Invesco Property Income Trust Limited
Annual Financial Report Announcement
for the year ended 31 March 2013
PERFORMANCE INFORMATION
AS AT AS AT
31 MARCH 31 MARCH
ASSETS 2013 2012
Net liabilities (£'000) (34,988) (25,343)
Adjusted net liabilities (£'000) (17,557) (11,911)
Net liability value per share per the (22.87)p (16.56)p
consolidated statement of financial position
Adjusted net liability value per share (11.47)p (7.78)p
Ordinary share mid-market price 0.56p 1.22p
Gearing, based on:
- gross assets 104% 101%
- net assets n/a n/a
YEAR ENDED
31 MARCH 2013
HIGHS/LOWS HIGH LOW
Adjusted net asset value† per share (7.69)p (11.47)p
Ordinary share price 1.26p 0.25p
YEAR YEAR
ENDED ENDED
31 MARCH 31 MARCH
EARNINGS AND DIVIDENDS 2013 2012
Profit/(loss) per ordinary share - basic and
diluted:
Revenue return 2.9p 1.9p
Capital return (10.1)p (5.6)p
(7.2)p (3.7)p
ONGOING CHARGES RATIO†
- on gross assets 1.5% 1.3%
- on net assets n/a n/a
.
CHAIRMAN'S STATEMENT
Introduction
The 12 months to 31 March 2013 have been very disappointing as we and, we
expect, shareholders would have welcomed some improvement in the property
market and progress towards meeting our objective of repaying liabilities by
September 2014. Notwithstanding strong performance from a number of other asset
classes, notably equities, returns from secondary real estate assets have
remained depressed and transaction activity has been low. In such market
conditions we have not been able to agree acceptable terms for any disposals.
Recent months, however, have shown some signs of increasing investor appetite.
While this is welcome, neither your Board nor the managers expect this to give
rise to any sharp recovery in asset prices in the short term. The Directors
therefore consider it highly unlikely that the Company can achieve either the
asset performance or the asset disposals to meet our objective of repaying all
liabilities by September 2014. We are engaged in discussions with the lending
bank with the aim of agreeing a way forward.
Performance
In the year, the UK portfolio's capital value fell 4.6% and the European
portfolio's capital value fell 3.9% in euros.
Adjusted shareholders' funds at the year end were £-17.46 million or -11.47p
per share, down from £-11.91 million (-7.78p) a year earlier. A major factor in
the decline has been the write-off of the goodwill balance carried as an asset
of £5.8 million on last year's balance sheet. The goodwill reflected the
Board's expectations that certain French assets could be disposed of,
consistent with previous market practice, in a way that would avoid the full
burden of the deferred liability to French taxation on capital gains falling on
the Company. Expected changes in tax legislation, market conditions and recent
practice have reduced the likelihood of agreeing a liability-sharing
transaction structure and the Directors no longer consider it appropriate to
recognise an intangible asset to offset against the liability to deferred tax.
Income generation remains good despite a challenging occupational market. Net
income was £4.4 million, up from £2.9 million last year thanks in large part to
a substantial reduction in interest payable which followed the expiry of
interest rate swaps on €90 million of Euro borrowings in April 2012, reducing
the interest rate payable (excluding margin) on that portion of borrowings from
4.58% to a fixed 1.03%.
Activity
Once again we are pleased to report the success of a number of lease
negotiations with existing and new tenants across a number of properties, which
are detailed in the Manager's report. Despite these successes we finish the
year with vacancy rates at higher levels, both in the UK and in Europe, than at
the beginning of the year. This serves to illustrate the difficulties we face
in a market where tenants continue to enjoy strong negotiating positions.
Reducing these vacancy rates is a priority in the coming year.
We continue to review and consider opportunities for disposals. As mentioned
earlier, appetite for risk among both investors and providers of finance has
remained low, with the result that few such opportunities have arisen and none
have progressed to a transaction.
Financing
The sterling value of the Company's bank borrowings was £191.9 million (31
March 2012: £192.3 million), comprising £75.3 million drawn in sterling and €
138.3 million drawn in Euros. £1.5 million equivalent of Euro borrowings were
repaid during the period as part of the agreement with the bank to relax the
loan to value (LTV) covenants to which I referred last year. The Company also
has outstanding £2 million drawn on a working capital facility provided by
Invesco Ltd. Including accrued interest the liability stood at £2.3 million at
the year end.
The LTV at 31 March 2013 was 104.6% (31 March 2012: 101.0%). This is below the
current covenanted maximum of 110% but exceeds the maximum that will apply
after 30 September 2013.
On a forward-looking basis, the Company's interest cover ratio (ICR) stood at
149.2% at 31 March (31 March 2012: 176.0%). This decrease reflects a higher
vacancy rate in the portfolio and forthcoming lease expiries.
Since the year end, €90 million notional in interest rate swaps have expired
and, with the consent of the lending bank, have not been replaced. This amount
now represents a net exposure for the group to floating interest rates.
Annual accounts - going concern
As has been the case in recent years there are again elements of uncertainty
affecting the basis of preparation of the Group's annual accounts.
While the Group was compliant with all its banking covenants as at 31 March
2013, the maximum permitted LTV ratio of 110% will reduce to 100% after 30
September 2013. The LTV ratio as at 31 March 2013 was 104.6% and, given the
market outlook, there is little expectation that the ratio will fall below 100%
before the lower LTV limit becomes effective. In addition there is uncertainty
over how the Group will meet any liability falling due on expiry of currency
swaps in April 2016.
In the event of a breach of covenant or failure to meet the swap liability, the
lending bank have the right to demand repayment of all amounts owed to it
which, if exercised, would mean the Company could no longer be treated as a
going concern. Following discussions with the lending bank it does not seem
likely that the lending bank will trigger such an action and we are seeking to
agree terms for an extension to the facility. As a result, and notwithstanding
the uncertainty, the Directors have concluded that the Group's annual accounts
should be prepared on a going concern basis.
Annual General Meeting
There are two items of special business to be proposed at the Company's AGM.
First, the resolution proposed each year allowing the Company to convene
general meetings (other than the AGM) on 14 rather than 21 clear days' notice;
and second, a resolution to amend the Company's investment objective and
policy.
This second special business resolution stems from the recognition, noted
above, that the Directors no longer expect the existing investment objective to
be achieved in the timescale prescribed. The principal amendment, therefore, is
to remove the 28 September 2014 date from the objective. The Directors also now
believe it would be appropriate, in the unlikely event of there being a surplus
for shareholders following repayment of liabilities, to wind up the Company
rather than make any further investments and the investment policy has been
amended to reflect this. These amendments are not intended or expected to
change the way in which the portfolio will be managed.
The Directors recommend shareholders to vote in favour of all resolutions, as
we intend to do in respect of our own shareholdings.
Board
As indicated earlier in the year Susan McCabe stood down from the Board after
the year end. I would like to record my thanks to Susan for her contribution to
the Company during her time on the Board. We welcome Phil Austin as a Director
and expect his experience of the banking industry will prove valuable in the
difficult period ahead.
Outlook
Whilst there are some indications of a return to more positive investor
sentiment towards the property market sectors in which we are invested there is
a strong sense that this is `too little, too late'. Nevertheless the group
remains cash flow positive and able to service its debt and we are hopeful of
agreeing extended terms with the bank.
In the meantime, the manager's efforts remain focused on protecting and, where
possible, enhancing the quality and quantity of rental income whilst also
considering opportunities for disposals as they arise. The prospects of
returning to a positive NAV remain, however, very unlikely.
Richard Barnes
Chairman
18 July 2013
PROPERTY MANAGER'S REPORT
Economic Background
As expected, the GDP data across most of Europe for Q1 2013 were weak, but we
continue to believe that there will be some improvement in the second half of
the year as European economies begin to feel the benefits of the slow
recoveries underway in Asia and the USA. However, the recovery is forecast to
continue to be `bumpy' as austerity dominates European fiscal policy.
In the short-term growth is expected to be underpinned by export growth, tied
to the general global recovery, while medium-term growth is driven firstly by
business investment and then by a gradual recovery in consumer expenditure.
Short-term `winners', therefore, are likely to be Germany and the Nordics, but
the UK should start to benefit in the medium term, and looks to be one of the
stronger five-year performers.
Whilst there is some improvement in the economic outlook, interest rates are
forecast to stay low for some time yet. Bank base rates are now not expected to
begin to rise until 2015/2016 in most European jurisdictions, and in this low
interest rate environment benchmark government bond yields are also expected to
remain well below historic levels. This should provide some comfort for real
estate investors as, relative to these benchmarks, real estate pricing still
appears reasonably attractive and the cost of debt is also supportive.
Property Markets
There remains a wide divergence in performance and outlook between core assets,
and properties in secondary markets remains. The `gap' continues to be apparent
in occupier demand, investor demand, and the appetite of the banks to lend to
property owners. This `triple whammy' continues to suppress prospects for the
secondary markets, though there are some signs in the UK that investors are
starting to consider non-core opportunities in the search for higher returns.
While this possible change in sentiment isn't even enough to be classified
`green shoots', it does offer some hope that the eyes of investors are being
attracted by the high yields and low capital values that can be achieved in the
regional and more secondary markets.
Improving stability in prime markets is expected to continue and strong
investor demand to be sustained, but we also expect that in some of the more
robust markets (the UK being a particularly good example) investors may begin
to accept additional risk, be it locational, build quality and shorter income
streams.
After a strong end to 2012, Q1 2013 investment volumes were relatively muted,
although higher yielding sectors such as logistics and hotels were in strong
demand. The majority of this investment activity took place in the core
established markets and in the so-called `Gateway Cities' (of London, Paris,
Frankfurt etc), and an increasing proportion of these transactions were being
undertaken by the `Sovereign Wealth' type investor groups. This activity has
resulted in a further reduction in prime yields in key gateway cities across
most sectors, and in these markets yields are close to record lows. In the
short-term we expect this story to remain dominant in Europe, and in a number
of markets we are expecting a further modest (c.25 bps) hardening of yields
during 2013 driven mostly by the depth of investment demand.
Asset Management
While we continue to be relatively successful in maintaining the leased status
of the portfolio vacancy has risen, and there are some larger, single lease,
expiries on the horizon which are beginning to impact the look forward ICR
calculation.
Over 34,500 sqm expired during the year (13% of the portfolio by area) but
31,500 sqm was either leased or renewed. In addition breaks beyond 2013 were
removed in leases covering 13,800 sqm. Post period end we have also signed or
agreed leases covering 2,100 sqm and removed future breaks from 1,600 sqm. The
main concern for performance is the general lower rents and concessions, as
well as investment, required to continue to achieve these lettings.
Some of the main lease events include:
A lease amendment agreed with Daimler AG at the Böblingen asset in Germany for
an additional 1,160 sqm office, replacing one of the smaller tenants. This
takes their total occupation to 89% of the property and the agreement included
a waiver of their first break option for the remainder of the space.
At Rozendal in Belgium we managed to finalise a lease renewal with the main
tenant (46% of the rent passing) on a six year firm period running from
September 2012. We were also successful in leasing half of the space on the
first floor which has been vacant since acquisition of the building. This
followed a light refurbishment of the space.
We reported last time a lease extension with the largest tenant at Le
Directoire in France for a further six years certain. Since this agreement
approximately half of the building has been leased or renewed. 30% was leased
during the year, bringing five new tenants and renewing and extending with one
of the larger tenants. Post quarter end a further lease renewal with agreement
to extend to additional floors covering 20% of the space (in total) has been
agreed.
At St Esteve, Spain, the incumbent tenant agreed to a six-month extension on
the current terms to December 2012, to provide time to find a new underlying
contract. We subsequently agreed with the same tenant to remain in occupation
until June 2015 albeit at a reduced rent.
The 6th floor at Old Jewry was refurbished at the start of 2013 and has
benefited from a stronger City occupier market. Agreements post year end to let
this space will mean the building is 100% let. In addition we settled a rent
review at a new high mark for the building. These transactions all provide
increases on previous evidence in the building and a strong position for rent
reviews and lease renewals in the next 12 to 18 months.
At Amersham we have received notice from the tenant to break and the lease will
come to an end in November 2013. At this point the building will be 100%
vacant. The location opposite the train station and substantial car parking
makes the building an attractive proposition to a single occupier or as a
multi-let product, and is one of the only good office products in the town
centre. We are therefore hopeful of re-leasing the building in due course.
Disposals
There remains limited investor demand for secondary property assets and
locations across Europe. In this context we have continued to hold back sales
so far to benefit from the income yield provided and opportunity to enhance
values through asset management initiatives, and to give time for any market
recovery to commence.
Cash
We have continued to hold any surplus cash within the Company, rather than
repay senior debt, to retain flexibility. Debt repayment would mean that the
cash would no longer be available to the company, limiting the scope to invest
into the properties as required to improve the physical condition of buildings,
or to retain or secure tenants. We have invested an aggregate of approximately
£3 million capital expenditure over the last two years into various properties
across the portfolio, despite limiting this to only necessary works and using
rent free incentives where possible to encourage tenants to fund improvements.
Outlook
While there is mention earlier of what are possibly the first signs of a
widening of investor interest into the regional and secondary markets (at least
in the UK), we also caution that we still expect it to take some time before
investor momentum develops. There would then be a further lag between improving
activity, and the evidence required to drive a change in valuations.
The impact on the outlook for the Company's portfolio is that we are not
expecting a market led recovery in liquidity or valuations in the short term,
though our ongoing progress with the active management of the portfolio gives
us some confidence that cashflows should be sustainable.
Valuing assets in illiquid markets will continue to provide a challenge, and we
do expect the UK and European assets to be exposed to varying market dynamics
as the `bumpy' pattern of recovery continues. There is as a result an ongoing
risk of possible further valuation declines, probably higher in Europe than in
the UK.
Rory Morrison
Invesco Asset Management Limited
18 July 2013
PROPERTY PORTFOLIO INFORMATION
INVESTMENT PROPERTIES
at 31 March 2013
VALUE % OF
PROPERTY COUNTRY £ MILLION PORTFOLIO
Le Directoire, St Cloud France 31.7 17.3
Böblingen Germany 17.7 9.6
St Michel Sur Orge, Ile de France France 17.5 9.6
Le Diapason, Paris France 16.0 8.7
11 Old Jewry, London EC2 UK 12.1 6.6
Unipath Building, Bedfordshire UK 8.9 4.9
Hellaby Lane, Rotherham UK 8.0 4.3
Interface Business Park, Wooton Basset UK 7.9 4.3
Brackmills Industrial Estate, Northampton UK 7.4 4.1
Le Verdun, Gentilly France 6.9 3.8
Total of top ten investment properties 134.2 73.2
Other properties 49.2 26.8
TOTAL MARKET VALUE OF PROPERTIES (23 properties) 183.4 100.0
Investment properties are analysed after deduction of obligations under finance
leases of £7.6 million.
LEASE EXPIRY PROFILE
2013 2012
ANNUAL % OF ANNUAL % OF
INCOME ANNUAL INCOME ANNUAL
PERIOD OF LEASE £'000 INCOME £'000 INCOME
0-3 yrs 10,854 63.0 10,790 56.7
3-7 yrs 4,641 27.0 5,202 27.4
7-10 yrs 1,094 6.4 2,197 11.6
10-15 yrs 536 3.1 536 2.8
15-20 yrs 93 0.5 278 1.5
> 20 yrs 1 0.0 1 0.0
CURRENT ANNUAL INCOME FROM PROPERTIES 17,219 100.0 19,004 100.0
Annual income is derived from leases in place at 31 March 2013 and so will
differ from total annual income received by the Group for the year ended 31
March 2013.
SECTOR WEIGHTINGS OF PORTFOLIO BY GEOGRAPHIC AREA
As AT 31 March 2013
% OF PORTFOLIO
SECTOR UK FRANCE BELGIUM SPAIN GERMANY TOTAL
Industrial 28.4 12.1 - 2.0 - 42.5
Offices 10.8 29.8 7.3 - 9.6 57.5
Total 39.2 41.9 7.3 2.0 9.6 100.0
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
REPORT OF THE DIRECTORS
Current and Future Developments
As part of the Company's overall strategy, the Company will continue to manage
its affairs so as to aim to repay its bank borrowings and other liabilities on
or before 28 September 2014, and having met these obligations, to provide a
return for shareholders. However, as the Chairman states in his statement, the
prevailing state of European economies and property markets give the Directors
no optimism for any improvement in the relevant market segments over the coming
period. Against this backdrop and given the deficit in shareholders' funds the
Directors now believe it to be most unlikely that the Company will be able to
achieve its objective of meeting all its liabilities by September 2014. The
Directors and the Manager are engaged in discussions with the lending bank to
address the situation. In the meantime the Directors and the Manager will
continue to work to protect and, where possible, enhance value through
asset-specific initiatives.
Principal Risks and Uncertainties
The principal risk factors relating to the Company can be divided into various
areas:
Investment Policy
The Board has established guidelines to ensure that the Investment Policy
approved by shareholders is pursued by the Manager.
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 and, as set
out under Current and Future Developments on page 13 it currently appears
unlikely that the Company will be able to.
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 was 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 2011, 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.
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 investment properties
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 investment properties or that investment properties 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.
The Alternative Investment Fund Managers Directive may impose obligations on
the Company and the Manager which may have significant consequences for the
Company and may increase its compliance and regulatory costs.
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 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 Group; and
• the Report of the Directors 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 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 Group, and hence for taking reasonable steps for the prevention
and detection of fraud and other irregularities.
Signed on behalf of the Board of Directors
Richard Barnes
Chairman
18 July 2013
.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 MARCH 2013
2013 2012
REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL
NOTES £'000 £'000 £'000 £'000 £'000 £'000
Income
Rental and service 21,652 - 21,652 25,197 - 25,197
charge income
Interest receivable 2 707 - 707 640 - 640
and other income
Realised gains on - 183 183 - - -
swaps
Unrealised gain on - 289 289 - 1,895 1,895
swaps
Losses on investment
properties
Unrealised loss on - (9,200) (9,200) - (5,736) (5,736)
revaluation of
properties
Lease incentive - (177) (177) - (1,096) (1,096)
Realised loss on - - - - (329) (329)
disposal of
properties
Total income 22,359 (8,905) 13,454 25,837 (5,266) 20,571
Expenses
Management fees (930) (127) (1,057) (916) (125) (1,041)
Property expenses (7,033) - (7,033) (8,392) - (8,392)
Professional fees (2,258) - (2,258) (2,221) - (2,221)
Goodwill impairment - (5,897) (5,897) - - -
Total expenses (10,221) (6,024) (16,245) (11,529) (125) (11,654)
Profit/(loss) before 3 12,138 (14,929) (2,791) 14,308 (5,391) 8,917
finance costs and tax
Finance costs 4 (7,617) (1,040) (8,657) (11,238) (1,533) (12,771)
Profit/(loss) before 4,521 (15,969) (11,448) 3,070 (6,924) (3,854)
tax
Tax (charge)/credit (69) 543 474 (121) (1,612) (1,733)
Profit/(loss) for the 4,452 (15,426) (10,974) 2,949 (8,536) (5,587)
year attributable to
equity shareholders
Other comprehensive
income/(expenses)
Exchange differences (89) 368
on translating
foreign operations
Unrealised gain on 1,418 3,717
revaluation of
interest rate swaps
1,329 4,085
Total comprehensive (9,645) (1,502)
income/ (expenses)
Loss per ordinary (7.2)p (3.7)p
share - basic and
diluted
The total column of this statement represents the Group'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.
.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 MARCH 2013
STATED
CAPITAL OTHER TRANSLATION CAPITAL REVENUE
RESERVE RESERVE RESERVE RESERVE RESERVE TOTAL
£'000 £'000 £'000 £'000 £'000 £'000
Balance at 31 March 101,368 (9,805) 1,487 (175,913) 59,022 (23,841)
2011
(Loss)/profit for the - - - (8,536) 2,949 (5,587)
year
Other comprehensive
income:
Unrealised gain on - 3,717 368 - - 4,085
revaluation of
interest rate swaps
Balance at 31 March 101,368 (6,088) 1,855 (184,449) 61,971 (25,343)
2012
(Loss)/profit for the - - - (15,426) 4,452 (10,974)
year
Other comprehensive
income:
Exchange differences - - (89) - - (89)
on translating foreign
operations
Unrealised gain on - 1,418 - - - 1,418
revaluation of
interest rate swaps
Balance at 31 March 101,368 (4,670) 1,766 (199,874) 66,422 (34,988)
2013
.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AT 31 MARCH 2013
2013 2012
NOTES £'000 £'000
Non-current assets
Investment properties 191,028 197,570
Intangible assets - 5,842
191,028 203,412
Current assets
Trade and other receivables 5,744 5,752
Cash and cash equivalents 11,198 14,004
16,942 19,756
Total assets 207,970 223,168
Current liabilities
Trade and other payables (14,058) (15,692)
Interest rate swap liabilities (149) (809)
Currency rate swap liabilities - (1,008)
Obligations under finance lease (458) -
(14,665) (17,509)
Total assets less current liabilities 193,305 205,659
Non-current liabilities
Bank loan (191,288) (192,269)
Other payables (2,796) (2,911)
Interest rate swap liabilities (4,521) (5,279)
Currency rate swap liabilities (9,785) (10,074)
Obligations under finance leases (7,142) (7,283)
Deferred taxation (12,761) (13,186)
(228,293) (231,002)
Net liabilities (34,988) (25,343)
Capital and reserves
Stated capital 5 101,368 101,368
Other reserve (4,670) (6,088)
Translation reserve 1,766 1,855
Capital reserves (199,874) (184,449)
Revenue reserves 66,422 61,971
Issued capital and reserves (34,988) (25,343)
Net asset value per ordinary share 6 (22.9)p (16.6)p
Approved by the Board of Directors on 18 July 2013
Richard Barnes
Chairman
.
CONSOLIDATED STATEMENT of CASH FLOWS
FOR THE YEAR ENDED 31 MARCH 2013
2013 2012
Notes £'000 £'000
Operating activities
Rent and service charges received 21,140 27,065
Bank interest received 5 13
Proceeds on swap disposal (825) -
Bank loan interest paid (8,656) (12,771)
Operating expense payments (11,423) (17,890)
Tax paid (128) (191)
Net cash inflow/(outflow) from operating 113 (3,774)
activities
Investing activities
Capital expenditures and incentives (1,473) (1,321)
Sale of investment properties - 11,335
Net cash (outflow)/inflow from investing (1,473) 10,014
activities
Financing activities
Repayment of loan (1,597) (9,967)
Net cash outflow from financing activities (1,597) (9,967)
Decrease in cash and cash equivalents (2,957) (3,727)
Cash and cash equivalents at beginning of year 14,004 17,846
Effect of foreign exchange changes 151 (115)
Cash and cash equivalents at end of year 11,198 14,004
.
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 5,
16 and 24, at 31 March 2013 the Group had bank loans of £191.9 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 104.6%, which is below the maximum 110% currently
permitted under the Company's bank facility. The ICR was 149.2% 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 £2.3 million (2012: £2.3 million) on the Group's
£10 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 2014 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, but there is come uncertainty as to how the Group might meet any
liability falling due on expiry of current swaps in April 2016.
The terms of the bank facility provide that the maximum permitted LTV ratio
falls from 110% to 100% after 30 September 2013. There is a reasonable
likelihood that the Company will be unable to comply with the limit. The
lending bank will, in this event, have the right to demand repayment of amounts
owed to it which, if exercised, presents a material uncertainty which, may cast
significant doubt about the Company's ability to continue as a going concern.
The Board and its advisers are engaged in discussions with the lending bank
with a view to agreeing revised terms which will address these uncertainties.
Taking into account the recent history of the Company's relationship with its
lending bank, the Directors consider it unlikely that the bank will wish to
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 is to repay its bank borrowings and
other obligations. 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, and were subsequently endorsed by the European Union.
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 fair
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.
Details of the fair value estimation for derivatives have been provided in
notes 1(i) and 24 to these financial statements.
(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
2013 2012
£'000 £'000
Interest receivable 5 13
Other income 702 627
707 640
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 2013 31 MARCH 2012
REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL
£'000 £'000 £'000 £'000 £'000 £'000
Directors' fees 125 - 125 121 - 121
Fees payable to the 92 - 92 90 - 90
Company's Auditor for the
audit of the financial
statements
Fees payable to the 111 - 111 124 - 124
Company's Auditor for the
audit of the Company's
subsidiaries pursuant to
legislation
Total audit fees - current 203 - 203 214 - 214
period
Other fees payable to the
Company's Auditor:
Tax services 67 - 67 46 - 46
Corporate finance services 18 - 18 47 - 47
Total non-audit fees 85 - 85 93 - 93
4. Finance costs
YEAR ENDED YEAR ENDED
31 MARCH 2013 31 MARCH 2012
REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL
£'000 £'000 £'000 £'000 £'000 £'000
Interest on principal loan 3,873 528 4,401 6,552 895 7,447
amount
Interest in respect of 3,326 454 3,780 4,269 582 4,851
interest rate swap
arrangement
Interest on finance lease 418 58 476 417 56 473
and other interest
7,617 1,040 8,657 11,238 1,533 12,771
5. Stated capital
2013 2012
£'000 £'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
6. 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:
2013 2012
NET ASSETS NET ASSETS
NET ASSET ATTRIBUTABLE NET ASSET ATTRIBUTABLE
VALUE £'000 VALUE £'000
Ordinary shares (22.9)p (34,988) (16.6)p (25,343)
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:
2013 2012
PENCE PENCE
PER SHARE £'000 PER SHARE £'000
Consolidated NAV per (22.9) (34,988) (16.6) (25,343)
accounts
Adjustments:
Goodwill - - (3.8) (5,842)
Deferred tax 8.3 12,761 8.6 13,186
Swaps 3.1 4,670 4.0 6,088
Adjusted NAV (11.5) (17,557) (7.8) (11,911)
The adjusted NAV is per the European Public Real Estate Association (`EPRA')
measure, published in August 2011. The EPRA NAV per share excludes the fair
value adjustments for debt and interest rate derivatives, deferred taxation on
revaluations, capital allowances and goodwill.
7. 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. Further details are provided in the
Report of the Directors and note 4.
On 31 March 2008, the Company entered into an agreement with Invesco Limited
(`Invesco'), the parent company of the Investment Manager, under which Invesco
agreed to provide a credit facility of up to £10 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 £2 million had been
drawn down and £0.3 million of interest was accrued (2012: £2 million drawn
down and £0.3 million accrued).
On 17 June 2013 the Company's Luxembourg subsidiaries entered into agreements
with IREM, an Invesco group company, for the provision of administration and
company secretarial services. Fees payable to IREM will amount in aggregate to
up to €200,000 (plus VAT if applicable) to be adjusted annually by reference to
inflation.
As disclosed in the Report of the Directors, 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 and
Administrator 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 £60,000 (2012: £
60,000) and out of pocket expenses
.
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 23 September 2013 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
18 July 2013
Enquiries to:
Invesco Asset Management Limited
Angus Pottinger
020 7065 3714
Rory Morrison,
020 7543 3581