Half-yearly Report
29 AUGUST 2014
STANDARD LIFE INVESTMENTS PROPERTY INCOME TRUST
RESULTS IN RESPECT OF THE PERIOD ENDED 30 JUNE 2014
Financial Highlights
- Net Asset Value total return of 11.7% for the six months ended 30 June 2014.
- Share price increased by 9.3% over the six months ended 30 June 2014 to 76.5p.
- Dividend yield of 6.1% based on 30 June 2014 share price of 76.5p.
- 2 properties purchased for £18.5m excluding costs and 4 properties sold for
£27.0m excluding costs.
- Share capital increased 3.7% over the six months ended 30 June 2014.
- 50m new ordinary shares issued at a price of 72.9p per share on 30 July 2014.
Total Returns (with dividends re-invested) 6 months to 30
June 2014
Net Asset Value per share* +11.7%
Share Price total return* +12.7%
*Source: Morningstar
Capital Values 30 June 31 December
2014 2013 % Change
Net Asset Value per share 1 70.6p 65.5p +7.8%
EPRA* Net Asset Value per share 2 70.7p 65.6p +7.8%
Share Price 76.5p 70.0p +9.3%
Premium of Share Price to Net Asset 8.4% 6.9% -
Value
Total Assets £204.7m £191.6m +6.8%
Loan to Value 3 34.2% 40.9% -
Cash Balance £23.2m £12.3m -
Dividends 30 June 30 June
2014 2013
Dividends per share 4 2.294p 2.266p
Dividend yield 5 6.1% 7.5%
Property Returns 6 months to 30 12 months to
June 31 December
2014 2013
Property income return 6 4.0% 7.7%
IPD property income monthly index 7 2.8% 6.1%
Property total return (property only) 7.4% 11.7%
8
IPD property total return monthly 8.4% 9.9%
index 7
1. Calculated under International Financial Reporting Standards.
2. EPRA NAV represents the value of an entity's equity on a long-term basis.
Some items, such as fair value of derivatives, are therefore excluded.
3. Calculated as bank borrowings less all cash as a percentage of the open
market value of the property portfolio as at 30 June 2014.
4. Dividends paid during the 6 months to 30 June 2014.
5. Calculated using 30 June quarterly dividend compounded over a year.
6. The net income receivable for the period expressed as a percentage of the
capital employed. Quarterly figures are compounded over the period to give the
rate over six months.
7. Source: IPD quarterly version of the monthly index funds (excludes cash).
8. The sum of capital growth and net income for the period expressed as a
percentage of capital employed excluding cash.
* The European Public Real Estate Association (EPRA) is a common interest
group, which aims to promote, develop and represent the European public real
estate sector.
Strategic Report: Chairman's Statement
I have pleasure presenting my first statement as chairman of your
Company. I would like to pay tribute to my predecessor Paul Orchard Lisle for
his wise counsel and leadership of the Company over the last three years and
wish him well in his retirement. Robert Peto joined the Board at the AGM and
has taken over the chairmanship of the Property Valuation Committee, where his
extensive property knowledge is proving extremely useful.
Last year Paul predicted that there would be a general increase in
property values in the next twelve months and I am delighted that this has
indeed been the actual outcome as the recovery in the UK economy has continued
and broadened outside London and the South East.
Your Company's income return has been maintained. We were able to
collect 97.8% of the rents due to us within 14 days of the end of each
quarter, excluding administrations. During the period, we increased the
quarterly dividend by 2.5% to 1.161p per share reflecting a combination of
lower interest costs, improving outlook for rents and lower void rates. The
shares provided a dividend yield of 6.1% on our share price at the end of the
six month period. The Company's net asset value per share ("NAV") rose by 7.8%
in the period largely due a strong performance from the London and South East
office properties. The value of our properties rose by 8.2% in the same
period, based on the standing portfolio.
An important part of our property investment strategy is to buy
into assets where astute asset management can enhance rental and capital
values and to buy properties that are out of favour but which we think should
show some capital appreciation. With that in mind, we have bought a Grade A
office in the Farnborough Aerospace Centre for £14.9m reflecting a yield of
8.1% and two industrial units in Livingston for £3.6m with an initial yield of
10.65%.
On the reverse side, we have a policy of taking profits from
investments that we consider have served their purpose and, if necessary, in
cutting losses where the performance has been below our expectations and the
potential for gain looks uncertain. Accordingly we have sold the Company's
largest asset for £16m reflecting a yield of 7.25%. The logistics unit in
Bolton is let to Tesco until September 2016 and was sold to reduce expiry risk
in that year. In addition a portfolio of three retail warehouses was sold for
a total of £11.2m. Details of these transactions and of other changes to the
property portfolio are in the Investment Manager's report.
The elimination of all voids was a priority target stated in last
year's interim report and I am delighted to report that through active
management initiatives and the sale of the retail warehouse portfolio the void
rate has been reduced to 0.6%. Other portfolio matters are covered in the
Investment Manager's report.
I am pleased to report that the Company's equity base was increased
by 3.7% in the six months ended 30 June 2014 through the issue of 5.7m new
ordinary shares at a premium to NAV. At 30 June, the Company's shares were
priced at 76.5p in contrast to 70.0p at the start of the reporting year. On 1
July 2014 the Company published a prospectus to seek to raise 100m new shares
through an initial placing, offer for subscription and placing programme over
the next twelve months.
I am pleased to report that the first tranche of 50m shares was
issued on 30 July 2014 and provides additional equity capital of £36.4m. The
Manager has identified a pipeline of appropriate UK commercial properties for
investment.
As previously reported the Board agreed to appoint its Investment
Manager as the Company's AIFM and Standard Life Investments (Corporate Funds)
Limited received its authorisation on 7 July 2014. There will be additional
expenses to the Company in the form of depositary costs. However I am pleased
that the Investment Manager will not be increasing their fees for their
additional regulatory responsibilities. Indeed as disclosed in the recent
prospectus the Board has negotiated a new tiered investment management fee
structure that will reduce the total expense ratio ("TER") in future years
following the successful fund raising referred to above.
As stated in the 2013 accounts the Board has concluded that it
would be in the best interests of shareholders if the Company was to convert
to a REIT. The Board expects to send details to shareholders in the coming
months and to put proposals to shareholders in November 2014.
Since 30 June 2014, the Company has completed the purchase of three
modern logistics units in the Midlands for a total price of £28.65m,
reflecting a yield of 7%. The three units were built in 2008/9 and are fully
let.
There are risks to the UK economic recovery but it seems likely
that tenant demand should improve. For some types of property there has been
very little increase in supply over the last few years so that rents should
continue to rise. There has already been an increase in capital values but UK
property remains an attractive asset class, given the yield differential over
bonds and equities.
Richard Barfield
Chairman
29 August 2014
Strategic 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 the 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
prior to making a recommendation to the Board in relation to a proposed
property purchase. 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
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.
- Loss on financial instruments. The Company has entered into two
interest rate swap arrangements. These swap instruments are valued and
monitored on a monthly basis by the counterparty bank. The Investment Manager
checks the valuation 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 a 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.
The Board seeks to mitigate and manage these 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.
Investment Manager's Report
UK Real Estate Market
UK real estate continues to benefit from an economy that is growing
at its fastest pace since 2007 and a recovery that is becoming increasingly
broad based. Total return according to the IPD index was a healthy 8.4% for
the six months to end June. Capital values rose by 5.8% over the same period.
An improvement in capital growth continues to be driven by increased investor
allocations to the asset class which shows no sign of abating. Rental growth
continues to improve at a broad level with rents expected to pick up further
into the recovery cycle. Rents rose by 1.3% in the six months to end June.
Returns for the UK listed real estate equities sector remained
positive over the six month period with the FTSE EPRA/NAREIT UK rising by
8.4%. By comparison, the FTSE All Share Index rose by 1.6% over the same
timeframe. The UK listed real estate sector was relatively volatile following
changes in expectations for UK interest rate rises, although performance did
recover towards the end of the period.
Over the period, real estate's positive margin over the risk free
rate (using gilts as a proxy) remained relatively stable at around 300 basis
points. The margin remains well above the historical average of around 200
basis points.
The outperformance of the office sector against All Property
remained in place in this reporting period with offices recording returns of
11.6% in the six months to end June against 8.4% for All Property. The
industrial sector remains marginally behind the office sector returning 11.2%
over the same period. The retail sector continues to be the weakest performing
sector returning 6.8% in the six months to end June, an improvement on the
5.9% in the previous six months to end March. For the second consecutive
quarter all sectors experienced positive capital value growth. Offices once
again recorded the highest growth of 8.6% whilst industrial values experienced
further strong upward momentum with growth of 7.5% in the six months to end
June. Retail values continue to recover rising by 3.5% in the latest six month
period compared to growth of 2.6% in the six months to end March. The office
sector continues to provide the highest rental growth with rents rising by
3.4% p.a., exceeding the 1.3% p.a. for All Property. Rental growth in the
office market is largely driven by London, but there are signs that a recovery
in rental growth is beginning to spread outside the capital. Industrial rental
growth improved modestly with rents rising by 1.9% p.a. against 1.1% p.a.
previously. Retail rents continued to decline but fell at a slower rate.
Retail rents fell by -0.1% p.a., an improvement on the -0.4% decline in the
year to end March.
Investment Outlook
In the favourable environment of improving confidence and reducing
void rates, investors are allocating more capital to the sector and
consequently, given the increased weight of capital, risk appetite is
increasing. Our view remains that poorer quality secondary and tertiary assets
remain unattractive at a broad level although there will be opportunities for
repositioning assets or generating reasonably good returns on a comparable
basis from some poorer quality secondary assets. This is likely to involve
much hard work and effort on the asset management side and the risk of an
extended void period continues to be high for these types of assets. In terms
of outlook, we expect reasonable positive total returns on a three year
holding period due to the high yield and capital appreciation expectations.
The asset class remains attractive from a fundamental point of view because of
the strengthening economy and a limited pipeline of future new developments.
Rising interest rates are an emerging risk although there is a reasonable
buffer in pricing to compensate if the market prices in a further acceleration
of rate rises. The retail sector continues to face a series of headwinds that
may hold back recovery in weaker locations due to oversupply and structural
issues but the prospects for retail towards the South East and Central London
are expected to improve further as economic recovery gains more traction.
Opportunities are arising for reasonable quality secondary buildings where
these assets can be repositioned as prime. There is also likely to be a short
term rebound for secondary asset prices due to the elevated margin in pricing
between prime and secondary reducing as risk appetite improves. We continue to
expect locational choices to be the defining characteristics contributing to
returns over the remainder of 2014. We expect income to be a reasonable
contributor to returns over the latter half of the year although capital
values are expected to provide stronger growth over this period. Prime and
good quality secondary assets and selective poorer quality secondary assets in
stronger locations are likely to provide the best opportunities in the
improving economic environment we anticipate for the rest of 2014.
Performance
The Company's investment portfolio has continued to provide an
attractive income return, ahead of the general UK real estate market.
The above average income return is not at the expense of total
return from the portfolio. The Company's NAV total return is considered by the
Board to be a key performance indicator. For the 6 months to end June 2014 the
Company had a NAV total return of 11.7%.
Investment Strategy
The Investment Manager and the Board are focused on providing an
attractive level of income to investors, but also on seeking opportunities
that will enable growth in the income and capital value of the assets. We
believe that by investing in good quality buildings in good locations, let to
good tenants we can meet this objective, and we take an active approach to
asset management and investment activity.
We target a covered dividend, and for the first six months of 2014
the cover was 115%.
Lease Expiry Profile
Over the last three years we have targeted short leases on new
purchases where we believed the real estate fundamentals were good, as this
strategy provided attractive income yields. As a result, the Company has an
average weighted lease expiry (to earlier of lease end or break) of 5.6 years,
lower than the equivalent for IPD of 7.2 years (if leases over 35 years are
excluded). In an environment of low supply levels in most markets and
virtually no new development over the last 5 years, it is possible to retain
tenants where the property meets their needs. By early July this year we had
secured 90% of the income at risk due to lease expiries or breaks in 2014, in
line with retention levels over the last few years
Portfolio Valuation
The investment portfolio is valued on a quarterly basis by Jones
Lang La Salle. As at 30 June 2014 the real estate portfolio was valued at
£178.8m and the Company held cash of £23.2m. This compares to £176.4m and
£12.3m respectively at the end of December 2013. After removing the effect of
purchases and sales, the real estate portfolio increased by 8.2% over the
period.
The investment portfolio has an initial yield of 7.5% and a true
equivalent yield of 7.6% as at 30 June 2014.
Investment Activity
Purchases
During the period the Company acquired the following investments:
Cullen Square Livingston: The Company acquired two logistics units
for £3.6m at a yield of 10.6%. The units are let to Crown Worldwide and UK
Mail for just over 5 years.
Chester House Farnborough: The Company acquired a grade A office
building let to BAE Systems Ltd for a further 9 years. The purchase price of
£14.9m reflected an initial yield of 8.1%.
After the period end the Company completed the purchase of three
separate logistics units built in 2008/9 for a price of £28.65m, at an initial
net yield of 7.1%. The three units are Tetron 93 in Swadlincote, let at
£431,000 p.a. until 2021, Tetron 141 Swadlincote, let at £670,500 p.a. until
2022 (but with a tenant break in 2018), and Denby 242, let at £1,032,000 p.a.
until 2025 (with a tenant break in year 15). All three units were built in
2008/2009 and provide good quality modern accommodation.
At the period end the Company had agreed terms (but not
contractually bound) to purchase two other investments for a total of £24m and
is actively looking at a number of opportunities that meet the Company
objective of investing in good quality assets at an attractive yield.
Sales
During the reporting period the Company disposed of its largest
unit, a logistics unit in Bolton let to Tesco until September 2016 for £16.1m,
a yield of 7.25%. The sale was in order to manage expiry risk in 2016.
The Company also sold a portfolio of three retail warehouse
investments for £11m. These assets did not meet our performance expectations
and we had completed asset management initiatives on two of them.
Asset Management
At the period end the Company had a low void rate of 0.6% (IPD
7.6%). This compares to a void rate of 10.3% at the same time last year, and
6.5% at year end.
During the period the key asset management transactions were:
- Letting of Bourne House Staines - In Q1 an agreement for lease
was signed with Ricoh for a new 10 year lease (with a break in year 7), the
lease will start in early September once the refurbishment works have been
completed.
- Lease extension at Drakes Way Swindon - In Q2 we extended the
lease on Drakes Way Swindon by 12 months. Although the tenant wanted a longer
lease we are exploring a redevelopment of the site with solicitors having been
instructed on a new lease to a food store operator.
- St James House Cheltenham - The 4th floor was let to a new tenant
and a lease regear completed on part of the 3rd floor, providing new rental
evidence for the upcoming rent reviews.
Debt
The Company has a debt facility with RBS for £84m which is fully
drawn down. The facility is due to expire in December 2018. The all in cost of
the debt has been fixed at 3.8% by way of a hedge to the end of the facility.
The facility provides for a maximum LTV of 65%. As at 30 June the Company had
an LTV of 34% and an interest cover ratio of 150%.
Equity Raise
In early July, after the end of the reporting period, the Company
issued a prospectus for the issue of up to a maximum of 100m shares. The first
tranche was oversubscribed and 50m shares were issued on 30 July 2014. The
£36.4m of equity raised is being used to fund the acquisitions detailed above
(or others in line with the investment strategy if those detailed do not
proceed to completion). Further shares, up to the maximum, may be issued under
the prospectus until July 2015 if further investment opportunities are
identified.
Jason Baggaley
Fund Manager
Statement of Directors' Responsibilities
The Directors are responsible for preparing the Interim Management
Report in accordance with applicable law and regulations. The Directors
confirm that to the best of their knowledge:
- The condensed set of Financial Statements have been prepared in
accordance with IAS 34; and
- The Interim Management Report includes a fair review of the
information required by 4.2.7R and 4.2.8R of the Financial Services
Authority's Disclosure and Transparency Rules.
- In accordance with 4.2.9R of the Financial Services Authority's
Disclosure and Transparency Rules, it is confirmed that this publication has
not been audited, or reviewed by the Company's auditors.
The Interim Report, for the six months ended 30 June 2014,
comprises an Interim Management Report in the form of the Chairman's
Statement, the Investment Manager's Report, the Directors' Responsibility
Statement and a condensed set of Unaudited Consolidated Financial Statements.
The Directors each confirm to the best of their knowledge that:
a. the Unaudited Consolidated Financial Statements, prepared in
accordance with IFRSs as adopted by the European Union, give a true and fair
view of the assets, liabilities, financial position and profit or loss of the
Group; and
b. the Interim 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 faced.
For and on behalf of the Directors of Standard Life Investments
Property Income Trust Limited
Richard Barfield
Chairman
29 August 2014
UNAUDITED FINANCIAL STATEMENTS
Unaudited Consolidated Statement of Comprehensive Income
for the period ended 30 June 2014
Notes 1 Jan 14 to 1 Jan 13 to
30 Jun 14 30 Jun 13
£ £
Rental income 7,462,953 6,520,056
Surrender premium income 18,154 -
Valuation gain / (loss) from investment properties 5 9,176,100 (2,016,259)
(Loss) / Profit on disposal of investment properties (2,032,950) 7,232
Investment management fees 3 (735,457) (649,986)
Other direct property operating expenses (483,017) (588,174)
Directors' fees and expenses (68,052) (69,030)
Valuer's fee (22,787) (13,771)
Auditor's fee (22,900) (19,500)
Other administration expenses (110,643) (109,111)
Operating profit 13,181,401 3,061,457
Finance income 25,420 30,118
Finance costs (1,636,315) (2,685,413)
Profit for the period 11,570,506 406,162
Other comprehensive income
Valuation (loss) / gain on cash flow hedges (141,937) 3,752,184
Total comprehensive income for the period,
net of tax 11,428,569 4,158,346
Earnings per share: pence pence
Basic and diluted earnings per share 7.31 0.28
Adjusted (EPRA) earnings per share 2.80 1.68
All items in the above Unaudited Consolidated Statement of Comprehensive
Income derive from continuing operations.
Unaudited Consolidated Balance Sheet
as at 30 June 2014
Notes 30 Jun 2014 31 Dec 2013
£ £
ASSETS
Non-current assets
Investment properties 5 177,457,102 172,886,556
Lease incentives 1,102,407 3,269,593
Interest rate swaps 917,670 1,207,299
Deferred Tax 587,315 587,315
180,064,494 177,950,763
Current assets
Trade and other receivables 1,447,459 1,305,524
Cash and cash equivalents 23,214,217 12,303,310
24,661,676 13,608,834
Total assets 204,726,170 191,559,597
EQUITY
Capital and reserves attributable
to Company's equity holders
Share capital 35,369,964 31,337,024
Retained earnings 7,366,290 6,560,853
Capital reserves (27,143,241) (34,144,454)
Other distributable reserves 97,838,372 97,838,372
Total equity 113,431,385 101,591,795
LIABILITIES
Non-current liabilities
Bank borrowings 83,923,001 83,866,594
Other liabilities 6,094 6,094
Rental deposits due to tenants 588,730 336,596
84,517,825 84,209,284
Current liabilities
Trade and other payables 5,685,856 4,519,722
Interest rate swaps 1,090,604 1,238,296
Other liabilities 500 500
6,776,960 5,758,518
Total liabilities 91,294,785 89,967,802
Total equity and liabilities 204,726,170 191,559,597
Net Asset Value (NAV) per share
NAV 70.6p 65.5p
EPRA NAV 70.7p 65.6p
Approved by the Board of Directors on 29 August 2014 and signed on its behalf
by:
Sally-Ann Farnon
Director
Unaudited Consolidated Statement of Changes in Equity
for the period ended 30 June 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 period - 11,570,506 - - 11,570,506
Valuation loss on
cash flow hedges - - (141,937) - (141,937)
Total comprehensive
gain for the period - 11,570,506 (141,937) - 11,428,569
Dividends paid 7 - (3,621,919) - - (3,621,919)
Ordinary shares
issued* 4,032,940 - - - 4,032,940
Valuation gain of 5
investment properties - (9,176,100) 9,176,100 - -
Loss on disposal of
investment properties - 2,032,950 (2,032,950) - -
Balance at 30 June 2014 35,369,964 7,366,290 (27,143,241) 97,838,372 113,431,385
* this value represents both the nominal and the premium raised on issuing the
ordinary shares.
Unaudited Consolidated Statement of Changes in Equity
for the period ended 30 June 2013
Other
Share Retained Capital distributable
Notes Capital earnings reserves reserves Total equity
£ £ £ £ £
Opening balance 1 January 2013 22,280,186 7,711,894 (47,199,621) 97,838,372 80,630,831
Profit for the period - 406,162 - - 406,162
Valuation gain on cash flow hedges - - 3,752,184 - 3,752,184
Total comprehensive gain for the period - 406,162 3,752,184 - 4,158,346
Dividends Paid 7 - (3,264,892) - - (3,264,892)
Ordinary shares issued* 6,709,663 - - - 6,709,663
Valuation loss of investment properties - 2,016,259 (2,016,259) - -
Profit on disposal of investment properties - (7,232) 7,232 - -
Balance at 30 June 2013 28,989,849 6,862,191 (45,456,464) 97,838,372 88,233,948
* this value represents both the nominal and the premium raised on issuing the
ordinary shares.
Unaudited Consolidated Cash Flow Statement
for the period ended 30 June 2014
Notes 1 Jan 14 to 1 Jan 13 to
30 Jun 14 30 Jun 13
£ £
Cash generated from operating activities 9 7,362,202 3,962,710
Cash flows from investing activities
Interest received 25,420 30,118
Purchase of investment properties 5 (19,611,648) (10,354,650)
Capital expenditure on investment properties 5 (2,206,823) (287,416)
Net proceeds from disposal of investment properties 26,567,050 907,232
Net cash used in investing activities 4,773,999 (9,704,716)
Cash flows from financing activities
Ordinary shares issued net of issue costs 4,032,940 6,709,663
Interest paid on bank borrowing (1,010,693) (885,749)
Payments on interest rate swaps (625,622) (1,743,332)
Dividends paid to the Company's shareholders 7 (3,621,919) (3,264,892)
Net cash used in financing activities (1,225,294) 815,690
Net increase / (decrease) in cash and cash equivalents in the period 10,910,907 (4,926,316)
Cash and cash equivalents at beginning of period 12,303,310 13,527,186
Cash and cash equivalents at end of period 23,214,217 8,600,870
Standard Life Investments Property Income Trust Limited
Notes to the Unaudited Consolidated Financial Statements
for the period ended 30 June 2014
1 GENERAL INFORMATION
Standard Life Investments Property Income Trust Limited ("the Company") and
its subsidiary (together the "Group") carries on the business of property
investment through a portfolio of freehold and leasehold investment properties
located in the United Kingdom. The Company is a limited liability company
incorporated and domiciled 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 Unaudited Consolidated Financial Statements were approved for issue by
the Board of Directors on 29 August 2014.
The Audited Consolidated Financial Statements of the company for the year
ended 31 December 2013 are available on request from the registered office.
2 ACCOUNTING POLICIES
Basis of preparation
The Unaudited Consolidated Financial Statements of the Group have been
prepared in accordance with IAS 34 Interim Financial Reporting, and all
applicable requirements of The Companies (Guernsey) Law, 2008. The Unaudited
Consolidated Financial Statements have been prepared under the historical cost
convention as modified by the measurement of investment property and
derivative financial instruments at fair value. The Unaudited Consolidated
Financial Statements are presented in pound sterling and all values are not
rounded except when otherwise indicated.
These statements do not contain all of the information required for full
annual statements and should be read in conjunction with the Audited
Consolidated Financial Statements of the Company for the year ended 31
December 2013. The accounting policies adopted in the preparation of the
Interim Condensed Consolidated Financial Statements are consistent with those
followed in the preparation of the Group's annual consolidated financial
statements for the year ended 31 December 2013, except for the adoption of new
standards and interpretations effective as of 1 January 2014.
New standards and amendments apply for the first time in 2014 and are detailed
below:
IFRS 12 Disclosure of Interests in Other Entities
IFRS 12 sets out the requirements for disclosures relating to an entity's
interest in subsidiaries, joint arrangements, associates and structured
entities. The additional disclosure requirements in IFRS 12 are set out in
these Unaudited Condensed Financial Statements (see note 6).
Several other new standards and amendments apply for the first time in 2014.
However, they do not impact the Interim Condensed Consolidated Financial
Statements of the Group and are listed below:
- IFRS 10 Consolidated Financial Statements
- IFRS 11 Joint Arrangements
- IAS 27 Separate Financial Statements
- IAS 28 Investments in Associates and Joint Ventures
- IAS 39 Financial Instruments: Recognition and Measurement - Novation of
Derivatives and Continuation of Hedge Accounting (Amendments)
- Amendment to IAS 32 Financial Instruments: Presentation
- Amendment to IAS 36 Impairment of Assets
- Amendments to IFRS 10, IFRS 12 and IAS 27: Investment Entities
- Amendments to IFRS 10, IFRS 11 and IFRS 12 on transitional guidance
- IFRIC 21 Levies
The Group has not early adopted any other standard, interpretation or
amendment that has been issued but is not yet effective.
3 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.
Investment Manager
On 19 December 2003 Standard Life Investments (Corporate Funds) Limited ("the
Investment Manager") was appointed as Investment Manager to manage the
property assets of the Group. A new Investment Management Agreement ("IMA")
was entered into on 7 July 2014, appointing the Investment Manager as the
AIFM.
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. The total fees charged for the period
ended 30 June 2014 amounted to £735,457 (period ended 30 June 2013: £649,986).
The amount due and payable at the period end amounted to £373,266 excluding
VAT (period ended 30 June 2013: £329,025 excluding VAT).
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 has been 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.
4 TAXATION
Current income tax
A reconciliation of the product of accounting profit multiplied by
the applicable tax rate for the period ended 30 June 2014 and 2013 is as
follows:
30 Jun 2014 30 Jun 2013
£ £
Profit before income tax 11,570,506 406,162
Tax calculated at UK statutory income tax 2,314,101 81,232
rate
of 20% (30 June 2013: 20%)
Valuation (gain) / loss from investment (1,428,630) 401,806
properties
not subject to tax
Income not subject to tax (289,189) (75,539)
Expenditure not allowed for income tax 74,720 34,481
purposes
Tax loss utilised (671,002) (441,980)
Current income tax charge - -
Unaudited Consolidated Unaudited Consolidated Income
Balance Sheet Statement
30 Jun 2014 30 Jun 2013 30 Jun 2014 30 Jun 2013
£ £ £ £
Deferred income tax assets
Losses available 587,315 - - -
for
offset against
future
taxable income
Deferred income tax asset 587,315 - - -
The Group has available deferred tax assets of £2,366,832 (30 June
2013: £2,606,977) due to tax losses which arose in Guernsey that are available
for offset against future taxable profits of the Company in which the losses
arose. A deferred tax asset of £587,315 (30 June 2013: £Nil) has been
recognised in respect of these losses. The remaining £1,779,517 of deferred
tax assets have not been recognised as the Company expects to convert from a
Guernsey Investment Company to a Real Estate Investment Trust (REIT) by the
end of 2014 and as a result these tax losses would not be utilised. As a REIT,
any future profit generated by the Company would not be taxable in the
Company. Due to the expected REIT conversion, the Group plans to amortise the
deferred tax asset of £587,315 over the coming 6 months as a tax charge in the
Consolidated Statement of Comprehensive Income.
The Company and its subsidiary have obtained exempt company status
in Guernsey so that they are exempt from Guernsey taxation on income arising
outside Guernsey and bank interest receivable in Guernsey. The Board intend to
conduct the Group's affairs such that the Company and its subsidiary continue
to remain eligible for exemption.
5 INVESTMENT PROPERTIES
Country UK UK UK Total Total 31
Class Industrial Office Retail 30 June December
2014 2013
£ £ £ £ £
Market value as at 48,175,000 79,945,000 48,295,000 176,415,000 161,600,000
1 January
Purchase of 3,817,040 15,794,608 - 19,611,648 23,840,453
investment
property
Capital 2,389 2,316,945 (112,511) 2,206,823 326,840
expenditure on
investment
properties
Carrying value of (14,550,000) - (14,050,000) (28,600,000) (15,150,000)
disposed
investment
properties
Valuation gain 1,310,371 6,508,869 1,356,860 9,176,100 5,795,851
from investment
properties
Movement in lease (24,800) 24,578 (14,349) (14,571) 1,856
incentives
receivable
Closing market 38,730,000 104,590,000 35,475,000 178,795,000 176,415,000
value
Adjustment for (1,344,492) (3,535,038)
lease incentives*
Adjustment for 6,594 6,594
finance lease
obligations
Closing carrying 177,457,102 172,886,556
value
*Lease incentives are split between non-current of £1,102,407 and
current of £242,085.
Valuation gains and losses from investment properties are
recognised in profit and loss for the period and are attributable to changes
unrealised gains or losses relating to investment property (completed and
under construction) held at the end of the reporting period.
30 June 31 Dec 30 June 31 Dec
2014 2013 2014 2013
Number of properties Number of £ £
properties
Freehold 22 25 127,705,000 141,970,000
Leasehold 9 8 51,090,000 34,445,000
Closing market value 31 33 178,795,000 176,415,000
The fair value of the Group's completed investment property, apart
from the industrial estate in Swindon, is 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.
In the case of Swindon the alternative technique used by the valuer
was the development appraisal approach as this is the technique most suited to
valuing this asset. Although the development appraisal technique was used the
property in Swindon is not considered to be a development property. The
property has development potential in the future but it is still generating
income for the Group therefore it continues to be categorized as an investment
property and is therefore not shown separately as properties under
construction and has been included as investment property in the table above.
In the case of the development appraisal method, estimates of
capital outlays and construction cost, development costs, and anticipated
sales income are estimated to arrive at a series of net cash flows. Specific
development risks such as planning, zoning, licences, and building permits are
separately valued. Allowances for developers profit and finance costs during
construction and marketing periods are also reflected.
One property has changed valuation technique since 31 December 2013
when Bourne House in Staines was valued using the development appraisal
approach. The change in valuation technique was due to the timing of the
completion of the refurbishment project and the fact it was close to
completion at 30 June 2014.
The Company appoints a suitable valuer (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 property is classified as Level 3 in the fair value
hierarchy. There were no movements between levels during the period.
There are currently no restrictions on the realisability of
investment property 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 property:
- 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 & Fair value Valuation Key Unobservable input Range (weighted
Class technique average)
£
UK Industrial 38,251,429 - Income - Initial Yield - 0% to 10.42% (6.81%)
Level 3 Capitalisation - Reversionary Yield - 0% to 10.42% (7.12%)
- Equivalent Yield - 4.70% to 9.34% (7.48%)
- Estimated rental value per Sq.m - £37.59 to £191.06 (£76.11)
- Development - Construction costs per Sq.m - £1,291.68
Appraisal (exclude fees)
(Swindon property - Profit on cost % - 30%
only)
UK Office 104,082,009 - Income - Initial Yield - 0% to 13.48% (7.17%)
Level 3 Capitalisation - Reversionary Yield - 5.54% to 14.54% (7.36%)
- Equivalent Yield - 5.48% to 10.79% (7.14%)
- Estimated rental value per Sq.m - £80.55 to £418.87 (£175.64)
-
UK Retail 35,123,664 - Income - Initial Yield - 6.05% to 7.61% (7.06%)
Level 3 Capitalisation - Reversionary - 6.38% to 7.61% (6.99%)
Yield
- Equivalent - 6.55% to 7.58% (7.12%)
Yield
- Estimated - £76.56 to £135.51 (£114.61)
rental value per
Sq.m
177,457,102
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.
30 Jun 2014 31 Dec 2013
£ £
ERV p.a. 13,954,522 15,202,884
Area sq. ft. 1,449,391 1,734,445
Average ERV per sq. ft. £9.63 £8.77
Initial Yield 7.50% 7.67%
Reversionary Yield 5.33% 6.59%
The table below presents the sensitivity of the valuation to
changes in the most significant assumptions underlying the valuation of
completed investment property.
30 Jun 2014 31 Dec 2013
£ £
Increase in equivalent yield of 25 (6,460,000) (6,200,000)
bps
Decrease in rental rates of 5% (ERV) (6,780,000) (6,700,000)
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)
6 INVSTMENT IN OTHER ENTITIES
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.
7 DIVIDENDS
30 Jun 2014 30 Jun 2013
£ £
1.133p per ordinary share paid in 1,756,085 1,599,022
Februaryrelating to the quarter
ending 31 December 2013
(30 June 2013: 1.133p)
1.161p per ordinary share paid in May 1,865,834 1,665,870
relating to the quarter ending 31
March 2014
(30 June 2013: 1.133p)
3,621,919 3,264,892
On 22 August 2014 a dividend of £1,865,834, 1.161p per ordinary
share (30 June 2013: £1,728,043, 1.133p per ordinary share) in respect of the
quarter to 30 June 2014 was paid.
8 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 and calculated on a basis which adjusts the underlying reported
IFRS numbers. The adjustment made is to include a provision for payment of a
dividend in respect of the quarter then ended.
30 Jun 2014 31 Dec 2013
Number of Number of
Shares Shares
Number of ordinary shares at the 160,709,237 154,994,237
reporting date
30 Jun 2014 31 Dec 2013
£ £
Total equity per consolidated 113,431,385 101,591,795
financial statements
Net asset value per share 70.6p 65.5p
Adjustments:
Adjustment for dividend in respect (1,865,834) (1,756,085)
of the quarter ending on the
reporting date
Published adjusted net asset value 111,565,551 99,835,710
Published adjusted net asset value 69.4p 64.4p
per share
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.
30 Jun 2014 31 Dec 2013
£ £
Total equity per consolidated 113,431,385 101,591,795
financial statements
Adjustments:
Less: fair value of 172,934 30,997
derivatives
Published adjusted EPRA net asset value 113,604,319 101,622,792
Published adjusted EPRA net asset value 70.7p 65.6p
per share
Adjustments:
Adjustment for dividend in (1,865,834) (1,756,085)
respect
of the quarter ending on the
reporting date
Published adjusted EPRA net asset 111,738,485 99,866,707
value
Published adjusted EPRA net asset 69.5p 64.4p
value per share
9 CASH GENERATED FROM OPERATING ACTIVITIES
1 Jan 14 to 1 Jan 13 to
30 Jun 14 30 Jun 13
£ £
Profit for the period 11,570,506 406,162
Movement in lease incentives (67,274) (11,898)
Movement in trade and other (141,935) (670,077)
receivables
Movement in trade and other payables 1,533,160 (425,799)
Finance costs 1,636,315 2,685,413
Finance income (25,420) (30,118)
Valuation (gain) / loss from (9,176,100) 2,016,259
investment properties
Loss / (profit) on disposal of 2,032,950 (7,232)
investment properties
Cash generated from operations 7,362,202 3,962,710
In the Consolidated Cash Flow Statement, proceeds from disposal of
investment properties comprise:
1 Jan 14 to 1 Jan 13 to
30 Jun 14 30 Jun 13
£ £
Carrying value of disposed investment 28,600,000 900,000
properties (Note 5)
(Loss) / profit on disposal of (2,032,950) 7,232
investment properties
Proceeds from disposal of investment 26,567,050 907,232
properties
10 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.
11 EVENTS AFTER THE BALANCE SHEET DATE
Property Sales and Purchases
On 11 August 2014 the Group completed the purchase of Tetron 93 and
Tetron 141, two industrial investments in Swadlincote for £14.35m excluding
costs.
On 11 August 2014 the Group completed the purchase of Denby 242, an
industrial investment in Derby for £12.9m excluding costs.
Shares and Dividends
On 22 August 2014 a dividend of £1,865,834 in respect of the
quarter to 30 June 2014 was paid.
On 30 July 2014 the Group allotted 50m ordinary shares of 1p each,
which rank parri passu with the existing shares in issue, at a price of 72.9p
per share.
End of Notes to the Unaudited Consolidated Financial Statements for the period
ended 30 June 2014
Directors and Company Information
Directors Richard Arthur Barfield (Chairman) 1
Huw Griffith Evans 2
Sally-Ann Farnon 3
Shelagh Yvonne Mason 4
Robert Peto 5
Registered Office Trafalgar Court
Les Banques
St. Peter Port
Guernsey GY1 3QL
Registered Number 41352
Administrator & Secretary Northern Trust International Fund Administration
Services (Guernsey) Limited
Trafalgar Court
PO Box 255
Les Banques
St. Peter Port
Guernsey GY1 3QL
Registrar Computershare Investor Services (Guernsey) Limited
Le Truchot
St. Peter Port
Guernsey GY1 1WD
Investment Manager Standard Life Investments (Corporate Funds) Limited
1 George Street
Edinburgh EH2 2LL
Telephone: 0845 60 60 062
Independent Auditors Ernst & Young LLP
Royal Chambers
St Julian's Avenue
St Peter Port
Guernsey GY1 4AF
Solicitors Dickson Minto W.S. Mourant Ozannes
16 Charlotte Square 1 Le Marchant Street
Edinburgh EH2 4DF St Peter Port
Guernsey GY1 4HP
Broker Winterflood Securities Limited
The Atrium Building
Cannon Bridge
25 Dowgate Hill
London EC4R 2GA
Principal Bankers The Royal Bank of Scotland plc
135 Bishopsgate
London EC2M 3UR
Property Valuers Jones Lang LaSalle Limited
22 Hanover Square
London W1A 2BN
Depositary Citibank International plc
Canada Square
London
E14 5LB
1 Chairman of the Nomination Committee
2 Chairman of the Remuneration Committee
3 Chairman of the Audit Committee and designated as
Senior Independent Director
4 Chairman of the Management Engagement Committee
5 Chairman of the Property Valuation Committee
Additional Notes to the Interim Financial Report
The Interim Report and Condensed Financial Statements for the period from 1
January 2014 to 30 June 2014 will shortly be available for download from the
Company's website hosted by the Investment Manager (
www.standardlifeinvestments.co.uk/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.
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
Gordon Humphries
Standard Life Investments Limited
Tel: 0131 245 2735
Jason Baggaley
Standard Life Investments Limited
Tel: 0131 245 2833
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