Final Results

Insight Foundation Property Tst Ltd 09 June 2005 9 June 2005 Insight Foundation Property Trust Limited('IFPT/the 'Company') Results and Consolidated Financial Statements for the period from 27 May 2004 to 31 March 2005 CHAIRMAN'S STATEMENT Results I am pleased to report on a very positive set of results for our Company's first financial period ending 31 March 2005. The Company was incorporated on 27 May 2004 and commenced full operations on 16 July 2004. The Company's net asset value per share (NAV) has increased by over 7.5% over the period from 16 July 2004, and shareholders have received total dividends of 3.375 pence per share, making a total return of almost 11.0% over eight and a half months. The Company's share price continues to trade at a premium to net asset value, as it has done since the launch of the Company. The audited NAV has increased from the estimated launch NAV of 97.5 pence per share to 104.90 pence per share. Over the same period, dividends were paid on the 12 November 2004 and 11 February 2005 (each at 1.6875 pence per share). The NAV growth is clearly a reflection of the strength of the UK commercial property market but it also reflects the manager's active approach in terms of transactional activity, intensive asset management and innovative financing. Each of these areas has made an important contribution to the Company's progress in this initial period, both in terms of adding value to our asset base, and in reducing the potentially high costs of execution in the property market. The shares of the Company have enjoyed good levels of support since launch and were trading at 115.5 pence per share on the 31 March 2005, reflecting a 10% premium to the March NAV. Borrowings In March the Company successfully closed a Â£152.5 million debt securitisation facility. This financing structure is the first in the Property Investment Trust sector and provides keenly priced debt finance for the Company while preserving operational flexibility. The Company refinanced the Â£98 million interim facility it had arranged at launch and in addition the securitisation provides additional 'reserve note' capacity which provides significant financial flexibility for acquiring further properties. The securitised facility runs until the Company's continuation vote in 2014 and is fully hedged against interest rate movements. The total aggregate interest rate including annualised costs is 5.6% compared to our original assumption of 6.3% when the Company was launched. Expanded Shareholder Base In February, the Company announced that 50 million of the shares held by Clerical Medical With Profits Fund, equating to 19% of the issued share capital, were placed at a price of 108 pence per share. This sale was very well received and as a result, Clerical Medical's shareholding was reduced from approximately 61% to 42% of the issued share capital. The broader investor base, together with an enlarged free float should enhance the liquidity of our shares and is a positive step for the Company and its Shareholders. Shareholder Communication The Investment Manager, Insight Investment Management (Global) Limited (the ' Manager'), continues to issue quarterly Fact Sheets and a bespoke website for the Company will be launched during July. It is the Board's intention, with the support of the Manager, to continue to enhance the quality and transparency of our communication with shareholders. Manager Evaluation In March 2005, the Board spent a full day with the Manager, reviewing its investment processes, including the use of detailed asset business plans to achieve the Company's objectives. The Board believes that the continued appointment of the Manager, on the terms agreed, is in the interests of the Company and its shareholders as a whole. Corporate Governance The Board takes a prudent and proactive approach to corporate governance, with risk assessment and controls regularly reviewed by the Board. The Board's approach to this subject will be described in the Company's Annual Report. Board The Company's first period has been characterised by intense activity, with our property acquisitions and debt financing all entailing a high degree of complexity, in order to produce results which have been of great benefit to the Company both financially and structurally. I am grateful to my colleagues on the Board for their considerable efforts over this time The Directors recently commissioned a review by Trust Associates of the level of board remuneration, in the light of the workload which is entailed in a Company of this size and complexity. The review indicated that some adjustment would be appropriate, and the Report of the Directors in the Annual Report will contain details of these proposals, which will be put to shareholders at the Annual General Meeting. Prospects The UK property market produced a total return of 19.0% during 2004, as measured by the IPD Monthly Index (compared to 11.2% in 2003). This return has been driven largely by the recent decline in property income yields, with a fall in the income yield on the IPD Index from 7.4% to 6.5% in the 12 month period to 31 March 2005. Looking ahead, returns from property are likely to be more dependent on good levels of rental growth, rather than further falls in yields. In 2005, the Manager anticipates a full year return in the region of 10% to 11%. This return after adjustment for inflation, will compare very favourably with long run averages from the market. The property market continues to attract substantial cash inflows from a broad range of investors, and the challenge for many property investors will be to secure attractive assets at reasonable prices. In this regard, the Board continues to be confident that the Manager's highly active approach to asset management will position the Company's portfolio for good performance on both an absolute basis and in comparison with recognised property indices. The recent Budget met with a mixed response from the property industry. The withdrawal of Stamp Duty Land Tax relief for disadvantaged areas was not widely expected and had a material effect on values in some parts of the country. I am pleased to report that the Company had a below average exposure to such areas and therefore the impact on the Company's NAV was modest. The Budget also confirmed that the Inland Revenue will be pressing ahead with plans for UK REIT's (Real Estate Investment Trusts), potentially to be launched in 2006. The Board will continue to monitor the consultation process, particularly in relation to the significant tax issues, and the Manager remains closely involved in the Industry lobby groups. In the meantime, your Board will continue to consider and review the best form and size for the Company in order to generate the best risk adjusted returns for shareholders and to meet the Company's core objectives. With the Company's strong portfolio, increased financial flexibility and specialist property management, the Board views the future with confidence. Andrew Sykes Chairman 8 June 2005 For further information, please contact: Enquiries: Duncan Owen (Insight Investment Management) Tel: 020 7321 1676 Paul Smith / Jeff Lanyon (RBSI) Tel: 01481 740 820 Stephanie Highett / Dido Laurimore (Financial Dynamics) Tel: 020 7831 3113 Financial Highlights â€¢ Net asset value per share rose by 7.6% â€¢ Share price rose by 15.5% â€¢ Earnings per Share of 9.7p â€¢ The Group has declared and paid dividends per share amounting to 3.375 pence. 31 March 2005 Launch 16 July % Change 2004 Net asset value (NAV) Â£272.82M Â£253.5M 7.6 NAV per share published (pence) 105.3 NAV per share per accounts (pence) Note 1 104.9 97.5 7.6 Share price (pence) 115.5 100.0 15.5 Share Price premium to NAV 10.1% - - Peer Group Share Price Index Comparison Note 2 113.3 100.0 13.3 FTSE All Share Index 2457.73 2165.42 13.5 FTSE Real Estate Index 3256.74 2849.79 14.3 Note 1 Net asset value (NAV) is calculated using International Financial Reporting Standards. NAV shown for 16 July 2004 is shown as original prospectus estimate. Note 2 Comprising ISIS Property Trust Limited, ISIS Property Trust 2 Limited, The UK Balanced Property Trust Limited, Standard Life Investments Property Income Trust Limited, Invesco UK Property Income Trust, Teesland Advantage Property Trust. Reconciliation of net asset value per accounts to published net asset value Total Per share Â£,000 Pence Net asset value per accounts 272,822 104.9 Hedge reserve on interest rate swap 1,382 0.5 Expenses re-classified (330) (0.1) ------------ ------------ Published net asset value 273,874 105.3 ------------ ------------ Performance Summary Property Performance 31 March 2005 30 Sept 2004 Value of Investment Properties Â£379.45M Â£349.68M Current annualised rental income including rental guarantees Â£25.66M Â£23.91M Estimated open market rental value Â£26.48M Â£25.09M Underlying property performance* 7.54% - IPD Balanced Monthly Index Funds* 7.38% - * Source - Investment Property Databank. Period 30 September 2004 to 31 March 2005 Summary Consolidated Income Statement Net Rental and Related income Â£16.718M Realised and Unrealised Gains on Investment Property Â£16.893M Expenses (Â£3.320M) Net Finance costs (Â£3.180M) Profit before Tax Â£27.111M Taxation (Â£1.756M) Profit for the period Â£25.355M Earnings and Dividends since Launch Earnings per Share 9.7p Dividends paid per Share 3.375p Annualised Dividend Yield on 31 March 2005 share price 5.84% Bank Borrowings at 31 March 2005 Drawn down Facility Â£152.5M Gearing - borrowings as % of Total assets less Current Liabilities 35.9% Gearing - borrowings as % of asset value in Security Pool (see Note 14) 39.6% Net Gearing - borrowings less cash as % of Non Current Assets 25.6% Estimated Annualised Total Expense Ratio since Launch As % of Total Assets less Current Liabilities 1.11% As % of Equity 1.72% INVESTMENT MANAGER'S SUMMARY REPORT The Company Insight Foundation Property Trust Limited (the 'Company') was launched in July 2004 as a newly established Guernsey Domiciled Investment Company. The Company's strategy is to assemble and manage a portfolio of UK commercial property to provide Shareholders with an attractive level of income together with potential for income and capital growth. Our property strategy continues to be based on careful stock picking and selecting assets where we believe we are able to generate above average income returns through active management. The Investment Manager Insight Investment Management (Global) Limited ('Insight') is the Company's Investment Manager. Insight is one of the UK's largest and fastest growing property investment houses with commercial property assets of over Â£6 billion under management. Insight's investment strategy is research-led but based upon stock picking fundamentally sound assets which are well located and then enhancing them through asset management. Insight Investment has a strong performance track record and is both an innovative as well as pro-active property investment manager. The property division has over 50 professionals focused on the property sector. The Team Insight Investment's principal team for the Company's portfolio comprises the Investment Committee, which has worked closely together for a number of years on other high performing property investment funds and companies. The Investment Committee adheres to robust processes and rigorously reviews the property activity and all other associated matters when it meets every fortnight. Duncan Owen is Chairman of the Investment Committee and leads on investment matters, Philip Gadsden is the lead on financial and debt associated matters. Nick Montgomery runs the day to day asset management across the portfolio and Mark Long acts in preparing property forecasts and an economic overview including what this could mean for the Company's portfolio. The Portfolio's Performance As at 31 March 2005, the Company owned a direct property portfolio valued at Â£379.45 million comprising 74 assets. The portfolio has approximately 240 tenancies (with 180 different tenants as companies) with an average unexpired lease term of approximately eight and a half years. The portfolio is diversified both geographically and across the main sub-sectors of the UK property market. Sector Spread Type of Asset % Industrial 31 Office 35 Retail 34 Regional Spread Location % Central London 4 South East (excluding London) 43 Rest of South 11 Midlands and Wales 26 North and Scotland 16 Property tenure, expressed as a percentage of value: Type of tenure % Freehold 86.77 Virtual freehold (999 year leasehold at a peppercorn rent) 5.45 Long leasehold 7.77 As at 31 March 2005, the portfolio has shown a total valuation uplift of 6.5% since launch. The revaluation uplifts for the preceding quarters on a like for like basis are 2.36% for the two and a half months to 30 September 2004, 1.8% for the three months to 31 December 2004 and 2.2% to 31 March 2005. The performance of the properties is independently measured by the Investment Property Databank (IPD) on a like-for-like basis consistently against the main balanced monthly property index. For the period from launch to March 2005 the portfolio produced annualised returns broadly in line with this IPD benchmark. In the light of the fact that all the assets have been acquired in this first accounting period with the resulting costs, this is a very good period of performance compared with the IPD benchmark which reflects an average turnover rate equating to only 15% of assets by value. The Company now has in place the foundation of the core portfolio picked for the long term which is extremely encouraging for the prospective performance of the portfolio in 2005 to 2006 as the Company will be trading less and consequently will incur materially lower transactional costs. This has been borne out in the IPD measured returns for the quarter ending 31 March 2005 where the Company's portfolio produced a total return (i.e. valuation uplift and rental income) of 3.8% compared with the IPD index return of 2.7%, placing the Company in the top decile of its benchmark group. The Property Portfolio From launch to the 31 March 2005, the Company has made total acquisitions of Â£361.24 million and a selective disposal of Â£3.55m. This compares with the valuation of the property portfolio (as at 31 March 2005) of Â£379.45 million. The portfolio now produces a total income, including rental guarantees, of Â£25.66 million per annum and results in a yield of approximately 7.1% on the total purchase price, after all acquisition costs. The estimated open market rental value as at 31 March 2005 according to the Valuer was Â£26.48m per annum and therefore the reversionary yield on the total purchase price is higher at 7.3%. Including the period up to May 2005 additional portfolio activity is such that since launch, total purchases now total Â£366.735 million and following three further sales, total disposals have increased to Â£15.285 million. At launch, we identified two separate portfolios comprising 64 properties and acquired these for a total purchase price of Â£293.25 million, producing an income yield of 7%. The portfolios were chosen as they met the Company's core objectives, benefiting from good fundamental characteristics and with strong prospects for growth. They initially had approximately 240 tenancies, an excellent geographical and sector spread and a weighted income expiry term of about nine years. In addition to the strong diversification, the properties offered considerable active asset management opportunities and had a low exposure to the London office sector which was a proactive choice for this period of investment. The acquisitions were in a form that resulted in low acquisition costs. As a result there was a high opening Net Asset Value per Ordinary Share, estimated at 97.5p per share. The period immediately post launch was also characterised by significant activity. We assembled a strong team with systems necessary to implement the business plans for every asset. During the first period and as noted in the interim accounts, the Company also acquired a further nine properties for Â£49.51 million, again producing a net income yield of 7%. This acquisition included four offices, four industrial properties and a shopping centre with a total of 40 occupational tenants, adding further to the diversity of the portfolio. Since the Interim Report, the Company has acquired a distribution warehouse in Manchester and an office building in Brighton for a total consideration of Â£18.475 million. The yield for these acquisitions was 7.7%, after all purchase costs. These acquisitions met our principal objectives with above average income yield and good quality investments in strong locations well placed for growth. Since the quarter we have also completed the acquisition of a cash and carry warehouse property in Acton, West London for Â£5.5 million (which provides a yield of 6% which we expect to grow quickly to almost 9%). This again met our core objectives of acquiring well located assets with the ability to grow rental income via active asset management initiatives. The Company has also completed a limited number of disposals where a material premium over valuation has been achieved. We disposed of an industrial property in Newton Aycliffe in December 2004 for a price of Â£3.55 million, equating to an 18% capital uplift over the purchase price just two months earlier. Since the period end, lower yielding retail assets in Hemel Hempstead, Chichester and Chester have also been sold. In aggregate the three retail disposals achieved a premium of Â£1.15 million or 11% over the purchase prices paid in July 2004 and this represented a combined yield of 5.45% on the price achieved. These disposals again exceeded our core objective of selling lower yielding assets where there is a material profit to crystallise and to facilitate re-investment in high growth properties. We are using all efforts to ensure that the Company is substantially invested, whilst not having to compromise on our key investment principles. We have an intensive approach to stock selection and this is a strategy that is helping to secure mis-priced stock even in a today's competitive market. The matrix below provides a guide to our current view on value in the UK market. We consider this to be only a guide and it is subject to regular review: Short term Medium term Accumulate Yield 6%+ Retail warehousing Central London and SE offices Regional offices Value retail warehousing SE business parks Urban & SE industrial Avoid Market town shops Highly rented SE offices Highly rented provincial Highly rented rest of UK offices offices Secondary shops Prime low yield industrial High land supply areas High depreciation assets Additional Property Portfolio statistics at 31 March 2005 Ten largest properties Asset Value % Reynard Business Park, Brentford Â£17,300,000 4.6% Victory House, Trafalgar Place, Brighton Â£16,500,000 4.3% 20/22,Tudor Street,London, EC4 Â£16,400,000 4.3% The Albion Centre, Ilkeston Â£13,600,000 3.6% Union Park, Fifers Lane, Norwich Â£12,510,000 3.3% Olympic Office Centre, Wembley Â£12,500,000 3.3% Rectical, Bluebell Close, Alfreton Â£10,150,000 2.7% Victoria Plaza, Bolton Â£9,710,000 2.6% The Gate Centre, Brentford Â£9,450,000 2.5% 106 Oxford Road, Uxbridge Â£9,250,000 2.4% Totals Â£127,370,000 33.6% Ten largest tenancies Tenant Value % Mott MacDonald Ltd Â£1,307,148 5.19% Freshfields Sevices Company Â£1,279,600 5.08% Grand Metropolitan Estates Ltd Â£795,975 3.16% The British Broadcasting Corporation Â£733,500 2.91% Recticel SA Â£713,538 2.83% Jarvis Porter (Property Holdings) Ltd Â£700,000 2.78% Concept Automotive Services Ltd Â£515,970 2.05% Tucker, Crossland Darke (Irwin Mitchell) Â£506,638 2.01% Parametric Technology (UK) Ltd Â£486,200 1.93% CRP Print & Packaging Ltd Â£481,406 1.91% Totals Â£7,519,975 29.85% Unexpired occupational lease lengths, expressed as a percentage of current rent: Lease length % Less than 1 year 4 0 to 5 years 30 5 to 10 years 36 10 to 15 years 19 15+ years 11 Income risk analysis, expressed as a percentage of current rent: Income risk % Negligible & Government 47 Low 22 Low to medium 11 Asset Management Activity The underlying performance of the portfolio has been driven not just by stock selection but also by our pro-active and diligent approach to active asset management in a strong property market. This approach is required to ensure that the Company captures rental growth as fast as possible and consequently maximises all possible opportunities for capital value appreciation. Any vacant units are aggressively managed, and this is delivering strong results as well as low relative voids in the income across the portfolio. As at 31 March 2005 approximately 4% of the portfolio was vacant, down from 7% in July 2004. If leases currently under offer complete as anticipated, the void rate will be further reduced to approximately 2% of rental value. This compares to approximately 9% on an average portfolio (as measured by the IPD Index). For rent reviews, it is the Company's policy to always try to secure a rental uplift irrespective of the potential quantum of increase in the rent. This approach has been very successful for example, at a shop in Market Street, York, we pursued a settlement by reference to a third party expert and achieved a new rent of Â£285,000 per annum. Whilst this was a relatively small uplift of 3.6% on the previous rent payable, the valuation did not previously account for any uplift. As we secure a number of these types of uplifts across the portfolio, the cumulative effect of the approach across the portfolio becomes significant. Below we have detailed some recent, larger examples of asset management activity: The Gate Centre, The Great West Road (A4), Brentford Insight secured a detailed planning consent for change of use from industrial warehousing to a car showroom as well as simultaneously agreeing a new letting to HR Owen for a BMW car dealership. This initiative increases the rent from the units by 50%, and extends the average length of unexpired lease term for the multi-let industrial estate from four years to eleven years. This is having a material positive impact on the value of the property. The Company is also in the process of making further planning applications for changes of use to higher value uses at other properties. Olympic Office Centre, Fulton Road, Wembley We initiated a successful letting campaign on its 73,955 sq ft office in Wembley resulting in the property being fully let within four months of acquisition. The yield on the property book cost has increased from 1.6% to 8.4%. Additionally, this property should benefit considerably from the significant development and infrastructure improvements around the new Wembley stadium that is due to open in mid 2007. Ilkeston At the Company's shopping centre in Ilkeston, our focused approach following the acquisition of the centre has resulted in a key new letting to a multiple retailer at a level 10% ahead of the independent valuation. This sets a materially higher rental value for the entire centre. Financing In March the Company successfully closed a debt securitisation and has drawn down Â£152.5M from the facility. This innovative financing structure is the first for the property Investment Trust sector and is indicative of the proactive approach adopted by the Company both prior to and since launch. The Company re-financed the Â£98 million interim facility it previously had in place and the securitisation provides additional capacity to acquire further properties as part of the pool of assets over which the lender has security. More importantly, the Company has also secured the ability to use up to Â£30 million of the amount drawn down for any purpose including acquiring assets that need not be charged to the lender. Together with the broader levels of flexibility that exist in the loan documentation, the Company therefore has significant room for manoeuvre in acquiring new properties quickly and efficiently and in managing the portfolio in line with our stated objectives. The loan facility runs until the Company's continuation vote in 2014 and the amount drawn down is fully hedged against future interest rate movements. The total aggregate interest rate including annualised costs is 5.6% compared to the original Prospectus assumption of 6.3%. It is also worth recording that the securitisation included an additional Â£150 million facility of reserve notes which can be drawn down in the future very efficiently (subject to Rating Agency consent). Outlook We anticipate returns to the UK commercial property market of between 10%-11% for 2005 and reducing to closer to 7%-8% over the foreseeable future. Prime yields continue to reflect strong real estate fundamentals with expectations for rental growth, but it is a more mixed picture for secondary stock. The yield gap between prime and secondary has reduced significantly relative to historical levels. Our view therefore is that secondary stock is now relatively less attractive. The principal focus for 2005 and 2006 will be to target and acquire properties in London and the South East, especially where they involve larger lot sizes offering active management opportunities and flexibility for potential occupiers. In summary, our focus for property activity will be to: Be substantially fully invested and pursue new investment in high growth assets and segments of the market â€¢ Consider the sale of lower yielding retail properties and properties where a significant premium to valuation can be crystallised â€¢ Pursue active management initiatives set to make a significant impact on valuation â€¢ Maintain and enhance the current portfolio to ensure a continued broad diversity of properties and tenants. Insight's strong market coverage continues to identify and secure value across different sectors and types of property. We will always be prepared to act where we see opportunities to unlock value through selective new acquisitions and asset management solutions. Additionally, we will consider all other options for the Company to further improve returns and growth. Duncan Owen Insight Investment Management 8 June 2005 Consolidated Income Statement For the period to 31 March 2005 27/5/2004 To 31/03/2005 Notes Â£'000 Rent receivable 16,693 Other income 3 318 Property operating expenses 4 (293) ------------ Net rental and related income 16,718 ------------ Profit on disposal of investment property 390 Valuation gains on investment property 18,425 Valuation losses on investment property (1,922) ------------ Net valuation gains on investment property 9 16,503 ------------ Expenses Investment management fee (2,418) Valuers' and other professional fees (473) Administrative fee (120) Audit fee (50) Directors' fees (72) Other expenses 5 (187) ------------ Total Expenses (3,320) ------------ Net operating profit before net finance costs 30,291 Interest receivable 430 Interest payable (3,477) Finance expenses (133) ------------ Net finance costs (3,180) ------------ Profit before tax 27,111 Taxation 6 (1,756) ------------ Profit for the period 25,355 ======= Basic and diluted earnings per share 7 9.7p ======= All items in the above statement are derived from continuing operations. The accompanying notes form an integral part of the financial statements. Consolidated Balance Sheet At 31 March 2005 31/03/2005 Notes Â£'000 Investment properties 9 379,450 ------------ Non-current assets 379,450 ------------ Trade and other receivables 12 4,694 Cash and cash equivalents 55,222 - ------------ Current assets 59,916 ------------ Total assets 439,366 ======= Issued capital and reserves 13 272,822 ------------ Equity 272,822 ------------ Interest-bearing loans and borrowings 14 148,482 Interest rate swap 1,382 Provisions 15 2,000 ------------ Non-current liabilities 151,864 ------------ Trade and other payables 16 12,875 Taxation payable 6 1,805 ------------ Current liabilities 14,680 ------------ Total liabilities 166,544 ------------ Total equity and liabilities 439,366 ======= Net Asset Value per Ordinary Share 17 104.9p ======= The financial statements were approved at a meeting of the Board of Directors held on 8 June 2005 and signed on its behalf by: Andrew Sykes Director (Chairman) Paul Smith Director Company Balance Sheet At 31 March 2005 31/03/2005 Notes Â£'000 Investment in subsidiary companies 10 347,464 Loans to subsidiary companies 11 16,486 ------------ Non-current assets 363,950 ------------ Trade and other receivables 12 6,981 Cash and cash equivalents 9,352 ------------ Current assets 16,333 ------------ Total assets 380,283 ======= Issued capital and reserves 13 275,527 ------------ Equity 275,527 ------------ Non interest-bearing loans and borrowings 14 103,994 ------------ Non-current liabilities 103,994 ------------ Trade and other payables 16 762 ------------ Current liabilities 762 ------------ Total liabilities 104,756 ------------ Total equity and liabilities 380,283 ======= Consolidated Statement of Changes in Equity 27/5/2004 To Notes 31/03/2005 Â£'000 Profit for the period 25,355 Dividends paid 8 (8,775) Issue of Ordinary Shares 13 260,000 Issue costs 13 (2,376) Hedge reserve 13 (1,382) ------------ Equity at 31 March 2005 272,822 ======= Consolidated Statement of Cash Flows 27/5/2004 to 31/03/2005 Operating activities Â£'000 Profit for the period 25,355 Adjustments for: Profit on disposal of investment property (390) Net valuation gains on investment property (16,503) Net finance cost 3,180 Taxation 1,756 ------------ Operating profit before changes in working capital and provisions 13,398 Increase in trade and other receivables (4,682) Increase in trade and other payables 10,860 ------------ Cash generated from operations 19,576 Interest paid (3,279) Interest received 417 ------------ Cash flows from operating activities 16,714 ------------ Investing Activities Proceeds from sale of investment property 3,550 Acquisition of investment property (364,107) ------------ Cash flows from investing activities (360,557) ------------ Financing Activities Proceeds on issue of Ordinary Shares 260,000 Issue costs paid on issuance of Ordinary Shares (2,376) Draw down of short term bank loan 98,100 Repayment of short term bank loan (98,100) Draw down of long term loan 152,500 Finance costs paid to date on arrangement of long term loan (2,284) Dividends paid (8,775) ------------ Cash flows from financing activities 399,065 ------------ Net increase in cash and cash equivalents at 31 March 2005 55,222 ======= Notes to the Financial Statements 1. Significant accounting policies The Insight Foundation Property Trust Limited is a closed-ended investment company incorporated in Guernsey. The consolidated financial statements of the Company for the period ended 31 March 2005 comprise the Company and its subsidiaries (together referred to as the 'Group'). Statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ('IFRS') issued by, or adopted by, the International Accounting Standards Board (the 'IASB'), interpretations issued by the International Financial Reporting Standards Committee, applicable legal and regulatory requirements of Guernsey Law and the Listing Rules of the UK Listing Authority. Basis of preparation The financial statements are presented in sterling, rounded to the nearest thousand. They are prepared on the historical cost basis except that investment properties are stated at their fair value. The accounting policies have been consistently applied to the results, assets, liabilities and cash flows of the entities included in the consolidated financial statements. The preparation of financial statements in conformity with IFRS requires management to make judgement, estimates and assumptions that affect the application of policies and the reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Basis of consolidation The consolidated financial statements comprise the accounts of the Company and all of its subsidiaries drawn up to 31 March each year. Subsidiaries are those entities, including special purpose entities, controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Intra-group balances and any unrealised gains and losses arising from intra-group transactions are eliminated in preparing the consolidated financial statements. Investment property Investment properties are initially recognised at cost, being the fair value of the consideration given, including transaction costs associated with the investment property. After initial recognition, investment properties are measured at fair value, with unrealised gains and losses recognised in the Consolidated Income Statement. Realised gains and losses on the disposal of properties are recognised in the Consolidated Income Statement. Fair value is based on the open market valuations of the properties as provided by Knight Frank LLP a firm of independent chartered surveyors, at the balance sheet date. Market valuations are carried out on a quarterly basis. Cash and cash equivalents Cash in banks and short-term deposits that are held to maturity are carried at cost. Cash and cash equivalents are defined as cash in hand, demand deposits and short-term, highly liquid investments readily convertible to known amounts of cash and subject to insignificant risk of changes in value. For the purposes of the Consolidated Statement of Cash Flows, cash and cash equivalents consist of cash in hand and short-term deposits in banks. Derivative financial instruments The Group uses derivative financial instruments to hedge its exposure to interest rate fluctuations. It is not the Group's policy to trade in derivative financial instruments. Derivative financial instruments are recognised initially at cost and are subsequently re-measured and stated at fair value. Fair value of interest rate swaps is the estimated amount that the Group would receive or pay to terminate the swap at the balance sheet date. The gain or loss on re-measurement to fair value of cash flow hedges in the form of derivative financial instruments are taken directly to the Statement of Changes in Equity. Such gains and losses are taken to a reserve created specifically for that purpose, described as the Hedge reserve. On maturity or early redemption the realised gains or losses arising from cash flow hedges in the form of derivative instruments are taken to the Income Statement, with an associated transfer from the Statement of Changes in Equity in respect of unrealised gains or losses arising in the fair value of the same arrangement. The Group considers the terms of its interest rate swap qualify for hedge accounting. Share capital Incremental external costs directly attributable to the equity transaction and costs associated with the establishment of the Company that would otherwise have been avoided are written off against the share premium account. Dividends are recognised as a liability in the period in which they are declared. Provisions A provision is recognised in the Balance Sheet when the Group has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. Income Rental income from investment properties is accounted for on a straight-line basis over the term of ongoing leases and is shown gross of any UK income tax. Any material premiums or rent-free periods are spread evenly over the lease term. Interest receivable derives from cash monies held in current and deposit accounts throughout the period and is accounted for on an accruals basis. Expenses All expenses are accounted for on an accruals basis. The Group's investment management and administration fees, finance costs (including interest on the long term borrowings) and all other expenses are charged through the Consolidated Income Statement. Expenses incurred in establishing the Group's credit facilities have been capitalised and are amortised over the lifetime of the facilities and charged through the Consolidated Income Statement. Taxation The Company and its Guernsey registered subsidiaries have obtained exempt company status in Guernsey under the terms of the Income Tax (Exempt Bodies) (Guernsey) Ordinance 1989 so that they are exempt from Guernsey taxation on income arising outside Guernsey and on bank interest receivable in Guernsey. Each company is, therefore, only liable to a fixed fee of Â£600 per annum. The Directors intend to conduct the Group's affairs such that they continue to remain eligible for exemption. The Company and its subsidiaries are subject to United Kingdom income tax on income arising on investment properties, after deduction of debt financing costs and other allowable expenses. Income tax on the profit or loss for the period comprises current tax. Current tax is the expected tax payable on the taxable income for the period, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in respect of previous periods. Capital gains tax is provided for where properties held by UK subsidiaries have been sold at prices over and above their initial purchase prices. Deferred income tax is provided using the liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantially enacted at the balance sheet date. Deferred tax assets are recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Segmental reporting The Directors are of the opinion that the Group is engaged in a single segment of business, being property investment business and in one geographical area, the United Kingdom. Interest-bearing loans and borrowings Interest-bearing borrowings are recognised initially at the fair value of the consideration received less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the income statement over the period of the borrowings on an effective interest basis. 2. Material agreements (i) Under the terms of an appointment made by the Board on 24 June 2004, Insight Investment Management (Global) Limited was appointed as Investment Manager to the Company. The Investment Manager is entitled to a base fee and a performance fee together with reasonable expenses incurred by it in the performance of its duties. The base fee is equal to one quarter of 95 basis points of the gross assets of the Company per quarter. In addition, and subject to the conditions below, the Investment Manager is entitled to an annual performance fee where the total return per Ordinary Share during the relevant financial period exceeds an annual rate of 10 per cent (the 'performance hurdle'). Where the performance hurdle is met, a performance fee will be payable in an amount equal to 15 per cent of any aggregate total return over and above the performance hurdle. A performance fee will only be payable where: (i) in respect of the relevant financial period, the total return of the underlying assets meets or exceeds the Investment Property Databank ('IPD') Monthly Index balanced funds benchmark on a like for like basis; and (ii) the annualised total return over the period from admission of the Company's Ordinary Shares to the end of the relevant financial period is equal to or greater than 10 per cent per annum. The Investment Management Agreement may not be terminated by either the Company or the Investment Manager prior to the second anniversary of the agreement but, thereafter, any party may terminate the agreement on not less than twelve months notice in writing. (ii) Under the terms of an Administration, Registrar, Custodian and Secretarial Agreement dated 24 June 2004, the Company appointed RBSI Fund Services (Guernsey) Limited to act as administrator, registrar, custodian and corporate secretary of the Company. The Administrator is entitled to a fee of Â£35,000 per annum together with an additional fee of 3.25 basis points of the gross assets of the Company, subject to an overall minimum of Â£150,000 per annum and an aggregate maximum fee payable by the Company, and its subsidiaries, to the Administrator, its affiliates and the CREST Service Provider of Â£250,000 per annum. The Administration Agreement may be terminated by either party by six month's notice in writing. 3. Other income 27/05/2004 to 31/03/2005 Â£'000 Insurance commissions 268 Miscellaneous income 50 ------------ 318 ------------ The Group is obliged to arrange insurance on the majority of its property assets for which it receives a commission and is stated net of any fees payable to insurance brokers. 4. Property operating expenses 27/05/2004 to 31/03/2005 Â£'000 Surveyor fees 122 Agents' fees 72 Repairs and maintenance 51 Advertising 29 Rates - Vacant 13 Other expenses 6 ---------- 293 ---------- 5. Other expenses 27/05/2004 to 31/03/2005 Â£'000 Directors' and officers' insurance premium 60 Printing costs 36 Regulatory costs 23 Other expenses 68 ------------ 187 ------------ 6. Taxation 27/05/2004 to 31/03/2005 Reconciliation of effective tax rate Â£'000 Profit before tax 27,111 ------------ Effect of: Income tax using UK income tax rate of 22% 5,964 Capital gains on revaluation not taxable (3,631) Capital gains on revaluation taxable 1,121 Profit on disposal not taxable (86) Other net income not taxable (1,612) ------------ Current tax expense 1,756 Subsidiary companies' pre-acquisition liabilities 49 ------------ Taxation payable 1,805 ------------ The Company and its Guernsey registered subsidiaries have obtained exempt company status in Guernsey under the terms of the Income Tax (Exempt Bodies) (Guernsey) Ordinance 1989 so that they are exempt from Guernsey taxation on income arising outside Guernsey and on bank interest receivable in Guernsey. Each company is, therefore, only liable to a fixed fee of Â£600 per annum. The Directors intend to conduct the Group's affairs such that they continue to remain eligible for exemption. At launch, properties were acquired in a series of subsidiary companies which were liable either to UK Income Tax or UK Corporation tax on their taxable profits after deduction of debt financing costs and other allowable expenses. Subsequently, the Company's properties have been generally consolidated into a single subsidiary company which has enabled the company to benefit from the advantageous terms available from the securitised loan facility (see Note 14). At the time of consolidation, properties sold from the UK subsidiaries crystallised a liability to UK Capital Gains Tax on gains realised over and above their initial purchase prices. A provision of Â£1.121 million has been allowed in these accounts and is included within the taxation figure. 7. Basic and diluted earnings per share The basic and diluted earnings per share is based on the net profit for the period of Â£25,355,000 and the weighted average number of Ordinary Shares in issue during the period of 260,000,000. 8. Dividends paid 27/05/2004 to No. of 31/03/2005 Ordinary Rate Â£'000 Shares (pence) First interim dividend paid 12 November 2004 260 million 1.6875 4,387 Second interim dividend paid 11 February 2005 260 million 1.6875 4,388 ------------ ------------ 3.3750 8,775 ------------ ------------ 9. Investment properties 31/03/2005 Â£'000 Leasehold Freehold Total Acquisitions 48,307 315,800 364,107 Provision for further purchase consideration (note 15) - 2,000 2,000 Disposals - (3,160) (3,160) ------------ ------------ ------------ At cost - 31 March 2005 48,307 314,640 362,947 ------------ ------------ ------------ Net valuations gains on investment property per Consolidated Income Statement 1,888 14,615 16,503 ------------ ------------ ------------ ------------ ------------ ------------ At Valuation - 31 March 2005 50,195 329,255 379,450 ------------ ------------ ------------ The carrying amount of investment property is the fair value of the property as determined by Knight Frank LLP, a firm of independent charter surveyors, who are a registered independent appraiser. Fair values were determined having regard to recent market transactions for similar properties in the same location as the Group's investment property. 10. Investment in subsidiary companies 31/03/2005 Â£'000 Additions in the period and as at 31 March 2005 347,464 ------------ The Group's investment properties are held by its subsidiary companies. All of the Company's subsidiaries are wholly owned. The principal subsidiaries which hold investment property are as follows: Subsidiary Domicile Insight Foundation Property Limited Guernsey LP (Brentford) Limited Guernsey LP (Tudor Street) Limited Guernsey Cotswold Properties Limited Gibraltar The principal subsidiaries which have entered into lending facilities on behalf of the Company and its property holding subsidiaries are: Insight Foundation Holding Company Limited Guernsey Real Estate Capital (Foundation) Limited Guernsey Real Estate Capital (Foundation) Limited is not a wholly owned subsidiary but the accounts of this special purpose vehicle have been included within these consolidated financial statements on the basis that the Company has the power, directly or indirectly, to govern the financial and operating policies of that entity so as to obtain benefits from its activities. 11. Loans to subsidiary companies At 31 March 2005 the Company had outstanding loans of Â£16,486,000 to its subsidiary companies. The loans have no fixed repayment date and interest is charged on 60% of the outstanding balance at an annual rate of 3 per cent above the UK base rate. 12. Trade and other receivables 31/03/2005 Â£'000 Group Rent receivable 2,834 Receivable on portfolio acquisition 921 Other debtors 939 ------------ 4,694 ------------ Company Amounts due from subsidiary companies 6,047 Receivable on portfolio acquisition 921 Other debtors 13 ------------ 6,981 ------------ 13. Issued capital and reserves Authorised share capital The authorised share capital of the Company is represented by an unlimited number of Ordinary Shares of no par value. Issued share capital During the period the Company issued 260,000,000 Ordinary Shares of no par value. The amount paid in respect of each share on issue was Â£1. Deducted from these proceeds were costs directly attributable to the issue of Â£2,376,000. On 1 October 2004, the Royal Court of Guernsey confirmed the reduction of share capital by way of a cancellation of an amount standing to the credit of the Company's share premium account. The amount so cancelled was credited as a distributable reserve and is available as distributable profits to be used for all purposes permitted under Guernsey company law, including the buyback of shares and the payment of dividends. Reserves 31/03/2005 Group Â£'000 Transfer from share premium account on reduction of share capital 257,624 Profit for the period 25,355 Dividends paid (8,775) ------------ Income reserve 274,204 Hedge reserve (1,382) ------------ 272,822 ------------ Company Transfer from share premium account on reduction of share capital 257,624 Profit for the period 26,678 Dividends paid (8,775) ------------ 275,527 ------------ Dividends On 21 April 2005 the Directors declared a dividend of Â£1.6875 pence per share, giving a total dividend payable of Â£4,387,500. The dividend has not been included as a liability. 14. Interest-bearing loans and borrowings This note provides information about the contractual terms of the Group's interest-bearing loans and borrowings. For more information about the Group's exposure to interest rate risk, see note 18. Group 31/03/2005 Non-current liabilities Â£'000 Class A Secured Floating Rate Notes 139,000 Class B Secured Floating Rate Notes 13,500 ------------ 152,500 Less: Finance costs incurred (4,077) Add: Amortised finance costs 59 (4,018) ------------ ------------ 148,482 ------------ Company Non-current liabilities Loans from subsidiaries 103,994 ------------ 103,994 ------------ The Company (via its principal subsidiary, Insight Foundation Holding Company Limited) has entered into a long term Â£152.5m loan (repayable as a whole in July 2014) with Real Estate Capital (Foundation) Limited, a single purpose lender, which issued Secured Floating Rate Notes that have been admitted to the Official List of the Irish Stock Exchange. Full details of the Issue were published in an Offering Circular on 18 March 2005. Proceeds of the issue were used to re-finance previous short term borrowings (approximately Â£98m), and the balance to acquire further investment properties. The Notes were issued at a blended margin of 20.8 basis points ('bps') over LIBOR and simultaneously the Company entered into an equivalent maturity swap agreement at 5.1%. In aggregate therefore the Company's long term debt facilities have an effective interest rate of 5.31%. The Company has capitalised costs of Â£4m which it incurred in arranging this facility. These are being amortised over the life of the loan which has the effect of adding an additional 28bps per annum to the cost of the loan. The Facility has first charge security over all the property assets owned by the Company at 23 March 2005 (value at 31 March 2005 - Â£363m) together with Â£22m cash made available from the Facility (the 'Security Pool'). Assets can be sold and bought within this Security Pool without any need to revert to the Issuer or the Rating Agents up to an annual turnover rate of 20%. Various covenants apply during the term of the loan although the Facility has been designed to provide significant operational flexibility. The principal covenants however are that the loan should not comprise more than 60% of the value of the assets in the Security Pool (39.6% at 31 March 2005) nor should estimated rental and other income arising from assets in the Security Pool for the next 12 month period comprise less than 150% of the interest payments anticipated to be due over that same period (interest cover at 31 March 2005 - 270%). Arising from the Facility, a further sum of approximately Â£30m (known as Working Capital) can be used by the Company for any purpose and does not comprise part of the assets held in the Security Pool. 15. Provisions 31/3/2005 Group Â£'000 Provision made in the period 2,000 ------------ Balance at 31 March 2005 2,000 ------------ At launch the Group acquired two properties from Clerical Medical Investment Group Limited (Wembley and Hinckley) where certain specific asset management initiatives that had been started had not reached a conclusion. The Company therefore agreed to pay further purchase consideration to Clerical Medical dependent on the success of these initiatives and calculated as a percentage of the potential uplift after certain minimum growth thresholds have been met. These obligations both reach a conclusion by July 2006 (or earlier if the assets are sold) but the Directors consider that based on the current valuations of these two assets, it is prudent to provide for further purchase consideration of Â£2m. 16. Trade and other payables 31/03/2005 Â£'000 Group Rent received in advance 5,880 Rental deposits 2,658 VAT payable 995 Other trade payables and accruals 3,342 ------------ 12,875 ------------ Company Trading account with subsidiary company 100 Trade payables and accruals 662 ------------ 762 ------------ 17. Net asset value per Ordinary Share The net asset value per Ordinary share is based on the net assets of Â£272,822,000 and 260,000,000 Ordinary Shares in issue at the balance sheet date. 18. Financial instruments and properties The Group holds cash and liquid resources as well as having debtors and creditors that arise directly from its operations. The Group has entered into an interest rate swap contract which is used to limit exposure to interest rate risks but does not have any other derivative instruments. The main risks arising from the Group's financial instruments and properties are market price risk, credit risk, liquidity risk and interest rate risk. The Board regularly reviews and agree policies for managing each of these risks and these are summarised below. Market price risk Rental income and the market value for properties are generally affected by overall conditions in the local economy, such as changes in gross domestic product, employment trends, inflation and changes in interest rates. Changes in gross domestic product may also impact employment levels, which in turn may impact the demand for premises. Furthermore, movements in interest rates may also affect the cost of financing for real estate companies. Both rental income and property values may also be affected by other factors specific to the real estate market, such as competition from other property owners, the perceptions of prospective tenants of the attractiveness, convenience and safety of properties, the inability to collect rents because of bankruptcy or the insolvency of tenants or otherwise, the periodic need to renovate, repair and release space and the costs thereof, the costs of maintenance and insurance, and increased operating costs. The Directors monitor the market value of investment properties by having independent valuations carried out quarterly by Knight Frank LLP. Credit risk Credit risk is the risk that an issuer or counter party will be unable or unwilling 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 costs, including legal expenses, in maintaining, insuring and re-letting the property. The Manager reviews reports prepared by Experion on the credit quality of the company's tenants and aims to ensure there are no excessive concentration of risk and that the impact of any default by a tenant is minimised. In respect of credit risk arising from other financial assets of the Group, which comprise of cash and cash equivalents, the Group's exposure to credit risk arises from default of the counterparty with a maximum exposure equal to the carrying amounts of these instruments. In order to mitigate such risks the Group's cash is maintained with major international financial institutions. During the period and at the balance sheet date the Group maintained relationships with branches and subsidiaries of HSBC Bank plc, The Royal Bank of Scotland plc and ING Barings. Liquidity risk Liquidity risk is the risk that the Group will encounter in realising assets or otherwise raising funds to meet financial commitments. The Group's investments comprise UK commercial property. Property and property related assets are inherently difficult to value due to the individual nature of each property. As a result, valuations are subject to substantial uncertainty. There is no assurance that the estimates resulting from the valuation process will reflect the actual sales price even where such sales occur shortly after the valuation date. Investments in property are relatively illiquid, however the Group has tried to mitigate this risk by investing in desirable properties in prime locations. In certain circumstances, the terms of the Group's debt facilities entitle the lender to require early repayment and in such circumstances the Group's ability to maintain dividend levels and the net asset value attributable to the Ordinary Shares could be adversely affected. Interest rate risk The Group's exposure to market risk for changes in interest rates relates primarily to the Group's long-term debt obligations. As described in note 14 the Group has entered into an interest rate swap contract whereby the rate of the Group's long term debt facilities have an effective fixed interest rate of 5.31% per annum until maturity of the debt. In respect of income-earning financial assets and interest-bearing financial liabilities, the following table indicates their effective interest rates at the balance sheet date and the periods in which they re-price. Effective Total 6 months or More than 5 Interest less years Rate Â£'000 Â£'000 Â£'000 Cash and cash equivalents 4.5% 55,222 55,222 - Interest-bearing loans and borrowings 5.3% (148,482) - (148,482) ------------ ------------ ------------ (93,260) 55,222 (148,482) ------------ ------------ ------------ Fair Values The fair values of financial assets and liabilities is not materially different from their carrying value in the financial statements. 19. Operating leases The group leases out its investment property under operating leases. At 31 March 2005 the future minimum annual lease payments under non-cancellable leases are as follows: Â£'000 Less than one year 981 Between one and five years 7,427 More than five years 16,464 ------------ 24,872 ------------ The total above comprises the total contracted rent receivable as at 31 March 2005 and does not equate to the rent receivable shown in the Consolidated Income Statement. In addition, however, the Group is currently entitled to receive further short term income of Â£788,000 per annum arising principally from rental guarantees and rent payable by tenants who still occupy properties where their lease may have expired. 20. Related parties (i) Insight Investment Management (Global) Limited is entitled to fees for its services as Investment Manager. The total charge to the income statement during the period was Â£2,418,000. Further details of the terms of the Investment Management Agreement are disclosed in note 2. (ii) As disclosed in the original prospectus the Group acquired a portfolio of properties from Clerical Medical Investment Group Limited for Â£195.25 million who, as a substantial shareholder, are considered to be a related party. 21. Capital commitments At 31 March 2005 the Group had no significant capital commitments. This information is provided by RNS The company news service from the London Stock Exchange

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