STANDARD LIFE INVESTMENTS PROPERTY
INCOME TRUST
ANNUAL FINANCIAL REPORT IN RESPECT OF
THE YEAR ENDED 31 DECEMBER 2015
Strategic Report: Financial
Highlights
- The company has grown by over 70% in the year with
NAV now standing at £312.8m (2014: £184.4m) driven by portfolio
capital growth, NAV accretive share issuance and successful asset
management initiatives;
- NAV total return of 15.5% and share price total
return of 15.5% in the year, both outperforming the FTSE REIT Index
total return of 10.6% and FTSE All Share Index of 1.0%;
- NAV accretive share issuance of £110m in the year
the proceeds of which have been timeously invested;
- In order to help finance the purchase of the
portfolio of assets described below, the Company increased its
borrowing facilities from £84.4million to £139.4million in the form
of an additional term loan of £40.6million and a revolving credit
facility of £14.4million. As at 31 December
2015 this resulted in a loan to value of 28.1% (31 Dec 2014 – 29.2%) and a weighted average
interest rate on loan facilities as at 31
December 2015 of 2.7% (31 Dec
2014 – 3.66%);
- In the absence of unforeseen circumstances it is
the intention of the Company to increase the annual dividend in
2016 to 4.76p, an increase of 2.5%. This equates to a yield of 5.5%
based on the share price as at 31 March
2016 compared to the FTSE All-Share REIT Index of 3.3% and
the FTSE All-Share Index of 3.8% at the same date;
- Ongoing charges of 1.1% as at 31 December 2015 (2014: 1.6%) underlining the
benefits of the significant rise in the Company’s NAV in the year
and strong cost control.
Property Highlights
- As at 31 December
2015, the portfolio was valued at £452m;
- Portfolio total return for the year of 13.1%, just
ahead of the IPD Quarterly version of Monthly Index total return of
13.0% .The standing portfolio (assets held throughout the period)
had a total return of 14.7% against a benchmark return of
13.3%;
- Acquired £217m of assets in the year, including a
portfolio of 22 assets for £165m in December
2015 which complemented the existing portfolio, will
strengthen dividend cover and provide a number of asset management
opportunities;
- Sales totalling £55m in the year undertaken to
realise profits as well as remove future underperformance risk from
the portfolio;
- A number of successful asset management
initiatives, contributing to income and capital values, completed
during the year including:
- five new lettings completed during the year securing £0.8m
pa of new rent
- nine lease extensions agreed with existing tenants securing
£2.2m pa
- Successful lease renewals and lettings at White Bear
Yard, an office investment in London which is the Company’s largest asset,
to drive performance
- Multi let industrial estate in Aberdeen fully let at
year end with two large lettings for ten years to the Scottish
Ministers and CCF adding to income security.
- Void rate of 1.1% at 31
December 2015 (1.4% in 2014), significantly below the
benchmark figure of 8.4%;
- Continuing strong rent collection rates of 100%
within 28 days highlighting the continued strength of tenant
covenants and the Investment Manager’s credit management process
for rent collection.
| Capital Values &
Gearing |
31 December
2015 |
31 December
2014 |
% Change |
| Total assets (£m) |
467.3 |
278.7 |
67.7 |
| Net asset value per share (p) |
82.2 |
75.5 |
8.9 |
| Ordinary Share Price (p) |
84.5 |
78.3 |
7.9 |
| Premium/(Discount) to net asset
value (%) |
2.8 |
3.7 |
|
| Loan to Value* |
28.1 |
29.2 |
|
|
|
|
|
|
|
|
|
| Total Return |
1 year %
return |
3 year %
return |
5 year %
return |
| NAV** |
15.5 |
78.1 |
84.8 |
| Share Price** |
15.5 |
77.3 |
84.3 |
| FTSE Real Estate Investment Trusts
Index |
10.6 |
63.6 |
94.8 |
| FTSE All-Share Index |
1.0 |
23.4 |
33.8 |
Property Returns & Statistics (%) |
|
Year ended
31 December
2015 |
Year ended
31 December
2014 |
| Property income return |
|
6.1 |
7.5 |
| IPD property income monthly
index |
|
4.9 |
5.6 |
| Property total return |
|
13.1 |
18.0 |
| IPD property total return monthly
index |
|
13.0 |
17.9 |
| Void rate |
|
1.1 |
1.4 |
|
|
|
|
| Earnings & Dividends |
|
31 December
2015 |
31 December
2014 |
| Dividends declared per ordinary
share (p) |
|
4.644 |
4.616 |
| Dividend Yield (%)*** |
|
5.5 |
5.9 |
| FTSE Real Estate Investment Trusts
Index Yield (%) |
|
3.0 |
3.0 |
| FTSE All-Share Index Yield (%) |
|
3.7 |
3.4 |
| Ongoing Charges**** |
|
|
|
| As a % of average net assets
including direct property cost |
|
1.5 |
2.3 |
| As a % of
average net assets excluding direct property cost |
|
1.1 |
1.6 |
* Calculated as bank borrowings less all cash as a percentage of
the open market value of the property portfolio as at the end of
each year.
** Assumes re-investment of dividends excluding transaction
costs.
*** Based on an annual dividend of 4.644p and the share price at 31
December.
**** Calculated as investment manager fees, auditor’s fees,
directors’ fees and other administrative expenses divided by the
average NAV for the year.
Sources: Standard Life Investments, Investment Property Databank
(“IPD”).
Strategic Report: Chairman’s
Statement
In what has been a transformational year, I have much pleasure
in reporting that the net asset value of your Company grew by 70%
in its first full year as a REIT. This growth was achieved through
the issue of over £110million of shares in the year to fund
acquisitions combined with continued growth in the property
portfolio, which comfortably beat its benchmark over the 12 month
period. The Company has also announced an increase in its dividend
for 2016.
Property Portfolio
In December 2015, the Company
announced that it had acquired a portfolio of 22 assets for £165
million funded through a mixture of equity issuance, debt and
existing cash resources. The successful acquisition of this
portfolio further diversifies the sector, tenant and regional
exposure of the Company, offers significant asset management
opportunities to create further value and will enhance dividend
cover going forward. In addition to this, the Company acquired a
further 9 properties in the year for £49.5million and disposed of
10 properties for a total of £58.7million. As a result of this
activity the portfolio is now valued at £452million, an increase of
£182million in the year. Further details on the portfolio can be
found in the Investment Manager’s report.
Share Issuance
As part of the portfolio acquisition above, the Company issued
shares to the value of £75.7million at a premium to NAV. In
addition, in the first half of the year, the Company issued shares
to the value of £34.8million at a minimum premium to NAV of 5%, all
of which was efficiently invested into the portfolio to help
generate positive returns and minimise cash drag. The share
issuance programme the Company has undertaken has helped the
Company grow significantly in the year, boosting the liquidity of
the Company’s shares and resulting in the ongoing charges of the
Company falling from 1.6% at the end of December 2014 to 1.1% at the end of 2015 with a
further fall expected in 2016.
Performance
The Company has delivered both strong NAV and share price
performance over the year. The NAV total return for the year was
15.5%, driven by strong capital growth in the property portfolio.
The share price total return was 15.5% and the Company’s shares
continued to trade at a premium to NAV of 2.8% as at 31 December 2015. Both the NAV and share price
total return outperformed the FTSE All-Share REIT index total
return of 10.6% and the FTSE All-Share Index of 1.0%.
Debt
In order to help fund the acquisition of the portfolio mentioned
above the Company restructured its borrowings with RBS in
December 2015. The Company increased
its borrowing facilities from £84.4million to £139.4million. The
additional borrowing was in the form of an additional term loan of
£40.6million and a revolving credit facility (“RCF”) of
£14.4million (with the potential to draw a further £15.6million of
the RCF) all of which is due to expire in June 2017. As at 31 December the loan to value
ratio (assuming all cash is placed with RBS as an offset to the
loan balance) was 28.1%. The bank covenant level is 65 %.
The Company is in advanced negotiations to refinance all its
existing loan facilities on favourable terms and expects to make a
further announcement on this shortly.
Dividends
The Company paid dividends totalling 4.644p relating to the 2015
financial year. Subsequent to the acquisition of the portfolio
described above, which should boost dividend cover going forward in
the absence of unforeseen circumstances, the Board announced their
intention to increase the dividend by 2.5% in 2016 to four
quarterly payments of 1.19p. Based on the share price as at
31 March 2016 this equates to a yield
of 5.5% which compares favourably to the yield on both the FTSE All
Share REIT Index of 3.3% and the FTSE All-Share Index of 3.8% at
the same date.
Board Changes
As announced in the Interim Report it is my intention to stand
down from the Board at the AGM in June
2016, to be replaced by Robert
Peto. I am also pleased to report that, subsequent to the
year end, the Company has appointed Mike
Balfour as a new director. He was previously Chief Executive
Officer of Thomas Miller Investment Management and has a wealth of
experience in investment management and closed ended funds.
Base Erosion and Profit Shifting
In early October 2015, the OECD
published guidance relating to base erosion and profit shifting
(“BEPS”). In light of this guidance, the recent budget introduced
changes to the rules on interest deductibility for tax purposes
which will come into force in 2017. It is too early to be
definitive as to the impact, if any, that this change will have on
the Company given its REIT status. However, the Company and its
advisers will continue to closely monitor the situation.
Outlook
The UK economy is expected to continue to grow, although at
below trend levels, despite elevated risks both at home and abroad.
Occupier markets remain relatively strong which should maintain
rental growth momentum over the next few years, although there are
signs of some occupiers putting decisions on hold pending greater
certainty on the outcome of the EU referendum. However, given the
fall in yields for real estate in recent years, which is not
expected to continue, and the recent 1% stamp duty rise in the
budget, it is anticipated that commercial property returns will
moderate with total returns being driven by income.
Against this background, the Company’s portfolio is well
positioned to continue to grow. The portfolio acquisition in
December 2015 increased the scale and
diversity of the portfolio and will give rise to further asset
management opportunities which will be crucial in an environment
where yield compression is limited. Importantly, the new portfolio
should also boost income generation at a time when income is
becoming the main driver of performance. Combined with the upcoming
refinancing of the Company’s debt facilities, which should generate
significant interest savings, your Company is in a strong position
for the future.
Richard Barfield
Chairman
18 April 2016
Strategic Report: Strategic
Overview
Objective
The objective of the Company is to provide shareholders with an
attractive level of income together with the prospect of income and
capital growth.
Investment Policy and Business
Model
The Board intends to achieve the investment objective by
investing in a diversified portfolio of UK commercial properties.
The majority of the portfolio will be invested in direct holdings
within the three main commercial property sectors of retail, office
and industrial although the Company may also invest in other
commercial property such as hotels, nursing homes and student
housing. Investment in property development and investment in
co-investment vehicles, where there is more than one investor, is
permitted up to a maximum of 10% of the property portfolio.
In order to manage risk, without compromising flexibility, the
Board applies the following restrictions to the property portfolio,
in normal market conditions:
- No property will be greater by value than 15% of
total assets.
- No tenant (excluding the Government) will be
responsible for more than 20% of the Company’s rent roll.
- Gearing, calculated as borrowings as a percentage
of gross assets, will not exceed 65%. The Board’s current intention
is that the Company’s loan to value ratio (calculated as borrowings
less all cash as a proportion of property portfolio valuation) will
not exceed 45%.
As part of its strategy, the Board has contractually delegated
the management of the property portfolio, and other services, to
Standard Life Investments (Corporate Funds) Limited (‘Investment
Manager’).
Strategy
During the year, the Board reassessed its strategy, with the
help of its Investment Manager and other advisers.
The overall intention is to continue to distribute an attractive
income return alongside growth in the NAV and a good overall total
return.
At property level, it is intended that the Company remains
primarily invested in the commercial sector, while keeping a
watching brief on other classes such as student accommodation and
care homes. The Company is principally invested in office,
industrial and retail properties and intends to remain so. In all
sectors, poor secondary and tertiary locations are regarded as high
risk and will be avoided.
The Board’s preference is to buy into good but not necessarily
prime locations, where it perceives there will be good continuing
tenant demand, and to seek out properties where the asset
management skills within the Investment Manager can be used to
beneficial effect. The Board will continue to have very careful
regard to tenant profiles.
The Board continues to seek out opportunities for further growth
in the Company and achieved this during 2015 by raising an
additional £110m of capital through new share issues, as detailed
in the Chairman’s Statement.
The maintenance of a tax efficient structure was achieved by
converting the Company to a UK REIT on 1
January 2015.
The Board
The Board currently consists of a non-executive Chairman and
four non-executive Directors. There is a commitment to achieve the
proper levels of diversity. At the date of this report, the Board
consisted of one female and four male Directors. The Company does
not have any employees.
Key Performance Indicators
The Board meets quarterly and at each meeting reviews
performance against a number of key measures:
- Property income and total return against the
Quarterly Version of the Investment Property Databank Balanced
Monthly Funds Index (‘the Index’).
The Index provides a benchmark for the performance of the
Company’s property portfolio and enables the Board to assess how
the portfolio is performing relative to the market. A comparison is
made of the Company’s property returns against the Index over a
variety of time periods (quarter, annual, three years and five
years)
- Property voids
Property voids are unlet properties. The Board reviews the level
of property voids within the Company’s portfolio on a quarterly
basis and compares the level to the market average, as measured by
the Investment Property Databank. The Board seeks to ensure that
proper priority is being given by the Investment Manager to
replacing the Company’s income.
- Rent collection dates
The Board assesses rent collection by reviewing the percentage
of rents collected within 21 days of each quarter end.
- Net asset value total return
The net asset value total return reflects both the net asset
value growth of the Company and also the dividends paid to
shareholders. The Board regards this as the best overall measure of
value delivered to shareholders. The Board assesses the net asset
value total return of the Company over various time periods
(quarter, annual, three years, five years) and compares the
Company’s returns to those of its peer group of listed,
closed-ended property investment companies.
- Premium or discount of the share price to net
asset value
The Board closely monitors the premium or discount of the share
price to the net asset value and believes that a key driver to the
level of the premium or discount is the Company’s long term
investment performance. However, there can be short term volatility
in the premium or discount and the Board takes powers at each AGM
to enable it to issue or buy back shares with a view to limiting
this volatility.
- Dividend per share and dividend yield
A key objective of the Company is to provide an attractive,
sustainable level of income to shareholders and the Board reviews,
at each Board meeting, the level of dividend per share and the
dividend yield, in conjunction with detailed financial forecasts,
to ensure that this objective is being met and is sustainable.
The Board considers the performance measures both over various
time periods and against similar funds.
A record of these measures are disclosed in the Financial
Highlights, Chairman’s Statement and Investment Manager’s
Report.
Principal Risks and Uncertainties
The Company’s assets consist of direct investments in UK
commercial property. Its principal risks are therefore related to
the commercial property market in general, but also the particular
circumstances of the properties in which it is invested, and their
tenants. The Board and Investment Manager seek to mitigate these
risks through a strong initial due diligence process, continual
review of the portfolio and active asset management initiatives.
All of the properties in the portfolio are insured, providing
protection against risks to the properties and also protection in
case of injury to third parties in relation to the properties.
The Board has also identified a number of other specific risks
that are reviewed at each Board meeting. These are as follows:
- The Company and its objectives become unattractive
to investors. This is mitigated through regular contact with
shareholders, a regular review of share price performance and the
level of the discount or premium at which the shares trade to net
asset value and regular meetings with the Company’s broker to
discuss these points and address any issues that arise.
- Poor selection of new properties for investment. A
comprehensive and documented initial due diligence process, which
will filter out properties that do not fit required criteria, is
carried out by the Investment Manager. Where appropriate, this is
followed by detailed review and challenge by the Board prior to a
decision being made to proceed with a purchase. This process is
designed to mitigate the risk of poor property selection.
- Tenant failure or inability to let property. Due
diligence work on potential tenants is undertaken before entering
into new lease arrangements. In addition, tenants are kept under
constant review through regular contact and various reports both
from the managing agents and the Investment Manager’s own reporting
process. Contingency plans are put in place at units that have
tenants that are believed to be in financial trouble. The Company
subscribes to the Investment Property Databank Iris Report which
updates the credit and risk ranking of the tenants and income
stream, and compares it to the rest of the UK real estate
market.
- Breach of loan covenants. The Investment Manager
monitors the loan covenants on a regular basis and provides a
monthly certificate to the bank confirming compliance with the
covenants. Compliance is also reviewed by the Board each quarter
and there is regular dialogue between the Investment Manager and
the bank on Company activity and performance.
- Loss on financial instruments. The Company has
entered into a number of interest rate swap arrangements. These
swap instruments are valued and monitored on a monthly basis by the
counterparty bank. The Investment Manager checks the valuations of
the swap instruments internally to ensure they are accurate. In
addition, the credit rating of the bank that the swaps are taken
out with is assessed regularly.
Other risks faced by the Company include the following:
- Strategic – incorrect strategy, including sector
and property allocation and use of gearing, could all lead to poor
return for shareholders.
- Tax efficiency – the structure of the Company or
changes to legislation could result in the Company no longer being
a tax efficient investment vehicle for shareholders.
- Regulatory – breach of regulatory rules could lead
to the suspension of the Company’s Stock Exchange Listing,
financial penalties or a qualified audit report.
- Financial – inadequate controls by the Investment
Manager or third party service providers could lead to
misappropriation of assets. Inappropriate accounting policies or
failure to comply with accounting standards could lead to
misreporting or breaches of regulations.
- Operational – failure of the Investment Manager’s
accounting systems or disruption to the Investment Manager’s
business, or that of third party service providers, could lead to
an inability to provide accurate reporting and monitoring, leading
to loss of shareholder confidence.
- Economic – inflation or deflation, economic
recessions and movements in interest rates could affect property
valuations and also bank borrowings.
- Geopolitical – geopolitical instability or change
could have an adverse affect on UK real estate and stock
markets.
The implementation of AIFMD during 2014 and the conversion of
the Company to a UK REIT on 1 January
2015 have introduced additional regulatory risks to the
Company in the form of ensuring compliance with the respective
regulations. In relation to AIFMD, the Board receives regular
reporting from the AIFM and the depositary to ensure both are
meeting their regulatory responsibilities in respect of the
Company. In relation to UK REIT status, the Board has put in place
a system of regular reporting to ensure that the requirements of
the UK REIT regime are being adequately monitored and fully
complied with.
The Board seeks to mitigate and manage all risks through
continual review, policy setting and enforcement of contractual
obligations. It also regularly monitors the investment environment
and the management of the Company’s property portfolio, levels of
gearing and the overall structure of the Company.
Social, Community and Employee
Responsibilities
The Company has no direct social, community or employee
responsibilities. The Company has no employees and accordingly no
requirement to separately report in this area as the management of
the portfolio has been delegated to the Investment Manager. In
light of the nature of the Company’s business there are no relevant
human rights issues and there is thus no requirement for a human
rights policy. The Board does, however, closely monitor the
policies of its suppliers to ensure that proper provision is in
place.
Environmental Policy
The Investment Manager acquires and manages properties on behalf
of the Company. It is recognised that these activities have both
direct and indirect environmental impacts.
The Board has endorsed the Investment Manager’s own
environmental policy which is to work in partnership with
contractors, suppliers, tenants and consultants to minimise those
impacts, seeking continuous improvements in environmental
performance and conducting regular reviews.
The Investment Manager’s policy focuses on energy conservation,
mitigating greenhouse gas (‘GHG’) emissions, maximising waste
recycling and water conservation.
As an investment company, the Company’s own direct environmental
impact is minimal and GHG emissions are therefore negligible.
Information on the GHG emissions in relation to the Company’s real
estate portfolio is disclosed in the Standard Life Investments
annual Sustainable Real Estate Investment report, a copy of which
can be obtained on request from the Investment Manager. The Company
was awarded Green Star ranking from the Global Real Estate
Sustainability Benchmark for 2015.
Viability Statement
The Board considers viability as part of its ongoing programme
of monitoring risk. The Board considers five years to be a
reasonable time horizon over which to review the continuing
viability of the Company, although it does have regard to viability
over the longer term, in particular to key points outside this time
frame, such as the due dates for the repayment of long-term
debt.
The Board has considered the nature of the Company’s assets and
liabilities and associated cash flows and has determined that five
years is the maximum timescale over which the performance of the
Company can be forecast with a material degree of accuracy and so
is an appropriate period over which to consider the Company’s
viability.
In assessing the Company’s viability, the Board has carried out
thorough reviews of the following:
- Detailed NAV, cash resources and income forecasts,
prepared by the Investment Manager, for a five year period under
both normal and stressed conditions;
- The Company’s ability to pay its operational
expenses, bank interest and dividends over a five year period;
- Future debt repayment dates and debt covenants, in
particular those relating to LTV and interest cover; and
- The valuation and liquidity of the Company’s property
portfolio, Investment Manager’s portfolio strategy for the future
and the market outlook.
The Board has also carried out a robust assessment of the
principal risks faced by the Company. The Board takes any potential
risks to the ongoing success of the Company and its ability to
perform, including the refinancing of its current debt facility,
very seriously and works hard to ensure that risks are kept to a
minimum at all times.
Based on the results of the analysis outlined above, the Board
has a reasonable expectation that the Company will be able to
continue in operation and meet its liabilities as they fall due
over the five year period of its assessment.
Approval of Strategic Report
The Strategic Report comprises the Financial Highlights,
Chairman’s Statement, Strategic Overview and Investment Manager’s
Report. The Strategic Report was approved by the Board on
18 April 2016 and signed on its
behalf by:
Richard Barfield
Chairman
18 April 2016
Strategic Report: Investment Manager’s
Report
UK Real Estate Market
Despite recent market volatility the UK economic fundamentals
remain intact, providing a solid base for real estate occupier
demand. A key risk to the outlook remains weak global growth
particularly among emerging markets and an appreciating currency
could weigh on the UK recovery further out. The uncertainty
surrounding a vote on Brexit also has scope to disrupt both the
economy and investment markets. Returns for the real estate asset
class continue to moderate but remain compelling relative to other
asset classes. Over the twelve months to 31
December 2015, all Property recorded a total return of 13.0%
p.a. according to the quarterly version of the IPD Monthly Index
whilst rental growth continued to improve at 4.2% p.a. in the
twelve months period.
UK listed real estate equities total returns were 10.6% over the
year to 31 December 2015,
outperforming the FTSE100 which fell by 1.3% in total return terms
and the FTSE All Share which rose by 1.0%.
In the year to end December, the office sector continued to
generate the highest returns. The sector recorded a total return of
17.2% whilst the industrial sector recorded the next strongest
returns at 16.6%. Retail remains the laggard sector with a total
return of 8.1% in the year. As in 2014 capital growth was fuelled
by falling yields, driven mainly by the weight of money, and the
relatively attractive yield on real estate. Over the last three
months of 2015 (and continuing into 2016) the rate of capital
growth slowed and yield compression appears to have stopped.
Investment Outlook
Total returns for UK real estate look to have peaked for this
cycle and income is likely to be the main component of returns
going forward as opposed to capital growth which has been a key
element of returns over the past few years. During the last three
months of 2015 yield compression slowed as investors expectations
of interest rate rises grew. That sentiment moderated in the first
two months of 2016, to be replaced by a concern over global growth,
and the impact that will have on occupier demand. Despite
heightened global uncertainty, projections for UK economic growth
are likely to remain in positive territory and provide a reasonable
backdrop for the domestic real estate outlook. Relative to longer
term government bonds, the yield gap remains significant by
historic standards, and that should lead to continued investor
demand for real estate as investors search for attractive, stable
and predictable sources of income. Indeed, the sector remains
attractive from a fundamental point of view, with reasonable
economic drivers and a limited pipeline of future new developments
expected to maintain rental growth. We anticipate reasonable
positive total returns for investors on a three year hold period
due to the elevated yield and income growth prospects.
The great unknown at the time of writing is what the outcome,
and impact, of the referendum on EU membership will be. At the very
least one can expect a slowdown in occupier demand in the lead up
to it, especially in central London. In the short term at least the rest of
the UK is likely to be insulated to some degree. If the vote is to
remain in the EU then this slowdown in demand is likely to be
temporary. If the vote is to leave, then the impact is not possible
to predict currently due to the range of possible outcomes, but
will be negative on pricing for the short to medium term at
least.
Investment Management Strategy
The investment strategy remains focused on achieving the
Company’s objective of producing an attractive income return with
the prospect of income and capital growth. During the year the
Company’s NAV per share grew by 8.9%. At the year end share price
of 84.5p the dividend yield was 5.5%. The Company’s Board continues
to target a covered dividend.
2015 was another year of growth for the Company. An important
part of the growth strategy was to protect and enhance existing
shareholders interests. This was done by issuing shares at a
reasonable premium to the then NAV (normally 5%), and minimising
cash drag by only raising funds when we were confident the money
could be deployed in a reasonable time period on attractive
investments.
At the end of the reporting period the Company undertook a large
transaction whereby it bought a fund of 22 assets (‘the new
portfolio’) for £165m using a combination of new equity, debt, and
existing cash. No stamp duty was payable on the purchase and the
new equity was raised at a premium of 2.8%.
Even during times of growth it is important to manage existing
assets, and we remained focussed on regearing leases and disposing
of assets that have specific risk to the fund; more details of
which can be found below.
Performance
The Company’s aim is to provide investors with an attractive
income return, with potential for growth in income and capital.
The income yield on the portfolio has to be sufficient to
maintain the covered dividend. The income yield from the Company’s
portfolio has been consistently higher than the more general market
as recorded by the IPD monthly index.
Although income is a key focus for us, the NAV total return to
investors is also important, as is raising new equity at a
reasonable premium to the then NAV so that purchase costs do not
negatively impact existing shareholders. It is also important, when
raising equity in a rising market to try and avoid cash drag by not
raising too much at one time and being unable to invest it. The
cash drag impacts both capital returns and also the ability to
maintain a covered dividend.
Portfolio Valuation
The Company’s investment portfolio was valued by Jones Lang La Salle on a quarterly basis
throughout 2015. For the December valuation (and ongoing
valuations) the new portfolio was valued by Knight Frank. At the
year end the total portfolio was valued at £452.0m, and the Company
held £12.4m of cash. This compares to £270.1m (this is the open
market value adjusted for anticipated sales costs on properties
held for sale) and £5.4m respectively as at end 2014.
Lease Expiry Profile
The Company has an average unexpired lease term to the earliest
of lease end or tenant break of 5.8 years. This compares to the IPD
average of 7.5 years (excluding leases over 35 years). The
portfolio before the purchase of the new portfolio had an unexpired
lease term of 7.2 years, and one of the attractions of buying the
new portfolio was the opportunity for asset management.
Approximately 10% of the Company’s income is subject to a lease
expiry or break in 2016, and 9% in 2017.
Purchases
The philosophy of the Company is to acquire assets that offer an
attractive income return and have good medium/long term prospects.
We like to be able to add value through asset management, and seek
to buy in lot sizes where there is less competition. We focus on
good quality assets, in good locations, let to good tenants. We are
less concerned about lease length, as past experience has shown
tenant retention is high where the assets are of good quality and
meet occupier needs.
During the first nine months of the year the Company acquired 9
assets for a total of £49.5m excluding costs.
In the final quarter the Company completed the purchase of the
new portfolio – 22 assets for £165m excluding costs. The portfolio
was a very good fit for the Company as it had a similar structure
with over exposure to office and industrial, and an underweight
position to retail. The geographical split was also beneficial with
nothing in central London but 28%
in Greater London and a further
27% in the South East. The new portfolio has plenty of opportunity
for asset management, with a number of shorter leases, and with an
initial yield of 5.9% there is scope to increase rents in the short
term.
Sales
The Company undertook several sales to reduce specific expiry
risk, exiting some smaller assets that we felt would not perform in
line with expectations, and taking profit from others. We completed
on the sale of 10 assets for a total of £58.7m
Asset Management
Asset management is central to how we run the portfolio. We like
to meet with our tenants and make sure that the property we own
meets occupiers needs. During the course of 2015 we completed 6 new
lettings and 8 lease regears. As a result we ended the year with
voids of just 1.1%, well below the IPD benchmark level of 8.4%.
It is noticeable that in many parts of the UK the supply of good
quality accommodation is limited, with increasing tenant demand.
This is leading to rental growth from competition between tenants.
In this environment it is important to understand tenant needs to
maintain income security, and to add value through lease regears
and taking surrenders to refurbish space and upgrade it.
Jason Baggaley
Fund Manager
Statement of Directors’
Responsibilities
The Directors are responsible for preparing the Annual Report
and the Group financial statements for each year which give a true
and fair view, in accordance with the applicable Guernsey law and those International Financial
Reporting Standards (“IFRSs”) as adopted by the European Union.
The Directors are required to prepare Group financial statements
for each financial year which give a true and fair view of the
state of affairs of the Group and of the financial performance and
cash flows of the Group for that period. In preparing those
Financial Statements, the Directors are required to:
- select suitable accounting policies in accordance
with IAS 8: Accounting Policies, Changes in Accounting Estimates
and Errors and then apply them consistently;
- make judgement and estimates that are reasonable
and prudent;
- present information, including accounting
policies, in a manner that provides relevant, reliable, comparable
and understandable information;
- provide additional disclosures when compliance
with the specific requirements in IFRSs as adopted by the European
Union is insufficient to enable users to understand the impact of
particular transactions, other events and conditions on the Group’s
financial position and financial performance;
- state that the Group has complied with IFRSs as
adopted by the European Union, subject to any material departures
disclosed and explained in the Group financial statements; and
- prepare the Group Financial Statements on a going
concern basis unless it is inappropriate to presume that the Group
will continue in business.
The Directors confirm that they have complied with the above
requirements in preparing the Financial Statements.
The Directors are responsible for keeping adequate accounting
records, that are sufficient to show and explain the Group’s
transactions and disclose with reasonable accuracy at any time, the
financial position of the Group and to enable them to ensure that
the Financial Statements comply with The Companies (Guernsey) Law, 2008. They are also responsible
for safeguarding the assets of the Group and hence for taking
reasonable steps for the prevention and detection of fraud, error
and non compliance with law and regulations.
The maintenance and integrity of the Company’s website is the
responsibility of the Directors; the work carried out by the
auditors does not involve considerations of these matters and,
accordingly, the auditors accept no responsibility for any change
that may have occurred to the Financial Statements since they were
initially presented on the website. Legislation in Guernsey governing the preparation and
dissemination of the financial statements may differ from
legislation in other jurisdictions.
Responsibility Statement of the
Directors’ in respect of the Consolidated Annual Report
Statement under the Disclosure and
Transparency Rules
The Directors each confirm to the best of their knowledge
that:
- the Consolidated Financial Statements, prepared in
accordance with IFRSs as adopted by European Union, give a true and
fair view of the assets, liabilities, financial position and profit
or loss of the Group; and
- the management report, which is incorporated into
the Strategic Report, Directors’ Report and Investment Manager’s
Report, includes a fair review of the development and performance
of the business and the position of the Group, together with a
description of the principal risks and uncertainties that they
face.
Statement under the UK Corporate
Governance Code
The Directors each confirm to the best of their knowledge and
belief that:
- the Annual Report and Consolidated Financial
Statements taken as a whole are fair, balanced and understandable
and provide the information necessary to assess the Group’s
performance, business model and strategy.
Approved by the Board on 18 April
2016
Richard Barfield
Chairman
All enquiries to:
The Company Secretary
Northern Trust International Fund Administration Services
(Guernsey) Limited
Trafalgar Court
Les Banques
St Peter Port
Guernsey
GY1 3Ql
Tel: 01481 745001
Fax: 01481 745051
Jason Baggaley
Standard Life Investments Limited
Tel: 0131 245 2833
Graeme McDonald
Standard Life Investments Limited
Tel: 0131 245 3151
AUDITED FINANCIAL STATEMENTS
Consolidated Statement of
Comprehensive Income
for the year ended 31 December
2015
|
Notes |
2015 |
2014 |
|
|
£ |
£ |
| Rental income |
|
20,142,180 |
16,145,930 |
| Surrender premium
income |
|
120,000 |
38,469 |
| Valuation gain from
investment properties |
7 |
17,636,973 |
21,197,869 |
| Costs on business
acquisition |
10 |
(1,942,498) |
– |
| (Loss) / gain on asset
acquisition |
9 |
(75,181) |
136,938 |
| (Profit) / (loss) on
disposal of investment properties |
|
3,024,748 |
(1,840,412) |
| Investment management
fees |
4 |
(2,105,104) |
(1,690,233) |
| Other direct property
operating expenses |
|
(929,165) |
(1,000,785) |
| Directors' fees and
expenses |
23 |
(124,296) |
(145,997) |
| Valuer’s fee |
4 |
(92,324) |
(56,542) |
| Auditor’s fee |
4 |
(82,308) |
(46,513) |
| Other administration
expenses |
|
(376,776) |
(358,161) |
| Operating
profit |
|
35,196,249 |
32,380,563 |
|
|
|
|
| Finance income |
5 |
68,186 |
72,326 |
| Finance costs |
5 |
(3,324,782) |
(3,282,172) |
| Profit for the year
before taxation |
|
31,939,653 |
29,170,717 |
|
|
|
|
| Taxation |
|
|
|
| Tax charge |
6 |
– |
(587,315) |
| Profit for the
year, net of tax |
|
31,939,653 |
28,583,402 |
|
|
|
|
Other comprehensive income
Valuation gain/(loss) on cash flow hedges |
15 |
589,647 |
(2,643,942) |
|
|
|
|
Total
comprehensive income for the year,
net of tax |
|
32,529,300 |
25,939,460 |
|
|
|
|
| Earnings per
share: |
|
pence |
pence |
| Basic and diluted
earnings per share |
19 |
11.39 |
15.40 |
| Adjusted (EPRA)
earnings per share |
19 |
4.05 |
4.90 |
All items in the above Consolidated Statement of Comprehensive
Income derive from continuing operations.
Consolidated Balance Sheet
as at 31 December 2015
|
Notes |
2015 |
2014 |
|
|
£ |
£ |
| ASSETS |
|
|
|
| Non-current
assets |
|
|
|
| Investment
properties |
7 |
448,616,754 |
261,672,121 |
| Lease incentives |
7 |
3,457,588 |
2,436,976 |
|
|
452,074,342 |
264,109,097 |
Current assets
Investment properties held for sale |
8 |
– |
6,550,100 |
| Trade and other
receivables |
11 |
2,858,851 |
2,660,440 |
| Cash and cash
equivalents |
12 |
12,395,516 |
5,399,095 |
|
|
15,254,367 |
14,609,635 |
|
|
|
|
| Total
assets |
|
467,328,709 |
278,718,732 |
LIABILITIES |
|
|
|
| Current
liabilities |
|
|
|
| Trade and other
payables |
13 |
12,788,999 |
7,205,415 |
| Interest rate
swaps |
15 |
908,751 |
1,386,451 |
| Other liabilities |
|
– |
500 |
|
|
13,697,750 |
8,592,366 |
| Non-current
liabilities |
|
|
|
| Bank borrowings |
14 |
139,048,848 |
83,980,382 |
| Interest rate
swaps |
15 |
1,176,541 |
1,288,488 |
| Other liabilities |
|
– |
6,094 |
| Rental deposits due to
tenants |
|
622,283 |
483,880 |
|
|
140,847,672 |
85,758,844 |
|
|
|
|
| Total
liabilities |
|
154,545,422 |
94,351,210 |
|
|
|
|
| Net assets |
|
312,783,287 |
184,367,522 |
|
|
|
|
| EQUITY |
|
|
|
| Capital and
reserves attributable |
|
|
|
| to Company's equity
holders |
|
|
|
| Share capital |
17 |
204,820,219 |
96,188,648 |
| Retained earnings |
18 |
6,167,329 |
7,634,503 |
| Capital reserves |
18 |
3,957,367 |
(17,294,001) |
| Other distributable
reserves |
18 |
97,838,372 |
97,838,372 |
| Total
equity |
|
312,783,287 |
184,367,522 |
|
|
|
|
| Net Asset Value
(NAV) per share |
|
|
|
| NAV |
21 |
82.2p |
75.5p |
| EPRA NAV |
21 |
82.7p |
76.6p |
Approved by the Board of Directors on 18
April 2016 and signed on its behalf by:
Richard Barfield
Director
Consolidated Statement of Changes in
Equity
for the year ended 31 December
2015
|
|
|
|
|
Other |
|
|
|
Share |
Retained |
Capital |
distributable |
|
|
Notes |
Capital |
earnings |
reserves |
reserves |
Total
equity |
|
|
£ |
£ |
£ |
£ |
£ |
| Opening balance 1
January 2015 |
|
96,188,648 |
7,634,503 |
(17,294,001) |
97,838,372 |
184,367,522 |
|
|
|
|
|
|
|
| Profit for the
year |
|
– |
31,939,653 |
– |
– |
31,939,653 |
| Valuation gain on
cash |
|
|
|
|
|
|
| flow hedges |
15 |
– |
– |
589,647 |
– |
589,647 |
| Total comprehensive
gain for the year |
|
– |
31,939,653 |
589,647 |
– |
32,529,300 |
|
|
|
|
|
|
|
| Ordinary shares
issued |
|
|
|
|
|
|
| net of issue
costs |
17 |
108,631,571 |
– |
– |
– |
108,631,571 |
| Dividends Paid |
20 |
– |
(12,745,106) |
– |
– |
(12,745,106) |
| Valuation gain of |
|
|
|
|
|
|
| investment
properties |
7 |
– |
(17,636,973) |
17,636,973 |
– |
– |
| Profit on disposal of
investment properties |
|
– |
(3,024,748) |
3,024,748 |
– |
– |
| Balance at 31
December 2015 |
|
204,820,219 |
6,167,329 |
3,957,367 |
97,838,372 |
312,783,287 |
Consolidated Statement of Changes in
Equity
for the year ended 31 December 2014
|
|
|
|
|
Other |
|
|
|
Share |
Retained |
Capital |
distributable |
|
|
Notes |
Capital |
earnings |
reserves |
reserves |
Total
equity |
|
|
£ |
£ |
£ |
£ |
£ |
| Opening balance 1
January 2014 |
|
31,337,024 |
6,560,853 |
(34,144,454) |
97,838,372 |
101,591,795 |
|
|
|
|
|
|
|
| Profit for the
year |
|
– |
28,583,402 |
– |
– |
28,583,402 |
| Valuation loss on
cash |
|
|
|
|
|
|
| flow hedges |
15 |
– |
– |
(2,643,942) |
– |
(2,643,942) |
| Total comprehensive
gain for the year |
|
– |
28,583,402 |
(2,643,942) |
– |
25,939,460 |
|
|
|
|
|
|
|
| Ordinary shares
issued |
|
|
|
|
|
|
| net of issue
costs |
17 |
64,851,624 |
– |
– |
– |
64,851,624 |
| Dividends Paid |
20 |
– |
(8,015,357) |
– |
– |
(8,015,357) |
| Valuation gain of |
|
|
|
|
|
|
| investment
properties |
7 |
– |
(21,197,869) |
21,197,869 |
– |
– |
| Gain on asset
acquisition |
|
– |
(136,938) |
136,938 |
– |
– |
| Loss on disposal of
investment properties |
|
– |
1,840,412 |
(1,840,412) |
– |
– |
| Balance at 31
December 2014 |
|
96,188,648 |
7,634,503 |
(17,294,001) |
97,838,372 |
184,367,522 |
Consolidated Cash Flow Statement
for the year ended 31 December 2015
|
Notes |
2015 |
2014 |
|
|
£ |
£ |
| Cash flows from
operating activities |
|
|
|
| Profit for the year
before taxation |
|
31,939,653 |
29,170,717 |
| Movement in
non-current lease incentives |
|
270,464 |
(1,290,976) |
| Movement in trade and
other receivables |
|
1,230,084 |
(1,354,916) |
| Movement in trade and
other payables |
|
3,735,996 |
2,917,533 |
| Finance costs |
5 |
3,324,782 |
3,282,172 |
| Finance income |
5 |
(68,186) |
(72,326) |
| Valuation gain from
investment properties |
7 |
(17,636,973) |
(21,197,869) |
| Loss / (gain) on asset
acquisition |
9 |
75,181 |
(136,938) |
| (Profit) / loss on
disposal of investment properties |
|
(3,024,748) |
1,840,412 |
| Net cash inflow
from operating activities |
|
19,846,253 |
13,157,809 |
|
|
|
|
| Cash flows from
investing activities |
|
|
|
| Interest received |
5 |
68,186 |
72,326 |
| Purchase of investment
properties |
7 |
(52,198,123) |
(97,853,799) |
| Business acquisition
net of cash acquired |
10 |
(165,060,458) |
– |
| Capital expenditure on
investment properties |
7 |
(1,144,434) |
(2,708,022) |
Net
proceeds from disposal of investment
properties |
7 |
57,854,848 |
26,759,588 |
| Net cash outflow
from investing activities |
|
(160,479,981) |
(73,729,907) |
|
|
|
|
| Cash flows from
financing activities |
|
|
|
| Proceeds on issue of
ordinary shares |
17 |
110,462,680 |
65,868,956 |
| Transaction costs of
issue of shares |
17 |
(1,831,109) |
(1,017,332) |
| Bank borrowing |
14 |
55,000,000 |
– |
| Bank borrowing
arrangement costs |
14 |
(173,450) |
– |
| Interest paid on bank
borrowings |
5 |
(1,869,338) |
(1,931,665) |
| Payment on interest
rate swaps |
5 |
(1,213,528) |
(1,236,719) |
| Dividends paid to the
Company’s shareholders |
20 |
(12,745,106) |
(8,015,357) |
| Net cash inflow
from financing activities |
|
147,630,149 |
53,667,883 |
|
|
|
|
Net
increase/(decrease) in cash and cash
equivalents in the year |
|
6,996,421 |
(6,904,215) |
|
|
|
|
| Cash and cash
equivalents at beginning of the year |
|
5,399,095 |
12,303,310 |
| Cash and cash
equivalents at end of year |
12 |
12,395,516 |
5,399,095 |
Standard Life Investments Property
Income Trust Limited
Notes to the Consolidated Financial
Statements
for the year ended 31 December
2015
1 GENERAL INFORMATION
Standard Life Investments Property Income Trust Limited (“the
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 Trafalgar Court, Les
Banques, St Peter Port, Guernsey.
These audited Consolidated Financial Statements were approved
for issue by the Board of Directors on 18
April 2016.
2 ACCOUNTING POLICIES
2.1 Basis of preparation
The audited Consolidated Financial Statements of the Group have
been prepared in accordance with and comply with International
Financial Reporting Standards as adopted by the European Union
(“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.
Changes in accounting policy and
disclosure
The accounting policies adopted are consistent with those of the
previous financial year. The following amendments to existing
standards and interpretations were effective for the year, but
either they were not applicable to or did not have a material
impact on the group:
- Annual Improvements to IFRSs 2011–2013 Cycle
- IFRIC 21 Levies
New and amended standards and
interpretations not applied
The following new and amended standards and interpretations in
issue are adopted by the EU but are not yet effective and have not
been applied by the Group:
|
|
|
Effective date |
| IAS 19 Employee
Benefits – Defined Benefit Plans: Employee Contributions
(Amendments) |
|
|
1
February 2015 |
| Annual Improvements to
IFRSs 2010–2012 Cycle |
|
|
1
February 2015 |
| Amendments to IFRS
11: Accounting for Acquisitions of Interests in Joint
Operations |
|
|
1
January 2016 |
| Amendments to IAS 16
and IAS 41: Agriculture: Bearer Plants |
|
|
1
January 2016 |
| Amendments to IAS 16
and IAS 38: Clarification of Acceptable Methods of Depreciation and
Amortisation |
|
|
1
January 2016 |
| Amendments to IAS 27:
Equity Method in Separate Financial Statements |
|
|
1
January 2016 |
| Amendments to IAS 1:
Disclosure Initiative |
|
|
1
January 2016 |
| Annual Improvements to
IFRSs 2012–2014 Cycle |
|
|
1
January 2016 |
The directors do not expect the adoption of these standards and
interpretations to have a material impact on the consolidated or
company financial statements in the period of initial
application.
2.2 Significant accounting judgements,
estimates and assumptions
The preparation of the Group’s financial statements requires
management to make judgements, estimates and assumptions that
affect the reported amounts of revenues, expenses, assets and
liabilities, and the disclosure of contingent liabilities, at the
reporting date. However, uncertainty about these assumptions and
estimates could result in outcomes that could require a material
adjustment to the carrying amount of the asset or liability
affected in the future periods. The most significant estimates and
judgements are set out below.
Fair value of investment
properties
Investment properties are stated at fair value as at the Balance
Sheet date. Gains or losses arising from changes in fair values are
included in the Consolidated Statement of Comprehensive Income in
the year in which they arise. The fair value of investment
properties is determined by independent real estate valuation
experts using recognised valuation techniques. The fair values are
determined based on recent real estate transactions with similar
characteristics and locations to those of the Group’s assets.
The determination of the fair value of investment properties
requires the use of valuation models which use a number of
judgements and assumptions. The only model used was the income
capitalisation method. Under the income capitalisation method, a
property’s fair value is judged based on the normalised net
operating income generated by the property, which is divided by the
capitalisation rate (discounted by the investor’s rate of return).
Under the income capitalisation method, over (above market rent)
and under-rent situations are separately capitalised
(discounted).
The sensitivity analysis in note 7 details the decrease in the
valuation of investment properties if equivalent yield increases by
25 basis points or rental rates (ERV) decreases by 5%.
Fair value of financial
instruments
When the fair value of financial assets and financial
liabilities recorded in the Consolidated Balance Sheet cannot be
derived from active markets, they are determined using a variety of
valuation techniques that include the use of mathematical models.
The input to these models are taken from observable markets where
possible, but where this is not feasible, a degree of judgement is
required in establishing fair value. The judgements include
considerations of liquidity and model inputs such as credit risk
(both own and counterparty’s), correlation and volatility. Changes
in assumptions about these factors could affect the reported fair
value of financial instruments. The models are calibrated regularly
and tested for validity using prices from any observable current
market transactions in the same instrument (without modification or
repackaging) or based on any available observable market data.
The valuation of interest rate swaps used in the Balance Sheet
is provided by The Royal Bank of Scotland. These values are validated by
comparison to internally generated valuations prepared using the
fair value principles outlined above.
The sensitivity analysis in note 3 details the increase and
decrease in the valuation of interest rate swaps if market rate
interest rates had been 100 basis points higher and 100 basis
points lower.
Business Combinations
During the year the Group acquired subsidiaries that own real
estate. At the time of acquisition, the Group considers whether
each acquisition represents the acquisition of a business or the
acquisition of an asset. The Group accounts for an acquisition as a
business combination where an integrated set of activities is
acquired in addition to the property. More specifically,
consideration is made of the extent to which significant processes
are acquired and, in particular, the extent of services provided by
the subsidiaries. The Group assessed the acquisition of Aviva
Investors UK Real Estate Recovery II Unit Trust (the “Unit Trust”
or “UT”), a Jersey Property Unit Trust “JPUT”, as detailed in note
10, in the current year as a purchase of a business because the
strategic management function and associated processes were
purchased along with the investment properties.
When the acquisition of subsidiaries does not represent a
business, it is accounted for as an acquisition of a group of
assets and liabilities. The cost of the acquisition is allocated to
the assets and liabilities acquired based upon their relative fair
values, and no goodwill or deferred tax is recognised.
2.3 Summary of significant accounting
policies
A Basis of consolidation
The audited consolidated financial statements comprise the
financial statements of Standard Life Investments Property Income
Trust Limited and its material wholly owned subsidiary
undertakings.
Control is achieved when the Group is exposed, or has rights, to
variable returns from its involvement with subsidiaries and has the
ability to affect those returns through its power over the
subsidiary. Specifically, the Group controls a subsidiary if, and
only if, it has:
- Power over the subsidiary (i.e., existing rights
that give it the current ability to direct the relevant activities
of the subsidiary)
- Exposure, or rights, to variable returns from its
involvement with the subsidiary
- The ability to use its power over the subsidiary
to affect its returns
The Group assesses whether or not it controls a subsidiary if
facts and circumstances indicate that there are changes to one or
more of the three elements of control. Consolidation of a
subsidiary begins when the Group obtains control over the
subsidiary and ceases when the Group loses control of the
subsidiary.
Assets, liabilities, income and expenses of a subsidiary
acquired or disposed of during the year are included in the
consolidated statement of other comprehensive income from the date
the Group gains control until the date when the Group ceases to
control the subsidiary.
The financial statements of the subsidiaries are prepared for
the same reporting period as the parent company, using consistent
accounting policies. All intra-group balances, transactions and
unrealised gains and losses resulting from intra-group transactions
are eliminated in full.
B Functional and presentation
currency
Items included in the financial statements of each of the
Group’s entities are measured using the currency of the primary
economic environment in which the entity operates (“the functional
currency”). The consolidated financial statements are presented in
pounds sterling, which is also the Company’s functional
currency.
C Revenue recognition
Revenue is recognised as follows;
i) Bank interest
Bank interest income is recognised on an accruals basis.
ii) Rental income
Rental income from operating leases is net of sales taxes and
value added tax (“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 2015 were
£120,000 (2014: £38,469) as detailed in the Statement of
Comprehensive Income and related to a tenant break during the
year.
iii) Property disposals
Where revenue is obtained by the sale of properties, it is
recognised when the significant risks and returns have been
transferred to the buyer. This will normally take place on exchange
of contracts unless there are significant conditions attached. For
conditional exchanges, sales are recognised when these conditions
are satisfied.
D Expenditure
All expenses are accounted for on an accruals basis. The
investment management and administration fees, finance and all
other revenue expenses are charged through the Consolidated
Statement of Comprehensive Income as and when incurred. The Group
also incurs capital expenditure which can result in movements in
the capital value of the investment properties. The movements in
capital expenditure are reflected in the Statement of Comprehensive
Income as a valuation gain/(loss). Portrack Interchange in Stockton
On Tees did not earn any income until it was sold on 2 September 2015 (2014: no non-income producing
properties).
E Taxation
Current income tax assets and liabilities are measured at the
amount expected to be recovered from or paid to taxation
authorities. The tax rates and tax laws used to compute the amount
are those that are enacted or substantively enacted by the
reporting date. Current income tax relating to items recognised
directly in equity is recognised in equity and not in the income
statement. Positions taken in tax returns with respect to
situations in which applicable tax regulations are subject to
interpretation are reviewed periodically and provisions are
established where appropriate.
The Group recognises liabilities for current taxes based on
estimates of whether additional taxes will be due. Where the final
tax outcome of these matters is different from the amounts that
were initially recorded, such differences will impact the income
and deferred tax provisions in the period in which the
determination is made.
Deferred tax assets and liabilities are recognised on a net
basis to the extent they relate to the same fiscal unity and fall
due in approximately the same period.
F Investment property
Investment properties comprise completed property and property
under construction or re-development that is held to earn rentals
or for capital appreciation or both. Property held under a lease is
classified as investment property when the definition of an
investment property is met.
Investment properties are measured initially at cost including
transaction costs. Transaction costs include transfer taxes,
professional fees for legal services and initial leasing
commissions to bring the property to the condition necessary for it
to be capable of operating. The carrying amount also includes the
cost of replacing part of an existing investment property at the
time that cost is incurred if the recognition criteria are met.
Subsequent to initial recognition, investment properties are
stated at fair value. Fair value is based upon the market valuation
of the properties as provided by the independent valuers as
described in note 2.2. Gains or losses arising from changes in the
fair values are included in the Consolidated Statement of
Comprehensive Income in the year in which they arise. For the
purposes of these financial statements, in order to avoid double
counting, the assessed fair value is:
i) Reduced by the carrying amount of any accrued income
resulting from the spreading of lease incentives and/or minimum
lease payments.
ii) Increased by the carrying amount of any liability to the
superior leaseholder or freeholder that has been recognised in the
Balance Sheet as a finance lease obligation.
Acquisitions of investment properties are considered to have
taken place on exchange of contracts unless there are significant
conditions attached. For conditional exchanges acquisitions are
recognised when these conditions are satisfied.
Investment properties are derecognised when they have been
disposed of or permanently withdrawn from use and no future
economic benefit is expected from the disposal. Any gains or losses
on the retirement or disposal of investment properties are
recognised in the Consolidated Statement of Comprehensive Income in
the year of retirement or disposal.
Gains or losses on the disposal of investment properties are
determined as the difference between net disposal proceeds and the
carrying value of the asset in the previous full period financial
statements.
G Non-current assets held for sale
Non-current assets (and disposal groups) classified as held for
sale are measured at the lower of carrying amount and fair value
less costs to sell.
Non-current assets and disposal groups are classified as held
for sale if their carrying amount will be recovered through a sale
transaction rather than through continuing use. This condition is
regarded as met only when the sale is highly probable and the asset
(or disposal group) is available for immediate sale in its present
condition. Management must be committed to the sale which should be
expected to qualify for recognition as a completed sale within one
year from the date of classification.
When the Group is committed to a sale plan involving loss of
control of a subsidiary, all of the assets and liabilities of that
subsidiary are classified as held for sale when the criteria
described above are met, regardless of whether the Group will
retain a non-controlling interest in its former subsidiary after
the sale.
H Trade and other receivables
Trade receivables are recognised and carried at the lower of
their original invoiced value and recoverable amount. Where the
time value of money is material, receivables are carried at
amortised cost. A provision for impairment of trade receivables is
established when there is objective evidence that the Group will
not be able to collect all amounts due according to the original
terms of the receivables. Significant financial difficulties of the
debtor, probability that the debtor will enter bankruptcy or
financial reorganisation, and default or delinquency in payments
(more than 30 days overdue) are considered indicators that the
trade receivable is impaired. The amount of the provision is the
difference between the asset’s carrying amount and the present
value of estimated future cash flows, discounted at the original
effective interest rate. The carrying amount of the asset is
reduced through use of an allowance account, and the amount of the
loss is recognised in the Consolidated Statement of Comprehensive
Income. When a trade receivable is uncollectible, it is written off
against the allowance account for trade receivables. Subsequent
recoveries of amounts previously written off are credited in the
Consolidated Statement of Comprehensive Income.
I Cash and cash equivalents
Cash and cash equivalents are defined as cash in hand, demand
deposits, and other short-term highly liquid investments readily
convertible within three months or less to known amounts of cash
and subject to insignificant risk of changes in value.
J Borrowings and interest expense
All loans and borrowings are initially recognised at the fair
value of the consideration received, less issue costs where
applicable. After initial recognition, all interest-bearing loans
and borrowings are subsequently measured at amortised cost.
Amortised cost is calculated by taking into account any discount or
premium on settlement. Borrowing costs are recognised within
finance costs in the Consolidated Statement of Comprehensive Income
as incurred.
K Accounting for derivative financial
instruments and hedging activities
Derivatives are initially recognised at fair value on the date a
derivative contract is entered into and are subsequently remeasured
at their fair value. The method of recognising the resulting gain
or loss depends on whether the derivative is designated as a
hedging instrument, and if so, the nature of the item being hedged.
The Group documents at the inception of the transaction the
relationship between hedging instruments and hedged items, as well
as its risk management objective and strategy for undertaking
various hedging transactions. The Group also documents its
assessment both at hedge inception and on an ongoing basis of
whether the derivatives that are used in hedging transactions are
highly effective in offsetting changes in fair values or cash flows
of hedged items. The effective portion of changes in the fair value
of derivatives that are designated and qualify as cash flow hedges
are recognised in other comprehensive income in the Consolidated
Statement of Comprehensive Income. The gains or losses relating to
the ineffective portion are recognised in operating profit in the
Consolidated Statement of Comprehensive Income.
Amounts taken to equity are transferred to profit or loss when
the hedged transaction affects profit or loss, such as when the
hedged financial income or financial expense is recognised.
When a derivative is held as an economic hedge for a period
beyond 12 months after the end of the reporting period, the
derivative is classified as non-current consistent with the
classification of the underlying item. A derivative instrument that
is a designated and effective hedged instrument is classified
consistent with the classification of the underlying hedged
item.
L Service charge
The Company has appointed a managing agent to deal with the
service charge at the investment properties and the Company is
acting as an agent for the service charge and not a principal. As a
result the Group recognises void expenses in the Consolidated
Statement of Comprehensive Income. The table in note 22 is a
summary of the service charge during the year. It shows the amount
the service charge has cost the tenants for the 12 months to
31 December 2015, the amount the
tenants have been billed based on the service charge budget and the
amount the Group has paid in relation to void units over the year.
The table also shows the balancing service charge that is due back
to the tenants as at the Balance Sheet date.
M Other financial liabilities
Trade and other payables are recognised and carried at invoiced
value as they are considered to have payment terms of 30 days or
less and are not interest bearing. The balance of trade and other
payables are considered to meet the definition of an accrual and
have been expensed through the income statement or Balance Sheet
depending on classification. VAT payable at the Balance Sheet date
will be settled within 31 days of the Balance Sheet date with Her
Majesty’s Revenue and Customs (“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 13
are those that are due within one year as a result of upcoming
tenant expiries.
3 FINANCIAL RISK MANAGEMENT
The Group’s principal financial liabilities, other than
derivatives, are loans and borrowings. The main purpose of the
Group’s loans and borrowings is to finance the acquisition and
development of the Group’s property portfolio. The Group has rent
and other receivables, trade and other payables and cash and
short-term deposits that arise directly from its operations.
The Group is exposed to market risk (including interest rate
risk and real estate risk), credit risk, capital risk and liquidity
risk. The Group is not exposed to currency risk or price risk. The
Group is engaged in a single segment of business, being property
investment in one geographical area, the United Kingdom. Therefore the Group only
engages in one form of currency being pounds sterling. The Group
currently invests in direct non-listed property and is therefore
not exposed to price risk.
The Board of Directors reviews and agrees policies for managing
each of these risks which are summarised below.
Market risk
Market risk is the risk that the fair values of financial
instruments will fluctuate because of changes in market prices. The
financial instruments held by the Group that are affected by market
risk are principally the derivative financial instruments.
i) Interest Rate risk
The Group invests cash balances with RBS and Citibank. These
balances expose the Group to cash flow interest rate risk as the
Group’s income and operating cash flows will be affected by
movements in the market rate of interest. There is considered to be
no fair value interest rate risk in regard to these balances.
The bank borrowings as described in note 14 also expose the
Group to cash flow interest rate risk. The Group’s policy is to
manage its cash flow interest rate risk using interest rate swaps,
in which the Group has agreed to exchange the difference between
fixed and floating interest amounts based on a notional principal
amount (see note 15). The Group has floating rate borrowings of
£72,000,000 and £12,432,692, all of which has been fixed via
interest rate swaps. The Group increased borrowings by £55,000,000
on 22 December 2015 to fund the
purchase of the units in Aviva Investors UK Real Estate Recovery II
Unit Trust. As a result of this the margin interest rate on
borrowings decreased from 1.65% to 1.25% from 22 December 2015. The terms of the interest rate
swap were unchanged from the existing agreement and resulted in an
ineffective hedge from 22 December
2015.
The bank borrowings are carried at amortised cost and the Group
considers this to be a close approximation to fair value. The fair
value of the bank borrowings is affected by changes in the market
interest rate. The fair value of the interest rate swaps is exposed
to changes in the market interest rate as their fair value is
calculated as the present value of the estimated future cash flows
under the agreements. The accounting policy for recognising the
fair value movements in the interest rate swaps is described in
note 2.3.
Trade and other receivables and trade and other payables are
interest free and have settlement dates within one year and
therefore are not considered to present a fair value interest rate
risk.
The following tables set out the carrying amount of the Group’s
financial instruments excluding the amortisation of borrowing costs
as outlined in note 5. Bank borrowings have been fixed due to
interest rate swaps and are detailed further in note 15:
| As at 31
December 2015: |
|
|
|
|
Fixed Rate
£ |
Variable rate
£ |
Weighted
average
interest rate
£ |
| Cash and cash
equivalents |
- |
12,395,516 |
0.402% |
| Bank borrowings |
72,000,000 |
- |
3.302% |
| Bank borrowings |
12,432,692 |
- |
3.021% |
| Bank borrowings |
- |
55,000,000 |
1.753% |
|
|
|
|
|
|
|
|
| As at 31 December
2014: |
|
|
|
|
Fixed Rate
£ |
Variable rate
£ |
Weighted
average
interest rate
£ |
| Cash and cash
equivalents |
- |
5,399,095 |
0.645% |
| Bank borrowings |
72,000,000 |
- |
3.802% |
| Bank borrowings |
12,432,692 |
- |
3.521% |
|
|
|
|
|
At 31 December 2015, if market
rate interest rates had been 100 basis points higher with all other
variables held constant, the profit for the year would have been
£183,654 higher (2014: £182,269 higher profit) as a result of the
higher interest income on cash and cash equivalents. Other
Comprehensive Income and the Capital Reserve would have been
£2,266,614 higher (2014: £2,313,008 higher) as a result of an
increase in the fair value of the derivative designated as a cash
flow hedge of floating rate borrowings.
At 31 December 2015, if market
rate interest rates had been 100 basis points lower with all other
variables held constant, the profit for the year would have been
£183,654 lower (2014: £127,268 lower profit) as a result of the
lower interest income on cash and cash equivalents. Other
Comprehensive Income and the Capital Reserve would have been
£2,350,900 lower (2014: £3,254,898 lower) as a result of a decrease
in the fair value of the derivative designated as a cash flow hedge
of floating rate borrowings.
ii) Real estate risk
The Group has identified the following risks associated with the
real estate portfolio:
a) The cost of the development schemes may increase if
there are delays in the planning process. The Group uses advisers
who are experts in the specific planning requirements in the
scheme’s location in order to reduce the risks that may arise in
the planning process.
b) A major tenant may become insolvent causing a
significant loss of rental income and a reduction in the value of
the associated property (see also credit risk below). To reduce
this risk, the Group reviews the financial status of all
prospective tenants and decides on the appropriate level of
security required via rental deposits or guarantees.
c) The exposure of the fair values of the portfolio to
market and occupier fundamentals. The Group aims to manage such
risks by taking an active approach to asset management (working
with tenants to extend leases and minimise voids), capturing profit
(selling when the property has delivered a return to the Group that
the Group believes has been maximised and the proceeds can be
reinvested into more attractive opportunities) and identifying new
investments (generally at yields that are accretive to the revenue
account and where the Group believes there will be greater
investment demand in the medium term).
Credit risk
Credit risk is the risk that a counterparty will be unable to
meet a commitment that it has entered into with the Group. In the
event of default by an occupational tenant, the Group will suffer a
rental income shortfall and incur additional related costs. The
Investment Manager regularly reviews reports produced by Dun and
Bradstreet and other sources, including the IPD IRIS report, to be
able to assess the credit worthiness of the Group’s tenants and
aims to ensure that there are no excessive concentrations of credit
risk and that the impact of default by a tenant is minimised. In
addition to this, the terms of the Group’s bank borrowings require
that the largest tenant accounts for less than 20% of the Group’s
total rental income, that the five largest tenants account for less
than 50% of the Group’s total rental income and that the ten
largest tenants account for less than 75% of the Group’s total
rental income. The maximum credit risk from the tenant arrears of
the Group at the financial year end was £1,696,704 (2014:
£1,738,063) as detailed in note 11.
With respect to credit risk arising from other financial assets
of the Group, which comprise cash and cash equivalents, the Group’s
exposure to credit risk arises from default of the counterparty
bank with a maximum exposure equal to the carrying value of these
instruments. As at 31 December 2015
£7,821,163 (2014:£4,634,184) was placed on deposit with The Royal
Bank of Scotland plc (“RBS”),
£1,193,437 (2014: £764,911) was held with Citibank and £3,380,916
was held with RBS on behalf of Standard Life Investments Unit Trust
and Standard Life Investment Limited Partnership, two subsidiaries
as mentioned in note 9. The credit risk associated with the cash
deposits placed with RBS is mitigated by virtue of the Group having
a right to off-set the balance deposited against the amount
borrowed from RBS should RBS be unable to return the deposits for
any reason. Citibank is rated A-2 Stable by Standard
& Poor’s and P-2 Stable by Moody’s. RBS is rated A-3 Positive
by Standard & Poor’s and NP Positive by Moody’s.
Liquidity risk
Liquidity risk is the risk that the Group will encounter
difficulties in realising assets or otherwise raising funds to meet
financial commitments. The investment properties in which the Group
invests are not traded in an organised public market and may be
illiquid. As a result, the Group may not be able to liquidate its
investments in these properties quickly at an amount close to their
fair value in order to meet its liquidity requirements. The
following table summarises the maturity profile of the Group’s
financial liabilities based on contractual undiscounted
payments.
Year ended 31 December 2015
|
On
demand |
12
months |
1 to 5
years |
>5
years |
Total |
|
£ |
£ |
£ |
£ |
£ |
| Interest-bearing
loans |
– |
2,565,213 |
140,715,298 |
– |
143,280,511 |
| Interest rate
swaps |
– |
1,201,368 |
2,398,705 |
– |
3,600,073 |
| Trade and other
payables |
5,309,803 |
– |
– |
– |
5,309,803 |
Rental
deposits due
to tenants |
– |
173,072 |
611,458 |
10,825 |
795,355 |
|
5,309,803 |
3,939,653 |
143,725,461 |
10,825 |
152,985,742 |
Year ended 31 December 2014
|
On
demand |
12
months |
1 to 5
years |
>5
years |
Total |
|
£ |
£ |
£ |
£ |
£ |
| Interest-bearing
loans |
– |
1,868,495 |
90,038,178 |
– |
91,906,673 |
| Interest rate
swaps |
– |
1,223,953 |
3,665,814 |
– |
4,889,767 |
| Leasehold
obligations |
– |
500 |
2,000 |
52,500 |
55,000 |
| Trade and other
payables |
2,066,393 |
– |
– |
– |
2,066,393 |
Rental
deposits due
to tenants |
– |
155,728 |
386,380 |
97,500 |
639,608 |
|
2,066,393 |
3,248,676 |
94,092,372 |
150,000 |
99,557,441 |
The disclosed amount for interest rate swaps in the above table
are the estimated net undiscounted cash flows.
The Group’s liquidity position is regularly monitored by
management and is reviewed quarterly by the Board of Directors.
Capital risk
The Group’s objectives when managing capital are to safeguard
the Group’s ability to continue as a going concern in order to
provide returns for shareholders and to maintain an optimal capital
structure to reduce the cost of capital.
In order to maintain or adjust the capital structure, the Group
may adjust the amount of dividends paid to shareholders, return
capital to shareholders, issue new shares, increase or decrease
borrowings or sell assets to reduce debt.
The Group monitors capital on the basis of the gearing ratio.
This ratio is calculated as net debt divided by gross assets. Net
debt is calculated as total borrowings less cash and cash
equivalents. Gross assets are calculated as non-current assets and
current assets as shown in the Consolidated Balance Sheet.
The gearing ratios at 31 December
2015 and at 31 December 2014
were as follows:
|
2015
£ |
2014
£ |
| Total Borrowings
(excluding amortisation of arrangement fees) |
139,432,692 |
84,432,692 |
| Less: cash and cash
equivalents |
(12,395,516) |
(5,399,095) |
| Net debt |
127,037,176 |
79,033,597 |
|
|
|
| Gross Assets |
467,328,709 |
278,718,732 |
|
|
|
| Gearing ratio |
27% |
28% |
Gearing, calculated as net debt as a percentage of gross assets
at 31 December 2015 was 27% and must
not exceed 65%. The Board’s current intention is that the Company’s
loan to value ratio (calculated as borrowings less all cash as a
proportion of the property portfolio valuation) will not exceed
45%.
Fair values
Set out below is a comparison by class of the carrying amounts
and fair value of the Group’s financial instruments that are
carried in the financial
statements.
|
|
Carrying Amount |
Fair Value |
|
|
2015 |
2014 |
2015 |
2014 |
| Financial Assets |
|
£ |
£ |
£ |
£ |
| Cash and cash
equivalents |
|
12,395,516 |
5,399,095 |
12,395,516 |
5,399,095 |
| Trade and other
receivables |
|
2,858,851 |
2,660,440 |
2,858,851 |
2,660,440 |
|
|
|
|
|
|
| Financial
Liabilities |
|
|
|
|
|
| Bank borrowings |
|
139,048,848 |
83,980,382 |
139,415,524 |
84,202,020 |
| Interest rate
swaps |
|
2,085,292 |
2,674,939 |
2,085,292 |
2,674,939 |
| Trade and other
payables |
|
6,105,159 |
2,706,001 |
6,105,159 |
2,706,001 |
|
|
|
|
|
|
|
|
|
The fair value of the financial assets and liabilities are
included at an estimate of the amount at which the instrument could
be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. The following methods
and assumptions were used to estimate the fair value:
- Cash and cash equivalents, trade and other
receivables are the same as fair value due to the short-term
maturities of these instruments.
- The fair value of bank borrowings is estimated by
discounting future cash flows using rates currently available for
debt on similar terms and remaining maturities. The fair value
approximates their carrying values gross of unamortised transaction
costs. This is considered as being valued at level 2 of the fair
value hierarchy and has not changed level since 31 December 2014.
- The fair value of the interest rate swap contract
is estimated by discounting expected future cash flows using
current market interest rates and yield curve over the remaining
term of the instrument. This is considered as being valued at level
2 of the fair value hierarchy and has not changed level since
31 December 2014. The definition of
the valuation techniques are explained in the significant
accounting judgements, estimates and assumptions.
The following table shows an analysis of the fair values of
financial instruments recognised in the Balance Sheet by the level
of the fair value hierarchy*:
|
|
Level
1 |
Level
2 |
Level
3 |
Total
fair value |
| 31 December 2015 |
|
|
|
|
|
| Interest rate
swaps |
|
– |
2,085,292 |
– |
2,085,292 |
|
|
|
|
|
|
| 31 December 2014 |
|
|
|
|
|
| Interest rate
swaps |
|
– |
2,674,939 |
– |
2,674,939 |
*Explanation of the fair value hierarchy:
Level 1 – Quoted (unadjusted) market prices in active markets for
identical assets or liabilities.
Level 2 – Valuation techniques for which the lowest level input
that is significant to the fair value measurement is directly or
indirectly observable.
Level 3 – Valuation techniques for which the lowest level input
that is significant to the fair value measurement is
unobservable.
4 FEES
Investment management fees
On 19 December 2003 Standard Life
Investments (Corporate Funds) Limited (“the Investment 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”).
Under the terms of the IMA dated 19
December 2003, the Investment Manager was entitled to
receive a fee at the annual rate of 0.85% of the total assets,
payable quarterly in arrears except where cash balances exceed 10%
of the total assets. The fee applicable to the amount of cash
exceeding 10% of total assets was altered to be 0.20% per annum,
payable quarterly in arrears. The Investment Manager also agreed to
reduce its charge to 0.75% of the total assets of the Group until
such time as the net asset value per share returns to the launch
level of 97p. This was applicable from the quarter ending
31 December 2008 onwards and did not
affect the reduced fee of 0.20% on cash holdings above 10% of total
assets.
Under the terms of the IMA dated 7 July
2014, the above fee arrangements apply up to 31 July 2014. From 1
August 2014, the fee was changed to 0.75% of total assets up
to £200 million; 0.70% of total assets between £200 million and
£300 million; and 0.65% of total assets in excess of £300 million.
The total fees charged for the year ended 31
December 2015 amounted to £2,105,104 (year ended
31 December 2014: £1,690,233). The
amount due and payable at the year end amounted to £400,767
excluding VAT (year ended 31 December
2014: £500,165 excluding VAT).
In respect of the annual management fee for the year ended
31 December 2015, the Investment
Manager agreed to rebate £400,000 of the fee following the
successful completion of the fund raising and new property
portfolio acquisition in December
2015.
Administration, secretarial and
registrar fees
On 19 December 2003 Northern Trust
International Fund Administration Services (Guernsey) Limited (“Northern 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 ended 31
December 2015 amounted to £82,046 (2014: £82,927). The
amount due and payable at the year end amounted to £18,331
(2014:£nil).
Valuer’s fee
Jones Lang LaSalle and Knight
Frank (“the Valuers”), independent international real estate
consultants, were appointed as valuers in respect of the assets
comprising the property portfolio. The total valuation fees charged
for the year ended 31 December 2015
amounted to £92,324 (2014: £56,542) of which minimum fees of £2,500
per property (2014: £2,500) were incurred for new properties added
to the portfolio. The amount due and payable at the year end
amounted to £12,727 excluding VAT (2014: £10,590 excluding
VAT).
Auditor’s fee
At the year end date Ernst & Young LLP continued as
independent auditor of the Group. The auditor’s fees for the year
ended 31 December 2015 amounted to
£82,308 (2014: £46,513) and relate to audit services provided for
the 2015 financial year. Ernst & Young LLP also provided
non-audit services in 2015 in respect of advice relating to the
social security position of the Group’s directors of £1,100 (2014;
£nil) and advice in relation to the UK REIT distribution rules of
£950 (2014; £nil). Ernst & Young LLP also provided non- audit
services in respect of due diligence costs for asset acquisitions
and tax accounting advice for the prospectus in 2015 amounting to
£110,000 (2014: £32,000) and £47,000 (2014: £nil) respectively.
Total non-audit fees incurred up to the Balance Sheet date amounted
to £159,050 (2014: £126,000).
5 FINANCE INCOME AND COSTS
|
|
|
|
2015 |
2014 |
|
£ |
£ |
| Interest income on cash
and cash equivalents |
68,186 |
72,326 |
| Finance income |
68,186 |
72,326 |
|
|
|
| Interest expense on
bank borrowings |
1,869,338 |
1,931,665 |
| Payments on interest
rate swaps |
1,213,528 |
1,236,719 |
| Amortisation of
arrangement costs (See Note 14) |
241,916 |
113,788 |
| Finance
costs |
3,324,782 |
3,282,172 |
6 TAXATION
Current income tax
The major components of income tax expense for the years ended
31 December are:
|
2015 |
2014 |
|
£ |
£ |
Consolidated Income Statement
Current Income Tax |
|
|
| Current Income Tax
Charge |
– |
– |
Deferred Income Tax |
|
|
| Utilisation of deferred
tax asset |
– |
587,315 |
| Income
Tax charge/(credit) reported in the income statement |
– |
587,315 |
A reconciliation between the tax charge / (credit) and the
product of accounting profit multiplied by the applicable tax rate
for the year ended 31 December 2015
and 2014 is, as follows:
|
2015 |
2014 |
|
£ |
£ |
| Profit
before tax |
31,939,653 |
29,170,717 |
|
|
|
Tax
calculated at UK statutory income tax/corporation
tax rate of 20.25% (2014: 20%) |
6,467,780 |
5,834,143 |
| UK REIT exemption on
net income and gains |
(3,304,893) |
– |
Valuation
gain in respect of investment properties
not subject to tax |
(3,571,487) |
(4,266,961) |
Profit /
(loss) on disposal of investment properties
not subject to tax |
15,244 |
368,082 |
| Income not subject to
tax |
– |
(716,760) |
Expenditure not allowed for corporation tax/income
tax purposes |
393,356 |
86,711 |
| Tax loss utilised |
– |
(1,305,215) |
| Utilisation of Deferred
Tax Asset |
– |
587,315 |
| Current income tax
charge |
– |
587,315 |
|
|
|
|
|
|
|
|
Consolidated Balance Sheet |
Consolidated Income
Statement |
|
2015 |
2014 |
2015 |
2014 |
|
|
£ |
£ |
£ |
| Deferred income tax
assets |
|
|
|
|
| Losses available for
offset against future taxable income |
– |
– |
– |
587,315 |
Deferred income tax asset/
(credit) |
– |
– |
– |
587,315 |
Unrecognised deferred tax
As at 31 December 2015, the Group
had an unrecognised deferred tax asset of £nil (2014: £2,075,946).
Tax losses of the Group generated prior to entry to the UK REIT
regime can no longer be utilised and are lost. If a UK REIT sells a
property within 3 years of completion of development, the REIT tax
exemption does not apply. There were no such properties at
31 December 2014 or 31 December 2015.
UK REIT status
The Group migrated tax residence to the UK and elected to be
treated as a UK REIT with effect from 1
January 2015. As a UK REIT, the income profits of the
Group’s UK property rental business are exempt from corporation tax
as are any gains it makes from the disposal of its properties,
provided they are not held for trading or sold within three years
of completion of development. The Group is otherwise subject to UK
corporation tax at the prevailing rate.
As the principal company of the REIT, the Company is required to
distribute at least 90% of the income profits of the Group’s UK
property rental business. There are a number of other conditions
that also require to be met by the Company and the Group to
maintain REIT tax status. These conditions were met in the period
and the Board intends to conduct the Group’s affairs such that
these conditions continue to be met.
The Company and its material Guernsey subsidiaries have obtained exempt
company status in Guernsey so that
they are exempt from Guernsey
taxation on income arising outside Guernsey and bank interest receivable in
Guernsey.
7 INVESTMENT PROPERTIES
| Country |
UK |
UK |
UK |
UK |
| Class |
Industrial |
Office |
Retail |
Total |
|
2015
£ |
2015
£ |
2015
£ |
2015
£ |
| Market value as at 1
January |
108,660,000 |
114,265,100 |
47,125,000 |
270,050,100 |
| Purchase of investment
properties |
11,217,775 |
19,005,390 |
21,974,958 |
52,198,123 |
| Acquired through
business combination (note 10) |
69,050,000 |
59,850,000 |
36,100,000 |
165,000,000 |
| Capital expenditure on
investment properties |
1,034,205 |
72,989 |
37,240 |
1,144,434 |
| Carrying value of
disposed investment properties |
(11,405,000) |
(38,325,100) |
(5,100,000) |
(54,830,100) |
| Valuation gain from
investment properties |
8,404,316 |
8,529,645 |
703,012 |
17,636,973 |
| Movement in lease
incentives receivable |
108,704 |
666,976 |
9,790 |
785,470 |
| Market value at 31
December |
187,070,000 |
164,065,000 |
100,850,000 |
451,985,000 |
| Adjustment for lease
incentives* |
(353,854) |
(2,383,140) |
(631,252) |
(3,368,246) |
| Carrying value at
31 December |
186,716,146 |
161,681,860 |
100,218,748 |
448,616,754 |
*Lease incentives are split between non current assets of
£3,457,588 and current liabilities of £89,342 (note 13).
The valuations were performed by Jones
Lang Lasalle and Knight Frank, accredited independent
valuers with a recognised and relevant professional qualification
and recent experience of the location and category of the
investment properties being valued. The valuation model in
accordance with Royal Institute of Chartered Surveyors (‘RICS’)
requirements on disclosure for Regulated Purpose Valuations has
been applied (RICS Valuation - Professional Standards January 2014 published by the Royal Institution
of Chartered Surveyors). These valuation models are consistent with
the principles in IFRS 13. The market value provided by
Jones Lang Lasalle and Knight Frank
at the year end was £451,985,000 (2014: £270,225,000) however an
adjustment has been made for lease incentives of £3,368,246* (2014:
£1,834,473) that are already accounted for as an asset. In
accordance with the accounting policy in note 2.3, in order to
arrive at fair value the market values of leasehold investment
properties have been adjusted to reflect the fair value of finance
lease obligations. Valuation gains and losses from investment
properties are recognised in the Consolidated Statement of
Comprehensive Income for the period and are attributable to changes
in unrealised gains or losses relating to investment properties
(completed and under construction) held at the end of the reporting
period.
At 31 December 2014 the Group
disclosed a number of post balance sheet events including the sale
and purchase of investment properties. During the year the Group
completed the purchase of DSG in Preston for £15.8m excluding costs and the
sale of De Ville Court in Weybridge for £3.15m excluding
costs.
| Country |
UK |
UK |
UK |
UK |
| Class |
Industrial |
Office |
Retail |
Total |
|
2014
£ |
2014
£ |
2014
£ |
2014
£ |
| Market value as at 1
January |
48,175,000 |
79,945,000 |
48,295,000 |
176,415,000 |
| Purchase of investment
properties |
72,084,707 |
15,097,439 |
10,671,653 |
97,853,799 |
| Capital expenditure on
investment properties |
29,971 |
2,779,559 |
(101,508) |
2,708,022 |
| Carrying value of
disposed investment properties |
(14,550,000) |
– |
(14,050,000) |
(28,600,000) |
| Valuation gain from
investment properties |
2,961,019 |
16,132,344 |
2,104,506 |
21,197,869 |
| Movement in lease
incentives receivable |
(40,697) |
310,758 |
205,349 |
475,410 |
| Investment properties
recategorised as held for sale |
– |
(6,550,100) |
– |
(6,550,100) |
| Market value at 31
December |
108,660,000 |
107,715,000 |
47,125,000 |
263,500,000 |
|
|
|
|
|
| Adjustment for lease
incentives |
(462,673) |
(800,767) |
(571,033) |
(1,834,473) |
| Adjustment for finance
lease obligations |
– |
6,594 |
– |
6,594 |
| Carrying value at
31 December |
108,197,327 |
106,920,827 |
46,553,967 |
261,672,121 |
In the Consolidated Cash Flow Statement, proceeds from disposal
of investment properties comprise:
|
2015 |
2014 |
|
£ |
£ |
| Carrying value of
disposed investment properties |
54,830,100 |
28,600,000 |
| Profit / (loss) on
disposal of investment properties |
3,024,748 |
(1,840,412) |
| Net proceeds from
disposal of investment properties |
57,854,848 |
26,759,588 |
| Valuation
Methodology |
|
The fair value of completed investment properties are
determined using the income capitalisation method.
The income capitalisation method is based on capitalising the net
income stream at an appropriate yield. In establishing the net
income stream the valuer has reflected the current rent (the gross
rent) payable to lease expiry, at which point the valuer has
assumed that each unit will be re-let at their opinion of ERV. The
valuer has made allowances for voids and rent free periods where
appropriate, as well as deducting non recoverable costs where
applicable. The appropriate yield is selected on the basis of the
location of the building, its quality, tenant credit quality and
lease terms amongst other factors.
No properties have changed the valuation technique during the year.
At the Balance Sheet date the income capitalisation method is
appropriate for valuing all assets.
The Group appoints suitable valuers (such appointment is reviewed
on a periodic basis) to undertake a valuation of all the direct
real estate investments on a quarterly basis. The valuation is
undertaken in accordance with the then current RICS guidelines and
requirements as mentioned above. |
The Investment Manager meets with the valuer on a quarterly basis
to ensure the valuer is aware of all relevant information for the
valuation and any change in the investment over the quarter. The
Investment Manager then reviews and discusses the draft valuations
with the valuer to ensure correct factual assumptions are made. The
valuer reports a final valuation that is then reported to the
Board.
The management group that determines the Company’s valuation
policies and procedures for property valuations is the Property
Valuation Committee. The Committee reviews the quarterly property
valuation report produced by the Valuer (or such other person as
may from time to time provide such property valuation services to
the Company) before its submission to the Board, focussing in
particular on:
- significant adjustments from the previous property
valuation report
- reviewing the individual valuations of each property
- compliance with applicable standards and guidelines
including those issued by RICS and the UKLA Listing Rules
- reviewing the findings and any recommendations or
statements made by the valuer
- considering any further matters relating to the valuation
of the properties
The Chairman of the Committee makes a brief report of the findings
and recommendations of the Committee to the Board after each
Committee meeting. The minutes of the Committee meetings are
circulated to the Board. The Chairman submits an annual report to
the Board summarising the Committee’s activities during the year
and the related significant results and findings.
All investment properties are classified as Level 3 in the fair
value hierarchy. There were no movements between levels during the
year.
There are currently no restrictions on the realisability of
investment properties or the remittance of income and proceeds of
disposal.
The table below outlines the valuation techniques used to derive
Level 3 fair values for each class of investment properties:
- The fair value measurements at the end of the reporting
period.
- The level of the fair value hierarchy (e.g. Level 3) within
which the fair value measurements are categorised in their
entirety.
- A description of the valuation techniques applied.
- Fair value measurements, quantitative information about the
significant unobservable inputs used in the fair value
measurement.
- The inputs used in the fair value measurement, including
the ranges of rent charged to different units within the same
building. |
| Country &
Class |
Fair
value (£) |
Valuation
technique |
Key unobservable
input |
Range
(weighted average)
|
UK
Industrial
Level 3 |
186,716,146 |
· Income
Capitalisation
|
· Initial
Yield
· Reversionary Yield
· Equivalent Yield
· Estimated rental
value
per Sq.m |
·0% to
15.84% (5.88%)
·5.53% to 10.65% (6.91%)
·5.65% to 9.09% (6.60%)
·£19.15 to £132.76 (£58.45) |
|
|
|
|
|
UK
Office
Level 3 |
161,681,860 |
· Income
Capitalisation
|
· Initial
Yield
· Reversionary Yield
· Equivalent Yield
· Estimated rental value per Sq.m |
·0% to
12.04% (5.87%)
·5.62% to 10.78% (6.81%)
·4.74% to 9.01% (6.25%)
·£137.47 to £669.67 (£276.85) |
UK
Retail
Level 3 |
100,218,748 |
· Income
Capitalisation |
· Initial
Yield
· Reversionary Yield
· Equivalent Yield
· Estimated rental value per Sq.m |
·2.79% to
9.47% (6.31%)
·3.85% to 8.23% (5.85%)
·5.55% to 7.92% (6.50%)
·£95.24 to £834.77 (£173.14) |
|
448,616,754 |
|
|
|
Descriptions and definitions
The table above includes the following descriptions and definitions
relating to valuation techniques and key unobservable inputs made
in determining the fair values.
Estimated rental value (ERV)
The rent at which space could be let in the market conditions
prevailing at the date of valuation.
Equivalent yield
The equivalent yield is defined as the internal rate of return of
the cash flow from the property, assuming a rise to ERV at the next
review, but with no further rental growth.
Initial yield
Initial yield is the annualised rents of a property expressed as a
percentage of the property value.
Reversionary yield
Reversionary yield is the anticipated yield to which the initial
yield will rise (or fall) once the rent reaches the ERV.
The table below shows the ERV per annum, area per square foot,
average ERV per square foot, initial yield and reversionary yield
as at the Balance Sheet date. |
|
2015 |
2014 |
|
£ |
£ |
| ERV p.a. |
32,111,174 |
20,460,185 |
| Area sq. ft. |
3,933,195 |
2,736,927 |
| Average ERV per sq.
ft. |
£8.16 |
£7.48 |
| Initial Yield |
5.97% |
6.59% |
| Reversionary Yield |
4.97% |
5.13% |
The table below presents the sensitivity of the valuation to
changes in the most significant assumptions underlying the
valuation of completed investment properties.
|
2015 |
2014 |
|
£ |
£ |
| Increase in equivalent
yield of 25 bps |
(18,600,000) |
(10,100,000) |
| Decrease in rental
rates of 5% (ERV) |
(17,700,000) |
(10,100,000) |
Below is a list of how the interrelationships in the sensitivity
analysis above can be explained.
In both cases outlined in the sensitivity table the estimated
Fair Value would increase (decrease) if:
· The ERV is higher (lower)
· Void periods were shorter (longer)
· The occupancy rate was higher (lower)
· Rent free periods were shorter (longer)
· The capitalisation rates were lower (higher)
8 INVESTMENT PROPERTIES HELD FOR
SALE
As at 31
December 2015 the Group had no investment properties classified as
held for sale.
As at 31 December 2014 the Group had exchanged contracts with third
parties for the sale of De Ville Court, Weybridge for a price of
£3,150,000 and Chancellors Place, Chelmsford for £3,525,000. The
sale of De Ville Court completed on 20 January 2015 and the sale of
Chancellors Place completed on 30 June 2015. The independently
assessed market value of De Ville Court as at 31 December 2014 was
£3,150,000 and the independently assessed market value of
Chancellors Place as at 31 December 2014 was £3,575,000. As at 31
December 2014 the carrying value of De Ville Court was £3,038,250
(net of transaction costs of £111,750) and the carrying value of
Chancellors Place was £3,511,850 (net of transaction costs of
£63,150).
Reconciliation of investment properties held for sale to
independent valuers report: |
|
|
2015 |
2014 |
|
£ |
£ |
| De Ville Court |
– |
3,150,000 |
| Chancellors Place |
– |
3,575,000 |
| Less: transaction
costs |
– |
(174,900) |
| Adjusted Market
Value at 31 December |
– |
6,550,100 |
9 INVESTMENT IN SUBSIDIARY
UNDERTAKINGS
The Company owns 100 per cent of the issued ordinary share
capital of Standard Life Investments Property Holdings Limited, a
company with limited liability incorporated and domiciled in
Guernsey, Channel Islands, whose principal business is
property investment.
The Group, through its subsidiary, owns 100 per cent of the
issued ordinary share capital of Huris (Farnborough) Limited, a
company incorporated in the Cayman
Islands whose principal business is property investment.
The Group, through its subsidiary, owns 100 per cent of the
issued ordinary share capital of HEREF Eden Main Limited, a company
incorporated in Jersey whose principal business is property
investment.
The acquisitions of Huris (Farnborough) Limited and HEREF Eden
Main Limited were accounted for as acquisitions of assets in 2014
which generated a loss of £75,181 (2014: £136,938 gain) in the year
ended 31 December 2015 as detailed in
the Consolidated Statement of Comprehensive Income. The directors
believe that such treatment is appropriate as it better reflects
the substance of the transactions i.e. the acquired companies are
shell companies which hold investment properties and had immaterial
other net assets. The investment properties owned by Huris
(Farnborough) Limited and HEREF Eden Main Limited were transferred
to Standard Life Investments Property Holdings Limited in 2014. The
remaining assets of both companies total £59,727 (2014: £44,273
liability) at the Balance Sheet date and have been included in
trade and other receivables.
During the year the Group acquired 100% of the units in Aviva
Investors UK Real Estate Recovery II Unit Trust (the “Unit Trust”
or “UT”), a Jersey Property Unit Trust “JPUT”. The acquisition
included the entire issued share capital of a General Partner which
holds, through a Limited Partnership, the new portfolio of 22 UK
real estate assets. The transaction completed on 23 December 2015 and the Group has treated the
acquisition as a Business Combination in accordance with IFRS 3.
The Group Undertakings consist of the following entities at the
Balance Sheet date:
- Standard Life Investments Property Holdings Limited, a
company with limited liability incorporated in Guernsey, Channel
Islands.
- Standard Life Investments SLIPIT Unit Trust, a Jersey
Property Unit Trust domiciled in Jersey, Channel Islands (formerly Aviva Investors UK
Real Estate Recovery II Unit Trust).
- Standard Life Investments (SLIPIT) Limited Partnership,
a limited partnership established in England (formerly Aviva Investors UK Real
Estate Recovery II Limited Partnership).
- Standard Life Investments SLIPIT (General Partner)
Limited, a company with limited liability incorporated in the
United Kingdom (formerly Aviva
Investors UK Real Estate Recovery II (General Partner)
Limited).
- Standard Life Investments SLIPIT (Nominee) Limited, a company
with limited liability incorporated and domiciled in the
United Kingdom (formerly Aviva
Investors UK Real Estate Recovery II (Nominee) Limited).
- Ceres Court Properties Limited , a company with limited
liability incorporated and domiciled in the United Kingdom.
10 BUSINESS COMBINATIONS
On 23 December 2015, the Group
acquired 100% of the shares of Aviva Investors UK Real Estate
Recovery II Unit Trust (the “Unit Trust” or “UT”), a Jersey
Property Unit Trust “JPUT”. The acquisition included the entire
issued share capital of Standard Life Investments SLIPIT (General
Partner) Limited which holds, through Standard Life Investments
(SLIPIT) Limited Partnership, the new portfolio of 22 UK real
estate assets. Standard Life Investments Limited Partnership
(previously Aviva Investors UK Real Estate Recovery II Limited
Partnership) holds a portfolio of retail, office and industrial
buildings let under operating leases and the acquisition was made
to give the Group access to those assets. The existing strategic
management function and associated processes were acquired with the
property and, as such, the Directors consider this transaction the
acquisition of a business, rather than an asset acquisition.
The fair value of the identifiable assets and liabilities of
Aviva Investors UK Real Estate Recovery II Unit Trust (now re-named
Standard Life Investments SLIPIT Unit Trust) as at the date of
acquisition were:
|
|
Fair
value recognised
on acquisition |
|
|
£ |
| Investment
property |
|
165,000,000 |
| Trade receivables |
|
1,428,495 |
| Cash and cash
equivalents |
|
132,045
166,560,540 |
|
|
|
| Trade payables |
|
(1,368,037) |
|
|
165,192,503 |
The purchase consideration of £165,192,503 for the 100% interest
acquired consists of £75,027,974 raised from issuing new shares net
of costs, borrowings of £54,826,550 net of loan arrangement costs
and £35,337,979 from existing cash reserves. The due diligence
costs of £1,942,498 incurred in connection with the acquisition
have been expensed and are included in the Consolidated Statement
of Comprehensive Income. From the date of acquisition, Standard
Life Investments Unit Trust has contributed £582,685 to the profit
after tax of the Group and revenues of £350,212 in the form of
property rental income. If the acquisition had occurred on
1 January 2015 the Standard Life
Investments SLIPIT Unit Trust would have contributed £29,053,934 to
the profit after tax of the Group and £11,013,373 revenues in the
form of property rental income.
11 TRADE AND OTHER RECEIVABLES
|
2015 |
2014 |
|
£ |
£ |
| Trade
receivables |
1,710,199 |
1,745,004 |
| Less:
provision for impairment of trade receivables |
(13,495) |
(6,941) |
| Trade
receivables (net) |
1,696,704 |
1,738,063 |
|
|
|
| Rental
deposits held on behalf of tenants |
795,355 |
639,608 |
| Other
receivables |
366,792 |
282,769 |
| Total
trade and other receivables |
2,858,851 |
2,660,440 |
|
|
|
|
|
Reconciliation for changes in the provision for impairment of
trade receivables:
|
2015 |
2014 |
|
£ |
£ |
| Opening
balance |
(6,941) |
(114,622) |
| Charge for
the year |
(13,495) |
(6,941) |
| Reversal of
provision |
6,941 |
114,622 |
| Closing
balance |
(13,495) |
(6,941) |
|
|
|
|
|
The estimated fair values of receivables are the discounted
amount of the estimated future cash flows expected to be received
and approximate their carrying amounts.
The trade receivables above relate to rental income receivable
from tenants of the investment properties. When a new lease is
agreed with a tenant the Investment Manager performs various money
laundering checks and makes a financial assessment to determine the
tenant’s ability to fulfil its obligations under the lease
agreement for the foreseeable future. The majority of tenants are
invoiced for rental income quarterly in advance and are issued with
invoices at least 21 days before the relevant quarter starts.
Invoices become due on the first day of the quarter and are
considered past due if payment is not received by this date. Other
receivables are considered past due when the given terms of credit
expire.
Amounts are considered impaired when it becomes unlikely that
the full value of a receivable will be recovered. Movement in the
balance considered to be impaired has been included in other direct
property costs in the Consolidated Statement of Comprehensive
Income. As of 31 December 2015, trade
receivables of £13,495 (2014: £6,941) were considered impaired and
provided for.
The ageing of these receivables is as follows:
|
2015 |
2014 |
|
£ |
£ |
| 0 to 3
months |
12,905 |
1,562 |
| 3 to 6
months |
352 |
5,379 |
| Over 6
months |
238 |
– |
|
13,495 |
6,941 |
|
|
|
|
|
As of 31 December 2015, trade
receivables of £1,696,704 (2014: £1,738,063) were less than 3
months past due but considered not impaired.
12 CASH AND CASH EQUIVALENTS
|
2015 |
2014 |
|
£ |
£ |
| Cash held
at bank |
4,574,353 |
764,911 |
| Cash held
on deposit with RBS (see note 14) |
7,821,163 |
4,634,184 |
|
12,395,516 |
5,399,095 |
|
|
|
|
|
Cash held at banks earns interest at floating rates based on
daily bank deposit rates. Deposits are made for varying periods of
between one day and three months, depending on the immediate cash
requirements of the Group, and earn interest at the applicable
short-term deposit rates.
13 TRADE AND OTHER PAYABLES
|
2015 |
2014 |
|
£ |
£ |
| Trade
payables |
541,091 |
553,969 |
| Other
payables |
4,768,713 |
1,512,424 |
| VAT
payable |
680,674 |
473,469 |
| Deferred
rental income |
6,536,107 |
3,907,322 |
| Rental
deposits due to tenants |
173,072 |
155,728 |
| Lease
incentives due within one year |
89,342 |
602,503 |
|
12,788,999 |
7,205,415 |
|
|
|
|
|
|
|
|
Trade payables are non-interest bearing and are normally settled
on 30-day terms.
14 BANK BORROWINGS
|
2015 |
2014 |
|
£ |
£ |
| Loan
facility and drawn down outstanding balance |
139,432,692 |
84,432,692 |
|
|
|
|
|
| Opening carrying
value |
83,980,382 |
83,866,594 |
| Borrowings during the
year |
55,000,000 |
– |
| Arrangement costs of
additional facility |
(173,450) |
– |
| Amortisation of
arrangement costs |
241,916 |
113,788 |
| Closing carrying
value |
139,048,848 |
83,980,382 |
On 20 January 2012 the Company
completed the drawdown of £84,432,692 loan with The Royal Bank of
Scotland plc (“RBS”). The facility
was repayable on 16 December 2018,
however this date was re-negotiated during the year as detailed
below. Interest is payable at a rate equal to the aggregate of 3
month Libor, a margin of 1.65% (below 40% LTV) or 1.75% (40% to 60%
LTV inclusive) or 1.95% (above 60% LTV) until 21 December 2015.
On 22 December 2015 the Company
increased its borrowing facilities from £84,432,692 to
£139,432,692. The additional borrowing was in the form of an
additional term loan of £40,567,308 and a revolving credit facility
(“RCF”) of £14,432,692 (with the potential to draw a further
£15,567,308 of the RCF) all of which is due to expire in
June 2017. Interest from 22 December 2015 is payable at a rate equal to
the aggregate of 3 month Libor, a margin of 1.25%.
Under the terms of the loan facility there are certain events
which would entitle RBS to terminate the loan facility and demand
repayment of all sums due. Included in these events of default is
the financial undertaking relating to the loan to value percentage.
The loan agreement notes that the loan to value percentage is
calculated as the loan amount less the amount of any sterling cash
deposited within the security of RBS divided by the gross secured
property value, and that this percentage should not exceed 65% for
the period to and including 22 December
2016 and should not exceed 60% after 22 December 2016 to maturity.
|
2015 |
2014 |
|
£ |
£ |
| Loan
amount |
139,432,692 |
84,432,692 |
| Cash
deposited within the security of RBS |
(7,821,163) |
(4,634,184) |
|
131,611,529 |
79,798,508 |
|
|
|
| Investment properties valuation |
451,985,000 |
270,225,000 |
|
|
|
| Loan to
value percentage |
29.1% |
29.5% |
|
|
|
| Loan to
value percentage covenant |
65.0% |
65.0% |
|
|
|
| Loan to
value percentage if all cash is deposited within the security of
RBS |
28.1% |
29.2% |
|
|
|
|
|
Other loan covenants that the Group is obliged to meet include
the following:
- that the net rental income is not less than 150% of the
finance costs for any three month period
- that the largest single asset accounts for less than 15%
of the Gross Secured Asset Value
- that the largest ten assets accounts for less than 75%
of the Gross Secured Asset Value
- that sector weightings are restricted to 55%, 45% and
45% for the Office, Retail and Industrial sectors respectively
- that the largest tenant accounts for less than 20% of
the Group’s annual net rental income
- that the five largest tenants account for less than 50%
of the Group’s annual net rental income
- that the ten largest tenants account for less than 75%
of the Group’s annual net rental income
During the year the Group did not default on any of its
obligations under its loan agreement.
The loan facility is secured by fixed and floating charges over
the assets of the Company and its wholly owned subsidiary, Standard
Life Investments Property Holdings Limited.
15 INTEREST RATE SWAPS
The Company has 2 interest rate swap agreements with RBS which
both have a maturity date of 16 December
2018.
On 20 January 2012 the Company
completed an interest rate swap of a notional amount of £12,432,692
with RBS. This interest rate swap has a maturity of 16 December 2018. Under the swap the Company has
agreed to receive a floating interest rate linked to 3 month Libor
and pay a fixed interest rate of 1.77125%.
On 20 January 2012 the Company
completed an interest rate swap of a notional amount of £72,000,000
with RBS which replaces the interest rate swap entered into on
29 December 2003. This interest rate
swap effective date is 29 December
2013 and has a maturity date of 16
December 2018. Under the swap the Company has agreed to
receive a floating interest rate linked to 3 month Libor and pay a
fixed interest rate of 2.0515%.
|
2015 |
2014 |
|
£ |
£ |
| Opening
fair value of interest rate swaps at 1 January |
(2,674,939) |
(30,997) |
| Valuation
gain/(loss) on interest rate swaps |
589,647 |
(2,643,942) |
Closing fair value of interest rate swaps at 31
December
Interest rate swaps due: |
(2,085,292) |
(2,674,939) |
| Less than
one year |
(908,751) |
(1,386,451) |
| Between one
and five years |
(1,176,541) |
(1,288,488) |
| Closing
fair value of interest rate swaps at 31 December |
(2,085,292) |
(2,674,939) |
|
|
|
|
|
The individual swap assets and liabilities are listed below:
| Interest rate swap with
a start date of 20 January 2012 maturing on 16 December 2018 |
(220,107) |
(278,270) |
| Interest rate swap with
a start date of 29 December 2013 maturing on 16 December 2018 |
(1,865,185) |
(2,396,669) |
|
(2,085,292) |
(2,674,939) |
16 LEASE ANALYSIS
Lessor length
The Group has entered into leases on its property portfolio.
This property portfolio as at 31 December
2015 had an average lease expiry of 5 years and 10 months.
Leases include clauses to enable periodic upward revision of the
rental charge according to prevailing market conditions. Some
leases contain options to break before the end of the lease
term.
Future minimum rentals receivable under non-cancellable
operating leases as at 31 December are as follows:
|
2015 |
2014 |
|
£ |
£ |
| Within one
year |
26,596,634 |
17,200,407 |
| After one
year, but not more than five years |
85,580,067 |
54,964,023 |
| More than
five years |
52,490,484 |
48,214,243 |
|
Total |
164,667,185 |
120,378,673 |
|
|
|
|
|
The largest single tenant at the year end accounts for 4.6%
(2014: 6.7%) of the current annual passing rent.
17 SHARE CAPITAL
Under the Company’s Articles of Incorporation, the Company may
issue an unlimited number of ordinary shares of 1 pence each. As at 31
December 2015 there were 380,690,419 ordinary shares of
1 pence each in issue. All ordinary
shares rank equally for dividends and distributions and carry one
vote each. There are no restrictions concerning the transfer of
ordinary shares in the Company, no special rights with regard to
control attached to the ordinary shares, no agreements between
holders of ordinary shares regarding their transfer known to the
Company and no agreement which the Company is party to that affects
its control following a takeover bid.
| Allotted, called up and
fully paid: |
2015 |
2014 |
|
£ |
£ |
| Opening
balance |
96,188,648 |
31,337,024 |
Shares issued between 25 February 2015 and
21 December 2015 at a price of between
78.1p and 82.0p per share |
110,462,680 |
– |
| Shares
issued between 7 March 2014 and 19 November 2014 at a price of
between 71.5p and 76.0p per share |
– |
65,868,956 |
| Issue costs
associated with new ordinary shares |
(1,831,109) |
(1,017,332) |
| Closing
balance |
204,820,219 |
96,188,648 |
|
|
|
|
2015 |
2014 |
|
Number of
shares |
Number of
shares |
| Opening
balance |
244,216,165 |
154,994,237 |
| Issued
during the year |
136,474,254 |
89,221,928 |
| Closing
balance |
380,690,419 |
244,216,165 |
|
|
|
|
|
18 RESERVES
Retained earnings
This is a distributable reserve and represents the cumulative
revenue earnings of the Group less dividends declared as payable to
the Company’s shareholders.
Capital reserves
This reserve represents realised gains and losses on disposed
investment properties and unrealised valuation gains and losses on
investment properties and cash flow hedges since the Company’s
launch. This reserve also represents the realised gain on the
acquisition of two subsidiaries during the year to 31 December 2014 as detailed in note 9.
Other distributable reserves
This reserve represents the share premium raised on launch of
the Company which was subsequently converted to a distributable
reserve by special resolution dated 4
December 2003. This balance has been reduced by the
allocation of preference share finance costs.
The detailed movement of the above reserves for the years to
31 December 2015 and 31 December 2014 can be found in the Consolidated
Statement of Changes in Equity.
19 EARNINGS PER SHARE
Basic earnings per share amounts are calculated by dividing
profit for the year net of tax attributable to ordinary equity
holders by the weighted average number of ordinary shares
outstanding during the year. As there are no dilutive instruments
outstanding, basic and diluted earnings per share are
identical.
The following reflects the income and share data used in the
basic and diluted earnings per share computations:
|
2015 |
2014 |
|
£ |
£ |
| Profit for
the year net of tax |
31,939,653 |
28,583,402 |
|
|
|
|
|
|
2015 |
2014 |
|
Number of
shares |
Number of
shares |
| Weighted
average number of ordinary shares outstanding during the year |
280,330,039 |
185,548,062 |
| Profit
per ordinary share |
11.39p |
15.40p |
|
|
|
|
|
EPRA publishes guidelines for calculating adjusted earnings that
represent earnings from the core operational activities. Therefore,
it excludes the effect of movements in the fair value of, and
results from sales of, investment properties together with the
effect of movements in the fair value of financial instruments.
|
2015 |
2014 |
|
£ |
£ |
| Profit for
the year net of tax |
31,939,653 |
28,583,402 |
| Less:
revaluation movements on investment properties |
(17,636,973) |
(21,197,869) |
| Less: loss
/ (gain) on asset acquisition |
75,181 |
(136,938) |
| Less:
(profit) / loss on disposal of investment properties |
(3,024,748) |
1,840,412 |
| Adjusted
(EPRA) profit for the year |
11,353,113 |
9,089,007 |
|
|
|
|
|
|
2015 |
2014 |
|
Number of
shares |
Number of
shares |
| Weighted
average number of ordinary shares outstanding during the year |
280,330,039 |
185,548,062 |
| Adjusted
(EPRA) profit per share |
4.05p |
4.90p |
|
|
|
|
|
20 DIVIDENDS AND PROPERTY INCOME
DISTRIBUTION GROSS OF INCOME TAX
|
2015 |
2014 |
|
£ |
£ |
| Non
Property Income Distributions |
|
|
| 1.161p per
ordinary share paid in February relating to the quarter ending 31
December (2014: 1.133p) |
2,835,350 |
1,756,085 |
| 1.161p per
ordinary share paid in May relating to the quarter ending 31 March
(2014: 1.161p) |
– |
1,865,834 |
| 1.161p per
ordinary share paid in August relating to the quarter ending 30
June (2014: 1.161p) |
– |
1,865,834 |
| 1.161p per
ordinary share paid in November relating to the quarter ending 30
September (2014: 1.161p) |
2,220,581 |
2,527,604 |
|
|
|
| Property
Income Distributions |
|
|
| 1.161p per
ordinary share paid in May relating to the quarter ending 31
March |
3,213,406 |
– |
| 1.161p per
ordinary share paid in August relating to the quarter ending 30
June |
3,348,175 |
– |
| 1.161p per
ordinary share paid in November relating to the quarter ending 30
September |
1,127,594 |
– |
|
12,745,106 |
8,015,357 |
|
|
|
|
|
On 1 January 2015 the Company
converted to a UK REIT from a Guernsey Investment Company (GIC).
The payment in February 2015 is the
dividend relating to the period prior to REIT conversion for the
quarter ended 31 December 2014 and
relates to when the Company was a GIC. The payment in May 2015 is the first property income
distribution (gross of income tax) following REIT conversion for
the quarter ended 31 March 2015.
21 RECONCILIATION OF CONSOLIDATED NET
ASSET VALUE TO PUBLISHED NET ASSET VALUE
The net asset value attributable to ordinary shares is published
quarterly and is based on the most recent valuation of the
investment properties.
|
2015 |
2014 |
|
Number of
shares |
Number of
shares |
| Number of
ordinary shares at the reporting date |
380,690,419 |
244,216,165 |
|
|
|
|
|
|
2015 |
2014 |
|
£ |
£ |
Total equity per audited consolidated financial
statements |
312,783,287 |
184,367,522 |
| Net
asset value per share |
82.2p |
75.5p |
|
|
|
|
|
The EPRA publishes guidelines for calculating adjusted NAV. EPRA
NAV represents the fair value of an entity’s equity on a long-term
basis. Items that EPRA considers will have no impact on the long
term, such as fair value of derivatives, are therefore
excluded.
|
2015 |
2014 |
|
£ |
£ |
Total equity per audited consolidated financial
statements |
312,783,287 |
184,367,522 |
| Adjustments: |
|
|
| Add: fair
value of derivatives |
2,085,292 |
2,674,939 |
| EPRA net
asset value |
314,868,579 |
187,042,461 |
|
|
|
| EPRA net
asset value per share |
82.7p |
76.6p |
|
|
|
|
|
22 SERVICE CHARGE
The Company has appointed an agent to manage the service charge
at the investment properties. The table below is a summary of the
service charge during the year. The table shows the service charge
cost to the tenants, the amount the tenants have been billed based
on the service charge budget and the amount the Company has paid in
relation to void units over the year. The table also shows the
balancing service charge that is due to/from the tenants as at the
Balance Sheet date.
|
2015 |
2014 |
|
£ |
£ |
| Total
service charge expenditure incurred |
1,685,569 |
1,557,269 |
|
|
|
| Total
service charge billed to tenants excluding void units and service
charge caps |
1,492,339 |
1,663,864 |
| Service
charge billed to the Group in respect of void units and service
charge caps |
74,448 |
120,164 |
| Service
charge due from/(to) tenants as at 31 December |
118,782 |
(226,759) |
|
1,685,569 |
1,557,269 |
|
|
|
|
|
|
23 RELATED PARTY DISCLOSURES
Parties are considered to be related if one party has the
ability to control the other party or exercise significant
influence over the other party in making financial or operational
decisions.
Ordinary share capital
Standard Life Assurance Limited held 34,439,001 (2014:
19,644,001) of the issued ordinary shares at the Balance Sheet date
on behalf of its Unit Linked Property Funds. This equates to 9.0%
(2014: 8.0%) of the ordinary share capital in issue at the Balance
Sheet date.
| Directors
remuneration |
| The remuneration of
the key management personnel is detailed below which includes pay
as you earn tax and national insurance contributions. Further
details on the key management personnel can be found in the
Director’s Remuneration Report and The Corporate Governance
Report. |
|
2015 |
2014 |
|
|
£ |
£ |
|
| Richard
Barfield (appointed chairman 29 May 2014) |
33,000 |
31,223 |
|
| Sally-Ann
Farnon (appointed 16 July 2010) |
28,500 |
29,500 |
|
| Shelagh
Mason (retired 31 December 2014) |
– |
26,500 |
|
| Huw Evans
(appointed 11 April 2013) |
26,000 |
26,500 |
|
| Robert Peto
(appointed 28 May 2014) |
26,000 |
16,736 |
|
| Paul
Orchard-Lisle (retired 28 May 2014) |
– |
13,107 |
|
| Employers
national insurance contributions |
5,872 |
– |
|
|
119,372 |
143,566 |
|
| Directors
expenses |
4,924 |
2,431 |
|
|
124,296 |
145,997 |
|
|
|
|
|
|
|
Investment Manager
Management of the property portfolio is contractually delegated
to Standard Life Investments (Corporate Funds) Limited as
Investment Manager and the contract with the Investment Manager can
be terminated by the Company. Transactions with the Investment
Manager in the year are detailed in note 4.
24 SEGMENTAL INFORMATION
The Board has considered the requirements of IFRS 8 ‘operating
segments’. The Board is of the view that the Group is engaged in a
single segment of business, being property investment and in one
geographical area, the United
Kingdom.
25 EVENTS AFTER THE BALANCE SHEET
DATE
On 29 February 2016 the Group
started the process of liquidating Standard Life Investments SLIPIT
Unit Trust. As part of the liquidation process the trustees of the
Standard Life Investments SLIPIT Unit Trust distributed the
interests in the Standard Life Investments (SLIPIT) Limited
Partnership to Standard Life Investments Property Holdings Limited
(99%) and Standard Life Investments Property Income Trust Limited
(1%).
On 31 March 2016 a fourth interim
dividend for the period 1 October
2015 to 20 December 2015 of
1.022 pence per share was paid. The
dividend was split as a property income dividend of 0.528 pence per share and an ordinary dividend of
0.494 pence per share.
On 31 March 2016 a fifth interim
dividend for the period 21 December
2015 to 31 December 2015 of
0.139 pence per share was paid. The
dividend was split as a property income dividend of 0.072 pence per share and an ordinary dividend
0.067 pence per share.
Additional Notes to the Annual
Financial Report
This Annual Financial Report announcement is not the Company’s
statutory accounts for the year ended 31
December 2015. The statutory accounts for the year ended
31 December 2015 received an audit
report which was unqualified and did not include a reference to any
matters to which the auditors drew attention by way of emphasis
without qualifying their report.
The statutory accounts for the financial year ended 31 December 2015 were approved by the Directors
on 18 April 2016. The Company’s AGM
is to be held on 2 June 2016. The
Annual Report and Notice of AGM will be posted to shareholders in
April 2016 and will be available for
download from the Company’s website hosted by the Investment
Manager (www.standardlifeinvestments.com/its).
Please note that past performance is not necessarily a guide to
the future and that the value of investments and the income from
them may fall as well as rise. Investors may not get back the
amount they originally invested.
END