23 MARCH
2017
STANDARD LIFE INVESTMENTS PROPERTY
INCOME TRUST
RESULTS IN RESPECT OF THE YEAR ENDED
31 DECEMBER 2016
Financial Highlights
- Robust Net Asset Value (“NAV”) total return of 4.4% in the
year, driven by positive investment activity and successful asset
management set against a background of volatility in the commercial
property market.
- Strong share price total return over the year of 7.0% compared
to total return on FTSE All Share REIT Index of -7.0% with the
Company’s shares standing at a premium to NAV of 6.8% as at
31 December 2016.
- Prudent Loan to Value (“LTV”) at year end of 26.0% (2015 –
28.1%) with debt at an attractive interest rate of 2.6%.
- The Company had cash of £13million at year end plus £20million
available to utilise of its Revolving Credit Facility (“RCF”) which
will enable the Company to take advantage of opportunities as and
when they arise.
- Dividend cover of 117% in 2016 as the acquisition of the Pearl
portfolio in December 2015, and the
opportunities this presented, boosted income generation over the
year.
- Following the 2.5% dividend increase in 2016, the yield on the
Company’s share price as at 31 December stood at 5.5% which
compares favourably to the FTSE All-Share REIT Index (3.7%) and the
FTSE All-Share Index (3.5%) at the same date.
- Overall, the Company has a secure balance sheet, significant
financial resources and a portfolio of assets which is continuing
to provide strong income generation for shareholders.
Property Highlights
- As at 31 December 2016, the
portfolio was valued at £429.9million.
- Portfolio total return for the year was 5.8%, significantly
ahead of the IPD Quarterly version of Monthly Index total return
(“the Company’s benchmark”) of 2.2%. The capital return of -0.7%
and the income return of 6.5% from the portfolio both outperformed
the comparative benchmark figures (-2.5% and 4.8%
respectively).
- Sales totalling £20.2million in the year undertaken to realise
profit, remove future underperformance risk and reduce gearing in a
time of market volatility. Post the year end this trend continued
with £30million being sold, including the Company’s largest asset
at White Bear Yard.
- A number of successful asset management initiatives,
contributing to income and capital values, completed during the
year including:
- 8 new lettings completed during the year securing £907,000 of
new rent pa; and
- 11 lease renegotiations agreed with existing tenants securing
income of £1.38million pa.
- Void rate of 3.3% at 31 December
2016, significantly below the benchmark figure of 7.1%.
- Positive rent collection rates of 99% within 21 days
highlighting the continued strength of tenant covenants in an
environment where income is likely to be the key component of
returns going forward.
- The Company’s investment portfolio has an initial yield of
6.3%, and given the nature of the investments and the leases in the
portfolio this yield is expected to trend upwards (based on the
current valuation) to 7.2% over the next five years.
PERFORMANCE SUMMARY
Earnings & Dividends |
|
|
31 December
2016 |
31 December
2015 |
Revenue earnings per share
(excluding capital items & swaps breakage costs) |
|
|
5.56 |
4.74 |
Dividends declared per ordinary
share (p) |
|
|
4.76 |
4.644 |
Dividend cover (%)* |
|
|
117 |
104 |
Dividend Yield (%)** |
|
|
5.5 |
5.5 |
FTSE Real Estate Investment Trusts
Index Yield (%) |
|
|
3.7 |
3.0 |
FTSE All-Share Index Yield (%) |
|
|
3.5 |
3.7 |
Ongoing charges*** |
|
|
|
|
As a % of average net assets
including direct property costs |
|
|
1.7 |
1.5 |
As a % of average net assets
excluding direct property costs |
|
|
1.3 |
1.1 |
Capital Values &
Gearing |
|
31 December
2016 |
31 December
2015 |
% Change |
Total Assets (£million) |
|
445.7 |
467.3 |
(4.6) |
NAV per share (p) (note 21) |
|
81.0 |
82.2 |
(1.5) |
Ordinary Share Price (p) |
|
86.5 |
84.5 |
2.4 |
Premium to NAV (%) |
|
6.8 |
2.8 |
|
LTV**** |
|
26.0 |
28.1 |
|
Total Return |
|
1 Year %
return |
3 Year %
return |
5 Year %
return |
NAV***** |
|
4.4 |
48.6 |
80.4 |
Share Price***** |
|
7.0 |
46.8 |
129.8 |
FTSE Real Estate Investment Trusts
Index |
|
(7.0) |
27.3 |
98.8 |
FTSE All-Share Index
|
|
16.8 |
19.3 |
61.8 |
Property Returns & Statistics
% |
|
|
31 December
2016 |
31 December
2015 |
Property income return
|
|
|
6.5 |
6.1 |
IPD benchmark income return
|
|
|
4.8 |
4.9 |
Property total return |
|
|
5.8 |
13.1 |
IPD benchmark total return |
|
|
2.2 |
13.0 |
Void rate |
|
|
3.3 |
1.1 |
* Calculated as revenue earnings per share (excluding capital items
& swaps breakage costs) as a percentage of dividends declared
per ordinary share.
** Based on an annual dividend of 4.76p and 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. 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.
**** Calculated as bank borrowings less all cash as a percentage of
the open market value of the property portfolio as at the end of
each year.
***** Assumes re-investment of dividends excluding transaction
costs.
Sources: Standard Life Investments, Investment Property Databank
(“IPD”)
CHAIRMAN’S STATEMENT
In my first annual report as your Chairman I am pleased to
report that your Company has continued to deliver above benchmark
performance set against a background of considerable political
upheaval which has provided a challenging background for the UK
commercial property market
Background
The past twelve months have proved to be a watershed year with
unexpected referenda and election results in both the UK and
the United States resulting in
heightened uncertainty as to what the future holds. The decision by
the UK electorate to leave the European Union in June 2016, followed by the ensuing political
fallout, impacted both the financial markets and, in particular,
real estate markets, as REIT share prices fell and open ended funds
closed to redemptions. In addition, the vote was expected to impact
immediately the wider economy as it was anticipated both investment
and consumer spending would be adversely affected. At the time of
writing, the reality has been somewhat different with the UK
economy growing by 0.6% in both Q3 and Q4 of 2016. This was
bolstered by the service sector as the economy continued to rely on
the consumer although this may not continue as inflationary
pressures increase.
The election of President Trump in the
United States followed the lead set by the UK with
disenfranchised voters making themselves heard and producing a
surprise result, contrary to opinion poll forecasts. President
Trump has made an immediate impact, issuing a number of executive
orders on healthcare, oil and gas pipelines and, somewhat more
controversially, immigration. Perhaps encouraged by the above,
“populism” is gaining traction across the developed nations as a
number of elections in Europe
approach, increasing geopolitical risk and resulting in an
environment that is fraught with uncertainty. From a UK
perspective, the main focus will be on whether the new US
President’s policies boost the performance of the US economy,
thereby providing a fillip to the world economy, and whether the UK
can quickly negotiate trade deals upon the UK’s exit from the
EU.
Performance
Against such a background the Company has performed well in the
year. Even without the political machinations, it was anticipated
that real estate returns would moderate in 2016, especially after
the Chancellor announced a 1% rise in stamp duty in the March
budget. Following the EU referendum, the direction of valuations
has been volatile, falling in September but recovering somewhat by
December. Overall, your Company delivered a robust NAV total return
of 4.4%. This was driven by a relatively strong performance from
the portfolio which delivered a total return of 5.8 % compared to
the IPD benchmark return of 2.2 %, with both capital and income
delivering above benchmark returns. The capital performance was
boosted by positive investment activity as five assets were sold
for £20.2million after costs which, in aggregate, was 5.6% ahead of
December 2015 valuations. This trend
continued after the year end where a further two assets have been
sold at prices in-line with their December
2016 valuations, including the Company’s largest asset,
White Bear Yard in London thereby
removing the Company’s only exposure to the City of London office sector.
The share price total return in the year was 7.0% as the share
price premium to NAV increased to 6.8% at the year end reflecting
the ongoing demand for the Company’s shares as investors’ appetite
for attractive and sustainable income returns continued. This
return compares favourably to the return on the FTSE All-Share REIT
index which returned -7.0% in the calendar year.
In order to ensure the Company’s share price premium over its
NAV does not become excessive, in January
2017 the Company applied for, and was granted, a
blocklisting of 19 million shares, approximately 5% of the issued
share capital. To date 7.275 million of shares have been issued
under this blocklisting to meet excess market demand. All shares
have been issued at a premium to NAV and hence have been accretive
to existing shareholders.
Dividends
As indicated at the time of the acquisition of the Pearl
portfolio in December 2015, the
Company increased its dividend by 2.5% for 2016 to 4.76p. This
represents an attractive yield of 5.5% as at 15 March 2017, significantly higher than that
produced by the FTSE All-Share REIT Index ( 3.8%) and also other
mainstream asset classes such as equities (FTSE All Share Index
yield of 3.2%) and gilts (Ten Year Gilt yield of 1.2%) at the same
date. Importantly, it should also be highlighted that this dividend
has been fully covered by net income with a healthy dividend cover
of 117% for the calendar year.
Debt
As described in the Interim Report, the Company refinanced its
debt facilities in April 2016. A new
£110million seven year facility at a fixed rate of 2.725% and, in
order to introduce flexibility to the capital structure, a RCF of
£35million were taken out with the Royal Bank of Scotland. At the year end the Company, having
used sales proceeds to pay down debt, had a prudent LTV of 26.0%
(net of all cash) and an attractive all-in rate of financing of
2.6%.
Board Changes
As mentioned in the Interim Report, Dick
Barfield, my predecessor as Chairman, retired from the
Company at the AGM in June 2016 and I
would like to thank him for his strong and dedicated leadership as
the Company more than doubled in size over the course of his
tenure. In addition, James
Clifton-Brown was appointed to the Board in August 2016. In his short time on the Board,
James, who has taken my place as Chairman of the Property Valuation
Committee, has proved to be a great asset and the Company will
benefit from his many years of experience working in the commercial
property sector.
Investment Manager
The Board has noted the recent announcement relating to a
proposed merger between Standard Life and Aberdeen Asset
Management. It is too early to comment on the potential
implications for the Company of the proposed merger and we will
monitor the progress of the transaction with interest.
Outlook
2017 is expected to be an eventful year in the UK and abroad.
The UK’s economic landscape is expected to be dominated by the
continued political debate over the Article 50 process for exiting
the European Union. The twists and turns of politics are expected
to dominate the headlines elsewhere in the world as the year
progresses. How this impacts the wider UK economy remains to be
seen with the Bank of England
forecasting growth of 2.0% in 2017, the same as that achieved in
2016. Any temptations to increase interest rates are likely to be
muted by the negative impacts on consumer spending resulting from
externally generated inflation, and the historically modest level
of anticipated economic growth –“lower for longer” in terms of
interest rates continues to be the most likely scenario.
However, despite the unprecedented levels of uncertainty, real
estate still has some significant attractions as an asset class.
The sector has considerably lower void rates, speculative
development and gearing levels compared to previous cycles which
should help reduce volatility. In addition, there remains a
significant gap between the attractive and historically stable
yields currently being produced on real estate and those produced
by other mainstream asset classes. This provides a buffer against
any modest increases in interest rates.
Within the framework outlined above, the Company has a number of
defensive qualities that makes it well positioned for the current
market. While secondary assets may not be as resilient in the
anticipated risk averse environment expected in the next twelve
months, the portfolio of 57 assets is well diversified both in
terms of sector and geography and currently has a bias towards the
Industrial sector which is expected to be the strongest performing
sector in 2017. The sale of White Bear Yard has removed an asset
whose value may have come under pressure given the potential for a
“hard” Brexit and where there was letting risk in 2019 which may
have required significant capital expenditure. Secondly, in an
environment where income will be the main driver of returns, the
Company also has a strong tenant base, low void rate (3.3%) and a
strong rent collection rate (99% within 21 days) which helps
underpin the strong income return and attractive dividend yield
paid to shareholders. In the UK, where historically low interest
rates are fast becoming the norm, the demand for products that
produce an attractive and sustainable level of income is high and
this is one of the reasons your Company continues to trade at a
premium rating. Finally, the Company has a prudent LTV level and a
debt structure that allows gearing to be managed appropriately
while still providing resources to invest further in the portfolio.
Taking all these factors together, I believe that your Company is
well placed to continue delivering value for shareholders.
Robert
Peto
Chairman
22 March 2017
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 LTV 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,
controlled growth in the Company. Since the year end, the Company
has raised an additional £6.2million through new share issues, as
detailed in the Chairman’s Statement.
The Company continues to maintain a tax efficient structure,
having migrated its tax residence to the UK and becoming a UK REIT
on 1 January 2015.
The Board
The Board currently consists of a non-executive Chairman and
four non-executive Directors. There is also a commitment to achieve
the proper levels of diversity. At the date of this report, the
Board consists 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 IPD 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 IPD. The Board seeks to ensure that proper priority is being
given by the Investment Manager to maintaining 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.
- NAV total return
The NAV total return reflects both the NAV 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 NAV total return of the Company over various
time periods (quarter, annual, three years and 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 NAV
The Board closely monitors the premium or discount of the share
price to the NAV 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 Annual
General Meeting (“AGM”) to enable it to issue or buy back shares
with a view to limiting this volatility.
- Dividend per share and dividend cover
A key objective of the 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 cover, in conjunction with detailed financial forecasts,
to ensure that this objective is being met and is sustainable.
The Board considers the performance measures both over various
time periods and against similar funds.
A record of these measures is disclosed in the Financial
Highlights, Chairman’s Statement and Investment Manager’s
Report.
Principal Risks and Uncertainties
The Board ensures that proper consideration of risk is
undertaken in all aspects of the Company’s business on a regular
basis. During the year, the Board carried out an assessment of the
risk profile of the Company, including consideration of risk
appetite, risk tolerance and risk strategy. The Board regularly
reviews the principal risks of the Company, seeking assurance that
these risks are appropriately rated and that appropriate risk
mitigation is in place.
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, leading to a widening discount.
This risk is mitigated through regular contact with
shareholders, a regular review of share price performance and the
level of the discount or premium at which the shares trade to NAV
and regular meetings with the Company’s broker to discuss these
points and address any issues that arise.
- Net revenues fall such that the Company cannot sustain its
level of dividend, for example due to tenant failure or inability
to let properties.
This risk is mitigated through regular review of forecast
dividend cover, regular contact with shareholders and regular
review of tenant mix, risk and profile. Due diligence work on
potential tenants is undertaken before entering into new lease
arrangements and tenants are kept under constant review through
regular contact and various reports both from the managing agents
and the Investment Manager’s own reporting process. Contingency
plans are put in place at units that have tenants that are believed
to be in financial trouble. The Company subscribes to the IPD 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.
- Uncertainty or change in the macroeconomic environment results
in property becoming an undesirable asset class, causing a decline
in property values.
This risk is managed through regular reporting from, and
discussion with, the Investment Manager and other advisors.
Macroeconomic conditions form part of the decision making process
for purchases and sales of properties and for sector allocation
decisions.
Macroeconomic uncertainty increased during 2016, following the
UK’s decision to leave the EU and the US presidential election. The
Board continues to closely monitor the effect of this on property
values and also the impact of any resultant regulatory changes that
may impact the Company.
- Breach of loan covenants.
This risk is mitigated by the Investment Manager monitoring the
loan covenants on a regular basis and providing a quarterly
certificate to the bank confirming compliance with the covenants.
Compliance is also reviewed by the Board each quarter and there is
regular dialogue between the Investment Manager and the bank on
Company activity and performance.
- Loss on financial instruments.
The Company has entered into an interest rate swap arrangement.
This swap instrument is valued and monitored on a monthly basis by
the counterparty bank. The Investment Manager checks the valuation
of the swap instrument internally to ensure this is accurate. In
addition, the credit rating of the bank that the swap is 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.
The implementation of AIFMD during 2014 and the conversion of
the Company to a UK REIT on 1 January
2015 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.
A new regulatory risk arose in 2016 with the introduction of the
EU’s Market Abuse Regulations (“MAR”) which apply to UK listed
companies. The Company has updated its policies and procedures to
ensure that it is compliant with the requirements of MAR.
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.
Sustainable Real Estate Investment
Policy
The Investment Manager acquires, develops and manages properties
on behalf of the Company. It is recognised that these activities
have both direct and indirect environmental and social impacts. The
Board has adopted the Investment Manager’s own Sustainable Real
Estate Investments Policy and associated Environmental Management
Systems and is committed to environmental management in all phases
of an asset’s cycle – from acquisition through demolition,
redevelopment and operational management to disposal. The focus is
on energy conservation, mitigating greenhouse gases emissions,
maximising waste recycling and water conservation. To facilitate
this, the Investment Manager works 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 approach to monitoring and improving
the sustainability performance of the assets held by the Company
has been highly successful. Energy consumption and greenhouse gas
emissions for managed assets in the Company reduced by 8% and 11%
respectively in 2015/16 compared with the year before. The Company
also achieved its zero waste to landfill target, recovering value
from all waste produced.
In conjunction with these environmental principles the Company
has a health and safety policy which demonstrates commitment to
providing safe and secure buildings that promote a healthy
working/customer experience that supports a healthy lifestyle. The
Company, through the Investment Manager, manages and controls
health and safety risks systematically as any other critical
business activity using technologically advanced systems and
environmentally protective materials and equipment. The aim is to
achieve a health and safety performance the Company can be proud of
and allow the Company to earn the confidence and trust of tenants,
customers, employees, shareholders and society at large.
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.
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 in relation to LTV and interest cover; and
- The valuation and liquidity of the Company’s property
portfolio, the 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, 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 and signed
on its behalf by:
Robert
Peto
Chairman
22 March 2017
INVESTMENT MANAGER’S REPORT
UK Real Estate Market
2016 was an eventful year many of us will not forget. The
decision by the UK to leave the EU was not the result we had
expected, and it had a dramatic and immediate impact on the UK real
estate market. In the six months since the vote we have seen a
return to more normal market conditions, although there is still a
very uncertain outlook for the market, with heightened political
and economic uncertainty likely to remain for the next couple of
years. Over the twelve months to the end of December
2016, all property recorded a total return of 2.6% against 13.9%
in the twelve months to the end of December
2015. The sharp capital decline following the EU Referendum
was the main contributor to the fall in returns although market
conditions and sentiment have stabilised in recent months. Capital
values fell by -2.8% in the year to the end of December (against a
7.8% increase over 2015), whilst rental growth fell to 2.0% in 2016
compared to 4.3% in 2015. As for the equity markets, the FTSE All
Share and the FTSE 100 total returns rose by 16.8% and 19.1%
respectively over the calendar year 2016. For listed real estate
equities, total returns declined by 8.5% over 2016.
In times of market uncertainty it is easy to apply a broad brush
approach, but in reality the UK commercial real estate market is
made up of many sub markets with different drivers of returns. The
retail market has, of course, been going through a period of change
for several years, but this has created opportunity in one of our
favoured markets; industrial/ logistics. The industrial sector was
the strongest performing in 2016, and this looks likely to continue
with the devalued sterling supporting greater demand for industrial
space in the UK for export led companies. With low levels of supply
in most industrial areas we are seeing rental growth, as increasing
build costs push up the economic rent for delivery of new
accommodation. Central London
offices face some challenges given the unknown shape of Brexit, but
in many parts of the UK, supply of good quality accommodation is
scarce and demand has remained fairly resilient.
UK economic growth over the course of 2016 was 2% which was
better than was anticipated by economists following the referendum
uncertainty and was only a marginal decline on the 2.2% growth
recorded in 2015. Growth over the year has been heavily reliant on
private consumption. Consumers have been resilient to date, with
strong retail sales reported recently compared to last year
although discounting is likely to be a key factor. There are also
suggestions that consumers may be using credit facilities to bring
forward big-ticket purchases in anticipation of higher inflation in
2017. As a result of sterling’s significant decline post the
referendum and higher commodity prices over the year, inflationary
pressures are rising going into 2017.
Investment Outlook
2017 is expected to be another eventful year both in the UK and
abroad. The UK’s economic landscape is expected to be dominated by
the continued political wrangling over the Article 50 process for
exiting the European Union in the UK and the twists and turns of
politics are expected to dominate the headlines elsewhere in the
world as the year progresses.
Despite the uncertainty associated with the political wrangling,
UK real estate continues to provide an elevated yield compared to
other assets. Furthermore, lending to the sector is at a lower
level than in 2007/2008, and, unlike in the Financial Crisis,
liquidity remains reasonable. Additionally, development continues
to be relatively constrained by historic standards and existing
vacancy rates are below average levels in most markets, which
should all help to continue to stabilise the market. In an
environment where the economic fundamentals are expected to soften
and with uncertainty remaining above “normal” levels, we expect
lower returns from property than has been the case over the last
few years. Location and asset quality will be crucial determinants
of how markets respond to pressures in the year ahead. Furthermore,
the steady secure income component generated by the asset class is
likely to be the key driver of returns going forward. The market is
likely to be sentiment driven in the short term as the politics
continues to evolve, which will further affect capital values,
while the medium term impact will continue to hinge on the economic
effects. From a sector perspective, we continue to favour
industrial and logistics property, although they are not likely to
be immune to the ongoing uncertainty, they are expected to be
comparatively resilient. As for the retail sector, inflationary
pressures may prove to be a significant headwind as they impact not
only the retailer’s cost base, but also consumers’ ability to
spend, and further polarisation within the market is likely to be
more pronounced. We continue to expect Central London offices to be the most impacted
sector given the linkages to European markets via cross border
trading.
Overall, investor appetite is expected to be sustained and the
retention of the UK’s safe haven status should also ensure the
asset class is better placed longer term.
Investment Management Strategy
The investment strategy remains to invest in a diversified
portfolio of UK commercial real estate assets that will support an
attractive income return with some prospect for capital and rental
growth. It is important to the Board and manager that the Company
has a covered dividend, which it did again in 2016 (117% covered
for the year) despite an increase in the dividend in Q1 2016.
In order to generate enough income to pay a covered dividend
(Dividend yield 5.5% as at year end) the Company invests in a
diversified portfolio, focused mainly on the industrial and office
sector, and in good quality assets in strong locations, let to
secure tenants who are able to pay the rent. Also we have a lower
than average lease length in order to get a bit more yield. We are
structurally underweight to retail as good quality retail is low
yielding, and also to Central
London offices which are more volatile and also low
yielding.
The Investment Manager seeks to reduce risk at lease expiry by
entering into early discussions with tenants about renewing their
leases or removing break options, and has thus maintained a high
occupancy rate (96.7% at year end).
2016 was a year of consolidation for the Company having
completed the purchase of a portfolio of 22 assets in December 2015 for £165million. I am pleased to
say that the properties have generally performed ahead of our
assumptions with only one exception, where a tenant we had assumed
would renew its lease is not going to. The new portfolio has made a
positive contribution to the Company’s performance.
The decision of the UK to leave the EU following the referendum
has not had a significant impact on the Company’s strategy as we
believed the UK was relatively advanced in its real estate cycle
before June, and had already reduced risk in the portfolio. The
decision to leave has, however, made us continue to have a cautious
stance. A demonstration of this caution is the reduction in the LTV
throughout the year by using sale proceeds to reduce the drawn RCF.
Just after the year end the LTV stood at 24.1%, down from 28.1% as
at December 2015, with just £5m of
the RCF remaining drawn.
Performance
2016 was another good year for the Company, especially at the
underlying portfolio level.
The investment portfolio had an income return of 6.5% for the
year ended December 2016, and saw a
slight decline of 0.7% in capital, compared to the IPD benchmark
figure of 4.8% and -2.5% respectively, meaning the Company had a
total return of 5.8% for the year versus the benchmark 2.2%. The
Company also outperformed the benchmark at a property level over 3
and 5 years.
As shareholders are aware, the Company utilises debt in its
structure. As reported later in this report the Company entered
into a new debt facility and interest rate swap in April 2016, and during the course of the year the
mark to market value of the interest rate swap has had a major
impact on the NAV – as at the end of the year the liability on the
swap was £3.6million. The gearing also had a negative impact on the
NAV with the decline in capital values.
Against its peer group the Company had a moderate year on a NAV
total return basis, but remains strong over the longer term. The
Company has continued to trade on a wider premium than the peer
group average, apart from a short lived blip shortly after the
referendum. The total return of 7.0% outperformed the peer group
average and real estate index.
The Company continues to pay a fully covered dividend,
representing a yield of 5.5% on the year end share price. Again,
this compares well with the peer group.
Valuation
The Company’s investment portfolio was valued on a quarterly
basis throughout 2016 by JLL (on the original portfolio) and by
Knight Frank on the “new” portfolio acquired in December 2015. At the year end the portfolio was
valued at £429.9million and the Company held £13.1million cash.
This compares to £452.0million and £12.4million respectively as at
December 2015 (the difference is
mainly due to the sale of five assets for £20.2million over the
period, with sale proceeds used to reduce debt by £20million).
Lease Expiry Profile
The Company has an average unexpired lease term to the earliest
of lease end or tenant break of 5.5 years. The IPD index has a
slightly longer average of 7.4 years (excluding leases over 35
years). Although the Company has, as at the end of December, 62.5%
of leases expiring in the next five years asset management
initiatives and sales already underway will reduce this by about
6.7%. In 2017 approximately 6.5% of the rent is due to expire and
9.4% in 2018. The peak of expiries is in 2020/ 2021 giving the
asset management team time to regear leases, although we are
finding many tenants are delaying making decisions on occupational
needs until they really have to.
In times of uncertain outlook we have often found that a greater
number of tenants renew as the cost and disruption of moving is
significant, and the choice of decent accommodation to move to is
very limited due to a lack of new development over the last ten
years.
Purchases
The Company made no purchases during 2016 as it sought to bed in
the portfolio bought in December 2015
and to use sale proceeds to reduce borrowings.
After the period end (in February
2017) the Company did however complete the purchase of a
150,000sq.ft. industrial unit for £5.5million, reflecting an
initial yield of 6.3%. The property is located close to the Nissan
plant in Sunderland, and is let to
a Nissan supplier for another 5 years. The property has scope to be
extended, and we hope to be able to regear the lease and increase
the rent.
Sales
The Company completed five sales during the period for a total
of £20.2million after costs, and a further two sales post the year
end for £30million. The sales reflected the Company’s policy of
reducing risk and future capex/void where it can do so at an
attractive price. Two of the sales were of vacant properties, two
were offices with short leases and buildings in need of major capex
with void risk in the near future, and the remainder were assets
that we did not expect to perform in line with the Company’s
requirements in the short to medium term.
Asset Management
The investment manager seeks to protect and enhance the future
income stream from the Company’s assets through an active approach
to asset management. We consider it important to understand our
tenants’ needs and business to ensure we provide buildings that
work for them. If we can do that we can retain tenants at lease
expiry. We have maintained a high occupancy rate again in 2016, at
96.7% at the year end (compared to 98.9% in December 2015). The voids are dominated by a
logistics unit in Oldham, which
represents half the total void by rent. The benchmark occupation
level is about 93%.
During the course of 2016, 11 lease regears or extensions were
completed, along with 8 new lettings. Needless to say for a period
after the June referendum it was harder to complete asset
management deals as everyone took a step back to consider what the
result meant for them. We are beginning to see a number of
companies make decisions to commit to new or longer leases again,
and at the end of February, have 3 of our vacant units under offer
out of a total of 11 available to let, and a higher level of
viewings on the others than we had in the reporting period.
Debt
In April 2016 the Company put in
place a new debt facility with RBS which replaced the short term
facility it had due to expire in June
2017. The new facility gives the Company greater flexibility
in its capital structure by having a new term facility for
£110million until April 2023, and a
RCF for £35million. As at mid-January
2017, £5million of the RCF remained drawn, giving the
Company an LTV of 24.1% against a covenant of 60%.
The Company has an interest rate swap in place for the duration
of the term loan to give certainty of its cost of debt. As at the
end of December the Company’s all in cost of debt was 2.6%. As a
result of the movement in swap rates following the referendum, the
Company had a liability on the mark to market value of the swap of
£3.6million as at the year end. It should be noted that this will
revert to zero at maturity.
Jason
Baggaley
Fund Manager
STATEMENT OF DIRECTORS’
RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report
and the 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 Company Financial
Statements for each financial year which give a true and fair view
of the state of affairs of the Company and of the financial
performance and cash flows of the Company 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 Company’s
transactions and disclose with reasonable accuracy at any time, the
financial position of the Company 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 consideration 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 22 March
2017
Robert
Peto
Chairman
FINANCIAL STATEMENTS
Consolidated
Statement of Comprehensive Income |
|
|
|
|
for the year ended 31 December
2016 |
|
|
2016 |
2015 |
|
|
Notes |
£ |
£ |
Rental income |
|
|
30,414,862 |
20,142,180 |
Surrender premium income |
|
|
81,500 |
120,000 |
Valuation (loss)/gain from
investment properties |
|
7 |
(5,300,992) |
17,636,973 |
Costs on business acquisition |
|
10 |
- |
(1,942,498) |
Loss on asset acquisition |
|
|
- |
(75,181) |
Profit on disposal of investment
properties |
|
|
1,067,395 |
3,024,748 |
Investment management fees |
|
4 |
(3,157,399) |
(2,105,104) |
Valuer’s fees |
|
4 |
(99,001) |
(92,324) |
Audit fees
|
|
4 |
(73,695) |
(82,308) |
Directors’ fees and
subsistence |
|
23 |
(164,225) |
(124,296) |
Other direct property expenses |
|
|
(1,372,597) |
(929,165) |
Other administration expenses |
|
|
(445,144) |
(376,776) |
Operating profit |
|
|
20,950,704 |
35,196,249 |
|
|
|
|
|
Finance income |
|
5 |
30,536 |
68,186 |
Finance costs |
|
5 |
(4,047,594) |
(3,324,782) |
Loss on derecognition of interest
rate swaps |
|
15 |
(2,735,000) |
- |
Profit for the year before
taxation |
|
|
14,198,646 |
31,939,653 |
|
|
|
|
|
Taxation |
|
|
|
|
Tax charge |
|
6 |
- |
- |
Profit for the year, net of
tax |
|
19 |
14,198,646 |
31,939,653 |
|
|
|
|
|
Other Comprehensive
Income |
|
|
|
|
Net change in fair value of swaps
reclassified to profit and loss |
|
15 |
2,735,000 |
- |
Valuation (loss)/gain on cash flow
hedge |
|
15 |
(4,212,250) |
589,647 |
Total Other Comprehensive
Income |
|
|
(1,477,250) |
589,647 |
|
|
|
|
|
Total comprehensive income for
the year, net of tax |
|
|
12,721,396 |
32,529,300 |
|
|
|
|
|
Earnings per share |
|
|
pence |
pence |
Basic and diluted
earnings per share |
|
19 |
3.73 |
11.39 |
Adjusted (EPRA) earnings per
share |
|
19 |
5.56 |
4.05 |
All items in the above Consolidated Statement of Comprehensive
Income derive from continuing operations.
Consolidated Balance
Sheet |
|
|
|
|
as at 31 December 2016 |
|
|
2016 |
2015 |
|
|
Notes |
£ |
£ |
ASSETS |
|
|
|
|
Non-current
assets |
|
|
|
|
Investment properties |
|
7 |
395,782,781 |
448,616,754 |
Lease incentives |
|
7 |
4,187,219 |
3,457,588 |
|
|
|
399,970,000 |
452,074,342 |
Current assets |
|
|
|
|
Investment properties held for
sale |
|
7 |
29,975,000 |
- |
Trade and other receivables |
|
11 |
2,723,757 |
2,858,851 |
Cash and cash equivalents |
|
12 |
13,054,057 |
12,395,516 |
|
|
|
45,752,814 |
15,254,367 |
|
|
|
|
|
Total assets |
|
|
445,722,814 |
467,328,709 |
|
|
|
|
|
LIABILITIES |
|
|
|
|
Current liabilities |
|
|
|
|
Trade and other payables |
|
13 |
8,784,217 |
12,788,999 |
Interest rate swap |
|
15 |
1,341,101 |
908,751 |
|
|
|
10,125,318 |
13,697,750 |
|
|
|
|
|
Non-current liabilities |
|
|
|
|
Bank borrowings |
|
14 |
124,001,828 |
139,048,848 |
Interest rate swap |
|
15 |
2,221,441 |
1,176,541 |
Rent deposits due to tenants |
|
|
936,668 |
622,283 |
|
|
|
127,159,937 |
140,847,672 |
|
|
|
|
|
Total liabilities
|
|
|
137,285,255 |
154,545,422 |
|
|
|
|
|
Net
assets |
|
|
308,437,559 |
312,783,287 |
|
|
|
|
|
EQUITY |
|
|
|
|
Capital and reserves attributable
to Company’s equity holders |
|
|
|
|
Share capital |
|
17 |
204,820,219 |
204,820,219 |
Retained earnings |
|
18 |
7,532,448 |
6,167,329 |
Capital reserves |
|
18 |
(1,753,480) |
3,957,367 |
Other distributable reserves |
|
18 |
97,838,372 |
97,838,372 |
Total equity |
|
|
308,437,559 |
312,783,287 |
|
|
|
|
|
NAV per share (pence) |
|
|
|
|
NAV |
|
21 |
81.0 |
82.2 |
EPRA NAV |
|
21 |
82.0 |
82.7 |
Approved by the Board of Directors on 22
March 2017 and signed on its behalf by:
Robert
Peto
Director
Consolidated Statement of Changes
in Equity |
|
|
|
|
|
|
for the year ended 31 December
2016 |
|
Share
Capital |
Retained
earnings |
Capital
reserves |
Other distributable
reserves |
Total
equity |
|
Notes |
£ |
£ |
£ |
£ |
£ |
Opening balance 1 January
2016 |
|
204,820,219 |
6,167,329 |
3,957,367 |
97,838,372 |
312,783,287 |
Profit for the year |
|
- |
14,198,646 |
- |
- |
14,198,646 |
Other comprehensive income |
|
- |
- |
(1,477,250) |
- |
(1,477,250) |
Total comprehensive
income for the year |
|
- |
14,198,646 |
(1,477,250) |
- |
12,721,396 |
Dividends paid |
20 |
- |
(17,067,124) |
- |
- |
(17,067,124) |
Valuation loss from investment
properties |
7 |
- |
5,300,992 |
(5,300,992) |
- |
- |
Profit on disposal of investment
properties |
|
- |
(1,067,395) |
1,067,395 |
- |
- |
Balance at 31
December 2016 |
|
204,820,219 |
7,532,448 |
(1,753,480) |
97,838,372 |
308,437,559 |
Consolidated Statement of Changes
in Equity |
|
|
|
|
|
|
for the year ended
31 December 2015 |
|
Share
Capital |
Retained
earnings |
Capital
reserves |
Other distributable
reserves |
Total
equity |
|
Notes |
£ |
£ |
£ |
£ |
£ |
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 |
Other comprehensive income |
|
- |
- |
589,647 |
- |
589,647 |
Total comprehensive
income 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 from 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 Cash Flow
Statement |
|
|
|
|
for the year ended 31 December
2016 |
|
|
2016 |
2015 |
|
|
Notes |
£ |
£ |
Cash flows from operating
activities |
|
|
|
|
Profit for the year before
taxation |
|
|
14,198,646 |
31,939,653 |
Movement in non-current lease
incentives |
|
|
(816,862) |
270,464 |
Movement in trade and other
receivables |
|
|
135,094 |
1,230,084 |
Movement in trade and other
payables |
|
|
(3,690,397) |
3,735,996 |
Loss on derecognition of interest
rate swaps
|
|
|
2,735,000 |
- |
Finance costs |
|
5 |
4,047,594 |
3,324,782 |
Finance income |
|
5 |
(30,536) |
(68,186) |
Valuation loss/(gain) from
investment properties |
|
7 |
5,300,992 |
(17,636,973) |
Loss on asset acquisition
|
|
|
- |
75,181 |
Profit on disposal of investment
properties |
|
7 |
(1,067,395) |
(3,024,748) |
Net cash inflow from operating
activities |
|
|
20,812,136 |
19,846,253 |
|
|
|
|
|
Cash flows from investing
activities |
|
|
|
|
Interest received |
|
5 |
30,536 |
68,186 |
Purchase of investment
properties |
|
7 |
- |
(52,198,123) |
Business acquisition net of cash
acquired |
|
10 |
- |
(165,060,458) |
Capital expenditure on investment
properties |
|
7 |
(1,479,788) |
(1,144,434) |
Net proceeds from disposal of
investment properties |
|
7 |
20,192,395 |
57,854,848 |
Net cash inflow/(outflow) from
investing activities |
|
|
18,743,143 |
(160,479,981) |
|
|
|
|
|
Cash flows from financing
activities |
|
|
|
|
Proceeds on issue of ordinary
shares |
|
17 |
- |
110,462,680 |
Transaction costs of issues of
shares |
|
17 |
- |
(1,831,109) |
Repayment of bank borrowing |
|
14 |
(139,432,692) |
- |
Bank borrowing |
|
14 |
145,000,000 |
55,000,000 |
Repayment of RCF |
|
14 |
(20,000,000) |
- |
Bank borrowing arrangement
costs |
|
14 |
(1,138,458) |
(173,450) |
Interest paid on bank borrowing |
|
5 |
(2,594,070) |
(1,869,338) |
Payments on interest rate swap |
|
5 |
(929,394) |
(1,213,528) |
Swaps breakage costs |
|
15 |
(2,735,000) |
- |
Dividends paid to the Company’s
shareholders |
|
20 |
(17,067,124) |
(12,745,106) |
Net cash (outflow)/inflow from
financing activities |
|
|
(38,896,738) |
147,630,149 |
|
|
|
|
|
Net increase in cash and cash
equivalents |
|
|
658,541 |
6,996,421 |
Cash and cash equivalents at
beginning of year |
|
|
12,395,516 |
5,399,095 |
Cash and cash equivalents at end
of year |
|
|
13,054,057 |
12,395,516 |
Notes to the Consolidated Financial Statements
for the year ended 31 December
2016
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 22
March 2017.
2 ACCOUNTING POLICIES
2.1 Basis of preparation
The audited Consolidated Financial Statements of the Group have
been prepared in accordance with International Financial Reporting
Standards as adopted by the European Union (“IFRS”), and all
applicable requirements of The Companies (Guernsey) Law, 2008. The audited Consolidated
Financial Statements of the Group have been prepared under the
historical cost convention as modified by the measurement of
investment property and derivative financial instruments at fair
value. The Consolidated Financial Statements are presented in
pounds sterling and all values are not rounded except when
otherwise indicated.
Changes in accounting policy and
disclosure
The accounting policies adopted are consistent with those in the
previous financial year. The following amendments to existing
standards and interpretations were effective for the year, but were
either not applicable to or did not have a material impact on the
Group:
- Amendments to IAS1: Disclosure Initiative
- Amendments to IAS 16 and IAS 41: Agriculture: Bearer
Plants
- Amendments to IAS 16 and IAS 38: Clarification of Acceptable
Methods of Depreciation and Amortisation
- Amendments to IAS 27: Equity Method in Separate Financial
Statements
- Amendments to IFRS 10, IFRS 12 and IAS 28: Investment
Entities: Applying Consolidation Exception
- Amendments to IFRS 11: Accounting for Acquisitions of
Interests in Joint Operations
- Annual Improvements to IFRSs 2012 – 2014 Cycle
New and amended standards and
interpretations not applied
The following new and amended standards in issue are adopted by
the EU but are not yet effective and have not been applied by the
Group:
Effective
date
IFRS 9 Financial
Instruments
1 January 2018
IFRS 15 Revenue from Contracts with
Customers
1 January 2018
IFRS 9 – Financial Instruments
In July 2014, the IASB published
the final version of IFRS 9 ‘Financial Instruments’ which replaces
the existing guidance in IAS 39 ‘Financial Instruments: Recognition
and Measurement’. The IFRS 9 requirements represent a change from
the existing requirements in IAS 39 in respect of financial
assets.
The standard contains two primary measurement categories for
financial assets: amortised cost and fair value. A financial asset
would be measured at amortised cost if it is held within a business
model whose objective is to hold assets in order to collect
contractual cash flows, and the asset’s contractual terms give rise
on specified dates to cash flows that are solely payments of
principal and interest on the principal outstanding. All other
financial assets would be measured at fair value.
The standard eliminates the existing IAS 39 categories of held
to-maturity, available-for-sale and loans and receivables.
For financial liabilities, IFRS 9 largely carries forward,
without substantive amendment, the guidance on classification and
measurement from IAS 39. The main change is that, in cases where
the fair value option is taken for financial liabilities, the part
of a fair value change due to an entity’s own credit risk is
recorded in other comprehensive income rather than in profit or
loss.
The standard introduces new requirements for hedge accounting
that align hedge accounting more closely with risk management and
establishes a more principles-based approach to hedge accounting.
The standard also adds new requirements to address the impairment
of financial assets and means that a loss event will no longer need
to occur before an impairment allowance is recognised.
The standard will be effective for annual periods beginning on
or after 1 January 2018, and is
required to be applied retrospectively with some exemptions. The
Group has assessed IFRS 9’s full impact and it does not currently
anticipate that this standard will have any material impact on the
Group’s Financial Statements as presented for the current year.
IFRS 15 – Revenue from Contracts with
Customers
IFRS 15 specifies how and when an entity should recognise
revenue from contracts and enhances the nature of revenue
disclosures.
The Group notes lease contracts within the scope of IAS 17
‘Leases’ are excluded from the scope of IFRS 15. Rental income
derived from operating leases is therefore outwith the scope of
IFRS 15, and the group therefore does not anticipate IFRS 15 having
a material impact on the Group’s Financial Statements as presented
for the current year.
The Group notes under specific circumstances, certain elements
of contracts the Group may enter (for example, rental guarantees
provided when selling a property) potentially fall within the scope
of IFRS 15. The Group does not have any contracts in place at
31 December 2016 that it believes
meet these specific criteria, but will review again in advance of
implementing IFRS 15.
The standard permits a modified retrospective approach in the
year of adoption (from 1 January
2018) by recognising a cumulative catch up adjustment to
opening retained earnings. The Group intends utilising this
modified retrospective approach should any contracts fall within
scope, but has not and does not intend implementing the standard in
advance of the effective date.
2.2 Significant accounting judgements,
estimates and assumptions
The preparation of the Group’s Financial Statements requires
management to make judgements, estimates and assumptions that
affect the reported amounts of revenues, expenses, assets and
liabilities, and the disclosure of contingent liabilities, at the
reporting date. However, uncertainties about these assumptions and
estimates could result in outcomes that could require a material
adjustment to the carrying amount of the asset or liability
affected in the future periods. The most significant estimates and
judgements are set out below.
Fair value of investment
properties
Investment properties are stated at fair value as at the Balance
Sheet date. Gains or losses arising from changes in fair values are
included in the Consolidated Statement of Comprehensive Income in
the year in which they arise. The fair value of investment
properties is determined by external real estate valuation experts
using recognised valuation techniques. The fair values are
determined having regard to any recent real estate transactions
where available, with similar characteristics and locations to
those of the Group’s assets.
In most cases however, the determination of the fair value of
investment properties requires the use of valuation models which
use a number of judgements and assumptions. The only model used was
the income capitalisation method. Under the income capitalisation
method, a property’s fair value is judged based on the normalised
net operating income generated by the property, which is divided by
the capitalisation rate (discounted by the investor’s rate of
return). Under the income capitalisation method, over (above market
rent) and under-rent situations are separately capitalised
(discounted).
The sensitivity analysis 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 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 ended 31 December
2015, 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 of 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
Standard Life Investments SLIPIT Unit Trust (formerly Aviva
Investors UK Real Estate Recovery II Unit Trust), a Jersey Property
Unit Trust, as detailed in note 10, in 2015 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
pound sterling, which is also the Company’s functional
currency.
C Revenue recognition
Revenue is recognised as follows;
i) Bank interest
Bank interest income is recognised on an accruals basis.
ii) Rental income
Rental income from operating leases is net of sales taxes and
value added tax (“VAT”) recognised on a straight line basis over
the lease term including lease agreements with stepped rent
increases. The initial direct costs incurred in negotiating and
arranging an operating lease are recognised as an expense over the
lease term on the same basis as the lease income. The cost of any
lease incentives provided are recognised over the lease term, on a
straight line basis as a reduction of rental income. The resulting
asset is reflected as a receivable in the Consolidated Balance
Sheet. The valuation of investment properties is reduced by the
total of the unamortised lease incentive balances. Any remaining
lease incentive balances in respect of properties disposed of are
included in the calculation of the profit or loss arising at
disposal.
Contingent rents, being those payments that are not fixed at the
inception of the lease, for example increases arising on rent
reviews, are recorded as income in periods when they are earned.
Rent reviews which remain outstanding at the year end are
recognised as income, based on estimates, when it is reasonable to
assume that they will be received.
The surrender premiums received for the year ended 2016 were
£81,500 (2015: £120,000) as detailed in the Statement of
Comprehensive Income and related to a tenant break during the
year.
iii) Property disposals
Where revenue is obtained by the sale of properties, it is
recognised once the sale transaction has been completed, regardless
of when contracts have been exchanged.
D Expenditure
All expenses are accounted for on an accruals basis. The
investment management and administration fees, finance and all
other revenue expenses are charged through the Consolidated
Statement of Comprehensive Income as and when incurred. The Group
also incurs capital expenditure which can result in movements in
the capital value of the investment properties. The movements in
capital expenditure are reflected in the Statement of Comprehensive
Income as a valuation gain/(loss). In 2016, there were no
non-income producing properties (2015: Portrack Interchange in
Stockton on Tees did not earn any income until it was sold on
2 September 2015).
E Taxation
Current income tax assets and liabilities are measured at the
amount expected to be recovered from or paid to taxation
authorities. The tax rates and tax laws used to compute the amount
are those that are enacted or substantively enacted by the
reporting date. Current income tax relating to items recognised
directly in other comprehensive income or in equity is recognised
in other comprehensive income and in equity respectively, and not
in the income statement. Positions taken in tax returns with
respect to situations in which applicable tax regulations are
subject to interpretation, if any, are reviewed periodically and
provisions are established where appropriate.
The Group recognises liabilities for current taxes based on
estimates of whether additional taxes will be due. When the final
tax outcome of these matters is different from the amounts that
were initially recorded, such differences will impact the income
and deferred tax provisions in the period in which the
determination is made.
Deferred income tax is provided using the liability method on
all temporary differences at the reporting date between the tax
bases of assets and liabilities and their carrying amounts for
financial reporting purposes. Deferred income tax assets are
recognised only to the extent that it is probable that taxable
profit will be available against which deductible temporary
differences, carried forward tax credits or tax losses can be
utilised. The amount of deferred tax provided is based on the
expected manner of realisation or settlement of the carrying amount
of assets and liabilities. In determining the expected manner of
realisation of an asset the Directors consider that the Group will
recover the value of investment property through sale. Deferred
income tax relating to items recognised directly in equity is
recognised in equity and not in profit or loss.
F Investment property
Investment properties comprise completed property and property
under construction or re-development that is held to earn rentals
or for capital appreciation or both. Property held under a lease is
classified as investment property when the definition of an
investment property is met.
Investment properties are measured initially at cost including
transaction costs. Transaction costs include transfer taxes,
professional fees for legal services and initial leasing
commissions to bring the property to the condition necessary for it
to be capable of operating. The carrying amount also includes the
cost of replacing part of an existing investment property at the
time that cost is incurred if the recognition criteria are met.
Subsequent to initial recognition, investment properties are
stated at fair value. Fair value is based upon the market valuation
of the properties as provided by the external valuers as described
in note 2.2. Gains or losses arising from changes in the fair
values are included in the Consolidated Statement of Comprehensive
Income in the year in which they arise. For the purposes of these
financial statements, in order to avoid double counting, the
assessed fair value is:
i) Reduced by the carrying amount of any accrued income
resulting from the spreading of lease incentives and/or minimum
lease payments.
ii) Increased by the carrying amount of any liability to the
superior leaseholder or freeholder (for properties held by the
Group under operating leases) that has been recognised in the
Balance Sheet as a finance lease obligation.
Acquisitions of investment properties are considered to have
taken place on exchange of contracts unless there are significant
conditions attached. For conditional exchanges acquisitions are
recognised when these conditions are satisfied.
Investment properties are derecognised when it has been disposed
of or permanently withdrawn from use and no future economic benefit
is expected from its 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
(except for investment property measured using fair value
model).
Non-current assets and disposal groups are classified as held
for sale if their carrying amount will be recovered through a sale
transaction rather than through continuing use. This condition is
regarded as met only when the sale is highly probable and the asset
(or disposal group) is available for immediate sale in its present
condition. Management must be committed to the sale which should be
expected to qualify for recognition as a completed sale within one
year from the date of classification.
When the Group is committed to a sale plan involving loss of
control of a subsidiary, all of the assets and liabilities of that
subsidiary (i.e. disposal group) are classified as held for sale
when the criteria described above are met, regardless of whether
the Group will retain a non-controlling interest in its former
subsidiary after the sale.
H Trade and other receivables
Trade receivables are recognised and carried at the lower of
their original invoiced value and recoverable amount. Where the
time value of money is material, receivables are carried at
amortised cost. A provision for impairment of trade receivables is
established when there is objective evidence that the Group will
not be able to collect all amounts due according to the original
terms of the receivables. Significant financial difficulties of the
debtor, probability that the debtor will enter bankruptcy or
financial reorganisation, and default or delinquency in payments
(more than 30 days overdue) are considered indicators that the
trade receivable is impaired. The amount of the provision is the
difference between the asset’s carrying amount and the present
value of estimated future cash flows, discounted at the original
effective interest rate. The carrying amount of the asset is
reduced through use of an allowance account, and the amount of the
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 expenses 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 hedging 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 net service charge and 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 2016, 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 from 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 pound sterling. The Group
currently invests in direct non-listed property and is therefore
not exposed to price risk.
The Board of Directors reviews and agrees policies for managing
each of these risks which are summarised below.
Market risk
Market risk is the risk that the fair values of financial
instruments will fluctuate because of changes in market prices. The
financial instruments held by the Group that are affected by market
risk are principally the 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
£125,000,000. £110,000,000 of these borrowings has been fixed via
an interest rate swap.
The bank borrowings are carried at amortised cost and the Group
considers this to be a close approximation to fair value. The fair
value of the bank borrowings is affected by changes in the market
interest rate. The fair value of the interest rate swap is exposed
to changes in the market interest rate as their fair value is
calculated as the present value of the estimated future cash flows
under the agreements. The accounting policy for recognising the
fair value movements in the interest rate swaps is described in
note 2.3.
Trade and other receivables and trade and other payables are
interest free and have settlement dates within one year and
therefore are not considered to present a fair value interest rate
risk.
The following tables set out the carrying amount of the Group’s
financial instruments excluding the amortisation of borrowing costs
as outlined in note 14. Bank borrowings have been fixed due to an
interest rate swap and is detailed further in note 15:
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As at 31 December 2016 |
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Fixed rate |
Variable
rate |
interest
rate |
|
|
|
|
£ |
£ |
£ |
Cash and cash
equivalents |
|
|
|
- |
13,054,057 |
0.212% |
Bank borrowings |
|
|
|
110,000,000 |
- |
2.725% |
Bank borrowings |
|
|
|
- |
15,000,000 |
1.567% |
|
|
|
|
|
|
|
As at 31 December 2015 |
|
|
|
Fixed rate |
Variable
rate |
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% |
At 31 December 2016, 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
£19,459 lower (2015: £183,654 higher) as a result of the higher
interest income on cash and cash equivalents offset by the higher
interest expense on the RCF. Other Comprehensive
Income and the Capital Reserve would have been £6,806,871 higher
(2015: £2,266,614 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 2016, 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
£19,459 higher (2015: £183,654 lower ) as a result of the lower
interest income on cash and cash equivalents off set by the lower
interest expense on the RCF. Other Comprehensive Income and the
Capital Reserve would have been £7,285,802 lower (2015: £2,350,900
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 £958,147 (2015: £1,696,704)
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 2016
£3,489,002 (2015:£7,821,163) was placed on deposit with The Royal
Bank of Scotland plc (“RBS”),
£9,565,055 (2015: £1,193,437) was held with Citibank. In the prior
year £3,380,916 was held with RBS on behalf of Standard Life
Investments SLIPIT Unit Trust and Standard Life Investments
(SLIPIT) Limited Partnership, two wholly owned 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 Stable 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.
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|
|
|
|
Year
ended 31 December 2016 |
|
On
demand |
12
months |
1 to 5
years |
> 5 years |
Total |
|
|
£ |
£ |
£ |
£ |
£ |
Interest-bearing
loans |
|
- |
2,151,250 |
8,605,000 |
127,689,063 |
138,445,313 |
Interest rate swaps |
|
- |
1,081,300 |
4,325,200 |
1,351,625 |
6,758,125 |
Trade and other payables |
|
1,642,956 |
- |
- |
- |
1,642,956 |
Rental deposits due to
tenants |
|
- |
186,673 |
492,576 |
444,092 |
1,123,341 |
|
|
1,642,956 |
3,419,223 |
13,422,776 |
129,484,780 |
147,969,735 |
|
|
|
|
|
|
|
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 |
|
5,309,804 |
- |
- |
- |
5,309,804 |
Rental deposits due to
tenants |
|
- |
173,072 |
611,458 |
10,825 |
795,355 |
|
|
5,309,804 |
3,939,653 |
143,725,461 |
10,825 |
152,985,743 |
The disclosed amounts for interest-bearing loans and 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 benefits for other
stakeholders and to maintain an optimal capital structure to reduce
the cost of capital.
In order to maintain or adjust the capital structure, the Group
may adjust the amount of dividends paid to shareholders, return
capital to shareholders, issue new shares, increase or decrease
borrowings or sell assets to reduce debt.
The Group monitors capital on the basis of the gearing ratio.
This ratio is calculated as net debt divided by gross assets. Net
debt is calculated as total borrowings (excluding unamortised
arrangement fees) less cash and cash equivalents. Gross assets is
calculated as non-current and current assets, as shown in the
Consolidated Balance Sheet.
The gearing ratios at 31 December
2016 and at 31 December 2015
were as follows:
|
|
|
|
|
2016 |
2015 |
|
|
|
|
|
£ |
£ |
Total borrowings (excluding
unamortised arrangement fees) |
|
|
|
|
125,000,000 |
139,432,692 |
Less: cash and cash equivalents |
|
|
|
|
(13,054,057) |
(12,395,516) |
Net debt |
|
|
|
|
111,945,943 |
127,037,176 |
|
|
|
|
|
|
|
Gross assets |
|
|
|
|
445,722,814 |
467,328,709 |
|
|
|
|
|
|
|
Gearing ratio (must not exceed
65%) |
|
|
|
|
25% |
27% |
The Board’s current intention is that the Company’s LTV ratio
(calculated as borrowings less all cash as a proportion of the
property portfolio valuation) will not exceed 45% (see note
14).
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 |
|
|
|
2016 |
2015 |
2016 |
2015 |
|
|
|
£ |
£ |
£ |
£ |
Financial assets |
|
|
|
|
|
|
Cash and cash equivalents |
|
|
13,054,057 |
12,395,516 |
13,054,057 |
12,395,516 |
Trade and other receivables |
|
|
2,723,757 |
2,858,851 |
2,723,757 |
2,858,851 |
|
|
|
|
|
|
|
Financial liabilities |
|
|
|
|
|
|
Bank borrowings |
|
|
124,001,828 |
139,048,848 |
124,440,019 |
139,415,524 |
Interest rate swaps |
|
|
3,562,542 |
2,085,292 |
3,562,542 |
2,085,292 |
Trade and other payables |
|
|
2,766,297 |
6,105,159 |
2,766,297 |
6,105,159 |
The fair value of the financial assets and liabilities are
included at an estimate of the price that would be received to sell
a financial asset or paid to transfer a financial liability in an
orderly transaction between market participants at the measurement
date. The following methods and assumptions were used to estimate
the fair value:
- Cash and cash equivalents, trade and other receivables and
trade and other payables are the same as fair value due to the
short-term maturities of these instruments.
- The fair value of bank borrowings is estimated by discounting
future cash flows using rates currently available for debt on
similar terms and remaining maturities. The fair value approximates
their carrying values gross of unamortised transaction costs. This
is considered as being valued at level 2 of the fair value
hierarchy and has not changed level since 31
December 2015.
-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 2015.
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*:
Year ended 31 December
2016 |
|
|
Level 1 |
Level 2 |
Level 3 |
Total fair
value |
Interest rate swap |
|
|
- |
3,562,542 |
- |
3,562,542 |
|
|
|
|
|
|
|
Year ended 31 December
2015 |
|
|
Level 1 |
Level 2 |
Level 3 |
Total fair
value |
Interest rate
swaps |
|
|
- |
2,085,292 |
- |
2,085,292 |
*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 the Investment Manager is entitled to
0.75% of total assets up to £200 million; 0.70% of total assets
between £200 million and £300 million; and 0.65% of total assets in
excess of £300 million. The total fees charged for the year
amounted to £3,157,399 (2015: £2,105,104). The amount due and
payable at the year end amounted to £772,290 excluding VAT (2015:
£400,767 excluding VAT).
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 amounted to £75,472 (2015: £82,046).
The amount due and payable at the year end amounted to £nil
(2015:£18,331).
Valuer’s fee
JLL and Knight Frank (“the Valuers”), external 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 amounted to £99,001 (2015: £92,324) of
which minimum fees of £2,500 per property (2015: £2,500) were
incurred due for new properties added to the portfolio. The amount
due and payable at the year end amounted to £18,458 excluding VAT
(2015: £12,727 excluding VAT).
Auditor’s fee
At the year end date Ernst & Young LLP continued as
independent auditor of the Group. The audit fees for the year
amounted to £73,695 (2015: £82,308) and relate to audit services
provided for the 2016 financial year. Ernst & Young LLP also
provided non-audit services in 2016 in respect of taxation advice
amounting to £4,500 (2015; £1,100). In 2015 Ernst & Young LLP
also provided tax advice in relation to the UK REIT distribution
rules amounting to £950. 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 and £47,000 respectively. Total non-audit
fees incurred up to the Balance Sheet date amounted to £4,500
(2015: £159,050) and are included within other administration
expenses in the Statement of Comprehensive Income.
5 FINANCE INCOME AND COSTS
|
|
|
|
|
2016 |
2015 |
|
|
|
|
|
£ |
£ |
Interest income on cash and cash
equivalents |
|
|
|
|
30,536 |
68,186 |
Finance income |
|
|
|
|
30,536 |
68,186 |
|
|
|
|
|
|
|
Interest expense on
bank borrowings |
|
|
|
|
2,594,070 |
1,869,338 |
Payments on interest rate swap |
|
|
|
|
929,394 |
1,213,528 |
Amortisation of arrangement costs
(see note 14) |
|
|
|
|
524,130 |
241,916 |
Finance costs |
|
|
|
|
4,047,594 |
3,324,782 |
6 TAXATION
UK REIT Status
The Group migrated tax residence to the UK and elected to be
treated as a UK REIT with effect from 1
January 2015. As a UK REIT, the income profits of the
Group’s UK property rental business are exempt from corporation tax
as are any gains it makes from the disposal of its properties,
provided they are not held for trading or sold within three years
of completion of development. The Group is otherwise subject to UK
corporation tax at the prevailing rate.
As the principal company of the REIT, the Company is required to
distribute at least 90% of the income profits of the Group’s UK
property rental business. There are a number of other conditions
that also require to be met by the Company and the Group to
maintain REIT tax status. These conditions were met in the period
and the Board intends to conduct the Group’s affairs such that
these conditions continue to be met for the foreseeable future.
The Company and its Guernsey
subsidiary have obtained exempt company status in Guernsey so that they are exempt from
Guernsey taxation on income
arising outside Guernsey and bank
interest receivable in Guernsey.
A reconciliation between the tax charge and the product of
accounting profit multiplied by the applicable tax rate for the
year ended 31 December 2016 and 2015
is, as follows:
|
|
|
|
|
2016 |
2015 |
|
|
|
|
|
£ |
£ |
Profit before tax |
|
|
|
|
14,198,646 |
31,939,653 |
Tax calculated at UK statutory
corporation tax rate of 20% (2015: 20.25%) |
|
|
|
|
2,839,729 |
6,467,780 |
UK REIT exemption on net income and
gains |
|
|
|
|
(3,963,833) |
(3,304,893) |
Valuation loss/(gain)
in respect of investment properties not subject to tax |
|
|
|
|
1,060,198 |
(3,571,487) |
Profit on disposal of investment
properties not subject to tax |
|
|
|
|
- |
15,244 |
Expenditure not allowed for
corporation tax/income tax purposes |
|
|
|
|
63,906 |
393,356 |
Current income tax
charge |
|
|
|
|
- |
- |
7 INVESTMENT PROPERTIES
Country
|
UK |
UK |
UK |
|
Class |
Industrial |
Office |
Retail |
Total |
|
2016 |
2016 |
2016 |
2016 |
|
£ |
£ |
£ |
£ |
Market value as at 1
January |
187,070,000 |
164,065,000 |
100,850,000
|
451,985,000 |
Capital expenditure on investment
properties |
969,776 |
53,563 |
456,449 |
1,479,788 |
Opening market value of disposed
investment properties |
(7,950,000) |
(8,675,000) |
(2,500,000) |
(19,125,000) |
Valuation loss from investment
properties |
1,261,400 |
(4,868,783) |
(1,693,609) |
(5,300,992) |
Movement in lease incentives
receivable |
383,824 |
(99,780) |
622,160 |
906,204 |
Market value at 31 December
|
181,735,000 |
150,475,000 |
97,735,000 |
429,945,000 |
Investment property recategorised as
held for sale |
- |
(29,975,000) |
- |
(29,975,000) |
Market value net of held for sale
at 31 December |
181,735,000 |
120,500,000 |
97,735,000 |
399,970,000 |
Adjustment for lease incentives |
(721,099) |
(2,212,708) |
(1,253,412) |
(4,187,219) |
Carrying value at 31
December |
181,013,901 |
118,287,292 |
96,481,588 |
395,782,781 |
The valuations were performed by JLL and Knight Frank,
accredited external valuers with recognised and relevant
professional qualifications and recent experience of the location
and category of the investment properties being valued. The
valuation model, in accordance with Royal Institute of Chartered
Surveyors (‘RICS’) requirements on disclosure for Regulated Purpose
Valuations has been applied (RICS Valuation – Professional
Standards January 2014 published by
the Royal Institution of Chartered Surveyors). These valuation
models are consistent with the principles in IFRS 13. The market
value provided by JLL and Knight Frank at the year end was
£429,945,000 (2015: £451,985,000) however an adjustment has been
made for lease incentives of £4,187,219 (2015: £3,368,246) that are
already accounted for as an asset. Valuation gains and losses from
investment properties are recognised in the Consolidated Statement
of Comprehensive Income for the period and are attributable to
changes in unrealised gains or losses relating to investment
properties held at the end of the reporting period.
Country
|
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 |
Opening market 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 as 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 |
*In 2015, lease incentives are split between non-current assets
of £3,457,588 and current liabilities of £89,342 (note 13).
In the Consolidated Cash Flow Statement, proceeds from disposal
of investment properties comprise:
|
|
|
2016 |
2015 |
|
|
|
£ |
£ |
Opening market value of disposed
investment properties |
|
|
19,125,000 |
54,830,100 |
Profit on disposal of investment
properties |
|
|
1,067,395 |
3,024,748 |
Net proceeds from disposal of
investment properties |
|
|
20,192,395 |
57,854,848 |
Valuation Methodology
The fair value of completed investment properties are determined
using the income capitalisation method.
The income capitalisation method is based on capitalising the
net income stream at an appropriate yield. In establishing the net
income stream the valuers have reflected the current rent (the
gross rent) payable to lease expiry, at which point the valuer has
assumed that each unit will be re-let at their opinion of ERV. The
valuers have made allowances for voids where appropriate, as well
as deducting non recoverable costs where applicable. The
appropriate yield is selected on the basis of the location of the
building, its quality, tenant credit quality and lease terms
amongst other factors.
No properties have changed valuation technique during the year.
At the Balance Sheet date the income capitalisation method is
appropriate for valuing all assets.
The Group appoints suitable valuers (such appointment is
reviewed on a periodic basis) to undertake a valuation of all the
direct real estate investments on a quarterly basis. The valuation
is undertaken in accordance with the then current RICS guidelines
and requirements as mentioned above.
The Investment Manager meets with the valuers on a quarterly
basis to ensure the valuers are aware of all relevant information
for the valuation and any change in the investment over the
quarter. The Investment Manager then reviews and discusses the
draft valuations with the valuers to ensure correct factual
assumptions are made. The valuers report a final valuation that is
then reported to the Board.
The management group that determines the Company’s valuation
policies and procedures for property valuations is the Property
Valuation Committee. The Committee reviews the quarterly property
valuation reports produced by the valuers (or such other person as
may from time to time provide such property valuation services to
the 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 and inputs
used to derive Level 3 fair values for each class of investment
properties. The table includes:
- The fair value measurements at the end of the reporting
period.
- The level of the fair value hierarchy (e.g. Level 3) within
which the fair value measurements are categorised in their
entirety.
- A description of the valuation techniques applied.
- Fair value measurements, quantitative information about the
significant unobservable inputs used in the fair value
measurement.
- The inputs used in the fair value measurement, including the
ranges of rent charged to different units within the same
building.
Country & Class |
Fair Value |
Valuation Technique |
Key Unobservable Input |
Range (weighted average) |
|
£ |
|
|
|
UK Industrial Level 3 |
181,735,000 |
Income Capitalisation |
Initial Yield
Reversionary Yield
Equivalent Yield
Estimated rental value per Sq. m |
0% to 9.26% (5.88%)
5.52% to 10.92% (6.89%)
5.73% to 8.74% (6.55%)
£20.20 to £152.78 (£61.34) |
UK Office Level 3 |
150,475,000 |
Income Capitalisation |
Initial Yield
Reversionary Yield
Equivalent Yield
Estimated rental value per Sq. m |
4.86% to 8.89%
(6.67%)
5.57% to 8.86% (7.05%)
5.19% to 8.74% (6.43%)
£138.98 to £669.67 (£280.15) |
UK Retail Level 3 |
97,735,000 |
Income Capitalisation |
Initial Yield
Reversionary Yield
Equivalent Yield
Estimated rental value per Sq. m |
4.87% to 8.96%
(6.56%)
3.87% to 7.93% (5.81%)
5.37% to 7.94% (6.49%)
£95.24 to £281.94 (£158.49) |
|
429,945,000 |
|
|
|
Descriptions and definitions
The following descriptions and definitions relate to valuation
techniques and key observable inputs made in determining the fair
values.
Estimated rental value (ERV)
The rent at which space could be let in the market conditions
prevailing at the date of valuation.
Equivalent yield
The equivalent yield is defined as the internal rate of return
of the cash flow from the property, assuming a rise or fall to ERV
at the next review or lease termination, but with no further rental
change.
Initial yield
Initial yield is the annualised rents of a property expressed as
a percentage of the property value.
Reversionary yield
Reversionary yield is the anticipated yield to which the initial
yield will rise (or fall) once the rent reaches the ERV.
The table below shows the ERV per annum, area per square foot,
average ERV per square foot, initial yield and reversionary yield
as at the Balance Sheet date.
|
|
|
2016 |
2015 |
ERV p.a. |
|
|
£31,037,488 |
£32,111,174 |
Area sq. ft. |
|
|
3,745,069 |
3,933,195 |
Average ERV per sq. ft. |
|
|
£8.29 |
£8.16 |
Initial yield |
|
|
6.3% |
6.0% |
Revisionary yield |
|
|
7.2% |
7.2% |
The table below presents the sensitivity of the valuation to
changes in the most significant assumptions underlying the
valuation of completed investment property.
|
|
|
2016 |
2015 |
|
|
|
£ |
£ |
Increase in equivalent yield of 25
bps. |
|
|
(17,901,800) |
(18,600,000) |
Decrease in rental rates of 5%
(ERV) |
|
|
(21,464,055) |
(17,700,000) |
Below is a list of how the interrelationships in the sensitivity
analysis above can be explained.
In both cases outlined in the sensitivity table the estimated Fair
Value would increase (decrease) if:
· The ERV is higher (lower)
· Void periods were shorter (longer)
· The occupancy rate was higher (lower)
· Rent free periods were shorter (longer)
· The capitalisation rates were lower (higher)
8 INVESTMENT PROPERTIES HELD FOR
SALE
As at 31 December 2016 the Group
had exchanged contracts with third parties for the sale of The
Quadrangle, Cheltenham for a price
of £11,075,000. The sale of The Quadrangle completed on
10 January 2017. As at 31 December 2016, the Group was actively seeking
a buyer for White Bear Yard. The Group exchanged contracts and
completed this sale on 22 March 2017
for a price of £19,000,000.
As at 31 December 2015 the Group
had no investment properties classified as held for sale.
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 acquisitions of Huris (Farnborough) Limited and HEREF Eden
Main Limited were accounted for as acquisitions of assets in 2014
which generated a loss of £nil (2015: £75,181 loss) in the year
ended 31 December 2016 as detailed in
the Consolidated Statement of Comprehensive Income. During the year
to 31 December 2016, HEREF Eden Main
Limited was liquidated. The Group intends to liquidate Huris
(Farnborough) Limited in the next financial year.
In 2015 the Group acquired 100% of the units in Standard Life
Investments SLIPIT Unit Trust, (formerly Aviva Investors UK Real
Estate Recovery II Unit Trust) a Jersey Property Unit Trust. The
acquisition included the entire issued share capital of a General
Partner which holds, through a Limited Partnership, a portfolio of
22 UK real estate assets. The transaction completed on 23 December 2015 and the Group has treated the
acquisition as a Business Combination in accordance with IFRS 3
(see note 10).
During the year ended 31 December
2016, the Group liquidated the following entities:
? Standard Life Investments SLIPIT Unit Trust.
? Ceres Court Properties Limited, a company with limited
liability incorporated and domiciled in the United Kingdom.
? HEREF Eden Main Limited, a company incorporated in Jersey,
Channel Islands.
The Group Undertakings consist of the following 100% owned
subsidiaries at the Balance Sheet date:
- Standard Life Investments Property Holdings Limited, a company
with limited liability incorporated in Guernsey, Channel
Islands.
- Standard Life Investments (SLIPIT) Limited Partnership, a
limited partnership established in England.
- Standard Life Investments SLIPIT (General Partner) Limited, a
company with limited liability incorporated in England.
- Standard Life Investments SLIPIT (Nominee) Limited, a company
with limited liability incorporated and domiciled in England.
- Huris (farnborough) Limited, a company incorporated in the
Cayman Islands.
10 BUSINESS COMBINATIONS
On 23 December 2015, the Group
acquired 100% of the shares of Standard Life Investments SLIPIT
Unit Trust (formerly Aviva Investors UK Real Estate Recovery II
Unit Trust), a Jersey Property Unit Trust, through the Group’s
property subsidiary, Standard Life Investments Property Holdings
Limited. The acquisition included the entire issued share capital
of Standard Life Investments SLIPIT (General Partner) Limited which
holds, through a Limited Partnership, a portfolio of 22 UK real
estate assets. Standard Life Investments (SLIPIT) 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 as an acquisition of a business, rather than an
asset acquisition.
The fair value of the identifiable assets and liabilities of
Standard Life Investments SLIPIT Unit Trust as at the date of
acquisition were:
|
|
|
|
Fair value
recognised on acquisition 2015 |
|
|
|
|
£ |
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 consisted 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 cash reserves. The due diligence costs
of £1,942,498 incurred in connection with the acquisition have been
expensed and were included in the 2015 Consolidated Statement of
Comprehensive Income. In 2015, from the date of acquisition,
Standard Life Investments SLIPIT Unit Trust 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
|
|
|
2016 |
2015 |
|
|
|
£ |
£ |
Trade receivables |
|
|
992,099 |
1,710,199 |
Less: provision for impairment of
trade receivables |
|
|
(33,952) |
(13,495) |
Trade receivables (net) |
|
|
958,147 |
1,696,704 |
|
|
|
|
|
Rental deposits held on behalf of
tenants |
|
|
1,123,341 |
795,355 |
Other receivables |
|
|
642,269 |
366,792 |
Total trade and other
receivables |
|
|
2,723,757 |
2,858,851 |
Reconciliation for changes in the provision for impairment of
trade receivables:
|
|
|
2016 |
2015 |
|
|
|
£ |
£ |
Opening balance |
|
|
(13,495) |
(6,941) |
Charge for the year |
|
|
(33,952) |
(13,495) |
Reversal of provision |
|
|
13,495 |
6,941 |
Closing balance |
|
|
(33,952) |
(13,495) |
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 2016, trade
receivables of £33,952 (2015: £13,495) were considered impaired and
provided for.
The ageing of these receivables is as follows:
|
|
|
2016 |
2015 |
|
|
|
£ |
£ |
0 to 3 months |
|
|
8,625 |
12,905 |
3 to 6 months |
|
|
5,625 |
352 |
Over 6 months |
|
|
19,702 |
238 |
|
|
|
33,952 |
13,495 |
As of 31 December 2016, trade
receivables of £958,147 (2015: £1,696,704) were less than 3 months
past due but considered not impaired.
12 CASH AND CASH EQUIVALENTS
|
|
|
2016 |
2015 |
|
|
|
£ |
£ |
Cash held at bank |
|
|
9,565,055 |
4,574,353 |
Cash held on deposit with RBS (see
note 14) |
|
|
3,489,002 |
7,821,163 |
|
|
|
13,054,057 |
12,395,516 |
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
|
|
|
2016 |
2015 |
|
|
|
£ |
£ |
Trade and other payables |
|
|
1,642,956 |
5,309,804 |
VAT payable |
|
|
888,553 |
680,674 |
Deferred rental income |
|
|
6,066,035 |
6,536,107 |
Rental deposits due to tenants |
|
|
186,673 |
173,072 |
Lease incentives due within one
year |
|
|
- |
89,342 |
|
|
|
8,784,217 |
12,788,999 |
Trade payables are non-interest bearing and are normally settled
on 30-day terms.
14 BANK BORROWINGS
|
|
|
2016 |
2015 |
|
|
|
£ |
£ |
Loan facility and drawn down
outstanding balance |
|
|
125,000,000 |
139,432,692 |
Opening carrying value |
|
|
139,048,848 |
83,980,382 |
Repayment of 2015 loan |
|
|
(139,432,692) |
- |
Borrowings during the year |
|
|
145,000,000 |
55,000,000 |
Repayment of RCF |
|
|
(20,000,000) |
- |
Arrangements costs of additional
facility |
|
|
(1,138,458) |
(173,450) |
Amortisation of arrangement
costs |
|
|
524,130 |
241,916 |
Closing carrying value |
|
|
124,001,828 |
139,048,848 |
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 to 31 December 2015 as detailed below. Interest was
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
and completed the drawdown of an additional £55,000,000 loan with
RBS. The additional borrowing was in the form of an additional term
loan of £40,567,308 and a RCF of £14,432,692 (with the potential to
draw a further £15,567,308 of the
RCF). The entire debt facility and the drawn down balance of
£139,432,692 were then repayable on 27 June
2017. Interest from 22 December
2015 was payable at a rate equal to the aggregate of 3 month
LIBOR and a margin of 1.25%
On 28 April 2016 the fully drawn
down balance of £139,432,692 was repaid.
On 28 April 2016 the Company
entered into an agreement to extend £145 million of its existing
£155 million debt facility with RBS. The debt facility consists of
a £110 million seven year term loan facility and a £35 million five
year RCF. The RCF may by agreement be extended by one year on two
occasions. During the year £20 million of the RCF was repaid, with
the balance of £15million remaining drawn down by the Group at
31 December 2016. Interest is payable
on the Term Loan at 3 month LIBOR plus 1.375% and on the RCF at
LIBOR plus 1.2%. This equates to a rate of 2.725% on the Term Loan
and 1.58% on the RCF which together give an attractive blended rate
of 2.6%.
Under the terms of the loan facility there are certain events
which would entitle RBS to terminate the loan facility and demand
repayment of all sums due. Included in these events of default is
the financial undertaking relating to the LTV percentage. The new
loan agreement notes that the LTV percentage is calculated as the
loan amount less the amount of any sterling cash deposited within
the security of RBS divided by the gross secured property value,
and that this percentage should not exceed 60% for the period to
and including 27 April 2021 and
should not exceed 55% after 27 April
2021 to maturity.
|
|
|
2016 |
2015 |
|
|
|
£ |
£ |
Loan amount |
|
|
125,000,000 |
139,432,692 |
Cash deposited within the security
of RBS |
|
|
(3,489,002) |
(7,821,163) |
|
|
|
121,510,998 |
131,611,529 |
|
|
|
|
|
Investment property valuation |
|
|
429,945,000 |
451,985,000 |
|
|
|
|
|
LTV percentage |
|
|
28.3% |
29.1% |
|
|
|
|
|
LTV percentage covenant |
|
|
60.0% |
65.0% |
|
|
|
|
|
LTV percentage if all cash is
deposited within the security of RBS |
|
|
26.0% |
28.1% |
Other loan covenants that the Group is obliged to meet include
the following:
- that the net rental income is not less than 150% of the
finance costs for any three month period
- that the largest single asset accounts for less than 15% of
the Gross Secured Asset Value
- that the largest ten assets accounts for less than 75% of the
Gross Secured Asset Value
- that sector weightings are restricted to 55%, 45% and 55% for
the Office, Retail and Industrial sectors respectively
- that the largest tenant accounts for less than 20% of the
Group’s annual net rental income
- that the five largest tenants account for less than 50% of the
Group’s annual net rental income
- that the ten largest tenants account for less than 75% of the
Group’s annual net rental income
During the year, the Group did not default on any of its
obligations and loan covenants under its loan agreement.
The loan facility is secured by fixed and floating charges over
the assets of the Company and its wholly owned subsidiaries,
Standard Life Investments Property Holdings Limited and Standard
Life Investments (SLIPIT) Limited Partnership.
15 INTEREST RATE SWAP
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 had a maturity of 16 December 2018. Under the swap the Company had
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 replaced the interest rate swap entered into on
29 December 2003. This interest rate
swap effective date was 29 December
2013 and had a maturity date of 16
December 2018. Under the swap the Company had agreed to
receive a floating interest rate linked to 3 month LIBOR and pay a
fixed interest rate of 2.0515%.
On 28 April 2016, both of the
above interest rate swaps were repaid at a cost of £2,735,000.
As part of the refinancing of loans (see note 14), on
28 April 2016 the Company completed
an interest rate swap of a notional amount of £110,000,000 with
RBS. The interest rate swap effective date is 28 April 2016 and has a maturity date of
27 April 2023. Under the swap the
Company has agreed to receive a floating interest rate linked to 3
month LIBOR and pay a fixed interest rate of 1.35%.
|
|
|
2016 |
2015 |
|
|
|
£ |
£ |
Opening fair value of interest rate
swaps at 1 January |
|
|
(2,085,292) |
(2,674,939) |
Valuation (loss)/gain on interest
rate swaps |
|
|
(4,212,250) |
589,647 |
Swaps breakage costs |
|
|
2,735,000 |
- |
Closing fair value of interest
rate swaps at 31 December |
|
|
(3,562,542) |
(2,085,292) |
The individual swap assets and liabilities are listed below:
|
|
|
2016 |
2015 |
|
|
|
£ |
£ |
Interest rate swap with a start date
of 20 January 2012 maturing on 16 December 2018 |
|
|
- |
(220,107) |
Interest rate swap with a start date
of 29 December 2013 maturing on 16 December 2018 |
|
|
- |
(1,865,185) |
Interest rate swap with a start date
of 28 April 2016 maturing on 27 April 2023 |
|
|
(3,562,542) |
- |
|
|
|
(3,562,542) |
(2,085,292) |
16 LEASE ANALYSIS
The Group has entered into leases on its property portfolio.
This property portfolio as at 31 December
2016 had an average lease expiry of 5 years and 6 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:
|
|
|
2016 |
2015 |
|
|
|
£ |
£ |
Within one year |
|
|
26,641,958 |
26,596,634 |
After one year, but not more than
five years |
|
|
69,213,166 |
85,580,067 |
More than five years |
|
|
57,451,817 |
52,490,484 |
Total |
|
|
153,306,941 |
164,667,185 |
The largest single tenant at the year end accounts for 4.6%
(2015: 4.6%) of the current annual passing rent.
17 SHARE CAPITAL
Under the Company’s Articles of Incorporation, the Company may
issue an unlimited number of ordinary shares of 1 pence each, subject to issuance limits set at
the AGM each year. As at 31 December
2016 and 31 December 2015
there were 380,690,419 ordinary shares of 1p 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: |
|
|
2016 |
2015 |
|
|
|
£ |
£ |
Opening balance |
|
|
204,820,219 |
96,188,648 |
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 |
Issue costs associated with new
ordinary shares |
|
|
- |
(1,831,109) |
Closing balance |
|
|
204,820,219 |
204,820,219 |
|
|
|
2016 |
2015 |
|
|
|
Number of
shares |
Number of
shares |
Opening balance |
|
|
380,690,419 |
244,216,165 |
Issued during the year |
|
|
- |
136,474,254 |
Closing balance |
|
|
380,690,419 |
380,690,419 |
18 RESERVES
The detailed movement of the below reserves for the years to
31 December 2016 and 31 December 2015 can be found in the Consolidated
Statement of Changes in Equity.
Retained earnings
This is a distributable reserve and represents the cumulative
revenue earnings of the Group less dividends paid to the Company’s
shareholders.
Capital reserves
This reserve represents realised gains and losses on disposed
investment properties and unrealised valuation gains and losses on
investment properties and cash flow hedges since the Company’s
launch.
Other distributable reserves
This reserve represents the share premium raised on launch of
the Company which was subsequently converted to a distributable
reserve by special resolution dated 4
December 2003. This balance has been reduced by the
allocation of preference share finance costs.
19 EARNINGS PER SHARE
Basic earnings per share amounts are calculated by dividing
profit for the year net of tax attributable to ordinary equity
holders by the weighted average number of ordinary shares
outstanding during the year. As there are no dilutive instruments
outstanding, basic and diluted earnings per share are
identical.
The earnings per share for the year is set out in the table
below. In addition one of the key metrics the Board considers is
dividend cover. This is calculated by dividing the net revenue
earnings in the year (profit for the year net of tax excluding all
capital items and the swaps breakage costs) divided by the
dividends payable in relation to the financial year. For 2016 this
equated to a figure of 117% (2015: 104%).
The following reflects the income and share data used in the
basic and diluted earnings per share computations:
|
|
|
2016 |
2015 |
|
|
|
£ |
£ |
Profit for the year net of tax |
|
|
14,198,646 |
31,939,653 |
|
|
|
|
|
|
|
|
2016 |
2015 |
Weighted average number of ordinary
shares outstanding during the year |
|
|
380,690,419 |
280,330,039 |
|
|
|
|
|
Earnings per ordinary share
(pence) |
|
|
3.73 |
11.39 |
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.
|
|
|
2016 |
2015 |
|
|
|
£ |
£ |
Profit for the year net of tax |
|
|
14,198,646 |
31,939,653 |
Loss/(gain) on revaluation movements
on investment properties |
|
|
5,300,992 |
(17,636,973) |
Loss on asset acquisition |
|
|
- |
75,181 |
Profit on disposal of investment
properties |
|
|
(1,067,395) |
(3,024,748) |
Loss on derecognition of interest
rate swaps |
|
|
2,735,000 |
- |
Adjusted (EPRA) profit for the
year |
|
|
21,167,243 |
11,353,113 |
|
|
|
|
|
|
|
|
2016 |
2015 |
Weighted average number of ordinary
shares outstanding during the year |
|
|
380,690,419 |
280,330,039 |
|
|
|
|
|
Adjusted (EPRA) earnings per
share (pence) |
|
|
5.56 |
4.05 |
20 DIVIDENDS AND PROPERTY INCOME
DISTRIBUTION GROSS OF INCOME TAX
|
|
2016 |
2015 |
|
|
£ |
£ |
Non Property Income
Distributions |
|
|
|
1.161p per ordinary share paid in
February 2015 relating to the quarter ending 31 December 2014 |
|
- |
2,835,350 |
1.161p per ordinary share paid in
November 2015 relating to the quarter ending 30 September 2015 |
|
- |
2,220,581 |
0.561p per ordinary share paid in
March 2016 relating to the quarter ending 31 December 2015 |
|
1,679,695 |
- |
Property Income
Distributions |
|
|
|
0.60p per ordinary share paid in
March 2016 relating to the quarter ending 31 December 2015 |
|
1,796,781 |
- |
1.19p per ordinary share paid in May
2016 relating to the quarter ending 31 March 2016 (2015:
1.161p) |
|
4,530,216 |
3,213,406 |
1.19p per ordinary share paid in
August 2016 relating to the quarter ending 30 June 2016 (2015:
1.161p) |
|
4,530,216 |
3,348,175 |
1.19p per ordinary share paid in
November 2016 relating to the quarter ending 30 September 2016
(2015: 1.161p) |
|
4,530,216 |
1,127,594 |
|
|
17,067,124 |
12,745,106 |
On 31 March 2017 a dividend in
respect of the quarter to 31 December
2016 of 1.19 pence per share
will be paid. This dividend will be split as a property income
dividend of 0.35 pence per share and
a non property income dividend of 0.84
pence per share.
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 was the first property income
distribution (gross of income tax) following REIT conversion for
the quarter ended 31 March 2015.
21 RECONCILIATION OF CONSOLIDATED NAV
TO PUBLISHED NAV
The NAV attributable to ordinary shares is published quarterly
and is based on the most recent valuation of the investment
properties.
|
|
2016 |
2015 |
Number of ordinary shares at the
reporting date
|
|
380,690,419 |
380,690,419 |
|
|
|
|
|
|
2016 |
2015 |
|
|
£ |
£ |
Total equity per audited
consolidated financial statements |
|
308,437,559 |
312,783,287 |
NAV per share (pence) |
|
81.0 |
82.2 |
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.
|
|
2016 |
2015 |
|
|
£ |
£ |
Total equity per consolidated
financial statements |
|
308,437,559 |
312,783,287 |
Adjustments: |
|
|
|
Add: fair value of derivatives |
|
3,562,542 |
2,085,292 |
EPRA NAV |
|
312,000,101 |
314,868,579 |
|
|
|
|
EPRA NAV per share
(pence) |
|
82.0 |
82.7 |
22 SERVICE CHARGE
The Company has appointed a managing agent to deal with the
service charge at the investment properties. The table below is a
summary of the service charge during the year. The table shows the
amount the service charge costs 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 back from
the tenants as at the Balance Sheet date.
|
|
2016 |
2015 |
|
|
£ |
£ |
Total service charge expenditure
incurred |
|
1,888,993 |
1,685,569 |
Total service charge billed to
tenants excluding void units and service charge caps |
|
1,550,599 |
1,492,339 |
Service charge billed to the Group
in respect of void units and service charge caps |
|
135,432 |
74,448 |
Service charge due from tenants as
at 31 December |
|
202,962 |
118,782 |
|
|
1,888,993 |
1,685,569 |
23 RELATED PARTY DISCLOSURES
Directors’ remuneration
The remuneration of 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 Directors’ Remuneration Report and the Corporate
Governance Report.
|
|
2016 |
2015 |
|
|
£ |
£ |
Robert Peto (appointed Chairman 2
June 2016) |
|
34,558 |
26,000 |
Sally-Ann Farnon (appointed 16 July
2010) |
|
33,250 |
28,500 |
Huw Evans (appointed 11 April
2013) |
|
30,000 |
26,000 |
Mike Balfour (appointed 10 March
2016) |
|
24,723 |
- |
James Clifton-Brown (appointed 17
August 2016) |
|
12,061 |
- |
Richard Barfield (retired 2 June
2016) |
|
14,808 |
33,000 |
Employers national insurance
contributions |
|
7,866 |
5,872 |
|
|
157,266 |
119,372 |
Directors expenses |
|
6,959 |
4,924 |
|
|
164,225 |
124,296 |
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 out 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
Dividends
On 31 March 2017 a dividend in
respect of the quarter to 31 December
2016 of 1.19 pence per share
will be paid. This dividend will be split as a property income
dividend of 0.35 pence per share and
a non property income dividend of 0.84
pence per share.
Purchases
On 20 February 2017 the Group
completed the purchase of SNOP, Washington, an industrial property for £5.5
million excluding costs.
Sales
On 10 January 2017 the Group
completed the sale of The Quadrangle, Cheltenham for £11.075 million excluding
costs.
On 22 March 2017 the Group
completed the sale of White Bear Yard for £19million excluding
costs.
Share Issues
During the period from 1 February
2017 to 15 March 2017 the
Group has raised £6.2million through the issue of 7.275 million new
ordinary shares.
This Annual Financial Report announcement is not the Company's
statutory accounts for the year ended 31
December 2016. The statutory accounts for the year ended
31 December 2016 received an audit
report which was unqualified.
The Annual Report will be posted to shareholders in April 2017 and additional copies will be
available from the Manager (Tel. 0131 245 3151) or by download from
the Company's webpage (www.slipit.co.uk).
Please note that past performance is not necessarily a guide to
the future and that the value of investments and the income from
them may fall as well as rise. Investors may not get back the
amount they originally invested.
All enquiries to:
The Company Secretary
Northern Trust International Fund Administration Services
(Guernsey) Limited
Trafalgar Court
Les Banques
St Peter Port
Guernsey
GY1 3QL
Tel: 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
END