TIDMSLI
6 April 2018
STANDARD LIFE INVESTMENTS PROPERTY INCOME TRUST
RESULTS IN RESPECT OF THE YEARED 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 GBP20
million for investment into the portfolio.
-Overall, the Company, with a market capitalisation of GBP368 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 GBP433.2 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 GBP512,000 per annum of income during the year
-14 lease renegotiations/rent reviews securing GBP740,000 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
31 31
Earnings & Dividends December December
2017 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 31
December December
2017 2016 Change %
Total Assets (GBPmillion) 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 % 3 Year % 5 Year %
Return Return 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 31
December December
2017 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 GBP122 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 GBP20 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 GBP22 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 GBP35 million of its
revolving credit facility to utilise and uncommitted cash of GBP18.3 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 GBP
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 7.7 14.7 37.6
Funds sector
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 GBP433.2 million, and it
held uncommitted cash of GBP18.3 million (this compared with GBP429.9 million and GBP
13.1 million as at year end 2016). During the year the Group also reduced its
debt by repaying GBP15 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 GBP48.9 million, and then
after the year end a further three purchases completed for GBP23.6 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 GBP
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 GBP5.5 million reflected a yield of
6.3%.
101 Princess Street, Manchester: We purchased this multi-let office for GBP8.1
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 GBP13.45 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 GBP4.58 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 GBP12 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 GBP11.5 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 GBP6.1 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 GBP6
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 GBP71.4 million. The Group also exchanged contracts on the sale of its
biggest asset Elstree Tower, Borehamwood for GBP20 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 GBP5.23 million. After the year end, the Group exchanged contracts for
the sale of an office building in Slough for GBP13.25 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 GBP10 million of capex would have been required as well as letting
risk. We completed this sale for GBP11.1 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 GBP19 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 GBP8.2 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 GBP2.2 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 GBP4.3 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 GBP5
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 GBP5.2 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 GBP16.4 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 GBP
628,600pa of rent, and let 8 units for a total of GBP512,000pa. We also settled
nine rent reviews, with a total increase in rent of GBP111,200pa.
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 GBP27,565,991 92.26%
Vacant GBP2,313,297 7.74%
Marsh Way, Rainham Industrial GBP636,197 2.13% Agreement for lease
signed
Unit 6, Broadgate, Industrial GBP544,000 1.82% Proposal made
Oldham
Explorer 1 & 2, Crawley Office GBP373,500 1.25% Being refurbished
The Pinnacle, Reading Office GBP253,000 0.85% Rent guarantee from
purchase
Foxholes Business Park, Industrial GBP186,800 0.63% One of 4 units under
Hartford offer
One Station Square, Office GBP126,750 0.42% Rent guarantee from
Bracknell purchase
Charter Court, Slough Office GBP59,300 0.20%
Ocean Trade Centre, Industrial GBP41,500 0.14% Under offer
Aberdeen
Kings Business Park, Industrial GBP41,250 0.13% Under offer
Bristol
Howard Town Retail Retail GBP28,100 0.09% Under offer
Park, Glossop
Budbrooke Industrial Industrial GBP14,900 0.05% Under offer
Estate, Warwick
New Palace Place, Office GBP8,000 0.03%
London
Total GBP29,879,288 100.00%
Debt
The Group has two debt facilities in place, both with RBS:
The term loan of GBP110 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
GBP2.2 million as at end 2017 (GBP3.6 million same time 2016). It should be noted
that the value of the swap will revert to GBP0 at maturity.
In addition, the Group has a GBP35 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 GBP 2016 GBP
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 GBP 2016 GBP
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 Other
Share Retained Capital distributable
Capital earnings reserves reserves Total equity
Notes GBP GBP GBP GBP GBP
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 Other
Share Retained Capital distributable
Capital earnings reserves reserves Total equity
Notes GBP GBP GBP GBP GBP
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 GBP 2016 GBP
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 (1,067,395)
138,237
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 (2,594,070)
(2,089,843)
Payments on interest rate swap 5 (929,394)
(1,106,369)
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 12,395,516
13,054,057
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 GBP
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 GBP14,688 (2016: GBP
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 GBP
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 Interest
rate rate
GBP GBP GBP
Cash and cash equivalents - 14,334,504 0.020%
Bank borrowings 110,000,000 - 2.725%
At 31 December 2016 Fixed rate Variable Interest
rate rate
GBP GBP GBP
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 GBP143,345 higher (2016: GBP19,459 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 GBP5,604,283 higher (2016: GBP6,806,871 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 GBP143,345 lower (2016: GBP19,459 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 GBP5,941,013 lower (2016: GBP7,285,802 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 GBP1,421,341 (2016: GBP958,417) 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 GBP6,969,884
(2016: GBP3,489,002) was placed on deposit with The Royal Bank of Scotland plc
("RBS"), GBP7,364,620 (2016: GBP9,565,055) 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 > 5 years Total
years
GBP GBP GBP GBP GBP
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 > 5 years Total
years
GBP GBP GBP GBP GBP
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
GBP GBP
Total borrowings (excluding unamortised arrangement 110,000,000 125,000,000
fees)
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
GBP GBP GBP GBP
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 GBP200 million; 0.70% of total assets between GBP200 million and GBP300
million; and 0.65% of total assets in excess of GBP300 million. The total fees
charged for the year amounted to GBP3,136,218 (2016: GBP3,157,399). The amount due
and payable at the year end amounted to GBP807,005 excluding VAT (2016: GBP772,290
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 GBP65,000. Northern Trust is also entitled to
reimbursement of reasonable out of pocket expenses. Total fees and expenses
charged for the year amounted to GBP76,150 (2016: GBP75,472). The amount due and
payable at the year end amounted to GBP20,540 (2016: GBPnil).
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 GBP
71,844 (2016: GBP99,001) of which minimum fees of GBP2,500 per property (2016: GBP
2,500) were incurred due for new properties added to the portfolio. The amount
due and payable at the year end amounted to GBP37,158 excluding VAT (2016: GBP
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 GBP74,500 (2016: GBP73,695) 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
GBPnil in 2017 (2016; GBP4,500). Total non-audit fees incurred up to the Balance
Sheet date amounted to GBPnil (2016: GBP4,500) and are included within other
administration expenses in the Consolidated Statement of Comprehensive Income.
5 Finance Income and Costs
2017 2016
GBP GBP
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, GBP390,503 of the interest expense on bank borrowings
and GBP208,670 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
GBP GBP
Surplus before tax 42,465,234 14,198,646
Tax calculated at UK statutory corporation tax rate of 8,174,558 2,839,729
19.25% (2016: 20%)
UK REIT exemption on net income and gains (3,864,098) (3,963,833)
Valuation (gain)/loss in respect of investment (4,461,169) 1,060,198
properties not subject to tax
Excess management expenses not utilised 150,709 -
Expenditure not allowed for corporation tax/income tax - 63,906
purposes
Current income tax charge - -
7 Investment Properties
UK UK UK
Industrial Office Retail
Total
2017 2017 2017 2017
GBP GBP GBP GBP
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 GBP433,210,000 (2016: GBP
429,945,000) however an adjustment has been made for lease incentives of GBP
3,657,917 (2016: GBP4,187,219) 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
GBP GBP GBP GBP
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) 906,204
622,160
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
GBP GBP
Opening market value of disposed investment properties 72,225,000 19,125,000
(Loss)/gain on disposal of investment properties 1,067,395
(138,237)
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)
GBP
UK Industrial 213,135,000 Income Capitalisation Initial Yield -3.47% to 9.06% (5.24%)
Level 3 Reversionary Yield 5.33% to 9.11% (6.72%)
Equivalent Yield 5.00% to 8.24% (6.28%)
Estimated rental value per Sq. GBP29.71 to GBP214.08 (GBP84.88)
ft
UK Office 150,450,000 Income Capitalisation Initial Yield 3.45% to 9.00% (6.27%)
Level 3 Reversionary Yield 4.98% to 9.49% (6.95%)
Equivalent Yield 4.90% to 7.55% (6.43%)
Estimated rental value per Sq. GBP165.30 to GBP731.42 (GBP296.87)
ft
UK Retail 69,625,000 Income Capitalisation Initial Yield 5.01% to 8.56% (6.43%)
Level 3 Reversionary Yield 5.27% to 9.17% (6.20%)
Equivalent Yield 5.10% to 8.65% (6.49%)
Estimated rental value per Sq. GBP117.32 to GBP497.24 (GBP226.37)
ft
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. GBP GBP
30,925,950 31,037,488
Area sq ft 3,799,885 3,745,069
Average ERV per sq ft GBP8.14 GBP8.29
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
GBP GBP
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 GBP25.3 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 GBP11,075,000. 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 GBP19,000,000.
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
GBP GBP
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
GBP GBP
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
GBP2,875 (2016: GBP33,952) were considered impaired and provided for.
The ageing of these receivables is as follows:
2017 2016
GBP GBP
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 GBP1,421,341 (2016: GBP958,147) were
less than 3 months past due but considered not impaired.
11 Cash and Cash Equivalents
2017 2016
GBP GBP
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
GBP GBP
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
GBP GBP
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
GBP84,432,692 to GBP139,432,692 and completed the drawdown of an additional GBP
55,000,000 loan with RBS. The additional borrowing was in the form of an
additional term loan of GBP40,567,308 and a RCF of GBP14,432,692 (with the
potential to draw a further GBP15,567,308 of the RCF). The entire debt facility
and the drawn down balance of GBP139,432,692 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 GBP139,432,692 was repaid.
On 28 April 2016 the Group entered into an agreement to extend GBP145 million of
its existing GBP155 million debt facility with RBS. The debt facility consists of
a GBP110 million seven year term loan facility and a GBP35 million five year RCF.
The RCF may by agreement be extended by one year on two occasions. During the
year GBP15 million of the RCF was repaid, with the balance of GBPnil 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
GBP GBP
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 GBP12,432,692 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 GBP72,000,000 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 GBP2,735,000.
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 GBP110,000,000 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
GBP GBP
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
GBP GBP
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 (2,244,799) (3,562,542)
2023
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
GBP GBP
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
GBP GBP
Opening balance 204,820,219 204,820,219
Shares issued between 1 February 2017 and 7 December 2017 at a price of 12,467,700 -
85.9p and 91.3p per share
Issue costs associated with new ordinary shares (93,507) -
Closing balance 217,194,412 204,820,219
2017 2016
Number of Number of
shares 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
GBP GBP
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 GBP4,797,073. 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
GBP GBP
Non Property Income Distributions
0.84p per ordinary share paid in March 2017 relating to the quarter ending 31 3,258,910 1,679,695
December 2016 (2016: 0.561p)
Property Income Distributions
0.35p per ordinary share paid in March 2017 relating to the quarter ending 31 1,357,879 1,796,781
December 2016 (2016: 0.60p)
1.19p per ordinary share paid in May 2017 relating to the quarter ending 31 4,626,903 4,530,216
March 2017 (2016: 1.19p)
1.19p per ordinary share paid in August 2017 relating to the quarter ending 30 4,665,723 4,530,216
June 2017 (2016: 1.19p)
1.19p per ordinary share paid in November 2017 relating to the quarter ending 4,686,998 4,530,216
30 September 2017 (2016: 1.19p)
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
GBP GBP
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
GBP GBP
Total service charge expenditure incurred 1,663,097 1,888,993
Total service charge billed to tenants excluding void units and service charge 1,800,731 1,550,599
caps
Service charge billed to the Group in respect of void units and service charge 181,659 135,432
caps
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
GBP GBP
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 GBP11.5 million excluding costs.
On 2nd February 2018 the Group completed the purchase of Grand National Leisure
Park, Aintree, a retail park for GBP6.125 million excluding costs.
On 7th February 2018 the Group completed the purchase of Sandy, a retail
warehouse for GBP6.020 million excluding costs.
Sales
On 19 January 2018 the Group completed the sale of Bathgate Retail Park for GBP
5.23 million excluding costs.
On 16 March 2018 the Group completed the sale of Elstree Tower, Borehamwood for
GBP20 million excluding costs.
On 21 March 2018, the Group exchanged contracts for the sale of Charter Court,
Slough for GBP13.25 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 GBP
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
END
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