TIDMIPI
Invesco Property Income Trust Limited
Annual Financial Report Announcement
for the year ended 31 March 2012
PERFORMANCE INFORMATION
AS AT AS AT
31 MARCH 31 MARCH
ASSETS 2012 2011
Net liabilities (GBP'000) (25,343) (23,840)
Adjusted net liabilities (GBP'000) (11,911) (7,908)
Net liability value per share per the (16.56)p (15.58)p
consolidated statement of financial position
Adjusted net liability value per share (7.78)p (5.17)p
Ordinary share mid-market price 1.22p 1.77p
Premium to adjusted net asset value per share 115.6% 134.2%
Gearing, based on:
- gross assets 101% 98%
- net assets n/a n/a
YEAR ENDED 31 MARCH 2012
HIGHS/LOWS HIGH LOW
Adjusted net asset value per share (5.40)p (8.20)p
Ordinary share price 1.9p 0.8p
YEAR YEAR
ENDED ENDED
31 MARCH 31 MARCH
2012 2011
EARNINGS AND DIVIDENDS
Profit/(loss) per ordinary share - basic and
diluted:
Revenue return 1.9p 3.9p
Capital return (5.6)p (3.6)p
(3.7)p 0.3p
Dividends per ordinary share - -
ONGOING CHARGES RATIO
- on gross assets 1.3% 1.2%
- on net assets n/a n/a
CHAIRMAN'S STATEMENT
Introduction
The year to 31 March 2012 saw the conclusion of the process begun in 2008 to
review strategic options for the Company in light of its non-compliance with
banking covenants. At a general meeting in September 2011 shareholders approved
the restructuring of the Group's borrowing arrangements and revisions to the
Company's investment objective and policy. This represented a significant
achievement in avoiding the total loss that we believe would have resulted from
the lending bank exercising its rights to demand immediate repayment of the
loan balances.
The Company's primary objective is now to repay its borrowings and other
liabilities by 28 September 2014 and it seems likely that repayment will need
to be funded from proceeds of sale of the Group's properties. Unfortunately we
are embarking on this exercise against a backdrop of European economies
struggling to recover from the effects of the financial crisis. Markets remain
volatile, investor sentiment is risk-averse and activity is subdued. In the
absence of a significant improvement in market background the Directors have
little confidence that full realisation of the portfolio before the repayment
date will raise sufficient proceeds to meet all the Group's liabilities. We are
monitoring this closely with our lending bank.
Annual accounts for the year ended 31 March 2012
The Group was compliant with all its banking covenants as at 31 March 2012 and
at 30 June 2012. We are pleased to have agreed with our lending bank that a LTV
ratio of up to the current maximum of 110% will be permitted until 30 September
2013, after which it will reduce to 100%, the level that was to have applied
after 31 December 2012.
The LTV ratio as at 30 June 2012 was 102.2% and, given the market outlook,
there can be no guarantee that the ratio will not rise to above 110% on or
before 30 September 2013. The lending bank would, in this event, have the right
to demand repayment of amounts owed to it which, if exercised, would mean the
Company could no longer be treated as a going concern. Taking into account the
recent history of the Company's relationship with its lending bank, the
Directors consider it unlikely that the bank would exercise its rights to
demand repayment in these circumstances. As a result, and notwithstanding the
uncertainty, the Directors have concluded that the consolidated accounts should
be prepared on a going concern basis.
Performance
Like-for-like, the UK portfolio's capital values fell 4.6% in sterling and the
European portfolio's capital values fell 1.7% in euros.
Adjusted shareholders' funds at the year end were GBP-11.9 million or -7.8p per
share, down from GBP-7.9 million (-5.2p) a year earlier. On an accounts basis the
retained loss for the year was lower, reflecting a reduction in the interest
rate swap liabilities which are excluded from the adjusted figures.
Income generation remains robust, although lower than last year which benefited
from a GBP2.8 million lease surrender premium. Net income was GBP2.9 million and we
can look forward to a like-for-like improvement this year as our euro interest
rate hedges expired in April and, as required under the banking facility, have
been replaced, reducing the interest rate payable (excluding margin) on that
portion of borrowings from 4.58% to 1.03%.
Activity
Following some tenant departures I indicated in my report last year that
rebuilding European rental income would be a priority. The European vacancy
rate reached 19.8% last June and I am pleased to report that this had fallen to
13.9% by the year end as 16 new leases have ben signed. In addition lease
renewals and extensions have helped produce an average unexpired lease term at
31 March of 2.5 years in Europe, only slightly below last June's 2.6 years.
One disposal completed in the year: the sale in May of Pegasus House,
Peterborough for GBP11.5 million.
Financing
The sterling value of the Company's bank borrowings was GBP192.3 million (31
March 2011: GBP208.6 million), comprising GBP75.3 million drawn in sterling and EUR
140.2 million drawn in euros. GBP10.0 million of sterling borrowings were repaid
during the period following the sale of Pegasus House. The Company has agreed,
since the year end, to repay a further GBP1.5 million of borrowings in
consideration for the relaxation of the LTV covenant referred to above. This
will be funded from cash resources.
The bank loan to value ratio at 31 March 2012 was 101.0% (31 March 2011:
97.6%). This is below the current covenanted maximum of 110%. As previously
stated, we are pleased to have agreed with our lending bank an amendment to the
LTV covenant, maintaining a maximum of 110% until 30 September 2013, after
which it will reduce to 100%, the level that was to have applied after 31
December 2012.
On a forward-looking basis, the Company's interest cover stood at 176.0% at 31
March (31 March 2011: 132.8%). This improvement reflects increased income from
leasing successes as well as significantly lower interest rates payable
following the expiry of euro interest rate hedges in April 2012.
The Company has outstanding GBP2 million of a working capital facility provided
by Invesco Ltd. Including accrued interest the liability stood at GBP2.3 million
at the year end. The repayment date under this facility has been extended so as
to be co-terminous with the revised banking facility.
Outlook
In my report last year I stated that we would need to be patient before
economic recovery and/or investor sentiment provided a stimulus for asset
recovery in the markets to which we are exposed. Your Board remains of this
view and, with downside risks associated with sovereign debt problems in the
Eurozone showing few signs of abatement, our degree of confidence in the timing
and quantum of any recovery is, if anything, receding. This casts doubt on our
ability to achieve the objective of meeting the repayment date of our banking
facility in September 2014.
In the meantime we are more dependent than ever on asset level initiatives for
short term portfolio performance. Fortunately our track record in this regard
is good, but there are few other causes for optimism at present.
Richard Barnes
Chairman
30 July 2012
PROPERTY MANAGER'S REPORT
Economic Background
Over last 18 months the overriding theme of uncertainty has continued across UK
and European political, economic and real estate environments. The early signs
of stabilisation have proved unsustainable, with headline indicators showing
on-going weakness.
Growth across Europe is forecast to begin to recover in the second half of this
year in only the strongest economies, supported by the steady improvement
expected in the US. However, growth in 2013 is still forecast to be well below
trend levels. It is not until 2014 that most countries are forecast to return
to sustainable trend levels of growth. For the Southern European economies, the
timing of this recovery is delayed by at least another 12 months.
There is potential upside to the forecasts for the more mature economies of UK,
France and Germany, as well as the Central European and Nordic countries. With
underlying economic fundamentals in better shape, with either good export based
economies, currency independence or lower national debt levels providing some
room for optimism. It will be improving sentiment that will be the trigger for
such improved prospects.
However, clear risks remain principally driven by the Eurozone crisis.
Individual countries could still default, and bank balance sheets are still
showing signs of significant stress. Recent actions to delay default, and
support banks may at least enable the Eurozone and the ECB to strengthen
firewalls and limit contagion.
Interest rates are now not expected to rise until late 2013/early 2014. The
Bank of England is unlikely to feel pressure to raise rates for some time.
Monetary policy at the ECB has been less supportive than in the UK and has
resulted in a much more modest expansion of the ECB balance sheet. While this
suggests that the ECB could do more, it is likely to remain relatively
conservative for political reasons. Should key economies such as Germany and
France return to trend growth swiftly, we may see pressure on the ECB to raise
interest rates, much as it did in early 2011.
Financing conditions grew more difficult towards the end of 2011 as lending
banks pulled back to domestic markets, and became more risk averse. While
interest rates remain low across the UK and Europe, lending margins continued
to rise due to the cost of intra-bank borrowing, as banks became more cautious
about counter-party risk. In a recent ULI survey respondents expected lending
conditions to remain problematic in 2012, with over 50% of respondents
suggesting lending conditions would be worse in 2012 than in 2011.
Property Markets
At a pan-European level, yields were broadly stable throughout the year.
However, this message masks some significant regional differences. Yields in
southern European markets, where stringent austerity policies are being enacted
as a consequence of the sovereign debt crisis, tended to move out during the
year as cross-border investors sought greater compensation for the increased
risks in the region. Conversely, in Germany, the Nordics and the CEE markets,
yields continued to harden as capital competed for a limited supply of
investment product.
A similar pattern was evident in relation to rental growth, with stronger
performance in London, Paris and key German cities, and rents still declining
in the weaker markets.
The rental growth and yield shift story is not simply one of core vs.
periphery. There also continues to be significant divergence in prospects
between prime and secondary properties across Europe. Hard evidence regarding
secondary rents and yields is scarce principally due to an almost complete
absence of transaction activity, but IPD UK data and anecdotal evidence across
Europe continues to indicate that secondary yields remain close to historic
highs while rents are still falling. Furthermore, leasing vacant secondary
stock continues to be very challenging and, therefore, landlords are offering
tenants considerable incentives to remain in their current space. In
oversupplied markets, the only future for vacant secondary stock may be
redevelopment to an alternative use. However, a lack of finance available for
development means vacant stock is likely to continue to be a drag on the
secondary market for some time.
IPD data demonstrates the divergence in performance of prime and secondary
property. As an example, the UK data published for Q1 2012 shows a second
consecutive quarter of negative value movement, at -0.7% (this could be
classified as a `technical recession' for UK property, last seen in June 2009).
UK values overall remain some 30% below the peak levels seen in 2007, whereas
for higher yielding properties (a good proxy for secondary property), the Q1
2012 value movement stood at -1.5% with values still sitting nearly 40% below
the 2007 peak.
In continental Europe the picture is similar, though with only annual IPD data
available it is more difficult to identify shorter term trends.
Asset Management
In recent reports we have highlighted the importance of maintaining occupancy
across the portfolio, in the face of the challenges mentioned earlier in this
report. While local challenges will vary considerably, the overall mantra of
`getting it let... and keeping it let' remains the key to securing the best
performance possible from the Company's portfolio. We are pleased that we have
managed to reduce the overall vacancy rate to 9.4% as at the period end (from
13.6% last year), as a result of considerable efforts by our local asset
management specialists. This overall vacancy rate compares favourably to the
most recently published IPD figures, with the UK rate at end of March 2012
standing at 9.2%, and in the Continental European market, IPD void rates at the
end of December 2011 stood at 7.3% in France, 12.2% in Spain, 0.2% in Germany
and 10.2% in Belgium.
All other things being equal, the natural shortening of unexpired lease terms
will lead to declining asset valuations. The challenge this Company's portfolio
is facing is that as a result of market uncertainty and the on-going aversion
to risk, the value discounting associated with shortening leases is becoming
more aggressive.
We have been successfully maintaining the average unexpired lease term at close
to four years over the last eight quarters, through effective lease renewal,
and extension. We are finding that it is proving to be more of a challenge in
the current climate to conclude such leasing negotiations with tenants with the
effect of enhancing the overall average unexpired lease term. Tenants appear
unwilling at this point to enter into lease negotiations more than two or so
years before a lease expiry or break option, restricting the rate of progress
that can be achieved in improving the lease profile of the Company's portfolio
as a whole. We are currently in discussions with a number of tenants across the
portfolio where their leases expire in the next couple of years, and while we
are hopeful of achieving positive outcomes there remains some uncertainty as to
the likely terms and timing of any such agreements.
Against an uncertain value cycle, maintaining occupancy and operating cash flow
are essential to sustaining the Company's ability to meet its short term
obligations. The current Interest Cover Ratio, calculated using the interest
payable to the Company's lending bank, is currently running at a 176%, which
offers some headroom compared to a current covenanted minimum of 110%.
The major asset management activity to conclude successfully during the period
was the leasing of the vacant ground and lower ground floor space at Old Jewry,
City of London. Bank of China (UK) Ltd (the owner-occupier of the adjacent
office property) signed a new 20 year lease of 10,400sqft, at an annual rent of
GBP185,000 per annum. This letting resulted in the property becoming fully
leased.
At the same property, we renegotiated tenant break options on two separate
leases, with AIOI and Fortis. Both tenants had break options operable in 2012,
with a rent free option if they did not break. We agreed to provide that rent
free now in return for the removal of the break. This extends the certain lease
term to 2014 on one lease and to March 2018 on the other.
A lease re-gear concluded at the Theale property, adds an additional three
years certain (potentially eight years given the penalised break option) to the
occupation of one of the existing tenants, Sunguard, in return for reduced rent
closer to market levels.
A further five leases were completed at Le Diapason in Paris during the period,
for a total of 2,687sqm, including most recently a new lease for the 3rd floor
of building B leaving the vacancy rate at only around 5%. This property had
vacancy of 46% as recently as the end of 2010, so this letting progress is
encouraging to see.
A new lease was agreed at Le Directoire for the main tenant. The tenant's break
option effective in September 2012 was used as a trigger to negotiate new lease
terms. In return for an initial rent reduction and 12 months' rent free from
October 2012, we have secured a six year lease certain from that date while
avoiding an immediate vacancy plus saving potential refurbishment costs should
the space have become vacant.
The vacant warehouse at Combs la Ville is being marketed either to let, or for
a sale to an owner occupier, but local market conditions mean that there has
been little interest in recent months.
Disposals
As noted in last year's report, the disposal of the office property at Pegasus
House, Peterborough completed in May 2011, following the successful
renegotiation and extension of the lease term to the occupying tenant.
There have been no further disposals over the period. There is very limited
apparent demand for secondary properties either in the UK or the European
markets in which the Company is invested. The clear preference from investors,
as mentioned earlier, is for high quality properties with secure and longer
term lease contracts in place.
Investor appetite is driven by factors mostly outside the control of the
Company. Our continued focus on improving the leasing profile across the
portfolio will help improve the characteristics of the assets to make them more
attractive to the investment market.
Under the terms of the refinancing, the Company has retained the flexibility to
progress the current strategy of managing the portfolio on an asset by asset
basis, seeking to maximise the return potential from the portfolio through a
combination of effective asset management, and selective asset disposals timed
to maximise performance of each asset for the Company.
Outlook
The recently announced `Double Dip' recession in the UK has taken many market
forecasters by surprise, but it is probably symptomatic of the complex economic
and political challenges facing Europe. Many of these have been mentioned
earlier in this report.
What is clear is that this on-going uncertainty is working against the
secondary property markets. Investors' aversion to risk remains, growth
prospects are limited, tenants are finding it harder to make occupational
commitments, and lending banks are unwilling to lend against all but the
strongest assets.
There appear to be no `quick fix' solutions for these wider issues, and as a
consequence we are concerned that this Company's portfolio will continue to
face tough challenges. We do not expect valuations to start to recover as a
result of market recovery for many months yet, and we may well see the vacancy
rate across the portfolio start to rise again as occupiers find the economic
climate working against them.
Rory Morrison
Invesco Asset Management Limited
30 July 2012
PROPERTY PORTFOLIO INFORMATION
INVESTMENT PROPERTIES
at 31 March 2012
VALUE % OF
PROPERTY COUNTRY GBP MILLION PORTFOLIO
Le Directoire, St Cloud France 30.6 16.1
St Michel Sur Orge, Ile de France France 17.9 9.4
Böblingen Germany 17.1 9.0
Le Diapason, Paris France 15.8 8.3
11 Old Jewry, London EC2 UK 12.2 6.4
Unipath Building, Bedfordshire UK 9.0 4.7
Brackmills Industrial Estate, Northampton UK 8.1 4.3
Hellaby Lane, Rotherham UK 8.0 4.2
Interface Business Park, Wooton Basset UK 7.9 4.2
Le Verdun, Gentilly France 7.6 4.0
Total of top ten investment properties 134.2 70.6
Other properties 56.1 29.4
TOTAL MARKET VALUE OF PROPERTIES (23 190.3 100.0
properties)
Investment properties are analysed after deduction of obligations under finance
leases of GBP7.3 million.
LEASE EXPIRY PROFILE
2012 2011
ANNUAL % OF ANNUAL % OF
INCOME ANNUAL INCOME ANNUAL
PERIOD OF LEASE GBP'000 INCOME GBP'000 INCOME
0-3 yrs 10,790 56.7 8,716 43.5
3-7 yrs 5,202 27.4 7,871 39.3
7-10 yrs 2,197 11.6 2,822 14.0
10-15 yrs 536 2.8 281 1.4
15-20 yrs 278 1.5 255 1.3
> 20 yrs 1 0.0 93 0.5
CURRENT ANNUAL INCOME FROM 19,004 100.0 20,038 100.0
PROPERTIES
Annual income is derived from leases in place at 31 March 2012 and so will
differ from total annual income received by the Group for the year ended 31
March 2012.
SECTOR WEIGHTINGS OF PORTFOLIO BY GEOGRAPHIC AREA
AS AT 31 MARCH 2012
% OF PORTFOLIO
SECTOR UK FRANCE BELGIUM SPAIN GERMANY TOTAL
Industrial 28.6 12.3 - 3.4 - 44.3
Offices 11.0 28.4 7.3 - 9.0 55.7
Total 39.6 40.7 7.3 3.4 9.0 100.0
AS AT 31 MARCH 2011
% of portfolio
SECTOR UK FRANCE BELGIUM SPAIN GERMANY TOTAL
Industrial 27.9 11.9 - 3.6 - 43.4
Offices 14.5 25.3 8.2 - 8.6 56.6
Total 42.4 37.2 8.2 3.6 8.6 100.0
REPORT OF THE DIRECTORS
Related Party Transactions
No director has an interest in any transactions which are or were unusual in
their nature or significant to the nature of the Group. The Directors of the
Group received fees for their services.
On 31 March 2008, the Company entered into an agreement with Invesco Ltd
(`Invesco'), the parent company of the Manager, under which Invesco agreed to
provide a credit facility of up to GBP10 million at 8% per annum. The facility
agreement was amended on 31 March 2011, extending the termination date to 28
September 2014. No further interest will accrue on amounts outstanding and no
further draw downs are available. At the year end GBP2 million had been drawn
down and GBP0.3 million of interest was accrued (2011: GBP2 million drawn down and
GBP0.3 million accrued).
Mr. Angus Spencer-Nairn retired on 31 December 2009 as the Senior Partner of
Rawlinson & Hunter Jersey, which owns R&H Fund Services (Jersey) Limited (`R&
H'), the Company Secretary appointed on 30 March 2007. Mr. Spencer-Nairn
retired as a director of R&H on 1 January 2010. R&H were paid fees of GBP60,000
(2011: GBP60,000) and out of pocket expenses.
Principal Risks and Uncertainties
The principal risk factors relating to the Company can be divided into various
areas:
Investment Policy
There is no guarantee that the Investment Policy adopted by the Company will
provide the returns sought by the Company. There can be no guarantee,
therefore, that the Company will achieve its investment objective.
The Board has established guidelines to ensure that the Investment Policy
approved by shareholders is pursued by the Manager.
Ordinary Shares and Dividends
The market value of an ordinary share is affected by its NAV, but also takes
into account supply and demand for those ordinary shares, along with wider
economic factors and changes in the law, including tax law, and political
factors. As such, the market value of an ordinary share can fluctuate and may
not always reflect its underlying NAV and the price of an ordinary share may
trade at a discount to its NAV.
There can be no guarantee that any appreciation in the value of the Company's
investments will occur and investors may not get back the full value of their
investment. Due to the potential difference between the mid-market price of the
ordinary shares and the prices at which they are sold, there is no guarantee
that their realisable value will reflect their market price.
While it has been the intention of the Directors to pay dividends to ordinary
shareholders quarterly, the ability to do so depends on rental income from the
underlying assets, the Company's financial position, and conditions imposed by
banking covenants. Dividends have been suspended and no further dividends are
expected to be paid for the foreseeable future.
Gearing
Whilst the use of borrowings by the Company should enhance the capital return
on the ordinary shares where the value of the Company's underlying assets is
rising, it has the opposite effect where the value of the underlying assets is
falling. Furthermore, should any fall in the underlying asset value or expected
revenues result in the Company or any property owning subsidiary breaching the
financial covenants contained in any loan agreement (including any bank
facility), the Company may be required to repay such borrowings in whole or in
part, together with any attendant costs. This could adversely affect the
capital and income return to shareholders. As part of the loan restructuring
completed in the year, the lending bank has imposed limits on certain
activities, including capital expenditure, that the Company is able to
undertake without the lending bank's prior consent. If such consent is withheld
the Company may be unable to carry out such activities which the Directors and
Manager believe to be desirable and may have an adverse impact on the
performance of the Company.
If the Company is required to repay all or part of its borrowings, it may be
required to sell assets from the property portfolio at less than their market
value or at a time or in circumstances where the realisation proceeds are
reduced because of a downturn in property values generally or because there is
limited time to market the property.
If the rental income realised from the Group's property investments falls for
any reason, the use of borrowings by the Company may increase the impact of
such a fall and will have an adverse effect on the Company's ability to service
its borrowings.
Interest and Currency Risks
As the Company has significant borrowings, the Company is exposed to interest
rate fluctuations as borrowings are obtained either based on floating or fixed
term interest rates. In addition, the Company invests in Continental European
property exposing the Company to movements in the euro exchange rate. Where the
Company hedges against both of these risks, it may not be successful in doing
so. Any increase in interest rates or adverse changes in the euro exchange rate
will have a negative impact on the NAV of the ordinary shares.
Market Movements and Portfolio Performance
Rental income and the market value for properties are affected by general
economic conditions and/or by the political and economic climate of the
jurisdictions in which the Group's property assets are situated as well as in
the rest of the world. The marketability and value of investments held by the
Company will, therefore, depend on many factors some of which may be beyond the
control of the Company such as changes in gross domestic products, employment
trends, inflation, interest rates, natural disasters, the environment, changes
in the supply and demand for real estate in an area and credit risks. There is
therefore no assurance that there will be either a ready market for any
investments or that investments will be sold at a profit or will yield positive
cash flows.
Both rental income and market value of properties are also affected by other
factors specific to the real estate market, such as competition from other
property owners, the perceptions of prospective tenants of the attractiveness,
convenience and safety of properties, the inability to lease properties on
favourable terms, the inability to collect rents, the periodic need to
renovate, repair and let space and the costs thereof, the costs of maintenance
and insurance, and increased operating costs. In addition, certain significant
expenditure, including operating expenses, must be met by the owner even when
the property is vacant.
While the Board obviously cannot influence the aforementioned factors, it is
vigilant in monitoring and taking steps to mitigate the effects of them should
they occur. The performance of the Manager is carefully monitored by the Board,
and the continuation of the investment mandate is reviewed each year.
Past performance of the Company is not necessarily indicative of future
performance.
For a fuller discussion of the economic and market conditions facing the
Company and the current and future performance of the portfolio of the Company,
please see both the Chairman's Statement and Manager's Report.
Regulatory
The Company is subject to various laws and regulations by virtue of its status
as a collective investment fund holding a permit under CIF Law, and regulated
by the Commission under the Jersey Listed Fund Guide, as well as its listings
on the London Stock Exchange and Channel Islands Stock Exchange.
A serious breach of regulatory rules may lead to suspension from the above
Stock Exchanges or a qualified Audit Report. Other control failures, either by
the Manager or any other of the Company's service providers, may result in
operational or reputational issues, erroneous disclosures, loss of assets
through fraud, as well as breaches of regulations.
Changes in taxation, legal, regulatory, corporate governance, environmental,
landlord and tenant and planning laws, regulations and guidelines may occur in
the European Union that may adversely affect the Company, its investments in
the affected jurisdiction and/or position of shareholders, and may reduce
returns for shareholders.
Reliance on Third Party Service Providers
The Company has no employees and the Directors have all been appointed on a
non-executive basis. The Company is therefore reliant upon the performance of
third party service providers for its executive function. In particular, the
Manager performs services which are integral to the operation of the Company.
Failure by any service provider to carry out its obligations to the Company in
accordance with the terms of its appointment could have a materially
detrimental impact on the operation of the Company and could affect the ability
of the Company to successfully pursue its Investment Policy.
The Manager may be exposed to the risk that litigation, misconduct, operational
failures, negative publicity and press speculation, whether or not it is valid,
will harm its reputation. Any damage to the reputation of the Manager could
result in potential counterparties and third parties being unwilling to deal
with the Manager and by extension the Company. This could have an adverse
impact on the ability of the Company to successfully pursue its Investment
Policy.
DIRECTORS' RESPONSIBILITIES STATEMENT
in respect of the preparation of the annual financial report
The Directors are responsible for preparing the financial statements in
accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each
financial year. Under that law the Directors have elected to prepare group
financial statements in accordance with International Financial Reporting
Standards (`IFRS') as adopted by the European Union. The financial statements
are required by law to give a true and fair view of the state of affairs of the
Group and of the profit or loss of the Group for that period.
International Accounting Standard 1 requires that financial statements present
fairly for each financial period the Group's financial position, financial
performance and cash flows. This requires the faithful representation of the
effects of transactions, other events and conditions in accordance with the
definitions and recognition criteria for assets, liabilities, income and
expenses set out in the International Accounting Standards Board's `Framework
for the preparation and presentation of financial statements'. In virtually all
circumstances, a fair presentation will be achieved by compliance with all
applicable IFRS. However, directors are also required to:
* properly select and apply accounting policies;
* 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 IFRS are insufficient to enable users to understand the impact of particular
transactions, other events and conditions on the entity's financial position
and financial performance; and
* make an assessment of the Company's ability to continue as a going concern.
The Directors, to the best of their knowledge, state that:
* the financial statements, prepared in accordance with IFRS as adopted by the
European Union, give a true and fair view of the assets, liabilities, financial
position and results of the Company and the Group; and
* the Report of the Directors includes a fair review of the development and
performance of the business and the position of the Company and the Group
together with a description of the principal risks and uncertainties that it
faces.
The Directors are responsible for keeping proper accounting records that
disclose with reasonable accuracy at any time the financial position of the
Group and enable them to ensure that the financial statements comply with the
Companies (Jersey) Law 1991. They are also responsible for safeguarding the
assets of the Company and the Group, and hence for taking reasonable steps for
the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Manager's website.
Legislation in Jersey and the United Kingdom governing the preparation and
dissemination of financial statements may differ from legislation in other
jurisdictions.
Signed on behalf of the Board of Directors
Richard Barnes
Chairman
30 July 2012
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 MARCH 2012
2012 2011
REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Income
Rental and service 25,197 - 25,197 25,906 - 25,906
charge income
Interest receivable 640 - 640 4,134 - 4,134
and other income
Unrealised gain on - 1,895 1,895 - 1,814 1,814
swaps
(Losses)/gains on
investment properties
Unrealised loss on - (5,736) (5,736) - (6,864) (6,864)
revaluation of
properties
Lease incentive - (1,096) (1,096) - (1,601) (1,601)
Realised (loss)/gain - (329) (329) - 1,833 1,833
on disposal of
properties
25,837 (5,266) 20,571 30,040 (4,818) 25,222
Expenses
Management fees (916) (125) (1,041) (869) (118) (987)
Property expenses (8,392) - (8,392) (8,800) - (8,800)
Professional fees (2,221) - (2,221) (2,009) - (2,009)
Goodwill impairment - - - - (273) (273)
(11,529) (125) (11,654) (11,678) (391) (12,069)
Profit/(loss) before 14,308 (5,391) 8,917 18,362 (5,209) 13,153
finance costs and tax
Finance costs (11,238) (1,533) (12,771) (12,284) (1,675) (13,959)
Profit/(loss) before 3,070 (6,924) (3,854) 6,078 (6,884) (806)
tax
Tax (charge)/credit (121) (1,612) (1,733) (46) 1,288 1,242
Profit/(loss) for the 2,949 (8,536) (5,587) 6,032 (5,596) 436
year attributable to
equity shareholders
Other comprehensive
income/(expenses)
Exchange differences 368 (342)
on translating foreign
operations
Unrealised gain on - 399
revaluation of cross
currency swap
Unrealised gain on 3,717 6,059
revaluation of
interest rate swaps
4,085 6,116
Total comprehensive (1,502) 6,552
(expenses)/income
(Loss)/profit per (3.7)p 0.3p
ordinary share - basic
and diluted
The total column of this statement represents the Company's consolidated
statement of comprehensive income. The supplementary revenue and capital
columns are presented for information in accordance with the Statement of
Recommended Practice issued by the Association of Investment Companies. All
items in the above statement derive from continuing operations. No operations
were acquired or discontinued in the year.
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 MARCH 2012
STATED
CAPITAL OTHER TRANSLATION CAPITAL REVENUE
RESERVE RESERVE RESERVE RESERVE RESERVE TOTAL
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Balance at 31 March 101,368 (15,864) 1,430 (170,315) 52,988 (30,393)
2010
(Loss)/profit for - - - (5,596) 6,032 436
the year
Other comprehensive
income:
Unrealised gain on - - 399 - - 399
revaluation of cross
currency swaps
Exchange differences - - (342) - - (342)
on translating
foreign operations
Unrealised gain on - 6,059 - - - 6,059
revaluation of
interest rate swaps
Balance at 31 March 101,368 (9,805) 1,487 (175,911) 59,020 (23,841)
2011
(Loss)/profit for - - - (8,536) 2,949 (5,587)
the year
Other comprehensive
income:
Exchange differences - - 368 - - 368
on translating
foreign operations
Unrealised gain on - 3,717 - - - 3,717
revaluation of
interest rate swaps
Balance at 31 March 101,368 (6,088) 1,855 (184,447) 61,969 (25,343)
2012
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AT 31 MARCH 2012
2012 2011
GBP'000 GBP'000
Non-current assets
Investment properties 197,570 220,647
Intangible assets 5,842 6,128
203,412 226,775
Current assets
Trade and other receivables 5,752 4,152
Cash and cash equivalents 14,004 17,846
19,756 21,998
Total assets 223,168 248,773
Current liabilities
Trade and other payables (15,692) (18,331)
Interest rate swap liabilities (809) -
Currency rate swap liabilities (1,008) -
Bank loans - (208,558)
(17,509) (226,889)
Total assets less current liabilities 205,659 21,884
Non-current liabilities
Bank loan (192,269) -
Other payables (2,911) (3,739)
Interest rate swaps liabilities (5,279) (9,805)
Currency rate swaps liabilities (10,074) (12,976)
Obligations under finance leases (7,283) (6,949)
Deferred taxation (13,186) (12,255)
(231,002) (45,724)
Net liabilities (25,343) (23,840)
Capital and reserves
Stated capital 101,368 101,368
Other reserve (6,088) (9,805)
Translation reserve 1,855 1,488
Capital reserves (184,449) (175,913)
Revenue reserves 61,971 59,022
Issued capital and reserves (25,343) (23,840)
Net asset value (16.6)p (15.6)p
Approved by the Board of Directors on 30 July 2012
Richard Barnes
Chairman
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENT OF CASH FLOW
FOR THE YEAR ENDED 31 MARCH 2012
2012 2011
GBP'000 GBP'000
Operating activities
Rent and service charges received 27,065 32,386
Bank interest received 13 2
Bank loan interest paid (12,771) (13,959)
Operating expense payments (17,890) (8,257)
Tax (paid)/recovered (191) 43
Net cash (outflow)/inflow from operating (3,774) 10,215
activities
Investing activities
Capital expenditures and incentives (1,321) (2,456)
Sale of investment properties 11,335 18,524
Net cash inflow from investing activities 10,014 16,068
Financing activities
Repayment of loan (9,967) (17,213)
Net cash outflow from financing activities (9,967) (17,213)
(Decrease)/increase in cash and cash (3,727) 9,070
equivalents
Cash and cash equivalents at beginning of 17,846 8,821
year
Effect of foreign exchange changes (115) (45)
Cash and cash equivalents at end of year 14,004 17,846
The accompanying notes are an integral part of these financial statements.
NOTES TO THE FINANCIAL STATEMENTS
1. Accounting policies
A summary of the principal accounting policies, all of which have been applied
consistently throughout this and the previous year, is set out below.
(a) Going Concern
As disclosed in the Chairman's Statement, Report of the Directors and notes, at
31 March 2012 the Group had bank loans of GBP192.3 million secured on the Group's
investment properties. Under the terms of the bank loan, the Group has to
comply with a number of financial covenants, of which the two most material are
a loan to value (`LTV') covenant and an interest cover ratio (`ICR') covenant.
The LTV was 101%, which is below the maximum 110% permitted under the Company's
bank facility. The ICR was 176% compared to a covenanted minimum of 110%.
The facility with Invesco Limited was amended on 31 March 2011 extending the
termination date to 28 September 2014. At the year end the amount drawn down
including accrued interest was GBP2.3 million (2011: GBP2.3 million) on the Group's
GBP10 million loan facility with Invesco Limited. No further interest will accrue
on amounts outstanding, and no further drawings on the facility are permitted.
In order for the Group to continue to trade as a going concern, the Directors
of each of the entities in the Group need to be satisfied that they will
continue to be able to meet their operating costs and expenses as they fall
due. The Directors have prepared cash flow forecasts covering the period to
July 2013 which show, after taking into account reasonable possible changes,
that there is a generation of positive operational cash flow for the Group in
the period.
The headroom before any breach of the LTV covenant, however, is such that it is
foreseeable that market movements could lead to the maximum 110% being breached
by 30 September 2013. The lending bank would, in this event, have the right to
demand repayment of amounts owed to it which, if exercised, would mean the
Company could no longer be treated as a going concern. Taking into account the
recent history of the Company's relationship with its lending bank, the
Directors consider it unlikely that the bank would exercise its rights to
demand repayment in these circumstances.
At the present time, therefore, and despite this material uncertainty the
Directors consider it appropriate to prepare the financial statements on the
going concern basis. In the event that a going concern basis should become
inappropriate, the assets of the Group would be written down to their
recoverable value and provision made for any further liabilities that may
arise. At this time it is not practicable to quantify such adjustments.
The Company's primary investment objective, adopted during the year, is to
repay its bank borrowings and other obligations on or before 28 September 2014.
Whilst concluding that the going concern basis is appropriate for these
financial statements, the Directors believe that meeting this objective is
likely to necessitate the disposal of all or substantially all the Group's
property assets by the debt repayment date and, further, that the Company's
residual assets following such repayment are unlikely to constitute a viable
business.
(b) Basis of Accounting
The financial statements of the Group have been prepared in accordance with
International Financial Reporting Standards (`IFRS') as adopted for use in the
European Union, which comprise standards and interpretations approved by the
International Accounting Standards Board (`IASB'), and International Accounting
Standards and Standing Interpretations Committee interpretations approved by
the International Accounting Standards Committee (`IASC') that remain in
effect.
The financial statements have been prepared on the historical cost basis,
except for the revaluation of investment properties and derivative financial
instruments. Where presentational guidance set out in the Statement of
Recommended Practice (`SORP') for investment trusts issued by the Association
of Investment Companies (`AIC') in January 2009 is consistent with the
requirements of IFRS, the Directors have sought to prepare the financial
statements on a basis compliant with the recommendations of the SORP.
The preparation of the financial statements in conformity with IFRS requires
management to make judgements, estimates and assumptions that affect the
application of policies and the reported amounts of assets and liabilities,
income and expenses. The estimates and associated assumptions are based on
historical experience and various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis of
making judgements about the carrying value of assets and liabilities that are
not readily apparent from other sources.
Actual results may differ from these estimates. The estimates and underlying
assumptions are reviewed on an ongoing basis. Revisions to accounting estimates
are recognised in the period in which the estimate is revised if the revision
only affects that period, or in the period of the revision and future periods
if the revision affects both current and future periods.
In applying the Group's accounting policies, the Directors make key judgements
and assumptions; the key sources of estimation and uncertainty are in the
following areas:
Property valuations
In determining the fair value of investment properties under IAS 40 at open
market value, there is a degree of uncertainty and judgement involved. The
Group uses external professional valuers to determine the relevant amounts. The
valuers' opinion is that, with market conditions which currently prevail, there
is likely to be a greater than usual degree of uncertainty in respect of
valuations. Until the number and consistency of comparable transactions
increase, this situation is likely to remain.
Classification of leases
In determining whether leases and related properties represent operating or
finance leases, consideration is given to whether the tenant or landlord bears
the risks and rewards of ownership.
Goodwill
Goodwill is reviewed for impairment. Judgement is exercised in determining
whether there is an impairment and requires an estimation of the value in use
of the cash generating unit to which the goodwill has been allocated.
Judgements will include cashflow forecasts, based on reasonable and supported
assumptions, and the discount rate to be applied, based on the rate that the
market would expect on an investment of an equivalent risk.
Valuation of derivatives
All derivatives are measured at fair value. Fair value is the value at which a
position could be closed out or sold in a transaction to a willing and
knowledgeable counterparty over a reasonable period of time under current
market conditions. Fair values of the Group's derivatives are determined by
reference to observable market prices and so valued using quoted prices
obtained from financial institutions. The pricing methodology does not entail
material subjectivity because the methodologies utilised do not include
significant judgement and unobservable inputs but actively quoted prices. The
ultimate realisable value and fair value at any period end date will fluctuate
depending upon market movements principally in interest rates and foreign
exchange rates. The ultimate realisable value at the value date of the
derivative contracts may materially differ from the fair value at the period
end.
(c) Principal Activity
The principal activity of the Company and its subsidiaries (together the
`Group') is investment in investment properties.
(d) Basis of Consolidation
The consolidated financial statements include the financial statements of the
Company and its subsidiary undertakings made up to Statement of Financial
Position (SoFP) date.
Subsidiaries are consolidated from the date on which control is transferred to
the Group and cease to be consolidated from the date on which control is
transferred out of the Group.
(e) Segmental Reporting
A business segment is a group of assets and operations engaged in providing
products or services that are subject to risks and returns that are different
from those of other business segments. A geographical segment is engaged in
providing products or services within a particular economic environment that is
subject to risks and returns which are different from those segments operating
in other economic environments.
2. Interest receivable and other income
YEAR YEAR
ENDED ENDED
31 MARCH 31 MARCH
2012 2011
GBP'000 GBP'000
Interest receivable 13 2
Other income 627 4,132
640 4,134
Other income includes gains from the reversal of accruals, and surrender
premiums. (2011: GBP2.8 million surrender premium received for the Priory
Business Park property).
3. Profit/(loss) before finance costs and tax
Profit/(loss) before finance costs and tax is stated after charging:
YEAR ENDED YEAR ENDED
31 MARCH 2012 31 MARCH 2011
REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Directors' fees 121 - 121 123 - 123
Fees payable to the 90 - 90 90 - 90
Company's Auditor for the
audit of the financial
statements
Fees payable to the 124 - 124 121 - 121
Company's Auditor for the
audit of the Company's
subsidiaries pursuant to
legislation
Total audit fees - 214 - 214 211 - 211
current period
Other fees payable to the
Company's Auditor:
Tax services 46 - 46 85 - 85
Corporate finance 47 - 47 55 - 55
services
Total non-audit fees 93 - 93 140 - 140
4. Stated capital
2012 2011
GBP'000 GBP'000
Authorised:
153,000,000 ordinary shares of no par value - -
Allotted, called-up and fully paid:
153,000,000 ordinary shares of no par value 101,368 101,368
5. Net asset value per ordinary share
(a) The net asset value per ordinary share and the net asset values
attributable at the year end calculated in accordance with the Articles of
Association were as follows:
2012 2011
NET ASSETS NET ASSETS
NET ASSET ATTRIBUTABLE NET ASSET ATTRIBUTABLE
VALUE GBP'000 VALUE GBP'000
Ordinary shares (16.6)p (25,343) (15.6)p (23,840)
Net asset value per ordinary share is based on net assets at the year end and
153,000,000 ordinary shares, being the number of ordinary shares in issue at
the year end.
(b) Reconciliation of consolidated NAV per share to adjusted NAV:
2012 2011
PENCE PENCE
PER SHARE GBP'000 PER SHARE GBP'000
Consolidated NAV per (16.6) (25,343) (15.6) (23,840)
accounts
Adjustments:
Goodwill (3.8) (5,842) (4.0) (6,128)
Deferred tax 8.6 13,186 8.0 12,255
Swaps 4.0 6,088 6.4 9,805
Adjusted NAV (7.8) (11,911) (5.2) (7,908)
The adjusted NAV is per the European Public Real Estate Association (`EPRA')
measure, published in January 2006. The EPRA NAV per share excludes the fair
value adjustments for debt and interest rate derivatives, deferred taxation on
revaluations, capital allowances and goodwill.
6. The audited Annual Financial Report will be posted to shareholders shortly.
Copies may be obtained during normal business hours from the Company's
Registered Office, Ordnance House, 31 Pier Road, St Helier, Jersey, JE4 8PW and
will be available shortly from Invesco Perpetual on the following website:
www.invescoperpetual.co.uk/investmenttrusts
The Annual General Meeting will be held on 10 September 2012 at 12 noon at
Ordnance House, 31 Pier Road, St Helier, Jersey, JE4 8PW.
By Order of the Board
R&H Fund Services (Jersey) Limited
Company Secretary
30 July 2012
Enquiries to:
Invesco Asset Management Limited
Angus Pottinger
020 7065 3714
Rory Morrison,
020 7543 3581
END
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