Results in respect of the year ended 31 Decembe...

30 April 2021

STANDARD LIFE INVESTMENTS PROPERTY INCOME TRUST LIMITED

LEI: 549300HHFBWZRKC7RW84

RESULTS IN RESPECT OF THE YEAR ENDED 31 DECEMBER 2020

2020 Financial Review

• Financial Resources of £55 million as at 31 December 2020 (2019: £37 million) available for investment to enhance earnings in the form of the Company’s low cost revolving credit facility.
• Low Loan to Value of 23.0% (2019: 24.6%) as at year end compared to Association of Investment Companies ("AIC") peer group average of 31.0%.
• Dividends paid of 3.808p in the year (2019: 4.76p). This equates to 80% of the level paid in 2019. Dividends were reduced in the year as rent collection fell due to COVID-19. Dividends paid in 2020 equated to a yield of 6.3% based on the share price as at 31 December 2020 compared to FTSE Index yield of 3.4% and the FTSE All-Share REIT Index yield of 3.1%.
• NAV total return of –4.6% (2019: 4.1%) as valuations came under pressure, particularly in the first half of the year, due to COVID-19. NAV has outperformed AIC peer group over longer term delivering a total return of 140.2% compared to AIC peer group total return of 32.4% over 10 years.
• Share price total return of –29.8% (2019: 18.0%) as sentiment towards the UK commercial real estate sector was negatively impacted by COVID-19. The share price has delivered strong returns over the longer terms with a share price total return over 10 years of 70.3% compared to the AIC peer group of 10.8%.
• Share buybacks totalling £6m as at 23 April 2021 at significant discounts to NAV which are accretive to both NAV performance and earnings.

2020 Portfolio Review

• Portfolio total return of -1.8% (2019: 4.8%) marginally below that of the benchmark return of –1.6% (2019: 1.3%) as both capital and income returns were impacted by COVID-19.
• Rent collection for 2020 of 93.6% of rent due (2019: 99%) as tenant base, geared towards Industrials, proved resilient in a COVID-19 environment.
• Occupancy rate of 91.7% (2019: 93.4%) compares favourably to the MSCI benchmark rate of 90.8% (2019: 92.4%).
• A total of 15 lease renewals and restructurings were undertaken, securing £2,587,491 pa in rent, and a total of 8 lettings securing £890,369pa
• 5 rent reviews were settled with uplifts in rent, securing an additional £58,256pa (an average increase of 19% on previous rent).
• In 2020 we completed our largest solar PV scheme to date; a 918 kWp scheme in Sandy to supply electricity to our occupier Flamingo Flowers. The Company now has 6 operational PV schemes totalling 1.2 MWp, and has another 20 schemes in various stages of implementation.
• Portfolio well positioned: Portfolio is well positioned towards sectors forecast to outperform by our Investment Manager with a 48.2% (2019: 51.2%) weighting in Industrials (MSCI benchmark: 35.1%, 2019: 30.7%).

PERFORMANCE SUMMARY

Earnings and Dividends			2020	2019
IFRS earnings per share			(3.88)	3.98
EPRA earnings per share (p) (excluding capital items & swap movements)*			4.10	4.76
Dividends declared per ordinary share (p)			3.808	4.76
Dividend cover (%)			108	100
Dividend yield (%)**			6.3	5.2
FTSE All-Share Real Estate Investment Trusts Index Yield (%)			3.1	3.9
FTSE All-Share Index Yield (%)			3.4	4.1
Ongoing Charges***
As a % of average net assets including direct property costs			2.0	2.0
As a % of average net assets excluding direct property costs			1.2	1.2
Capital Values & Gearing		31 December 2020	31 December 2019	Change %
Total assets (£million)		459.6	505.8	(9.1)
Net asset value per share (p) (note 21)		82.0	89.9	(8.8)
Ordinary Share Price (p)		60.0	91.0	(34.1)
Premium/(Discount) to NAV (%)		(26.8)	1.2
Loan to Value (%)†		23.0	24.6
Total Return	1 year % return	3 year % return	5 year % return	10 year % return
NAV‡	(4.6)	8.8	30.0	140.2
Share Price‡	(29.8)	(24.0)	(7.6)	70.3
FTSE All-Share Real Estate Investment Trusts Index	(16.2)	(4.1)	0.2	95.2
FTSE All-Share Index	(9.8)	(2.7)	28.5	71.9
Property Returns & Statistics (%)			31 December 2020	31 December 2019
Property income return			4.9	5.2
MSCI Benchmark income return			4.7	4.7
Property total return			(1.8)	4.8
MSCI Benchmark total return			(1.6)	1.3
Void rate			8.3	6.6

* Calculated as profit for the period before tax (excluding capital items & swaps costs) divided by weighted average number of shares in issue in the period. EPRA stands for European Public Real Estate Association.

** Based on dividend paid of 3.808p and the share price at 31 December 2020 of  60.0p.

*** Calculated as investment manager fees, auditor’s fees, directors’ fees and other administrative expenses divided by the average NAV for the year.

† Calculated as bank borrowings less all cash as a percentage of the open market value of the property portfolio as at the end of each year.

‡ Assumes re-investment of dividends excluding transaction costs.

Sources: Aberdeen Standard Investments, MSCI.

STRATEGIC REPORT – CHAIRMAN’S STATEMENT

BACKGROUND

The last 12 months have been among the most tumultuous in modern times. The tragic human impact of COVID-19 has touched every country across the world and the economic impact will be felt for years to come in the form of much higher state borrowing which, at some point, will have to be repaid. The roll-out of the vaccines has provided some much needed hope, particularly in the UK where the death toll per capita has been one of the highest in the world. New variants allowing, vaccine rollouts should result in lockdowns continuing to be eased and more normality returning to everyday life. Two other events that would normally have been the most significant in any other year, namely the Brexit deal agreed between the UK and the EU and the election of a new President in the United States, should also decrease the political uncertainty that has been so evident in recent years.

REAL ESTATE MARKET

The UK Commercial real estate market is linked to the performance of the UK economy. The fact that the UK economy shrank by the largest amount in over 300 years gives a context in which to view the overall performance of the commercial real estate market. With limited investment transactions, rising capitalisation yields and falling rental values in many sectors, the MSCI benchmark (UK Monthly Index Funds Quarterly Property Index) recorded a total return of -1.6% with a capital return of –6.1% in 2020. The divergence across sectors has been marked with COVID-19 accelerating trends that were already evident before the pandemic with the industrial sector delivering a total return of 8.6% as the move towards online retail continued apace. This trend, and the fact most shops could not physically open for large parts of the year, resulted in the retail sector returning –11.5% in 2020.

The ‘Other’ sector, a large component of which is leisure, also came under pressure as restaurants, pubs and cinemas closed through the various lockdowns returning –7.5%. Finally, while the death of the office may be overstated, office values came under pressure resulting in a total return of –1.8%.

A key focus across the industry has been rent collection. The various lockdowns have impacted detrimentally the ability of some tenants to pay rent which in turn has resulted in a number of listed property REITs reducing dividends. The main exception being those that have tenants purely from the logistics or supermarket sectors, two sectors that have fared well in the COVID-19 environment.

PORTFOLIO AND CORPORATE PERFORMANCE

Against this background the performance of the portfolio was a tale of two halves. Values fell in the first six months of the year when COVID-19 first appeared, effectively closing the economy driving valuations down with material uncertainty clauses becoming prevalent across the valuation industry. However, the portfolio rebounded strongly in the second half of the year as property fundamentals came to the fore. This resulted in the portfolio producing a total return of –1.8%, marginally below that of the benchmark. This was made up of an income return of 4.9% being offset by a capital return of –6.4%. The Investment Manager’s report provides a full analysis of the portfolio performance.

This portfolio performance contributed to a NAV total return of –4.6% in the year as the NAV was also impacted by gearing and the negative movement in the Company’s swap liability of £1.5 million.

The swap liability now stands at £3.7 million which will reduce to zero as the fixed term loan approaches maturity in 2023.

The total return to shareholders in the period was –29.8% as the share price fell due to sentiment towards the commercial real estate industry deteriorating over concerns around rent collection levels and reduced dividends and asset values. The discount at which the Company’s shares traded to NAV stood at 25.5% as at 31 March which is broadly in-line with other diversified REITs. Given these types of discount levels during the year the Board took the investment decision to undertake a share buyback programme, and as at 23 April 2021 has bought back £6 million of shares at an average discount of 26%, thereby increasing both the NAV and earnings per share.

These share buybacks contrast sharply with the pre COVID-19 world in February 2020 when the premium rating of the Company allowed it to issue 1 million new shares at a price of over 6% above NAV.

Whilst in the short term returns have been impacted by COVID-19, the Company continues to have a strong longer term track record with a NAV total return of 140.2% and share price total return of 70.3% over ten years to end of 2020 compared to the equivalent AIC peer group total return of 32.4% and 10.8% respectively. Open ended property funds returned 47.2% over the same period, with these funds having been closed for redemption for a significant period of time during the pandemic.

RENT COLLECTION AND DIVIDENDS

Throughout the period of the pandemic, the Board and its Investment Manager have been very conscious of the Company’s Environmental, Social and Governance (“ESG”) obligations as a responsible landlord. The Company is acutely aware of the pressure that lockdown has had on our tenants’ businesses and has worked with tenants to agree rental deferments, rent free periods in exchange for amended lease terms (generally an extension of leases) and, in some extreme cases, rental write offs (generally with the smallest tenants who have no means of paying). At the close of business on 31 March 2021, the Company had received payments reflecting 93.6% of rents billed in relation to 2020. Further detail on ESG, rent collection and interaction with tenants is included in the Investment Manager’s Report.

COVID-19 has placed great strain on the revenue accounts of a number of property companies resulting in many postponing dividends for a period of time until the outlook for rent collection became clearer. The Board is very cognisant of the importance of income to our shareholders. Throughout the period of the pandemic the Company has continued to pay a divided with payments of 3.808 pence per share being paid in 2020, 80% of the level paid in 2019. In addition to the fourth interim dividend paid in February 2021 and in-line with the REIT rules, the Company has announced it will also pay a fifth interim dividend in relation to 2020 of 0.381p on 18 May 2021 to shareholders on the register at 30 April 2021.

The Board will continue to monitor the progress of the vaccine roll out on lockdown restrictions, rent collection and hence earnings on a quarterly basis. Furthermore, the Company in future will need to acquire properties that are well equipped and relevant for a post COVID world, which will tend to offer more modest income yields. A key aim, barring any further lockdowns, is to increase the dividend back to a level that is sustainable given the current portfolio as well as future investment and letting activity.

FINANCIAL RESOURCES & PORTFOLIO ACTIVITY

The Company is in a strong financial position. At the year end, the Company had a prudent Loan to Value (“LTV”) of 23.0% compared to a peer group average of 31.0% with only the £110 million term loan drawn. The quarterly loan covenants for the whole of 2020 were also comfortably met with rental income having to fall by 77% and property values by 54% from year end levels before covenants are endangered. In addition, the Company has significant financial resources available for investment comprising all £55 million of its flexible, low cost revolving credit facility. Post year end the sale of £10.4m of assets also gives the Company additional firepower. In terms of the utilisation of these resources, the Company will look to invest in assets that fit the portfolio strategy including consideration of assets such as forestry that will help offset the Company’s carbon footprint. In addition, it will continue to selectively buy back shares at discount levels the Board believe represents a good use of capital.

ANNUAL GENERAL MEETING (“AGM)

The Board has been monitoring closely the ongoing impact of the Covid-19 pandemic upon the arrangements for the Company's upcoming AGM on 16 June 2021. At the time of writing, elements of the National Lockdown remain in place and shareholder attendance at AGMs is not legally permissible. Therefore, in order to provide certainty, whilst encouraging and promoting interaction and engagement with our shareholders, the Board has decided to hold an interactive Online Shareholder Presentation which will be held at 11.00 a.m. on Friday, 4 June 2021. At the presentation, shareholders will receive updates from the Chairman and Manager and there will be the opportunity for an interactive question and answer session. Following the online presentation, shareholders will still have time during which to submit their proxy votes prior to the AGM and I would encourage all shareholders to lodge their votes in advance in this manner. Further information on how to register for the event can be found on https://www.workcast.com/register?cpak=4594420195653739.

The AGM on 16 June 2021 will, by necessity, be a functional only closed AGM, and it will be held at 09:00 at the offices of Dickson Minto WS at 16 Charlotte Square, Edinburgh EH2 4DF. Arrangements will be made by the Company to ensure that the minimum number of shareholders required to form a quorum will attend the meeting in order that the meeting may proceed and the business be concluded. The Board considers these arrangements to be in the best interests of shareholders given the current circumstances.

The Board strongly discourages shareholders from attending the AGM and entry will be refused if Government guidance so requires or if the Chairman considers it to be necessary. Instead, shareholders are encouraged to exercise their votes in respect of the meeting in advance. Any questions from shareholders who are unable to join the Online Shareholder Presentation may be submitted to the company secretary at: [e-mail]. The Board and/or the Manager will seek to respond to all such questions received either before, or after the AGM.

On behalf of the Board I should like to thank shareholders in advance for their co-operation and understanding and I very much look forward to presenting to as many shareholders as possible at the Online Shareholder Presentation.

OUTLOOK

The COVID-19 pandemic has resulted in the UK suffering an unprecedented economic shock, with GDP falling by 9.9% in 2020. However, assuming the vaccine programme continues to be successful and is not thrown off course by variants of the disease necessitating another lockdown, the economy should grow strongly in 2021. Our Investment Manager forecasts GDP growth of 6.2% on that basis.

From a real estate perspective, overall the market is not expected to perform as well as the wider economy and returns will be heavily polarized between sectors and even within sectors. COVID-19 has accelerated the structural trend towards online retail, benefitting industrials and away from the high street and shopping centres. As lockdown is eased and shops begin to reopen this trend will moderate but it is unlikely to reverse over the medium term given the convenience of online shopping. Moving onto offices, there continues to be a place for offices in any diversified portfolio, but in the future it is likely that offices will act more as hubs for collaboration with occupiers looking for more modern buildings in prime locations that promote wellbeing.

This, in turn, will result in older, more secondary offices falling out of favour. Leisure should recover as lockdown eases and has the potential to perform relatively well when the public gain the confidence to go back to restaurants, pubs and cinemas.

SLIPIT is structurally well aligned to take advantage of the trends referred to above. The portfolio is significantly overweight to the industrial sector with a weighting of 48% at the year end with only 12% of the portfolio being in retail at the same date. The Company has a strong balance sheet with relatively low gearing and significant financial resources to invest into both our existing portfolio, such as the modernisation of our largest office investment at Hagley Road in Birmingham, as well as new investment opportunities and NAV accretive share buybacks. In addition, the Company continues to pay out an attractive dividend to shareholders in a world where low interest rates will continue to be the norm.

Overall, your Company has strong foundations at both a portfolio and corporate level which has enabled it to meet the challenges posed by the current difficult situation as well as being relatively well positioned for the future.

James Clifton-Brown Chairman

29 April 2021

STRATEGIC REPORT – STAKEHOLDER ENGAGEMENT

This section, which serves as the Company’s section 172 statement, explains how the Directors have promoted the success of the Company for the benefit of its members as a whole during the financial year to 31 December 2020, taking into account the likely long term consequences of decisions, the need to foster relationships with all stakeholders and the impact of the Company’s operations on the environment, in accordance with the AIC Code on Corporate Governance.

THE ROLE OF THE DIRECTORS

The Company is a REIT and has no executive directors or employees and is governed by the Board of Directors. Its main stakeholders are Shareholders, the Investment Manager, Tenants, Service Providers, Debt Providers, the Environment and the Community.

As set out in the Corporate Governance Report, the Board has delegated day-to-day management of the assets to the Investment Manager and either directly or through the Investment Manager, the Company employs key suppliers to provide services in relation to property management, health & safety, valuation, legal and tax requirements, auditing, depositary obligations and share registration, amongst others. All decisions relating to the Company’s investment policy, investment objective, dividend policy, gearing, corporate governance and strategy in general are reserved for the Board. The Board meets quarterly, with numerous other ad-hoc meetings, and receives full information on the Company’s performance, financial position and any other relevant information. At least once a year, the Board also holds a meeting specifically to review the Group’s strategy.

The Board regularly reviews the performance of the Investment Manager, and its other service providers, to ensure they manage the Company, and its stakeholders, effectively and that their continued appointment is in the best long term interests of the stakeholders as a whole.

The Board also reviews its own performance annually to ensure it is meeting its obligations to stakeholders. Engagement with key stakeholders is considered formally as part of the annual evaluation process.

STRATEGIC ACTIVITY DURING THE YEAR

Notable transactions where the interests of stakeholders were actively considered by the Board during the year, and subsequently, include:

• All decisions relating to the Company's dividends – the Board recognised the importance of dividends to its shareholders especially when the COVID-19 crisis had forced many companies, across multiple sectors of the economy, to cancel or suspend their dividends. Despite some disruption to cash collection during the financial year, the Company continued to pay out a dividend during the pandemic with payments made in 2020 totalling 3.8p per share which equates to 80% of the 2019 level.

• Issuance and buyback of shares – in February 2020, the Board approved the issue of 1 million new ordinary shares at a 6% premium to NAV with the proceeds used to reduce the Company's borrowings and was invested in accordance with the Company's investment policy. During the year, the Company bought back 2,548,997 ordinary shares into treasury. The Board believes that investment by the Company in its own shares at the levels of discount to net asset value during the year and subsequently offers an attractive investment opportunity for its shareholders given the financial resources the Company has at its disposal.

• Ongoing investment activity – the Company, with oversight from the Board, undertook strategic activity in selling a small non air conditioned office in Derby following a regear of the lease and a standalone retail warehouse let to Smyth’s Toys. The most significant sale (in late December) was of four multi-let industrial estates for £37.75m. Industrial is a favoured sector but the Company wanted to realise the positive performance delivered on these assets recognising that future performance within the industrial sector is likely to be more polarised, with logistics performing better than small multi-let units. All of these sales reflected the Investment Manager's changing expectations for some assets following COVID-19. The sale proceeds were used to repay the £35m drawn under the Revolving Credit Facility (RCF) and also meant the Company had resources for investment and share buy backs.

The Board’s primary focus is to promote the long term success of the Company for the benefit of its stakeholders as a whole. The Board oversees the delivery of the investment objective, policy and strategy, as agreed by the Company’s shareholders. As set out above, the Board considers the long term consequences of its decisions on its stakeholders to ensure the long term sustainability of the Company.

SHAREHOLDERS

Shareholders are key stakeholders and the Board places great importance on communication with them. The Board welcomes all shareholders’ views and aims to act fairly to all shareholders. The Board believes that the Company’s shareholders seek an attractive and sustainable level of income, the prospect of growth of income and capital in the longer term, a well-executed sustainable investment policy, responsible capital allocation and value for money.

The Investment Manager and Company’s Broker regularly meet with shareholders, and prospective shareholders, to discuss Company initiatives and seek feedback. The views of shareholders are discussed by the Board at every Board meeting, and action taken to address any shareholder concerns. The Investment Manager provides regular updates to shareholders and the market through the Annual Report, Half-Yearly Report, Quarterly Net Asset Value announcements, Company Factsheets and its website.

The Chair offers to meet with key shareholders at least annually, and other Directors are available to meet shareholders as required. This allows the Board to hear feedback directly from shareholders on the Company’s ongoing strategy. Despite the challenges arising from COVID-19, the Investment Manager undertook several meetings with large shareholders to provide reports on the progress of the Company and receive feedback, which was then provided to the full Board.

The Company’s AGM provides a forum, both formal and informal, for shareholders to meet and discuss issues with the Directors and Investment Manager of the Company. The Board would ordinarily encourage as many shareholders as possible to attend the Company’s AGM to engage directly with the Board. The Board has been monitoring closely the ongoing impact of the COVID-19 pandemic upon the arrangements for the Company’s upcoming AGM on Wednesday, 16 June 2021. At the time of writing, elements of the National Lockdown remain in place and shareholder attendance at AGMs is not legally permissible. Therefore, in order to provide certainty, whilst encouraging and promoting interaction and engagement with the Company’s shareholders, the AGM will be a closed meeting, with the minimum representatives present to form a quorum.

However, as set out in the Chairman’s statement, the Board has decided to hold an interactive Online Presentation and Shareholder Question and Answer Session with the Manager which will be held at 11.00am on Friday 4 June 2021. Following the online presentation, shareholders will still have time during which to submit their proxy votes prior to the AGM and the Board encourages all shareholders to lodge their votes in advance. Full details on how to register for the Q&A can be found in the Chairman’s statement. Shareholders are encouraged to submit questions in advance of the Q&A by email to: [e-mail].

TENANTS

Another key stakeholder group is that of the underlying tenants that occupy space in the properties that the Company owns. The Investment Manager works closely with tenants to understand their needs through regular communication and visits to properties.

The Board believes that tenants benefit from a trusting and long term working relationship with the Investment Manager, sustainable buildings and tenancies, value for money and a focus on the community, health & safety and the environment.

The Investment Manager consults with tenants and, on the Board’s behalf, invests in our buildings to improve the quality and experience for our occupiers as well as reduce voids and improve values, helping to produce stronger returns. The Board receives reports on tenant engagement and interaction at every Board meeting. The Board also expects the Investment Manager to undertake extensive financial due diligence on potential tenants to mitigate the risk of tenant failure or inability to let properties.

During the COVID-19 pandemic, the Company’s Investment Manager has worked closely with tenants to understand their needs. The Board believes that this is a crisis that impacts on individuals as much as companies and takes the Social aspects of ESG very seriously. The Board firmly believes that by helping tenants now and building relationships the Company will have better occupancy over future months and years, which will in turn benefit the Company’s cash flow.

DEBT PROVIDER

The Company has a term loan facility and revolving credit facility with The Royal Bank of Scotland International Limited (“RBSI”). RBSI seeks responsible portfolio management and ongoing compliance with the Company’s loan covenants. The Company maintains a positive working relationship with RBSI and provides regular updates on business activity and compliance with its loan covenants.

THE COMMUNITY AND THE ENVIRONMENT

The Board and the Investment Manager are committed to investing in a responsible manner. There are a number of geopolitical, technological, social and demographic trends underway globally that can, and do, influence real estate investments – many of these changes fall under the umbrella of ESG considerations. As a result, the Investment Manager fully integrates ESG factors into its investment decision making and governance process.

The Board has adopted the Investment Manager’s ESG Policy and associated operational procedures and is committed to environmental management in all phases of the investment process.

The Company aims to invest responsibly, to achieve environmental and social benefits alongside returns. By integrating ESG factors into the investment process, the Company aims to maximise the performance of the assets and minimise exposure to risk.

INVESTMENT MANAGER

The Chairman’s Statement and Investment Manager’s Report detail the key investment decisions taken during the year and subsequently. The Investment Manager has continued to manage the Company’s assets in accordance with the mandate provided by shareholders, with the oversight of the Board. The Board receives presentations from the Investment Manager at every Board meeting to help it to exercise effective oversight of the Investment Manager and the Company’s Strategy. The Board formally reviews the performance of the Investment Manager, and the fees it receives, at least annually.

OTHER SERVICE PROVIDERS

The Board via the Management Engagement Committee also ensures that the views of its service providers are heard and at least annually reviews these relationships in detail. The aim is to ensure that contractual arrangements remain in line with best practice, services being offered meet the requirements and needs of the Company and performance is in line with the expectations of the Board, Investment Manager and other relevant stakeholders. Reviews will include those of the company secretary, broker, share registrar and audit.

STRATEGIC REPORT – STRATEGIC OVERVIEW

OBJECTIVE

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

INVESTMENT POLICY AND BUSINESS MODEL

The Board intends to achieve the investment objective by investing in a diversified portfolio of UK commercial properties. The majority of the portfolio will be invested in direct holdings within the three main commercial property sectors of retail, office and industrial although the Group may also invest in other commercial property such as hotels, nursing homes and student housing.

Investment in property development and investment in co-investment vehicles, where there is more than one investor, is permitted up to a maximum of 10% of the property portfolio.

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

• No property will be greater by value than 15% of total assets.

• No tenant (excluding the Government) will be responsible for more than 20% of the Group’s rent roll.

• Gearing, calculated as borrowings as a percentage of gross assets, will not exceed 65%. The Board’s current intention is that the Group’s Loan to Value ratio (calculated as borrowings less all cash as a proportion of property portfolio valuation) will not exceed 45%.

As part of its strategy, the Board has contractually delegated the management of the property portfolio, and other services, to Aberdeen Standard Fund Managers Limited (“the Investment Manager”).

STRATEGY

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

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

At the property level, it is intended that the Group remains primarily invested in the commercial sector, while keeping a watching brief on other classes such as student accommodation and care homes as well as other sectors which will enable the Company to meets its environmental targets.

The Group is principally invested in office, industrial and retail properties and intends to remain so but will keep alert to other opportunities. In addition consideration will be given to acquiring assets that will enable the Company to meet its ESG objectives.

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

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

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

The Board continues to seek out opportunities for further, controlled growth in the Group.

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

THE BOARD

As at 31 December 2020, the Board consisted of a non-executive Chairman and four non-executive Directors. The names and biographies of those directors who held office at 31 December 2020 and at the date of this report appear in the Annual Report and indicate their range of property, investment, commercial and financial experience. There is also a commitment to achieve the proper levels of diversity.

Robert Peto stepped down from the Board on 25 August 2020 and was succeeded as Chair by James Clifton-Brown. Sarah Slater succeeded James as the Chair of the Property Valuation Committee.

KEY PERFORMANCE INDICATORS

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

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

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

Property voids.

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

Rent collection dates.

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

Net asset value total return.

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

Premium or discount of the share price to net asset value.

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

Dividend per share and dividend cover.

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

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

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

PRINCIPAL RISKS AND UNCERTAINTIES

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

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

The overarching risk that has emerged is COVID-19, the global pandemic that has impacted all areas of society in the UK and abroad. This pandemic has caused significant loss of life and global economic disruption. It arguably affects all areas of risk on which the Company reports and has increased the risk profile of the Company. In the section following, particular consideration has been given to how COVID-19 is impacting on the specific risks that are reviewed at each Board meeting.

The Group and its objectives become unattractive to investors, leading to widening of the discount.

This risk is mitigated through regular contact with shareholders, a regular review of share price performance and the level of the discount or premium at which the shares trade to net asset value and regular meetings with the Group’s broker to discuss these points and address any issues that arise. COVID-19 has increased the volatility of the Company’s share price and, reflecting wider market sentiment, has resulted in the Company’s shares trading at a discount to prevailing NAV of 25.5% as at 31 March 2021, in-line with other diversified peers in the Company's AIC peer group.

Net revenue falls such that the Group cannot sustain its level of dividend, for example due to tenant failure or inability to let properties.

This risk is mitigated through regular review of forecast dividend cover and of tenant mix, risk and profile. Due diligence work on potential tenants is undertaken before entering into new lease arrangements and tenants are kept under constant review through regular contact and various reports both from the managing agents and the Investment Manager’s own reporting process.

Contingency plans are put in place at units that have tenants that are believed to be in financial trouble. The Group subscribes to the MSCI Iris Report which updates the credit and risk ranking of the tenants and income stream, and compares it to the rest of the UK real estate market.

An emerging risk in the year was the poor performance of the retail sector due to a number of high profile administrations and store closures in this sector as most retail units were closed for part of the year and into 2021.

The Group has partially mitigated this risk by having an underweight position to the retail sector with only 11.7% exposure to this sector against the benchmark weighting of 22.8% as at the end of December 2020.

The lockdown of many businesses as a result of COVID-19 has resulted in a significant fall of rental collection rates. Rent collection for 2020 was 93.6% resulting in a fall in EPRA earnings during the year. The Company reduced its dividend to reflect this fall in rental levels and the continued uncertainty, paying out a dividend that equated to 80% if its 2019 level.

Uncertainty or change in the macroeconomic environment results in property becoming an undesirable asset class, causing a decline in property values.

This risk is managed through regular reporting from, and discussion with, the Investment Manager and other advisers. Macroeconomic conditions form part of the decision making process for purchases and sales of properties and for sector allocation decisions.

The impact of COVID-19 on the UK economy has been severe with the largest fall in GDP in over 300 years. This has impacted both property values and the ability of tenants to pay rent. Assuming the vaccination programme works and lockdown continues to be eased then UK GDP should grow strongly in the current year. The impact of the trade deal with the EU will also require to be monitored to ensure it does not have a negative impact on the UK economy.

Breach of loan covenants.

This risk is mitigated by the Investment Manager monitoring the loan covenants on a regular basis and providing a quarterly certificate to the bank confirming compliance with the covenants. Compliance is also reviewed by the Board each quarter and there is regular dialogue between the Investment Manager and RBS, the lending bank, on Group activity and performance. Throughout 2020 the loan covenants were comfortably met. As at 31 December the Loan to Value Ratio reported to RBS was 25% (limit of 60%) and interest cover of 678% (limit 175%).

Environmental.

Environmental risk is considered as part of each purchase and monitored on an ongoing basis by the Investment Manager. However, with extreme weather events both in the UK and globally becoming a more regular occurrence due to climate change, the impact of the environment on the property portfolio and on the wider UK economy is seen as an increasing risk.

Please see the Environmental, Social and Governance Policy section and the Investment Manager's Report for further details on how the Company addresses environmental risk, including climate change.

Other risks faced by the Group include the following:

• Strategic – incorrect strategy, including sector and property allocation and use of gearing, could all lead to a poor return for shareholders.

• Tax efficiency – the structure of the Group or changes to legislation could result in the Group no longer being a tax efficient investment vehicle for shareholders.

• Regulatory – breach of regulatory rules could lead to the suspension of the Group’s Stock Exchange Listing, financial penalties or a qualified audit report.

• Financial – inadequate controls by the Investment Manager or third party service providers could lead to misappropriation of assets. Inappropriate accounting policies or failure to comply with accounting standards could lead to misreporting or breaches of regulations.

• Operational – failure of the Investment Manager’s accounting systems or disruption to the Investment Manager’s business, or that of third party service providers, could lead to an inability to provide accurate reporting and monitoring, leading to loss of shareholder confidence.

• Cyber Risk – Business continuity or other risks to any of the Company’s service providers or properties, following a catastrophic event e.g. terrorist attack, cyber-attack, power disruptions or civil unrest, leading to disruption of service, loss of data etc.

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

Details of the Group’s internal controls are described in more detail in the Corporate Governance Report in the Annual Report.

SOCIAL, COMMUNITY AND EMPLOYEE RESPONSIBILITIES

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

ENVIRONMENTAL, SOCIAL AND GOVERNANCE POLICY

Approach to ESG

The Company adopts the Investment Manager’s policy and approach to integrating ESG and this has been used as the basis for establishing the Company’s ESG objectives.

The Investment Manager views ESG as a fundamental part of its business. Whilst real estate investment provides valuable economic benefits and returns for investors it has – by its nature – the potential to affect environmental and social outcomes, both positively and negatively.

The Investment Manager’s approach is underpinned by the following three over-arching principles:

• Transparency, Integrity and Reporting: being transparent in the ways in which we communicate and discuss our strategy, approach and performance with our investors and stakeholders.

• Capability and Collaboration: drawing together and harnessing the capabilities and insights of our platforms, with those of our investment, supply chain and industry partners.

• Investment Process and Asset Management: integrating ESG into decision making, governance, underwriting decisions and asset management approach. This includes the identification and management of material ESG risks and opportunities across the portfolio.

Of particular focus is responding to climate change, both in terms of resilience to climate impacts and in reducing emissions from the Company’s activities. The Investment Manager has recently published a framework for achieving net-zero greenhouse gas emissions across the real estate assets it manages and the Company is among the first to start this process, as outlined in the Investment Manager’s Report.

EPRA Sustainability Best Practice Recommendations Guidelines

We have adopted the 2017 EPRA Sustainability Best Practice Recommendations Guidelines (sBPR) to inform the scope of indicators we report against. We have reported against all EPRA sBPR indicators that are material to the Company. We also report additional data not required by the EPRA sBPR where we believe it to be relevant (e.g. like-for-like greenhouse gas emissions).

A full outline of the scope of reporting and materiality review in relation to EPRA sBPR indicators is included in Appendix X which also provides disclosures required under Streamlined Energy and Carbon Reporting (SECR).

Operational Performance Summary

The Investment Manager has processes in place to ensure operational sustainability performance is monitored and actions are implemented to drive continual improvement. The effect of COVID-19 on occupancy has had an impact on energy consumption and greenhouse gas emissions. It is unfortunately not possible to fully disaggregate this impact from improvement measures undertaken at assets. The performance figures for 2020 should be viewed in this context.

Like-for-like landlord electricity and gas consumption reduced year-on-year across the Company’s assets, by 12% and 1% respectively. This helped drive a 17% reduction in like-for-like greenhouse gas emissions associated with landlord-procured energy.

Full details of performance against material EPRA sBPR indicators are included in the Annual Report.

2020 GRESB Assessment

The GRESB Assessment is the leading global sustainability benchmark for real estate vehicles. The Company has been submitted to GRESB since 2012. In the 2020 assessment, the Company achieved a score of 62 and a two star rating. The 2020 GRESB assessment represented a major overhaul of the benchmark which affected certain types of portfolio more than others and means comparisons with previous years are not possible. Our focus on ESG, and in particular on improving coverage of tenant data, will help improve the Company’s GRESB score in future years.

HEALTH & SAFETY

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

VIABILITY STATEMENT

The Board considers viability as part of its ongoing programme of financial reporting and monitoring risk. The Board continually reviews the prospects for the Company over the longer term taking into account the Company’s current financial position, its operating model, and the diversified constituents of its portfolio. In addition the Board considers strong initial due diligence processes, the continued review of the portfolio and the active asset management initiatives. Given the above, the Board believes that the Company has a sound basis upon which to continue to deliver returns over the long term.

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

The Board has also carried out a robust assessment of the principal and emerging risks faced by the Group. The main risks which the Board considers will affect the business model are: future performance, solvency, liquidity, tenant failure leading to a fall in dividend cover and macroeconomic uncertainty.

These risks have all been considered in light of the financial and economic impact arising from COVID-19.

The Board takes any potential risks to the ongoing success of the Group, and its ability to perform, very seriously and works hard to ensure that risks are consistent with the Group’s risk appetite at all times. In assessing the Group’s viability, the Board has carried out thorough reviews of the following:

• Detailed NAV, cash resources and income forecasts, prepared by the Company’s Investment Manager, for a five year period under both normal and stressed conditions;

• Additional modelling that has been undertaken around the potential impact of COVID-19 on rent collection, cash flow, dividend cover, Net Asset Value and loan covenants;

• The Group’s ability to pay its operational expenses, bank interest, tax and dividends over a five year period;

• Future debt repayment dates and debt covenants, in particular those in relation to LTV and interest cover;

• The ability of the Company to refinance its debt facilities in April 2023;

• Demand for the Company’s shares and levels of premium or discount at which the shares trade to NAV;

Views of shareholders; and

• The valuation and liquidity of the Group’s property portfolio, the Investment Manager’s portfolio strategy for the future and the market outlook.

Despite the uncertainty in the UK regarding the ongoing impact of the COVID-19 pandemic, the Board has a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the next five years. This assessment is based on the current financial position of the Company, its performance track record and feedback it receives from shareholders.

APPROVAL OF STRATEGIC REPORT

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

James Clifton-Brown Chairman

29 April 2021

STRATEGIC REPORT – INVESTMENT MANAGER’S REPORT

MARKET REVIEW

2020 will be a year remembered by everyone. UK gross domestic product (GDP) fell by 9.9%, the largest annual decline in output in 300 years. The effects of the pandemic were far reaching, with no sector of the economy coming out unscathed, including real estate.

Furthermore, the lockdown measures implemented at the end of 2020 are likely to result in the economy shrinking by 4% in the first quarter of 2021. Assuming the vaccine roll out continues smoothly, the UK economy is expected to see growth return only in the second half of 2021.

Returns in the UK real estate market turned negative in 2020, with a total return of -2.3% (per the MSCI Quarterly Index), the first negative calendar year since 2008. As was the case pre-pandemic, returns at the sector level remained highly polarised with industrials and residential the only two sectors to post positive total returns during 2020. The industrial sector was the stand out performer, recording another strong year with returns of 9.2%, aided by capital value growth of 4.6%. Both South East and rest of UK industrials had a strong 2020, with total returns of 10.1% and 7.6% respectively. The retail sector continued to weigh on all commercial property returns with a total return of –12.4% and values falling by –17.1% over the course of the year. At -1.0% in Q4, the office sector saw its weakest quarterly return since Q3 2016, contributing an annual return of –1.7%.

The fourth quarter rally in 2019 for the FTSE UK REIT index was quickly unwound in the first quarter of 2020 as the pandemic took hold. During the first quarter of 2020, the index recorded a total return of –27%, and despite a late vaccine relief rally in the final months of 2020, the FTSE UK REIT index delivered a total return of –16.2% for the full year, with the FTSE All-Share Index returning –9.8%. The hierarchy of favoured sectors remained broadly the same, with the variance in NAVs between the most and least favoured sectors becoming more pronounced. Industrial names benefited from a clear acceleration in structural shifts towards online retailing, largely to the detriment of retail REITs. As a result, pricing held up better for the former, whereas pricing for retail REITs continued to trade at deep discounts to NAV. With uncertainty surrounding the outlook for the office occupational market, London office developers continued to trade at discounts to NAV.

COVID-19 has created near-term cyclical headwinds for the UK real estate sector, whilst providing the catalyst for acceleration in structural trends that were already underway pre-pandemic. The requirement for more flexible workplace arrangements is evident in the office sector and a number of companies are reassessing their requirements in light of more flexible working arrangements and lower expected growth. Take-up decreased across major office markets and availability rates rose sharply. Demand for the best quality space has proven to be more resilient and this is likely to be the case going forward for the sector. The clear beneficiary in the acceleration of structural changes was the industrial and logistics sector. The logistics sector recorded its strongest year of take-up on record in 2020 as the closure of non-essential retail units, for a large part of the year, facilitated a greater transition to online retailing. Despite the obvious challenges, the COVID-19 impact on UK retail has not been homogenous across all retail sub-sectors as illustrated by the resilience of supermarket trading. In fact, the supermarket sector benefitted from unprecedented Christmas demand in 2020, with take home grocery sales rising 11.4% year-on-year over the 12 weeks to 27 December 2020 according to Kantar data.

OFFICE

The office sector delivered a total return of –1.7% in 2020 according to the MSCI Quarterly Index. However, the headline number masks significant variation in returns both geographically and even within cities. Within Central London there was a clear divergence in performance, where City offices recorded a total return of 1.1% with values declining by –2.2% in 2020. Conversely West End offices recorded a total return of –5.8% in 2020, with values down –8.8% over the year. Regional offices experienced capital value declines of –4.2%, resulting in a marginally positive total return of 0.3% over the year. The performance of offices is perhaps unsurprising given that the pandemic has resulted in a noticeable deterioration in the occupational market. Aside from the short-term cyclical disruption COVID-19 has undoubtedly created, it has also accelerated longer term structural challenges for the sector. The increased prominence of working from home for the majority of office based staff has resulted in some occupiers putting requirements for future space on hold while they evaluate how to deal with more agile working arrangements. The result is that take-up was down over 50% in 2020 and by the end of December both vacancy and availability rates in Central London had increased to 8.1% and 10% respectively. However, it is important to highlight a clear distinction by building quality. The availability of Grade A office space remains well balanced in the capital, as it does in key regional markets, especially for larger floorplates. But there has been a sharp increase in sub-let or so called grey space coming to the market, accounting for 75% of the total in London.

Similar trends were witnessed in the regional office markets, with the take up dropping by 33% on the ten-year average within the largest nine regional office markets. There remains scant evidence of the weak occupational market putting material downward pressure on headline rents at this point, but the momentum by the end of 2020 was negative as rents declined by –0.8% over the course of the year. We therefore expect to see further rental declines in

2021 as more evidence becomes apparent. The office sector will remain an area of significant change, with a greater divergence in returns expected between offices that meet occupier needs, and those that do not.

RETAIL

According to the MSCI Quarterly Index, the retail sector delivered a total return of –12.3% in 2020, with values falling by 16.9%. That overall performance masks significant dispersion within the sector, however. Shopping centre values collapsed by just under 30% over the last 12 months, dwarfing the 17% fall in values seen in 2019. Average shopping centre values now sit 66% below their 2007 peak level and, with virtually no investment market liquidity, pricing suggests further falls in 2021. In complete contrast, supermarket values rose by 1.4% in 2020, with their status as essential infrastructure and their long, secure income profiles proving highly attractive to investors. Retail warehouses, which represent a broad church of assets, sit right in-between, with values down 15.7% on average over the last 12 months. Solus (standalone) units, many let to DIY or discount operators on long leases, lost only 8.7% of value on average.

By the end of the year, solus units had stabilised and began to see modest capital growth. However, the largest parks, often with more exposure to the fashion sector, saw values fall by nearly 21% in 2020. Meanwhile, high streets have also suffered from a collapse in footfall and the enforced closure of fashion occupiers. For the first time, Central London has not been immune, with values down 16.9%, compared with a 20% decline for all shops nationally. Indeed, London suffered the most of any region in the final quarter. The impact of COVID-19 on international travel and office-related footfall going forward is a major threat to retail and hospitality businesses in London, where rents and business rates have soared over the last 10 years. While the government has provided significant support and protection for retailers since the pandemic began, with the recent budget extending some of these measures such as business rates holidays and a new restart grant, the eventual ending of these measures could herald further business failures and rising vacancy rates. The polarisation between positive performance from assets in essential retail use, relying on predictable, local catchment spending, and discretionary retail that is hamstrung by travel limitations and trading restrictions may continue for much of 2021. In the longer term, the acceleration of sales transitioning online during the pandemic and greater prevalence of turnover-based rental payments is expected to mean a further rebasing of rents across discretionary retail locations. In contrast, however, the step change in online grocery spend likely underpins the importance and performance prospects of the dominant, well-configured supermarkets that are crucial for fulfilment and last-mile distribution.

INDUSTRIAL

Industrials maintained their position as the best performing UK commercial real estate sector for the fourth consecutive year. The sector delivered a total return of 9.2% in 2020, with values rising by 4.6% according to the MSCI Quarterly Index. Sentiment towards the sector remains very positive given the favourable structural drivers of the occupier market, especially for space constrained logistics in urban areas. This is particularly the case in the South East where the segment recorded a total return of 10.1% driven by capital growth of 5.9%. Performance for London industrials was the strongest, delivering a total return of 7.9% in Q4 and 12.3% for the calendar year.

Despite a year categorised by multiple lockdowns, impeding travel and inspections, investment levels reached £10.1bn in 2020, the highest level recorded since 2017. As a result, the industrial sector accounted for 22% of all UK investment transactions during the year, the highest market share on record. The pandemic clearly resulted in an acceleration in the transition to online retailing which was reflected in the occupational market. The UK logistics sector experienced a record year of take-up in 2020 with 50.1 million sq. ft. of new leases agreed on warehouse space, 12.7 million sq. ft. ahead of the previous record set in 2016 according to Savills. Leases agreed with Amazon accounted for a quarter of all take-up, but the sector would still have broken new records even if Amazon and short-term deals were removed. Aided by a record year of take-up, the vacancy rate for the logistics sector now stands at 5.7% at the national level and an even lower 3.5% in London and the South East. Market fundamentals remain supportive for continued rental growth driven by a structurally supportive demand outlook.

ALTERNATIVES

The UK real estate alternative sector, or “Other Property” as it is categorised by MSCI, represents real estate which falls outside the traditional ‘Retail’, ‘Office’ or ‘Industrial’ definitions. This sector recorded a total return of –5.3% in 2020. This is predominantly due to the large weighting of leisure and hotels within the sample. Returns for these segments during the year were –14.6% and –2.6% respectively. Both of these consumer facing segments have borne the brunt of the challenges created as a result of the pandemic, with the path to recovery expected to be gradual and not without its challenges, especially for the hospitality sector. Outwith these two sectors, the Purpose Built Student Accommodation (PBSA) sector continued to attract investor interest, despite lockdowns inhibiting the return of students to university. In the face of a challenging occupational backdrop, the sector still managed to deliver a total return of 4.9% in the year to September 2020 according to CBRE.

As was the case with the majority of sectors, the returns within the sector were highly polarised. Prime assets which are aligned to top tier universities significantly outperformed secondary assets. Early indications from UCAS illustrate that applications for the 2021/22 academic year look positive, and provided a vaccine can be rolled out by September 2021, the sector should see this converted to PBSA bookings.

Investor interest in the build to rent (BtR) sector continued unabated in 2020, recording its highest annual investment total on record at £3.5 billion, with a number of new entrants to the market announced during 2020. Although these sectors remain nascent compared to more developed international markets, there remains significant interest given their more resilient performance during the pandemic.

MARKET OUTLOOK

2021 is expected to be a year of two halves. The national lockdown and restrictions on travel along with the impact of the final Brexit deal will have a negative impact on the economy and real estate market in the first half of the year. However the second half is expected to be significantly different as the economy reopens with strong growth albeit from a low base. The economic shocks from COVID-19, as well as the after effects of Brexit are going to create a challenging macroeconomic environment and after the strong bounce back we are likely to be in a new period of low growth and low interest rates.

The low interest rate environment is likely to support continued demand for real estate as an income producing real asset. The weight of money available to invest in real estate is going to be supportive of values, however we expect a strong differential in performance both across sectors, and within sectors.

The theme of Industrial performing well and Retail poorly is expected to continue, but become more nuanced. Shopping centres and fashion-led retail is likely to continue to see falling capital and rental values, whilst food and budget retail should hold up well. Logistics remains a strong sub sector with continued demand pushing rents and values up, but we suggest greater caution is required around smaller multi let units generally rented to poorer covenants more likely to struggle in a weaker economic environment. The office market is in a period of change and is likely to see rental value falls and reduced demand: however, it is a sector that is likely also to see the best properties do better and the weaker ones worse as users and buyers become more selective.

Income will be the main driver of returns over the next few years. Long let secure income is trading at ever lower yields, and those seeking a greater yield are going to have to take an active approach of investing in assets with shorter leases but more sustainable income through diversification and good quality assets that meet occupier needs.

PERFORMANCE

There are a number of measures we use to assess performance. These are detailed below, and range from the performance of the investments to what shareholders have experienced.

Portfolio return:

A comparison of the investment portfolio return against the MSCI benchmark is the best measure of how the underlying portfolio is performing. 2020 was a difficult year for the Company, with all assets written down in value in the first half of the year, reflecting the sentiment surrounding the national lockdown.

As the year progressed this was in part unwound, particularly in the industrial / logistics space. One of the characteristics of the market in 2020 was a wider than normal dispersion of returns both between sectors, but also within sectors. The Company’s portfolio total return slightly underperformed the MSCI benchmark in 2020 but still compares favourably to the index over 3, 5, and 10 years. The chart below shows these returns.

NAV return:

The NAV total return is probably the best measure of the sum of the investment manager’s effort. As can be expected at a time of negative capital value movement the NAV is impacted by the debt utilized to invest in additional properties. Also during 2020 the liability held in the accounts for the interest swap increased to £3.74m, which also had a negative impact on the NAV – this will revert to £0 on maturity (April 2023) and so the NAV will benefit in the future. The Company’s NAV total return v that of the AIC Property Direct UK sector, and also the IA open ended funds sector are shown in the table below.

Share Price total return:

This measure is least reflective of the investment managers’ input, but is of course most reflective of the experience of the shareholder. The share price moved quite dramatically over 2020 – trading at a premium to NAV at the beginning of the year but moving to a significant discount as the pandemic developed. Towards the end of 2020 the Company started to buy back its own shares as an investment as the shares were perceived as good value relative to other investment opportunities available to the Investment Manager.

NAV Total Returns to 31 December 2020	1 year (%)	3 years (%)	5 years (%)	10 years (%)
Standard Life Investments Property Income Trust	(4.6)	8.8	30.0	140.2
AIC Property Direct – UK sector (weighted average) Investment Association Open Ended Commercial Property Funds sector	1.2 (3.6)	15.6 0.4	24.9 8.6	32.4 47.2

Source: AIC, Aberdeen Standard Investments

	Share Price Total Returns to 31 December 2020	1 year (%)	3 years (%)	5 years (%)	10 years (%)
Standard Life Investments Property Income Trust		(29.8)	(24.0)	(7.6)	70.3
FTSE All-Share Index		(9.8)	(2.7)	28.5	71.9
FTSE All-Share REIT Index		(16.2)	(4.1)	0.2	95.2
AIC Property Direct – UK sector (weighted average)		(2.0)	11.6	20.2	10.8

Source: AIC, Aberdeen Standard Investments

VALUATION

The investment portfolio is valued on a quarterly basis by Knight Frank LLP. At the risk of repetition, 2020 was a challenging year for valuers. The RICS (governing body for valuers) required valuations in March to have a material uncertainty clause for all valuations, stating that a lower level of confidence in the reliability of the valuation figure could be expected. By year end the material uncertainty clause had been lifted, and greater transaction levels provided more evidence to support valuations.

At the 2020 year end the portfolio was valued at £437.7m (£493.2m December 2019) and cash of £9.4m was held (£6.5 December 2019). The portfolio comprised of 50 assets as at 30 December (56 assets as at December 2019). Drawn debt at year end was £110m with none of the £55m revolving credit facility drawn (£18m drawn December 2019).

INVESTMENT STRATEGY

The Company has a clear investment objective that drives the activities of the Board and Investment Manager. The investment objective is “to provide investors with an attractive income return, with the prospects of income and capital growth, through investing in a diversified portfolio of commercial real estate assets in the UK.” The Board and investment Manager believe that the dividend should be covered by income over the medium term.

That objective has been challenged in 2020 with many tenants unable to pay rent, or paying reduced amounts during lockdown. Although 93% of rent due was collected through 2020 it was necessary to reduce the dividend to protect the balance sheet during such uncertain times. The reduction in dividend was made for the 2nd, 3rd and 4th quarters of the year, where 60% of the previous dividend level was paid. In total this resulted in the dividends paid in 2020 being 80% of the 2019 level. A balancing top up payment has also been declared in April of 0.381p.

As the immediate impact of COVID-19 lockdowns eases and the economy reopens, so one expects to see a recovery in the rents received by the Company and, potentially enabling an increase in the dividend again. COVID-19 has, however, accelerated trends already seen in the market and the Board and Investment Manager believe that some changes in emphasis in the investment strategy are required.

Income remains a key focus, but it should not be at the expense of total return, and it is important that we invest in assets that can produce a reliable future income. ESG is an important consideration and we believe that only assets that meet high ESG standards will appeal to tenants and provide a strong resilient income flow. As such we expect future investments to have a strong ESG focus and that will have an impact in the yield we obtain. This is a nuanced change of focus, with ESG driving our strategy more, and means the portfolio yield is likely to trend to the low 5%s from the existing 5.8%. Although these assets might have lower yields, they are likely to have stronger net operating income growth to support future dividend growth.

Later in the report we detail the Company’s ESG activities: however it is worth pointing out under the investment strategy that ESG is at the heart of everything we do. We believe that having a portfolio which is fit for the future, will meet occupiers’ needs and provide the strongest returns, requires a progressive approach to ESG. As such, ESG is a key component of decision making for the Company.

PURCHASES

One purchase was made during 2020 of a retail warehouse unit let to B&Q for a further 11 years. The unit is in Halesowen and is a strong performer for B&Q. The purchase price of £19.5 million reflected an income yield of 7.5%. Although retail was considered very unfashionable in 2020 we believe units like this, with strong alternative use potential in the future as well as a long secure income stream from the existing tenant provide attractive return prospects.

The Company ended 2020 with circa £55 million available to invest. The Investment Manager is assessing a number of opportunities, with an expectation of investing available resources during 2021.

SALES

Three sales were completed in 2020 totalling £51 million. In January the Company sold a single let office building in Staines for £10.7 million, and then in December sold a standalone retail warehouse for £3.3 million and a portfolio of four multi let industrial estates for £37.75 million.

After the reporting period the Company completed the sale of an office in Derby for £4.3 million.

The sales were undertaken following an extensive review of the portfolio which took into account concerns over the aftermath of COVID-19 and Brexit where we identified several assets that we no longer had confidence would deliver the return characteristics we look for.

ASSET MANAGEMENT

The Investment Manager has an experienced asset management team dedicated to the Company, who take an active approach to managing the assets to add value through restructuring and extending leases, refurbishment and upgrading of assets, and leasing of vacant accommodation. Over the last 12 months the main focus of asset management has been on working with tenants to understand their needs and help them through the various trading restrictions individual companies have experienced.

The level of tenant interaction has been very pleasing, and in many cases we have been able to work with the tenant to agree a suitable solution to the issues COVID-19 created. We worked closely with our managing agents to ensure that buildings were managed in such a way as to protect staff and users of the buildings, to minimise operating costs, but also to properly maintain services and equipment. Indeed, we have been able to bring forward some planned works so that they can be undertaken when the buildings are at very low occupancy levels.

Rent collection has been very much in the spotlight. We have taken an approach of dealing with each tenant individually based on their needs. We only have a small number of sole trader retail units (e.g. tanning studios / hairdressers etc.) because of our low retail exposure, but in those cases we have written off rent during lockdowns as the tenant has no ability to generate income, or indeed recoup lost earnings once they reopen. For other tenants we have, where required, provided rent free periods in return for a lease restructuring to extend the lease commitment, or agreed deferments for payment.

Sadly, the Government’s restriction on enforcing lease contacts has meant some tenants have chosen not to pay rent and not to engage with us, despite having the ability to pay. While we have a prudent provision for bad debts in the financial statements, we anticipate recovery of some of the outstanding rents once we are able to enforce lease obligations again.

Collection By Sector 2020

		Gross Demand	% Received
Retail		£3,412,470	82%
Industrial		£15,953,490	100%
Office		£10,926,581	91%
Other		£2,415,252	78%
Total		£32,707,793	93.6%

During the reporting period five rent reviews were settled with uplifts in rent, securing an additional £58,256 pa (an average increase of 19% on previous rent). A total of 15 lease renewals and restructurings were undertaken, securing £2,587,491 pa in rent, and a total of eight lettings securing £890,369 pa.

DEBT

The Company utilises debt, with two forms of borrowings, both from the Royal Bank of Scotland. The main facility is a fully drawn term loan of £110m which matures in April 2023. The Company entered into an interest rate swap when the term loan was taken out, and that is marked to market each quarter in the NAV. At the end of the year it stood as a liability of £3.75m (£2.2m 2019). This will revert to zero on maturity in April 2023 giving a boost to the NAV.

The Company also has a £55m revolving credit facility. Following asset sales at the end of the year this was fully repaid, and provides firepower for future purchases.

The Loan to Value (LTV) at year end was 23.0%, (Dec 2019 24.6%), with an all in cost of 2.7%. The Company is comfortable with an LTV in the range of 20–35%.

With the debt facility due to mature in April 2023 the Company will formulate a strategy to replace the existing facility in ahead of maturity.

ESG

In many ways it feels wrong to have a separate part of the report on ESG, as it is an integral part of how we manage the Company. ESG now features in every decision we make and by considering ESG risks and opportunities we help protect and enhance performance over the long term. We aim to position SLIPIT at the forefront of ESG as we believe that buildings with strong ESG credentials will have the greatest appeal to occupiers.

Our approach has matured significantly in recent years and will continue to develop as we learn more about the ESG trends affecting the built environment and the objectives of our stakeholders. It’s a process that continually evolves but what doesn’t change is our commitment to deliver value through improving the quality of the built environment and to create better places for our occupiers and local communities.

We have started to take real practical steps on several of the most material issues for the Company. The portfolio managers have piloted Aberdeen Standard Investment’s proprietary ESG Impact Dial tool which we are using to baseline the ESG performance of all Company assets and set objectives across a full range of ESG topics.

Here, we summarise current activities and objectives related to our current focus areas and in particular, describe our activities on energy and carbon emissions.

CARBON REDUCTION AND ENERGY EFFICIENCY

The Company has an active approach to managing energy efficiency and carbon emissions across the portfolio where there is landlord-procured energy. Since 1 April 2018 the Company has only procured Green certified electricity for all its supplies. The realities of transforming the Company to net-zero carbon mean we are starting to look far more holistically at emissions from the portfolio’s properties; including tenant emissions and embodied carbon from developments.

Following the Investment Manager’s net zero commitment in 2019, the Company has committed to being a pioneer portfolio and will undertake work to develop its own net-zero pathway this year. Our view is that by fully understanding the implications of decarbonisation now and positioning the portfolio favourably will help mitigate potential future value impairment due to regulatory changes and changing occupier demands.

The kick-off phase in 2021 will involve the benchmarking of existing assets and the definition of best-value strategies to achieve net zero. We have already started assessing and implementing such as energy efficiency upgrades, the electrification of heating and renewable energy installations. Around 85% of the Company’s current carbon footprint is due to occupier energy consumption. One of the biggest challenges we have experienced to date has been gaining detailed data and understanding of tenant consumption. Knowledge is key to improving the performance of the company, and we are trying to work with our tenants firstly to understand and then to improve energy consumption.

Even with an extensive programme of measures there are likely to be residual carbon emissions from the portfolio in the future. We have already begun exploring options to compensate for these emissions ourselves through direct investment in afforestation which can help avoid potential future offset costs.

The timeline overleaf summarises the high-level components of this strategy. This will be refined further this year following detailed pathway work.

In 2020 we completed our largest solar PV scheme to date; a 918 kWp scheme in Sandy to supply electricity to our occupier Flamingo Flowers, more details of which is given in the infographic overleaf. The Company now has six operational PV schemes totalling 1.2MWp and has another 20 schemes in various stages of implementation. All the schemes involve selling generated power to the tenant, which provides the Company with an attractive return, reduces the carbon load on the Company, but also reduces cost for the tenant and supports their ESG credentials.

It is very easy to just concentrate on the “E” of ESG, but the “S” is important in how we manage buildings. Social aspects are much harder to measure, but relate to how we create an environment where people want to work – it helps improve morale and productivity for our tenants and therefore improves demand / retention at our buildings. Fifteen months ago we would have talked about the functions we arrange on site in some of our multi let offices, such as access to Yoga classes, great shower and changing facilities, pop up stands supporting local charities and food bank collections. COVID has put those on hold, but it doesn’t mean we have stopped. Small things like arranging for the office Christmas tree to go to a hospital children’s ward, or donating the tea and coffee supplies from the office break out to an ICU ward for hospital workers have continued to engage with occupiers, and create a sense of community around our buildings.

OUTLOOK AND FUTURE STRATEGY

The one certainty we have today is that change will continue. Many of the themes we have seen from COVID-19 will also continue; with elevated on-line retail, a mix of home working, and a challenging economic environment.

The increased focus on ESG is also likely to continue and that is an area the Company is looking to be a leader. The way that the Company can deliver its corporate objective of an attractive level of income, with prospects of income and capital growth, is to ensure it has a portfolio that is of sufficient ESG standards to appeal to occupiers and thus benefit from increases in net operating income and occupancy. A slightly lower yield today might be required to ensure strong total returns in the future. The Company is developing its pathway to carbon neutrality and hopes to invest in land for reforestation in order to achieve this at a known cost, rather than be exposed to future, potentially expensive, carbon offset pricing.

We will retain our active approach to managing the Company, ensuring that our assets are affordable and appeal to occupiers. We will structure the Company to be “future fit” and ready to meet the challenges of change.

STATEMENT OF DIRECTORS’ RESPONSIBILITIES

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

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

• select suitable accounting policies in accordance with IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors and then apply them consistently;

• make judgement and estimates that are reasonable and prudent;

• present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

• provide additional disclosures when compliance with the specific requirements in IFRSs as adopted by the European Union is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group’s financial position and financial performance;

• state that the Group has complied with IFRSs as adopted by the European Union, subject to any material departures disclosed and explained in the Group Consolidated Financial Statements; and

• prepare the Group Consolidated Financial Statements on a going concern basis unless it is inappropriate to presume that the Group will continue in business.

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

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

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

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

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

• the Consolidated Financial Statements, prepared in accordance with IFRSs as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group; and

• the management report, which is incorporated into the Strategic Report, Directors’ Report and Investment Manager’s Report, includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that they face.

Statement under the UK Corporate Governance Code.

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

Approved by the Board on

29 April 2021

James Clifton-Brown Chairman

FINANCIAL STATEMENTS

Consolidated Statement of Comprehensive Income  for the year ended 31 December 2020	Notes	31-Dec-20 £	31-Dec-19 £
Rental income		29,439,549	29,878,646
Service charge income		3,543,976	3,313,463
Surrender premium		21,250	580,000
Valuation loss from investment properties	7	(27,640,224)	(3,613,836)
(Loss)/gain on disposal of investment properties	7	(4,806,137)	427,304
Investment management fees	4	(3,198,519)	(3,492,880)
Valuer’s fees	4	(84,638)	(97,668)
Auditor’s fees	4	(118,400)	(81,850)
Directors’ fees and subsistence	22	(236,953)	(227,276)
Service charge expenditure		(3,543,976)	(3,313,463)
Other direct property expenses		(4,904,968)	(2,935,023)
Other administration expenses		(512,849)	(530,862)
Operating (loss)/profit		(12,041,889)	19,906,555
Finance income	5	3,896	15,856
Finance costs	5	(3,744,074)	(3,778,280)
L os s / ( p r o fi t ) f o r th e pe r i o d b e f or e t a x a tio n		(15,782,067)	16,144,131
Taxation
Tax charge		—	—
( L os s ) / P r o fi t f o r t h e pe r i o d , n e t o f t a x		(15,782,067)	16,144,131
Other Comprehensive Income
Valuation loss on cash flow hedge	14	(1,514,638)	(1,416,653)
Total other comprehensive loss		(1,514,638)	(1,416,653)
Total comprehensive (loss)/gain for the period, net of tax		(17,296,705)	14,727,478
Earnings per share		2020 (p)	2019 (p)
Basic and diluted earnings per share	18	(3.88)	3.98
EPRA earnings per share	18	4.10	4.76

Consolidated Balance Sheet as at 31 December 2020
		31 December	31 December
ASSETS	Notes	2020 £	2019 £

Non-current assets Investment properties	7	428,412,375	477,855,299
Lease incentives	7	5,885,270	5,523,822
Rental deposits held on behalf of tenants		855,866	1,298,364
		435,153,511	484,677,485
Current assets Investment properties held for sale	8	4,300,000	10,700,000
Trade and other receivables	10	10,802,197	3,913,519
Cash and Cash equivalents	11	9,383,371	6,475,619
		24,485,568	21,089,138
Total Assets		459,639,079	505,766,623
LIABILITIES
Current liabilities Trade and other payables	12	13,096,054	9,232,072
Interest rate swap	14	1,472,387	644,465
		14,568,441	9,876,537
Non-current liabilities Bank borrowings	13	109,542,823	127,316,886
Interest rate swap	14	2,262,867	1,576,151
Obligations under finance leases	15	902,645	904,121
Rent deposits due to tenants		855,866	1,298,364
		113,564,201	131,095,522
Total liabilities		128,132,642	140,972,059
Net assets		331,506,437	364,794,564
EQUITY		2020 £	2019 £
Capital and reserves attributable to Company’s equity holders Share capital	17	228,383,857	227,431,057
Treasury share reserve	17	(1,450,787)	–
Retained earnings	18	7,339,209	6,168,350
Capital reserves	18	(604,214)	33,356,785
Other distributable reserves	18	97,838,372	97,838,372
Total equity		331,506,437	364,794,564

Consolidated Statement of Changes in Equity for the year ended 31 December 2020	Notes	Share Capital £	Treasury shares £	Retained Earnings £	Capital Reserves £	Other Distributable Reserves £	Total equity £
Opening balance 1 January 2020		227,431,057	—	6,168,350	33,356,785	97,838,372	364,794,564
Loss for the year		—	—	(15,782,067)	—	—	(15,782,067)
Other comprehensive income		—	—	—	(1,514,638)	—	(1,514,638)
Total comprehensive loss for the period		—	—	(15,782,067)	(1,514,638)	—	(17,296,705)
Ordinary shares issued net of issue costs	17	952,800	—	—	—	—	952,800
Ordinary shares placed into treasury net of issue costs	17	—	(1,450,787)	—	—	—	(1,450,787)
Dividends paid	20	—	—	(15,493,435)	—	—	(15,493,435)
Valuation loss from investment properties	7	—	—	27,640,224	(27,640,224)	—	—
Loss on disposal of investment properties	7	—	—	4,806,137	(4,806,137)	—	—
Balance at 31 December 2020		228,383,857	(1,450,787)	7,339,209	(604,214)	97,838,372	331,506,437

Consolidated Statement of Changes in Equity for the year ended 31 December 2019
		Share Capital	Retained earnings	Capital reserves	Other Distributable Reserves	Total equity
	Notes	£	£	£	£	£
Opening balance 1 January 2019		227,431,057	6,156,881	37,959,970	97,838,372	369,386,280
Profit for the year		—	16,144,131	—	—	16,144,131
Other comprehensive income		—	—	(1,416,653)	—	(1,416,653)
Total comprehensive income for the period		—	16,144,131	(1,416,653)	—	14,727,478
Ordinary shares issued net of issue costs	17	—	—	—	—	—
Dividends paid	20	—	(19,319,194)	—	—	(19,319,194)
Valuation loss from investment properties	7	—	3,613,836	(3,613,836)	—	—
Gain on disposal of investment properties	7	—	(427,304)	427,304	—	—
Balance at 31 December 2019		227,431,057	6,168,350	33,356,785	97,838,372	364,794,564

Consolidated Cash Flow Statement for the year ended 31 December 2020
Cash flows from operating activities	Notes	31-Dec-20	31-Dec-19
		£	£
Profit for the year before taxation		(15,782,067)	16,144,131
Movement in lease incentives		(1,694,642)	(1,881,958)
Movement in trade and other receivables		(6,446,180)	(400,215)
Movement in trade and other payables		3,421,484	(2,216,558)
Finance costs	5	3,744,074	3,778,280
Finance income	5	(3,896)	(15,856)
Valuation loss from investment properties	7	27,640,224	3,613,836
Loss/(gain) on disposal of investment properties	7	4,806,137	(427,304)
Net cash inflow from operating activities		15,685,134	18,594,356
Cash flows from investing activities
Interest received	5	3,896	15,856
Purchase of investment properties	7	(21,297,754)	(25,808,526)
Capital expenditure on investment properties	7	(4,947,828)	(4,628,353)
Net proceeds from disposal of investment properties	7	50,973,863	35,067,304
Net cash inflow from investing activities		24,732,177	4,646,281
Cash flows from financing activities
Proceeds on issue of ordinary shares	17	952,800	—
Shares bought back during the year	17	(1,450,787)	—
Bank borrowing	13	27,000,000	1,000,000
Repayment of RCF	13	(45,000,000)	(3,000,000)
Bank borrowing arrangement costs	13	—	(150,000)
Interest paid on bank borrowing	5	(2,479,388)	(2,986,775)
Payments on interest rate swaps	5	(1,038,749)	(574,021)
Dividends paid to the Company’s shareholders	20	(15,493,435)	(19,319,194)
Net cash outflow from financing activities		(37,509,559)	(25,029,990)
Net increase/(decrease) in cash and cash equivalents		2,907,752	(1,789,353)
Cash and cash equivalents at beginning of year	11	6,475,619	8,264,972
Cash and cash equivalents at end of year	11	9,383,371	6,475,619

Notes to the Consolidated Financial Statements for the year ended 31 December 2020

1 GENERAL INFORMATION

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

The address of the registered office is PO Box 255, Trafalgar Court, Les Banques, St Peter Port, Guernsey.

These audited Consolidated Financial Statements were approved for issue by the Board of Directors on 29 April 2021.

2 ACCOUNTING POLICIES

2.1  Basis of preparation

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

The Directors have considered the basis of preparation of the accounts given the COVID-19 pandemic and believe that it is still appropriate for the accounts to be prepared on the going concern basis.

Changes in accounting policy and disclosure

A number of new standards and amendments to standards and interpretations are effective for annual periods beginning on or after 1 January 2020, and have not been applied in preparing these consolidated financial statements.

None of these are expected to have a significant effect on the consolidated financial statements of the Group, except the following set out below:

• Amendments to IFRS 3, Business Combinations – The IASB published an amendment to the requirements of IFRS 3 in relation to whether a transaction meets the definition of a business combination. The amendment clarifies the definition of a business, as well as provides additional illustrative examples, including those relevant to the real estate industry. A significant change in the amendment is the option for an entity to assess whether substantially all of the fair value of the gross assets acquired is concentrated in a single asset or group of similar assets. If such a concentration exists, the transaction is not viewed as an acquisition of a business and no further assessment of the business combination guidance is required. This will be relevant where the value of the acquired entity is concentrated in one property, or a group of similar properties. The amendment is effective for periods beginning on or after 1 January 2020 with earlier application permitted. There will be no impact on transition since the amendments are effective for business combinations for which the acquisition date is on or after the transition date.

Annual Improvements to IFRS

The Group has made no adjustments to its financial statements in relation to IFRS Standards detailed in the annual Improvements to IFRS 2018-2020 Cycle (effective for annual reporting periods beginning on or after 1 January 2022). The Group will consider these amendments in due course to see if they will have any impact on the Group.

2.2  Significant accounting judgements, estimates and assumptions

The preparation of the Group’s Financial Statements requires management to make judgements, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities, at the reporting date. However, uncertainties about these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amount of the asset or liability affected in the future periods. The most significant estimates and judgements are set out below. There were no critical accounting judgements.

Fair value of investment properties

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

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

The sensitivity analysis in note 7 details the decrease in the valuation of investment properties if equivalent yield increases by 50 basis points or rental rates (ERV) decreases by 5% which the Board believes are reasonable sensitivities to apply given historical movements in valuations.

Fair value of financial instruments

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

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

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

The sensitivity analysis in note 3 details the increase and decrease in the valuation of interest rate swaps if market rate interest rates had been 100 basis points higher and 100 basis points lower.

Provision for Bad debts

Provision for bad debts are also a key estimation uncertainty. These are measured with reference to amounts included as income at the year end but not yet collected. In assessing whether the credit risk of an asset has significantly increased the Group takes into account qualitative and quantitative reasonable and supportable forward-looking information.

Due to the impact of COVID-19 on collection rates, there has been a significant increase in our assessed credit risk. Each individual rental income debtor is reviewed to assess whether it is believed there is a probability of default and expected credit loss given the knowledge and intelligence of the individual tenant and an appropriate provision made.

2.3  Summary of significant accounting policies A Basis of consolidation

The audited Consolidated Financial Statements comprise the financial statements of Standard Life Investments Property Income Trust Limited and its material wholly owned subsidiary undertakings.

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

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

• Power over the subsidiary (i.e. existing rights that give it the current ability to direct the relevant activities of the subsidiary)

• Exposure, or rights, to variable returns from its involvement with the subsidiary

• The ability to use its power over the subsidiary to affect its returns

The Group assesses whether or not it controls a subsidiary if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated statement of other comprehensive income from the date the Group gains control until the date when the Group ceases to control the subsidiary.

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

B Functional and presentation currency

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

C Revenue Recognition

Revenue is recognised as follows:

i)  Bank interest

Bank interest income is recognised on an accruals basis.

ii)  Rental income

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

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

The surrender premiums received for the year ended 2020 were £21,250 (2019: £580,000) as detailed in the Statement of Comprehensive Income and related to a tenant break during the year.

iii)  Property disposals

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

D Expenditure

All expenses are accounted for on an accruals basis. The investment management and administration fees, finance and all other revenue expenses are charged through the Consolidated Statement of Comprehensive Income as and when incurred.

The Group also incurs capital expenditure which can result in movements in the capital value of the investment properties. The movements in capital expenditure are reflected in the Statement of Comprehensive Income as a valuation gain/(loss). In 2020, there were no non-income producing properties (2019: nil).

E Taxation

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

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

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

F Investment property

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

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

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

i)  Reduced by the carrying amount of any accrued income resulting from the spreading of lease incentives and/or minimum lease payments.

ii)  Increased by the carrying amount of any liability to the superior leaseholder or freeholder (for properties held by the Group under operating leases) that has been recognised in the Balance Sheet as a finance lease obligation.

Acquisitions of investment properties are considered to have taken place on exchange of contracts unless there are significant conditions attached. For conditional exchanges acquisitions are recognised when these conditions are satisfied. Investment properties are derecognised when they have been disposed of or permanently withdrawn from use and no future economic benefit is expected from their disposal. Any gains or losses on the retirement or disposal of investment properties are recognised in the Consolidated Statement of Comprehensive Income in the year of retirement or disposal.

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

G Investment properties held for sale

Non-current assets (and disposal groups) classified as held for sale are measured at the lower of carrying amount and fair value (except for investment property measured using fair value model).

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

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

H Trade and other receivables

Trade receivables are recognised and carried at the lower of their original invoiced value and recoverable amount. Where the time value of money is material, receivables are carried at amortised cost. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments (more than 30 days overdue) are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through use of an allowance account, and the amount of the expected credit loss is recognised in the Consolidated Statement of Comprehensive Income. When a trade receivable is uncollectible, it is written off against the allowance account for trade receivables. Subsequent recoveries of amounts previously written off are credited in the Consolidated Statement of Comprehensive Income.

The Group loss allowance is based on expected credit loss as calculated using the “provision matrix” approach and a forward-looking component based on individual tenant profiles. The Group considers a financial asset to be in default when the borrower is unlikely to pay its credit obligations to the Group in full. The Group writes off trade receivables when there is no reasonable expectation of recovery.

I Cash and cash equivalents

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

J Borrowings and interest expense

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

K Accounting for derivative financial instruments and hedging activities

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

Amounts taken to equity are transferred to profit or loss when the hedged transaction affects profit or loss, such as when the hedged financial income or financial expenses are recognised.

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

L Service charge

The Group has appointed a managing agent to deal with the service charge at the investment properties and the Group is acting as an agent for the service charge and not a principal. As a result the Group recognises net service charge and void expenses in the Consolidated Statement of Comprehensive Income. Service charge that is payable by tenants is shown as income and a corresponding expense in the Consolidated Statement of Comprehensive Income.

M Other financial liabilities

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

3 FINANCIAL RISK MANAGEMENT

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

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

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

Market risk

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

i) Interest Rate risk

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

The bank borrowings as described in note 13 also expose the Group to cash flow interest rate risk. The Group’s policy is to manage its cash flow interest rate risk using interest rate swaps, in which the Group has agreed to exchange the difference between fixed and floating interest amounts based on a notional principal amount (see note 14). The Group has floating rate borrowings of £110,000,000. The full £110,000,000 of these borrowings has been fixed via an interest rate swap.

The bank borrowings are carried at amortised cost and the Group considers this to be a close approximation to fair value. The fair value of the bank borrowings is affected by changes in the market interest rate. The fair value of the interest rate swap is exposed to changes in the market interest rate as their fair value is calculated as the present value of the estimated future cash flows under the agreements. The accounting policy for recognising the fair value movements in the interest rate swaps is described in note 2.3.

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

The tables below set out the carrying amount of the Group’s financial instruments excluding the amortisation of borrowing costs as outlined in note 13. Bank borrowings have been fixed due to an interest rate swap and is detailed further in note 14:

At 31 December 2020	Fixed Rate	Variable Rate £	Interest Rate £
Cash and cash equivalents	-	9,383,371	0.000%
Bank borrowings	110,000,000	-	2.725%

At 31 December 2019	Fixed Rate	Variable Rate £	Interest Rate £
Cash and cash equivalents	-	6,475,619	0.020%
Bank borrowings	128,000,000	-	2.640%

At 31 December 2020, if market rate interest rates had been 100 basis points higher, which is deemed appropriate given historical movements in interest rates, with all other variables held constant, the profit for the year would have been £93,834 higher (2019: £115,244 lower) as a result of the higher interest income on cash and cash equivalents. Other Comprehensive Income and the Capital Reserve would have been £2,507,886 higher (2019: £3,851,254 higher) as a result of an increase in the fair value of the derivative designated as a cash flow hedge of floating rate borrowings.

At 31 December 2020, if market rate interest rates had been 100 basis points lower with all other variables held constant, the profit for the year would have been £93,834 lower (2019: £115,244 higher) as a result of the lower interest income on cash and cash equivalents. Other Comprehensive Income and the Capital Reserve would have been £2,519,221 lower (2019: £3,898,889 lower) as a result of a decrease in the fair value of the derivative designated as a cash flow hedge of floating rate borrowings.

ii)  Real estate risk

The Group has identified the following risks associated with the real estate portfolio. The risks following, in particular b and c and also credit risk have increased given the COVID-19 pandemic and the resultant effect on tenants’ ability to pay rent:

a)  The cost of any development schemes may increase if there are delays in the planning process. The Group uses advisers who are experts in the specific planning requirements in the scheme’s location in order to reduce the risks that may arise in the planning process.

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

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

Credit risk

Credit risk is the risk that a counterparty will be unable to meet a commitment that it has entered into with the Group. In the event of default by an occupational tenant, the Group will suffer a rental income shortfall and incur additional related costs. The Investment Manager regularly reviews reports produced by Dun and Bradstreet and other sources, including the IPD IRIS report, to be able to assess the credit worthiness of the Group’s tenants and aims to ensure that there are no excessive concentrations of credit risk and that the impact of default by a tenant is minimised. In addition to this, the terms of the Group’s bank borrowings require that the largest tenant accounts for less than 20% of the Group’s total rental income, that the five largest tenants account for less than 50% of the Group’s total rental income and that the ten largest tenants account for less than 75% of the Group’s total rental income. The maximum credit risk from the tenant arrears of the Group at the financial year end was £6,019,917 (2019: £2,599,862) as detailed in note 10. The Investment Manager also has a detailed process to identify the expected credit loss from tenants who are behind with rental payments.

This involves a review of every tenant who owes money with the Investment Manager using their own knowledge and communications with the tenant to assess whether a provision should be made. This resulted in the provision for bad debts increasing to £2.58 million at the year end (2019: £139,000).

With respect to credit risk arising from other financial assets of the Group, which comprise cash and cash equivalents, the Group’s exposure to credit risk arises from default of the counterparty bank with a maximum exposure equal to the carrying value of these instruments. As at 31 December 2020 £921,920 (2019: £3,393,849) was placed on deposit with The Royal Bank of Scotland plc (“RBS”), £7,749,473 (2019: £3,081,770) was held with Citibank and £711,978 (2019: £nil) was held with Barclays. The credit risk associated with the cash deposits placed with RBS is mitigated by virtue of the Group having a right to off-set the balance deposited against the amount borrowed from RBS should RBS be unable to return the deposits for any reason. Citibank is rated A-2 Stable by Standard & Poor’s and P-2 Stable by Moody’s. RBS is rated A-1 Negative by Standard & Poor’s and P-1 Positive by Moody’s. Barclays is rated A-1 Negative by Standard & Poor’s and P-1 Stable by Moody’s.

Liquidity risk

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

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

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

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

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

Financial Liabilities

		On demand		12 months	1 to 5 years			>5 years		Total
Year ended 31 December 2020		£		£	£			£		£
Interest-bearing loans		—		1,565,575	112,168,436			—		113,734,011
Interest rate swaps		—		1,431,925	1,789,906			—		3,221,831
Trade and other payables		4,986,275		26,068	104,271			2,632,853		7,749,467
Rental deposits due to tenants		—		736,793	521,194			334,673		1,592,660
		4,986,275		3,760,361	114,583,807			2,967,526		126,297,969

	On demand	12 months	1 to 5 years	>5 years	Total
Year ended 31 December 2019	£	£	£	£	£
Interest-bearing loans	—	20,387,418	115,371,691	—	135,759,109
Interest rate swaps	—	610,082	1,372,685	—	1,982,767
Trade and other payables	3,177,865	26,068	104,271	2,658,921	5,967,125
Rental deposits due to tenants	—	320,878	514,128	784,237	1,619,243
	3,177,865	21,344,446	117,362,775	3,443,158	145,328,244

Capital risk

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

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

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

The gearing ratios at 31 December 2020 and at 31 December 2019 were as follows:

	2020	2019
	£	£
Total borrowings (excluding unamortised arrangement fees)	110,000,000	128,000,000
Gross assets	459,639,079	505,766,623
Gearing ratio (must not exceed 65%)	23.93%	25.31%

The Group also monitors the Loan to Value ratio which is calculated as gross assets divided by gross borrowings less cash. As at 31 December 2020 this was 23.0% (2019: 24.6%).

Fair values

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

	Carrying Amount		Fair Value
	2020	2019	2020	2019
Financial Assets	£	£	£	£
Cash and cash equivalents	9,383,371	6,475,619	9,383,371	6,475,619
Trade and other receivables	10,802,197	4,388,390	10,802,197	4,388,390
Financial Liabilities Bank borrowings	109,542,823	127,316,886	113,000,998	130,066,813
Interest rate swaps	3,735,254	2,220,616	3,735,254	2,220,616
Trade and other payables	5,797,386	5,320,162	5,797,386	5,320,162

The fair value of trade receivables and payables are materially equivalent to their amortised cost.

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

The following methods and assumptions were used to estimate the fair value:

• Cash and cash equivalents, trade and other receivables and trade and other payables are the same as fair value due to the short-term maturities of these instruments.

• The fair value of bank borrowings is estimated by discounting future cash flows using rates currently available for debt on similar terms and remaining maturities. The fair value approximates their carrying values gross of unamortised transaction costs. This is considered as being valued at level 2 of the fair value hierarchy and has not changed level since 31 December 2019.

• The fair value of the interest rate swap contract is estimated by discounting expected future cash flows using current market interest rates and yield curve over the remaining term of the instrument. This is considered as being valued at level 2 of the fair value hierarchy and has not changed level since 31 December 2019. The definition of the valuation techniques are explained in the significant accounting judgements, estimates and assumptions is in the Annual Report.

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

Year ended 31 December 2020	Level 1	Level 2	Level 3	Total fair value
Interest rate swap	—	3,735,254	—	3,735,254
Year ended 31 December 2019	Level 1	Level 2	Level 3	Total fair value
Interest rate swap	—	2,220,616	—	2,220,616

Level 1 Quoted (unadjusted) market prices in active markets for identical assets or liabilities.

Level 2 Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable. Level 3 Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable.

Please see note 7 for details on the valuation of Investment properties.

4 FEES

Investment management fees

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 (“Alternative Investment Fund Manager”). On 10 December 2018, the Investment Manager contract was novated on the same commercial terms to Aberdeen Standard Fund Managers Limited.

Until 30 June 2019, under the terms of the IMA the Investment Manager was entitled to 0.75% of total assets up to £200 million; 0.70% of total assets between £200 million and £300 million; and 0.65% of total assets in excess of £300 million. From 1 July 2019, under the terms of the IMA the Investment Manager is entitled to 0.70% of total assets up to £500 million; and 0.60% of total assets in excess of £500 million. The total fees charged for the year amounted to £3,198,519 (2019: £3,492,880). The amount due and payable at the year end amounted to £779,737 excluding VAT (2019: £866,598 excluding VAT). In addition the Company paid the Investment Manager a sum of £131,000 (2019: £109,800) to participate in the Managers marketing programme and Investment Trust share plan.

Administration, secretarial fees

On 19 December 2003 Northern Trust International Fund Administration Services (Guernsey) Limited (“Northern Trust”) was appointed administrator, secretary and registrar to the Group. Northern Trust is entitled to an annual fee, payable quarterly in arrears, of £65,000. Northern Trust is also entitled to reimbursement of reasonable out of pocket expenses. Total fees and expenses charged for the year amounted to £65,000 (2019: £65,000). The amount due and payable at the year end amounted to £16,250 (2019: £16,250).

Valuer’s fee

Knight Frank LLP (“the Valuers”), external international real estate consultants, was appointed as valuers in respect of the assets comprising the property portfolio. The total valuation fees charged for the year amounted to £84,638 (2019: £97,668). The total valuation fee comprises a base fee for the ongoing quarterly valuation, and a one off fee on acquisition of an asset. The amount due and payable at the year end amounted to £18,602 excluding VAT (2019: £20,960 excluding VAT).

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

Auditor’s fee

At the year end date Deloitte LLP continued as independent auditor of the Group. The audit fees for the year amounted to £118,400 (2019: £81,850) and relate to audit services provided for the 2020 financial year. Deloitte LLP did not provide any non- audit services in the year (2019: nil).

5 FINANCE INCOME AND COSTS

	2020 £	2019 £
Interest income on cash and cash equivalents	3,896	15,856
Finance income	3,896	15,856
Interest expense on bank borrowings	2,479,388	2,986,775
Payments on interest rate swap	1,038,749	574,021
Amortisation of arrangement costs (see note 13)	225,937	217,484
Finance costs	3,744,074	3,778,280

Of the finance costs above, £339,797 of the interest expense on bank borrowings and £282,462 of payments on interest rate swaps were accruals at 31 December 2020 and included in Trade and other payables.

6 TAXATION

UK REIT Status

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

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

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

A reconciliation between the tax charge and the product of accounting profit multiplied by the applicable tax rate for the year ended 31 December 2020 and 2019 is as follows:

	2020 £	2019 £
Surplus before tax	(15,782,067)	16,144,131
Tax calculated at UK statutory corporate tax rate of 19% (2019: 19%)	(2,998,593)	3,067,385
UK REIT exemption on net income	(3,166,216)	(3,672,826)
Valuation (gain) in respect of investment properties not subject to tax	6,164,809	605,441
Current income tax charge	-	-

7 INVESTMENT PROPERTIES

	UK Industrial 2020 £	UK Office 2020 £	UK Retail 2020 £	UK Other 2020 £	Total 2020 £
Market value at 1 January	252,800,000	163,305,000	42,270,000	34,800,000	493,175,000
Purchase of investment properties	5,099	623,074	20,669,581	—	21,297,754
Capital expenditure on investment properties	727,680	4,051,295	168,853	—	4,947,828
Opening market value of disposed investment properties	(41,100,000)	(10,700,000)	(3,980,000)	—	(55,780,000)
Valuation loss from investment properties	(2,093,045)	(15,149,700)	(8,286,927)	(2,110,552)	(27,640,224)
Movement in lease incentives receivable	860,266	565,331	308,493	(39,448)	1,694,642
Market value at 31 December	211,200,000	142,695,000	51,150,000	32,650,000	437,695,000
Investment property recognised as held for sale	—	(4,300,000)	—	—	(4,300,000)
Market value net of held for sale at 31 December	211,200,000	138,395,000	51,150,000	32,650,000	433,395,000
Right of use asset recognised on leasehold properties	—	902,645	—	—	902,645
Adjustment for lease incentives	(2,499,310)	(2,209,756)	(609,940)	(566,264)	(5,885,270)
Carrying value at 31 December	208,700,690	137,087,889	50,540,060	32,083,736	428,412,375

	UK Industrial	UK Office	UK Retail	UK Other	Total
	2019	2019	2019	2019	2019
	£	£	£	£	£
Market value at 1 January	259,150,000	159,630,000	46,530,000	33,800,000	499,110,000
Purchase of investment properties	17,025,471	8,783,055	—	—	25,808,526
Capital expenditure on investment properties	2,455,684	2,172,669	—	—	4,628,353
Opening market value of disposed investment properties	(29,540,000)	(5,100,000)	—	—	(34,640,000)
Valuation loss from investment properties	3,274,144	(3,644,062)	(4,256,539)	1,012,621	(3,613,836)
Movement in lease incentives receivable	434,701	1,463,338	(3,461)	(12,621)	1,881,957
Market value at 31 December	252,800,000	163,305,000	42,270,000	34,800,000	493,175,000
Investment property recognised as held for sale	—	(10,700,000)	—	—	(10,700,000)
Market value net of held for sale at 31 December	252,800,000	152,605,000	42,270,000	34,800,000	482,475,000
Right of use asset recognised on leasehold properties	—	904,121	—	—	904,121
Adjustment for lease incentives	(1,999,983)	(2,616,679)	(301,447)	(605,713)	(5,523,822)
Carrying value at 31 December	250,800,017	150,892,442	41,968,553	34,194,287	477,855,299

The valuations were performed by Knight Frank LLP, accredited external valuers with recognised and relevant professional qualifications and recent experience of the location and category of the investment properties being valued. The valuation model in accordance with Royal Institute of Chartered Surveyors (‘RICS’) requirements on disclosure for Regulated Purpose Valuations has been applied (RICS Valuation – Professional Standards January 2014 published by the Royal Institution of Chartered Surveyors). These valuation models are consistent with the principles in IFRS 13. The market value provided by Knight Frank at the year end was £437,695,000 (2019: £493,175,000) however an adjustment has been made for lease incentives of £5,885,270 (2019: £5,523,822) that are already accounted for as an asset. In addition, as required under IFRS 16, a right of use asset of £902,645 has been recognised in respect of the present value of future ground rents. As required under IFRS 16 an amount of £902,645 has also been recognised as an obligation under finance leases in the balance sheet. Valuation gains and losses from investment properties are recognised in the Consolidated Statement of Comprehensive Income for the period and are attributable to changes in unrealised gains or losses relating to investment properties held at the end of the reporting period.

In the Consolidated Cash Flow Statement, proceeds from disposal of investment properties comprise:
	2020 £	2019 £
Opening market value of disposed investment properties	55,780,000	34,640,000
( Loss)/Profit on disposal of investment properties	(4,806,137)	427,304
Net proceeds from disposal of investment properties	50,973,863	35,067,304

Valuation methodology

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

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

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

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

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

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

• significant adjustments from the previous property valuation report;

• reviewing the individual valuations of each property;

• compliance with applicable standards and guidelines including those issued by RICS and the UKLA Listing Rules;

• reviewing the findings and any recommendations or statements made by the valuer;

• considering any further matters relating to the valuation of the properties.

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

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

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

• The fair value measurements at the end of the reporting period.

• The level of the fair value hierarchy (e.g. Level 3) within which the fair value measurements are categorised in their entirety.

• A description of the valuation techniques applied.

• Fair value measurements, quantitative information about the significant unobservable inputs used in the fair value measurement.

• The inputs used in the fair value measurement, including the ranges of rent charged to different units within the same building.

Country & Class	Fair Value £	Valuation Technique	Key Unobservable Input	Range (weighted average)
UK Industrial	211,200,000	Income Capitalisation	- Initial Yield	0.00% to 8.08% (5.54%)
Level 3			- Reversionary Yield	4.29% to 10.29% (6.26%)
			- Equivalent Yield	4.26% to 8.55% (6.21%)
			- Estimated rental value per sq ft	£2.75 to £8.50 (£5.70)
UK Office	142,695,000	Income Capitalisation	- Initial Yield	0.00% to 13.36% (5.24%)
Level 3			- Reversionary Yield	5.32% to 10.01% (7.66%)
			- Equivalent Yield	5.23% to 8.55% (7.11%)
			- Estimated rental value per sq ft	£10.25 to £111.00 (£25.54)
UK Retail	51,150,000	Income Capitalisation	- Initial Yield	4.79% to 8.49% (7.99%)
Level 3			- Reversionary Yield	5.12% to 7.84% (6.83%)
			- Equivalent Yield	5.63% to 8.05% (7.43%)
			- Estimated rental value per sq ft	£8.35 to £90.00 (£15.53)
UK Other	32,650,000	Income Capitalisation	- Initial Yield	4.91% to 6.89% (5.90%)
Level 3			- Reversionary Yield	5.03% to 6.90% (5.80%)
			- Equivalent Yield	5.01% to 6.91% (5.87%)
			- Estimated rental value per sq ft	£7.50 to £30.00 (£19.75)
	437,695,000

Descriptions and definitions

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

Estimated rental value (ERV)

The rent at which space could be let in the market conditions prevailing at the date of valuation.

Equivalent yield

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

Initial yield

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

Reversionary yield

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

The table below shows the ERV per annum, area per square foot, average ERV per square foot, initial yield and reversionary yield as at the Balance Sheet date.
	2020	2019
ERV p.a.	£32,180,024	£34,224,876
Area sq ft	3,825,017	4,102,486
Average ERV per sq ft	£8.41	£8.34
Initial Yield	5.8%	5.2%
Reversionary Yield	6.9%	6.7%
The table below presents the sensitivity of the valuation to changes in the most significant assumptions underlying the valuation of completed investment property. The Board believes these are reasonable sensitivities given historic movements in valuations.
	2020 £	2019 £
Increase in equivalent yield of 50 bps	(34,483,590)	(53,790,866)
Decrease of 5% in ERV	(17,437,618)	(23,968,000)

Below is a list of how the interrelationships in the sensitivity analysis above can be explained. In both cases outlined in the sensitivity table the estimated fair value would increase (decrease) if:

• The ERV is higher (lower)

• Void periods were shorter (longer)

• The occupancy rate was higher (lower)

• Rent free periods were shorter (longer)

• The capitalisation rates were lower (higher)

8 INVESTMENT PROPERTIES HELD FOR SALE

As at 31 December 2020, the Group was actively seeking a buyer for Interfleet House, Derby. The Group both exchanged contracts and completed this sale on 8 January 2021 for a price of £4,346,000.

As at 31 December 2019, the Group was actively seeking a buyer for Bourne House, Staines. The Group both exchanged contracts and completed this sale on 3 January 2020 for a price of £10,791,000.

9 INVESTMENT IN SUBSIDIARY UNDERTAKINGS

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

In 2015 the Group acquired 100% of the units in Standard Life Investments SLIPIT Unit Trust, (formerly Aviva Investors UK Real Estate Recovery II Unit

Trust) a Jersey Property Unit Trust. The acquisition included the entire issued share capital of a General Partner which held, through a Limited Partnership, a portfolio of 22 UK real estate assets. The transaction completed on 23 December 2015 and the Group has treated the acquisition as a Business Combination in accordance with IFRS 3.

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

• Standard Life Investments Property Holdings Limited, a company with limited liability incorporated in Guernsey, Channel Islands.

• Standard Life Investments (SLIPIT) Limited Partnership, a limited partnership established in England.

• Standard Life Investments SLIPIT (General Partner) Limited, a company with limited liability incorporated in England.

• Standard Life Investments SLIPIT (Nominee) Limited, a company with limited liability incorporated and domiciled in England.

• Hagley Road Limited, a company with limited liability incorporated in Jersey, Channel Islands.

10 TRADE AND OTHER RECEIVABLES

	2020 £	2019 £
Trade receivables	8,603,476	2,738,455
Less: provision for impairment of trade receivables	(2,583,559)	(138,593)
Trade receivables (net)	6,019,917	2,599,862
Rental deposits held on behalf of tenants	736,793	320,878
Other receivables	4,045,487	992,779
Total trade and other receivables	10,802,197	3,913,519

The increase in other receivables is predominantly due to monies receivable following the sale of the Industrial portfolio in December 2020 plus rental income amounts due from JLL following the change in process from May 2020 whereby JLL invoice and collect the rents.

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

	2020 £	2019 £
Opening balance	(138,593)	(99,395)
Charge for the year	(2,444,966)	(39,198)
Reversal of provision	—	—
Closing balance	(2,583,559)	(138,593)

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

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

Amounts are considered impaired when it becomes unlikely that the full value of a receivable will be recovered. Movement in the balance considered to be impaired has been included in other direct property costs in the Consolidated Statement of Comprehensive Income. As at 31 December 2019, trade receivables of £2,583,559 (2019: £138,593) were considered impaired and provided for.

If the provision for bad debts increased by £1 million then the Company’s earnings and net asset value would decrease by £1 million. If the provision for bad debts decreased by £1 million then the Company’s earnings and net asset value would increase by £1 million.

The ageing of these receivables is as follows:
	2020 £	2019 £
0 to 3 months	(252,550)	(118,416)
3 to 6 months	(705,740)	(1,427)
Over 6 months	(1,625,269)	(18,750)
Closing balance	(2,583,559)	(138,593)
As of 31 December 2020, trade receivables of £6,019,917 (2019: £2,599,862) were less than 3 months past due but considered not impaired.

11 CASH AND CASH EQUIVALENTS

	2020	2019
	£	£
Cash held at bank	8,461,451	3,081,770
Cash held on deposit with RBS	921,920	3,393,849
	9,383,371	6,475,619
Cash held at banks earns interest at floating rates based on daily bank deposit rates. Deposits are made for varying periods of between one day and three months, depending on the immediate cash requirements of the Group, and earn interest at the applicable short-term deposit rates.

12 TRADE AND OTHER PAYABLES

	2020	2019
	£	£
Trade and other payables	3,302,081	2,796,799
VAT payable	1,684,195	381,068
Deferred rental income	7,372,985	5,733,327
Rental deposits due to tenants	736,793	320,878
	13,096,054	9,232,072
Trade payables are non-interest bearing and are normally settled on 30-day terms.

13 BANK BORROWINGS

	2020	2019
	£	£
Loan facility and drawn down outstanding balance	110,000,000	130,000,000
Opening carrying value	127,316,886	129,249,402
Borrowings during the year	27,000,000	1,000,000
Repayment of RCF	(45,000,000)	(3,000,000)
Arrangements costs of additional facility	—	(99,997)
Amortisation of arrangement costs	225,937	167,481
Closing carrying value	109,542,823	127,316,886

On 28 April 2016 the Company entered into an agreement to extend £145 million of its existing £155 million debt facility with RBS. The debt facility consisted of a £110 million seven year term loan facility and a £35 million five year RCF which was extended by two years in May 2018 with the margin on the RCF now at LIBOR plus 1.45%. Interest is payable on the Term Loan at 3 month LIBOR plus 1.375% which equates to a fixed rate of 2.725% on the Term Loan.

In June 2019, the Company also entered into a new arrangement with the Royal Bank of Scotland International Limited (RBSI) to extend its Revolving Credit Facility (RCF) by £20 million. This facility has a margin of 1.60% above LIBOR. As at 31 December 2020 none of the RCF was drawn (2019: £20 million).

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

	2020 £	2019 £
Loan amount	110,000,000	128,000,000
Cash	(9,383,371)	(6,475,619)
	100,616,629	121,524,381
Investment property valuation	437,695,000	493,175,000
LTV percentage	23.0%	24.6%

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

• that the net rental income is not less than 150% of the finance costs for any three month period;

• that the largest single asset accounts for less than 15% of the Gross Secured Asset Value;

• that the largest ten assets accounts for less than 75% of the Gross Secured Asset Value;

• that sector weightings are restricted to 55%, 45% and 55% for the Office, Retail and Industrial sectors respectively;

• that the largest tenant accounts for less than 20% of the Group’s annual net rental income;

• that the five largest tenants account for less than 50% of the Group’s annual net rental income;

• that the ten largest tenants account for less than 75% of the Group’s annual net rental income.

During the year, the Group complied with its obligations and loan covenants under its loan agreement.

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

14  INTEREST RATE SWAP

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

The Group has adopted the "interest rate benchmark reform" amendments in the current financial year. These allow the Group to continue hedge accounting for its benchmark interest rate exposure during the period of uncertainty arising from interest rate benchmark reforms. The Group will continue to apply these amendments until the uncertainty arising from interest rate benchmark reform is no longer present with respect to the timing and amount of the interest rate benchmark cash flows.

None of the Group's current LIBOR-linked contracts include fallback provisions for a cessation of the referenced benchmark interest rate. The Group will look to implement fallback language for different instruments and IBORs when appropriate.

The Group has only one hedge instruments as noted above, for which the Group has applied the "interest rate benchmark reform" amendments.

	2020 £	2019 £
Opening fair value of interest rate swaps at 1 January	(2,220,616)	(803,963)
Valuation (loss)/gain on interest rate swaps	(1,514,638)	(1,416,653)
Closing fair value of interest rate swaps at 31 December	(3,735,254)	(2,220,616)

The split of the swap liability is listed below.

	2020 £	2019 £
Current liabilities	(1,472,387)	(644,465)
Non-current liabilities	(2,262,867)	(1,576,151)
Interest rate swap with a start date of 28 April 2016 maturing on 27 April 2023	(3,735,254)	(2,220,616)

Please see the Annual Report for further EPRA disclosures.

15  OBLIGATIONS UNDER FINANCE LEASES

	Minimum lease		Present value of minimum lease
	payments	Interest	payments
	2020	2020	2020
	£	£	£
Less than one year	26,068	(24,552)	1,516
Between two and five years	104,271	(97,784)	6,487
More than five years	2,632,853	(1,738,211)	894,642
Total	2,763,192	(1,860,547)	902,645

	Minimum lease		Present value of minimum lease
	payments	Interest	payments
	2019	2019	2019
	£	£	£
Less than one year	26,068	(24,592)	1,476
Between two and five years	104,271	(97,956)	6,316
More than five years	2,658,921	(1,762,591)	896,329
Total	2,789,260	(1,885,139)	904,121

The above table shows the present value of future lease payments in relation to the ground lease payable at Hagley Road, Birmingham as required under IFRS 16. A corresponding asset has been recognised and is part of Investment properties as shown in note 7.

16  LEASE ANALYSIS

The Group has granted leases on its property portfolio. This property portfolio as at 31 December 2020 had an average lease expiry of six years and two months. Leases include clauses to enable periodic upward revision of the rental charge according to prevailing market conditions. Some leases contain options to break before the end of the lease term.

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

	2020 £	2019 £
Within one year	26,247,932	25,806,303
After one year, but not more than five years	98,059,956	79,140,128
More than five years	77,593,168	94,344,918
Total	201,901,056	199,291,349

The largest single tenant at the year end accounts for 5.6% (2019: 4.5%) of the current annual passing rent.

17    SHARE CAPITAL

Under the Company’s Articles of Incorporation the Company may issue an unlimited number of ordinary shares of 1 pence each, subject to issuance limits set at the AGM each year. As at 31 December 2020 there were 404,316,422 ordinary shares of shares rank equally for dividends and distributions and carry one vote each. There are no restrictions concerning the transfer of ordinary shares in the Company, no special rights with regard to control attached to the ordinary shares, no agreements between holders of ordinary shares regarding their transfer known to the Company and no agreement  which the Company is party to that affects its control following a takeover bid.

In February 2020 the Company issued a further 1 million shares raising £952,800 after costs.

Allotted, called up and fully paid:

	2020 £	2019 £
Opening balance	227,431,057	227,431,057
Shares issued	960,000	-
Issue costs associated with new ordinary shares	(7,200)	-
Closing balance	228,383,857	227,431,057

Treasury Shares

In November 2020, the Company undertook a share buyback programme at various levels of discount to the prevailing NAV. As at 31 December 2020 2,548,997 shares had been bought back at a cost of £1,450,787 after costs and are included in the Treasury share reserve.

	2020 £	2019 £
Opening balance	-	-
Bought back during the year	1,450,787	-
Closing balance	1,450,787	-

The number of shares in issue as at 31 December 2020/2019 is as follows:

	2020 Number of shares	2019 Number of shares
Opening balance	405,865,419	405,865,419
Issued during the year	1,000,000	-
Bought back during the year and put into Treasury	(2,548,997)	-
Closing balance	404,316,422	405,865,419

18  RESERVES

The detailed movement of the below reserves for the years to 31 December 2020 and 31 December 2019 can be found in the Consolidated Statement of Changes in Equity.

Retained earnings

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

Capital reserves

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

Other distributable reserves

This reserve represents the share premium raised on launch of the Company which was subsequently converted to a distributable reserve by special resolution dated 4 December 2003.

19  EARNINGS PER SHARE

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

The earnings per share for the year is set out in the table below. In addition one of the key metrics the Board considers is dividend cover.

This is calculated by dividing the net revenue earnings in the year (surplus for the year net of tax excluding all capital items and the swaps breakage costs) divided by the dividends payable in relation to the financial year. For 2020 this equated to a figure of 108% (2019: 100%).

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

	2020 £	2019 £
Surplus for the year net of tax	(15,782,067)	16,144,131
	2020 £	2019 £
Weighted average number of ordinary shares outstanding during the year	406,650,268	405,865,419
Earnings per ordinary share (p)	(3.88)	3.98
Profit for the year excluding capital items	16,664,294	19,330,662
EPRA earnings per share (p)	4.10	4.76

20  DIVIDENDS AND PROPERTY INCOME DISTRIBUTION GROSS OF INCOME TAX

Non Property Income Distributions		2020 £	2019 £
0.561p per ordinary share paid in March 2020 relating to the quarter ending 31 December 2019 (2019: 0.125p)		2,284,011	507,333
0.238p per ordinary share paid in May 2020 relating to the quarter ending 31 March 2020 (2019: nil)		968,340	1,923,802
Property Income Distributions
0.629p per ordinary share paid in March 2020 relating to the quarter ending 31 December 2019 (2019: 1.065p)		2,557,687	4,322,467
0.952p per ordinary share paid in May 2020 relating to the quarter ending 31 March 2020 (2019: 1.19p)		3,873,359	4,829,798
0.714p per ordinary share paid in August 2020 relating to the quarter ending 30 June 2020 (2019: 1.19p)		2,905,019	4,829,798
0.714p per ordinary share paid in November 2020 relating to the quarter ending 30 September 2020 (2019: 0.716p)		2,905,019	2,905,996
		15,493,435	19,319,194

On 26 Feb 2021 a dividend in respect of the quarter to 31 December 2020 of 0.714 pence per share was paid wholly as a property income dividend.

21   RECONCILIATION OF CONSOLIDATED NAV TO PUBLISHED NAV

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

	2020	2019
Number of ordinary shares at the reporting date	404,316,422	405,865,419
	2020 £	2019 £
Total equity per audited consolidated financial statements	331,506,437	364,794,564
NAV per share (p)	82.0	89.9

22  RELATED PARTY DISCLOSURES

Directors’ remuneration

The Directors of the Company are deemed as key management personnel and received fees for their services. Further details are provided in the Directors’ Total fees for the year were £236,953 (2019: £227,276) none of which remained payable at the year end (2019: nil).

Aberdeen Standard Fund Managers Limited, as the Manager of the Group from 10 December 2018, (previously Standard Life Investments (Corporate Funds) Limited), received fees for their services as investment managers. Further details are provided in note 4.

	2020	2019
Robert Peto	30,077	44,000
Sally-Ann Farnon	-	17,850
Huw Evans	36,000	35,000
Mike Balfour James Clifton-Brown	40,000 39,638	37,000 35,000
Jill May	36,000	28,135
Sarah Slater Employers national insurance contributions	36,000 18,737	3,455 16,276
	236,452	216,716
Directors expenses	501	10,560
	236,953	227,276

23  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.

24  EVENTS AFTER THE BALANCE SHEET DATE

On 8 January 2021, the Company completed the sale of Interfleet House, Derby for £4.30m.

On 26 Feb 2021 a dividend in respect of the quarter to 31 December 2020 of 0.714 pence per share was paid wholly as a property income dividend.

On 19 March 2021, the Company completed the sale of Valley Road, Bradford for £2.65m.

On 26 March 2021 the Company completed the sale of Persimmon House, Dartford for £3.1m.

Up to 23 April 2021 the Company bought back a further 7.4m shares for £4.5m.

On 20 April 2021 a fifth interim dividend of 0.381p per share was declared payable on 18 May 2021.

This Annual Financial Report announcement is not the Company's statutory accounts for the year ended 31 December 2020. The statutory accounts for the year ended 31 December 2020 received an audit report which was unqualified.

The Annual Report will be posted to shareholders in May 2021 and will be available by download from the Company's webpage ( www.slipit.co.uk ).

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

All enquiries to:

The Company Secretary
Northern Trust International Fund Administration Services (Guernsey) Limited
Trafalgar Court
Les Banques
St Peter Port
Guernsey
GY1 3QL

Tel: [phone]
Fax: [phone]

For further information:-

Jason Baggaley – Real Estate Fund Manager, Aberdeen Standard Investments
Tel:  [phone] or [e-mail]

Oli Lord – Deputy Fund Manager, Aberdeen Standard Investments
Tel: [phone] or [e-mail]

Graeme McDonald - Senior Fund Control Manager, Aberdeen Standard Investments
Tel: [phone] or [e-mail]