Annual Report and Accounts
STANDARD LIFE INVESTMENTS PROPERTY INCOME TRUST
ANNUAL FINANCIAL REPORT IN RESPECT OF THE YEAR ENDED 31 DECEMBER 2015
Strategic Report: Financial Highlights
- The company has grown by over 70% in the year with NAV now standing at £312.8m (2014: £184.4m) driven by portfolio capital growth, NAV accretive share issuance and successful asset management initiatives;
- NAV total return of 15.5% and share price total return of 15.5% in the year, both outperforming the FTSE REIT Index total return of 10.6% and FTSE All Share Index of 1.0%;
- NAV accretive share issuance of £110m in the year the proceeds of which have been timeously invested;
- In order to help finance the purchase of the portfolio of assets described below, the Company increased its borrowing facilities from £84.4million to £139.4million in the form of an additional term loan of £40.6million and a revolving credit facility of £14.4million. As at 31 December 2015 this resulted in a loan to value of 28.1% (31 Dec 2014 – 29.2%) and a weighted average interest rate on loan facilities as at 31 December 2015 of 2.7% (31 Dec 2014 – 3.66%);
- In the absence of unforeseen circumstances it is the intention of the Company to increase the annual dividend in 2016 to 4.76p, an increase of 2.5%. This equates to a yield of 5.5% based on the share price as at 31 March 2016 compared to the FTSE All-Share REIT Index of 3.3% and the FTSE All-Share Index of 3.8% at the same date;
- Ongoing charges of 1.1% as at 31 December 2015 (2014: 1.6%) underlining the benefits of the significant rise in the Company’s NAV in the year and strong cost control.
Property Highlights
- As at 31 December 2015, the portfolio was valued at £452m;
- Portfolio total return for the year of 13.1%, just ahead of the IPD Quarterly version of Monthly Index total return of 13.0% .The standing portfolio (assets held throughout the period) had a total return of 14.7% against a benchmark return of 13.3%;
- Acquired £217m of assets in the year, including a portfolio of 22 assets for £165m in December 2015 which complemented the existing portfolio, will strengthen dividend cover and provide a number of asset management opportunities;
- Sales totalling £55m in the year undertaken to realise profits as well as remove future underperformance risk from the portfolio;
- A number of successful asset management initiatives, contributing to income and capital values, completed during the year including:
- five new lettings completed during the year securing £0.8m pa of new rent
- nine lease extensions agreed with existing tenants securing £2.2m pa
- Successful lease renewals and lettings at White Bear Yard, an office investment in London which is the Company’s largest asset, to drive performance
- Multi let industrial estate in Aberdeen fully let at year end with two large lettings for ten years to the Scottish Ministers and CCF adding to income security.
- Void rate of 1.1% at 31 December 2015 (1.4% in 2014), significantly below the benchmark figure of 8.4%;
- Continuing strong rent collection rates of 100% within 28 days highlighting the continued strength of tenant covenants and the Investment Manager’s credit management process for rent collection.
| Capital Values & Gearing | 31 December 2015 | 31 December 2014 | % Change |
| Total assets (£m) | 467.3 | 278.7 | 67.7 |
| Net asset value per share (p) | 82.2 | 75.5 | 8.9 |
| Ordinary Share Price (p) | 84.5 | 78.3 | 7.9 |
| Premium/(Discount) to net asset value (%) | 2.8 | 3.7 | |
| Loan to Value* | 28.1 | 29.2 | |
| Total Return | 1 year % return | 3 year % return | 5 year % return |
| NAV** | 15.5 | 78.1 | 84.8 |
| Share Price** | 15.5 | 77.3 | 84.3 |
| FTSE Real Estate Investment Trusts Index | 10.6 | 63.6 | 94.8 |
| FTSE All-Share Index | 1.0 | 23.4 | 33.8 |
Property Returns & Statistics (%) |
Year ended 31 December 2015 |
Year ended 31 December 2014 |
|
| Property income return | 6.1 | 7.5 | |
| IPD property income monthly index | 4.9 | 5.6 | |
| Property total return | 13.1 | 18.0 | |
| IPD property total return monthly index | 13.0 | 17.9 | |
| Void rate | 1.1 | 1.4 | |
| Earnings & Dividends | 31 December 2015 |
31 December 2014 |
|
| Dividends declared per ordinary share (p) | 4.644 | 4.616 | |
| Dividend Yield (%)*** | 5.5 | 5.9 | |
| FTSE Real Estate Investment Trusts Index Yield (%) | 3.0 | 3.0 | |
| FTSE All-Share Index Yield (%) | 3.7 | 3.4 | |
| Ongoing Charges**** | |||
| As a % of average net assets including direct property cost | 1.5 | 2.3 | |
| As a % of average net assets excluding direct property cost | 1.1 | 1.6 |
* Calculated as bank borrowings less all cash 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.
*** Based on an annual dividend of 4.644p and the share price at 31 December.
**** Calculated as investment manager fees, auditor’s fees, directors’ fees and other administrative expenses divided by the average NAV for the year.
Sources: Standard Life Investments, Investment Property Databank (“IPDâ€).
Strategic Report: Chairman’s Statement
In what has been a transformational year, I have much pleasure in reporting that the net asset value of your Company grew by 70% in its first full year as a REIT. This growth was achieved through the issue of over £110million of shares in the year to fund acquisitions combined with continued growth in the property portfolio, which comfortably beat its benchmark over the 12 month period. The Company has also announced an increase in its dividend for 2016.
Property Portfolio
In December 2015, the Company announced that it had acquired a portfolio of 22 assets for £165 million funded through a mixture of equity issuance, debt and existing cash resources. The successful acquisition of this portfolio further diversifies the sector, tenant and regional exposure of the Company, offers significant asset management opportunities to create further value and will enhance dividend cover going forward. In addition to this, the Company acquired a further 9 properties in the year for £49.5million and disposed of 10 properties for a total of £58.7million. As a result of this activity the portfolio is now valued at £452million, an increase of £182million in the year. Further details on the portfolio can be found in the Investment Manager’s report.
Share Issuance
As part of the portfolio acquisition above, the Company issued shares to the value of £75.7million at a premium to NAV. In addition, in the first half of the year, the Company issued shares to the value of £34.8million at a minimum premium to NAV of 5%, all of which was efficiently invested into the portfolio to help generate positive returns and minimise cash drag. The share issuance programme the Company has undertaken has helped the Company grow significantly in the year, boosting the liquidity of the Company’s shares and resulting in the ongoing charges of the Company falling from 1.6% at the end of December 2014 to 1.1% at the end of 2015 with a further fall expected in 2016.
Performance
The Company has delivered both strong NAV and share price performance over the year. The NAV total return for the year was 15.5%, driven by strong capital growth in the property portfolio. The share price total return was 15.5% and the Company’s shares continued to trade at a premium to NAV of 2.8% as at 31 December 2015. Both the NAV and share price total return outperformed the FTSE All-Share REIT index total return of 10.6% and the FTSE All-Share Index of 1.0%.
Debt
In order to help fund the acquisition of the portfolio mentioned above the Company restructured its borrowings with RBS in December 2015. The Company increased its borrowing facilities from £84.4million to £139.4million. The additional borrowing was in the form of an additional term loan of £40.6million and a revolving credit facility (“RCFâ€) of £14.4million (with the potential to draw a further £15.6million of the RCF) all of which is due to expire in June 2017. As at 31 December the loan to value ratio (assuming all cash is placed with RBS as an offset to the loan balance) was 28.1%. The bank covenant level is 65 %.
The Company is in advanced negotiations to refinance all its existing loan facilities on favourable terms and expects to make a further announcement on this shortly.
Dividends
The Company paid dividends totalling 4.644p relating to the 2015 financial year. Subsequent to the acquisition of the portfolio described above, which should boost dividend cover going forward in the absence of unforeseen circumstances, the Board announced their intention to increase the dividend by 2.5% in 2016 to four quarterly payments of 1.19p. Based on the share price as at 31 March 2016 this equates to a yield of 5.5% which compares favourably to the yield on both the FTSE All Share REIT Index of 3.3% and the FTSE All-Share Index of 3.8% at the same date.
Board Changes
As announced in the Interim Report it is my intention to stand down from the Board at the AGM in June 2016, to be replaced by Robert Peto. I am also pleased to report that, subsequent to the year end, the Company has appointed Mike Balfour as a new director. He was previously Chief Executive Officer of Thomas Miller Investment Management and has a wealth of experience in investment management and closed ended funds.
Base Erosion and Profit Shifting
In early October 2015, the OECD published guidance relating to base erosion and profit shifting (“BEPSâ€). In light of this guidance, the recent budget introduced changes to the rules on interest deductibility for tax purposes which will come into force in 2017. It is too early to be definitive as to the impact, if any, that this change will have on the Company given its REIT status. However, the Company and its advisers will continue to closely monitor the situation.
Outlook
The UK economy is expected to continue to grow, although at below trend levels, despite elevated risks both at home and abroad. Occupier markets remain relatively strong which should maintain rental growth momentum over the next few years, although there are signs of some occupiers putting decisions on hold pending greater certainty on the outcome of the EU referendum. However, given the fall in yields for real estate in recent years, which is not expected to continue, and the recent 1% stamp duty rise in the budget, it is anticipated that commercial property returns will moderate with total returns being driven by income.
Against this background, the Company’s portfolio is well positioned to continue to grow. The portfolio acquisition in December 2015 increased the scale and diversity of the portfolio and will give rise to further asset management opportunities which will be crucial in an environment where yield compression is limited. Importantly, the new portfolio should also boost income generation at a time when income is becoming the main driver of performance. Combined with the upcoming refinancing of the Company’s debt facilities, which should generate significant interest savings, your Company is in a strong position for the future.
Richard Barfield
Chairman
18 April 2016
Strategic Report: Strategic Overview
Objective
The objective of the Company 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 Company 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 Company’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 Company’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 Standard Life Investments (Corporate Funds) Limited (‘Investment Manager’).
Strategy
During the year, the Board reassessed its strategy, 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.
At property level, it is intended that the Company remains primarily invested in the commercial sector, while keeping a watching brief on other classes such as student accommodation and care homes. The Company is principally invested in office, industrial and retail properties and intends to remain so. In all sectors, poor secondary and tertiary locations are regarded as high risk and will be avoided.
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 within the Investment Manager can be used to beneficial effect. The Board will continue to have very careful regard to tenant profiles.
The Board continues to seek out opportunities for further growth in the Company and achieved this during 2015 by raising an additional £110m of capital through new share issues, as detailed in the Chairman’s Statement.
The maintenance of a tax efficient structure was achieved by converting the Company to a UK REIT on 1 January 2015.
The Board
The Board currently consists of a non-executive Chairman and four non-executive Directors. There is a commitment to achieve the proper levels of diversity. At the date of this report, the Board consisted of one female and four male Directors. The Company does not have any employees.
Key Performance Indicators
The Board meets quarterly and at each meeting reviews performance against a number of key measures:
- Property income and total return against the Quarterly Version of the Investment Property Databank Balanced Monthly Funds Index (‘the Index’).
The Index provides a benchmark for the performance of the Company’s property portfolio and enables the Board to assess how the portfolio is performing relative to the market. A comparison is made of the Company’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 Company’s portfolio on a quarterly basis and compares the level to the market average, as measured by the Investment Property Databank. The Board seeks to ensure that proper priority is being given by the Investment Manager to replacing the Company’s 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 total return reflects both the net asset value growth of the Company 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 net asset value total return of the Company over various time periods (quarter, annual, three years, five years) and compares the Company’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 net asset value and believes that a key driver to the level of the premium or discount is the Company’s long term investment performance. However, there can be short term volatility in the premium or discount and the Board takes powers at each AGM to enable it to issue or buy back shares with a view to limiting this volatility.
- Dividend per share and dividend yield
A key objective of the Company 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 yield, 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 are disclosed in the Financial Highlights, Chairman’s Statement and Investment Manager’s Report.
Principal Risks and Uncertainties
The Company’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 Company and its objectives become unattractive to investors. This 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 Company’s broker to discuss these points and address any issues that arise.
- Poor selection of new properties for investment. A comprehensive and documented initial due diligence process, which will filter out properties that do not fit required criteria, is carried out by the Investment Manager. Where appropriate, this is followed by detailed review and challenge by the Board prior to a decision being made to proceed with a purchase. This process is designed to mitigate the risk of poor property selection.
- Tenant failure or inability to let property. Due diligence work on potential tenants is undertaken before entering into new lease arrangements. In addition, 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 Company 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.
- Breach of loan covenants. The Investment Manager monitors the loan covenants on a regular basis and provides a monthly 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 Company activity and performance.
- Loss on financial instruments. The Company has entered into a number of interest rate swap arrangements. These swap instruments are valued and monitored on a monthly basis by the counterparty bank. The Investment Manager checks the valuations of the swap instruments internally to ensure they are accurate. In addition, the credit rating of the bank that the swaps are taken out with is assessed regularly.
Other risks faced by the Company include the following:
- Strategic – incorrect strategy, including sector and property allocation and use of gearing, could all lead to poor return for shareholders.
- Tax efficiency – the structure of the Company or changes to legislation could result in the Company no longer being a tax efficient investment vehicle for shareholders.
- Regulatory – breach of regulatory rules could lead to the suspension of the Company’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.
- Geopolitical – geopolitical instability or change could have an adverse affect on UK real estate and stock markets.
The implementation of AIFMD during 2014 and the conversion of the Company to a UK REIT on 1 January 2015 have introduced additional regulatory risks to the Company in the form of ensuring compliance with the respective regulations. In relation to AIFMD, the Board receives regular reporting from the AIFM and the depositary to ensure both are meeting their regulatory responsibilities in respect of the Company. In relation to UK REIT status, the Board has put in place a system of regular reporting to ensure that the requirements of the UK REIT regime are being adequately monitored and fully complied with.
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 Company’s property portfolio, levels of gearing and the overall structure of the Company.
Social, Community and Employee Responsibilities
The Company has no direct social, community or employee responsibilities. The Company 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 Company’s business there are no relevant human rights issues and there is thus 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 Policy
The Investment Manager acquires and manages properties on behalf of the Company. It is recognised that these activities have both direct and indirect environmental impacts.
The Board has endorsed the Investment Manager’s own environmental policy which is to work in partnership with contractors, suppliers, tenants and consultants to minimise those impacts, seeking continuous improvements in environmental performance and conducting regular reviews.
The Investment Manager’s policy focuses on energy conservation, mitigating greenhouse gas (‘GHG’) emissions, maximising waste recycling and water conservation.
As an investment company, the Company’s own direct environmental impact is minimal and GHG emissions are therefore negligible. Information on the GHG emissions in relation to the Company’s real estate portfolio is disclosed in the Standard Life Investments annual Sustainable Real Estate Investment report, a copy of which can be obtained on request from the Investment Manager. The Company was awarded Green Star ranking from the Global Real Estate Sustainability Benchmark for 2015.
Viability Statement
The Board considers viability as part of its ongoing programme of monitoring risk. The Board considers five years to be a reasonable time horizon over which to review the continuing viability of the Company, although it does have regard to viability over the longer term, in particular to key points outside this time frame, such as the due dates for the repayment of long-term debt.
The Board has considered the nature of the Company’s assets and liabilities and associated cash flows and has determined that five years is the maximum timescale over which the performance of the Company can be forecast with a material degree of accuracy and so is an appropriate period over which to consider the Company’s viability.
In assessing the Company’s viability, 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 Company’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 relating to LTV and interest cover; and
- The valuation and liquidity of the Company’s property portfolio, 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 Company. The Board takes any potential risks to the ongoing success of the Company and its ability to perform, including the refinancing of its current debt facility, 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 Company 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 Highlights, Chairman’s Statement, Strategic Overview and Investment Manager’s Report. The Strategic Report was approved by the Board on 18 April 2016 and signed on its behalf by:
Richard Barfield
Chairman
18 April 2016
Strategic Report: Investment Manager’s Report
UK Real Estate Market
Despite recent market volatility the UK economic fundamentals remain intact, providing a solid base for real estate occupier demand. A key risk to the outlook remains weak global growth particularly among emerging markets and an appreciating currency could weigh on the UK recovery further out. The uncertainty surrounding a vote on Brexit also has scope to disrupt both the economy and investment markets. Returns for the real estate asset class continue to moderate but remain compelling relative to other asset classes. Over the twelve months to 31 December 2015, all Property recorded a total return of 13.0% p.a. according to the quarterly version of the IPD Monthly Index whilst rental growth continued to improve at 4.2% p.a. in the twelve months period.
UK listed real estate equities total returns were 10.6% over the year to 31 December 2015, outperforming the FTSE100 which fell by 1.3% in total return terms and the FTSE All Share which rose by 1.0%.
In the year to end December, the office sector continued to generate the highest returns. The sector recorded a total return of 17.2% whilst the industrial sector recorded the next strongest returns at 16.6%. Retail remains the laggard sector with a total return of 8.1% in the year. As in 2014 capital growth was fuelled by falling yields, driven mainly by the weight of money, and the relatively attractive yield on real estate. Over the last three months of 2015 (and continuing into 2016) the rate of capital growth slowed and yield compression appears to have stopped.
Investment Outlook
Total returns for UK real estate look to have peaked for this cycle and income is likely to be the main component of returns going forward as opposed to capital growth which has been a key element of returns over the past few years. During the last three months of 2015 yield compression slowed as investors expectations of interest rate rises grew. That sentiment moderated in the first two months of 2016, to be replaced by a concern over global growth, and the impact that will have on occupier demand. Despite heightened global uncertainty, projections for UK economic growth are likely to remain in positive territory and provide a reasonable backdrop for the domestic real estate outlook. Relative to longer term government bonds, the yield gap remains significant by historic standards, and that should lead to continued investor demand for real estate as investors search for attractive, stable and predictable sources of income. Indeed, the sector remains attractive from a fundamental point of view, with reasonable economic drivers and a limited pipeline of future new developments expected to maintain rental growth. We anticipate reasonable positive total returns for investors on a three year hold period due to the elevated yield and income growth prospects.
The great unknown at the time of writing is what the outcome, and impact, of the referendum on EU membership will be. At the very least one can expect a slowdown in occupier demand in the lead up to it, especially in central London. In the short term at least the rest of the UK is likely to be insulated to some degree. If the vote is to remain in the EU then this slowdown in demand is likely to be temporary. If the vote is to leave, then the impact is not possible to predict currently due to the range of possible outcomes, but will be negative on pricing for the short to medium term at least.
Investment Management Strategy
The investment strategy remains focused on achieving the Company’s objective of producing an attractive income return with the prospect of income and capital growth. During the year the Company’s NAV per share grew by 8.9%. At the year end share price of 84.5p the dividend yield was 5.5%. The Company’s Board continues to target a covered dividend.
2015 was another year of growth for the Company. An important part of the growth strategy was to protect and enhance existing shareholders interests. This was done by issuing shares at a reasonable premium to the then NAV (normally 5%), and minimising cash drag by only raising funds when we were confident the money could be deployed in a reasonable time period on attractive investments.
At the end of the reporting period the Company undertook a large transaction whereby it bought a fund of 22 assets (‘the new portfolio’) for £165m using a combination of new equity, debt, and existing cash. No stamp duty was payable on the purchase and the new equity was raised at a premium of 2.8%.
Even during times of growth it is important to manage existing assets, and we remained focussed on regearing leases and disposing of assets that have specific risk to the fund; more details of which can be found below.
Performance
The Company’s aim is to provide investors with an attractive income return, with potential for growth in income and capital.
The income yield on the portfolio has to be sufficient to maintain the covered dividend. The income yield from the Company’s portfolio has been consistently higher than the more general market as recorded by the IPD monthly index.
Although income is a key focus for us, the NAV total return to investors is also important, as is raising new equity at a reasonable premium to the then NAV so that purchase costs do not negatively impact existing shareholders. It is also important, when raising equity in a rising market to try and avoid cash drag by not raising too much at one time and being unable to invest it. The cash drag impacts both capital returns and also the ability to maintain a covered dividend.
Portfolio Valuation
The Company’s investment portfolio was valued by Jones Lang La Salle on a quarterly basis throughout 2015. For the December valuation (and ongoing valuations) the new portfolio was valued by Knight Frank. At the year end the total portfolio was valued at £452.0m, and the Company held £12.4m of cash. This compares to £270.1m (this is the open market value adjusted for anticipated sales costs on properties held for sale) and £5.4m respectively as at end 2014.
Lease Expiry Profile
The Company has an average unexpired lease term to the earliest of lease end or tenant break of 5.8 years. This compares to the IPD average of 7.5 years (excluding leases over 35 years). The portfolio before the purchase of the new portfolio had an unexpired lease term of 7.2 years, and one of the attractions of buying the new portfolio was the opportunity for asset management. Approximately 10% of the Company’s income is subject to a lease expiry or break in 2016, and 9% in 2017.
Purchases
The philosophy of the Company is to acquire assets that offer an attractive income return and have good medium/long term prospects. We like to be able to add value through asset management, and seek to buy in lot sizes where there is less competition. We focus on good quality assets, in good locations, let to good tenants. We are less concerned about lease length, as past experience has shown tenant retention is high where the assets are of good quality and meet occupier needs.
During the first nine months of the year the Company acquired 9 assets for a total of £49.5m excluding costs.
In the final quarter the Company completed the purchase of the new portfolio – 22 assets for £165m excluding costs. The portfolio was a very good fit for the Company as it had a similar structure with over exposure to office and industrial, and an underweight position to retail. The geographical split was also beneficial with nothing in central London but 28% in Greater London and a further 27% in the South East. The new portfolio has plenty of opportunity for asset management, with a number of shorter leases, and with an initial yield of 5.9% there is scope to increase rents in the short term.
Sales
The Company undertook several sales to reduce specific expiry risk, exiting some smaller assets that we felt would not perform in line with expectations, and taking profit from others. We completed on the sale of 10 assets for a total of £58.7m
Asset Management
Asset management is central to how we run the portfolio. We like to meet with our tenants and make sure that the property we own meets occupiers needs. During the course of 2015 we completed 6 new lettings and 8 lease regears. As a result we ended the year with voids of just 1.1%, well below the IPD benchmark level of 8.4%.
It is noticeable that in many parts of the UK the supply of good quality accommodation is limited, with increasing tenant demand. This is leading to rental growth from competition between tenants. In this environment it is important to understand tenant needs to maintain income security, and to add value through lease regears and taking surrenders to refurbish space and upgrade it.
Jason Baggaley
Fund Manager
Statement of Directors’ Responsibilities
The Directors are responsible for preparing the Annual Report and the Group 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 (“IFRSsâ€) as adopted by the European Union.
The Directors are required to prepare Group financial statements for each financial year which give a true and fair view of the state of affairs of the Group and of the financial performance and cash flows of the Group for that period. In preparing those 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 financial statements; and
- prepare the Group 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 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 Financial Statements since they were initially presented on the website. Legislation in Guernsey governing the preparation and dissemination of the financial statements may differ from legislation in other jurisdictions.
Responsibility Statement of the Directors’ in respect of the Consolidated Annual Report
Statement 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 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 18 April 2016
Richard Barfield
Chairman
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: 01481 745001
Fax: 01481 745051
Jason Baggaley
Standard Life Investments Limited
Tel: 0131 245 2833
Graeme McDonald
Standard Life Investments Limited
Tel: 0131 245 3151
AUDITED FINANCIAL STATEMENTS
Consolidated Statement of Comprehensive Income
for the year ended 31 December 2015
| Notes | 2015 | 2014 | |
| £ | £ | ||
| Rental income | 20,142,180 | 16,145,930 | |
| Surrender premium income | 120,000 | 38,469 | |
| Valuation gain from investment properties | 7 | 17,636,973 | 21,197,869 |
| Costs on business acquisition | 10 | (1,942,498) | – |
| (Loss) / gain on asset acquisition | 9 | (75,181) | 136,938 |
| (Profit) / (loss) on disposal of investment properties | 3,024,748 | (1,840,412) | |
| Investment management fees | 4 | (2,105,104) | (1,690,233) |
| Other direct property operating expenses | (929,165) | (1,000,785) | |
| Directors' fees and expenses | 23 | (124,296) | (145,997) |
| Valuer’s fee | 4 | (92,324) | (56,542) |
| Auditor’s fee | 4 | (82,308) | (46,513) |
| Other administration expenses | (376,776) | (358,161) | |
| Operating profit | 35,196,249 | 32,380,563 | |
| Finance income | 5 | 68,186 | 72,326 |
| Finance costs | 5 | (3,324,782) | (3,282,172) |
| Profit for the year before taxation | 31,939,653 | 29,170,717 | |
| Taxation | |||
| Tax charge | 6 | – | (587,315) |
| Profit for the year, net of tax | 31,939,653 | 28,583,402 | |
Other comprehensive income Valuation gain/(loss) on cash flow hedges |
15 | 589,647 | (2,643,942) |
| Total comprehensive income for the year, net of tax |
32,529,300 | 25,939,460 | |
| Earnings per share: | pence | pence | |
| Basic and diluted earnings per share | 19 | 11.39 | 15.40 |
| Adjusted (EPRA) earnings per share | 19 | 4.05 | 4.90 |
All items in the above Consolidated Statement of Comprehensive Income derive from continuing operations.
Consolidated Balance Sheet
as at 31 December 2015
| Notes | 2015 | 2014 | |
| £ | £ | ||
| ASSETS | |||
| Non-current assets | |||
| Investment properties | 7 | 448,616,754 | 261,672,121 |
| Lease incentives | 7 | 3,457,588 | 2,436,976 |
| 452,074,342 | 264,109,097 | ||
| Current assets Investment properties held for sale |
8 | – | 6,550,100 |
| Trade and other receivables | 11 | 2,858,851 | 2,660,440 |
| Cash and cash equivalents | 12 | 12,395,516 | 5,399,095 |
| 15,254,367 | 14,609,635 | ||
| Total assets | 467,328,709 | 278,718,732 | |
LIABILITIES |
|||
| Current liabilities | |||
| Trade and other payables | 13 | 12,788,999 | 7,205,415 |
| Interest rate swaps | 15 | 908,751 | 1,386,451 |
| Other liabilities | – | 500 | |
| 13,697,750 | 8,592,366 | ||
| Non-current liabilities | |||
| Bank borrowings | 14 | 139,048,848 | 83,980,382 |
| Interest rate swaps | 15 | 1,176,541 | 1,288,488 |
| Other liabilities | – | 6,094 | |
| Rental deposits due to tenants | 622,283 | 483,880 | |
| 140,847,672 | 85,758,844 | ||
| Total liabilities | 154,545,422 | 94,351,210 | |
| Net assets | 312,783,287 | 184,367,522 | |
| EQUITY | |||
| Capital and reserves attributable | |||
| to Company's equity holders | |||
| Share capital | 17 | 204,820,219 | 96,188,648 |
| Retained earnings | 18 | 6,167,329 | 7,634,503 |
| Capital reserves | 18 | 3,957,367 | (17,294,001) |
| Other distributable reserves | 18 | 97,838,372 | 97,838,372 |
| Total equity | 312,783,287 | 184,367,522 | |
| Net Asset Value (NAV) per share | |||
| NAV | 21 | 82.2p | 75.5p |
| EPRA NAV | 21 | 82.7p | 76.6p |
Approved by the Board of Directors on 18 April 2016 and signed on its behalf by:
Richard Barfield
Director
Consolidated Statement of Changes in Equity
for the year ended 31 December 2015
| Other | ||||||
| Share | Retained | Capital | distributable | |||
| Notes | Capital | earnings | reserves | reserves | Total equity | |
| £ | £ | £ | £ | £ | ||
| Opening balance 1 January 2015 | 96,188,648 | 7,634,503 | (17,294,001) | 97,838,372 | 184,367,522 | |
| Profit for the year | – | 31,939,653 | – | – | 31,939,653 | |
| Valuation gain on cash | ||||||
| flow hedges | 15 | – | – | 589,647 | – | 589,647 |
| Total comprehensive gain for the year | – | 31,939,653 | 589,647 | – | 32,529,300 | |
| Ordinary shares issued | ||||||
| net of issue costs | 17 | 108,631,571 | – | – | – | 108,631,571 |
| Dividends Paid | 20 | – | (12,745,106) | – | – | (12,745,106) |
| Valuation gain of | ||||||
| investment properties | 7 | – | (17,636,973) | 17,636,973 | – | – |
| Profit on disposal of investment properties | – | (3,024,748) | 3,024,748 | – | – | |
| Balance at 31 December 2015 | 204,820,219 | 6,167,329 | 3,957,367 | 97,838,372 | 312,783,287 |
Consolidated Statement of Changes in Equity
for the year ended 31 December 2014
| Other | ||||||
| Share | Retained | Capital | distributable | |||
| Notes | Capital | earnings | reserves | reserves | Total equity | |
| £ | £ | £ | £ | £ | ||
| Opening balance 1 January 2014 | 31,337,024 | 6,560,853 | (34,144,454) | 97,838,372 | 101,591,795 | |
| Profit for the year | – | 28,583,402 | – | – | 28,583,402 | |
| Valuation loss on cash | ||||||
| flow hedges | 15 | – | – | (2,643,942) | – | (2,643,942) |
| Total comprehensive gain for the year | – | 28,583,402 | (2,643,942) | – | 25,939,460 | |
| Ordinary shares issued | ||||||
| net of issue costs | 17 | 64,851,624 | – | – | – | 64,851,624 |
| Dividends Paid | 20 | – | (8,015,357) | – | – | (8,015,357) |
| Valuation gain of | ||||||
| investment properties | 7 | – | (21,197,869) | 21,197,869 | – | – |
| Gain on asset acquisition | – | (136,938) | 136,938 | – | – | |
| Loss on disposal of investment properties | – | 1,840,412 | (1,840,412) | – | – | |
| Balance at 31 December 2014 | 96,188,648 | 7,634,503 | (17,294,001) | 97,838,372 | 184,367,522 |
Consolidated Cash Flow Statement
for the year ended 31 December 2015
| Notes | 2015 | 2014 | |
| £ | £ | ||
| Cash flows from operating activities | |||
| Profit for the year before taxation | 31,939,653 | 29,170,717 | |
| Movement in non-current lease incentives | 270,464 | (1,290,976) | |
| Movement in trade and other receivables | 1,230,084 | (1,354,916) | |
| Movement in trade and other payables | 3,735,996 | 2,917,533 | |
| Finance costs | 5 | 3,324,782 | 3,282,172 |
| Finance income | 5 | (68,186) | (72,326) |
| Valuation gain from investment properties | 7 | (17,636,973) | (21,197,869) |
| Loss / (gain) on asset acquisition | 9 | 75,181 | (136,938) |
| (Profit) / loss on disposal of investment properties | (3,024,748) | 1,840,412 | |
| Net cash inflow from operating activities | 19,846,253 | 13,157,809 | |
| Cash flows from investing activities | |||
| Interest received | 5 | 68,186 | 72,326 |
| Purchase of investment properties | 7 | (52,198,123) | (97,853,799) |
| Business acquisition net of cash acquired | 10 | (165,060,458) | – |
| Capital expenditure on investment properties | 7 | (1,144,434) | (2,708,022) |
| Net proceeds from disposal of investment properties |
7 | 57,854,848 | 26,759,588 |
| Net cash outflow from investing activities | (160,479,981) | (73,729,907) | |
| Cash flows from financing activities | |||
| Proceeds on issue of ordinary shares | 17 | 110,462,680 | 65,868,956 |
| Transaction costs of issue of shares | 17 | (1,831,109) | (1,017,332) |
| Bank borrowing | 14 | 55,000,000 | – |
| Bank borrowing arrangement costs | 14 | (173,450) | – |
| Interest paid on bank borrowings | 5 | (1,869,338) | (1,931,665) |
| Payment on interest rate swaps | 5 | (1,213,528) | (1,236,719) |
| Dividends paid to the Company’s shareholders | 20 | (12,745,106) | (8,015,357) |
| Net cash inflow from financing activities | 147,630,149 | 53,667,883 | |
| Net increase/(decrease) in cash and cash equivalents in the year |
6,996,421 | (6,904,215) | |
| Cash and cash equivalents at beginning of the year | 5,399,095 | 12,303,310 | |
| Cash and cash equivalents at end of year | 12 | 12,395,516 | 5,399,095 |
Standard Life Investments Property Income Trust Limited
Notes to the Consolidated Financial Statements
for the year ended 31 December 2015
1 GENERAL INFORMATION
Standard Life Investments Property Income Trust Limited (“the Companyâ€) and its subsidiaries (together the “Groupâ€) 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 18 April 2016.
2 ACCOUNTING POLICIES
2.1 Basis of preparation
The audited Consolidated Financial Statements of the Group have been prepared in accordance with and comply with International Financial Reporting Standards as adopted by the European Union (“IFRSâ€), 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 of the previous financial year. The following amendments to existing standards and interpretations were effective for the year, but either they were not applicable to or did not have a material impact on the group:
- Annual Improvements to IFRSs 2011–2013 Cycle
- IFRIC 21 Levies
New and amended standards and interpretations not applied
The following new and amended standards and interpretations in issue are adopted by the EU but are not yet effective and have not been applied by the Group:
| Effective date | |||
| IAS 19 Employee Benefits – Defined Benefit Plans: Employee Contributions (Amendments) | 1 February 2015 | ||
| Annual Improvements to IFRSs 2010–2012 Cycle | 1 February 2015 | ||
| Amendments to IFRS 11: Accounting for Acquisitions of Interests in Joint Operations | 1 January 2016 | ||
| Amendments to IAS 16 and IAS 41: Agriculture: Bearer Plants | 1 January 2016 | ||
| Amendments to IAS 16 and IAS 38: Clarification of Acceptable Methods of Depreciation and Amortisation | 1 January 2016 | ||
| Amendments to IAS 27: Equity Method in Separate Financial Statements | 1 January 2016 | ||
| Amendments to IAS 1: Disclosure Initiative | 1 January 2016 | ||
| Annual Improvements to IFRSs 2012–2014 Cycle | 1 January 2016 |
The directors do not expect the adoption of these standards and interpretations to have a material impact on the consolidated or company financial statements in the period of initial application.
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, uncertainty 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 independent real estate valuation experts using recognised valuation techniques. The fair values are determined based on recent real estate transactions with similar characteristics and locations to those of the Group’s assets.
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. These values are validated by comparison to internally generated valuations prepared using the fair value principles outlined above.
The sensitivity analysis in note 3 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 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 to 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 Aviva Investors UK Real Estate Recovery II Unit Trust (the “Unit Trust†or “UTâ€), a Jersey Property Unit Trust “JPUTâ€, as detailed in note 10, in the current year 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 currencyâ€). The consolidated financial statements are presented in pounds 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 (“VATâ€) 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 2015 were £120,000 (2014: £38,469) 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 when the significant risks and returns have been transferred to the buyer. This will normally take place on exchange of contracts unless there are significant conditions attached. For conditional exchanges, sales are recognised when these conditions are satisfied.
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). Portrack Interchange in Stockton On Tees did not earn any income until it was sold on 2 September 2015 (2014: no non-income producing properties).
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 equity is recognised in equity and not in the income statement. Positions taken in tax returns with respect to situations in which applicable tax regulations are subject to interpretation 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. Where 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 tax assets and liabilities are recognised on a net basis to the extent they relate to the same fiscal unity and fall due in approximately the same period.
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 independent 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 that has been recognised in the Balance Sheet as a finance lease obligation.
Acquisitions of investment properties are considered to have taken place on exchange of contracts unless there are significant conditions attached. For conditional exchanges acquisitions are recognised when these conditions are satisfied.
Investment properties are derecognised when they have been disposed of or permanently withdrawn from use and no future economic benefit is expected from the 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 Non-current assets 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 less costs to sell.
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 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 established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. 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 amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. 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. When a trade receivable is uncollectible, it is written off against the allowance account for trade receivables. Subsequent recoveries of amounts previously written off are credited in the Consolidated Statement of Comprehensive Income.
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
Derivatives 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 offsetting 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 expense is 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 classified as non-current consistent with the classification of the underlying item. A derivative instrument that is a designated and effective hedged instrument is classified consistent with the classification of the underlying hedged item.
L Service charge
The Company has appointed a managing agent to deal with the service charge at the investment properties and the Company is acting as an agent for the service charge and not a principal. As a result the Group recognises void expenses in the Consolidated Statement of Comprehensive Income. The table in note 22 is a summary of the service charge during the year. It shows the amount the service charge has cost the tenants for the 12 months to 31 December 2015, the amount the tenants have been billed based on the service charge budget and the amount the Group has paid in relation to void units over the year. The table also shows the balancing service charge that is due back to the tenants as at the Balance Sheet date.
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 (“HMRCâ€) 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 13 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, other than derivatives, 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 pounds 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 derivative financial instruments.
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 14 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 15). The Group has floating rate borrowings of £72,000,000 and £12,432,692, all of which has been fixed via interest rate swaps. The Group increased borrowings by £55,000,000 on 22 December 2015 to fund the purchase of the units in Aviva Investors UK Real Estate Recovery II Unit Trust. As a result of this the margin interest rate on borrowings decreased from 1.65% to 1.25% from 22 December 2015. The terms of the interest rate swap were unchanged from the existing agreement and resulted in an ineffective hedge from 22 December 2015.
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 swaps 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 2.3.
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 following tables set out the carrying amount of the Group’s financial instruments excluding the amortisation of borrowing costs as outlined in note 5. Bank borrowings have been fixed due to interest rate swaps and are detailed further in note 15:
| As at 31 December 2015: | ||||
Fixed Rate £ |
Variable rate £ |
Weighted average interest rate £ |
||
| Cash and cash equivalents | - | 12,395,516 | 0.402% | |
| Bank borrowings | 72,000,000 | - | 3.302% | |
| Bank borrowings | 12,432,692 | - | 3.021% | |
| Bank borrowings | - | 55,000,000 | 1.753% | |
| As at 31 December 2014: | ||||
Fixed Rate £ |
Variable rate £ |
Weighted average interest rate £ |
||
| Cash and cash equivalents | - | 5,399,095 | 0.645% | |
| Bank borrowings | 72,000,000 | - | 3.802% | |
| Bank borrowings | 12,432,692 | - | 3.521% | |
At 31 December 2015, 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 £183,654 higher (2014: £182,269 higher profit) as a result of the higher interest income on cash and cash equivalents. Other Comprehensive Income and the Capital Reserve would have been £2,266,614 higher (2014: £2,313,008 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 2015, 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 £183,654 lower (2014: £127,268 lower profit) as a result of the lower interest income on cash and cash equivalents. Other Comprehensive Income and the Capital Reserve would have been £2,350,900 lower (2014: £3,254,898 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 (see also credit risk below). 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 £1,696,704 (2014: £1,738,063) as detailed in note 11.
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 2015 £7,821,163 (2014:£4,634,184) was placed on deposit with The Royal Bank of Scotland plc (“RBSâ€), £1,193,437 (2014: £764,911) was held with Citibank and £3,380,916 was held with RBS on behalf of Standard Life Investments Unit Trust and Standard Life Investment Limited Partnership, two subsidiaries as mentioned in note 9. 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-2 Stable by Standard & Poor’s and P-2 Stable by Moody’s. RBS is rated A-3 Positive by Standard & Poor’s and NP Positive 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.
Year ended 31 December 2015
| On demand | 12 months | 1 to 5 years | >5 years | Total | |
| £ | £ | £ | £ | £ | |
| Interest-bearing loans | – | 2,565,213 | 140,715,298 | – | 143,280,511 |
| Interest rate swaps | – | 1,201,368 | 2,398,705 | – | 3,600,073 |
| Trade and other payables | 5,309,803 | – | – | – | 5,309,803 |
| Rental deposits due to tenants |
– | 173,072 | 611,458 | 10,825 | 795,355 |
| 5,309,803 | 3,939,653 | 143,725,461 | 10,825 | 152,985,742 |
Year ended 31 December 2014
| On demand | 12 months | 1 to 5 years | >5 years | Total | |
| £ | £ | £ | £ | £ | |
| Interest-bearing loans | – | 1,868,495 | 90,038,178 | – | 91,906,673 |
| Interest rate swaps | – | 1,223,953 | 3,665,814 | – | 4,889,767 |
| Leasehold obligations | – | 500 | 2,000 | 52,500 | 55,000 |
| Trade and other payables | 2,066,393 | – | – | – | 2,066,393 |
| Rental deposits due to tenants |
– | 155,728 | 386,380 | 97,500 | 639,608 |
| 2,066,393 | 3,248,676 | 94,092,372 | 150,000 | 99,557,441 |
The disclosed amount for interest rate swaps in the above 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.
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 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 net debt divided by gross assets. Net debt is calculated as total borrowings less cash and cash equivalents. Gross assets are calculated as non-current assets and current assets as shown in the Consolidated Balance Sheet.
The gearing ratios at 31 December 2015 and at 31 December 2014 were as follows:
2015 £ |
2014 £ |
|
| Total Borrowings (excluding amortisation of arrangement fees) | 139,432,692 | 84,432,692 |
| Less: cash and cash equivalents | (12,395,516) | (5,399,095) |
| Net debt | 127,037,176 | 79,033,597 |
| Gross Assets | 467,328,709 | 278,718,732 |
| Gearing ratio | 27% | 28% |
Gearing, calculated as net debt as a percentage of gross assets at 31 December 2015 was 27% and must not exceed 65%. The Board’s current intention is that the Company’s loan to value ratio (calculated as borrowings less all cash as a proportion of the property portfolio valuation) will not exceed 45%.
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 | |||||||
| 2015 | 2014 | 2015 | 2014 | |||||
| Financial Assets | £ | £ | £ | £ | ||||
| Cash and cash equivalents | 12,395,516 | 5,399,095 | 12,395,516 | 5,399,095 | ||||
| Trade and other receivables | 2,858,851 | 2,660,440 | 2,858,851 | 2,660,440 | ||||
| Financial Liabilities | ||||||||
| Bank borrowings | 139,048,848 | 83,980,382 | 139,415,524 | 84,202,020 | ||||
| Interest rate swaps | 2,085,292 | 2,674,939 | 2,085,292 | 2,674,939 | ||||
| Trade and other payables | 6,105,159 | 2,706,001 | 6,105,159 | 2,706,001 | ||||
The fair value of the financial assets and liabilities are included at an estimate of the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The following methods and assumptions were used to estimate the fair value:
- Cash and cash equivalents, trade and other receivables 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 2014.
- 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 2014. The definition of the valuation techniques are explained in the significant accounting judgements, estimates and assumptions.
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*:
| Level 1 | Level 2 | Level 3 | Total fair value | ||
| 31 December 2015 | |||||
| Interest rate swaps | – | 2,085,292 | – | 2,085,292 | |
| 31 December 2014 | |||||
| Interest rate swaps | – | 2,674,939 | – | 2,674,939 |
*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.
4 FEES
Investment management fees
On 19 December 2003 Standard Life Investments (Corporate Funds) Limited (“the Investment Managerâ€) was appointed as Investment Manager to manage the property assets of the Group. A new Investment Management Agreement (“IMAâ€) was entered into on 7 July 2014, appointing the Investment Manager as the AIFM (“Alternative Investment Fund Managerâ€).
Under the terms of the IMA dated 19 December 2003, the Investment Manager was entitled to receive a fee at the annual rate of 0.85% of the total assets, payable quarterly in arrears except where cash balances exceed 10% of the total assets. The fee applicable to the amount of cash exceeding 10% of total assets was altered to be 0.20% per annum, payable quarterly in arrears. The Investment Manager also agreed to reduce its charge to 0.75% of the total assets of the Group until such time as the net asset value per share returns to the launch level of 97p. This was applicable from the quarter ending 31 December 2008 onwards and did not affect the reduced fee of 0.20% on cash holdings above 10% of total assets.
Under the terms of the IMA dated 7 July 2014, the above fee arrangements apply up to 31 July 2014. From 1 August 2014, the fee was changed 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 ended 31 December 2015 amounted to £2,105,104 (year ended 31 December 2014: £1,690,233). The amount due and payable at the year end amounted to £400,767 excluding VAT (year ended 31 December 2014: £500,165 excluding VAT).
In respect of the annual management fee for the year ended 31 December 2015, the Investment Manager agreed to rebate £400,000 of the fee following the successful completion of the fund raising and new property portfolio acquisition in December 2015.
Administration, secretarial and registrar fees
On 19 December 2003 Northern Trust International Fund Administration Services (Guernsey) Limited (“Northern Trustâ€) 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 ended 31 December 2015 amounted to £82,046 (2014: £82,927). The amount due and payable at the year end amounted to £18,331 (2014:£nil).
Valuer’s fee
Jones Lang LaSalle and Knight Frank (“the Valuersâ€), independent 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 ended 31 December 2015 amounted to £92,324 (2014: £56,542) of which minimum fees of £2,500 per property (2014: £2,500) were incurred for new properties added to the portfolio. The amount due and payable at the year end amounted to £12,727 excluding VAT (2014: £10,590 excluding VAT).
Auditor’s fee
At the year end date Ernst & Young LLP continued as independent auditor of the Group. The auditor’s fees for the year ended 31 December 2015 amounted to £82,308 (2014: £46,513) and relate to audit services provided for the 2015 financial year. Ernst & Young LLP also provided non-audit services in 2015 in respect of advice relating to the social security position of the Group’s directors of £1,100 (2014; £nil) and advice in relation to the UK REIT distribution rules of £950 (2014; £nil). Ernst & Young LLP also provided non- audit services in respect of due diligence costs for asset acquisitions and tax accounting advice for the prospectus in 2015 amounting to £110,000 (2014: £32,000) and £47,000 (2014: £nil) respectively. Total non-audit fees incurred up to the Balance Sheet date amounted to £159,050 (2014: £126,000).
5 FINANCE INCOME AND COSTS
| 2015 | 2014 | |
| £ | £ | |
| Interest income on cash and cash equivalents | 68,186 | 72,326 |
| Finance income | 68,186 | 72,326 |
| Interest expense on bank borrowings | 1,869,338 | 1,931,665 |
| Payments on interest rate swaps | 1,213,528 | 1,236,719 |
| Amortisation of arrangement costs (See Note 14) | 241,916 | 113,788 |
| Finance costs | 3,324,782 | 3,282,172 |
6 TAXATION
Current income tax
The major components of income tax expense for the years ended 31 December are:
| 2015 | 2014 | |
| £ | £ | |
| Consolidated Income Statement Current Income Tax |
||
| Current Income Tax Charge | – | – |
Deferred Income Tax |
||
| Utilisation of deferred tax asset | – | 587,315 |
| Income Tax charge/(credit) reported in the income statement | – | 587,315 |
A reconciliation between the tax charge / (credit) and the product of accounting profit multiplied by the applicable tax rate for the year ended 31 December 2015 and 2014 is, as follows:
| 2015 | 2014 | ||
| £ | £ | ||
| Profit before tax | 31,939,653 | 29,170,717 | |
| Tax calculated at UK statutory income tax/corporation tax rate of 20.25% (2014: 20%) |
6,467,780 | 5,834,143 | |
| UK REIT exemption on net income and gains | (3,304,893) | – | |
| Valuation gain in respect of investment properties not subject to tax |
(3,571,487) | (4,266,961) | |
| Profit / (loss) on disposal of investment properties not subject to tax |
15,244 | 368,082 | |
| Income not subject to tax | – | (716,760) | |
| Expenditure not allowed for corporation tax/income tax purposes |
393,356 | 86,711 | |
| Tax loss utilised | – | (1,305,215) | |
| Utilisation of Deferred Tax Asset | – | 587,315 | |
| Current income tax charge | – | 587,315 | |
| Consolidated Balance Sheet | Consolidated Income Statement |
|||
| 2015 | 2014 | 2015 | 2014 | |
| £ | £ | £ | ||
| Deferred income tax assets | ||||
| Losses available for offset against future taxable income | – | – | – | 587,315 |
| Deferred income tax asset/ (credit) |
– | – | – | 587,315 |
Unrecognised deferred tax
As at 31 December 2015, the Group had an unrecognised deferred tax asset of £nil (2014: £2,075,946). Tax losses of the Group generated prior to entry to the UK REIT regime can no longer be utilised and are lost. If a UK REIT sells a property within 3 years of completion of development, the REIT tax exemption does not apply. There were no such properties at 31 December 2014 or 31 December 2015.
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.
The Company and its material Guernsey subsidiaries 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.
7 INVESTMENT PROPERTIES
| Country | UK | UK | UK | UK |
| Class | Industrial | Office | Retail | Total |
| 2015 £ |
2015 £ |
2015 £ |
2015 £ |
|
| Market value as at 1 January | 108,660,000 | 114,265,100 | 47,125,000 | 270,050,100 |
| Purchase of investment properties | 11,217,775 | 19,005,390 | 21,974,958 | 52,198,123 |
| Acquired through business combination (note 10) | 69,050,000 | 59,850,000 | 36,100,000 | 165,000,000 |
| Capital expenditure on investment properties | 1,034,205 | 72,989 | 37,240 | 1,144,434 |
| Carrying value of disposed investment properties | (11,405,000) | (38,325,100) | (5,100,000) | (54,830,100) |
| Valuation gain from investment properties | 8,404,316 | 8,529,645 | 703,012 | 17,636,973 |
| Movement in lease incentives receivable | 108,704 | 666,976 | 9,790 | 785,470 |
| Market value at 31 December | 187,070,000 | 164,065,000 | 100,850,000 | 451,985,000 |
| Adjustment for lease incentives* | (353,854) | (2,383,140) | (631,252) | (3,368,246) |
| Carrying value at 31 December | 186,716,146 | 161,681,860 | 100,218,748 | 448,616,754 |
*Lease incentives are split between non current assets of £3,457,588 and current liabilities of £89,342 (note 13).
The valuations were performed by Jones Lang Lasalle and Knight Frank, accredited independent valuers with a recognised and relevant professional qualification 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). These valuation models are consistent with the principles in IFRS 13. The market value provided by Jones Lang Lasalle and Knight Frank at the year end was £451,985,000 (2014: £270,225,000) however an adjustment has been made for lease incentives of £3,368,246* (2014: £1,834,473) that are already accounted for as an asset. In accordance with the accounting policy in note 2.3, in order to arrive at fair value the market values of leasehold investment properties have been adjusted to reflect the fair value of finance lease obligations. 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 (completed and under construction) held at the end of the reporting period.
At 31 December 2014 the Group disclosed a number of post balance sheet events including the sale and purchase of investment properties. During the year the Group completed the purchase of DSG in Preston for £15.8m excluding costs and the sale of De Ville Court in Weybridge for £3.15m excluding costs.
| Country | UK | UK | UK | UK |
| Class | Industrial | Office | Retail | Total |
| 2014 £ |
2014 £ |
2014 £ |
2014 £ |
|
| Market value as at 1 January | 48,175,000 | 79,945,000 | 48,295,000 | 176,415,000 |
| Purchase of investment properties | 72,084,707 | 15,097,439 | 10,671,653 | 97,853,799 |
| Capital expenditure on investment properties | 29,971 | 2,779,559 | (101,508) | 2,708,022 |
| Carrying value of disposed investment properties | (14,550,000) | – | (14,050,000) | (28,600,000) |
| Valuation gain from investment properties | 2,961,019 | 16,132,344 | 2,104,506 | 21,197,869 |
| Movement in lease incentives receivable | (40,697) | 310,758 | 205,349 | 475,410 |
| Investment properties recategorised as held for sale | – | (6,550,100) | – | (6,550,100) |
| Market value at 31 December | 108,660,000 | 107,715,000 | 47,125,000 | 263,500,000 |
| Adjustment for lease incentives | (462,673) | (800,767) | (571,033) | (1,834,473) |
| Adjustment for finance lease obligations | – | 6,594 | – | 6,594 |
| Carrying value at 31 December | 108,197,327 | 106,920,827 | 46,553,967 | 261,672,121 |
In the Consolidated Cash Flow Statement, proceeds from disposal of investment properties comprise:
| 2015 | 2014 | |
| £ | £ | |
| Carrying value of disposed investment properties | 54,830,100 | 28,600,000 |
| Profit / (loss) on disposal of investment properties | 3,024,748 | (1,840,412) |
| Net proceeds from disposal of investment properties | 57,854,848 | 26,759,588 |
| 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 valuer has 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 valuer has made allowances for voids and rent free periods 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 the 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 above. |
|
The Investment Manager meets with the valuer on a quarterly basis to ensure the valuer is 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 valuer to ensure correct factual assumptions are made. The valuer reports a final valuation that is then reported to the Board. The management group that determines the Company’s valuation policies and procedures for property valuations is the Property Valuation Committee. The Committee reviews the quarterly property valuation report produced by the Valuer (or such other person as may from time to time provide such property valuation services to the Company) before its submission to the Board, focussing 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 used to derive Level 3 fair values for each class of investment properties: - 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 |
186,716,146 | · Income Capitalisation |
· Initial Yield · Reversionary Yield · Equivalent Yield · Estimated rental value per Sq.m |
·0% to 15.84% (5.88%) ·5.53% to 10.65% (6.91%) ·5.65% to 9.09% (6.60%) ·£19.15 to £132.76 (£58.45) |
| UK Office Level 3 |
161,681,860 | · Income Capitalisation |
· Initial Yield · Reversionary Yield · Equivalent Yield · Estimated rental value per Sq.m |
·0% to 12.04% (5.87%) ·5.62% to 10.78% (6.81%) ·4.74% to 9.01% (6.25%) ·£137.47 to £669.67 (£276.85) |
| UK Retail Level 3 |
100,218,748 | · Income Capitalisation | · Initial Yield · Reversionary Yield · Equivalent Yield · Estimated rental value per Sq.m |
·2.79% to 9.47% (6.31%) ·3.85% to 8.23% (5.85%) ·5.55% to 7.92% (6.50%) ·£95.24 to £834.77 (£173.14) |
| 448,616,754 |
| Descriptions and definitions The table above includes the following descriptions and definitions relating to valuation techniques and key unobservable 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 to ERV at the next review, but with no further rental growth. 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. |
| 2015 | 2014 | |
| £ | £ | |
| ERV p.a. | 32,111,174 | 20,460,185 |
| Area sq. ft. | 3,933,195 | 2,736,927 |
| Average ERV per sq. ft. | £8.16 | £7.48 |
| Initial Yield | 5.97% | 6.59% |
| Reversionary Yield | 4.97% | 5.13% |
The table below presents the sensitivity of the valuation to changes in the most significant assumptions underlying the valuation of completed investment properties.
| 2015 | 2014 | |
| £ | £ | |
| Increase in equivalent yield of 25 bps | (18,600,000) | (10,100,000) |
| Decrease in rental rates of 5% (ERV) | (17,700,000) | (10,100,000) |
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 2015 the Group had no investment properties classified as held for sale. As at 31 December 2014 the Group had exchanged contracts with third parties for the sale of De Ville Court, Weybridge for a price of £3,150,000 and Chancellors Place, Chelmsford for £3,525,000. The sale of De Ville Court completed on 20 January 2015 and the sale of Chancellors Place completed on 30 June 2015. The independently assessed market value of De Ville Court as at 31 December 2014 was £3,150,000 and the independently assessed market value of Chancellors Place as at 31 December 2014 was £3,575,000. As at 31 December 2014 the carrying value of De Ville Court was £3,038,250 (net of transaction costs of £111,750) and the carrying value of Chancellors Place was £3,511,850 (net of transaction costs of £63,150). Reconciliation of investment properties held for sale to independent valuers report: |
| 2015 | 2014 | |
| £ | £ | |
| De Ville Court | – | 3,150,000 |
| Chancellors Place | – | 3,575,000 |
| Less: transaction costs | – | (174,900) |
| Adjusted Market Value at 31 December | – | 6,550,100 |
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.
The Group, through its subsidiary, owns 100 per cent of the issued ordinary share capital of Huris (Farnborough) Limited, a company incorporated in the Cayman Islands whose principal business is property investment.
The Group, through its subsidiary, owns 100 per cent of the issued ordinary share capital of HEREF Eden Main Limited, a company incorporated in Jersey whose principal business is property investment.
The acquisitions of Huris (Farnborough) Limited and HEREF Eden Main Limited were accounted for as acquisitions of assets in 2014 which generated a loss of £75,181 (2014: £136,938 gain) in the year ended 31 December 2015 as detailed in the Consolidated Statement of Comprehensive Income. The directors believe that such treatment is appropriate as it better reflects the substance of the transactions i.e. the acquired companies are shell companies which hold investment properties and had immaterial other net assets. The investment properties owned by Huris (Farnborough) Limited and HEREF Eden Main Limited were transferred to Standard Life Investments Property Holdings Limited in 2014. The remaining assets of both companies total £59,727 (2014: £44,273 liability) at the Balance Sheet date and have been included in trade and other receivables.
During the year the Group acquired 100% of the units in Aviva Investors UK Real Estate Recovery II Unit Trust (the “Unit Trust†or “UTâ€), a Jersey Property Unit Trust “JPUTâ€. The acquisition included the entire issued share capital of a General Partner which holds, through a Limited Partnership, the new portfolio of 22 UK real estate assets. The transaction completed on 23 December 2015 and the Group has treated the acquisition as a Business Combination in accordance with IFRS 3. The Group Undertakings consist of the following entities at the Balance Sheet date:
- Standard Life Investments Property Holdings Limited, a company with limited liability incorporated in Guernsey, Channel Islands.
- Standard Life Investments SLIPIT Unit Trust, a Jersey Property Unit Trust domiciled in Jersey, Channel Islands (formerly Aviva Investors UK Real Estate Recovery II Unit Trust).
- Standard Life Investments (SLIPIT) Limited Partnership, a limited partnership established in England (formerly Aviva Investors UK Real Estate Recovery II Limited Partnership).
- Standard Life Investments SLIPIT (General Partner) Limited, a company with limited liability incorporated in the United Kingdom (formerly Aviva Investors UK Real Estate Recovery II (General Partner) Limited).
- Standard Life Investments SLIPIT (Nominee) Limited, a company with limited liability incorporated and domiciled in the United Kingdom (formerly Aviva Investors UK Real Estate Recovery II (Nominee) Limited).
- Ceres Court Properties Limited , a company with limited liability incorporated and domiciled in the United Kingdom.
10 BUSINESS COMBINATIONS
On 23 December 2015, the Group acquired 100% of the shares of Aviva Investors UK Real Estate Recovery II Unit Trust (the “Unit Trust†or “UTâ€), a Jersey Property Unit Trust “JPUTâ€. The acquisition included the entire issued share capital of Standard Life Investments SLIPIT (General Partner) Limited which holds, through Standard Life Investments (SLIPIT) Limited Partnership, the new portfolio of 22 UK real estate assets. Standard Life Investments Limited Partnership (previously Aviva Investors UK Real Estate Recovery II Limited Partnership) holds a portfolio of retail, office and industrial buildings let under operating leases and the acquisition was made to give the Group access to those assets. The existing strategic management function and associated processes were acquired with the property and, as such, the Directors consider this transaction the acquisition of a business, rather than an asset acquisition.
The fair value of the identifiable assets and liabilities of Aviva Investors UK Real Estate Recovery II Unit Trust (now re-named Standard Life Investments SLIPIT Unit Trust) as at the date of acquisition were:
| Fair value recognised on acquisition |
||
| £ | ||
| Investment property | 165,000,000 | |
| Trade receivables | 1,428,495 | |
| Cash and cash equivalents | 132,045 166,560,540 |
|
| Trade payables | (1,368,037) | |
| 165,192,503 |
The purchase consideration of £165,192,503 for the 100% interest acquired consists of £75,027,974 raised from issuing new shares net of costs, borrowings of £54,826,550 net of loan arrangement costs and £35,337,979 from existing cash reserves. The due diligence costs of £1,942,498 incurred in connection with the acquisition have been expensed and are included in the Consolidated Statement of Comprehensive Income. From the date of acquisition, Standard Life Investments Unit Trust has contributed £582,685 to the profit after tax of the Group and revenues of £350,212 in the form of property rental income. If the acquisition had occurred on 1 January 2015 the Standard Life Investments SLIPIT Unit Trust would have contributed £29,053,934 to the profit after tax of the Group and £11,013,373 revenues in the form of property rental income.
11 TRADE AND OTHER RECEIVABLES
| 2015 | 2014 | |||
| £ | £ | |||
| Trade receivables | 1,710,199 | 1,745,004 | ||
| Less: provision for impairment of trade receivables | (13,495) | (6,941) | ||
| Trade receivables (net) | 1,696,704 | 1,738,063 | ||
| Rental deposits held on behalf of tenants | 795,355 | 639,608 | ||
| Other receivables | 366,792 | 282,769 | ||
| Total trade and other receivables | 2,858,851 | 2,660,440 | ||
Reconciliation for changes in the provision for impairment of trade receivables:
| 2015 | 2014 | |||
| £ | £ | |||
| Opening balance | (6,941) | (114,622) | ||
| Charge for the year | (13,495) | (6,941) | ||
| Reversal of provision | 6,941 | 114,622 | ||
| Closing balance | (13,495) | (6,941) | ||
The estimated fair values of receivables are the discounted amount of the estimated future cash flows expected to be received and approximate 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 when it becomes unlikely that the full value of a receivable will be recovered. 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 2015, trade receivables of £13,495 (2014: £6,941) were considered impaired and provided for.
The ageing of these receivables is as follows:
| 2015 | 2014 | |||
| £ | £ | |||
| 0 to 3 months | 12,905 | 1,562 | ||
| 3 to 6 months | 352 | 5,379 | ||
| Over 6 months | 238 | – | ||
| 13,495 | 6,941 | |||
As of 31 December 2015, trade receivables of £1,696,704 (2014: £1,738,063) were less than 3 months past due but considered not impaired.
12 CASH AND CASH EQUIVALENTS
| 2015 | 2014 | |||
| £ | £ | |||
| Cash held at bank | 4,574,353 | 764,911 | ||
| Cash held on deposit with RBS (see note 14) | 7,821,163 | 4,634,184 | ||
| 12,395,516 | 5,399,095 | |||
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.
13 TRADE AND OTHER PAYABLES
| 2015 | 2014 | |||
| £ | £ | |||
| Trade payables | 541,091 | 553,969 | ||
| Other payables | 4,768,713 | 1,512,424 | ||
| VAT payable | 680,674 | 473,469 | ||
| Deferred rental income | 6,536,107 | 3,907,322 | ||
| Rental deposits due to tenants | 173,072 | 155,728 | ||
| Lease incentives due within one year | 89,342 | 602,503 | ||
| 12,788,999 | 7,205,415 | |||
Trade payables are non-interest bearing and are normally settled on 30-day terms.
14 BANK BORROWINGS
| 2015 | 2014 | |||
| £ | £ | |||
| Loan facility and drawn down outstanding balance | 139,432,692 | 84,432,692 | ||
| Opening carrying value | 83,980,382 | 83,866,594 |
| Borrowings during the year | 55,000,000 | – |
| Arrangement costs of additional facility | (173,450) | – |
| Amortisation of arrangement costs | 241,916 | 113,788 |
| Closing carrying value | 139,048,848 | 83,980,382 |
On 20 January 2012 the Company completed the drawdown of £84,432,692 loan with The Royal Bank of Scotland plc (“RBSâ€). The facility was repayable on 16 December 2018, however this date was re-negotiated during the year as detailed below. Interest is payable at a rate equal to the aggregate of 3 month Libor, a margin of 1.65% (below 40% LTV) or 1.75% (40% to 60% LTV inclusive) or 1.95% (above 60% LTV) until 21 December 2015.
On 22 December 2015 the Company increased its borrowing facilities from £84,432,692 to £139,432,692. The additional borrowing was in the form of an additional term loan of £40,567,308 and a revolving credit facility (“RCFâ€) of £14,432,692 (with the potential to draw a further £15,567,308 of the RCF) all of which is due to expire in June 2017. Interest from 22 December 2015 is payable at a rate equal to the aggregate of 3 month Libor, a margin of 1.25%.
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 loan to value percentage. The loan agreement notes that the loan to value 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 65% for the period to and including 22 December 2016 and should not exceed 60% after 22 December 2016 to maturity.
| 2015 | 2014 | |||
| £ | £ | |||
| Loan amount | 139,432,692 | 84,432,692 | ||
| Cash deposited within the security of RBS | (7,821,163) | (4,634,184) | ||
| 131,611,529 | 79,798,508 | |||
| Investment properties valuation | 451,985,000 | 270,225,000 | ||
| Loan to value percentage | 29.1% | 29.5% | ||
| Loan to value percentage covenant | 65.0% | 65.0% | ||
| Loan to value percentage if all cash is deposited within the security of RBS | 28.1% | 29.2% | ||
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 45% 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 under its loan agreement.
The loan facility is secured by fixed and floating charges over the assets of the Company and its wholly owned subsidiary, Standard Life Investments Property Holdings Limited.
15 INTEREST RATE SWAPS
The Company has 2 interest rate swap agreements with RBS which both have a maturity date of 16 December 2018.
On 20 January 2012 the Company completed an interest rate swap of a notional amount of £12,432,692 with RBS. This interest rate swap has a maturity of 16 December 2018. Under the swap the Company has agreed to receive a floating interest rate linked to 3 month Libor and pay a fixed interest rate of 1.77125%.
On 20 January 2012 the Company completed an interest rate swap of a notional amount of £72,000,000 with RBS which replaces the interest rate swap entered into on 29 December 2003. This interest rate swap effective date is 29 December 2013 and has a maturity date of 16 December 2018. Under the swap the Company has agreed to receive a floating interest rate linked to 3 month Libor and pay a fixed interest rate of 2.0515%.
| 2015 | 2014 | |||
| £ | £ | |||
| Opening fair value of interest rate swaps at 1 January | (2,674,939) | (30,997) | ||
| Valuation gain/(loss) on interest rate swaps | 589,647 | (2,643,942) | ||
| Closing fair value of interest rate swaps at 31 December Interest rate swaps due: |
(2,085,292) | (2,674,939) | ||
| Less than one year | (908,751) | (1,386,451) | ||
| Between one and five years | (1,176,541) | (1,288,488) | ||
| Closing fair value of interest rate swaps at 31 December | (2,085,292) | (2,674,939) | ||
The individual swap assets and liabilities are listed below:
| Interest rate swap with a start date of 20 January 2012 maturing on 16 December 2018 | (220,107) | (278,270) |
| Interest rate swap with a start date of 29 December 2013 maturing on 16 December 2018 | (1,865,185) | (2,396,669) |
| (2,085,292) | (2,674,939) |
16 LEASE ANALYSIS
Lessor length
The Group has entered into leases on its property portfolio. This property portfolio as at 31 December 2015 had an average lease expiry of 5 years and 10 months. 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:
| 2015 | 2014 | |||
| £ | £ | |||
| Within one year | 26,596,634 | 17,200,407 | ||
| After one year, but not more than five years | 85,580,067 | 54,964,023 | ||
| More than five years | 52,490,484 | 48,214,243 | ||
| Total | 164,667,185 | 120,378,673 | ||
The largest single tenant at the year end accounts for 4.6% (2014: 6.7%) of the current annual passing rent.
17 SHARE CAPITAL
Under the Company’s Articles of Incorporation, the Company may issue an unlimited number of ordinary shares of 1 pence each. As at 31 December 2015 there were 380,690,419 ordinary shares of 1 pence each in issue. 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: | 2015 | 2014 | ||
| £ | £ | |||
| Opening balance | 96,188,648 | 31,337,024 | ||
| Shares issued between 25 February 2015 and 21 December 2015 at a price of between 78.1p and 82.0p per share |
110,462,680 | – | ||
| Shares issued between 7 March 2014 and 19 November 2014 at a price of between 71.5p and 76.0p per share | – | 65,868,956 | ||
| Issue costs associated with new ordinary shares | (1,831,109) | (1,017,332) | ||
| Closing balance | 204,820,219 | 96,188,648 | ||
| 2015 | 2014 | |||
| Number of shares | Number of shares | |||
| Opening balance | 244,216,165 | 154,994,237 | ||
| Issued during the year | 136,474,254 | 89,221,928 | ||
| Closing balance | 380,690,419 | 244,216,165 | ||
18 RESERVES
Retained earnings
This is a distributable reserve and represents the cumulative revenue earnings of the Group less dividends declared as payable 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. This reserve also represents the realised gain on the acquisition of two subsidiaries during the year to 31 December 2014 as detailed in note 9.
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.
The detailed movement of the above reserves for the years to 31 December 2015 and 31 December 2014 can be found in the Consolidated Statement of Changes in Equity.
19 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 following reflects the income and share data used in the basic and diluted earnings per share computations:
| 2015 | 2014 | |||
| £ | £ | |||
| Profit for the year net of tax | 31,939,653 | 28,583,402 | ||
| 2015 | 2014 | |||
| Number of shares | Number of shares | |||
| Weighted average number of ordinary shares outstanding during the year | 280,330,039 | 185,548,062 | ||
| Profit per ordinary share | 11.39p | 15.40p | ||
EPRA publishes guidelines for calculating adjusted earnings that represent earnings from the core operational activities. Therefore, it excludes the effect of movements in the fair value of, and results from sales of, investment properties together with the effect of movements in the fair value of financial instruments.
| 2015 | 2014 | |||
| £ | £ | |||
| Profit for the year net of tax | 31,939,653 | 28,583,402 | ||
| Less: revaluation movements on investment properties | (17,636,973) | (21,197,869) | ||
| Less: loss / (gain) on asset acquisition | 75,181 | (136,938) | ||
| Less: (profit) / loss on disposal of investment properties | (3,024,748) | 1,840,412 | ||
| Adjusted (EPRA) profit for the year | 11,353,113 | 9,089,007 | ||
| 2015 | 2014 | |||
| Number of shares | Number of shares | |||
| Weighted average number of ordinary shares outstanding during the year | 280,330,039 | 185,548,062 | ||
| Adjusted (EPRA) profit per share | 4.05p | 4.90p | ||
20 DIVIDENDS AND PROPERTY INCOME DISTRIBUTION GROSS OF INCOME TAX
| 2015 | 2014 | |||
| £ | £ | |||
| Non Property Income Distributions | ||||
| 1.161p per ordinary share paid in February relating to the quarter ending 31 December (2014: 1.133p) | 2,835,350 | 1,756,085 | ||
| 1.161p per ordinary share paid in May relating to the quarter ending 31 March (2014: 1.161p) | – | 1,865,834 | ||
| 1.161p per ordinary share paid in August relating to the quarter ending 30 June (2014: 1.161p) | – | 1,865,834 | ||
| 1.161p per ordinary share paid in November relating to the quarter ending 30 September (2014: 1.161p) | 2,220,581 | 2,527,604 | ||
| Property Income Distributions | ||||
| 1.161p per ordinary share paid in May relating to the quarter ending 31 March | 3,213,406 | – | ||
| 1.161p per ordinary share paid in August relating to the quarter ending 30 June | 3,348,175 | – | ||
| 1.161p per ordinary share paid in November relating to the quarter ending 30 September | 1,127,594 | – | ||
| 12,745,106 | 8,015,357 | |||
On 1 January 2015 the Company converted to a UK REIT from a Guernsey Investment Company (GIC). The payment in February 2015 is the dividend relating to the period prior to REIT conversion for the quarter ended 31 December 2014 and relates to when the Company was a GIC. The payment in May 2015 is the first property income distribution (gross of income tax) following REIT conversion for the quarter ended 31 March 2015.
21 RECONCILIATION OF CONSOLIDATED NET ASSET VALUE TO PUBLISHED NET ASSET VALUE
The net asset value attributable to ordinary shares is published quarterly and is based on the most recent valuation of the investment properties.
| 2015 | 2014 | |||
| Number of shares | Number of shares | |||
| Number of ordinary shares at the reporting date | 380,690,419 | 244,216,165 | ||
| 2015 | 2014 | |||
| £ | £ | |||
| Total equity per audited consolidated financial statements |
312,783,287 | 184,367,522 | ||
| Net asset value per share | 82.2p | 75.5p | ||
The EPRA publishes guidelines for calculating adjusted NAV. EPRA NAV represents the fair value of an entity’s equity on a long-term basis. Items that EPRA considers will have no impact on the long term, such as fair value of derivatives, are therefore excluded.
| 2015 | 2014 | |||
| £ | £ | |||
| Total equity per audited consolidated financial statements |
312,783,287 | 184,367,522 | ||
| Adjustments: | ||||
| Add: fair value of derivatives | 2,085,292 | 2,674,939 | ||
| EPRA net asset value | 314,868,579 | 187,042,461 | ||
| EPRA net asset value per share | 82.7p | 76.6p | ||
22 SERVICE CHARGE
The Company has appointed an agent to manage the service charge at the investment properties. The table below is a summary of the service charge during the year. The table shows the service charge cost to the tenants, the amount the tenants have been billed based on the service charge budget and the amount the Company has paid in relation to void units over the year. The table also shows the balancing service charge that is due to/from the tenants as at the Balance Sheet date.
| 2015 | 2014 | ||||
| £ | £ | ||||
| Total service charge expenditure incurred | 1,685,569 | 1,557,269 | |||
| Total service charge billed to tenants excluding void units and service charge caps | 1,492,339 | 1,663,864 | |||
| Service charge billed to the Group in respect of void units and service charge caps | 74,448 | 120,164 | |||
| Service charge due from/(to) tenants as at 31 December | 118,782 | (226,759) | |||
| 1,685,569 | 1,557,269 | ||||
23 RELATED PARTY DISCLOSURES
Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions.
Ordinary share capital
Standard Life Assurance Limited held 34,439,001 (2014: 19,644,001) of the issued ordinary shares at the Balance Sheet date on behalf of its Unit Linked Property Funds. This equates to 9.0% (2014: 8.0%) of the ordinary share capital in issue at the Balance Sheet date.
| Directors remuneration |
| The remuneration of the key management personnel is detailed below which includes pay as you earn tax and national insurance contributions. Further details on the key management personnel can be found in the Director’s Remuneration Report and The Corporate Governance Report. |
| 2015 | 2014 | ||||
| £ | £ | ||||
| Richard Barfield (appointed chairman 29 May 2014) | 33,000 | 31,223 | |||
| Sally-Ann Farnon (appointed 16 July 2010) | 28,500 | 29,500 | |||
| Shelagh Mason (retired 31 December 2014) | – | 26,500 | |||
| Huw Evans (appointed 11 April 2013) | 26,000 | 26,500 | |||
| Robert Peto (appointed 28 May 2014) | 26,000 | 16,736 | |||
| Paul Orchard-Lisle (retired 28 May 2014) | – | 13,107 | |||
| Employers national insurance contributions | 5,872 | – | |||
| 119,372 | 143,566 | ||||
| Directors expenses | 4,924 | 2,431 | |||
| 124,296 | 145,997 | ||||
Investment Manager
Management of the property portfolio is contractually delegated to Standard Life Investments (Corporate Funds) Limited as Investment Manager and the contract with the Investment Manager can be terminated by the Company. Transactions with the Investment Manager in the year are detailed in note 4.
24 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.
25 EVENTS AFTER THE BALANCE SHEET DATE
On 29 February 2016 the Group started the process of liquidating Standard Life Investments SLIPIT Unit Trust. As part of the liquidation process the trustees of the Standard Life Investments SLIPIT Unit Trust distributed the interests in the Standard Life Investments (SLIPIT) Limited Partnership to Standard Life Investments Property Holdings Limited (99%) and Standard Life Investments Property Income Trust Limited (1%).
On 31 March 2016 a fourth interim dividend for the period 1 October 2015 to 20 December 2015 of 1.022 pence per share was paid. The dividend was split as a property income dividend of 0.528 pence per share and an ordinary dividend of 0.494 pence per share.
On 31 March 2016 a fifth interim dividend for the period 21 December 2015 to 31 December 2015 of 0.139 pence per share was paid. The dividend was split as a property income dividend of 0.072 pence per share and an ordinary dividend 0.067 pence per share.
Additional Notes to the Annual Financial Report
This Annual Financial Report announcement is not the Company’s statutory accounts for the year ended 31 December 2015. The statutory accounts for the year ended 31 December 2015 received an audit report which was unqualified and did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report.
The statutory accounts for the financial year ended 31 December 2015 were approved by the Directors on 18 April 2016. The Company’s AGM is to be held on 2 June 2016. The Annual Report and Notice of AGM will be posted to shareholders in April 2016 and will be available for download from the Company’s website hosted by the Investment Manager (www.standardlifeinvestments.com/its).
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.
END
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