Offshore Test Embargo Drafts 0209_add

STRATEGY

In pursuit of our aim to distribute an attractive income return, we have worked with our Investment Manager to improve the quality of the company's income stream. We are looking to enhance the portfolio of properties so that it is entirely let to tenants of substantial financial covenant at fair rents that have the potential to grow as the UK economy recovers. Our belief is that well positioned good secondary properties are more likely to deliver the future returns that we seek rather than the pursuit of heavily priced so-called prime opportunities. To an extent, the policy reflects the asset management skills of our manager, specifically in relation to multi-let buildings where frequently we are able to unlock latent value by the reorganisation of leases and the improvement of the accommodation.

FINANCIAL PERFORMANCE

Net Asset Value

At the end of the year the adjusted NAV was 56.6 pence per share, approximately 9.7% below that recorded at the end of December 2011. The movement is in line with our peer group's performance but is below our ambitions. Set out below is an analysis of the components and movements of the NAV calculation.

	Pence per share	% of opening NAV
Published adjusted NAV as at 31 December 2011	62.7	100.0
Decrease in valuation of property portfolio	(6.5)	(10.4)
Decrease in interest rate SWAP valuation	(0.6)	(0.9)
Other reserve movements	1.0	1.6
Published adjusted NAV as at 31 December 2012	56.6	90.3

The published NAV is calculated under International Financial Reporting Standards and adjusted for the payment of a dividend of 1.133p per share for the quarter ended 31 December 2012.

Earnings and Dividend

During 2012, the Company paid total dividends of 4.532p per share, an increase of 1.5% on dividends paid in 2011. Dividends paid in the year are shown below:

	2012 Pence per share	2011 Pence per share
Interim dividend paid in May relating to quarter ending 31 March	1.133	1.100
Interim dividend paid in August relating to quarter ending 30 June	1.133	1.100
Interim dividend paid in November relating to quarter ending 30 September	1.133	1.133
Interim dividend paid in February relating to quarter ending 31 December	1.133	1.133
	4.532	4.466

Loan to value ratio

At 31 December 2012 the LTV ratio (assuming all cash placed with RBS is offset against the loan balance) was 43.9%, within the range of 35% to 45% set by the Board.

Under the terms of the RBS loan facility, the LTV covenant is 65% until December 2016 reducing to 60% for the remaining two years.

Shares and Share Price

During the year, 3,000,000 new shares were issued at a premium to NAV bringing the total in issue to 139,631,746.

At 31 December 2012, our share price was 58.25p representing a premium over NAV of 2.9% and an increase in share value of approx 12.6% over the 12 month period. Over the year the share price total return was 21.1%.

Since the year end to 11 April 2013, the Company has issued a further 5,300,000 new shares at a premium to NAV bringing the total shares in issue to 144,931,746.

THE PORTFOLIO

Reflecting the strategy outlined previously, during the year we acquired multi-let office buildings in Cheltenham and Glasgow and sold the health club in Chislehurst.

Our void rate at the end of the year was 10.9% which is in line with the IPD average of 9.0%. However, of our voids, 5.6% represents space that we sought to take back in order to refurbish and relet. At the time of writing this report, all but 3.6% of the 10.9% is under offer, but of course subject to the completion of formal leases.

The former Focus unit at Wymondham (Norwich) remains unlet. We have an acceptable offer for the space from a food supermarket, but vested interests have challenged our planning application and the matter is being pursued in planning appeal.

Rent collection - on which we rely to pay dividends - was very satisfactory in 2012. 96% of our tenants paid the full amounts within 14 days of the due date and at the year end, long term debtors amounted to just 0.5% of the rent roll.

Of the occupational leases with expiry dates or break clauses in 2013, six have been extended or had break clauses removed, leaving just three to be resolved. We have also reached agreement in respect of 30% of the rent at risk in 2014.

DEBT AND FINANCE

As reported above, currently our NAV is adversely affected by the three interest rate swaps that the Company has in place. A swap facility of Â£72m will mature in December 2013, and as a consequence our NAV will be enhanced by Â£3.2m (2.3p per share). The remaining two swaps mature in December 2018.

In parallel, the new banking facility with RBS was completed in January 2012 and post December 2013 the all-in interest rate will fall from 6.3% to 3.8%, not only reducing a significant outflow of money (Â£1.8m p.a.) but also improving the dividend cover further.

CORPORATE GOVERANCE

The membership of the Board remained unchanged during the year. However David Moore has stated his intention to retire from the Board at the forthcoming Annual General Meeting, and I pay tribute to his diligence, enthusiasm and commitment to the Company as its first Chairman and as one of the founder directors.

Following a search conducted by the Nomination Committee, the Board is pleased to announce the appointment of Huw Evans as a Director, with effect from 11 April 2013. Huw is a Chartered Accountant and his career has included over fifteen years in corporate finance, advising on a wide range of companies in financial services and other sectors. Huw is currently a director of a number of Guernsey-based investment funds.

During the year, there has been a full review of the Board's performance both individually and collectively. The Board's Committees (Valuations, Nominations, Remuneration, Management Engagement and Audit) also met regularly to conduct the normal business within their terms of reference. In the case of the Management Engagement Committee, this included appraisals of all our service suppliers and in the case of the Valuations Committee direct discussions with our valuers.

OUTLOOK

While the UK will no doubt see more occupational tenants unable to continue their business in their current format, I am as confident as it is reasonable to be that we have a low risk exposure to such companies. I am therefore encouraged to believe that our focus on income generation will deliver good returns to investors in the year ahead. Part of so doing will be supported by the continuation of an active asset management regime. This will include some further reshaping of the portfolio to weed out any holdings that appear unable to perform to our requirements.

There are also some higher level matters that will require our attention in the coming months. By July 2014, we must be compliant with the new AIFM directive, and we have started discussions on the implications already, noting with regret that a financial burden will arise. We will also review our current structure in order to be sure that we deliver net returns to shareholders in an efficient manner.'

Jason Baggaley, on behalf of Investment Manager, stated:

'UK Commercial Real Estate Market

The total return for the UK commercial real estate market in 2012, as measured by the IPD Quarterly version of the Monthly Index, was 1.6%, a decline on the 2011 total return of 7.8%. Capital values declined steadily throughout 2012, falling by a total of -4.3%. This compares to a total return from equities of 10.2% and gilts 4.7%. Again, in 2012 it was because of the strong income characteristics of real estate that the total return was positive, with an income return of 6.2% according to IPD.

Although forecasting in the current market is extremely difficult the consensus appears to suggest prices stabilising during 2013.

Relative to other asset classes UK real estate remains attractively priced. The recent outward shift in gilt yields has reduced the margin slightly, but it still remains at historically high levels.

During 2012 there was a continued polarisation between prime and secondary in both the occupational and investment markets. This covered all sectors of the market, but was most prevalent in the retail market, where retailers are generally only taking stores in major centres that offer a complete retail and leisure experience, leaving secondary centres to flounder. We expect this to continue, and some of the poorer high streets and shopping centres are unlikely to recover. In many markets however, supply remains constrained. Tenant demand may remain muted as companies generally don't want to incur the cost of moving and fitting out a new office, however we are beginning to see examples of companies looking to acquire new accommodation as they become more comfortable with the economic outlook - some of them have been surprised at the lack of choice of good quality accommodation, and this theme is likely to continue with little prospect of new speculative development.

In the office sector risk aversion has continued with investors favouring prime buildings let on long leases. Central London has attracted overseas investors seeking a safe haven, and pricing has reached pre crash levels. As a result, there is increased interest in South East markets as domestic investors seek a bit more yield.

Outlook

A number of risks remain, such as the US fiscal cliff and the implosion of Europe, however generally these risks seem to be receding, and the outlook for 2013 is better than 2012. Although economic recovery is going to be protracted, we do believe the UK economy is past the worst, and as growth and confidence returns prices will stabilise, and return to moderate growth in the latter half of 2013 and into 2014. The shortage of supply of good quality accommodation bodes well for rental values as demand increases on the back of the economic improvement. Standard Life Investments forecasts an average total return of 7.9% pa for the next three years from UK Commercial real estate. The underlying property fundamentals will be critical to achieving these returns - good properties, in good locations, let to good tenants will do best, and income will be the main component of the total return. We will also start to see the benefit from higher yielding good quality properties let on shorter leases as asset management again becomes a driver for returns, and investors risk appetite returns. The trend of shorter leases is going to continue, and investors will have to get used to buying shorter income. Increasingly the fundamentals of the location and asset quality will prevail, along with an ability to actively manage the tenants and properties.

Investment Management Strategy:

The investment strategy we follow is closely aligned to the Company's objective of providing an attractive income return with the prospects for growth. We manage a high yield portfolio, concentrating on holding good quality assets in good locations, let to good tenants that are able to pay their rent. We rely on taking an active approach to managing these assets to maintain a strong income return, and will take profit by selling an asset that has poorer prospects of meeting our return requirements. We look to remain fully invested in higher yielding assets so that we can sustain a covered dividend policy.

Purchases:

The Company completed the purchase of two assets over the reporting period, both in the first half of 2012.

St James House Cheltenham: We bought this multi let office investment in Q2 for Â£8.4m. The 83,000 sqft building was originally built in 1982 but underwent major refurbishment in 2000 and 2010. Since purchase we have refurbished the reception and the 4th floor. The building is located in an established office location close to the town centre, and provides some of the best office accommodation in Cheltenham. It is let to 9 tenants with an average lease length of 8 years (6 years to break) at rents of circa Â£12psf. We have refurbished the 4th floor following lease expiry and are marketing it with an expected rent of Â£15psf. The building yielded 7.9% at year end, with an expected yield of circa 10% once the 4th floor is income producing.

140 West George Street Glasgow: At Â£4m this was a smaller investment than we normally make, but it is a delightful multi let office in the prime pitch of Glasgow. The grade 2 listed building was comprehensively refurbished in 2009 to a very high standard, and let of low rents of Â£17psf in the downturn. The purchase price reflected a yield of 9.5%, and a capital value of Â£170psf - close to the rebuild cost. Since purchase we have let the vacant 2nd floor and have removed two breaks in 2015.

Sales:

The Company sold its Virgin Active gym in Chislehurst in Q4 for Â£3.95m, a yield of 6.15%. The sale price was ahead of valuation, and although the property was let on a long lease with fixed increases, the first one was not due until 2018, so we took the opportunity to sell an asset that had weaker fundamentals but was keenly sought after in the investment market. The sale proceeds will be reinvested in a higher yielding asset similar to recent purchases, which will be accretive to the revenue account and provide opportunity for greater returns.

Portfolio Valuation:

The portfolio was valued quarterly by Jones Lang LaSalle. At year end the investment portfolio was valued at Â£161.6m and the Company had cash of Â£13.5m. This compares to a portfolio value of Â£162.1m and cash of Â£17.8m at year end 2011.

The relatively high cash level was due to the sale of Chislehurst in November, and the receipt of a large surrender premium in December. Circa Â£1.6m is allocated to the Q4 dividend payment, Â£2m for current refurbishment projects, and we are considering a number of attractive investment opportunities and asset management initiatives.

The portfolio yield at year end was 7.5% and the equivalent yield was 7.9%.

Asset Management:

We continue to focus on securing the future income stream for the Company.

During 2012 we secured 84% of the income at risk through lease break option or expiry in 2013, and we have now secured 30% of the income at risk in 2014. Although we have just over half of the income at risk over the next five years the majority is in 2014 - 2016, at a time when we expect an improvement in the economic environment and limited new development to have started.

Keeping voids to a minimum is important for an income fund. Generally during the year the Company reported a void rate of circa 6%, compared to IPD 9% (IPD calculated the Company's void rate at circa 3.5% on a like for like basis). In December the Company took a surrender of a lease from one of its biggest tenants at Bourne House in Staines, increasing voids to just under 11%. The tenant did, however, pay all the rent due up to the end of the lease in 2016 as part of the surrender premium. The Company will now refurbish the property and market it to new tenants.

As a result of taking back the lease at Staines the Company had a vacancy rate at year end of 10.9%. Of this, 5.6% is under refurbishment, and a further 1.6% is in solicitors hands. The Company suffered no tenant failure during the reporting period.

The major items of asset management during the year were:

Bourne House Staines: At the end of Q4 the Company took a surrender of the lease on its office investment in Staines. The lease was due to expire in March 2016, and the Company has received all rent due under the lease to that date, as well as dilapidations as a surrender premium. The Company is about to undertake a refurbishment of the office, prior to marketing for a new lease. The ERV represents 4.7% of the fund income, however the surrender premium provides rental cover and the refurbishment costs until the property is relet, and a longer term tenant is found.

Ocean Trade Centre Aberdeen: The 25 unit industrial estate was fully let at year end, following several lettings and lease extensions during 2012. Three units are due to become vacant in 2013, and we have extended the leases on two others already. Demand remains strong for this estate, and we have seen rental growth in 2012, although leases are short.

Clough Rd Hull: We let the old John Peters unit to Smyth's Toys on a new 15 year lease, so again the holding in Hull is fully let.

Ex Focus Unit Norwich: We continue to try and achieve a more beneficial planning consent and are pursuing an appeal to achieve this, in the meantime the unit is being marketed under the current planning consent.

Unit 1b Mansfield: We let this unit, which had been vacant for just over 2 years, and have agreed terms to let unit 5, which has also been vacant for a while.

140 West George St Glasgow: In addition to letting the second floor shortly after purchase two leases were extended and breaks removed to give 5 years term certain on the income.

Halfords Paisley: The property had 2 years left on the lease, and was in poor condition. We have regeared the lease for ten years term without a break, and have financed improvement works to the unit.

Easter Park Bolton: Working with the tenant we have installed photo voltaic panels to the roof, and are receiving both a feed in tariff and income from the power used by the tenant. The provision of "green energy" to the unit creates a long term income stream to the Company, and enhances the appeal of the unit to occupiers.

Performance:

The Company aims to provide an attractive income return to investors. It has a policy of a covered dividend, and so the underlying portfolio income return is important. The Company has consistently provided an above market income return.

Although providing an attractive income return is our main driver, we also want to provide an attractive total return to investors. At a property level the Company has also maintained a strong total return performance relative to the IPD Monthly Index.

Shareholder returns obviously differ from the underlying asset returns, and the table below shows the share price performance (with dividends reinvested) over the period for the peer group.

Total Returns (dividends reinvested)	%
Schroder Real Estate Income Trust	30.16
Standard Life Investments Property Income Trust	21.14
F&C Commercial Property Trust	8.19
Picton Property Income	6.16
ISIS Property Trust	5.59
UK Commercial Property Trust	2.55
IRP Property Investments	-3.14
Invesco Property Income Trust	-76.92

FTSE ALL SHARE	12.30
FTSE EPRA/NAREIT UK	29.89