6 April
2018
STANDARD LIFE INVESTMENTS PROPERTY
INCOME TRUST
RESULTS IN RESPECT OF THE YEAR ENDED
31 DECEMBER 2017
Financial Highlights
-NAV total return of 14.5% in the year, driven by strong
portfolio performance due to overweight exposure to outperforming
Industrial sector.
-Strong share price total return over the year of 13.7% compared
to the total return on the FTSE All-Share REIT Index of 12.2% and
the FTSE All-Share Index of 13.1% with the Company’s shares trading
at a premium to NAV of 6.4% as at 31
December 2017.
-The Company has continued to reduce gearing with an LTV of
18.0% at year end (31 Dec 2016:
26.0%) at an attractive interest rate of 2.7%.
-Dividend cover of 104% over the year as the Company continued
to pay a covered dividend.
-The yield on the Company’s share price as at 31 December 2017 stood at 5.1% which compares
favourably to the FTSE All-Share REIT Index (3.6%) and FTSE
All-Share Index (3.4%) at the same date.
-Since 1 January 2017 to date a
total of 22.425 million shares were issued under the Company’s
blocklisting facility generating net proceeds of £20 million for
investment into the portfolio.
-Overall, the Company, with a market capitalisation of £368
million as at 31 December 2017, has a
secure and growing balance sheet, significant financial resources
and a portfolio of assets that continues to underpin an attractive
and covered dividend for shareholders.
Property Highlights
-As at 31 December 2017, the
portfolio was valued at £433.2 million following an exercise that
repositioned the portfolio into assets that offer more secure
income and reduce risk.
-Property total return for the period was 12.1%, significantly
ahead of the IPD Quarterly version of Monthly Index total return of
10.5%. The income return of 6.3% from the portfolio continued to
outperform the comparative benchmark figure of 4.8% with a capital
return of 5.5% in line with that of the benchmark.
-A number of successful asset management initiatives,
contributing to income and capital values, completed during the
year including:
-8 new lettings generating £512,000 per annum of income during
the year
-14 lease renegotiations/rent reviews securing £740,000 per
annum of income
-Void rate of 7.7% as at year end with majority of voids being
in the Company’s favoured industrial sector.
-Positive rent collection rates of 99% within 21 days
highlighting the continued strength of tenant covenants in an
environment where income will be the key component of returns going
forward.
PERFORMANCE SUMMARY
Earnings & Dividends |
|
|
31 December
2017 |
31 December
2016 |
Revenue earnings per share
(excluding capital items & swap movements) (p) |
|
|
4.99 |
5.56 |
Dividends declared per ordinary
share (p) |
|
|
4.76 |
4.76 |
Dividend cover (%)* |
|
|
104 |
117 |
Dividend yield (%)** |
|
|
5.1 |
5.5 |
FTSE Real Estate Investment Trusts
Index Yield (%) |
|
|
3.6 |
3.7 |
FTSE All-Share Index Yield (%) |
|
|
3.4 |
3.5 |
Ongoing Charges*** |
|
|
|
|
As a % of average net assets
including direct property costs |
|
|
1.7 |
1.7 |
As a % of average net assets
excluding direct property costs |
|
|
1.2 |
1.3 |
Capital Values &
Gearing |
|
31 December
2017 |
31 December
2016 |
Change % |
Total Assets (£million) |
|
468.8 |
445.7 |
5.0 |
Net asset value per share (p) (note
20) |
|
87.6 |
81.0 |
8.1 |
Ordinary Share Price (p) |
|
93.25 |
86.50 |
7.8 |
Premium to NAV (%) |
|
6.4 |
6.8 |
|
Loan to value (%)**** |
|
18.0 |
26.0 |
|
Total Return
|
|
1 Year %
Return |
3 Year %
Return |
5 Year %
Return |
NAV***** |
|
14.5 |
38.1 |
112.9 |
Share Price**** |
|
13.7 |
40.5 |
115.8 |
FTSE All-Share REIT
Index |
|
12.2 |
15.4 |
70.8 |
FTSE All-Share Index
|
|
13.1 |
33.3 |
63.0 |
Property Returns & Statistics
% |
|
|
31 December
2017 |
31 December
2016 |
Property income return
|
|
|
6.3 |
6.5 |
IPD benchmark income return
|
|
|
4.8 |
4.8 |
Property total
return |
|
|
12.1 |
5.8 |
IPD benchmark total return |
|
|
10.5 |
2.2 |
Void rate |
|
|
7.7 |
3.3 |
* 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 the share price at
31 December.
*** Calculated as investment manager fees, auditor’s fees,
directors’ fees and other administrative expenses divided by the
average NAV for the year.
**** Calculated as bank borrowings less all cash (including cash
held at solicitors) 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
I am pleased to report that your Group has continued to produce
strong returns at both a NAV and shareholder level over the year.
These returns have been underpinned by a portfolio that has been
significantly re-positioned in the year, with investment into
assets in favoured sectors that offer more secure income and reduce
risk in the portfolio.
Background
The shadow of increasing political uncertainty, initially
created by the unknowns of Brexit, but further increased by the
worrying development of trade wars and the rising tensions with
Russia, are hanging over the UK.
Brexit, in particular, has resulted in a slowdown in the
growth of the UK economy which remains positive if unspectacular.
GDP grew by 1.7% in 2017, ahead of many forecasts at the start of
the year but lower than in 2016. This contrasts with the strong
pick-up in growth in both the US and the Eurozone. There are many
reasons for the slowdown in the UK economy but commentators
generally agree that there are two main causes. The first is the
squeeze on disposable incomes resulting from the pick-up in
inflation stemming from the 2016 Brexit vote and the subsequent
fall in the value of the pound. The second, and potentially more
worrying, is the fact that business investment has been much weaker
than expected with many companies delaying new projects until the
outcome of any Brexit deal becomes clear.
In this uncertain environment, the performance of the real
estate market has surprised on the upside. The Group’s benchmark
(IPD quarterly version of IPD Monthly Index Funds) produced a total
return of 10.5% in 2017, coming in ahead of the IPF Consensus
expectations for the year of 3.2%. Capital growth was robust over
the year with values rising by 5.5%, driven by the buoyant
performance of the industrial sector. On the income side, rental
growth was recorded in all sectors resulting in overall rental
growth of 1.9% and an income return of 4.8%.
Performance
The Group has performed well in the year. The portfolio total
return was 12.1% representing a significant margin over the
benchmark return. This outperformance was driven by an above
benchmark portfolio income return of 6.3% and a capital return of
5.5%. The capital return was achieved despite the drag of
transaction costs resulting from a total turnover in the portfolio
during the year of £122 million. This positive portfolio
performance, combined with a conservative level of gearing, helped
the Group achieve an attractive NAV total return of 14.5%.
The Company’s shares continued to trade at a premium, which
stood at 6.4% to NAV at the year end, underlining investors’
appetite for attractive, secure income returns. This continued
demand for the Company’s shares allowed the Company to undertake
NAV accretive share issuances under its blocklisting authority. Up
to 5 April 2018, a total of 22.425
million shares have been issued from the beginning of the
blocklisting facility at an average premium to NAV of 6.4% raising
£20 million for investment into the portfolio. The premium at the
end of the year was marginally less than the premium at the end of
the previous financial year which meant that the total shareholder
return for the year was slightly lower than the NAV total return at
13.7%.
Over the longer term the Group has also delivered good
performance with a NAV and share price total return over five years
of 112.9% and 115.8% respectively. By comparison, the FTSE
All-Share REIT Index returned 70.8% and the FTSE All-Share Index
returned 63.0% over the same period.
Dividends
Dividends totalling 4.76p were paid to shareholders in the year.
This represents a yield of 5.1% based on the share price at
31 December 2017 which compares
favourably to the yield on the FTSE All-Share REIT and FTSE
All-Share Indices (3.6% and 3.4% respectively).
Importantly, the dividend was more than fully covered by
earnings for the year (104%) which was achieved despite net
disposals of £22 million and the resultant loss in income. The
Board is fully aware of the importance to shareholders of paying
out an attractive income, with the maintenance of an appropriate
dividend cover being a key focus in the year ahead.
Financial Resources
As at the year end, the Group had a prudent Loan to Value ratio
of 18% reflecting the relatively cautious outlook going forward.
The Group has in place a term loan which is not due to expire until
2023 at a fixed interest rate of 2.73%. This compares to the net
initial yield on the portfolio of 5.5%, highlighting the income
accretive nature of this debt. The Group also had significant
firepower still available for investment with £35 million of its
revolving credit facility to utilise and uncommitted cash of £18.3
million at the year end. Overall, the board believes the Group is
in a good financial position with a strong balance sheet and
significant resources still available for investment.
Dick
Barfield
It is with great sadness that I have to report that my
predecessor as Chairman, Mr Dick
Barfield, recently passed away after a short illness. Dick,
who retired at the AGM in June 2016,
was a man of great character, leadership and integrity and he will
be sorely missed.
Outlook
The expectation for the next year is for more moderate economic
growth. However the extent of this moderation will be largely
dependant on the perceived success or otherwise of the Brexit
negotiations which, in turn, will impact on the level of business
investment. In addition, the extent of any rise in interest rates,
which the Bank of England has
indicated may rise more rapidly than forecast, will also influence
the performance of the economy and the property market in the
upcoming year.
In terms of the UK real estate market, values are now in excess
of the level before the Brexit vote in 2016 with strong
fundamentals in place. The yields generated by UK real estate are
still significantly higher than the other mainstream asset classes.
In addition, unlike in previous cycles, the leverage in the sector
is prudent and the market is still fairly liquid. Finally, by
historical standards, limited development and lower than average
vacancy rates should all provide a solid foundation for future
positive returns, albeit more geared towards income in the
immediate future.
In this environment, your Board believes the Group is in a good
position. While it is anticipated there may be more volatility in
secondary assets going forward, the portfolio of 54 assets at the
year-end is well diversified both by geography and sector. In terms
of the latter, the Group had a 49.2% exposure to Industrials which
our Investment Manager forecasts will remain the top performing
sector in 2018. The repositioning exercise, which has continued
into 2018, has also helped de-risk the portfolio by selling assets
that had limited future return prospects, particularly in the
retail sector, which the Company had a 16.1% exposure to at year
end (benchmark 35.7%), and reinvesting the proceeds into assets in
stronger sectors, such as well-located offices and industrial
units, which offer more secure income. Also, as highlighted, it is
anticipated that income will be the main driver of future returns.
In this respect the Group has a strong and diverse tenant base
which underpins the high income return and the attractive, covered
dividend the Group continues to pay. Finally, the Group has a
strong balance sheet, prudent gearing and significant cash
resources still available to invest, boosted by ongoing NAV
accretive share issues. Combining these factors, I believe your
Company is well set up to continue to deliver attractive relative
returns in the future.
Robert Peto
Chairman
5 April
2018
STRATEGIC OVERVIEW
Objective
The objective of the Group is to provide shareholders with an
attractive level of income together with the prospect of income and
capital growth.
Investment Policy and Business
Model
The Board intends to achieve the investment objective by
investing in a diversified portfolio of UK commercial properties.
The majority of the portfolio will be invested in direct holdings
within the three main commercial property sectors of retail, office
and industrial although the Group may also invest in other
commercial property such as hotels, nursing homes and student
housing. Investment in property development and investment in
co-investment vehicles, where there is more than one investor, is
permitted up to a maximum of 10% of the property portfolio.
In order to manage risk, without compromising flexibility, the
Board applies the following restrictions to the property portfolio,
in normal market conditions:
-No property will be greater by value than 15% of total
assets.
-No tenant (excluding the Government) will be responsible for
more than 20% of the Group’s rent roll.
-Gearing, calculated as borrowings as a percentage of gross
assets, will not exceed 65%. The Board’s current intention is that
the Group’s loan to value ratio (calculated as borrowings less all
cash as a proportion of property portfolio valuation) will not
exceed 45%.
As part of its strategy, the Board has contractually delegated
the management of the property portfolio, and other services, to
Standard Life Investments (Corporate Funds) Limited (“Investment
Manager”).
Strategy
Each year the Board undertakes a strategic review, with the help
of its Investment Manager and other advisers.
The overall intention is to continue to distribute an attractive
income return alongside growth in the NAV and a good overall total
return relative to the peer group.
At property level, it is intended that the Group remains
primarily invested in the commercial sector, while keeping a
watching brief on other classes such as student accommodation and
care homes. The Group is principally invested in office, industrial
and retail properties and intends to remain so.
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 Group. During 2017 and up to 5 April 2018, the Group raised an additional
£22.425 million through new share issues, as detailed in the
Chairman’s Statement.
The Group continues to maintain a tax efficient structure,
having migrated its tax residence to the UK and becoming a UK REIT
on 1 January 2015.
The Board
The Board currently consists of a non-executive Chairman and
four non-executive Directors, with a range of property, investment,
commercial and financial experience. There is also a commitment to
achieve the proper levels of diversity. At the date of this report,
the Board consisted of one female and four male Directors. The
Group 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
Group’s property portfolio and enables the Board to assess how the
portfolio is performing relative to the market. A comparison is
made of the Group’s property returns against the Index over a
variety of time periods (quarter, annual, three years and five
years).
Property voids.
Property voids are unlet properties. The Board reviews the level
of property voids within the Group’s portfolio on a quarterly basis
and compares the level to the market average, as measured by the
IPD. The Board seeks to ensure that, when a property becomes void,
the Investment Manager gives proper priority to seeking a new
tenant to maintain income.
Rent collection dates.
The Board assesses rent collection by reviewing the percentage
of rents collected within 21 days of each quarter end.
Net asset value total return.
The net asset value total return reflects both the net asset
value growth of the Group and also the dividends paid to
shareholders. The Board regards this as the best overall measure of
value delivered to shareholders. The Board assesses the net asset
value total return of the Group over various time periods (quarter,
annual, three years, five years) and compares the Group’s returns
to those of its peer group of listed, closed-ended property
investment companies.
Premium or discount of the share
price to net asset value.
The Board closely monitors the premium or discount of the share
price to the NAV and believes that a key driver to the level of the
premium or discount is the Group’s long term investment
performance. However, there can be short term volatility in the
premium or discount and the Board takes powers at each Annual
General Meeting (“AGM”) to enable it to issue or buy back shares
with a view to limiting this volatility.
Dividend per share and dividend
cover.
A key objective of the Group is to provide an attractive,
sustainable level of income to shareholders and the Board reviews,
at each Board meeting, the level of dividend per share and the
dividend cover, in conjunction with detailed financial forecasts,
to ensure that this objective is being met and is sustainable.
The Board considers the performance measures both over various
time periods and against similar funds.
A record of these measures is disclosed in the Financial and
Property Highlights, Chairman’s Statement and Investment Manager’s
Report.
Principal Risks and Uncertainties
The Board ensures that proper consideration of risk is
undertaken in all aspects of the Group’s business on a regular
basis. During the year, the Board carried out an assessment of the
risk profile of the Group, including consideration of risk
appetite, risk tolerance and risk strategy. The Board regularly
reviews the principal risks of the Group, seeking assurance that
these risks are appropriately rated and ensuring that appropriate
risk mitigation is in place.
The Group’s assets consist of direct investments in UK
commercial property. Its principal risks are therefore related to
the commercial property market in general, but also the particular
circumstances of the properties in which it is invested, and their
tenants. The Board and Investment Manager seek to mitigate these
risks through a strong initial due diligence process, continual
review of the portfolio and active asset management initiatives.
All of the properties in the portfolio are insured, providing
protection against risks to the properties and also protection in
case of injury to third parties in relation to the properties.
The Board has also identified a number of other specific risks
that are reviewed at each Board meeting. These are as follows:
The Group and its objectives become
unattractive to investors, leading to widening of the discount.
This risk is mitigated through regular contact with
shareholders, a regular review of share price performance and the
level of the discount or premium at which the shares trade to net
asset value and regular meetings with the Group’s broker to discuss
these points and address any issues that arise.
Net revenue falls such that the Group
cannot sustain its level of dividend, for example due to tenant
failure or inability to let properties.
This risk is mitigated through regular review of forecast
dividend cover and 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 Group
subscribes to the Investment Property Databank Iris Report which
updates the credit and risk ranking of the tenants and income
stream, and compares it to the rest of the UK real estate
market.
Uncertainty or change in the
macroeconomic environment results in property becoming an
undesirable asset class, causing a decline in property values.
This risk is managed through regular reporting from, and
discussion with, the Investment Manager and other advisers.
Macroeconomic conditions form part of the decision making process
for purchases and sales of properties and for sector allocation
decisions. Macroeconomic uncertainty continued during 2017,
particularly in relation to the UK’s decision to leave the EU. 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 Group.
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
Group activity and performance.
Loss on financial instruments.
The Group has entered into an interest rate swap arrangement.
This swap instrument is valued and monitored on a daily basis by
the counterparty bank. The Investment Manager checks the valuation
of the swap instrument internally to ensure it 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 Group include the following:
-Strategic – incorrect strategy, including sector and property
allocation and use of gearing, could all lead to a poor return for
shareholders.
-Tax efficiency – the structure of the Group or changes to
legislation could result in the Group no longer being a tax
efficient investment vehicle for shareholders.
-Regulatory – breach of regulatory rules could lead to the
suspension of the Group’s Stock Exchange Listing, financial
penalties or a qualified audit report.
-Financial – inadequate controls by the Investment Manager or
third party service providers could lead to misappropriation of
assets. Inappropriate accounting policies or failure to comply with
accounting standards could lead to misreporting or breaches of
regulations.
-Operational – failure of the Investment Manager’s accounting
systems or disruption to the Investment Manager’s business, or that
of third party service providers, could lead to an inability to
provide accurate reporting and monitoring, leading to loss of
shareholder confidence.
-Economic – inflation or deflation, economic recessions and
movements in interest rates could affect property valuations and
also bank borrowings.
The recent merger of Standard Life plc and Aberdeen Asset
Management PLC creates additional operational risk for the Group
due to the potential for changes in the way the Investment Manager
provides its services to the Group. The Board is keeping under
close review any potential implications for the Group arising from
the merger and the integration process.
The Board seeks to mitigate and manage all risks through
continual review, policy setting and enforcement of contractual
obligations. It also regularly monitors the investment environment
and the management of the Group’s property portfolio, levels of
gearing and the overall structure of the Group.
Social, Community and Employee
Responsibilities
The Group has no direct social, community or employee
responsibilities. The Group has no employees and accordingly no
requirement to 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 Group’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 Group. 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 to demolition,
redevelopment and operational management to disposal. The focus is
on energy efficiency, greenhouse gas emissions, resource management
and occupier satisfaction. To facilitate this, the 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 Group was awarded a Green Star ranking in the Global Real
Estate Sustainability Benchmark 2017 and improved its score by 8%
compared with 2016. A Green Star is awarded to entities that
perform well in both categories of the GRESB assessment: Management
& Policies and Implementation and Measurement. The Group’s
approach, through its Investment Manager, to monitoring and
improving the sustainability performance of the assets held by the
Group has been highly successful. Like-for- like landlord
electricity and gas consumption reduced year-on-year across the
Trust’s assets, by 16% and 27% respectively. This helped drive a
significant reduction in greenhouse gas emissions. Water
consumption also reduced year-on-year and 99.9% of waste was
diverted from landfill. For the first time this year we have
adopted the 2017 EPRA Sustainability Best Practice Recommendations
Guidelines (SPBRs) to inform the scope of indicators we report
against.
Health & Safety
Alongside these environmental principles the Group 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 Group, 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 Group can be proud of and allow the Group 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 has considered the nature of the Group’s assets and
liabilities and associated cash flows and has determined that five
years is the maximum timescale over which the performance of the
Group can be forecast with a material degree of accuracy and so is
an appropriate period over which to consider the Group’s
viability.
In assessing the Group’s viability, the Board has carried out
thorough reviews of the following:
-Detailed NAV, cash resources and income forecasts, prepared by
the Investment Manager, for a five year period under both normal
and stressed conditions;
-The Group’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 Group’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 Group. The Board takes any potential
risks to the ongoing success of the Group, and its ability to
perform, very seriously and works hard to ensure that risks are
kept to a minimum at all times.
Based on the results of the analysis outlined above, the Board
has a reasonable expectation that the Group will be able to
continue in operation and meet its liabilities as they fall due
over the five year period of its assessment.
Approval of Strategic Report
The Strategic Report comprises the Financial and Property
Highlights, Performance Summary, Chairman’s Statement, Strategic
Overview and Investment Manager’s Report. The Strategic Report was
approved by the Board and signed on its behalf by:
Robert
Peto
Chairman
5 April
2018
INVESTMENT MANAGER’S REPORT
UK Real Estate Market
The economy and the real estate market both surprised on the
upside in 2017. According to the ONS, economic growth is estimated
to have increased by 1.7% over the year; this compares to
projections at the start of the year for growth of 1.4%. Similarly,
All Property real estate returns were 10.5% (according to the
Group’s benchmark) over the year coming in ahead of the IPF
Consensus expectations of 3.2% for the year. Capital growth was
relatively strong over the year also with values rising by 5.4%.
Furthermore, rents increased by 1.9% over the year. As we move
through 2018, economists generally expect more subdued economic
growth for the year ahead and then some further moderation in
economic momentum in 2019 as the impact of leaving the European
Union becomes more pronounced. Real estate returns for the year are
expected to reflect this moderation in economic growth and more
subdued returns are expected in 2018 with less capital growth in
prospect and income anticipated to be the main driver of
returns.
As for the equity markets, the FTSE All-Share returned 13.1%
over 2017 whilst the FTSE 100 returned 12% over the year. Listed
real estate equities recorded a return of 12.7% in 2017.
In sector terms, the industrial sector has continued to
demonstrate its strength, generating a total return of 21.1% p.a.
in 2017. Retail was the laggard sector again, recording total
returns of 7.7%. Despite the political uncertainty associated with
the sector, the office sector recorded a total return of 8.5% over
2017. Industrial values continued to rise strongly over the year
whilst both the other two sectors only experienced modest capital
growth. Retail capital growth continued to be the weakest amongst
sectors with values increasing by 1.5%. Office values were
stronger, growing 3.5% over 2017. Rents remained on an upward trend
over the year, but within sectors, retail rental growth, at 0.4% in
2017, continued to be considerably weaker than the other sectors.
It was below office rental growth at 1.4% and industrials at 4.9%
over the year.
Investment Outlook
UK real estate continues to provide an elevated yield compared
to other assets and market values are now ahead of the level they
attained before the Brexit upheaval in 2016. Lending to the sector
remains prudent and liquidity remains reasonable. Additionally,
development continues to be relatively constrained by historic
standards, and existing vacancy rates are below average levels in
most markets, although there are pockets of oversupply in some
markets such as Central London
offices. The robust fundamentals should help to maintain the
positive returns the sector is currently recording. In this
environment, the steady secure income component generated by the
asset class is likely to be the key driver of returns over the next
few years. The market is expected to continue to be sentiment
driven in the short term as the politics and economic impact
associated with the UK’s withdrawal from the European Union
continues to evolve. The retail sector continues to face a series
of headwinds that may hold back recovery in less strong locations
due to oversupply and structural issues but the prospects for
retail in the South East and Central
London are expected to remain more robust. Given the
backdrop of continuing heightened macro uncertainty, investors are
becoming more risk averse and better quality assets are once again
broadly outperforming poorer quality. Occupier demand, particularly
in offices, has continued to focus on good quality real estate that
offer an elevated level of amenity to employees, as low levels of
unemployment mean the work environment is part of the offering to
recruit and retain the best people.
Performance
The Group performed well in 2017, with the portfolio
outperforming the MSCI / IPD benchmark (property level total return
of 12.1% vs benchmark 10.5%). Over the longer term performance has
been also relatively strong with outperformance over three and five
years. This has helped drive NAV total return which has exceeded
the property level total return over these time periods
highlighting the positive effect of the Group’s gearing.
The Group’s NAV total return also compared favourably to the
peer group as detailed below.
NAV Total Returns
to 31 December 2017 |
1
year (%) |
3
year (%) |
5
year (%) |
|
|
|
|
Standard Life
Investments Property Income Trust |
14.5 |
38.1 |
112.9 |
AIC Property Direct -
UK sector (weighted average) |
9.7 |
26.5 |
60.2 |
Investment Association
Open Ended Commercial Property Funds sector |
7.7 |
14.7 |
37.6 |
|
|
|
|
Company's ranking
in AIC Property Direct sector |
2 |
2 |
2 |
Source: Winterflood
Securities, Standard Life Investments |
|
|
|
Shown here is the Group’s share price performance – an obviously
important measure for investors, but one that is slightly less
relevant to the investment manager as the share price is not
directly influenced by its actions compared to the NAV or property
level returns. Nonetheless, the rating of the Group’s shares is an
important measure of the Group’s perception, and it has been
pleasing to see a premium rating throughout 2017 which has resulted
in a strong share price performance over the 12 months as
highlighted in the table below.
Share Price Total
Returns |
|
1
year (%) |
3
year (%) |
5
year (%) |
Standard Life
Investments Property Income Trust |
|
13.7 |
40.5 |
115.8 |
FTSE All-Share
Index |
|
13.1 |
33.3 |
63.0 |
FTSE All-Share REIT
Index |
|
12.2 |
15.4 |
70.8 |
AIC Property Direct UK
sector (weighted average) |
|
8.2 |
18.4 |
65.7 |
Source: Winterflood Securities,
Standard Life Investments
Valuation
The property portfolio was valued on a quarterly basis by Knight
Frank LLP (JLL valued part of the portfolio for the March 2017 valuation) throughout the year. At the
year end the property portfolio was valued at £433.2 million, and
it held uncommitted cash of £18.3 million (this compared with
£429.9 million and £13.1 million as at year end 2016). During the
year the Group also reduced its debt by repaying £15 million of the
revolving credit facility.
Investment Strategy
The Board and Investment Manager remains focused on delivering
an attractive income return to shareholders, but we also want to
provide investors with a reasonable total return. We aim to meet
these objectives through owning assets that we expect to perform in
line with our expectations, and also by actively managing the
assets we own to drive value and security of future income
streams.
Below we outline the activity that has taken place over the
year; however a brief summary of our investment policy is to sell
properties that we believe have more void or capex risk than we are
comfortable with, or where we think the asset will not perform in
line with requirements. The sales have therefore concentrated on
poorer quality retail warehousing which we believe could see
capital falls due to the structural changes in that marketplace,
and on office assets that are likely to require significant
expenditure and have large voids, where the potential return to the
Group for undertaking the capex is not considered adequate. We also
believe in realising a profit where we feel the property has
reached the top of its value.
When purchasing a new investment we look to acquire assets that
are in a good location and are going to appeal not just to the
existing tenant but also to future tenants. Although we are happy
to buy investments with some void or capex requirements we are not
looking at major refurbishment opportunities due to the lack of
income they would have. We do not have a particular regional focus,
although we do want to invest in vibrant areas.
Purchases
Six assets were purchased during 2017 for a total of £48.9
million, and then after the year end a further three purchases
completed for £23.6 million. The purchases are detailed below in
order of purchase. The purchases provide a diverse exposure to
asset type, location, and tenant. The one factor they have in
common is our belief that they have a sufficient appeal to the
current, and potential future, occupiers and hence will provide a
reliable source of income going forward.
Kings Business Park, Bristol: A
seven unit industrial estate close to the city centre of
Bristol, with asset management
opportunities. The purchase price of £5.27 million reflected a
yield of 6.25%.
SNOP, Washington: A single let
industrial unit of 150,000 sq ft located close to the Nissan car
plant in Washington. The property
is reversionary, and has a low site cover of 28%. The purchase
price of £5.5 million reflected a yield of 6.3%.
101 Princess Street, Manchester: We purchased this multi-let office
for £8.1 million, reflecting a yield of 6.45%. The traditional
brick building is let to six tenants and provides refurbished
“trendy” space with exposed services, and has strong potential for
rental growth.
Pinnacle, Reading: This multi-let office is located close to
Reading train station and offers good quality accommodation that we
intend to enhance. The purchase price of £13.45 million reflected a
yield of 6.75%.
Units H1, H2 & G, Nexus, Birmingham: a small single let industrial unit
that had just been let on a new 15 year lease. The purchase price
of £4.58 million represented a yield of 5.75%
One Station Square, Bracknell: We
purchased a refurbished multi-let office located adjacent to the
train station for £12 million, with a yield of 6.9% in December 2017. The building has one vacant floor
and we believe the recent improvements to the town centre, and loss
of office accommodation to residential use, provides good scope for
future rental growth.
Timbmet, Shellingford: In early January
2018 we completed the purchase of a single let warehouse
located between Oxford and
Swindon by way of a 25 year sale
and leaseback, with indexed rent reviews throughout the lease. The
purchase price of £11.5 million reflected an initial yield of
6.5%.
Grand National Retail Park, Aintree: This small leisure scheme
is located adjacent to the race course, an equestrian and event
facility, as well as established out of town retail. The tenants
all trade well and we believe there is scope for asset management –
indeed 2 weeks after purchase we agreed terms to take a break out
of the gym operator’s lease to give an additional five year term
certain to the lease. The purchase price of £6.1 million reflects a
yield of 6.85%.
Flamingo Flowers, Sandy: The purchase of this industrial
facility, used to process and distribute cut flowers, provides the
Group with an attractive income stream for a 19 year lease with
indexation from a low base rent. The site’s location, adjacent to a
junction of the A1, just 35 miles off the M25, provides interesting
longer term opportunities. The purchase price of £6 million
represents an initial yield of 6.25%.
Sales
Over the course of 2017 the Group completed the disposal of 9
assets for a total of £71.4 million. The Group also exchanged
contracts on the sale of its biggest asset Elstree Tower,
Borehamwood for £20 million with completion taking place on
16 March 2018. Contracts were also
exchanged on a further retail warehouse asset, Bathgate Retail
Park, with a completion date of 19 January
2018 for £5.23 million. After the year end, the Group
exchanged contracts for the sale of an office building in Slough
for £13.25 million, with completion expected on 6 April 2018.
The sales were driven by a desire to reduce future void / capex
risk, and also reduce exposure to two markets we are more concerned
about – Central London offices and
weaker retail warehousing.
Quadrangle, Cheltenham: The
lease on this office would have expired in June 2018 and circa £10 million of capex would
have been required as well as letting risk. We completed this sale
for £11.1 million, which was ahead of valuation, in January 2017.
White Bear Yard, London: We
completed the sale of this multi-let office in Clerkenwell for £19
million in March 2017 as we were
concerned about rising business rates, Brexit and the
non-air-conditioned nature of the building had future income risk.
The Group now has no core London
office exposure.
Matalan, Bradford and King’s Lynn: We sold two stand-alone
retail warehouse investments let to Matalan for a combined £8.2
million. The sale reduced exposure to retail, which we expect to
continue to under-perform.
Travis Perkins, Cheltenham: We sold a small, but dilapidated
industrial unit on a long lease to the tenant for £2.2 million. It
was one of the smallest assets in the fund.
IT Centre York: As we prefer town / city centre offices we sold
this single let office with a short lease for £4.3 million. It is
located out of town, and we were uncomfortable about future rental
prospects.
Range, Southend on Sea: We
continued our disinvestment of secondary retail warehousing with
the sale of this stand-alone unit to the local Council for £5
million.
Dorset St, Southampton: The
main tenant in the building left on lease expiry following
corporate changes, leaving the building 75% vacant and in need of
refurbishment. We did not believe the modernisation would provide
us with sufficient returns and therefore sold the property for £5.2
million.
DSG, Preston: This property was
heavily over rented and with a new scheme about to be developed
elsewhere in Preston we felt a
sale would capitalise on current demand for secure income and
protect the Group from anticipated capital decline in the unit. We
sold this property for £16.4 million.
Asset Management
One of the differentiators of real estate as an asset class is
the opportunity for active asset management to enhance returns. We
focus on working with tenants to try and ensure the assets meet
their requirements, so they want to remain in occupation, and are
willing to renew leases or take out lease break clauses. It is
cheaper to retain tenants than it is to find new ones, even
although it can sometimes be harder to capture all the potential
rental growth in such a circumstance.
With the continued political uncertainty both in the UK and
abroad, it is hardly surprising that many companies are delaying
making property decisions. Moving is expensive and time consuming,
so we find tenants are receptive to lease extension discussions,
but they want an increased level of flexibility in their leases,
and only commit when they have to.
During the course of the year we renewed or renegotiated 5
leases securing £628,600pa of rent, and let 8 units for a total of
£512,000pa. We also settled nine rent reviews, with a total
increase in rent of £111,200pa.
Over the course of 2017 the Group’s occupancy rate declined,
from 96.7% at year-end 2016, to 92.3%, based on percentage of
estimated rental value of the portfolio as at end 2017 resulting in
a void level of 7.7%. In January 2018
the Group signed an agreement for lease (completed 1 March 2018) on the largest void, an industrial
unit in Rainham, that represented over a quarter of this void
level. In addition, two of the recent purchases (Reading and
Bracknell) had void floors which were subject to a rental guarantee
when we purchased the properties, hence are generating income even
though they are technically void. Set out below is a table showing
the current status of each void unit in the portfolio.
Property Name |
Sector |
ERV |
ERV% |
Comment |
Let |
|
£27,565,991 |
92.26% |
|
Vacant |
|
£2,313,297 |
7.74% |
|
|
|
|
|
|
Marsh Way, Rainham |
Industrial |
£636,197 |
2.13% |
Agreement for lease signed |
Unit 6, Broadgate, Oldham |
Industrial |
£544,000 |
1.82% |
Proposal made |
Explorer 1 & 2, Crawley |
Office |
£373,500 |
1.25% |
Being refurbished |
The Pinnacle, Reading |
Office |
£253,000 |
0.85% |
Rent guarantee from purchase |
Foxholes Business Park,
Hartford |
Industrial |
£186,800 |
0.63% |
One of 4 units under offer |
One Station Square, Bracknell |
Office |
£126,750 |
0.42% |
Rent guarantee from purchase |
Charter Court, Slough |
Office |
£59,300 |
0.20% |
|
Ocean Trade Centre, Aberdeen |
Industrial |
£41,500 |
0.14% |
Under offer |
Kings Business Park, Bristol |
Industrial |
£41,250 |
0.13% |
Under offer |
Howard Town Retail Park,
Glossop |
Retail |
£28,100 |
0.09% |
Under offer |
Budbrooke Industrial Estate,
Warwick |
Industrial |
£14,900 |
0.05% |
Under offer |
New Palace Place, London |
Office |
£8,000 |
0.03% |
|
Total |
|
£29,879,288 |
100.00% |
|
Debt
The Group has two debt facilities in place, both with RBS:
The term loan of £110 million is fully drawn and the facility is
fixed until April 2023. The Group has
an interest rate swap in place to fix the rate paid, with an all-in
rate of 2.7%. The interest rate swap is valued at a liability of
£2.2 million as at end 2017 (£3.6 million same time 2016). It
should be noted that the value of the swap will revert to £0 at
maturity.
In addition, the Group has a £35 million Revolving Credit
Facility which is due to expire in April
2021 (although the Group has the right to extend it by two
years). As at the end of 2017 the RCF was undrawn.
The Group had a loan to value ratio at year end of 18% which is
down from the end 2016 LTV of 26.0%. The reduction in LTV has been
a deliberate move given the cautious outlook the Group has for the
market and it is now at the bottom end of the desired range.
Jason
Baggaley
Fund Manager
STATEMENT OF DIRECTORS’
RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report
and the Group financial statements for each year which give a true
and fair view, in accordance with the applicable Guernsey law and those International Financial
Reporting Standards (“IFRSs”) as adopted by the European Union.
In preparing those Financial Statements, the Directors are
required to:
-select suitable accounting policies in accordance with IAS 8:
Accounting Policies, Changes in Accounting Estimates and Errors and
then apply them consistently;
-make judgement and estimates that are reasonable and
prudent;
-present information, including accounting policies, in a manner
that provides relevant, reliable, comparable and understandable
information;
-provide additional disclosures when compliance with the
specific requirements in IFRSs as adopted by the European Union is
insufficient to enable users to understand the impact of particular
transactions, other events and conditions on the Group’s financial
position and financial performance;
-state that the Group has complied with IFRSs as adopted by the
European Union, subject to any material departures disclosed and
explained in the Group financial statements; and
-prepare the Group Financial Statements on a going concern basis
unless it is inappropriate to presume that the Group will continue
in business.
The Directors confirm that they have complied with the above
requirements in preparing the Financial Statements.
The Directors are responsible for keeping adequate accounting
records, that are sufficient to show and explain the Group’s
transactions and disclose with reasonable accuracy at any time, the
financial position of the Group and to enable them to ensure that
the Financial Statements comply with The Companies (Guernsey) Law, 2008. They are also responsible
for safeguarding the assets of the Group and hence for taking
reasonable steps for the prevention and detection of fraud, error
and non compliance with law and regulations.
The maintenance and integrity of the Company’s website is the
responsibility of the Directors; the work carried out by the
auditors does not involve considerations of these matters and,
accordingly, the auditors accept no responsibility for any change
that may have occurred to the Financial Statements since they were
initially presented on the website.
Legislation in Guernsey
governing the preparation and dissemination of the financial
statements may differ from legislation in other jurisdictions.
Responsibility Statement of the
Directors in respect of the Consolidated Annual Report under the
Disclosure and Transparency Rules
The Directors each confirm to the best of their knowledge
that:
-the Consolidated Financial Statements, prepared in accordance
with IFRSs as adopted by the European Union, give a true and fair
view of the assets, liabilities, financial position and profit or
loss of the Group; and
-the management report, which is incorporated into the Strategic
Report, Directors’ Report and Investment Manager’s Report, includes
a fair review of the development and performance of the business
and the position of the Group, together with a description of the
principal risks and uncertainties that they face.
Statement under the UK Corporate
Governance Code
The Directors each confirm to the best of their knowledge and
belief that the Annual Report and Consolidated Financial Statements
taken as a whole are fair, balanced and understandable and provide
the information necessary to assess the Group’s performance,
business model and strategy.
Approved by the Board on
5 April
2018
Robert
Peto
Chairman
FINANCIAL STATEMENTS
Consolidated Statement of
Comprehensive Income |
|
|
|
|
for the year ended 31 December
2017 |
Notes |
|
2017 £ |
2016 £ |
Rental income |
|
|
28,526,725 |
30,414,862 |
Surrender premium |
|
|
14,688 |
81,500 |
Valuation gain/(loss) from
investment properties |
7 |
|
23,174,903 |
(5,300,992) |
(Loss)/gain on disposal of
investment properties |
|
|
(138,237) |
1,067,395 |
Investment management fees |
4 |
|
(3,136,218) |
(3,157,399) |
Valuers fees |
4 |
|
(71,844) |
(99,001) |
Auditor’s fees |
4 |
|
(74,500) |
(73,695) |
Directors fees and expenses |
22 |
|
(194,011) |
(164,225) |
Other direct property expenses
|
|
|
(1,848,130) |
(1,372,597) |
Other administration expenses |
|
|
(434,466) |
(445,144) |
Operating surplus
|
|
|
45,818,910 |
20,950,704 |
|
|
|
|
|
Finance income |
5 |
|
2,752 |
30,536 |
Finance costs |
5 |
|
(3,356,428) |
(4,047,594) |
Loss on derecognition of interest
rate swap |
14 |
|
- |
(2,735,000) |
Surplus for the year before
taxation |
|
|
42,465,234 |
14,198,646 |
|
|
|
|
|
Taxation |
|
|
|
|
Tax charge |
|
|
- |
- |
Surplus for the year, net of
tax |
|
|
42,465,234 |
14,198,646 |
|
|
|
|
|
Other Comprehensive
Income |
|
|
|
|
Net change in fair value of the
swaps reclassified to profit and loss |
14 |
|
- |
2,735,000 |
Valuation gain/(loss) on cash flow
hedge |
14 |
|
1,317,743 |
(4,212,250) |
Total other comprehensive
surplus/(deficit) |
|
|
1,317,743 |
(1,477,250) |
|
|
|
|
|
Total comprehensive surplus for
the year, net of tax |
|
|
43,782,977 |
12,721,396 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share |
|
|
2017 (p) |
2016 (p) |
Basic and diluted
earnings per share |
18 |
|
10.91 |
3.73 |
EPRA earnings per share |
18 |
|
4.99 |
5.56 |
All items in the above Consolidated Statement of Comprehensive
Income derive from continuing operations.
Consolidated Balance
Sheet |
|
|
|
|
as at 31 December 2017 |
|
|
|
|
|
Notes |
|
2017 £ |
2016 £ |
ASSETS |
|
|
|
|
Non-current
assets |
|
|
|
|
Investment
properties |
7 |
|
404,252,083 |
395,782,781 |
Lease incentives |
7 |
|
3,657,917 |
4,187,219 |
Rent deposits held on behalf of
tenants |
|
|
995,942 |
936,668 |
|
|
|
408,905,942 |
400,906,668 |
Current assets |
|
|
|
|
Investment properties held for
sale |
8 |
|
25,300,000 |
29,975,000 |
Trade and other receivables |
10 |
|
20,256,944 |
1,787,089 |
Cash and cash equivalents |
11 |
|
14,334,504 |
13,054,057 |
|
|
|
59,891,448 |
44,816,146 |
|
|
|
|
|
Total assets |
|
|
468,797,390 |
445,722,814 |
|
|
|
|
|
LIABILITIES |
|
|
|
|
Current liabilities |
|
|
|
|
Trade and other payables |
12 |
|
10,451,289 |
8,784,217 |
Interest rate swap |
14 |
|
887,699 |
1,341,101 |
|
|
|
11,338,988 |
10,125,318 |
|
|
|
|
|
Non-current liabilities |
|
|
|
|
Bank borrowings |
13 |
|
109,107,044 |
124,001,828 |
Interest rate swap |
14 |
|
1,357,100 |
2,221,441 |
Rent deposits due to tenants |
|
|
995,942 |
936,668 |
|
|
|
111,460,086 |
127,159,937 |
|
|
|
|
|
Total liabilities
|
|
|
122,799,074 |
137,285,255 |
|
|
|
|
|
Net
assets |
|
|
345,998,316 |
308,437,559 |
|
|
|
|
|
EQUITY |
|
|
|
|
Capital and reserves attributable
to Company’s equity holders |
|
|
|
|
Share capital |
16 |
|
217,194,412 |
204,820,219 |
Retained earnings |
17 |
|
8,364,603 |
7,532,448 |
Capital reserves |
17 |
|
22,600,929 |
(1,753,480) |
Other distributable reserves |
17 |
|
97,838,372 |
97,838,372 |
Total equity |
|
|
345,998,316 |
308,437,559 |
Approved by the Board on 5 April 2018 and signed on its behalf by:
Robert Peto, Chairman |
|
|
|
|
Consolidated Statement of Changes
in Equity |
|
|
|
|
|
|
for the year ended 31 December
2017 |
|
Share Capital |
Retained earnings |
Capital reserves |
Other distributable
reserves |
Total equity |
|
Notes |
£ |
£ |
£ |
£ |
£ |
Opening balance 1 January
2017 |
|
204,820,219 |
7,532,448 |
(1,753,480) |
97,838,372 |
308,437,559 |
|
|
|
|
|
|
|
Surplus for the year |
|
- |
42,465,234 |
- |
- |
42,465,234 |
Other comprehensive income |
|
- |
- |
1,317,743 |
- |
1,317,743 |
Total comprehensive
surplus for the year |
|
- |
42,465,234 |
1,317,743 |
- |
43,782,977 |
|
|
|
|
|
|
|
Ordinary shares issued net of issue
costs |
16 |
12,374,193 |
- |
- |
- |
12,374,193 |
Dividends paid |
19 |
- |
(18,596,413) |
- |
- |
(18,596,413) |
Valuation gain from investment
properties |
7 |
- |
(23,174,903) |
23,174,903 |
- |
- |
Loss on disposal of investment
properties |
|
- |
138,237 |
(138,237) |
- |
- |
Balance at 31
December 2017 |
|
217,194,412 |
8,364,603 |
22,600,929 |
97,838,372 |
345,998,316 |
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 |
|
|
|
|
|
|
|
Surplus for the year |
|
- |
14,198,646 |
- |
- |
14,198,646 |
Other comprehensive income |
|
- |
- |
(1,477,250) |
- |
(1,477,250) |
Total comprehensive
surplus for the year |
|
- |
14,198,646 |
(1,477,250) |
- |
12,721,396 |
|
|
|
|
|
|
|
Dividends paid |
19 |
- |
(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 Cash Flow
Statement |
|
|
|
|
for the year ended 31 December
2017 |
|
|
|
|
|
Notes |
|
2017 £ |
2016 £ |
Cash flows from operating
activities |
|
|
|
|
Surplus for the year before
taxation |
|
|
42,465,234 |
14,198,646 |
Movement in non-current lease
incentives |
|
|
(114,820) |
(816,862) |
Movement in trade and other
receivables |
|
|
(18,529,129) |
135,094 |
Movement in trade and other
payables |
|
|
1,726,346 |
(3,690,397) |
Loss on derecognition of interest
rate swaps
|
|
|
- |
2,735,000 |
Finance costs |
5 |
|
3,356,428 |
4,047,594 |
Finance income |
5 |
|
(2,752) |
(30,536) |
Valuation (gain)/loss from
investment properties |
7 |
|
(23,174,903) |
5,300,992 |
Loss/(gain) on disposal of
investment properties |
7 |
|
138,237 |
(1,067,395) |
Net cash inflow from operating
activities |
|
|
5,864,641 |
20,812,136 |
|
|
|
|
|
Cash flows from investing
activities |
|
|
|
|
Interest received |
5 |
|
2,752 |
30,536 |
Purchase of investment
properties |
|
|
(50,012,676) |
- |
Capital expenditure on investment
properties |
7 |
|
(2,187,601) |
(1,479,788) |
Net proceeds from disposal of
investment properties |
7 |
|
72,086,763 |
20,192,395 |
Net cash inflow from investing
activities |
|
|
19,889,238 |
18,743,143 |
|
|
|
|
|
Cash flows from financing
activities |
|
|
|
|
Proceeds on issue of ordinary
shares |
16 |
|
12,467,700 |
- |
Transaction costs of issue of
shares |
16 |
|
(93,507) |
- |
Repayment of bank borrowing |
13 |
|
- |
(139,432,692) |
Bank borrowing |
13 |
|
- |
145,000,000 |
Repayment of RCF |
13 |
|
(15,000,000) |
(20,000,000) |
Bank borrowing arrangement
costs |
13 |
|
(55,000) |
(1,138,458) |
Interest paid on bank borrowing |
5 |
|
(2,089,843) |
(2,594,070) |
Payments on interest rate swap |
5 |
|
(1,106,369) |
(929,394) |
Swap breakage costs |
14 |
|
- |
(2,735,000) |
Dividends paid to the Company’s
shareholders |
19 |
|
(18,596,413) |
(17,067,124) |
Net cash outflow from financing
activities |
|
|
(24,473,432) |
(38,896,738) |
|
|
|
|
|
Net increase in cash and cash
equivalents |
|
|
1,280,447 |
658,541 |
Cash and cash equivalents at
beginning of year |
11 |
|
13,054,057 |
12,395,516 |
Cash and cash equivalents at end
of year |
|
|
14,334,504 |
13,054,057 |
Notes to the Consolidated Financial
Statements
for the year ended 31 December 2017
1 General Information
Standard Life Investment Property Income Trust Limited (“the
Company”) and its subsidiaries (together “the Group”) carries on
the business of property investment through a portfolio of freehold
and leasehold investment properties located in the United Kingdom. The Company is a limited
liability company incorporated in Guernsey, Channel
Islands. The Company has its listing on the London Stock
Exchange.
The address of the registered office is Trafalgar Court, Les
Banques, St Peter Port, Guernsey.
These audited Consolidated Financial Statements were approved
for issue by the Board of Directors on 5
April 2018.
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.
In the previous years, all rent deposits held on behalf of
tenants are classified as current assets within trade and other
receivables. The portion of rent deposits held on behalf of tenants
that will be used to pay non-current rent deposits due to tenants
are now classified as non-current assets, and the prior year
comparative was restated accordingly. There is no impact on net
assets or net profit on this reclassification, thus, presentation
of a third balance sheet is considered not necessary. As at
1 January 2016, an amount of £622,283
of the rent deposits held on behalf of tenants included in current
assets should have been reclassified as non-current assets.
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 were effective for the year, but were either not
applicable to or did not have a material impact on the Group:
-Amendments to IAS 7: Disclosure Initiative
-Amendments to IAS 12: Recognition of Deferred Tax Assets for
Unrealised Losses
-Annual Improvements to IFRSs 2014–2016 Cycle: Clarification for
the scope of the disclosure requirements in IFRS 12
New and amended standards and
interpretations not applied
As at the date of approval of the Group financial statements,
the following new and amended standards in issue are adopted by the
EU and are applicable to the Group but are not yet effective and
thus, have not been applied by the Group:
-IFRS 9 Financial Instruments (effective 1 January 2018)
-IFRS 15 Revenue from Contracts with Customers (effective
1 January 2018)
-Clarification to IFRS 15 Revenue from Contracts with Customers
(effective 1 January 2018)
-IFRS 16 Leases (effective 1 January
2018)
The Directors do not expect the adoption of these standards and
interpretations to have a material impact on the Consolidated or
Company Financial Statements in the period of initial
application.
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 2017 that it believes
meet these specific criteria, but will review again in advance of
implementing IFRS 15.
IFRS 16 – Leases
IFRS 16 sets out the principles for the recognition,
measurement, presentation and disclosures of leases for both
parties to a contract, i.e. the customer (‘lessee’) and the
supplier (‘lessor’). IFRS 16 replaces IAS 17 ‘Leases’.
IFRS 16 changes fundamentally the accounting for leases by
lessees by eliminating the current IAS 17 dual accounting model,
which distinguishes between on-balance sheet finance leases and
off-balance sheet operating leases. Instead IFRS 16 introduces a
single on-balance sheet accounting model where the lease, for
lessees, becomes an on-balance sheet liability that attracts
interest, together with a new lease asset.
For lessor accounting, lessors continue to classify leases as
finance and operating leases.
For companies with material off balance sheet leases, there will
be a change to key financial metrics derived from the company’s
assets and liabilities (for example, leverage ratios).
The standard will be effective for annual periods beginning on
or after 1 January 2019. The Group
has assessed IFRS 16’s full impact and it does not anticipate
currently that this standard will have any material impact on the
Group’s financial statements as presented for the current year.
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 in note 7 details the decrease in the
valuation of investment properties if equivalent yield increases by
25 basis points or rental rates (ERV) decreases by 5%.
Fair value of financial
instruments
When the fair value of financial assets and financial
liabilities recorded in the Consolidated Balance Sheet cannot be
derived from active markets, they are determined using a variety of
valuation techniques that include the use of mathematical models.
The input to these models are taken from observable markets where
possible, but where this is not feasible, a degree of judgement is
required in establishing fair value. The judgements include
considerations of liquidity and model inputs such as credit risk
(both own and counterparty’s), correlation and volatility.
Changes in assumptions about these factors could affect the
reported fair value of financial instruments. The models are
calibrated regularly and tested for validity using prices from any
observable current market transactions in the same instrument
(without modification or repackaging) or based on any available
observable market data.
The valuation of interest rate swaps used in the Balance Sheet
is provided by Natwest. These values are validated by comparison to
internally generated valuations prepared using the fair value
principles outlined above.
The sensitivity analysis in note 3 details the increase and
decrease in the valuation of interest rate swaps if market rate
interest rates had been 100 basis points higher and 100 basis
points lower.
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 Group’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 2017 were
£14,688 (2016: £81,500) 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 Consolidated Statement of
Comprehensive Income as a valuation gain/(loss). In 2017, there
were no non-income producing properties (2016: nil).
E Taxation
Current income tax assets and liabilities are measured at the
amount expected to be recovered from or paid to taxation
authorities. The tax rates and tax laws used to compute the amount
are those that are enacted or substantively enacted by the
reporting date. Current income tax relating to items recognised
directly in other comprehensive income or in equity is recognised
in other comprehensive income and in equity respectively, and not
in the income statement. Positions taken in tax returns with
respect to situations in which applicable tax regulations are
subject to interpretation, if any, are reviewed periodically and
provisions are established where appropriate.
The Group recognises liabilities for current taxes based on
estimates of whether additional taxes will be due. When the final
tax outcome of these matters is different from the amounts that
were initially recorded, such differences will impact the income
and deferred tax provisions in the period in which the
determination is made.
Deferred income tax is provided using the liability method on
all temporary differences at the reporting date between the tax
bases of assets and liabilities and their carrying amounts for
financial reporting purposes. Deferred income tax assets are
recognised only to the extent that it is probable that taxable
profit will be available against which deductible temporary
differences, carried forward tax credits or tax losses can be
utilised. The amount of deferred tax provided is based on the
expected manner of realisation or settlement of the carrying amount
of assets and liabilities. In determining the expected manner of
realisation of an asset the Directors consider that the Group will
recover the value of investment property through sale. Deferred
income tax relating to items recognised directly in equity is
recognised in equity and not in profit or loss.
F Investment property
Investment properties comprise completed property and property
under construction or re-development that is held to earn rentals
or for capital appreciation or both. Property held under a lease is
classified as investment property when the definition of an
investment property is met.
Investment properties are measured initially at cost including
transaction costs. Transaction costs include transfer taxes,
professional fees for legal services and initial leasing
commissions to bring the property to the condition necessary for it
to be capable of operating. The carrying amount also includes the
cost of replacing part of an existing investment property at the
time that cost is incurred if the recognition criteria are met.
Subsequent to initial recognition, investment properties are
stated at fair value. Fair value is based upon the market valuation
of the properties as provided by the external valuers as described
in note 2.2. Gains or losses arising from changes in the fair
values are included in the Consolidated Statement of Comprehensive
Income in the year in which they arise. For the purposes of these
financial statements, in order to avoid double counting, the
assessed fair value is:
i) Reduced by the carrying amount of any accrued income
resulting from the spreading of lease incentives and/or minimum
lease payments.
ii) Increased by the carrying amount of any liability to the
superior leaseholder or freeholder (for properties held by the
Group under operating leases) that has been recognised in the
Balance Sheet as a finance lease obligation.
Acquisitions of investment properties are considered to have
taken place on exchange of contracts unless there are significant
conditions attached. For conditional exchanges acquisitions are
recognised when these conditions are satisfied.
Investment properties are derecognised when 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 the 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
Interest rate swaps are initially recognised at fair value on
the date a derivative contract is entered into and are subsequently
remeasured at their fair value. The method of recognising the
resulting gain or loss depends on whether the derivative is
designated as a hedging instrument, and if so, the nature of the
item being hedged. The Group documents at the inception of the
transaction the relationship between hedging instruments and hedged
items, as well as its risk management objective and strategy for
undertaking various hedging transactions. The Group also documents
its assessment both at hedge inception and on an ongoing basis of
whether the derivatives that are used in hedging transactions are
highly effective in 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 surplus in the
Consolidated Statement of Comprehensive Income.
Amounts taken to equity are transferred to profit or loss when
the hedged transaction affects profit or loss, such as when the
hedged financial income or financial expenses are recognised.
When a derivative is held as an economic hedge for a period
beyond 12 months after the end of the reporting period, the
derivative is classified as non-current consistent with the
classification of the underlying item. A derivative instrument that
is a designated and effective hedging instrument is classified
consistent with the classification of the underlying hedged
item.
L Service charge
The Group has appointed a managing agent to deal with the
service charge at the investment properties and the Group is acting
as an agent for the service charge and not a principal. As a result
the Group recognises net service charge and void expenses in the
Consolidated Statement of Comprehensive Income. The table in note
21 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 2017, 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 12
are those that are due within one year as a result of upcoming
tenant expiries.
3 Financial Risk Management
The Group’s principal financial liabilities are loans and
borrowings. The main purpose of the Group’s loans and borrowings is
to finance the acquisition and development of the Group’s property
portfolio. The Group has rent and other receivables, trade and
other payables and cash and short-term deposits that arise directly
from its operations.
The Group is exposed to market risk (including interest rate
risk and real estate risk), credit risk, capital risk and liquidity
risk. The Group is not exposed to currency risk or price risk. The
Group is engaged in a single segment of business, being property
investment in one geographical area, the United Kingdom. Therefore the Group only
engages in one form of currency being pound sterling. The Group
currently invests in direct non-listed property and is therefore
not exposed to price risk.
The Board of Directors reviews and agrees policies for managing
each of these risks which are summarised below.
Market risk
Market risk is the risk that the fair values of financial
instruments will fluctuate because of changes in market prices. The
financial instruments held by the Group that are affected by market
risk are principally the interest rate swap.
i) Interest Rate risk
The Group invests cash balances with RBS and Citibank. These
balances expose the Group to cash flow interest rate risk as the
Group’s income and operating cash flows will be affected by
movements in the market rate of interest. There is considered to be
no fair value interest rate risk in regard to these balances.
The bank borrowings as described in note 13 also expose the
Group to cash flow interest rate risk. The Group’s policy is to
manage its cash flow interest rate risk using interest rate swaps,
in which the Group has agreed to exchange the difference between
fixed and floating interest amounts based on a notional principal
amount (see note 14). The Group has floating rate borrowings of
£110,000,000, all of which have been fixed via an interest rate
swap.
The bank borrowings are carried at amortised cost and the Group
considers this to be a close approximation to fair value. The fair
value of the bank borrowings is affected by changes in the market
interest rate. The fair value of the interest rate swap is exposed
to changes in the market interest rate as their fair value is
calculated as the present value of the estimated future cash flows
under the agreements. The accounting policy for recognising the
fair value movements in the interest rate swaps is described in
note 2.3.
Trade and other receivables and trade and other payables are
interest free and have settlement dates within one year and
therefore are not considered to present a fair value interest rate
risk.
The tables below set out the carrying amount of the Group’s
financial instruments excluding the amortisation of borrowing costs
as outlined in note 13. Bank borrowings have been fixed due to an
interest rate swap and are detailed further in note 14:
|
|
|
|
|
|
|
At 31 December 2017 |
|
|
|
Fixed rate |
Variable
rate |
Interest
rate |
|
|
|
|
£ |
£ |
£ |
Cash and cash
equivalents |
|
|
|
- |
14,334,504 |
0.020% |
Bank borrowings |
|
|
|
110,000,000 |
- |
2.725% |
|
|
|
|
|
|
|
At 31 December 2016 |
|
|
|
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% |
At 31 December 2017, if market
rate interest rates had been 100 basis points higher with all other
variables held constant, the surplus for the year would have been
£143,345 higher (2016: £19,459 lower) as a result of the higher
interest income on cash and cash equivalents off set by the higher
interest expense on the RCF. Other Comprehensive Income and the
Capital Reserve would have been £5,604,283 higher (2016: £6,806,871
higher) as a result of an increase in the fair value of the swap
designated as a cash flow hedge of floating rate borrowings.
At 31 December 2017, if market
rate interest rates had been 100 basis points lower with all other
variables held constant, the surplus for the year would have been
£143,345 lower (2016: £19,459 higher) 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 £5,941,013 lower (2016: £7,285,802
lower) as a result of a decrease in the fair value of the swap
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. To reduce this risk, the Group reviews the
financial status of all prospective tenants and decides on the
appropriate level of security required via rental deposits or
guarantees.
c) The exposure of the fair values of the portfolio to market
and occupier fundamentals. The Group aims to manage such risks by
taking an active approach to asset management (working with tenants
to extend leases and minimise voids), capturing profit (selling
when the property has delivered a return to the Group that the
Group believes has been maximised and the proceeds can be
reinvested into more attractive opportunities) and identifying new
investments (generally at yields that are accretive to the revenue
account and where the Group believes there will be greater
investment demand in the medium term).
Credit risk
Credit risk is the risk that a counterparty will be unable to
meet a commitment that it has entered into with the Group. In the
event of default by an occupational tenant, the Group will suffer a
rental income shortfall and incur additional related costs. The
Investment Manager regularly reviews reports produced by Dun and
Bradstreet and other sources, including the IPD IRIS report, to be
able to assess the credit worthiness of the Group’s tenants and
aims to ensure that there are no excessive concentrations of credit
risk and that the impact of default by a tenant is minimised. In
addition to this, the terms of the Group’s bank borrowings require
that the largest tenant accounts for less than 20% of the Group’s
total rental income, that the five largest tenants account for less
than 50% of the Group’s total rental income and that the ten
largest tenants account for less than 75% of the Group’s total
rental income. The maximum credit risk from the tenant arrears of
the Group at the financial year end was £1,421,341 (2016: £958,417)
as detailed in note 10.
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 2017
£6,969,884 (2016: £3,489,002) was placed on deposit with The Royal
Bank of Scotland plc (“RBS”),
£7,364,620 (2016: £9,565,055) was held with Citibank. 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.
The disclosed amounts for interest-bearing loans and interest
rate swaps in the below table are the estimated net undiscounted
cash flows.
The Group’s liquidity position is regularly monitored by
management and is reviewed quarterly by the Board of Directors.
|
|
|
|
|
|
|
Year ended 31
December 2017 |
|
On
demand |
12
months |
1 to 5
years |
> 5 years |
Total |
|
|
£ |
£ |
£ |
£ |
£ |
Interest-bearing
loans |
|
- |
2,085,600 |
8,342,400 |
110,521,400 |
120,949,400 |
Interest rate swaps |
|
- |
911,900 |
3,647,600 |
227,975 |
4,787,475 |
Trade and other payables |
|
3,245,930 |
- |
- |
- |
3,245,930 |
Rental deposits due to
tenants |
|
- |
586,189 |
395,688 |
600,254 |
1,582,131 |
|
|
3,245,930 |
3,583,689 |
12,385,688 |
111,349,629 |
130,564,936 |
|
|
|
|
|
|
|
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 |
Capital risk
The Group’s objectives when managing capital are to safeguard
the Group’s ability to continue as a going concern in order to
provide returns for shareholders and benefits for other
stakeholders and to maintain an optimal capital structure to reduce
the cost of capital.
In order to maintain or adjust the capital structure, the Group
may adjust the amount of dividends paid to shareholders, return
capital to shareholders, issue new shares, increase or decrease
borrowings or sell assets to reduce debt.
The Group monitors capital on the basis of the gearing ratio.
This ratio is calculated as total borrowings divided by gross
assets and has a limit of 65% set by the Articles of Association of
the Company. Gross assets are calculated as non-current and current
assets, as shown in the Consolidated Balance Sheet.
The gearing ratios at 31 December
2017 and at 31 December 2016
were as follows:
|
|
|
|
|
2017
£ |
2016
£ |
|
|
|
|
|
|
|
Total borrowings (excluding
unamortised arrangement fees) |
|
|
|
|
110,000,000 |
125,000,000 |
|
|
|
|
|
|
|
Gross assets |
|
|
|
|
468,797,390 |
445,722,814 |
|
|
|
|
|
|
|
Gearing ratio (must not exceed
65%) |
|
|
|
|
23.5% |
28.0% |
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 |
|
|
|
2017 |
2016 |
2017 |
2016 |
|
|
|
£ |
£ |
£ |
£ |
Financial assets |
|
|
|
|
|
|
Cash and cash equivalents |
|
|
14,334,504 |
13,054,057 |
14,334,504 |
13,054,057 |
Trade and other receivables |
|
|
20,256,944 |
1,787,079 |
20,256,944 |
1,787,079 |
|
|
|
|
|
|
|
Financial liabilities |
|
|
|
|
|
|
Bank borrowings |
|
|
109,107,044 |
124,001,828 |
111,678,649 |
124,440,019 |
Interest rate swaps |
|
|
2,244,799 |
3,562,542 |
2,244,799 |
3,562,542 |
Trade and other payables |
|
|
4,828,061 |
2,766,297 |
4,828,061 |
2,766,297 |
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 2016.
-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 2016. The definition of the valuation
techniques are explained in the significant accounting judgements,
estimates and assumptions.
Year ended 31 December
2017 |
|
|
Level 1 |
Level 2 |
Level 3 |
Total fair value |
Interest rate swap |
|
|
- |
2,244,799 |
- |
2,244,799 |
|
|
|
|
|
|
|
Year ended 31 December
2016 |
|
|
Level 1 |
Level 2 |
Level 3 |
Total fair value |
Interest rate swap |
|
|
- |
3,562,542 |
- |
3,562,542 |
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 £3,136,218 (2016: £3,157,399). The amount due and
payable at the year end amounted to £807,005 excluding VAT (2016:
£772,290 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 £76,150 (2016: £75,472).
The amount due and payable at the year end amounted to £20,540
(2016: £nil).
Valuers fee
Knight Frank LLP (“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 £71,844 (2016: £99,001) of which
minimum fees of £2,500 per property (2016: £2,500) were incurred
due for new properties added to the portfolio. The amount due and
payable at the year end amounted to £37,158 excluding VAT (2016:
£18,458 excluding VAT).
The annual fee is equal to 0.017 percent of the aggregate value
of the property portfolio paid quarterly.
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 £74,500 (2016: £73,695) and relate to audit services
provided for the 2017 financial year. Ernst & Young LLP also
provided non-audit services in respect of taxation advice amounting
to £nil in 2017 (2016; £4,500). Total non-audit fees incurred up to
the Balance Sheet date amounted to £nil (2016: £4,500) and are
included within other administration expenses in the Consolidated
Statement of Comprehensive Income.
5 Finance Income and Costs
|
|
|
|
|
2017 |
2016 |
|
|
|
|
|
£ |
£ |
Interest income on cash and cash
equivalents |
|
|
|
|
2,752 |
30,536 |
Finance income |
|
|
|
|
2,752 |
30,536 |
|
|
|
|
|
|
|
Interest expense on
bank borrowings |
|
|
|
|
2,089,843 |
2,594,070 |
Payments on interest rate swap |
|
|
|
|
1,106,369 |
929,394 |
Amortisation of arrangement costs
(see note 13) |
|
|
|
|
160,216 |
524,130 |
Finance costs |
|
|
|
|
3,356,428 |
4,047,594 |
Of the finance costs above, £390,503 of the interest expense on
bank borrowings and £208,670 of payments on interest rate swaps
were accruals at 31 December
2017.
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 year and
the Board intends to conduct the Group’s affairs such that these
conditions continue to be met for the foreseeable future.
Accordingly, deferred tax is no longer recognised on temporary
differences relating to the property rental business.
The Company and its Guernsey
subsidiary have obtained exempt company status in Guernsey so that they are exempt from
Guernsey taxation on income
arising outside Guernsey and bank
interest receivable in Guernsey.
A reconciliation between the tax charge and the product of
accounting profit multiplied by the applicable tax rate for the
year ended 31 December 2017 and 2016
is, as follows:
|
|
|
|
|
2017 |
2016 |
|
|
|
|
|
£ |
£ |
Surplus before tax |
|
|
|
|
42,465,234 |
14,198,646 |
|
|
|
|
|
|
|
Tax calculated at UK statutory
corporation tax rate of 19.25% (2016: 20%) |
|
|
|
|
8,174,558 |
2,839,729 |
UK REIT exemption on net income and
gains |
|
|
|
|
(3,864,098) |
(3,963,833) |
Valuation (gain)/loss
in respect of investment properties not subject to tax |
|
|
|
|
(4,461,169) |
1,060,198 |
Excess management expenses not
utilised |
|
|
|
|
150,709 |
- |
Expenditure not allowed for
corporation tax/income tax purposes |
|
|
|
|
- |
63,906 |
Current income tax charge |
|
|
|
|
- |
- |
7 Investment Properties
|
UK |
UK |
UK |
|
|
Industrial |
Office |
Retail |
Total |
|
2017 |
2017 |
2017 |
2017 |
|
£ |
£ |
£ |
£ |
Market value at 1 January |
181,735,000 |
150,475,000 |
97,735,000 |
429,945,000 |
Purchase of investment
properties |
15,767,982 |
34,244,694 |
- |
50,012,676 |
Capital expenditure on investment
properties |
1,500,705 |
547,156 |
139,740 |
2,187,601 |
Opening market value of disposed
investment properties |
(1,975,000) |
(39,700,000) |
(30,550,000) |
(72,225,000) |
Valuation gain from investment
properties |
15,734,294 |
5,217,229 |
2,223,380 |
23,174,903 |
Movement in lease incentives |
372,019 |
(334,079) |
76,880 |
114,820 |
Market value at 31 December
|
213,135,000 |
150,450,000 |
69,625,000 |
433,210,000 |
|
|
|
|
|
Investment properties recognised as
held for sale |
- |
(20,000,000) |
(5,300,000) |
(25,300,000) |
Market value net of held for sale
at 31 December |
213,135,000 |
130,450,000
|
64,325,000 |
407,910,000 |
|
|
|
|
|
Adjustment for lease incentives |
(1,093,118) |
(1,711,950) |
(852,849) |
(3,657,917) |
Carrying value at 31 December
|
212,041,882 |
128,738,050 |
63,472,151
|
404,252,083 |
The valuations were performed by Knight Frank LLP (JLL valued
part of the portfolio for the March
2017 valuation), 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 the Royal Institute
of Chartered Surveyors (‘RICS’) requirements on disclosure for
Regulated Purpose Valuations has been applied (RICS Valuation –
Professional Standards January 2014
(revised April 2015) published by the
Royal Institution of Chartered Surveyors). These valuation models
are consistent with the principles in IFRS 13. The market value
provided by Knight Frank at the year end was £433,210,000 (2016:
£429,945,000) however an adjustment has been made for lease
incentives of £3,657,917 (2016: £4,187,219) 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.
|
UK |
UK |
UK |
|
|
Industrial |
Office |
Retail |
Total |
|
2016 |
2016 |
2016 |
2016 |
|
£ |
£ |
£ |
£ |
Market value 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 gain/(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 properties recognised 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 |
In the consolidated Cash Flow Statement, proceeds from disposal
of investment properties comprise:
|
|
2017 |
2016 |
|
|
£ |
£ |
Opening market value of disposed
investment properties |
|
72,225,000 |
19,125,000 |
(Loss)/gain on disposal of
investment properties |
|
(138,237) |
1,067,395 |
Net proceeds from disposal of
investment properties |
|
72,086,763 |
20,192,395 |
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 Group’s valuation
policies and procedures for property valuations is the Property
Valuation Committee. The Committee reviews the quarterly property
valuation reports produced by the valuers (or such other person as
may from time to time provide such property valuation services to
the Group) before its submission to the Board, focusing in
particular on:
-significant adjustments from the previous property valuation
report
-reviewing the individual valuations of each property
-compliance with applicable standards and guidelines including
those issued by RICS and the UKLA Listing Rules
-reviewing the findings and any recommendations or statements
made by the valuer
-considering any further matters relating to the valuation of
the properties
The Chairman of the Committee makes a brief report of the
findings and recommendations of the Committee to the Board after
each Committee meeting. The minutes of the Committee meetings are
circulated to the Board. The Chairman submits an annual report to
the Board summarising the Committee’s activities during the year
and the related significant results and findings.
All investment properties are classified as Level 3 in the fair
value hierarchy. There were no movements between levels during the
year.
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 |
213,135,000 |
Income Capitalisation |
Initial Yield
Reversionary Yield
Equivalent Yield
Estimated rental value per Sq. ft |
-3.47% to 9.06%
(5.24%)
5.33% to 9.11% (6.72%)
5.00% to 8.24% (6.28%)
£29.71 to £214.08 (£84.88) |
UK Office
Level 3 |
150,450,000 |
Income Capitalisation |
Initial Yield
Reversionary Yield
Equivalent Yield
Estimated rental value per Sq. ft |
3.45% to 9.00%
(6.27%)
4.98% to 9.49% (6.95%)
4.90% to 7.55% (6.43%)
£165.30 to £731.42 (£296.87) |
UK Retail
Level 3 |
69,625,000 |
Income Capitalisation |
Initial Yield
Reversionary Yield
Equivalent Yield
Estimated rental value per Sq. ft |
5.01% to 8.56%
(6.43%)
5.27% to 9.17% (6.20%)
5.10% to 8.65% (6.49%)
£117.32 to £497.24 (£226.37) |
|
433,210,000 |
|
|
|
Descriptions and definitions
The table above includes the following descriptions and
definitions relating to valuation techniques and key observable
inputs made in determining the fair values.
Estimated rental value (ERV)
The rent at which space could be let in the market conditions
prevailing at the date of valuation.
Equivalent yield
The equivalent yield is defined as the internal rate of return
of the cash flow from the property, assuming a rise or fall to ERV
at the next review or lease termination, but with no further rental
change.
Initial yield
Initial yield is the annualised rents of a property expressed as
a percentage of the property value.
Reversionary yield
Reversionary yield is the anticipated yield to which the initial
yield will rise (or fall) once the rent reaches the ERV.
The table below shows the ERV per annum, area per square foot,
average ERV per square foot, initial yield and reversionary yield
as at the Balance Sheet date.
|
|
|
2017 |
2016 |
ERV p.a. |
|
|
£30,925,950 |
£31,037,488 |
Area sq ft |
|
|
3,799,885 |
3,745,069 |
Average ERV per sq ft |
|
|
£8.14 |
£8.29 |
Initial yield |
|
|
5.5% |
6.3% |
Reversionary yield |
|
|
4.7% |
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.
|
|
|
2017 |
2016 |
|
|
|
£ |
£ |
Increase in equivalent yield of 25
bps |
|
|
(18,981,000) |
(17,901,800) |
Decrease in rental rates of 5%
(ERV) |
|
|
(11,071,600) |
(21,464,055) |
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 2017 the Group
had exchanged contracts with third parties for the sale of Bathgate
Retail Park. The sale completed on 19
January 2018. Additionally, the Group had exchanged
contracts with third parties for the sale of Elstree Tower,
Borehamwood. The sale completed on 16 March
2018. As at 31 December 2017,
the combined value of these assets was £25.3 million.
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 completed on 10
January 2017. As at 31 December
2016, the Group was actively seeking a buyer for White Bear
Yard, London. The Group both
exchanged contracts and completed this sale on 22 March 2017 for a price of £19,000,000.
9 Investment in Subsidiary
Undertakings
During the year ended 31 December
2017, the Group liquidated the following entities:
-Huris (Farnborough) Limited, a company incorporated in the
Cayman 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 and domiciled in Guernsey, Channel
Islands, whose principle business is property
investment.
-Standard Life Investments (SLIPIT) Limited Partnership, a
limited partnership established in England, whose principle business is property
investment.
-Standard Life Investments SLIPIT (General Partner) Limited, a
company with limited liability incorporated in England, whose principle business is property
investment.
-Standard Life Investments SLIPIT (Nominee) Limited, a company
with limited liability incorporated and domiciled in England, whose principle business is property
investment.
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.
10 Trade and Other Receivables
|
|
|
2017 |
2016 |
|
|
|
£ |
£ |
Trade receivables |
|
|
1,424,216 |
992,099 |
Less: provision for impairment of
trade receivables |
|
|
(2,875) |
(33,952) |
Trade receivables (net) |
|
|
1,421,341 |
958,147 |
|
|
|
|
|
Rental deposits held on behalf of
tenants |
|
|
586,189 |
186,673 |
Cash held by Solicitors |
|
|
17,727,355 |
- |
Other receivables |
|
|
522,059 |
642,269 |
Total trade and other
receivables |
|
|
20,256,944 |
1,787,089 |
Reconciliation for changes in the provision for impairment of
trade receivables:
|
|
|
2017 |
2016 |
|
|
|
£ |
£ |
Opening balance |
|
|
(33,952) |
(13,495) |
Charge for the year |
|
|
(2,875) |
(33,952) |
Reversal of provision |
|
|
33,952 |
13,495 |
Closing balance |
|
|
(2,875) |
(33,952) |
The estimated fair values of receivables are the discounted
amount of the estimated future cash flows expected to be received
and the approximate of 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 2017, trade
receivables of £2,875 (2016: £33,952) were considered impaired and
provided for.
The ageing of these receivables is as follows:
|
|
|
2017 |
2016 |
|
|
|
£ |
£ |
0 to 3 months |
|
|
2,875 |
8,625 |
3 to 6 months |
|
|
- |
5,625 |
Over 6 months |
|
|
- |
19,702 |
|
|
|
2,875 |
33,952 |
As of 31 December 2017, trade
receivables of £1,421,341 (2016: £958,147) were less than 3 months
past due but considered not impaired.
11 Cash and Cash Equivalents
|
|
|
2017 |
2016 |
|
|
|
£ |
£ |
Cash held at bank |
|
|
7,364,620 |
9,565,055 |
Cash held on deposit with RBS |
|
|
6,969,884 |
3,489,002 |
|
|
|
14,334,504 |
13,054,057 |
Cash held at banks earns interest at floating rates based on
daily bank deposit rates. Deposits are made for varying periods of
between one day and three months, depending on the immediate cash
requirements of the Group, and earn interest at the applicable
short-term deposit rates.
12 Trade and Other Payables
|
|
|
2017 |
2016 |
|
|
|
£ |
£ |
Trade and other payables |
|
|
3,245,930 |
1,642,956 |
VAT payable |
|
|
892,068 |
888,553 |
Deferred rental income |
|
|
5,727,102 |
6,066,035 |
Rental deposits due to tenants |
|
|
586,189 |
186,673 |
Lease incentives due within one
year |
|
|
- |
- |
|
|
|
10,451,289 |
8,784,217 |
Trade payables are non-interest bearing and are normally settled
on 30-day terms.
13 Bank Borrowings
|
|
|
2017 |
2016 |
|
|
|
£ |
£ |
Loan facility and drawn down
outstanding balance |
|
|
110,000,000 |
125,000,000 |
Opening carrying value |
|
|
124,001,828 |
139,048,848 |
Repayment of 2015 loan |
|
|
- |
(139,432,692) |
Borrowings during the year |
|
|
- |
145,000,000 |
Repayment of RCF |
|
|
(15,000,000) |
(20,000,000) |
Arrangements costs of additional
facility |
|
|
(55,000) |
(1,138,458) |
Amortisation of arrangement
costs |
|
|
160,216 |
524,130 |
Closing carrying value |
|
|
109,107,044 |
124,001,828 |
On 22 December 2015, the Group
increased its previous 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 Group 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 £15 million of the RCF was repaid, with
the balance of £nil remaining drawn down by the Group at
31 December 2017. Interest is payable
on the Term Loan at 3 month LIBOR plus a margin of 1.375%. The
Company has entered into a swap arrangement which fixes the
interest rate on the Term Loan (see note 14 for further details)
and results in an all-in interest rate on the term loan of 2.725%.
Interest is payable on the RCF at relevant LIBOR plus a margin of
1.2%.
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. All loan covenants were comfortably met
during the year ended 31 December
2017.
|
|
|
2017 |
2016 |
|
|
|
£ |
£ |
Loan amount |
|
|
110,000,000 |
125,000,000 |
Cash held by Solicitors |
|
|
(17,727,355) |
- |
Cash and cash equivalents |
|
|
(14,334,504) |
(13,054,057) |
|
|
|
77,938,141 |
111,945,943 |
|
|
|
|
|
Investment property valuation |
|
|
433,210,000 |
429,945,000 |
LTV percentage |
|
|
18.0% |
26.0% |
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 Group and its wholly owned subsidiaries, Standard Life
Investments Property Holdings Limited and Standard Life Investments
(SLIPIT) Limited Partnership.
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%.
14 Interest Rate Swap
On 20 January 2012 the Group
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 Group 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 Group
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 Group 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 13), on
28 April 2016 the Group completed an
interest rate swap of a notional amount of £110,000,000 with RBS.
The interest rate swap effective date is 28
April 2016 and has a maturity date of 27 April 2023. Under the swap the Group has
agreed to receive a floating interest rate linked to 3 month LIBOR
and pay a fixed interest rate of 1.35%.
|
|
|
2017 |
2016 |
|
|
|
£ |
£ |
Opening fair value of interest rate
swaps at 1 January |
|
|
(3,562,542) |
(2,085,292) |
Valuation gain/(loss) on interest
rate swaps |
|
|
1,317,743 |
(4,212,250) |
Swaps breakage costs |
|
|
- |
2,735,000 |
Closing fair value of interest
rate swaps at 31 December |
|
|
(2,244,799) |
(3,562,542) |
The split of the swap liability is listed below:
|
|
|
2017 |
2016 |
|
|
|
£ |
£ |
Current liabilities |
|
|
(887,699) |
(1,341,101) |
Non-current liabilities |
|
|
(1,357,100) |
(2,221,441) |
Interest rate swap with a start date
of 28 April 2016 maturing on 27 April 2023 |
|
|
(2,244,799) |
(3,562,542) |
15 Lease Analysis
The Group has entered into leases on its property portfolio.
This property portfolio as at 31 December
2017 had an average lease expiry of 6 years and 2 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:
|
|
|
2017 |
2016 |
|
|
|
£ |
£ |
Within one year |
|
|
25,353,460 |
26,641,958 |
After one year, but not more than
five years |
|
|
62,905,498 |
69,213,166 |
More than five years |
|
|
32,278,558 |
57,451,817 |
Total |
|
|
120,537,516 |
153,306,941 |
The largest single tenant at the year end accounts for 5.0%
(2016: 4.6%) of the current annual passing rent.
16 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
2017 there were 394,865,419 ordinary shares of 1 pence each in issue (2016: 380,690,419). 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: |
|
|
2017 |
2016 |
|
|
|
£ |
£ |
Opening balance |
|
|
204,820,219 |
204,820,219 |
Shares issued between 1 February
2017 and 7 December 2017 at a price of 85.9p and 91.3p per
share |
|
|
12,467,700 |
- |
Issue costs associated with new
ordinary shares |
|
|
(93,507) |
- |
Closing balance |
|
|
217,194,412 |
204,820,219 |
|
|
|
2017 |
2016 |
|
|
|
Number of
shares |
Number of
shares |
Opening balance |
|
|
380,690,419 |
380,690,419 |
Issued during the year |
|
|
14,175,000 |
- |
Closing balance |
|
|
394,865,419 |
380,690,419 |
17 Reserves
The detailed movement of the below reserves for the years to
31 December 2017 and 31 December 2016 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.
18 Earnings per Share
Basic earnings per share amounts are calculated by dividing
surplus for the year net of tax attributable to ordinary equity
holders by the weighted average number of ordinary shares
outstanding during the year. As there are no dilutive instruments
outstanding, basic and diluted earnings per share are
identical.
The earnings per share for the year is set out in the table
below. In addition one of the key metrics the Board considers is
dividend cover. This is calculated by dividing the net revenue
earnings in the year (surplus for the year net of tax excluding all
capital items and the swaps breakage costs) divided by the
dividends payable in relation to the financial year. For 2017 this
equated to a figure of 104% (2016: 117%). The following reflects
the income and share data used in the basic and diluted earnings
per share computations:
|
|
|
2017 |
2016 |
|
|
|
£ |
£ |
Surplus for the year net of tax |
|
|
42,465,234 |
14,198,646 |
|
|
|
|
|
|
|
|
2017 |
2016 |
Weighted average number of ordinary
shares outstanding during the year |
|
|
389,272,679 |
380,690,419 |
|
|
|
|
|
Earnings per ordinary share
(p) |
|
|
10.91 |
3.73 |
Surplus for the year excluding
capital items |
|
|
19,428,568 |
21,167,243 |
EPRA earnings per share
(p) |
|
|
4.99 |
5.56 |
19 Dividends and Property Income
Distribution Gross of Income Tax
On 29 March 2018 a dividend in
respect of the quarter to 31 December
2017 of 1.19 pence per share
was paid totalling £4,797,073. This dividend was split as a
property income dividend of 0.522
pence per share and a non property income dividend of
0.668 pence per share.
|
|
2017 |
2016 |
|
|
£ |
£ |
Non Property Income
Distributions |
|
|
|
0.84p per ordinary share paid in
March 2017 relating to the quarter ending 31 December 2016 (2016:
0.561p) |
|
3,258,910 |
1,679,695 |
|
|
|
|
Property Income
Distributions |
|
|
|
0.35p per ordinary share paid in
March 2017 relating to the quarter ending 31 December 2016 (2016:
0.60p) |
|
1,357,879 |
1,796,781 |
1.19p per ordinary share paid in May
2017 relating to the quarter ending 31 March 2017 (2016:
1.19p) |
|
4,626,903 |
4,530,216 |
1.19p per ordinary share paid in
August 2017 relating to the quarter ending 30 June 2017 (2016:
1.19p) |
|
4,665,723 |
4,530,216 |
1.19p per ordinary share paid in
November 2017 relating to the quarter ending 30 September 2017
(2016: 1.19p) |
|
4,686,998 |
4,530,216 |
|
|
18,596,413 |
17,067,124 |
20 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.
|
|
2017 |
2016 |
Number of ordinary shares at the
reporting date
|
|
394,865,419 |
380,690,419 |
|
|
|
|
|
|
2017 |
2016 |
|
|
£ |
£ |
Total equity per audited
consolidated financial statements |
|
345,998,316 |
308,437,559 |
NAV per share (p) |
|
87.6 |
81.0 |
Service Charge
The Group 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 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.
|
|
2017 |
2016 |
|
|
£ |
£ |
Total service charge expenditure
incurred |
|
1,663,097 |
1,888,993 |
|
|
|
|
Total service charge billed to
tenants excluding void units and service charge caps |
|
1,800,731 |
1,550,599 |
Service charge billed to the Group
in respect of void units and service charge caps |
|
181,659 |
135,432 |
Service charge due (to)/from from
tenants as at 31 December |
|
(319,293) |
202,962 |
|
|
1,663,097 |
1,888,993 |
22 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.
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 Group. Transactions with the Investment
Manager in the year are detailed out in note 4.
|
|
2017 |
2016 |
|
|
£ |
£ |
Robert Peto (appointed Chairman 2
June 2016) |
|
40,000 |
34,558 |
Sally-Ann Farnon |
|
36,000 |
33,250 |
Huw Evans |
|
32,000 |
30,000 |
Mike Balfour (appointed 10 March
2016) |
|
32,000 |
24,723 |
James Clifton-Brown (appointed 17
August 2016) |
|
32,000 |
12,061 |
Richard Barfield (retired 2 June
2016) |
|
- |
14,808 |
Employers national insurance
contributions |
|
11,962 |
7,866 |
|
|
183,962 |
157,266 |
Directors expenses |
|
10,049 |
6,959 |
|
|
194,011 |
164,225 |
23 Segmental Information
The Board has considered the requirements of IFRS 8 ‘operating
segments’. The Board is of the view that the Group is engaged in a
single segment of business, being property investment and in one
geographical area, the United
Kingdom.
24 Events After the Balance Sheet
Date
Dividends
On 29 March 2018 a dividend in
respect of the quarter to 31 December
2017 of 1.19 pence per share
was paid. This dividend was split as a property income dividend of
0.522 pence per share and a non
property income dividend of 0.668
pence per share.
Purchases
On 5th January 2018 the Group
completed the purchase of Timbmet, an industrial property for £11.5
million excluding costs.
On 2nd February 2018 the Group
completed the purchase of Grand National Leisure Park, Aintree, a
retail park for £6.125 million excluding costs.
On 7th February 2018 the Group
completed the purchase of Sandy, a retail warehouse for £6.020
million excluding costs.
Sales
On 19 January 2018 the Group
completed the sale of Bathgate Retail Park for £5.23 million
excluding costs.
On 16 March 2018 the Group
completed the sale of Elstree Tower, Borehamwood for £20 million
excluding costs.
On 21 March 2018, the Group
exchanged contracts for the sale of Charter Court, Slough for
£13.25 million excluding costs. This is expected to complete on
6 April 2018.
Share Issues
During the period from 1 January
2018 to 16 March 2018 the
Group has raised £7.6 million through the issue of 8.25 million new
ordinary shares.
This Annual Financial Report announcement is not the Company's
statutory accounts for the year ended 31
December 2017. The statutory accounts for the year ended
31 December 2017 received an audit
report which was unqualified.
The Annual Report will be posted to shareholders in April 2018 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