated Cash Flow Statement, proceeds from disposal of investment properties comprise:

		2018	2017
		£	£
Opening market value of disposed investment properties		43,000,000	72,225,000
Gain/(loss) on disposal of investment properties		1,861,161	(138,237)
Net proceeds from disposal of investment properties		44,861,161	72,086,763

Valuation methodology
The fair value of completed investment properties are determined using the income capitalisation method.

The income capitalisation method is based on capitalising the net income stream at an appropriate yield. In establishing the net income stream the valuers have reflected the current rent (the gross rent) payable to lease expiry, at which point the valuer has assumed that each unit will be re-let at their opinion of ERV. The valuers have made allowances for voids where appropriate, as well as deducting non recoverable costs where applicable. The appropriate yield is selected on the basis of the location of the building, its quality, tenant credit quality and lease terms amongst other factors.

No properties have changed valuation technique during the year. At the Balance Sheet date the income capitalisation method is appropriate for valuing all assets.

The Group appoints suitable valuers (such appointment is reviewed on a periodic basis) to undertake a valuation of all the direct real estate investments on a quarterly basis. The valuation is undertaken in accordance with the then current RICS guidelines and requirements as mentioned earlier.

The Investment Manager meets with the valuers on a quarterly basis to ensure the valuers are aware of all relevant information for the valuation and any change in the investment over the quarter. The Investment Manager then reviews and discusses the draft valuations with the valuers to ensure correct factual assumptions are made. The valuers report a final valuation that is then reported to the Board.

The management group that determines the Group’s valuation policies and procedures for property valuations is the Property Valuation Committee. The Committee reviews the quarterly property valuation reports produced by the valuers (or such other person as may from time to time provide such property valuation services to the Group) before its submission to the Board, focusing in particular on:

• significant adjustments from the previous property valuation report;
• reviewing the individual valuations of each property;
• compliance with applicable standards and guidelines including those issued by RICS and the UKLA Listing Rules;
• reviewing the findings and any recommendations or statements made by the valuer;
• considering any further matters relating to the valuation of the properties.

The Chairman of the Committee makes a brief report of the findings and recommendations of the Committee to the Board after each Committee meeting. The minutes of the Committee meetings are circulated to the Board. The Chairman submits an annual report to the Board summarising the Committee’s activities during the year and the related significant results and findings.

All investment properties are classified as Level 3 in the fair value hierarchy. There were no movements between levels during the year.

There are currently no restrictions on the realisability of investment properties or the remittance of income and proceeds of disposal.

The table below outlines the valuation techniques and inputs used to derive Level 3 fair values for each class of investment properties. The table includes:

• The fair value measurements at the end of the reporting period.
• The level of the fair value hierarchy (e.g. Level 3) within which the fair value measurements are categorised in their entirety.
• A description of the valuation techniques applied.
• Fair value measurements, quantitative information about the significant unobservable inputs used in the fair value measurement.
• The inputs used in the fair value measurement, including the ranges of rent charged to different units within the same building.

Country & Class	Fair Value	Valuation Technique	Key Unobservable Input	Range (weighted average)
	£
UK Industrial Level 3	259,150,000	Income Capitalisation	·      Initial Yield ·      Reversionary Yield ·      Equivalent Yield ·      Estimated rental value per Sq. m	0.00% to 9.06% (5.01%) 4.31% to 9.06% (6.12%) 4.25% to 8.18% (5.95%) £2.75 to £215.75 (£191.20)
UK Office Level 3	159,630,000	Income Capitalisation	·      Initial Yield ·      Reversionary Yield ·      Equivalent Yield ·      Estimated rental value per Sq. m	0.00% to 9.00% (4.95%) 4.95% to 9.40% (6.97%) 4.75% to 8.66% (6.62%) £14.00 to £525.00 (£376.99)
UK Retail Level 3	46,530,000	Income Capitalisation	·      Initial Yield ·      Reversionary Yield ·      Equivalent Yield ·      Estimated rental value per Sq. m	4.98% to 7.51% (6.11%) 4.68% to 7.39% (5.81%) 5.28% to 7.46% (6.49%) £17.50 to £528.00 (£102.18)
UK Other Level 3	33,800,000	Income Capitalisation	·      Initial Yield ·      Reversionary Yield ·      Equivalent Yield ·      Estimated rental value per Sq. m	4.99% to 6.55% (5.47%) 4.98% to 6.90% (5.53%) 5.00% to 6.89% (5.63%) £18.68 to £108.00 (£40.62)
	499,110,000

Descriptions and definitions
The table above includes the following descriptions and definitions relating to valuation techniques and key observable inputs made in determining the fair values.

Estimated rental value (ERV)
The rent at which space could be let in the market conditions prevailing at the date of valuation.

Equivalent yield
The equivalent yield is defined as the internal rate of return of the cash flow from the property, assuming a rise or fall to ERV at the next review or lease termination, but with no further rental change.

Initial yield
Initial yield is the annualised rents of a property expressed as a percentage of the property value.

Reversionary yield
Reversionary yield is the anticipated yield to which the initial yield will rise (or fall) once the rent reaches the ERV.

The table below shows the ERV per annum, area per square foot, average ERV per square foot, initial yield and reversionary yield as at the Balance Sheet date.

			2018	2017
ERV p.a.			£34,380,532	£30,925,950
Area sq ft			4,374,342	3,799,885
Average ERV per sq ft			£7.86	£8.14
Initial yield			5.1%	5.5%
Reversionary Yield			4.5%	4.7%

The table below presents the sensitivity of the valuation to changes in the most significant assumptions underlying the valuation of completed investment property.

			2018	2017
			£	£
Increase in equivalent yield of 25 bps			(40,894,000)	(18,981,000)
Decrease in rental rates of 5% (ERV)			(16,563,503)	(11,071,600)

Below is a list of how the interrelationships in the sensitivity analysis above can be explained.

In both cases outlined in the sensitivity table the estimated Fair Value would increase (decrease) if:

• The ERV is higher (lower)
• Void periods were shorter (longer)
• The occupancy rate was higher (lower)
• Rent free periods were shorter (longer)
• The capitalisation rates were lower (higher)

8 Investment Properties Held For Sale
As at 31 December 2018 there were no investment properties held for sale (2017: £25,300,000).

9 Investment in Subsidiary Undertakings
The Company owns 100 per cent of the issued ordinary share capital of Standard Life Investments Property Holdings Limited, a company with limited liability incorporated and domiciled in Guernsey, Channel Islands, whose principal business is property investment.

During the year ended 31 December 2018, the Company acquired Hagley Road Limited, a company with limited liability incorporated and domiciled in Jersey, Channel Islands, whose principal business is property investment. Investment property to the value of £23,913,188 was acquired along with current liabilities of £489,079.

The Group undertakings consist of the following 100% owned subsidiaries at the Balance Sheet date:

• Standard Life Investments Property Holdings Limited, a property investment company with limited liability incorporated in Guernsey, Channel Islands.
• Standard Life Investments (SLIPIT) Limited Partnership, a property investment limited partnership established in England.
• Standard Life Investments SLIPIT (General Partner) Limited, a company with limited liability incorporated in England. This Company is the GP for the Limited Partnership.
• Standard Life Investments SLIPIT (Nominee) Limited, a company with limited liability incorporated and domiciled in England.
• Hagley Road Limited, a property investment company with limited liability incorporated in Jersey, Channel Islands.

10 Trade and Other Receivables

			2018	2017
			£	£
Trade receivables			3,036,500	1,424,216
Less: provision for impairment of trade receivables			(99,395)	(2,875)
Trade receivables (net)			2,937,105	1,421,341
Rental deposits held on behalf of tenants			660,926	586,189
Cash held by Solicitors			-	17,727,355
Other receivables (including lease incentives)			1,341,040	522,059
Total trade and other receivables			4,939,071	20,256,944

Reconciliation for changes in the provision for impairment of trade receivables:

			2018	2017
			£	£
Opening balance			(2,875)	(33,952)
Charge for the year			(96,520)	(2,875)
Reversal of provision			-	33,952
Closing balance			(99,395)	(2,875)

The estimated fair values of receivables are the discounted amount of the estimated future cash flows expected to be received and the approximate of their carrying amounts.

The trade receivables above relate to rental income receivable from tenants of the investment properties. When a new lease is agreed with a tenant the Investment Manager performs various money laundering checks and makes a financial assessment to determine the tenant’s ability to fulfil its obligations under the lease agreement for the foreseeable future. The majority of tenants are invoiced for rental income quarterly in advance and are issued with invoices at least 21 days before the relevant quarter starts. Invoices become due on the first day of the quarter and are considered past due if payment is not received by this date. Other receivables are considered past due when the given terms of credit expire.

Amounts are considered impaired using the expected credit loss method. Movement in the balance considered to be impaired has been included in other direct property costs in the Consolidated Statement of Comprehensive Income. As of 31 December 2018, trade receivables of £99,395 (2017: £2,875) were considered impaired and provided for.

The ageing of these receivables is as follows:

			2018	2017
			£	£
0 to 3 months			(55,115)	2,875
3 to 6 months			(21,619)	-
Over 6 months			(22,661)	-
Closing balance			(99,395)	2,875

As of 31 December 2018, trade receivables of £2,937,105 (2017: £1,421,341) were less than 3 months past due but considered not impaired.

11 Cash and Cash Equivalents

			2018	2017
			£	£
Cash held at bank			2,555,805	7,364,620
Cash held on deposit with RBS			5,709,167	6,969,884
			8,264,972	14,334,504

Cash held at banks earns interest at floating rates based on daily bank deposit rates. Deposits are made for varying periods of between one day and three months, depending on the immediate cash requirements of the Group, and earn interest at the applicable short-term deposit rates.

12 Trade and Other Payables

			2018	2017
			£	£
Trade and other payables			4,322,482	3,245,930
VAT payable			751,530	892,068
Deferred rental income			6,171,425	5,727,102
Rental deposits due to tenants			660,926	586,189
			11,906,363	10,451,289

Trade payables are non-interest bearing and are normally settled on 30-day terms.

13 Bank Borrowings

						2018		2017
						£		£
Loan facility and drawn down outstanding balance						130,000,000		110,000,000
Opening carrying value						109,107,044		124,001,828
Borrowings during the year						20,000,000		-
Repayment of RCF						-		(15,000,000)
Arrangements costs of additional facility						(52,490)		(55,000)
Amortisation of arrangement costs						194,848		160,216
Closing carrying value						129,249,402		109,107,044
Reconciliation of movements in liabilities from financing activities
	At 1 Jan 2018		Cash flows		Changes in fair value		Other  changes		At 31 Dec 2018
	£		£		£		£		£
Borrowings	109,107,044		19,947,510		-		194,848		129,249,402
Derivative financial instruments	2,244,799		-		(1,440,836)		-		803,963
	111,351,843		19,947,510		(1,440,836)		194,848		130,053,365

Reconciliation of movements in liabilities from financing activities
	At 1 Jan 2017	Cash flows	Changes in fair value	Other  changes	At 31 Dec 2017
	£	£	£	£	£
Borrowings	124,001,828	(15,055,000)	-	160,216	109,107,044
Derivative financial instruments	3,562,542	-	(1,317,743)	-	2,244,799
	127,564,370	(15,055,000)	(1,317,743)	160,216	111,351,843

On 28 April 2016 the Group entered into an agreement to extend £145 million of its existing £155 million debt facility with RBS. The debt facility consists of a £110 million seven year term loan facility and a £35 million five year RCF. The RCF may by agreement be extended by one year on two occasions and in the year this option was exercised with the RCF extended out to April 2023, the same maturity date as the term-loan. £130 million has been drawn down by the Group at 31 December 2018. Interest is payable on the Term Loan at 3 month LIBOR plus a margin of 1.375%. The Group has entered into a swap arrangement which fixes the interest rate on the term loan of 2.725%. Interest is payable on the RCF at relevant LIBOR plus a margin of 1.45%.

Under the terms of the loan facility there are certain events which would entitle RBS to terminate the loan facility and demand repayment of all sums due. Included in these events of default is the financial undertaking relating to the LTV percentage. The new loan agreement notes that the LTV percentage is calculated as the loan amount less the amount of any sterling cash deposited within the security of RBS divided by the gross secured property value, and that this percentage should not exceed 60% for the period to and including 27 April 2021 and should not exceed 55% after 27 April 2021 to maturity. All loan covenants were comfortably met during the year ended December 2018.

			2018	2017
			£	£
Loan amount			130,000,000	110,000,000
Cash held by Solicitors			-	(17,727,355)
Cash			(8,264,972)	(14,334,504)
			121,735,028	77,938,141
Investment property valuation			499,110,000	433,210,000
LTV percentage			24.4%	18.0%

Other loan covenants that the Group is obliged to meet include the following:

• that the net rental income is not less than 150% of the finance costs for any three month period;
• that the largest single asset accounts for less than 15% of the Gross Secured Asset Value;
• that the largest ten assets accounts for less than 75% of the Gross Secured Asset Value;
• that sector weightings are restricted to 55%, 45% and 75% for the Office, Retail and Industrial sectors respectively;
• that the largest tenant accounts for less than 20% of the Group’s annual net rental income;
• that the five largest tenants account for less than 50% of the Group’s annual net rental income;
• that the ten largest tenants account for less than 75% of the Group’s annual net rental income;

During the year, the Group did not default on any of its obligations and loan covenants under its loan agreement.

The loan facility is secured by fixed and floating charges over the assets of the Company and its wholly owned subsidiaries, Standard Life Investments Property Holdings Limited and Standard Life Investments (SLIPIT) Limited Partnership.

14 Interest Rate Swap
As part of the refinancing of loans (see note 13), on 28 April 2016 the Group completed an interest rate swap of a notional amount of £110,000,000 with RBS. The interest rate swap effective date is 28 April 2016 and has a maturity date of 27 April 2023. Under the swap the Group has agreed to receive a floating interest rate linked to 3 month LIBOR and pay a fixed interest rate of 1.35%.

			2018	2017
			£	£
Opening fair value of interest rate swaps at 1 January			(2,244,799)	(3,562,542)
Valuation gain on interest rate swaps			1,440,836	1,317,743
Closing fair value of interest rate swaps at 31 December			(803,963)	(2,244,799)

The split of the swap liability is listed below

			2018	2017
			£	£
Current liabilities			(451,714)	(887,699)
Non-current liabilities			(352,249)	(1,357,100)
Interest rate swap with a start date of 28 April 2016 maturing on 27 April 2023			(803,963)	(2,244,799)

15 Lease Analysis
The Group has entered into leases on its property portfolio. This property portfolio as at 31 December 2018 had an average lease expiry of six years. Leases include clauses to enable periodic upward revision of the rental charge according to prevailing market conditions. Some leases contain options to break before the end of the lease term.

Future minimum rentals receivable under non-cancellable operating leases as at 31 December are as follows:

			2018	2017
			£	£
Within one year			28,144,983	25,353,460
After one year, but not more than five years			75,726,933	62,905,498
More than five years			71,988,615	32,278,558
Total			175,860,531	120,537,516

The largest single tenant at the year end accounts for 4.5% (2017: 5.0%) of the current annual passing rent.

16 Share Capital
Under the Company’s Articles of Incorporation, the Company may issue an unlimited number of ordinary shares of 1 pence each, subject to issuance limits set at the AGM each year. As at 31 December 2018 there were 405,865,419 ordinary shares of 1p each in issue (2017: 394,865,419). All ordinary shares rank equally for dividends and distributions and carry one vote each. There are no restrictions concerning the transfer of ordinary shares in the Company, no special rights with regard to control attached to the ordinary shares, no agreements between holders of ordinary shares regarding their transfer known to the Company and no agreement which the Company is party to that affects its control following a takeover bid.

Allotted, called up and fully paid:			2018	2017
			£	£
Opening balance			217,194,412	204,820,219
Shares issued			10,314,000	12,467,700
Issue costs associated with new ordinary shares			(77,355)	(93,507)
Closing balance			227,431,057	217,194,412

			2018	2017
			Number of shares	Number of shares
Opening balance			394,865,419	380,690,419
Issued during the year			11,000,000	14,175,000
Closing balance			405,865,419	394,865,419

17 Reserves
The detailed movement of the below reserves for the years to 31 December 2018 and 31 December 2017 can be found in the Consolidated Statement of Changes in Equity.

Retained earnings
This is a distributable reserve and represents the cumulative revenue earnings of the Group less dividends paid to the Company’s shareholders.

Capital reserves
This reserve represents realised gains and losses on disposed investment properties and unrealised valuation gains and losses on investment properties and cash flow hedges since the Company’s launch.

Other distributable reserves
This reserve represents the share premium raised on launch of the Company which was subsequently converted to a distributable reserve by special resolution dated 4 December 2003. This balance has been reduced by the allocation of preference share finance costs.

18 Earnings per Share
Basic earnings per share amounts are calculated by dividing profit for the year net of tax attributable to ordinary equity holders by the weighted average number of ordinary shares outstanding during the year. As there are no dilutive instruments outstanding, basic and diluted earnings per share are identical.

The earnings per share for the year is set out in the table below. In addition one of the key metrics the Board considers is dividend cover. This is calculated by dividing the net revenue earnings in the year (surplus for the year net of tax excluding all capital items and the swaps breakage costs) divided by the dividends payable in relation to the financial year. For 2018 this equated to a figure of 89% (2017: 104%).

The following reflects the income and share data used in the basic and diluted earnings per share computations:

			2018	2017
			£	£
Surplus for the year net of tax			30,946,377	42,465,234
			2018	2017
			£	£
Weighted average number of ordinary shares outstanding during the year			403,172,131	389,272,679
Earnings per ordinary share (p)			7.68	10.91
Surplus for the year excluding capital items			17,028,172	19,428,568
EPRA earnings per share (p)			4.22	4.99

19 Dividends and Property Income Distribution Gross of Income Tax

		2018	2017
Non Property Income Distributions		£	£
0.668p per ordinary share paid in March 2018 relating to the quarter ending 31 December 2017 (2017: 0.84p)		2,692,811	3,258,910
0.421p per ordinary share paid in November 2018 relating to the quarter ending 30 September 2018 (2017: nil)		1,708,693	-
Property Income Distributions
0.552p per ordinary share paid in March 2018 relating to the quarter ending 31 December 2017 (2017: 0.35p)		2,104,262	1,357,879
1.19p per ordinary share paid in May 2018 relating to the quarter ending 31 March 2018 (2017: 1.19p)		4,797,073	4,626,903
1.19p per ordinary share paid in August 2018 relating to the quarter ending 30 June 2018 (2017: 1.19p)		4,811,949	4,665,723
0.769p per ordinary share paid in November 2018 relating to the quarter ending 30 September 2018 (2017: 1.19p)		3,121,106	4,686,998
		19,235,894	18,596,413

On 29 March 2019 a dividend in respect of the quarter to 31 December 2018 of 1.19 pence per share was paid totalling £4,829,798. The dividend was split as a property income dividend of 0.125 pence per share and a non property income dividend of 1.065 pence per share.

20 Reconciliation of Consolidated NAV to Published NAV
The NAV attributable to ordinary shares is published quarterly and is based on the most recent valuation of the investment properties.

		2018	2017
Number of ordinary shares at the reporting date		405,865,419	394,865,419
		2018	2017
		£	£
Total equity per audited consolidated financial statements		369,386,280	345,998,316
NAV per share (p)		91.0	87.6

21 Related Party Disclosures
Directors’ remuneration
The remuneration of Directors is detailed below which includes pay as you earn tax and national insurance contributions. Further details on the Directors can be found in the Directors’ Remuneration Report and the Corporate Governance Report.

		2018	2017
		£	£
Robert Peto		42,000	40,000
Sally-Ann Farnon		37,500	36,000
Huw Evans		33,500	32,000
Mike Balfour		33,500	32,000
James Clifton-Brown		33,500	32,000
Employers national insurance contributions		12,363	11,962
		192,363	183,962
Directors expenses		9,935	10,049
		202,298	194,011

Investment manager
Management of the property portfolio is contractually delegated to Aberdeen Standard Fund Managers Limited (up to 10 December 2018 – Standard Life Investments (Corporate Funds) Limited) as Investment Manager and the contract with the Investment Manager can be terminated by the Group on not less than one year’s notice. Transactions with the Investment Manager in the year are detailed out in note 4
 

22 Segmental Information
The Board has considered the requirements of IFRS 8 ‘operating segments’. The Board is of the view that the Group is engaged in a single segment of business, being property investment and in one geographical area, the United Kingdom.
 

This Annual Financial Report announcement is not the Company's statutory accounts for the year ended 31 December 2018. The statutory accounts for the year ended 31 December 2018 received an audit report which was unqualified.

The Annual Report will be posted to shareholders in May 2019 and additional copies will be available from the Manager (Tel. [phone]) or by download from the Company's webpage (www.slipit.co.uk).

Please note that past performance is not necessarily a guide to the future and that the value of investments and the income from them may fall as well as rise. Investors may not get back the amount they originally invested.

All enquiries to:

The Company Secretary
Northern Trust International Fund Administration Services (Guernsey) Limited
Trafalgar Court
Les Banques
St Peter Port
Guernsey
GY1 3QL
Tel: [phone]
Fax: [phone]

Jason Baggaley
Standard Life Investments Limited
Tel: [phone]

Graeme McDonald
Standard Life Investments Limited
Tel: [phone]

 

END