TIDMSLI
17 April 2019
STANDARD LIFE INVESTMENTS PROPERTY INCOME TRUST LIMITED
RESULTS IN RESPECT OF THE YEARED 31 DECEMBER 2018
Financial Highlights
- NAV total return of 9.6% in the year, due to strategic overweight position in
industrial sector. Over ten years the Company has produced a NAV total return
of 187.0% compared with the AIC Property Direct Sector average of 159.9%.
- Share price total return in the year was -8.3% compared to the total return
on the FTSE All-Share REIT Index of -12.4% and the FTSE All-Share Index of
-9.5%. Over ten years the Company has delivered a share price total return of
214.0% compared with the total return on the FTSE All-Share REIT Index of
115.0% and the FTSE All-Share Index of 138.4% highlighting consistent long term
performance of the Company's shares.
- Loan to value of 24.4% at year-end, one of the lowest in the peer group and
the wider REIT sector.
- Since 1 January 2018 to date GBP10.2 million of shares were issued under the
Company's blocklisting facility for investment into the portfolio.
- The dividend yield on the Company's share price as at 31 December 2018 stood
at 5.9% which compares favourably to the FTSE All-Share REIT Index (4.7%) and
FTSE All-Share Index (4.5%) at the same date.
- Overall, the Company, with a market capitalisation of GBP329 million as at 31
December 2018, has a secure and growing balance sheet, significant financial
resources and a portfolio of outperforming assets that continues to underpin an
attractive dividend for shareholders.
Property Highlights
- As at 31 December 2018, the portfolio was valued at GBP499.1 million (2017: GBP
433.2 million).
- Property total return for the period was 8.5%, significantly ahead of the IPD
Quarterly version of Monthly Index total return of 6.8%. The income return of
5.0% from the portfolio continued to outperform the comparative benchmark
figure of 4.6% with a capital return of 3.3% in excess of the benchmark return
of 2.1%.
- A number of successful asset management initiatives, contributing to income
and capital values, completed during the year including:
- 13 new lettings generating GBP2.65 million per annum of income
- 8 lease renegotiations/rent reviews securing longer term income of GBP
1.58 million per annum
- Occupancy rate of 94.1% (2017: 92.3%) as successful asset management
initiatives and strategic sales reduced the number of void units in the
portfolio.
- Positive rent collection rates of 98% within 21 days highlighting the
continued strength of tenant covenants in an environment where income will be
the key component of returns going forward.
- In 2018, the Company was the winner of the active property category in the AJ
Bell Fund and Investment Trust Awards and was also the FT Adviser Property Fund
of the Year.
PERFORMANCE SUMMARY
31 31
Earnings & Dividends December December
2018 2017
EPRA earnings per share (p) (excluding capital items & swap movements)* 4.22 4.99
Dividends declared per ordinary share (p) 4.76 4.76
Dividend cover (%) 89 104
Dividend yield (%)** 5.9 5.1
FTSE All-Share Real Estate Investment Trusts Index Yield (%) 4.7 3.6
FTSE All-Share Index Yield (%) 4.5 3.4
Ongoing Charges***
As a % of average net assets including direct property costs 2.0 1.7
As a % of average net assets excluding direct property costs 1.1 1.2
Capital Values & Gearing 31 31
December December
2018 2017 Change %
Total Assets (GBPmillion) 512.2 468.8 9.3
Net asset value per share (p) (note 20) 91.0 87.6 3.9
Ordinary Share Price (p) 81.1 93.25 (13.0)
(Discount)/Premium to NAV (%) (10.9) 6.4
Loan to value (%)? 24.4 18.0
Total Return 1 year % 3 year % 5 year %
return return return
NAV? 9.6 28.7 86.7
Share Price? (8.3) 11.6 53.2
FTSE All-Share Real Estate Investment Trusts Index (12.4) (8.6) 25.1
FTSE All-Share Index (9.5) 19.5 22.1
Property Returns & Statistics (%) 31 31
December December
2018 2017
Property income return 5.0 6.3
IPD benchmark income return 4.6 4.8
Property total return 8.5 12.1
IPD benchmark total return 6.8 10.5
Void rate 5.9 7.5
* Calculated as profit for the period before tax (excluding capital items &
swaps breakage costs) divided by weighted average number of shares in issue in
the period.
** Based on an annual dividend of 4.76p and the share price at 31 December
2018.
*** 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: Aberdeen Standard Investments, Investment Property Databank ("IPD")
Chairman's Statement
It is pleasing to report that your Company has continued to deliver both strong
portfolio and NAV returns in 2018. These returns have been driven by a
portfolio that is strategically weighted to the outperforming industrial
sector, with low exposure to the struggling retail sector. In addition, a
number of investment and letting transactions have been completed that have
added value and increased occupancy levels.
Background
Since the referendum result in June 2016 to leave the European Union and the
inconclusive result of the general election in 2017, the UK has been mired in
political uncertainty unlike that seen for a generation. This uncertainty is
now having direct economic implications with a number of companies triggering
Brexit contingency plans or cutting back on planned investment into the UK.
Combined with concerns over an escalating US/China trade war, UK GDP growth has
been muted with 1.4% GDP growth in 2018, a trend that is expected to continue
into 2019.
Against such an uncertain economic environment, the UK commercial real estate
market has delivered positive, albeit, slowing returns. The Company's benchmark
(Quarterly version of IPD Monthly Index Funds) produced a total return of 6.8%
in 2018, with the long-expected decline in capital values starting to bite in
the second half of the year.
However, even given this, capital growth over 2018 was a respectable 2.1%
driven by the outperforming industrial sector which produced strong capital
growth of 11.8%. The office sector delivered capital growth of 2.5% as overseas
money still sought prime office assets both in the City of London and,
increasingly, elsewhere in the UK. These returns were partially offset by a
5.8% fall in capital values in the retail sector which is still coming to terms
with the growing presence of online retailers and a number of high profile
company voluntary arrangements that resulted in both store closures and reduced
rents, a trend that looks likely to continue.
Income returns continued to be the main contributor to the overall positive
performance of the real estate sector, with the IPD benchmark producing an
income return of 4.6% in 2018 with rental growth of 0.7% being delivered, again
mainly driven by industrials.
Positive Portfolio and Corporate Performance
Your Company has continued to perform well in the year. The portfolio total
return was 8.5%, significantly above the benchmark return. The portfolio
delivered capital growth of 3.3%, boosted by its 52% weighting to the
industrial sector compared to a benchmark weighting of 28%. In addition, the
Company's low 9% weighting to the retail sector also helped deliver positive
relative performance given the benchmark weighting of 32%. The portfolio also
continued to produce an attractive income return of 5.0%, again above that of
the benchmark income return. This positive portfolio performance, combined with
the flexibility to use its debt facilities opportunistically during the year
while maintaining a relatively conservative level of gearing, helped the
Company achieve a NAV total return of 9.6%.
For the majority of the year the Company's shares traded at a premium to NAV.
This allowed the Company to issue 11 million new shares under its blocklisting
authority, all at significant premia to underlying NAV, raising net proceeds of
GBP10.2million. The Company's share price fell towards the end of the year as
sentiment towards commercial property unsurprisingly turned negative given the
well-publicised travails of the retail sector. This resulted in the Company's
shares falling to a 10.9% discount to NAV at the year end and a shareholder
total return for the year of -8.3% compared with the total return on the FTSE
All-Share REIT and FTSE All-Share Indices of -12.4% and -9.5% respectively.
Since the year end, however, the shares have recovered and as at 31 March 2019
stood at 90.1p, a 1% discount to NAV.
Over the longer term the Company has also delivered good NAV and shareholder
performance with NAV and share price total returns over ten years of 187% and
214% respectively. By comparison, the FTSE All-Share REIT Index returned 115%
and the FTSE All-Share Index returned 138% over the same period.
Dividends
Dividends totalling 4.76p were paid to shareholders in the year. This
represents a yield of 5.9% based on the share price at 31 December 2018 and
compares favourably to the yield on the FTSE All-Share REIT and FTSE All- Share
Indices (4.7% and 4.5% respectively).
Dividend cover was 89% for the year as void levels increased and the Company's
revolving credit facility ("RCF") remained largely unutilised for the majority
of the year. This equates to EPRA earnings per share of 4.22p in 2018. However,
the letting of the Company's largest void in December and the sale of the
second largest void in September resulted in the void rate falling to 5.9% as
at 31 December 2018 (31 December 2017: -7.7%). In addition, the purchase of
Hagley Road in November 2018, financed mainly through the use of the RCF,
should result in improved dividend cover going forward, all other things
remaining equal. The importance to shareholders of the attractive level of
dividend paid by the Company is recognised by the Board and the preservation
and potential growth in dividend cover is a key priority in the medium term.
The Company's current policy is to pay four interim dividends quarterly, in
March, May, August and November.
Board Changes
Sally-Ann Farnon has indicated she will stand down following the AGM to be held
in June. Sally-Ann has been a valuable member of the Board and Chair of the
Audit Committee during her tenure and her insight and knowledge will be sorely
missed. Mike Balfour, a qualified Chartered Accountant, will Chair the Audit
Committee upon Sally-Ann's departure, and Huw Evans will assume the role of
Senior Independent Director.
I am pleased that Jill May joined the Board on 12 March 2019. Jill has an
impressive background and has significant experience of capital markets which
will prove invaluable as the business
Outlook
The outlook for the next 12 months is clouded by the ongoing Brexit
negotiations and whether the UK leaves the EU with or without a deal or,
indeed, leaves at all. The outcome of this debate will, to a huge extent,
determine whether business investment and confidence starts to pick up and
sentiment starts to improve, or investment is held back and GDP growth remains
muted. Based on leaving the EU with a deal, our Investment Manager forecasts
GDP growth of 1.0% in 2019.
The commercial real estate market is not immune to the Brexit-related
uncertainty. While the real estate fundamentals are strong - comparatively high
yields compared with other asset classes, prudent leverage, limited development
and lower than average vacancy rates - uncertainty is reducing liquidity and
visibility of pricing in most areas of the market. The principal exception to
this is assets with long, secure income streams, which remain highly sought
after and in short supply.
Against such a background the Board believes the Company is well positioned to
continue delivering value. While secondary assets are inherently more volatile
in nature, the Company's portfolio is well diversified by region and sector.
The portfolio has a deliberate bias towards the industrial sector which our
Investment Manager forecasts will continue to be the strongest performing
sector over the next three years and a significantly underweight position to
retail which is forecast to be the worst performer. With income likely to be
the main driver of returns in the medium term, it is important to highlight the
Company's strong income profile. This is underpinned by a strong and diverse
tenant base and an active Investment Manager with a proven track record of
reducing voids and risk through successful investment and letting activity.
Finally, the Company continues to have a solid balance sheet, which has been
strengthened over the last 12 months by NAV accretive share issues, and prudent
but flexible gearing which has been used to capture opportunities that have
arisen with firepower remaining should further opportunities be identified.
Taking all these factors together, I believe your Company has a sound base on
which to continue producing the strong absolute and relative performance
delivered over the last decade.
Robert Peto
Chairman
17 April 2019
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 Aberdeen Standard Fund
Managers Limited ("the Investment Manager"). The Investment Manager was
appointed in place of Standard Life Investments (Corporate Funds) Limited on 10
December 2018 following the merger of Standard Life plc and Aberdeen Asset
Management PLC in August 2017. The Investment Manager was appointed on
identical terms to the arrangements previously in place with Standard Life
Investments (Corporate Funds) Limited, and there have been no changes to the
way the investment management services are provided to the Group.
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 of the Investment
Manager can be used to beneficial effect. The Board will continue to have very
careful regard to tenant profiles.
As part of this investment strategy, the Group recognises that tenants are a
key stakeholder and aims to foster a culture whereby the experience of tenants
is seen as paramount to the future success of the Group. The Investment Manager
works closely with tenants to understand their needs through regular
communication and visits to properties.
Where required, and in consultation with tenants, the Group refurbishes and
manages the owned assets to improve the tenants' experience, including
consideration of Health & Safety and environmental factors, with the aim being
to generate greater tenant satisfaction and retention and hence lower voids,
higher rental values and stronger returns.
The Board continues to seek out opportunities for further, controlled growth in
the Group. During 2018 and up to 31 March 2019, the Group raised an additional
GBP10.2 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
As at 31 December 2018, the Board consisted of a non- executive Chairman and
four non-executive Directors. The names and biographies of those directors who
held office at 31 December 2018 and at the date of this announcement will
appear in the published annual report and indicate their range of property,
investment, commercial and financial experience. There is also a commitment to
achieve the proper levels of diversity.
To assist the Board with orderly succession, the Board announced the
appointment of Jill May as an additional non-executive Director with effect
from 12 March 2019, subsequent to the financial year end. A resolution to elect
Jill May as a Director will be proposed to shareholders at the Annual General
Meeting ("AGM") on 13 June 2019. Sally-Ann Farnon will step down from the Board
following the conclusion of the 2019 AGM.
Key Performance Indicators
The Board meets quarterly and at each meeting reviews performance against a
number of key measures which are considered to be alternative performance
measures ("APMs"). These APMs are in line with recognised industry performance
measures both in the Real Estate and Investment Trust industry and help to
assess the overall performance of the portfolio and the wider Group:
Property income and total return against the Quarterly Version of the 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 ("NAV") total return reflects both the net asset value
growth of the Group and also the dividends paid to shareholders. The Board
regards this as the best overall measure of value delivered to shareholders.
The Board assesses the NAV total return of the Group over various time periods
(quarter, annual, three years, 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 and emerging risks of the Group, seeking
assurance that these risks are appropriately rated and ensuring that
appropriate risk mitigation is in place.
The Group's assets consist of direct investments in UK commercial property. Its
principal risks are therefore related to the commercial property market in
general, but also the particular circumstances of the properties in which it is
invested, and their tenants. The Board and Investment Manager seek to mitigate
these risks through a strong initial due diligence process, continual review of
the portfolio and active asset management initiatives. All of the properties in
the portfolio are insured, providing protection against risks to the properties
and also protection in case of injury to third parties in relation to the
properties.
The 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 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. An emerging
risk in the year was the poor performance of the retail sector due to a number
of high profile administrations and store closures in this sector. The Group
has partially mitigated this risk by having an underweight position to the
retail sector with only 9.3% exposure to this sector against the benchmark
weighting of 31.6%.
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 to be an emerging risk during 2018,
particularly in relation to the UK's decision to leave the EU ("Brexit"). The
initial economic implications of Brexit and the effect on the property market
is considered further in the Chairman's Statement and Investment Manager's
Report. The outcome and potential impact of Brexit is still unclear at the time
of writing. However, the Board continues to closely monitor the potential
effect of this on property values, tenants 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 merger of Standard Life plc and Aberdeen Asset Management PLC creates
additional operational risk for the Group. The Group appointed Aberdeen
Standard Fund Managers Limited as its alternative investment fund manager
("AIFM") in December 2018. The appointment is on identical terms to the
arrangements previously in place with Standard Life Investments (Corporate
Funds) Limited. There have been no changes so far to the way the Investment
Manager provides its services to the Group but 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 hence there is no requirement for a human
rights policy. The Board does, however, closely monitor the policies of its
suppliers to ensure that proper provision is in place.
Environmental, Social and Governance 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 Environmental, Social and Governance Policy ("ESG") and
associated operational procedures and is committed to environmental management
in all phases of the investment process.
The Investment Manager has identified four ESG megatrends that are highly
relevant for real estate investment now and in the future: Environment &
Climate Change, Governance & Engagement, Population & Urban Living and
Technology & Connectivity. The identification of risks and opportunities for
the Group in relation to each of the megatrends is embedded throughout the
investment process and at all levels - from Group-level strategic planning to
asset underwriting and individual asset ESG action plans.
To facilitate this, the Investment Manager works in partnership with
contractors, suppliers, tenants and consultants seeking continuous improvements
in ESG performance and conducting regular reviews.
The Group was awarded a Green Star ranking from the Global Real Estate
Sustainability Benchmark 2018 ("GRESB") and improved its score by 11% compared
with 2017. A Green Star is awarded to entities that perform well in both
categories of the GRESB assessment: Management & Policies and Implementation &
Measurement.
Following the disclosure of ESG performance against the European Public Real
Estate Association ("EPRA") Sustainability Best Practice Reporting guidelines
in the 2017 Annual Report, the Group received both Gold and Most Improved
awards from EPRA. These awards recognise the Group's strong commitment to ESG
and transparency.
Health & Safety
Alongside these environmental principles the Group has a Health & Safety policy
which demonstrates commitment to providing safe and secure buildings that
promote a healthy working/customer experience that supports a healthy
lifestyle. The Group, through the Investment Manager, manages and controls
Health & Safety risks systematically as any other critical business activity
using technologically advanced systems and environmentally protective materials
and equipment. The aim is to achieve a Health & Safety performance the Group
can be proud of and allow the Group to earn the confidence and trust of
tenants, customers, employees, shareholders and society at large.
The Grenfell Tower fire in 2017 highlighted the absolute requirement for
positive and proactive Health & Safety practices. The Group, as part of ongoing
management and due diligence processes, reviews the Health & Safety and
cladding systems at each of its properties and has received advice that they
are fully compliant.
Viability Statement
The board continually considers the prospects for the Company over the longer
term. Based on the Company's current financial position, its operating model,
and the diversified constituents of its portfolio, as well as the strong
initial due diligence processes, the continued review of the portfolio and the
active asset management initiatives, the Board believes that the Company has a
sound basis upon which to continue to deliver returns over the longer term.
In terms of viability, the Board has considered the nature of the Group's
assets and liabilities and associated cash flows and has determined that five
years is the maximum timescale over which the performance of the Group can be
forecast with a material degree of accuracy and so is an appropriate period
over which to consider the Group's viability.
In assessing the Group's viability and prospects, 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. The Company's two debt facilities are
due to expire in 2023 and the Board is not aware of any reason why it would
not be able to renew the loan facilities at that date or repay the loan if
preferred; 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, including the potential impact of Brexit. 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 Portfolio Highlights,
Performance Summary, Chairman's Statement, Strategic Overview and Investment
Manager's Report. The Strategic Report was approved by the Board and signed on
its behalf by:
Robert Peto, Chairman
17 April 2019
INVESTMENT MANAGER'S REPORT
UK Real Estate Market
According to the IPD Quarterly Index for UK Commercial Property, the 12-month
All Property total return to the end of December 2018 was 6.8% compared with
10.5% for 2017. Whilst 2018 was a weaker year for UK real estate, returns
remained favourable in comparison to other asset classes. On-going
uncertainties surrounding Brexit and the wider economy have caused investors to
be more cautious and after a sustained period of strong returns (8.2% per annum
annualised over the last 10 years), real estate is generally regarded as being
at a late stage in the cycle albeit supported by continuing low interest rates
and low yields from other asset classes.
The industrial sector continued to be the stand-out performer in the UK real
estate market with a total return of 16.7%. Despite IPD data suggesting that
rental growth is beginning to moderate the necessary drivers are still in place
to support further rental growth for the sector, with vacancy rates remaining
exceptionally low and interest in available space healthy.
The long-term structural challenges facing the retail sector are now being
reflected across the market as retailers struggle to cope with changing
shopping habits, higher costs and weaker consumer spending.
Retail failures and CVA's (Company Voluntary Arrangements) over the year,
including a number of well-known high street names and casual dining operators,
hit the headlines and caused investment sentiment to weaken. This is now
weighing on performance with retail valuations falling. The divergence between
the best and worst assets in the sector has widened and is likely to continue.
The retail sector as a whole had a total return of -0.7% and a capital decline
of 5.8% over 2018. It is expected that the sector will see further capital
falls in 2019 with continued distress amongst retailers and poor investor
sentiment.
The office sector provided a total return of 6.6% according to IPD with Central
London offices having held up better than many forecasters expected given
Brexit uncertainty and its perceived threat to tenant demand. The sector
continues to benefit from relatively low supply with conversion to residential
taking out a lot of poorer second rate accommodation.
During the year the IPD "other" sector continued to outperform the wider
market. As the name suggests the sector is made up from a number of asset types
in the wider "alternatives" category, such as leisure, data centres, and
hotels.
Performance
There are a number of ways to look at the Company's performance. The portfolio
level performance provides a direct comparison to the benchmark, and is
therefore the easiest way to compare performance to the wider property market.
The portfolio performance, to a large extent, drives the NAV total return which
we believe is the best overall measure as it encompasses all the costs of the
Company as well as the impact of gearing and is within the control of the Board
and Investment Manager. Finally, the share price return and yield which amounts
to the share price total return is an important measure for shareholders.
Building up these elements, we start with the portfolio level performance. We
measure that against the Quarterly version of the IPD Monthly Index Funds.
SLIPIT's size is below the average fund against the benchmark (GBP499 million
against a benchmark median of GBP732 million), and has a smaller average asset
size of GBP8.5 million v GBP17.8 million, but is one of the most active portfolios
with net investment in the top 10% of the index.
The NAV total return is a better measure of performance for investors as it
takes into account all of the costs of running the Company, investing in the
properties, and their upkeep/improvement, as well as the impact of gearing. The
table below shows the NAV total return over various time periods compared to
the AIC peer group and open ended property funds for a comparison against
alternative ways of investing in UK property.
The final table shows the share price total return performance, which of course
may be the most relevant measure to an investor. Towards the end of the
reporting period and into early 2019 we saw a greater level of volatility in
the share price as the wider equity market reacted to the increased Brexit
tension.
Over the majority of the year the Company's shares traded at a premium to NAV
with the average premium for the year being 3.7%. However, over December 2018
the shares moved to a discount. The volatility appears to have been as part of
the wider market stress with Brexit concerns coming to the fore, and especially
impacting property stocks. By the end of March the share price had stabilised
around NAV.
NAV Total Returns to 31 December 2018 1 year (%) 3 year (%) 5 year 10 year (%)
(%)
Standard Life Investments Property Income 9.6 28.7 86.7 187.0
Trust
AIC Property Direct - UK sector (weighted 5.8 22.2 66.5 159.9
average)
Investment Association Open Ended Commercial 3.9 12.4 35.5 74.3
Property Funds sector
Company's ranking in AIC Property Direct 4 2 1 2
sector
Source: AIC, Aberdeen Standard Investments
Share Price Total Returns to December 2018 1 year (%) 3 year (%) 5 year 10 year (%)
(%)
Standard Life Investments Property Income -8.3 11.6 53.2 214.0
Trust
FTSE All-Share Index -9.5 19.5 22.1 138.4
FTSE All-Share REIT Index -12.4 -8.6 25.1 115.0
AIC Property Direct - UK sector (weighted -1.6 10.2 34.6 234.0
average)
Source: AIC, Aberdeen Standard Investments
Valuation
The property portfolio was valued on a quarterly basis by Knight Frank LLP
throughout the year. The portfolio was valued at GBP499.1 million as at 31
December 2018 with cash of GBP8.3 million, which compares with GBP433.2 million and
GBP14.3 million respectively 12 months earlier. The Company also drew down GBP20
million of debt during the year from the revolving credit facility (GBPnil drawn
as at 31 December 2017).
Investment Strategy
The Board and Investment Manager remains focused on delivering an attractive
level of income to shareholders, but also seeks to provide investors with a
reasonable total return. We aim to meet these objectives by investing in assets
that we believe will meet the company's objectives. The Investment Manager
takes an active approach to asset management to help drive value and the
security of future income streams.
Our investment decisions start with a top down analysis so that we concentrate
on investing into and holding investments in the sectors that we believe have
the strongest fundamentals. This analysis led us to go overweight industrial/
underweight retail several years ago. Within the broad strategic overview of
the top down approach all investment decisions are then made on a bottom up
basis. Every property is unique, and we base buy/hold/sell decisions on how we
believe that asset is going to perform, and whether it will meet our investment
requirements. No asset is sacred, we aim to sell assets that we believe have
peaked in their individual investment cycle, or which have too much risk
compared to the potential returns.
When investing in new opportunities we take a long term approach. We aim to
acquire assets that will meet the needs of current and future occupiers, and
that are located in areas that are vibrant and will remain relevant. Although
we will buy assets with a small amount of vacancy, or which require some
capital expenditure to reposition, we do not generally look to undertake major
refurbishment or any speculative development as that would be detrimental to
meeting our income aims.
Over the last few years the Company has undertaken a significant number of
investment transactions, as we have reduced risk at an asset level, and also
increased the weighting to industrial and alternatives, whilst reducing
exposure to retail. With market uncertainty around Brexit, and anticipated
lower returns over the coming couple of years, we anticipate lower levels of
turnover.
Purchases
During the reporting period the Company completed eight purchases for a total
sum of GBP87.9 million (including purchase costs):
Timbmet, Shellingford: The Company acquired a 200,000 sq ft distribution
facility for GBP11.5 million by way of a sale and leaseback to provide a 25 year
lease with an initial yield of 6.5%. The property is located between Oxford and
Swindon and provides the tenant with cost effective accommodation with good
access to the national motorway network.
Grand National Retail Park, Aintree: The name is a bit misleading on this
purchase as it is in fact a leisure scheme with a PureGym, Premier Inn hotel,
KFC, and Toby Carvery. The property is located adjacent to the racecourse, and
the purchase price of GBP6.125 million reflected a yield of 6.8%.
Flamingo Flowers, Sandy: The Company acquired a 125,000 sq ft industrial
facility used for the preparation and distribution of cut flowers for GBP6
million. The property is let for a further 19 years, with indexation, and is
let at a rent of GBP3.17 per sq ft providing an initial yield of 6.25%. The
location is adjacent to a junction of the A1, just 35 miles north of the M25.
15 Basinghall Street, London: The Company acquired a City office building where
20% of the income is derived from two retail units, and two of the five office
floors are vacant. The property is located close to Bank Tube station, and
offers asset management opportunities. The purchase price of GBP12.15m reflected
an initial yield of 7% with a rental guarantee on the vacant space.
Building 3300, Birmingham Business Park: The Company increased its exposure to
the "other" sector with the purchase of a data centre with a very large power
supply on the outskirts of Birmingham. The property was acquired by way of a
sale and leaseback with a 20 year lease (tenant break in year 14 and two rights
to renew for a further 10 years) and benefits from annual indexed rental
increases. The purchase price of GBP12.2 million reflected an initial yield of
5.75%.
Shield Engineering, Burton Latimer: An industrial unit used for high end
aluminium moulding located close to Kettering. The property was acquired by way
of a sale and leaseback on a 20 year lease with indexation for GBP8.1 million,
reflecting an initial yield of 7.15%.
Speedy Hire, Cambuslang: The Company purchased a logistics unit of 61,200 sq ft
with a low site cover of 26% close to Junction 2A of the M74, providing easy
access to Glasgow and the Scottish motorway network. The purchase price of GBP
5.03 million reflected an initial yield of 5.9%. The property is let to Speedy
Hire for a further 5 years, and the lease has an outstanding rent review - upon
settlement we expect the running yield to increase to 7%.
54 Hagley Road, Birmingham: Towards the end of the year the Company acquired
its largest asset, a multi let office, for GBP23.75 million (an initial yield of
7.6%). The property has 18 tenants and is let at relatively low rents. We are
going to invest in additional amenities for the building, and a new tram stop
is due to be built outside the building in the next couple of years, further
enhancing its connectivity - we believe these items give good scope for rental
growth in the future.
Sales
The Company completed the sale of four assets in the reporting period for a
total of GBP44.9 million.
Elstree Tower, Borehamwood: The Company sold the single let office for GBP20
million (valuation GBP18 million). The property was let to the single largest
tenant in the portfolio, with a tenant break in 2020 and the potential need for
significant capex. The sale enabled the Company to reduce future void and capex
risk whilst realising a profit.
Bathgate Retail Park, Bathgate: A small edge of town centre retail park let to
three good tenants but with short leases, and concern over future occupancy.
The property was sold for GBP5.3 million.
Charter Court, Slough: Multi let office with some vacancy and need for
significant capex on lease expiry. The sale price of GBP13.25 million reflected a
yield of 6.4% and was ahead of valuation.
Broadgate, Oldham: The Company sold a 100,000 sq ft industrial unit that had
been vacant for over 18 months for GBP6.3 million. The sale price reflected the
expected valuation on a letting, and enabled the Company to exit its largest
void at a profit.
Asset Management
We pride ourselves in taking an active approach to managing our assets to
protect and enhance income streams and maximise value. We believe we have a
very experienced and capable asset management team that is integrated with the
fund management team. We try to have a principal to principal relationship with
tenants, and strive to ensure we provide occupiers with accommodation that is
relevant and meets their needs. We believe in investing in our assets
throughout their life so that depreciation is minimised, and tenants' needs can
be satisfied. This is particularly important in offices, where the quality and
style of accommodation is important for companies in how they present
themselves to staff and customers. We seek to provide an environment that
engages with the people working there, as we believe that is the best way to
maximise occupancy and therefore income.
During the course of 2018 we completed 13 new lettings, securing GBP2.65 million
per annum in rent, and restructured eight leases to secure longer income on GBP
1.58 million of rent. At the end of the year the occupancy level was 94.1%, an
improvement on the 92.3% a year before.
It is not surprising that the continued uncertainty of Brexit has impacted on
tenants' decision making - letting transactions are taking longer and tenants
are seeking more flexibility and only making commitments when they absolutely
have to. The retail occupational market is very thin, with only discount
retailers taking space; the office market has perhaps been surprisingly
resilient (we are certainly encouraged by viewing levels on the vacant
accommodation we have); and the industrial/ logistics demand has generally
remained robust, but certainly should not be taken for granted.
At the year end the Company had a vacancy rate of 5.9% in the portfolio. We are
not complacent about any of our voids as although we often manage to increase
the rent from previous lease levels, the cost of having properties vacant
impacts earnings
Debt
The Company has two debt facilities from The Royal Bank of Scotland plc; a GBP110
million term loan, which is due to expire in April 2023, and a revolving credit
facility (RCF) of GBP35 million, which also expires in April 2023.
As at the date of this report, GBP20 million of the RCF was drawn.
The Company's LTV as at 31 December 2018 was 24.4% (with a bank covenant limit
of 60%). The all in cost of the term loan at that date was 2.7%.The term loan
has an interest rate swap for the full amount, which at the reporting date held
a negative value of GBP0.8 million.
Outlook and Future Strategy
The uncertainty around Brexit is continuing to affect sentiment and in the
fourth quarter it was noticeable that investors were taking an increasingly
cautious approach to the market. Sector performance is increasingly polarised
with the appreciation in the industrial sector and assets with long secure
income streams struggling to off-set the continued decline in retail for most
balanced funds.
The uncertainty around the near-term political outlook means that the first
half of 2019, will see limited investment and occupational activity. In our
base case forecasts, assuming a smooth withdrawal from the EU can be achieved,
we expect a more normal market in the second half of the year. There is a
considerable weight of money still looking to access UK real estate, however it
is waiting for more certainty before committing.
Our three year annualised forecast is for low single digit returns, with
industrials continuing to outperform other sectors and retail remaining as the
laggard. A commonly asked question is when will retail be back to fair value/
desirable to invest in again? Not yet, is the simple answer; the changes in the
sector are structural, not cyclical, and valuations have not yet fully
reflected this. Equally, one has to wonder how long industrials can continue to
out-perform? For the foreseeable future is the answer, although they are now
expensive to buy, with most of the future growth being factored into the
purchase price. It has got to the stage where caution is required to invest in
the industrial sector to ensure the assets will perform in line with the
purchase assumptions - it is a sector that is now priced at a level where it is
better to own them than have to buy them.
Income will now be the main component of returns, and in the low interest rate
environment anticipated for the next few years, the elevated yield from real
estate will remain a key driver of investment demand.
We continue to focus on asset management initiatives with the aim of preserving
income and capital which are increasingly important in a late cycle
environment. The Company's strategy is to invest in good quality assets in good
locations that meet tenants' needs as this should provide a sustainable income
stream.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report and the Group
Consolidated Financial Statements for each year which give a true and fair
view, in accordance with the applicable Guernsey law and those International
Financial Reporting Standards ("IFRSs") as adopted by the European Union.
In preparing those Consolidated Financial Statements, the Directors are
required to:
* select suitable accounting policies in accordance with IAS 8: Accounting
Policies, Changes in Accounting Estimates and Errors and then apply them
consistently;
* make judgement and estimates that are reasonable and prudent;
* present information, including accounting policies, in a manner that
provides relevant, reliable, comparable and understandable information;
* provide additional disclosures when compliance with the specific
requirements in IFRSs as adopted by the European Union is insufficient to
enable users to understand the impact of particular transactions, other
events and conditions on the Group's financial position and financial
performance;
* state that the Group has complied with IFRSs as adopted by the European
Union, subject to any material departures disclosed and explained in the
Group Consolidated Financial Statements; and
* prepare the Group Consolidated Financial Statements on a going concern
basis unless it is inappropriate to presume that the Group will continue in
business.
The Directors confirm that they have complied with the above requirements in
preparing the Consolidated Financial Statements.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Group's transactions and disclose with
reasonable accuracy at any time, the financial position of the Group and to
enable them to ensure that the Financial Statements comply with The Companies
(Guernsey) Law, 2008. They are also responsible for safeguarding the assets of
the Group and hence for taking reasonable steps for the prevention and
detection of fraud, error and non-compliance with law and regulations.
The maintenance and integrity of the Company's website is the responsibility of
the Directors; the work carried out by the auditors does not involve
considerations of these matters and, accordingly, the auditors accept no
responsibility for any change that may have occurred to the Consolidated
Financial Statements since they were initially presented on the website.
Legislation in Guernsey governing the preparation and dissemination of the
consolidated financial statements may differ from legislation in other
jurisdictions.
Responsibility Statement of the Directors in respect of the Consolidated Annual
Report under the Disclosure and Transparency Rules
The Directors each confirm to the best of their knowledge that:
* the Consolidated Financial Statements, prepared in accordance with IFRSs as
adopted by the European Union, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Group; and
* the management report, which is incorporated into the Strategic Report,
Directors' Report and Investment Manager's Report, includes a fair review
of the development and performance of the business and the position of the
Group, together with a description of the principal risks and uncertainties
that they face.
Statement under the UK Corporate Governance Code
The Directors each confirm to the best of their knowledge and belief that the
Annual Report and Consolidated Financial Statements taken as a whole are fair,
balanced and understandable and provide the information necessary to assess the
Group's performance, business model and strategy.
Approved by the Board on
17 April 2019
Robert Peto
Chairman
FINANCIAL STATEMENTS
Consolidated Statement of Comprehensive Income
for the year ended 31 December 2018 Notes 2018 GBP 2017 GBP
Rental income 27,773,205 28,526,725
Service charge income 1,665,737 1,553,410
Surrender premium - 14,688
Valuation gain from investment properties 7 12,057,044 23,174,903
Gain/(Loss) on disposal of investment properties 1,861,161 (138,237)
Investment management fees 4 (3,381,779) (3,136,218)
Valuers fees 4 (91,396) (71,844)
Auditor's fees 4 (78,500) (74,500)
Director's fees and subsistence 21 (202,298) (194,011)
Service charge expenditure (1,665,737) (1,553,410)
Other direct property expenses (3,154,578) (1,848,130)
Other administration expenses (426,768) (434,466)
Operating profit 34,356,091 45,818,910
Finance income 5 58,411 2,752
Finance costs 5 (3,468,125) (3,356,428)
Profit for the year before taxation 30,946,377 42,465,234
Taxation
Tax charge - -
Profit for the period, net of tax 30,946,377 42,465,234
Other Comprehensive Income
Net change in fair value of the swaps reclassified to profit and loss 14 - -
Valuation gain on cash flow hedge 14 1,440,836 1,317,743
Total other comprehensive surplus 1,440,836 1,317,743
Total comprehensive gain for the period, net of tax 32,387,213 43,782,977
Earnings per share 2018 (p) 2017 (p)
Basic and diluted earnings per share 18 7.68 10.91
EPRA earnings per share 18 4.22 4.99
All items in the above Consolidated Statement of Comprehensive Income derive
from continuing operations.
The notes below are an integral part of these Consolidation Financial
Statements.
Consolidated Balance Sheet
as at 31 December 2018
ASSETS Notes 2018 GBP 2017 GBP
Non-current assets
Investment properties 7 495,245,556 404,252,083
Lease incentives 7 2,896,409 3,657,917
Rent deposits held on behalf of tenants 840,633 995,942
498,982,598 408,905,942
Current assets
Investment properties held for sale 8 - 25,300,000
Trade and other receivables 10 4,939,071 20,256,944
Cash and Cash equivalents 11 8,264,972 14,334,504
13,204,043 59,891,448
Total Assets 512,186,641 468,797,390
LIABILITIES
Current liabilities
Trade and other payables 12 11,906,363 10,451,289
Interest rate swap 14 451,714 887,699
12,358,077 11,338,988
Non-current liabilities
Bank borrowings 13 129,249,402 109,107,044
Interest rate swap 14 352,249 1,357,100
Rent deposits due to tenants 840,633 995,942
130,442,284 111,460,086
Total liabilities 142,800,361 122,799,074
Net assets 369,386,280 345,998,316
EQUITY 2018 GBP 2017 GBP
Capital and reserves attributable to Company's equity holders
Share capital 16 227,431,057 217,194,412
Retained earnings 17 6,156,881 8,364,603
Capital reserves 17 37,959,970 22,600,929
Other distributable reserves 17
97,838,372 97,838,372
Total equity 369,386,280 345,998,316
Approved by the Board on 17 April 2019 and signed on its behalf by: Robert
Peto, Chairman
The notes below are an integral part of these Consolidation Financial
Statements.
Consolidated Statement of Changes in Equity
for the year ended 31 December 2018 Other
Share Retained earnings Capital Distributable
Capital reserves Reserves Total equity
Notes GBP GBP GBP GBP GBP
Opening balance 1 January 2018 217,194,412 22,600,929 97,838,372 345,998,316
8,364,603
Profit for the year - 30,946,377 - - 30,946,377
Other comprehensive income - - 1,440,836 - 1,440,836
Total comprehensive income for the period - 30,946,377 1,440,836 -
32,387,213
Ordinary shares issued net of issue costs 16 10,236,645 - - - 10,236,645
Dividends paid 19 - (19,235,894) - -
(19,235,894)
Valuation gain from investment properties 7 - (12,057,044) 12,057,044 - -
Gain on disposal of investment properties 7 - (1,861,161) 1,861,161 - -
Balance at 31 December 2018 227,431,057 6,156,881 37,959,970 97,838,372 369,386,280
The notes below are an integral part of these Consolidation
Financial Statements.
Consolidated Statement of Changes in Equity
for the year ended 31 December 2017 Other
Share Retained earnings Capital Distributable
Capital reserves Reserves Total equity
Notes GBP GBP GBP GBP GBP
Opening balance 1 January 2017 204,820,219 (1,753,480) 97,838,372 308,437,559
7,532,448
Profit for the year - 42,465,234 - - 42,465,234
Other comprehensive income - - 1,317,743 - 1,317,743
Total comprehensive income for the period - 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 7 - 138,237 (138,237) - -
Balance at 31 December 2017 217,194,412 8,364,603 22,600,929 97,838,372 345,998,316
The notes below are an integral part of these Consolidation Financial
Statements.
Consolidated Cash Flow Statement
for the year ended 31 December 2018
Cash flows from operating activities Notes 2018 GBP 2017 GBP
Profit for the year before taxation 30,946,377 42,465,234
Movement in lease incentives (735,921) (114,820)
Movement in trade and other receivables 16,441,217 (18,529,129)
Movement in trade and other payables 1,243,386 1,726,346
Finance costs 5 3,524,503 3,356,428
Finance income 5 (58,411) (2,752)
Valuation gain from investment properties 7 (12,057,044) (23,174,903)
(Gain)/Loss on disposal of investment properties 7 (1,861,161) 138,237
Net cash inflow from operating activities 37,442,946 5,864,641
Cash flows from investing activities
Interest received 5 58,411 2,752
Purchase of investment properties 7 (64,023,051) (50,012,676)
Additions through business acquisition 7 (23,913,188) -
Capital expenditure on investment properties 7 (8,170,795) (2,187,601)
Net proceeds from disposal of investment properties 7 44,861,161 72,086,763
Net cash (outflow)/inflow from investing activities (51,187,462) 19,889,238
Cash flows from financing activities
Proceeds on issue of ordinary shares 16 10,314,000 12,467,700
Transaction costs of issue of shares 16 (77,355) (93,507)
Bank borrowing 13 20,000,000 -
Repayment of RCF 13 - (15,000,000)
Bank borrowing arrangement costs 13 (52,490) (55,000)
Interest paid on bank borrowing 5 (2,546,435) (2,089,843)
Payments on interest rate swap 5 (726,842) (1,106,369)
Dividends paid to the Company's shareholders 19 (19,235,894) (18,596,413)
Net cash inflow/(outflow) from financing activities 7,674,984 (24,473,432)
Net (decrease)/increase in cash and cash equivalents (6,069,532) 1,280,447
Cash and cash equivalents at beginning of year 11 14,334,504 13,054,057
Cash and cash equivalents at end of year 11 8,264,972 14,334,504
The notes below are an integral part of these Consolidation Financial
Statements.
Notes to the Consolidated Financial Statements for the year ended 31 December
2018
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 17 April 2019.
2 Accounting Policies
2.1 Basis of preparation
The audited Consolidated Financial Statements of the Group have been prepared
in accordance with International Financial Reporting Standards as adopted by
the European Union ("IFRS"), and all applicable requirements of The Companies
(Guernsey) Law, 2008. The audited Consolidated Financial Statements of the
Group have been prepared under the historical cost convention as modified by
the measurement of investment property and derivative financial instruments at
fair value. The Consolidated Financial Statements are presented in pounds
sterling and all values are not rounded except when otherwise indicated.
Changes in accounting policy and disclosure
The accounting policies adopted are consistent with those in the previous
financial year. The following amendments to existing standards and
interpretations were effective for the year, but were either not applicable to
or did not have a material impact on the Group:
* Annual Improvements to IFRS Standards 2014-2016 Cycle - Amendments to IFRS
1 - Deletion of short-term exemptions for first-time adopters
* Annual Improvements to IFRS Standards 2014-2016 Cycle - Amendments to IAS
28 - Clarification that measuring investees at fair value through profit or
loss is an investment-by-investment choice
* Amendments to IFRS 2: Classification and Measurement of Share-based Payment
Transactions
* Amendments to IFRS 4: Applying IFRS 9 Financial Instruments with IFRS 4
Insurance Contracts
* Amendments to IAS 40: Transfers of Investment Property
* IFRIC 22 Foreign Currency Transactions and Advance Consideration
New standards and interpretations applied
The following new and amended standards in issue are adopted by the EU and have
been applied by the Group:
* IFRS 9 Financial Instruments (effective 1 January 2018)
* IFRS 15 Revenue from Contracts with Customers (effective 1 January 2018)
IFRS 9 - Financial Instruments
In July 2014, the IASB published the final version of IFRS 9 'Financial
Instruments' which replaces the existing guidance in IAS 39 'Financial
Instruments: Recognition and Measurement'. The IFRS 9 requirements represent a
change from the existing requirements in IAS 39 in respect of financial assets.
The standard contains two primary measurement categories for financial assets:
amortised cost and fair value. A financial asset would be measured at amortised
cost if it is held within a business model whose objective is to hold assets in
order to collect contractual cash flows, and the asset's contractual terms give
rise on specified dates to cash flows that are solely payments of principal and
interest on the principal outstanding. All other financial assets would be
measured at fair value.
The standard eliminates the existing IAS 39 categories of held to-maturity,
available-for-sale and loans and receivables.
For financial liabilities, IFRS 9 largely carries forward without substantive
amendment the guidance on classification and measurement from IAS 39. The main
change is that, in cases where the fair value option is taken for financial
liabilities, the part of a fair value change due to an entity's own credit risk
is recorded in other comprehensive income rather than in profit or loss.
The standard introduces new requirements for hedge accounting that align hedge
accounting more closely with risk management and establishes a more
principles-based approach to hedge accounting. The standard also adds new
requirements to address the impairment of financial assets and means that a
loss event will no longer need to occur before an impairment allowance is
recognised. There has been no financial impact of the new standard to the
group.
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.
The Group has a non-rental revenue stream of service charge income, which is
within scope of the standard (see note 2.3 L for further details). Service
charge income is shown on the face of the Consolidated Income Statement as a
result of implementing the standard. Comparative figures have been included
accordingly. There has been no financial impact of the new standard to the
Group.
New standards, amendments and interpretation not yet effective
IFRS 16 - Leases
IFRS 16 'Leases' replaces IAS 17 'Leases' and is effective for annual periods
beginning on or after 1 January 2019. The key changes are the lessee and lessor
accounting models are no longer symmetrical.
The Group will not make any adjustments to the recognition of leases, where it
acts as lessor in the lease agreement.
The Group has made an assessment of the leases, where the Group acts as
intermediate lessor in the lease agreement, and does not anticipate that this
standard will have any material impact on the Group's financial statements as
presented for the current year.
There are a number of other changes to Accounting Standards from 2019 onwards
but no material impact is expected.
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
The Royal Bank of Scotland plc. These values are validated by comparison to
internally generated valuations prepared using the fair value principles
outlined above.
The sensitivity analysis in note 7 details the increase and decrease in the
valuation of interest rate swaps if market rate interest rates had been 100
basis points higher and 100 basis points lower.
Business combinations
During the year ended 31 December 2018, the Group acquired subsidiaries that
own real estate. At the time of acquisition, the Group considers whether each
acquisition represents the acquisition of a business or the acquisition of an
asset. The Group accounts for an acquisition as a business combination where an
integrated set of activities is acquired in addition of the property. More
specifically, consideration is made of the extent to which significant
processes are acquired and, in particular, the extent of services provided by
the subsidiaries. The Group assessed the acquisition of Hagley Road Limited, a
Jersey Limited Company, as detailed in note 9, as a purchase of a business
because the strategic management function and associated processes were
purchased along with the investment properties.
When the acquisition of subsidiaries does not represent a business, it is
accounted for as an acquisition of a group of assets and liabilities. The cost
of the acquisition is allocated to the assets and liabilities acquired based
upon their relative fair values, and no goodwill or deferred tax is recognised.
2.3 Summary of significant accounting policies
A Basis of consolidation
The audited Consolidated Financial Statements comprise the financial statements
of Standard Life Investments Property Income Trust Limited and its material
wholly owned subsidiary undertakings.
Control is achieved when the Group is exposed, or has rights, to variable
returns from its involvement with subsidiaries and has the ability to affect
those returns through its power over the subsidiary.
Specifically, the Group controls a subsidiary if, and only if, it has:
* Power over the subsidiary (i.e. existing rights that give it the current
ability to direct the relevant activities of the subsidiary)
* Exposure, or rights, to variable returns from its involvement with the
subsidiary
* The ability to use its power over the subsidiary to affect its returns
The Group assesses whether or not it controls a subsidiary if facts and
circumstances indicate that there are changes to one or more of the three
elements of control. Consolidation of a subsidiary begins when the Group
obtains control over the subsidiary and ceases when the Group loses control of
the subsidiary.
Assets, liabilities, income and expenses of a subsidiary acquired or disposed
of during the year are included in the consolidated statement of other
comprehensive income from the date the Group gains control until the date when
the Group ceases to control the subsidiary.
The financial statements of the subsidiaries are prepared for the same
reporting period as the parent company, using consistent accounting policies.
All intra-group balances, transactions and unrealised gains and losses
resulting from intra-group transactions are eliminated in full.
B Functional and presentation currency
Items included in the financial statements of each of the Group's entities are
measured using the currency of the primary economic environment in which the
entity operates ("the functional currency"). The Consolidated Financial
Statements are presented in pound sterling, which is also the Company's
functional currency.
C Revenue Recognition
Revenue is recognised as follows;
i) Bank interest
Bank interest income is recognised on an accruals basis.
ii) Rental income
Rental income from operating leases is net of sales taxes and value added tax
("VAT") recognised on a straight line basis over the lease term including lease
agreements with stepped rent increases. The initial direct costs incurred in
negotiating and arranging an operating lease are recognised as an expense over
the lease term on the same basis as the lease income. The cost of any lease
incentives provided are recognised over the lease term, on a straight line
basis as a reduction of rental income. The resulting asset is reflected as a
receivable in the Consolidated Balance Sheet. The valuation of investment
properties is reduced by the total of the unamortised lease incentive balances.
Any remaining lease incentive balances in respect of properties disposed of are
included in the calculation of the profit or loss arising at disposal.
Contingent rents, being those payments that are not fixed at the inception of
the lease, for example increases arising on rent reviews, are recorded as
income in periods when they are earned. Rent reviews which remain outstanding
at the year end are recognised as income, based on estimates, when it is
reasonable to assume that they will be received.
The surrender premiums received for the year ended 2018 were GBPnil (2017: GBP
14,688) as detailed in the Statement of Comprehensive Income and related to a
tenant break during the year.
iii) Property disposals
Where revenue is obtained by the sale of properties, it is recognised once the
sale transaction has been completed, regardless of when contracts have been
exchanged.
D Expenditure
All expenses are accounted for on an accruals basis. The investment management
and administration fees, finance and all other revenue expenses are charged
through the Consolidated Statement of Comprehensive Income as and when
incurred. The Group also incurs capital expenditure which can result in
movements in the capital value of the investment properties. The movements in
capital expenditure are reflected in the Statement of Comprehensive Income as a
valuation gain/(loss). In 2018, there were no non-income producing properties
(2017: 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
completion of contracts.
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 Investment properties held for sale
Non-current assets (and disposal groups) classified as held for sale are
measured at the lower of carrying amount and fair value.
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 calculated through the expected credit loss method in
accordance with IFRS 9. As part of this expected credit loss process the
following is taken into account: 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
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 in other direct property expenses
I Cash and cash equivalents
Cash and cash equivalents are defined as cash in hand, demand deposits, and
other short-term highly liquid investments readily convertible within three
months or less to known amounts of cash and subject to insignificant risk of
changes in value.
J Borrowings and interest expense
All loans and borrowings are initially recognised at the fair value of the
consideration received, less issue costs where applicable. After initial
recognition, all interest-bearing loans and borrowings are subsequently
measured at amortised cost. Amortised cost is calculated by taking into account
any discount or premium on settlement. Borrowing costs are recognised within
finance costs in the Consolidated Statement of Comprehensive Income as
incurred.
K Accounting for derivative financial instruments and hedging activities
Interest rate swaps are initially recognised at fair value on the date a
derivative contract is entered into and are subsequently remeasured at their
fair value. The method of recognising the resulting gain or loss depends on
whether the derivative is designated as a hedging instrument, and if so, the
nature of the item being hedged. The Group documents at the inception of the
transaction the relationship between hedging instruments and hedged items, as
well as its risk management objective and strategy for undertaking various
hedging transactions. The Group also documents its assessment both at hedge
inception and on an ongoing basis of whether the derivatives that are used in
hedging transactions are highly effective in off-setting changes in fair values
or cash flows of hedged items. The effective portion of changes in the fair
value of derivatives that are designated and qualify as cash flow hedges are
recognised in other comprehensive income in the Consolidated Statement of
Comprehensive Income.
The gains or losses relating to the ineffective portion are recognised in
operating profit in the Consolidated Statement of Comprehensive Income. Amounts
taken to equity are transferred to profit or loss when the hedged transaction
affects profit or loss, such as when the hedged financial income or financial
expenses are recognised.
When a derivative is held as an economic hedge for a period beyond 12 months
after the end of the reporting period, the derivative is classification as
non-current consistent with the classification of the underlying item. A
derivative instrument that is a designated and effective hedging instrument is
classification 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. Under IFRS 15 the Group acts as the principal for the
collection of service charge income and the associated expenditure. As a result
the Consolidated Statement of Comprehensive Income includes both the gross
service charge received in the year and the expenditure associated with the
service charge. Other direct property expenses include the service charge
expense incurred by the Group on its vacant properties.
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 GBP110 million of fixed rate
borrowings that have been fixed via an interest rate swap (see note 14). At the
year end the Group had also utilised GBP20 million of its revolving credit
facility the interest rate on which is fixed for the length of time the RCF is
utilised.
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 2.2.
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
note13. Bank borrowings have been fixed due to an interest rate swap and is
detailed further in note 14:
At 31 December 2018 Fixed Rate Variable Interest
Rate Rate
GBP GBP GBP
Cash and cash equivalents - 8,264,972 0.020%
Bank borrowings 130,000,000 - 2.650%
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 2018, if market rate interest rates had been 100 basis points
higher with all other variables held constant, the profit for the year would
have been GBP117,350 lower (2017: GBP143,345 higher) 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 GBP3,136,020 higher (2017: GBP5,604,283 higher) as a result of an
increase in the fair value of the derivative designated as a cash flow hedge of
floating rate borrowings
At 31 December 2018, if market rate interest rates had been 100 basis points
lower with all other variables held constant, the profit for the year would
have been GBP117,350 higher (2017: GBP143,345 lower) as a result of the lower
interest income on cash and cash equivalents off set by the lower interest
expense on the RCF. Other Comprehensive Income and the Capital Reserve would
have been GBP4,985,212 lower (2017: GBP5,941,013 lower) as a result of a decrease
in the fair value of the derivative designated as a cash flow hedge of floating
rate borrowings.
ii) Real estate risk
The Group has identified the following risks associated with the real estate
portfolio:
a) The cost of the development schemes may increase if there are delays in the
planning process. The Group uses advisers who are experts in the specific
planning requirements in the scheme's location in order to reduce the risks
that may arise in the planning process.
b) A major tenant may become insolvent causing a significant loss of rental
income and a reduction in the value of the associated property. 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 GBP2,937,105 (2017: GBP1,421,341) as detailed in note 10.
Rental deposits are placed in separate bank accounts and are therefore assessed
to have low credit risk.
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 2018 GBP5,709,167
(2017: GBP6,969,884) was placed on deposit with The Royal Bank of Scotland plc
("RBS"), GBP2,555,805 (2017: GBP7,364,620) 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-1 Stable by Standard & Poor's and P-2 Stable by Moody's.
RBS is rated A-2 Stable by Standard & Poor's and P-2 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 2018 On demand 12 months 1 to 5 > 5 years Total
years
GBP GBP GBP GBP GBP
Interest-bearing loans - 22,435,855 117,792,177 - 140,228,032
Interest rate swaps - 599,907 1,949,698 - 2,549,605
Trade and other payables 4,322,483 - - - 4,322,483
Rental deposits due to tenants - 660,926 549,525 291,108 1,501,599
4,322,483 23,696,688 120,291,400 291,108 148,601,679
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
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 2018 and at 31 December 2017 were as follows:
At 31 December 2018 2018 2017
GBP GBP
Total borrowings (excluding unamortised arrangement 130,000,000 110,000,000
fees)
Gross assets 512,186,641 468,797,390
Gearing ratio (must not exceed 65%) 25.38% 23.5%
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
2018 2017 2018 2017
Financial assets GBP GBP GBP GBP
Cash and cash equivalents 8,264,972 14,334,504 8,264,972 14,334,504
Trade and other receivables 4,939,071 20,256,944 4,939,071 20,256,944
Financial liabilities
Bank borrowings 129,249,402 109,107,044 130,055,982 111,678,649
Interest rate swaps 803,963 2,244,799 803,963 2,244,799
Trade and other payables 5,824,041 4,828,061 5,824,041 4,828,061
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 2017.
* The fair value of rental deposit liabilities is the same as the current
value as the monies owed are held in separate bank accounts.
* 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 following table shows an analysis of the fair values of financial
instruments recognised in the Balance Sheet by the level of the fair value
hierarchy*:
*Explanation of the fair value hierarchy:
Level 1 Quoted (unadjusted) market prices in active markets for identical
assets or liabilities.
Level 2 Valuation techniques for which the lowest level input that is
significant to the fair value measurement is directly or indirectly observable.
Level 3 Valuation techniques for which the lowest level input that is
significant to the fair value measurement is unobservable.
Year ended 31 December 2018 Level 1 Level 2 Level 3 Total fair
value
Interest rate swap - 803,963 - 803,963
Year ended 31 December 2017 Level 1 Level 2 Level 3 Total fair
value
Interest rate swap - 2,244,799 - 2,244,799
4 Fees
Investment management fees
Under the terms of the Investment Management Agreement between the Investment
Manager and the Company ("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 GBP3,381,779 (2017: GBP3,136,218).
The amount due and payable at the year end amounted to GBP875,512 excluding VAT
(2017: GBP807,005 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 GBP65,000 (2017: GBP65,000). The amount due and
payable at the year end amounted to GBP16,250 (2017:GBP16,250).
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
91,396 (2017: GBP71,844) of which minimum fees of GBP2,500 per property (2017: GBP
2,500) were incurred due for new properties added to the portfolio. The amount
due and payable at the year end amounted to GBP20,356 excluding VAT (2017: GBP
37,158 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 GBP78,500 (2017: GBP74,500) and
relate to audit services provided for the 2018 financial year. Ernst & Young
LLP also did not provide any non-audit services in the year (2017: nil).
5 Finance Income and Costs
2018 2017
GBP GBP
Interest income on cash and cash equivalents 58,411 2,752
Finance income 58,411 2,752
Interest expense on bank borrowings 2,546,435 2,089,843
Payments on interest rate swap 726,842 1,106,369
Amortisation of arrangement costs (see note 13) 194,848 160,216
Finance costs 3,468,125 3,356,428
Of the finance costs above, GBP555,692 of the interest expense on bank borrowings
and GBP113,800 of payments on interest rate swaps were accruals at 31 December
2018 and are included in Trade and other payables.
6 Taxation
UK REIT Status
The Group migrated tax residence to the UK and elected to be treated as a UK
REIT with effect from 1 January 2015. As a UK REIT, the income profits of the
Group's UK property rental business are exempt from corporation tax as are any
gains it makes from the disposal of its properties, provided they are not held
for trading or sold within three years of completion of development. The Group
is otherwise subject to UK corporation tax at the prevailing rate.
As the principal company of the REIT, the Company is required to distribute at
least 90% of the income profits of the Group's UK property rental business.
There are a number of other conditions that also require to be met by the
Company and the Group to maintain REIT tax status. These conditions were met in
the period and the Board intends to conduct the Group's affairs such that these
conditions continue to be met for the foreseeable future. Accordingly, deferred
tax is no longer recognised on temporary differences relating to the property
rental business.
The Company and its Guernsey subsidiary have obtained exempt company status in
Guernsey so that they are exempt from Guernsey taxation on income arising
outside Guernsey and bank interest receivable in Guernsey.
A reconciliation between the tax charge and the product of accounting profit
multiplied by the applicable tax rate for the year ended 31 December 2018 and
2017 is, as follows:
2018 2017
GBP GBP
Surplus before tax 30,946,377 42,465,234
Tax calculated at UK statutory corporation tax rate of 5,879,812 8,174,558
19% (2017: 19.25%)
UK REIT exemption on net income (3,235,353) (3,864,098)
Valuation (gain) in respect of investment properties (2,644,459) (4,461,169)
not subject to tax
Excess management expenses not utilised - 150,709
Current income tax charge - -
7 Investment Properties
UK UK UK UK
Industrial Office Retail Other Total
2018 2018 2018 2018 2018
GBP GBP GBP GBP GBP
Market value at 1 January 213,135,000 150,450,000 69,625,000 - 433,210,000
Sector reallocation - - (12,650,000) 12,650,000 -
Purchase of investment properties 32,038,597 12,740,385 (1,650) 19,245,719 64,023,051
Additions through business acquisition - 23,913,188 - - 23,913,188
Capital expenditure on investment properties 2,648,041 5,242,632 408 279,714 8,170,795
Opening market value of disposed investment properties (5,600,000) (32,100,000) (5,300,000) - (43,000,000)
Valuation gain from investment properties 16,233,616 (586,989) (5,113,656) 1,524,073 12,057,044
Movement in lease incentives receivable 694,746 (29,216) (30,102) 100,494 735,922
Market value at 31 December 259,150,000 159,630,000 46,530,000 33,800,000 499,110,000
Adjustment for lease incentives (1,787,864) (1,153,339) (304,908) (618,333) (3,864,444)
Carrying value at 31 December 257,362,136 158,476,661 46,225,092 33,181,667 495,245,556
The valuations were performed by Knight Frank LLP, accredited external valuers
with recognised and relevant professional qualifications and recent experience
of the location and category of the investment properties being valued. The
valuation model in accordance with Royal Institute of Chartered Surveyors
('RICS') requirements on disclosure for Regulated Purpose Valuations has been
applied (RICS Valuation - Professional Standards January 2014 published by the
Royal Institution of Chartered Surveyors - revised April 2015). These valuation
models are consistent with the principles in IFRS 13. The market value provided
by Knight Frank at the year end was GBP499,110,000 (2017: GBP433,210,000) however
an adjustment has been made for lease incentives of GBP3,864,444 (2017: GBP
3,657,917) that are already accounted for as an asset and included in
non-current (GBP2,896,409) and current assets (GBP968,035). 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. The purchase of Hagley Road for GBP23.9 million was
accomplished through the acquisition of the shares of a Jersey Limited Company
(see note 9). During the year one asset whose main purpose is leisure was
reclassified from Retail to the Other sector in line with IPD guidelines.
Further details on acquisitions and disposals are given in the Investment
Manager's report.
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 receivable 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
In the consolidated Cash Flow Statement, proceeds from disposal of investment
properties comprise:
2018 2017
GBP GBP
Opening market value of disposed investment properties 43,000,000 72,225,000
Gain/(loss) on disposal of investment properties 1,861,161
(138,237)
Net proceeds from disposal of investment properties 44,861,161 72,086,763
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 earlier.
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 & Fair Value Valuation Key Unobservable Input Range (weighted
Class Technique average)
GBP
UK 259,150,000 Income · Initial Yield 0.00% to 9.06%
Industrial Capitalisation · Reversionary Yield (5.01%)
Level 3 · Equivalent Yield 4.31% to 9.06%
· Estimated rental (6.12%)
value per Sq. m 4.25% to 8.18%
(5.95%)
GBP2.75 to GBP215.75 (GBP
191.20)
UK Office 159,630,000 Income · Initial Yield 0.00% to 9.00%
Level 3 Capitalisation · Reversionary Yield (4.95%)
· Equivalent Yield 4.95% to 9.40%
· Estimated rental (6.97%)
value per Sq. m 4.75% to 8.66%
(6.62%)
GBP14.00 to GBP525.00 (GBP
376.99)
UK Retail 46,530,000 Income · Initial Yield 4.98% to 7.51%
Level 3 Capitalisation · Reversionary Yield (6.11%)
· Equivalent Yield 4.68% to 7.39%
· Estimated rental (5.81%)
value per Sq. m 5.28% to 7.46%
(6.49%)
GBP17.50 to GBP528.00 (GBP
102.18)
UK Other 33,800,000 Income · Initial Yield 4.99% to 6.55%
Level 3 Capitalisation · Reversionary Yield (5.47%)
· Equivalent Yield 4.98% to 6.90%
· Estimated rental (5.53%)
value per Sq. m 5.00% to 6.89%
(5.63%)
GBP18.68 to GBP108.00 (GBP
40.62)
499,110,000
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.
2018 2017
ERV p.a. GBP GBP
34,380,532 30,925,950
Area sq ft 4,374,342 3,799,885
Average ERV per sq ft GBP7.86 GBP8.14
Initial yield 5.1% 5.5%
Reversionary Yield 4.5% 4.7%
The table below presents the sensitivity of the valuation to changes in the
most significant assumptions underlying the valuation of completed investment
property.
2018 2017
GBP GBP
Increase in equivalent yield of 25 bps (40,894,000) (18,981,000)
Decrease in rental rates of 5% (ERV) (16,563,503) (11,071,600)
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 2018 there were no investment properties held for sale (2017:
GBP25,300,000).
9 Investment in Subsidiary Undertakings
The Company owns 100 per cent of the issued ordinary share capital of Standard
Life Investments Property Holdings Limited, a company with limited liability
incorporated and domiciled in Guernsey, Channel Islands, whose principal
business is property investment.
During the year ended 31 December 2018, the Company acquired Hagley Road
Limited, a company with limited liability incorporated and domiciled in Jersey,
Channel Islands, whose principal business is property investment. Investment
property to the value of GBP23,913,188 was acquired along with current
liabilities of GBP489,079.
The Group undertakings consist of the following 100% owned subsidiaries at the
Balance Sheet date:
* Standard Life Investments Property Holdings Limited, a property investment
company with limited liability incorporated in Guernsey, Channel Islands.
* Standard Life Investments (SLIPIT) Limited Partnership, a property
investment limited partnership established in England.
* Standard Life Investments SLIPIT (General Partner) Limited, a company with
limited liability incorporated in England. This Company is the GP for the
Limited Partnership.
* Standard Life Investments SLIPIT (Nominee) Limited, a company with limited
liability incorporated and domiciled in England.
* Hagley Road Limited, a property investment company with limited liability
incorporated in Jersey, Channel Islands.
10 Trade and Other Receivables
2018 2017
GBP GBP
Trade receivables 3,036,500 1,424,216
Less: provision for impairment of trade receivables (99,395) (2,875)
Trade receivables (net) 2,937,105 1,421,341
Rental deposits held on behalf of tenants 660,926 586,189
Cash held by Solicitors - 17,727,355
Other receivables (including lease incentives) 1,341,040 522,059
Total trade and other receivables 4,939,071 20,256,944
Reconciliation for changes in the provision for impairment of trade
receivables:
2018 2017
GBP GBP
Opening balance (2,875) (33,952)
Charge for the year (96,520) (2,875)
Reversal of provision - 33,952
Closing balance (99,395) (2,875)
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 using the expected credit loss method. 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 2018, trade receivables of GBP99,395 (2017: GBP2,875) were considered
impaired and provided for.
The ageing of these receivables is as follows:
2018 2017
GBP GBP
0 to 3 months (55,115) 2,875
3 to 6 months (21,619) -
Over 6 months (22,661) -
Closing balance (99,395) 2,875
As of 31 December 2018, trade receivables of GBP2,937,105 (2017: GBP1,421,341) were
less than 3 months past due but considered not impaired.
11 Cash and Cash Equivalents
2018 2017
GBP GBP
Cash held at bank 2,555,805 7,364,620
Cash held on deposit with RBS 5,709,167 6,969,884
8,264,972 14,334,504
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
2018 2017
GBP GBP
Trade and other payables 4,322,482 3,245,930
VAT payable 751,530 892,068
Deferred rental income 6,171,425 5,727,102
Rental deposits due to tenants 660,926 586,189
11,906,363 10,451,289
Trade payables are non-interest bearing and are normally settled on 30-day
terms.
13 Bank Borrowings
2018 2017
GBP GBP
Loan facility and drawn down outstanding balance 130,000,000 110,000,000
Opening carrying value 109,107,044 124,001,828
Borrowings during the year 20,000,000 -
Repayment of RCF - (15,000,000)
Arrangements costs of additional facility (52,490) (55,000)
Amortisation of arrangement costs 194,848 160,216
Closing carrying value 129,249,402 109,107,044
Reconciliation of movements in liabilities from financing
activities
At 1 Jan 2018 Cash flows Changes in Other At 31 Dec
fair value changes 2018
GBP GBP GBP GBP GBP
Borrowings 109,107,044 19,947,510 - 194,848 129,249,402
Derivative financial instruments 2,244,799 - (1,440,836) - 803,963
111,351,843 19,947,510 (1,440,836) 194,848 130,053,365
Reconciliation of movements in liabilities from financing
activities
At 1 Jan Cash flows Changes in Other At 31 Dec
2017 fair value changes 2017
GBP GBP GBP GBP GBP
Borrowings 124,001,828 (15,055,000) - 160,216 109,107,044
Derivative financial instruments 3,562,542 - (1,317,743) - 2,244,799
127,564,370 (15,055,000) (1,317,743) 160,216 111,351,843
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 and in the
year this option was exercised with the RCF extended out to April 2023, the
same maturity date as the term-loan. GBP130 million has been drawn down by the
Group at 31 December 2018. Interest is payable on the Term Loan at 3 month
LIBOR plus a margin of 1.375%. The Group has entered into a swap arrangement
which fixes the interest rate on the term loan of 2.725%. Interest is payable
on the RCF at relevant LIBOR plus a margin of 1.45%.
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 December 2018.
2018 2017
GBP GBP
Loan amount 130,000,000 110,000,000
Cash held by Solicitors - (17,727,355)
Cash (8,264,972) (14,334,504)
121,735,028 77,938,141
Investment property valuation 499,110,000 433,210,000
LTV percentage 24.4% 18.0%
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 75% for the Office,
Retail and Industrial sectors respectively;
* that the largest tenant accounts for less than 20% of the Group's annual
net rental income;
* that the five largest tenants account for less than 50% of the Group's
annual net rental income;
* that the ten largest tenants account for less than 75% of the Group's
annual net rental income;
During the year, the Group did not default on any of its obligations and loan
covenants under its loan agreement.
The loan facility is secured by fixed and floating charges over the assets of
the Company and its wholly owned subsidiaries, Standard Life Investments
Property Holdings Limited and Standard Life Investments (SLIPIT) Limited
Partnership.
14 Interest Rate Swap
As part of the refinancing of loans (see note 13), on 28 April 2016 the Group
completed an interest rate swap of a notional amount of 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%.
2018 2017
GBP GBP
Opening fair value of interest rate swaps at 1 January (2,244,799) (3,562,542)
Valuation gain on interest rate swaps 1,440,836 1,317,743
Closing fair value of interest rate swaps at 31 December (803,963) (2,244,799)
The split of the swap liability is listed below
2018 2017
GBP GBP
Current liabilities (451,714) (887,699)
Non-current liabilities (352,249) (1,357,100)
Interest rate swap with a start date of 28 April 2016 maturing on 27 April (803,963) (2,244,799)
2023
15 Lease Analysis
The Group has entered into leases on its property portfolio. This property
portfolio as at 31 December 2018 had an average lease expiry of six years.
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:
2018 2017
GBP GBP
Within one year 28,144,983 25,353,460
After one year, but not more than five years 75,726,933 62,905,498
More than five years 71,988,615 32,278,558
Total 175,860,531 120,537,516
The largest single tenant at the year end accounts for 4.5% (2017: 5.0%) 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 2018 there were 405,865,419
ordinary shares of 1p each in issue (2017: 394,865,419). 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: 2018 2017
GBP GBP
Opening balance 217,194,412 204,820,219
Shares issued 10,314,000 12,467,700
Issue costs associated with new ordinary shares (77,355) (93,507)
Closing balance 227,431,057 217,194,412
2018 2017
Number of Number of
shares shares
Opening balance 394,865,419 380,690,419
Issued during the year 11,000,000 14,175,000
Closing balance 405,865,419 394,865,419
17 Reserves
The detailed movement of the below reserves for the years to 31 December 2018
and 31 December 2017 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 profit for the year
net of tax attributable to ordinary equity holders by the weighted average
number of ordinary shares outstanding during the year. As there are no dilutive
instruments outstanding, basic and diluted earnings per share are identical.
The earnings per share for the year is set out in the table below. In addition
one of the key metrics the Board considers is dividend cover. This is
calculated by dividing the net revenue earnings in the year (surplus for the
year net of tax excluding all capital items and the swaps breakage costs)
divided by the dividends payable in relation to the financial year. For 2018
this equated to a figure of 89% (2017: 104%).
The following reflects the income and share data used in the basic and diluted
earnings per share computations:
2018 2017
GBP GBP
Surplus for the year net of tax 30,946,377 42,465,234
2018 2017
GBP GBP
Weighted average number of ordinary shares outstanding during the year 403,172,131 389,272,679
Earnings per ordinary share (p) 7.68 10.91
Surplus for the year excluding capital items 17,028,172 19,428,568
EPRA earnings per share (p) 4.22 4.99
19 Dividends and Property Income Distribution Gross of Income Tax
2018 2017
Non Property Income Distributions GBP GBP
0.668p per ordinary share paid in March 2018 relating to the quarter ending 31 2,692,811 3,258,910
December 2017 (2017: 0.84p)
0.421p per ordinary share paid in November 2018 relating to the quarter ending 1,708,693 -
30 September 2018 (2017: nil)
Property Income Distributions
0.552p per ordinary share paid in March 2018 relating to the quarter ending 31 2,104,262 1,357,879
December 2017 (2017: 0.35p)
1.19p per ordinary share paid in May 2018 relating to the quarter ending 31 4,797,073 4,626,903
March 2018 (2017: 1.19p)
1.19p per ordinary share paid in August 2018 relating to the quarter ending 30 4,811,949 4,665,723
June 2018 (2017: 1.19p)
0.769p per ordinary share paid in November 2018 relating to the quarter ending 3,121,106 4,686,998
30 September 2018 (2017: 1.19p)
19,235,894 18,596,413
On 29 March 2019 a dividend in respect of the quarter to 31 December 2018 of
1.19 pence per share was paid totalling GBP4,829,798. The dividend was split as a
property income dividend of 0.125 pence per share and a non property income
dividend of 1.065 pence per share.
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.
2018 2017
Number of ordinary shares at the reporting date 405,865,419 394,865,419
2018 2017
GBP GBP
Total equity per audited consolidated financial statements 369,386,280 345,998,316
NAV per share (p) 91.0 87.6
21 Related Party Disclosures
Directors' remuneration
The remuneration of Directors is detailed below which includes pay as you earn
tax and national insurance contributions. Further details on the Directors can
be found in the Directors' Remuneration Report and the Corporate Governance
Report.
2018 2017
GBP GBP
Robert Peto 42,000 40,000
Sally-Ann Farnon 37,500 36,000
Huw Evans 33,500 32,000
Mike Balfour 33,500 32,000
James Clifton-Brown 33,500 32,000
Employers national insurance contributions 12,363 11,962
192,363 183,962
Directors expenses 9,935 10,049
202,298 194,011
Investment manager
Management of the property portfolio is contractually delegated to Aberdeen
Standard Fund Managers Limited (up to 10 December 2018 - Standard Life
Investments (Corporate Funds) Limited) as Investment Manager and the contract
with the Investment Manager can be terminated by the Group on not less than one
year's notice. Transactions with the Investment Manager in the year are
detailed out in note 4
22 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.
This Annual Financial Report announcement is not the Company's statutory
accounts for the year ended 31 December 2018. The statutory accounts for the
year ended 31 December 2018 received an audit report which was unqualified.
The Annual Report will be posted to shareholders in May 2019 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
END
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April 18, 2019 02:00 ET (06:00 GMT)
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