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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Standard Life Investments Property Income Trust Ld | LSE:SLI | London | Ordinary Share | GB0033875286 | ORD 1P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 79.00 | 79.00 | 79.40 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
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TIDMSLI
23 MARCH 2017
STANDARD LIFE INVESTMENTS PROPERTY INCOME TRUST
RESULTS IN RESPECT OF THE YEARED 31 DECEMBER 2016
Financial Highlights
- Robust Net Asset Value ("NAV") total return of 4.4% in the year, driven by
positive investment activity and successful asset management set against a
background of volatility in the commercial property market.
- Strong share price total return over the year of 7.0% compared to total
return on FTSE All Share REIT Index of -7.0% with the Company's shares standing
at a premium to NAV of 6.8% as at 31 December 2016.
- Prudent Loan to Value ("LTV") at year end of 26.0% (2015 - 28.1%) with debt
at an attractive interest rate of 2.6%.
- The Company had cash of GBP13million at year end plus GBP20million available to
utilise of its Revolving Credit Facility ("RCF") which will enable the Company
to take advantage of opportunities as and when they arise.
- Dividend cover of 117% in 2016 as the acquisition of the Pearl portfolio in
December 2015, and the opportunities this presented, boosted income generation
over the year.
- Following the 2.5% dividend increase in 2016, the yield on the Company's
share price as at 31 December stood at 5.5% which compares favourably to the
FTSE All-Share REIT Index (3.7%) and the FTSE All-Share Index (3.5%) at the
same date.
- Overall, the Company has a secure balance sheet, significant financial
resources and a portfolio of assets which is continuing to provide strong
income generation for shareholders.
Property Highlights
- As at 31 December 2016, the portfolio was valued at GBP429.9million.
- Portfolio total return for the year was 5.8%, significantly ahead of the IPD
Quarterly version of Monthly Index total return ("the Company's benchmark") of
2.2%. The capital return of -0.7% and the income return of 6.5% from the
portfolio both outperformed the comparative benchmark figures (-2.5% and 4.8%
respectively).
- Sales totalling GBP20.2million in the year undertaken to realise profit, remove
future underperformance risk and reduce gearing in a time of market volatility.
Post the year end this trend continued with GBP30million being sold, including
the Company's largest asset at White Bear Yard.
- A number of successful asset management initiatives, contributing to income
and capital values, completed during the year including:
- 8 new lettings completed during the year securing GBP907,000 of new rent pa;
and
- 11 lease renegotiations agreed with existing tenants securing income of GBP
1.38million pa.
- Void rate of 3.3% at 31 December 2016, significantly below the benchmark
figure of 7.1%.
- Positive rent collection rates of 99% within 21 days highlighting the
continued strength of tenant covenants in an environment where income is likely
to be the key component of returns going forward.
- The Company's investment portfolio has an initial yield of 6.3%, and given
the nature of the investments and the leases in the portfolio this yield is
expected to trend upwards (based on the current valuation) to 7.2% over the
next five years.
PERFORMANCE SUMMARY
Earnings & Dividends 31 31
December December
2016 2015
Revenue earnings per share (excluding capital items & swaps breakage costs) 5.56 4.74
Dividends declared per ordinary share (p) 4.76 4.644
Dividend cover (%)* 117 104
Dividend Yield (%)** 5.5 5.5
FTSE Real Estate Investment Trusts Index Yield (%) 3.7 3.0
FTSE All-Share Index Yield (%) 3.5 3.7
Ongoing charges***
As a % of average net assets including direct property costs 1.7 1.5
As a % of average net assets excluding direct property costs 1.3 1.1
Capital Values & Gearing 31 31
December December
2016 2015 % Change
Total Assets (GBPmillion) 445.7 467.3 (4.6)
NAV per share (p) (note 21) 81.0 82.2 (1.5)
Ordinary Share Price (p) 86.5 84.5 2.4
Premium to NAV (%) 6.8 2.8
LTV**** 26.0 28.1
Total Return 1 Year % 3 Year % 5 Year %
return return return
NAV***** 4.4 48.6 80.4
Share Price***** 7.0 46.8 129.8
FTSE Real Estate Investment Trusts Index (7.0) 27.3 98.8
FTSE All-Share Index 16.8 19.3 61.8
Property Returns & Statistics % 31 31
December December
2016 2015
Property income return 6.5 6.1
IPD benchmark income return 4.8 4.9
Property total return 5.8 13.1
IPD benchmark total return 2.2 13.0
Void rate 3.3 1.1
* Calculated as revenue earnings per share (excluding capital items & swaps
breakage costs) as a percentage of dividends declared per ordinary share.
** Based on an annual dividend of 4.76p and share price at 31 December.
***Calculated as investment manager fees, auditor's fees, directors' fees and
other administrative expenses divided by the average NAV for the year. In
respect of the annual management fee for the year ended 31 December 2015, the
Investment Manager agreed to rebate GBP400,000 of the fee following the
successful completion of the fund raising and new property portfolio
acquisition in December 2015.
**** Calculated as bank borrowings less all cash as a percentage of the open
market value of the property portfolio as at the end of each year.
***** Assumes re-investment of dividends excluding transaction costs.
Sources: Standard Life Investments, Investment Property Databank ("IPD")
CHAIRMAN'S STATEMENT
In my first annual report as your Chairman I am pleased to report that your
Company has continued to deliver above benchmark performance set against a
background of considerable political upheaval which has provided a challenging
background for the UK commercial property market
Background
The past twelve months have proved to be a watershed year with unexpected
referenda and election results in both the UK and the United States resulting
in heightened uncertainty as to what the future holds. The decision by the UK
electorate to leave the European Union in June 2016, followed by the ensuing
political fallout, impacted both the financial markets and, in particular, real
estate markets, as REIT share prices fell and open ended funds closed to
redemptions. In addition, the vote was expected to impact immediately the wider
economy as it was anticipated both investment and consumer spending would be
adversely affected. At the time of writing, the reality has been somewhat
different with the UK economy growing by 0.6% in both Q3 and Q4 of 2016. This
was bolstered by the service sector as the economy continued to rely on the
consumer although this may not continue as inflationary pressures increase.
The election of President Trump in the United States followed the lead set by
the UK with disenfranchised voters making themselves heard and producing a
surprise result, contrary to opinion poll forecasts. President Trump has made
an immediate impact, issuing a number of executive orders on healthcare, oil
and gas pipelines and, somewhat more controversially, immigration. Perhaps
encouraged by the above, "populism" is gaining traction across the developed
nations as a number of elections in Europe approach, increasing geopolitical
risk and resulting in an environment that is fraught with uncertainty. From a
UK perspective, the main focus will be on whether the new US President's
policies boost the performance of the US economy, thereby providing a fillip to
the world economy, and whether the UK can quickly negotiate trade deals upon
the UK's exit from the EU.
Performance
Against such a background the Company has performed well in the year. Even
without the political machinations, it was anticipated that real estate returns
would moderate in 2016, especially after the Chancellor announced a 1% rise in
stamp duty in the March budget. Following the EU referendum, the direction of
valuations has been volatile, falling in September but recovering somewhat by
December. Overall, your Company delivered a robust NAV total return of 4.4%.
This was driven by a relatively strong performance from the portfolio which
delivered a total return of 5.8 % compared to the IPD benchmark return of 2.2
%, with both capital and income delivering above benchmark returns. The capital
performance was boosted by positive investment activity as five assets were
sold for GBP20.2million after costs which, in aggregate, was 5.6% ahead of
December 2015 valuations. This trend continued after the year end where a
further two assets have been sold at prices in-line with their December 2016
valuations, including the Company's largest asset, White Bear Yard in London
thereby removing the Company's only exposure to the City of London office
sector.
The share price total return in the year was 7.0% as the share price premium to
NAV increased to 6.8% at the year end reflecting the ongoing demand for the
Company's shares as investors' appetite for attractive and sustainable income
returns continued. This return compares favourably to the return on the FTSE
All-Share REIT index which returned -7.0% in the calendar year.
In order to ensure the Company's share price premium over its NAV does not
become excessive, in January 2017 the Company applied for, and was granted, a
blocklisting of 19 million shares, approximately 5% of the issued share
capital. To date 7.275 million of shares have been issued under this
blocklisting to meet excess market demand. All shares have been issued at a
premium to NAV and hence have been accretive to existing shareholders.
Dividends
As indicated at the time of the acquisition of the Pearl portfolio in December
2015, the Company increased its dividend by 2.5% for 2016 to 4.76p. This
represents an attractive yield of 5.5% as at 15 March 2017, significantly
higher than that produced by the FTSE All-Share REIT Index ( 3.8%) and also
other mainstream asset classes such as equities (FTSE All Share Index yield of
3.2%) and gilts (Ten Year Gilt yield of 1.2%) at the same date. Importantly, it
should also be highlighted that this dividend has been fully covered by net
income with a healthy dividend cover of 117% for the calendar year.
Debt
As described in the Interim Report, the Company refinanced its debt facilities
in April 2016. A new GBP110million seven year facility at a fixed rate of 2.725%
and, in order to introduce flexibility to the capital structure, a RCF of GBP
35million were taken out with the Royal Bank of Scotland. At the year end the
Company, having used sales proceeds to pay down debt, had a prudent LTV of
26.0% (net of all cash) and an attractive all-in rate of financing of 2.6%.
Board Changes
As mentioned in the Interim Report, Dick Barfield, my predecessor as Chairman,
retired from the Company at the AGM in June 2016 and I would like to thank him
for his strong and dedicated leadership as the Company more than doubled in
size over the course of his tenure. In addition, James Clifton-Brown was
appointed to the Board in August 2016. In his short time on the Board, James,
who has taken my place as Chairman of the Property Valuation Committee, has
proved to be a great asset and the Company will benefit from his many years of
experience working in the commercial property sector.
Investment Manager
The Board has noted the recent announcement relating to a proposed merger
between Standard Life and Aberdeen Asset Management. It is too early to comment
on the potential implications for the Company of the proposed merger and we
will monitor the progress of the transaction with interest.
Outlook
2017 is expected to be an eventful year in the UK and abroad. The UK's economic
landscape is expected to be dominated by the continued political debate over
the Article 50 process for exiting the European Union. The twists and turns of
politics are expected to dominate the headlines elsewhere in the world as the
year progresses. How this impacts the wider UK economy remains to be seen with
the Bank of England forecasting growth of 2.0% in 2017, the same as that
achieved in 2016. Any temptations to increase interest rates are likely to be
muted by the negative impacts on consumer spending resulting from externally
generated inflation, and the historically modest level of anticipated economic
growth -"lower for longer" in terms of interest rates continues to be the most
likely scenario.
However, despite the unprecedented levels of uncertainty, real estate still has
some significant attractions as an asset class. The sector has considerably
lower void rates, speculative development and gearing levels compared to
previous cycles which should help reduce volatility. In addition, there remains
a significant gap between the attractive and historically stable yields
currently being produced on real estate and those produced by other mainstream
asset classes. This provides a buffer against any modest increases in interest
rates.
Within the framework outlined above, the Company has a number of defensive
qualities that makes it well positioned for the current market. While secondary
assets may not be as resilient in the anticipated risk averse environment
expected in the next twelve months, the portfolio of 57 assets is well
diversified both in terms of sector and geography and currently has a bias
towards the Industrial sector which is expected to be the strongest performing
sector in 2017. The sale of White Bear Yard has removed an asset whose value
may have come under pressure given the potential for a "hard" Brexit and where
there was letting risk in 2019 which may have required significant capital
expenditure. Secondly, in an environment where income will be the main driver
of returns, the Company also has a strong tenant base, low void rate (3.3%) and
a strong rent collection rate (99% within 21 days) which helps underpin the
strong income return and attractive dividend yield paid to shareholders. In the
UK, where historically low interest rates are fast becoming the norm, the
demand for products that produce an attractive and sustainable level of income
is high and this is one of the reasons your Company continues to trade at a
premium rating. Finally, the Company has a prudent LTV level and a debt
structure that allows gearing to be managed appropriately while still providing
resources to invest further in the portfolio. Taking all these factors
together, I believe that your Company is well placed to continue delivering
value for shareholders.
Robert Peto
Chairman
22 March 2017
STRATEGIC OVERVIEW
Objective
The objective of the Company is to provide shareholders with an attractive
level of income together with the prospect of income and capital growth.
Investment Policy and Business Model
The Board intends to achieve the investment objective by investing in a
diversified portfolio of UK commercial properties. The majority of the
portfolio will be invested in direct holdings within the three main commercial
property sectors of retail, office and industrial although the Company may also
invest in other commercial property such as hotels, nursing homes and student
housing. Investment in property development and investment in co-investment
vehicles, where there is more than one investor, is permitted up to a maximum
of 10% of the property portfolio.
In order to manage risk, without compromising flexibility, the Board applies
the following restrictions to the property portfolio, in normal market
conditions:
? No property will be greater by value than 15% of total assets.
? No tenant (excluding the Government) will be responsible for more than 20% of
the Company's rent roll.
? Gearing, calculated as borrowings as a percentage of gross assets, will not
exceed 65%. The Board's current intention is that the Company's LTV ratio
(calculated as borrowings less all cash as a proportion of property portfolio
valuation) will not exceed 45%.
As part of its strategy, the Board has contractually delegated the management
of the property portfolio, and other services, to Standard Life Investments
(Corporate Funds) Limited ("Investment Manager").
Strategy
During the year, the Board reassessed its strategy, with the help of its
Investment Manager and other advisers.
The overall intention is to continue to distribute an attractive income return
alongside growth in the NAV and a good overall total return.
At property level, it is intended that the Company remains primarily invested
in the commercial sector, while keeping a watching brief on other classes such
as student accommodation and care homes. The Company is principally invested in
office, industrial and retail properties and intends to remain so. In all
sectors, poor secondary and tertiary locations are regarded as high risk and
will be avoided.
The Board's preference is to buy into good but not necessarily prime locations,
where it perceives there will be good continuing tenant demand, and to seek out
properties where the asset management skills within the Investment Manager can
be used to beneficial effect. The Board will continue to have very careful
regard to tenant profiles.
The Board continues to seek out opportunities for further, controlled growth in
the Company. Since the year end, the Company has raised an additional GBP
6.2million through new share issues, as detailed in the Chairman's Statement.
The Company continues to maintain a tax efficient structure, having migrated
its tax residence to the UK and becoming a UK REIT on 1 January 2015.
The Board
The Board currently consists of a non-executive Chairman and four non-executive
Directors. There is also a commitment to achieve the proper levels of
diversity. At the date of this report, the Board consists of one female and
four male Directors. The Company does not have any employees.
Key Performance Indicators
The Board meets quarterly and at each meeting reviews performance against a
number of key measures:
- Property income and total return against the Quarterly Version of the IPD
Balanced Monthly Funds Index ("the Index").
The Index provides a benchmark for the performance of the Company's property
portfolio and enables the Board to assess how the portfolio is performing
relative to the market. A comparison is made of the Company's property returns
against the Index over a variety of time periods (quarter, annual, three years
and five years).
- Property voids
Property voids are unlet properties. The Board reviews the level of property
voids within the Company's portfolio on a quarterly basis and compares the
level to the market average, as measured by the IPD. The Board seeks to ensure
that proper priority is being given by the Investment Manager to maintaining
the Company's income.
- Rent collection dates
The Board assesses rent collection by reviewing the percentage of rents
collected within 21 days of each quarter end.
- NAV total return
The NAV total return reflects both the NAV growth of the Company and also the
dividends paid to shareholders. The Board regards this as the best overall
measure of value delivered to shareholders. The Board assesses the NAV total
return of the Company over various time periods (quarter, annual, three years
and five years) and compares the Company's returns to those of its peer group
of listed, closed-ended property investment companies.
- Premium or discount of the share price to NAV
The Board closely monitors the premium or discount of the share price to the
NAV and believes that a key driver to the level of the premium or discount is
the Company's long term investment performance. However, there can be short
term volatility in the premium or discount and the Board takes powers at each
Annual General Meeting ("AGM") to enable it to issue or buy back shares with a
view to limiting this volatility.
- Dividend per share and dividend cover
A key objective of the Company is to provide an attractive, sustainable level
of income to shareholders and the Board reviews, at each Board meeting, the
level of dividend per share and the dividend cover, in conjunction with
detailed financial forecasts, to ensure that this objective is being met and is
sustainable.
The Board considers the performance measures both over various time periods and
against similar funds.
A record of these measures is disclosed in the Financial Highlights, Chairman's
Statement and Investment Manager's Report.
Principal Risks and Uncertainties
The Board ensures that proper consideration of risk is undertaken in all
aspects of the Company's business on a regular basis. During the year, the
Board carried out an assessment of the risk profile of the Company, including
consideration of risk appetite, risk tolerance and risk strategy. The Board
regularly reviews the principal risks of the Company, seeking assurance that
these risks are appropriately rated and that appropriate risk mitigation is in
place.
The Company's assets consist of direct investments in UK commercial property.
Its principal risks are therefore related to the commercial property market in
general, but also the particular circumstances of the properties in which it is
invested, and their tenants. The Board and Investment Manager seek to mitigate
these risks through a strong initial due diligence process, continual review of
the portfolio and active asset management initiatives. All of the properties in
the portfolio are insured, providing protection against risks to the properties
and also protection in case of injury to third parties in relation to the
properties.
The Board has also identified a number of other specific risks that are
reviewed at each Board meeting. These are as follows:
- The Company and its objectives become unattractive to investors, leading to a
widening discount.
This risk is mitigated through regular contact with shareholders, a regular
review of share price performance and the level of the discount or premium at
which the shares trade to NAV and regular meetings with the Company's broker to
discuss these points and address any issues that arise.
- Net revenues fall such that the Company cannot sustain its level of dividend,
for example due to tenant failure or inability to let properties.
This risk is mitigated through regular review of forecast dividend cover,
regular contact with shareholders and regular review of tenant mix, risk and
profile. Due diligence work on potential tenants is undertaken before entering
into new lease arrangements and tenants are kept under constant review through
regular contact and various reports both from the managing agents and the
Investment Manager's own reporting process. Contingency plans are put in place
at units that have tenants that are believed to be in financial trouble. The
Company subscribes to the IPD Iris Report which updates the credit and risk
ranking of the tenants and income stream, and compares it to the rest of the UK
real estate market.
- Uncertainty or change in the macroeconomic environment results in property
becoming an undesirable asset class, causing a decline in property values.
This risk is managed through regular reporting from, and discussion with, the
Investment Manager and other advisors. Macroeconomic conditions form part of
the decision making process for purchases and sales of properties and for
sector allocation decisions.
Macroeconomic uncertainty increased during 2016, following the UK's decision to
leave the EU and the US presidential election. The Board continues to closely
monitor the effect of this on property values and also the impact of any
resultant regulatory changes that may impact the Company.
- Breach of loan covenants.
This risk is mitigated by the Investment Manager monitoring the loan covenants
on a regular basis and providing a quarterly certificate to the bank confirming
compliance with the covenants. Compliance is also reviewed by the Board each
quarter and there is regular dialogue between the Investment Manager and the
bank on Company activity and performance.
- Loss on financial instruments.
The Company has entered into an interest rate swap arrangement. This swap
instrument is valued and monitored on a monthly basis by the counterparty bank.
The Investment Manager checks the valuation of the swap instrument internally
to ensure this is accurate. In addition, the credit rating of the bank that the
swap is taken out with is assessed regularly.
Other risks faced by the Company include the following:
- Strategic - incorrect strategy, including sector and property allocation and
use of gearing, could all lead to poor return for shareholders.
-Tax efficiency - the structure of the Company or changes to legislation could
result in the Company no longer being a tax efficient investment vehicle for
shareholders.
- Regulatory - breach of regulatory rules could lead to the suspension of the
Company's Stock Exchange Listing, financial penalties or a qualified audit
report.
- Financial - inadequate controls by the Investment Manager or third party
service providers could lead to misappropriation of assets. Inappropriate
accounting policies or failure to comply with accounting standards could lead
to misreporting or breaches of regulations.
- Operational - failure of the Investment Manager's accounting systems or
disruption to the Investment Manager's business, or that of third party service
providers, could lead to an inability to provide accurate reporting and
monitoring, leading to loss of shareholder confidence.
- Economic - inflation or deflation, economic recessions and movements in
interest rates could affect property valuations and also bank borrowings.
The implementation of AIFMD during 2014 and the conversion of the Company to a
UK REIT on 1 January 2015 introduced additional regulatory risks to the Company
in the form of ensuring compliance with the respective regulations. In relation
to AIFMD, the Board receives regular reporting from the AIFM and the depositary
to ensure both are meeting their regulatory responsibilities in respect of the
Company. In relation to UK REIT status, the Board has put in place a system of
regular reporting to ensure that the requirements of the UK REIT regime are
being adequately monitored and fully complied with.
A new regulatory risk arose in 2016 with the introduction of the EU's Market
Abuse Regulations ("MAR") which apply to UK listed companies. The Company has
updated its policies and procedures to ensure that it is compliant with the
requirements of MAR.
The Board seeks to mitigate and manage all risks through continual review,
policy setting and enforcement of contractual obligations. It also regularly
monitors the investment environment and the management of the Company's
property portfolio, levels of gearing and the overall structure of the Company.
Social, Community and Employee Responsibilities
The Company has no direct social, community or employee responsibilities. The
Company has no employees and accordingly no requirement to separately report in
this area as the management of the portfolio has been delegated to the
Investment Manager. In light of the nature of the Company's business there are
no relevant human rights issues and there is thus no requirement for a human
rights policy. The Board does, however, closely monitor the policies of its
suppliers to ensure that proper provision is in place.
Sustainable Real Estate Investment Policy
The Investment Manager acquires, develops and manages properties on behalf of the Company. It is recognised that these activities have both direct and indirect environmental and social impacts. The Board has adopted the Investment Manager's own Sustainable Real Estate Investments Policy and associated Environmental Management Systems and is committed to environmental management in all phases of an asset's cycle - from acquisition through demolition, redevelopment and operational management to disposal. The focus is on energy conservation, mitigating greenhouse gases emissions, maximising waste recycling and water conservation. To facilitate this, the Investment Manager works in partnership with contractors, suppliers, tenants and consultants to minimise those impacts, seeking continuous improvements in environmental performance and conducting regular reviews. The Investment Manager's approach to monitoring and improving the sustainability performance of the assets held by the Company has been highly successful. Energy consumption and greenhouse gas emissions for managed assets in the Company reduced by 8% and 11% respectively in 2015/16 compared with the year before. The Company also achieved its zero waste to landfill target, recovering value from all waste produced. In conjunction with these environmental principles the Company has a health and safety policy which demonstrates commitment to providing safe and secure buildings that promote a healthy working/customer experience that supports a healthy lifestyle. The Company, through the Investment Manager, manages and controls health and safety risks systematically as any other critical business activity using technologically advanced systems and environmentally protective materials and equipment. The aim is to achieve a health and safety performance the Company can be proud of and allow the Company to earn the confidence and trust of tenants, customers, employees, shareholders and society at large. Viability Statement The Board considers viability as part of its ongoing programme of monitoring risk. The Board considers five years to be a reasonable time horizon over which to review the continuing viability of the Company. The Board has considered the nature of the Company's assets and liabilities and associated cash flows and has determined that five years is the maximum timescale over which the performance of the Company can be forecast with a material degree of accuracy and so is an appropriate period over which to consider the Company's viability. In assessing the Company's viability, the Board has carried out thorough reviews of the following: - Detailed NAV, cash resources and income forecasts, prepared by the Investment Manager, for a five year period under both normal and stressed conditions; - The Company's ability to pay its operational expenses, bank interest and dividends over a five year period; - Future debt repayment dates and debt covenants, in particular those in relation to LTV and interest cover; and - The valuation and liquidity of the Company's property portfolio, the Investment Manager's portfolio strategy for the future and the market outlook. The Board has also carried out a robust assessment of the principal risks faced by the Company. The Board takes any potential risks to the ongoing success of the Company, and its ability to perform, very seriously and works hard to ensure that risks are kept to a minimum at all times. Based on the results of the analysis outlined above, the Board has a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the five year period of its assessment. Approval of Strategic Report The Strategic Report comprises the Financial Highlights, Chairman's Statement, Strategic Overview and Investment Manager's Report. The Strategic Report was approved by the Board and signed on its behalf by: Robert Peto Chairman 22 March 2017 INVESTMENT MANAGER'S REPORT UK Real Estate Market 2016 was an eventful year many of us will not forget. The decision by the UK to leave the EU was not the result we had expected, and it had a dramatic and immediate impact on the UK real estate market. In the six months since the vote we have seen a return to more normal market conditions, although there is still a very uncertain outlook for the market, with heightened political and economic uncertainty likely to remain for the next couple of years. Over the twelve months to the end of December 2016, all property recorded a total return of 2.6% against 13.9% in the twelve months to the end of December 2015. The sharp capital decline following the EU Referendum was the main contributor to the fall in returns although market conditions and sentiment have stabilised in recent months. Capital values fell by -2.8% in the year to the end of December (against a 7.8% increase over 2015), whilst rental growth fell to 2.0% in 2016 compared to 4.3% in 2015. As for the equity markets, the FTSE All Share and the FTSE 100 total returns rose by 16.8% and 19.1% respectively over the calendar year 2016. For listed real estate equities, total returns declined by 8.5% over 2016. In times of market uncertainty it is easy to apply a broad brush approach, but in reality the UK commercial real estate market is made up of many sub markets with different drivers of returns. The retail market has, of course, been going through a period of change for several years, but this has created opportunity in one of our favoured markets; industrial/ logistics. The industrial sector was the strongest performing in 2016, and this looks likely to continue with the devalued sterling supporting greater demand for industrial space in the UK for export led companies. With low levels of supply in most industrial areas we are seeing rental growth, as increasing build costs push up the economic rent for delivery of new accommodation. Central London offices face some challenges given the unknown shape of Brexit, but in many parts of the UK, supply of good quality accommodation is scarce and demand has remained fairly resilient. UK economic growth over the course of 2016 was 2% which was better than was anticipated by economists following the referendum uncertainty and was only a marginal decline on the 2.2% growth recorded in 2015. Growth over the year has been heavily reliant on private consumption. Consumers have been resilient to date, with strong retail sales reported recently compared to last year although discounting is likely to be a key factor. There are also suggestions that consumers may be using credit facilities to bring forward big-ticket purchases in anticipation of higher inflation in 2017. As a result of sterling's significant decline post the referendum and higher commodity prices over the year, inflationary pressures are rising going into 2017. Investment Outlook 2017 is expected to be another eventful year both in the UK and abroad. The UK's economic landscape is expected to be dominated by the continued political wrangling over the Article 50 process for exiting the European Union in the UK and the twists and turns of politics are expected to dominate the headlines elsewhere in the world as the year progresses. Despite the uncertainty associated with the political wrangling, UK real estate continues to provide an elevated yield compared to other assets. Furthermore, lending to the sector is at a lower level than in 2007/2008, and, unlike in the Financial Crisis, liquidity remains reasonable. Additionally, development continues to be relatively constrained by historic standards and existing vacancy rates are below average levels in most markets, which should all help to continue to stabilise the market. In an environment where the economic fundamentals are expected to soften and with uncertainty remaining above "normal" levels, we expect lower returns from property than has been the case over the last few years. Location and asset quality will be crucial determinants of how markets respond to pressures in the year ahead. Furthermore, the steady secure income component generated by the asset class is likely to be the key driver of returns going forward. The market is likely to be sentiment driven in the short term as the politics continues to evolve, which will further affect capital values, while the medium term impact will continue to hinge on the economic effects. From a sector perspective, we continue to favour industrial and logistics property, although they are not likely to be immune to the ongoing uncertainty, they are expected to be comparatively resilient. As for the retail sector, inflationary pressures may prove to be a significant headwind as they impact not only the retailer's cost base, but also consumers' ability to spend, and further polarisation within the market is likely to be more pronounced. We continue to expect Central London offices to be the most impacted sector given the linkages to European markets via cross border trading. Overall, investor appetite is expected to be sustained and the retention of the UK's safe haven status should also ensure the asset class is better placed longer term. Investment Management Strategy The investment strategy remains to invest in a diversified portfolio of UK commercial real estate assets that will support an attractive income return with some prospect for capital and rental growth. It is important to the Board and manager that the Company has a covered dividend, which it did again in 2016 (117% covered for the year) despite an increase in the dividend in Q1 2016. In order to generate enough income to pay a covered dividend (Dividend yield 5.5% as at year end) the Company invests in a diversified portfolio, focused mainly on the industrial and office sector, and in good quality assets in strong locations, let to secure tenants who are able to pay the rent. Also we
have a lower than average lease length in order to get a bit more yield. We are
structurally underweight to retail as good quality retail is low yielding, and
also to Central London offices which are more volatile and also low yielding.
The Investment Manager seeks to reduce risk at lease expiry by entering into
early discussions with tenants about renewing their leases or removing break
options, and has thus maintained a high occupancy rate (96.7% at year end).
2016 was a year of consolidation for the Company having completed the purchase
of a portfolio of 22 assets in December 2015 for GBP165million. I am pleased to
say that the properties have generally performed ahead of our assumptions with
only one exception, where a tenant we had assumed would renew its lease is not
going to. The new portfolio has made a positive contribution to the Company's
performance.
The decision of the UK to leave the EU following the referendum has not had a
significant impact on the Company's strategy as we believed the UK was
relatively advanced in its real estate cycle before June, and had already
reduced risk in the portfolio. The decision to leave has, however, made us
continue to have a cautious stance. A demonstration of this caution is the
reduction in the LTV throughout the year by using sale proceeds to reduce the
drawn RCF. Just after the year end the LTV stood at 24.1%, down from 28.1% as
at December 2015, with just GBP5m of the RCF remaining drawn.
Performance
2016 was another good year for the Company, especially at the underlying
portfolio level.
The investment portfolio had an income return of 6.5% for the year ended
December 2016, and saw a slight decline of 0.7% in capital, compared to the IPD
benchmark figure of 4.8% and -2.5% respectively, meaning the Company had a
total return of 5.8% for the year versus the benchmark 2.2%. The Company also
outperformed the benchmark at a property level over 3 and 5 years.
As shareholders are aware, the Company utilises debt in its structure. As
reported later in this report the Company entered into a new debt facility and
interest rate swap in April 2016, and during the course of the year the mark to
market value of the interest rate swap has had a major impact on the NAV - as
at the end of the year the liability on the swap was GBP3.6million. The gearing
also had a negative impact on the NAV with the decline in capital values.
Against its peer group the Company had a moderate year on a NAV total return
basis, but remains strong over the longer term. The Company has continued to
trade on a wider premium than the peer group average, apart from a short lived
blip shortly after the referendum. The total return of 7.0% outperformed the
peer group average and real estate index.
The Company continues to pay a fully covered dividend, representing a yield of
5.5% on the year end share price. Again, this compares well with the peer
group.
Valuation
The Company's investment portfolio was valued on a quarterly basis throughout
2016 by JLL (on the original portfolio) and by Knight Frank on the "new"
portfolio acquired in December 2015. At the year end the portfolio was valued
at GBP429.9million and the Company held GBP13.1million cash. This compares to GBP
452.0million and GBP12.4million respectively as at December 2015 (the difference
is mainly due to the sale of five assets for GBP20.2million over the period, with
sale proceeds used to reduce debt by GBP20million).
Lease Expiry Profile
The Company has an average unexpired lease term to the earliest of lease end or
tenant break of 5.5 years. The IPD index has a slightly longer average of 7.4
years (excluding leases over 35 years). Although the Company has, as at the end
of December, 62.5% of leases expiring in the next five years asset management
initiatives and sales already underway will reduce this by about 6.7%. In 2017
approximately 6.5% of the rent is due to expire and 9.4% in 2018. The peak of
expiries is in 2020/ 2021 giving the asset management team time to regear
leases, although we are finding many tenants are delaying making decisions on
occupational needs until they really have to.
In times of uncertain outlook we have often found that a greater number of
tenants renew as the cost and disruption of moving is significant, and the
choice of decent accommodation to move to is very limited due to a lack of new
development over the last ten years.
Purchases
The Company made no purchases during 2016 as it sought to bed in the portfolio
bought in December 2015 and to use sale proceeds to reduce borrowings.
After the period end (in February 2017) the Company did however complete the
purchase of a 150,000sq.ft. industrial unit for GBP5.5million, reflecting an
initial yield of 6.3%. The property is located close to the Nissan plant in
Sunderland, and is let to a Nissan supplier for another 5 years. The property
has scope to be extended, and we hope to be able to regear the lease and
increase the rent.
Sales
The Company completed five sales during the period for a total of GBP20.2million
after costs, and a further two sales post the year end for GBP30million. The
sales reflected the Company's policy of reducing risk and future capex/void
where it can do so at an attractive price. Two of the sales were of vacant
properties, two were offices with short leases and buildings in need of major
capex with void risk in the near future, and the remainder were assets that we
did not expect to perform in line with the Company's requirements in the short
to medium term.
Asset Management
The investment manager seeks to protect and enhance the future income stream
from the Company's assets through an active approach to asset management. We
consider it important to understand our tenants' needs and business to ensure
we provide buildings that work for them. If we can do that we can retain
tenants at lease expiry. We have maintained a high occupancy rate again in
2016, at 96.7% at the year end (compared to 98.9% in December 2015). The voids
are dominated by a logistics unit in Oldham, which represents half the total
void by rent. The benchmark occupation level is about 93%.
During the course of 2016, 11 lease regears or extensions were completed, along
with 8 new lettings. Needless to say for a period after the June referendum it
was harder to complete asset management deals as everyone took a step back to
consider what the result meant for them. We are beginning to see a number of
companies make decisions to commit to new or longer leases again, and at the
end of February, have 3 of our vacant units under offer out of a total of 11
available to let, and a higher level of viewings on the others than we had in
the reporting period.
Debt
In April 2016 the Company put in place a new debt facility with RBS which
replaced the short term facility it had due to expire in June 2017. The new
facility gives the Company greater flexibility in its capital structure by
having a new term facility for GBP110million until April 2023, and a RCF for GBP
35million. As at mid-January 2017, GBP5million of the RCF remained drawn, giving
the Company an LTV of 24.1% against a covenant of 60%.
The Company has an interest rate swap in place for the duration of the term
loan to give certainty of its cost of debt. As at the end of December the
Company's all in cost of debt was 2.6%. As a result of the movement in swap
rates following the referendum, the Company had a liability on the mark to
market value of the swap of GBP3.6million as at the year end. It should be noted
that this will revert to zero at maturity.
Jason Baggaley
Fund Manager
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report and the Financial
Statements for each year which give a true and fair view, in accordance with
the applicable Guernsey law and those International Financial Reporting
Standards ("IFRSs") as adopted by the European Union.
The Directors are required to prepare Company Financial Statements for each
financial year which give a true and fair view of the state of affairs of the
Company and of the financial performance and cash flows of the Company for that
period. In preparing those Financial Statements, the Directors are required to:
- select suitable accounting policies in accordance with IAS 8: Accounting
Policies, Changes in Accounting Estimates and Errors and then apply them
consistently;
- make judgement and estimates that are reasonable and prudent;
- present information, including accounting policies, in a manner that provides
relevant, reliable, comparable and understandable information;
- provide additional disclosures when compliance with the specific requirements
in IFRSs as adopted by the European Union is insufficient to enable users to
understand the impact of particular transactions, other events and conditions
on the Group's financial position and financial performance;
- state that the Group has complied with IFRSs as adopted by the European
Union, subject to any material departures disclosed and explained in the Group
financial statements; and
- prepare the Group Financial Statements on a going concern basis unless it is
inappropriate to presume that the Group will continue in business.
The Directors confirm that they have complied with the above requirements in
preparing the Financial Statements.
The Directors are responsible for keeping adequate accounting records, that are
sufficient to show and explain the Company's transactions and disclose with
reasonable accuracy at any time, the financial position of the Company and to
enable them to ensure that the Financial Statements comply with The Companies
(Guernsey) Law, 2008. They are also responsible for safeguarding the assets of
the Group and hence for taking reasonable steps for the prevention and
detection of fraud, error and non compliance with law and regulations.
The maintenance and integrity of the Company's website is the responsibility of
the Directors; the work carried out by the auditors does not involve
consideration of these matters and, accordingly, the auditors accept no
responsibility for any change that may have occurred to the Financial
Statements since they were initially presented on the website. Legislation in
Guernsey governing the preparation and dissemination of the financial
statements may differ from legislation in other jurisdictions.
Responsibility Statement of the Directors' in respect of the Consolidated
Annual Report
Statement under the Disclosure and Transparency Rules
The Directors each confirm to the best of their knowledge that:
- the Consolidated Financial Statements, prepared in accordance with IFRSs as
adopted by European Union, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Group; and
- the management report, which is incorporated into the Strategic Report,
Directors' Report and Investment Manager's Report, includes a fair review of
the development and performance of the business and the position of the Group,
together with a description of the principal risks and uncertainties that they
face.
Statement under the UK Corporate Governance Code
The Directors each confirm to the best of their knowledge and belief that:
- the Annual Report and Consolidated Financial Statements taken as a whole are
fair, balanced and understandable and provide the information necessary to
assess the Group's performance, business model and strategy.
Approved by the Board on 22 March 2017
Robert Peto
Chairman
FINANCIAL STATEMENTS
Consolidated Statement of Comprehensive Income
for the year ended 31 December 2016 2016 2015
Notes GBP GBP
Rental income 30,414,862 20,142,180
Surrender premium income 81,500 120,000
Valuation (loss)/gain from investment properties 7 (5,300,992) 17,636,973
Costs on business acquisition 10 - (1,942,498)
Loss on asset acquisition - (75,181)
Profit on disposal of investment properties 1,067,395 3,024,748
Investment management fees 4 (3,157,399) (2,105,104)
Valuer's fees 4 (99,001) (92,324)
Audit fees 4 (73,695) (82,308)
Directors' fees and subsistence 23 (164,225) (124,296)
Other direct property expenses (1,372,597) (929,165)
Other administration expenses (445,144) (376,776)
Operating profit 20,950,704 35,196,249
Finance income 5 30,536 68,186
Finance costs 5 (4,047,594) (3,324,782)
Loss on derecognition of interest rate swaps 15 (2,735,000) -
Profit for the year before taxation 14,198,646 31,939,653
Taxation
Tax charge 6 - -
Profit for the year, net of tax 19 14,198,646 31,939,653
Other Comprehensive Income
Net change in fair value of swaps reclassified to profit and loss 15 2,735,000 -
Valuation (loss)/gain on cash flow hedge 15 (4,212,250) 589,647
Total Other Comprehensive Income (1,477,250) 589,647
Total comprehensive income for the year, net of tax 12,721,396 32,529,300
Earnings per share pence pence
Basic and diluted earnings per share 19 3.73 11.39
Adjusted (EPRA) earnings per share 19 5.56 4.05
All items in the above Consolidated Statement of Comprehensive Income derive
from continuing operations.
Consolidated Balance Sheet
as at 31 December 2016 2016 2015
Notes GBP GBP
ASSETS
Non-current assets
Investment properties 7 395,782,781 448,616,754
Lease incentives 7 4,187,219
3,457,588
399,970,000 452,074,342
Current assets
Investment properties held for sale 7 29,975,000 -
Trade and other receivables 11 2,723,757 2,858,851
Cash and cash equivalents 12 13,054,057 12,395,516
45,752,814 15,254,367
Total assets 445,722,814 467,328,709
LIABILITIES
Current liabilities
Trade and other payables 13 8,784,217 12,788,999
Interest rate swap 15 1,341,101 908,751
10,125,318 13,697,750
Non-current liabilities
Bank borrowings 14 124,001,828 139,048,848
Interest rate swap 15 2,221,441 1,176,541
Rent deposits due to tenants 936,668 622,283
127,159,937 140,847,672
Total liabilities 137,285,255 154,545,422
Net assets 308,437,559 312,783,287
EQUITY
Capital and reserves attributable to Company's equity holders
Share capital 17 204,820,219 204,820,219
Retained earnings 18 7,532,448 6,167,329
Capital reserves 18 (1,753,480) 3,957,367
Other distributable reserves 18 97,838,372 97,838,372
Total equity 308,437,559 312,783,287
NAV per share (pence)
NAV 21 81.0 82.2
EPRA NAV 21 82.0
82.7
Approved by the Board of Directors on 22 March 2017 and signed on its behalf
by:
Robert Peto
Director
Consolidated Statement of Changes in Equity
for the year ended 31 December 2016 Share Retained Capital Other Total equity
Capital earnings reserves distributable
reserves
Notes GBP GBP GBP GBP GBP
Opening balance 1 January 2016 204,820,219 6,167,329 3,957,367 97,838,372 312,783,287
Profit for the year - 14,198,646 - - 14,198,646
Other comprehensive income - - (1,477,250) -
(1,477,250)
Total comprehensive income for the year - 14,198,646 (1,477,250) -
12,721,396
Dividends paid 20 - (17,067,124) - -
(17,067,124)
Valuation loss from investment properties 7 - 5,300,992 (5,300,992) - -
Profit on disposal of investment properties - (1,067,395) 1,067,395 - -
Balance at 31 December 2016 204,820,219 7,532,448 (1,753,480) 97,838,372 308,437,559
Consolidated Statement of Changes in Equity
for the year ended 31 December 2015 Share Retained Capital Other distributable Total equity
Capital earnings reserves reserves
Notes GBP GBP GBP GBP GBP
Opening balance 1 January 2015 96,188,648 7,634,503 (17,294,001) 97,838,372 184,367,522
Profit for the year - 31,939,653 - - 31,939,653
Other comprehensive income - - -
589,647 589,647
Total comprehensive income for the year - 31,939,653 589,647 - 32,529,300
Ordinary shares issued net of issue costs 17 108,631,571 - - - 108,631,571
Dividends paid 20 - (12,745,106) - - (12,745,106)
Valuation gain from investment properties 7 - (17,636,973) 17,636,973 - -
Profit on disposal of investment properties - (3,024,748) 3,024,748 - -
Balance at 31 December 2015 204,820,219 6,167,329 3,957,367 97,838,372 312,783,287
Consolidated Cash Flow Statement
for the year ended 31 December 2016 2016 2015
Notes GBP GBP
Cash flows from operating activities
Profit for the year before taxation 14,198,646 31,939,653
Movement in non-current lease incentives (816,862) 270,464
Movement in trade and other receivables 135,094 1,230,084
Movement in trade and other payables (3,690,397) 3,735,996
Loss on derecognition of interest rate swaps 2,735,000 -
Finance costs 5 4,047,594 3,324,782
Finance income 5 (30,536)
(68,186)
Valuation loss/(gain) from investment properties 7 5,300,992 (17,636,973)
Loss on asset acquisition - 75,181
Profit on disposal of investment properties 7 (1,067,395) (3,024,748)
Net cash inflow from operating activities 20,812,136 19,846,253
Cash flows from investing activities
Interest received 5 30,536
68,186
Purchase of investment properties 7 - (52,198,123)
Business acquisition net of cash acquired 10 - (165,060,458)
Capital expenditure on investment properties 7 (1,479,788) (1,144,434)
Net proceeds from disposal of investment properties 7 20,192,395 57,854,848
Net cash inflow/(outflow) from investing activities 18,743,143 (160,479,981)
Cash flows from financing activities
Proceeds on issue of ordinary shares 17 - 110,462,680
Transaction costs of issues of shares 17 - (1,831,109)
Repayment of bank borrowing 14 (139,432,692) -
Bank borrowing 14 145,000,000 55,000,000
Repayment of RCF 14 (20,000,000) -
Bank borrowing arrangement costs 14 (1,138,458)
(173,450)
Interest paid on bank borrowing 5 (2,594,070) (1,869,338)
Payments on interest rate swap 5 (929,394) (1,213,528)
Swaps breakage costs 15 (2,735,000) -
Dividends paid to the Company's shareholders 20 (17,067,124)
(12,745,106)
Net cash (outflow)/inflow from financing activities (38,896,738) 147,630,149
Net increase in cash and cash equivalents 658,541 6,996,421
Cash and cash equivalents at beginning of year 12,395,516 5,399,095
Cash and cash equivalents at end of year 13,054,057 12,395,516
Notes to the Consolidated Financial Statements
for the year ended 31 December 2016
1 GENERAL INFORMATION
Standard Life Investments Property Income Trust Limited ("the Company") and its
subsidiaries (together "the Group") carries on the business of property
investment through a portfolio of freehold and leasehold investment properties
located in the United Kingdom. The Company is a limited liability company
incorporated in Guernsey, Channel Islands. The Company has its listing on the
London Stock Exchange.
The address of the registered office is Trafalgar Court, Les Banques, St Peter
Port, Guernsey.
These audited Consolidated Financial Statements were approved for issue by the
Board of Directors on 22 March 2017.
2 ACCOUNTING POLICIES
2.1 Basis of preparation
The audited Consolidated Financial Statements of the Group have been prepared
in accordance with International Financial Reporting Standards as adopted by
the European Union ("IFRS"), and all applicable requirements of The Companies
(Guernsey) Law, 2008. The audited Consolidated Financial Statements of the
Group have been prepared under the historical cost convention as modified by
the measurement of investment property and derivative financial instruments at
fair value. The Consolidated Financial Statements are presented in pounds
sterling and all values are not rounded except when otherwise indicated.
Changes in accounting policy and disclosure
The accounting policies adopted are consistent with those in the previous
financial year. The following amendments to existing standards and
interpretations were effective for the year, but were either not applicable to
or did not have a material impact on the Group:
- Amendments to IAS1: Disclosure Initiative
- Amendments to IAS 16 and IAS 41: Agriculture: Bearer Plants
- Amendments to IAS 16 and IAS 38: Clarification of Acceptable Methods of
Depreciation and Amortisation
- Amendments to IAS 27: Equity Method in Separate Financial Statements
- Amendments to IFRS 10, IFRS 12 and IAS 28: Investment Entities: Applying
Consolidation Exception - Amendments to IFRS 11: Accounting for Acquisitions of Interests in Joint Operations - Annual Improvements to IFRSs 2012 - 2014 Cycle New and amended standards and interpretations not applied The following new and amended standards in issue are adopted by the EU but are not yet effective and have not been applied by the Group: Effective date IFRS 9 Financial Instruments 1 January 2018 IFRS 15 Revenue from Contracts with Customers 1 January 2018 IFRS 9 - Financial Instruments In July 2014, the IASB published the final version of IFRS 9 'Financial Instruments' which replaces the existing guidance in IAS 39 'Financial Instruments: Recognition and Measurement'. The IFRS 9 requirements represent a change from the existing requirements in IAS 39 in respect of financial assets. The standard contains two primary measurement categories for financial assets: amortised cost and fair value. A financial asset would be measured at amortised cost if it is held within a business model whose objective is to hold assets in order to collect contractual cash flows, and the asset's contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal outstanding. All other financial assets would be measured at fair value. The standard eliminates the existing IAS 39 categories of held to-maturity, available-for-sale and loans and receivables. For financial liabilities, IFRS 9 largely carries forward, without substantive amendment, the guidance on classification and measurement from IAS 39. The main change is that, in cases where the fair value option is taken for financial liabilities, the part of a fair value change due to an entity's own credit risk is recorded in other comprehensive income rather than in profit or loss. The standard introduces new requirements for hedge accounting that align hedge accounting more closely with risk management and establishes a more principles-based approach to hedge accounting. The standard also adds new requirements to address the impairment of financial assets and means that a loss event will no longer need to occur before an impairment allowance is recognised. The standard will be effective for annual periods beginning on or after 1 January 2018, and is required to be applied retrospectively with some exemptions. The Group has assessed IFRS 9's full impact and it does not currently anticipate that this standard will have any material impact on the Group's Financial Statements as presented for the current year. IFRS 15 - Revenue from Contracts with Customers IFRS 15 specifies how and when an entity should recognise revenue from contracts and enhances the nature of revenue disclosures. The Group notes lease contracts within the scope of IAS 17 'Leases' are excluded from the scope of IFRS 15. Rental income derived from operating leases is therefore outwith the scope of IFRS 15, and the group therefore does not anticipate IFRS 15 having a material impact on the Group's Financial Statements as presented for the current year. The Group notes under specific circumstances, certain elements of contracts the Group may enter (for example, rental guarantees provided when selling a property) potentially fall within the scope of IFRS 15. The Group does not have any contracts in place at 31 December 2016 that it believes meet these specific criteria, but will review again in advance of implementing IFRS 15. The standard permits a modified retrospective approach in the year of adoption (from 1 January 2018) by recognising a cumulative catch up adjustment to opening retained earnings. The Group intends utilising this modified retrospective approach should any contracts fall within scope, but has not and does not intend implementing the standard in advance of the effective date. 2.2 Significant accounting judgements, estimates and assumptions The preparation of the Group's Financial Statements requires management to make judgements, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities, at the reporting date. However, uncertainties about these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amount of the asset or liability affected in the future periods. The most significant estimates and judgements are set out below. Fair value of investment properties Investment properties are stated at fair value as at the Balance Sheet date. Gains or losses arising from changes in fair values are included in the Consolidated Statement of Comprehensive Income in the year in which they arise. The fair value of investment properties is determined by external real estate valuation experts using recognised valuation techniques. The fair values are determined having regard to any recent real estate transactions where available, with similar characteristics and locations to those of the Group's assets. In most cases however, the determination of the fair value of investment properties requires the use of valuation models which use a number of judgements and assumptions. The only model used was the income capitalisation method. Under the income capitalisation method, a property's fair value is judged based on the normalised net operating income generated by the property, which is divided by the capitalisation rate (discounted by the investor's rate of return). Under the income capitalisation method, over (above market rent) and under-rent situations are separately capitalised (discounted). The sensitivity analysis details the decrease in the valuation of investment properties if equivalent yield increases by 25 basis points or rental rates (ERV) decreases by 5%. Fair value of financial instruments When the fair value of financial assets and financial liabilities recorded in the Consolidated Balance Sheet cannot be derived from active markets, they are determined using a variety of valuation techniques that include the use of mathematical models. The input to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgement is required in establishing fair value. The judgements include considerations of liquidity and model inputs such as credit risk (both own and counterparty's), correlation and volatility. Changes in assumptions about these factors could affect the reported fair value of financial instruments. The models are calibrated regularly and tested for validity using prices from any observable current market transactions in the same instrument (without modification or repackaging) or based on any available observable market data. The valuation of interest rate swaps used in the Balance Sheet is provided by The Royal Bank of Scotland. These values are validated by comparison to internally generated valuations prepared using the fair value principles outlined above. The sensitivity analysis details the increase and decrease in the valuation of interest rate swaps if market rate interest rates had been 100 basis points higher and 100 basis points lower. Business Combinations During the year ended 31 December 2015, the Group acquired subsidiaries that own real estate. At the time of acquisition, the Group considers whether each acquisition represents the acquisition of a business or the acquisition of an asset. The Group accounts for an acquisition as a business combination where an integrated set of activities is acquired in addition of the property. More specifically, consideration is made of the extent to which significant processes are acquired and, in particular, the extent of services provided by the subsidiaries. The Group assessed the acquisition of Standard Life Investments SLIPIT Unit Trust (formerly Aviva Investors UK Real Estate Recovery II Unit Trust), a Jersey Property Unit Trust, as detailed in note 10, in 2015 as a purchase of a business because the strategic management function and associated processes were purchased along with the investment properties. When the acquisition of subsidiaries does not represent a business, it is accounted for as an acquisition of a group of assets and liabilities. The cost of the acquisition is allocated to the assets and liabilities acquired based upon their relative fair values, and no goodwill or deferred tax is recognised. 2.3 Summary of significant accounting policies A Basis of consolidation The audited Consolidated Financial Statements comprise the financial statements of Standard Life Investments Property Income Trust Limited and its material wholly owned subsidiary undertakings. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with subsidiaries and has the ability to affect those returns through its power over the subsidiary. Specifically, the Group controls a subsidiary if, and only if, it has: - Power over the subsidiary (i.e. existing rights that give it the current ability to direct the relevant activities of the subsidiary) - Exposure, or rights, to variable returns from its involvement with the subsidiary - The ability to use its power over the subsidiary to affect its returns The Group assesses whether or not it controls a subsidiary if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated statement of other comprehensive income from the date the Group gains control until the date when the Group ceases to control the subsidiary.
The financial statements of the subsidiaries are prepared for the same
reporting period as the parent company, using consistent accounting policies.
All intra-group balances, transactions and unrealised gains and losses
resulting from intra-group transactions are eliminated in full.
B Functional and presentation currency
Items included in the financial statements of each of the Group's entities are
measured using the currency of the primary economic environment in which the
entity operates ("the functional currency"). The Consolidated Financial
Statements are presented in pound sterling, which is also the Company's
functional currency.
C Revenue recognition
Revenue is recognised as follows;
i) Bank interest
Bank interest income is recognised on an accruals basis.
ii) Rental income
Rental income from operating leases is net of sales taxes and value added tax
("VAT") recognised on a straight line basis over the lease term including lease
agreements with stepped rent increases. The initial direct costs incurred in
negotiating and arranging an operating lease are recognised as an expense over
the lease term on the same basis as the lease income. The cost of any lease
incentives provided are recognised over the lease term, on a straight line
basis as a reduction of rental income. The resulting asset is reflected as a
receivable in the Consolidated Balance Sheet. The valuation of investment
properties is reduced by the total of the unamortised lease incentive balances.
Any remaining lease incentive balances in respect of properties disposed of are
included in the calculation of the profit or loss arising at disposal.
Contingent rents, being those payments that are not fixed at the inception of
the lease, for example increases arising on rent reviews, are recorded as
income in periods when they are earned. Rent reviews which remain outstanding
at the year end are recognised as income, based on estimates, when it is
reasonable to assume that they will be received.
The surrender premiums received for the year ended 2016 were GBP81,500 (2015: GBP
120,000) as detailed in the Statement of Comprehensive Income and related to a
tenant break during the year.
iii) Property disposals
Where revenue is obtained by the sale of properties, it is recognised once the
sale transaction has been completed, regardless of when contracts have been
exchanged.
D Expenditure
All expenses are accounted for on an accruals basis. The investment management
and administration fees, finance and all other revenue expenses are charged
through the Consolidated Statement of Comprehensive Income as and when
incurred. The Group also incurs capital expenditure which can result in
movements in the capital value of the investment properties. The movements in
capital expenditure are reflected in the Statement of Comprehensive Income as a
valuation gain/(loss). In 2016, there were no non-income producing properties
(2015: Portrack Interchange in Stockton on Tees did not earn any income until
it was sold on 2 September 2015).
E Taxation
Current income tax assets and liabilities are measured at the amount expected
to be recovered from or paid to taxation authorities. The tax rates and tax
laws used to compute the amount are those that are enacted or substantively
enacted by the reporting date. Current income tax relating to items recognised
directly in other comprehensive income or in equity is recognised in other
comprehensive income and in equity respectively, and not in the income
statement. Positions taken in tax returns with respect to situations in which
applicable tax regulations are subject to interpretation, if any, are reviewed
periodically and provisions are established where appropriate.
The Group recognises liabilities for current taxes based on estimates of
whether additional taxes will be due. When the final tax outcome of these
matters is different from the amounts that were initially recorded, such
differences will impact the income and deferred tax provisions in the period in
which the determination is made.
Deferred income tax is provided using the liability method on all temporary
differences at the reporting date between the tax bases of assets and
liabilities and their carrying amounts for financial reporting purposes.
Deferred income tax assets are recognised only to the extent that it is
probable that taxable profit will be available against which deductible
temporary differences, carried forward tax credits or tax losses can be
utilised. The amount of deferred tax provided is based on the expected manner
of realisation or settlement of the carrying amount of assets and liabilities.
In determining the expected manner of realisation of an asset the Directors
consider that the Group will recover the value of investment property through
sale. Deferred income tax relating to items recognised directly in equity is
recognised in equity and not in profit or loss.
F Investment property
Investment properties comprise completed property and property under
construction or re-development that is held to earn rentals or for capital
appreciation or both. Property held under a lease is classified as investment
property when the definition of an investment property is met.
Investment properties are measured initially at cost including transaction
costs. Transaction costs include transfer taxes, professional fees for legal
services and initial leasing commissions to bring the property to the condition
necessary for it to be capable of operating. The carrying amount also includes
the cost of replacing part of an existing investment property at the time that
cost is incurred if the recognition criteria are met.
Subsequent to initial recognition, investment properties are stated at fair
value. Fair value is based upon the market valuation of the properties as
provided by the external valuers as described in note 2.2. Gains or losses
arising from changes in the fair values are included in the Consolidated
Statement of Comprehensive Income in the year in which they arise. For the
purposes of these financial statements, in order to avoid double counting, the
assessed fair value is:
i) Reduced by the carrying amount of any accrued income resulting from the
spreading of lease incentives and/or minimum lease payments.
ii) Increased by the carrying amount of any liability to the superior
leaseholder or freeholder (for properties held by the Group under operating
leases) that has been recognised in the Balance Sheet as a finance lease
obligation.
Acquisitions of investment properties are considered to have taken place on
exchange of contracts unless there are significant conditions attached. For
conditional exchanges acquisitions are recognised when these conditions are
satisfied.
Investment properties are derecognised when it has been disposed of or
permanently withdrawn from use and no future economic benefit is expected from
its disposal. Any gains or losses on the retirement or disposal of investment
properties are recognised in the Consolidated Statement of Comprehensive Income
in the year of retirement or disposal.
Gains or losses on the disposal of investment properties are determined as the
difference between net disposal proceeds and the carrying value of the asset in
the previous full period financial statements.
G Non-current assets held for sale
Non-current assets (and disposal groups) classified as held for sale are
measured at the lower of carrying amount and fair value (except for investment
property measured using fair value model).
Non-current assets and disposal groups are classified as held for sale if their
carrying amount will be recovered through a sale transaction rather than
through continuing use. This condition is regarded as met only when the sale is
highly probable and the asset (or disposal group) is available for immediate
sale in its present condition. Management must be committed to the sale which
should be expected to qualify for recognition as a completed sale within one
year from the date of classification.
When the Group is committed to a sale plan involving loss of control of a
subsidiary, all of the assets and liabilities of that subsidiary (i.e. disposal
group) are classified as held for sale when the criteria described above are
met, regardless of whether the Group will retain a non-controlling interest in
its former subsidiary after the sale.
H Trade and other receivables
Trade receivables are recognised and carried at the lower of their original
invoiced value and recoverable amount. Where the time value of money is
material, receivables are carried at amortised cost. A provision for impairment
of trade receivables is established when there is objective evidence that the
Group will not be able to collect all amounts due according to the original
terms of the receivables. Significant financial difficulties of the debtor,
probability that the debtor will enter bankruptcy or financial reorganisation,
and default or delinquency in payments (more than 30 days overdue) are
considered indicators that the trade receivable is impaired. The amount of the
provision is the difference between the asset's carrying amount and the present
value of estimated future cash flows, discounted at the original effective
interest rate. The carrying amount of the asset is reduced through use of an
allowance account, and the amount of the loss is recognised in the Consolidated
Statement of Comprehensive Income. When a trade receivable is uncollectible, it
is written off against the allowance account for trade receivables. Subsequent
recoveries of amounts previously written off are credited in the Consolidated
Statement of Comprehensive Income.
I Cash and cash equivalents
Cash and cash equivalents are defined as cash in hand, demand deposits, and
other short-term highly liquid investments readily convertible within three
months or less to known amounts of cash and subject to insignificant risk of
changes in value.
J Borrowings and interest expense
All loans and borrowings are initially recognised at the fair value of the
consideration received, less issue costs where applicable. After initial
recognition, all interest-bearing loans and borrowings are subsequently
measured at amortised cost. Amortised cost is calculated by taking into account
any discount or premium on settlement. Borrowing costs are recognised within
finance costs in the Consolidated Statement of Comprehensive Income as
incurred.
K Accounting for derivative financial instruments and hedging activities
Derivatives are initially recognised at fair value on the date a derivative
contract is entered into and are subsequently remeasured at their fair value.
The method of recognising the resulting gain or loss depends on whether the
derivative is designated as a hedging instrument, and if so, the nature of the
item being hedged. The Group documents at the inception of the transaction the
relationship between hedging instruments and hedged items, as well as its risk
management objective and strategy for undertaking various hedging transactions.
The Group also documents its assessment both at hedge inception and on an
ongoing basis of whether the derivatives that are used in hedging transactions
are highly effective in offsetting changes in fair values or cash flows of
hedged items. The effective portion of changes in the fair value of derivatives
that are designated and qualify as cash flow hedges are recognised in other
comprehensive income in the Consolidated Statement of Comprehensive Income. The
gains or losses relating to the ineffective portion are recognised in operating
profit in the Consolidated Statement of Comprehensive Income.
Amounts taken to equity are transferred to profit or loss when the hedged
transaction affects profit or loss, such as when the hedged financial income or
financial expenses is recognised.
When a derivative is held as an economic hedge for a period beyond 12 months
after the end of the reporting period, the derivative is classified as
non-current consistent with the classification of the underlying item. A
derivative instrument that is a designated and effective hedging instrument is
classified consistent with the classification of the underlying hedged item.
L Service charge
The Company has appointed a managing agent to deal with the service charge at
the investment properties and the Company is acting as an agent for the service
charge and not a principal. As a result the Group recognises net service charge
and void expenses in the Consolidated Statement of Comprehensive Income. The
table in note 22 is a summary of the service charge during the year. It shows
the amount the service charge has cost the tenants for the 12 months to 31
December 2016, the amount the tenants have been billed based on the service
charge budget and the amount the Group has paid in relation to void units over
the year. The table also shows the balancing service charge that is due from
the tenants as at the Balance Sheet date.
M Other financial liabilities
Trade and other payables are recognised and carried at invoiced value as they
are considered to have payment terms of 30 days or less and are not interest
bearing. The balance of trade and other payables are considered to meet the
definition of an accrual and have been expensed through the Income Statement or
Balance Sheet depending on classification. VAT payable at the Balance Sheet
date will be settled within 31 days of the Balance Sheet date with Her
Majesty's Revenue and Customs ("HMRC") and deferred rental income is rent that
has been billed to tenants but relates to the period after the Balance Sheet
date. Rent deposits recognised in note 13 are those that are due within one
year as a result of upcoming tenant expiries.
3 FINANCIAL RISK MANAGEMENT
The Group's principal financial liabilities, other than derivatives, are loans
and borrowings. The main purpose of the Group's loans and borrowings is to
finance the acquisition and development of the Group's property portfolio. The
Group has rent and other receivables, trade and other payables and cash and
short-term deposits that arise directly from its operations.
The Group is exposed to market risk (including interest rate risk and real
estate risk), credit risk, capital risk and liquidity risk. The Group is not
exposed to currency risk or price risk. The Group is engaged in a single
segment of business, being property investment in one geographical area, the
United Kingdom. Therefore the Group only engages in one form of currency being
pound sterling. The Group currently invests in direct non-listed property and
is therefore not exposed to price risk.
The Board of Directors reviews and agrees policies for managing each of these
risks which are summarised below.
Market risk
Market risk is the risk that the fair values of financial instruments will
fluctuate because of changes in market prices. The financial instruments held
by the Group that are affected by market risk are principally the derivative
financial instruments.
i) Interest Rate risk
The Group invests cash balances with RBS and Citibank. These balances expose
the Group to cash flow interest rate risk as the Group's income and operating
cash flows will be affected by movements in the market rate of interest. There
is considered to be no fair value interest rate risk in regard to these
balances.
The bank borrowings as described in note 14 also expose the Group to cash flow
interest rate risk. The Group's policy is to manage its cash flow interest rate
risk using interest rate swaps, in which the Group has agreed to exchange the
difference between fixed and floating interest amounts based on a notional
principal amount (see note 15). The Group has floating rate borrowings of GBP
125,000,000. GBP110,000,000 of these borrowings has been fixed via an interest
rate swap.
The bank borrowings are carried at amortised cost and the Group considers this
to be a close approximation to fair value. The fair value of the bank
borrowings is affected by changes in the market interest rate. The fair value
of the interest rate swap is exposed to changes in the market interest rate as
their fair value is calculated as the present value of the estimated future
cash flows under the agreements. The accounting policy for recognising the fair
value movements in the interest rate swaps is described in note 2.3.
Trade and other receivables and trade and other payables are interest free and
have settlement dates within one year and therefore are not considered to
present a fair value interest rate risk.
The following tables set out the carrying amount of the Group's financial
instruments excluding the amortisation of borrowing costs as outlined in note
14. Bank borrowings have been fixed due to an interest rate swap and is
detailed further in note 15:
As at 31 December 2016 Fixed rate Variable interest
rate rate
GBP GBP GBP
Cash and cash equivalents - 13,054,057 0.212%
Bank borrowings 110,000,000 - 2.725%
Bank borrowings - 15,000,000 1.567%
As at 31 December 2015 Fixed rate Variable interest
rate rate
GBP GBP GBP
Cash and cash equivalents - 12,395,516 0.402%
Bank borrowings 72,000,000 - 3.302%
Bank borrowings 12,432,692 - 3.021%
Bank borrowings - 55,000,000 1.753%
At 31 December 2016, if market rate interest rates had been 100 basis points
higher with all other variables held constant, the profit for the year would
have been GBP19,459 lower (2015: GBP183,654 higher) as a result of the higher
interest income on cash and cash equivalents offset by the higher interest
expense on the RCF. Other Comprehensive
Income and the Capital Reserve would have been GBP6,806,871 higher (2015: GBP
2,266,614 higher) as a result of an increase in the fair value of the
derivative designated as a cash flow hedge of floating rate borrowings.
At 31 December 2016, if market rate interest rates had been 100 basis points
lower with all other variables held constant, the profit for the year would
have been GBP19,459 higher (2015: GBP183,654 lower ) as a result of the lower
interest income on cash and cash equivalents off set by the lower interest
expense on the RCF. Other Comprehensive Income and the Capital Reserve would
have been GBP7,285,802 lower (2015: GBP2,350,900 lower) as a result of a decrease
in the fair value of the derivative designated as a cash flow hedge of floating
rate borrowings.
ii) Real estate risk
The Group has identified the following risks associated with the real estate
portfolio:
a) The cost of the development schemes may increase if there are delays in the
planning process. The Group uses advisers who are experts in the specific
planning requirements in the scheme's location in order to reduce the risks
that may arise in the planning process.
b) A major tenant may become insolvent causing a significant loss of rental
income and a reduction in the value of the associated property (see also credit
risk below). To reduce this risk, the Group reviews the financial status of all
prospective tenants and decides on the appropriate level of security required
via rental deposits or guarantees.
c) The exposure of the fair values of the portfolio to market and occupier
fundamentals. The Group aims to manage such risks by taking an active approach
to asset management (working with tenants to extend leases and minimise voids),
capturing profit (selling when the property has delivered a return to the Group
that the Group believes has been maximised and the proceeds can be reinvested
into more attractive opportunities) and identifying new investments (generally
at yields that are accretive to the revenue account and where the Group
believes there will be greater investment demand in the medium term.
Credit risk
Credit risk is the risk that a counterparty will be unable to meet a commitment
that it has entered into with the Group. In the event of default by an
occupational tenant, the Group will suffer a rental income shortfall and incur
additional related costs. The Investment Manager regularly reviews reports
produced by Dun and Bradstreet and other sources, including the IPD IRIS
report, to be able to assess the credit worthiness of the Group's tenants and
aims to ensure that there are no excessive concentrations of credit risk and
that the impact of default by a tenant is minimised. In addition to this, the
terms of the Group's bank borrowings require that the largest tenant accounts
for less than 20% of the Group's total rental income, that the five largest
tenants account for less than 50% of the Group's total rental income and that
the ten largest tenants account for less than 75% of the Group's total rental
income. The maximum credit risk from the tenant arrears of the Group at the
financial year end was GBP958,147 (2015: GBP1,696,704) as detailed in note 11.
With respect to credit risk arising from other financial assets of the Group,
which comprise cash and cash equivalents, the Group's exposure to credit risk
arises from default of the counterparty bank with a maximum exposure equal to
the carrying value of these instruments. As at 31 December 2016 GBP3,489,002
(2015:GBP7,821,163) was placed on deposit with The Royal Bank of Scotland plc
("RBS"), GBP9,565,055 (2015: GBP1,193,437) was held with Citibank. In the prior
year GBP3,380,916 was held with RBS on behalf of Standard Life Investments SLIPIT
Unit Trust and Standard Life Investments (SLIPIT) Limited Partnership, two
wholly owned subsidiaries as mentioned in note 9. The credit risk associated
with the cash deposits placed with RBS is mitigated by virtue of the Group
having a right to off-set the balance deposited against the amount borrowed
from RBS should RBS be unable to return the deposits for any reason. Citibank
is rated A-2 Stable by Standard & Poor's and P-2 Stable by Moody's. RBS is
rated A-3 Stable by Standard & Poor's and NP Positive by Moody's.
Liquidity risk
Liquidity risk is the risk that the Group will encounter difficulties in
realising assets or otherwise raising funds to meet financial commitments. The
investment properties in which the Group invests are not traded in an organised
public market and may be illiquid. As a result, the Group may not be able to
liquidate its investments in these properties quickly at an amount close to
their fair value in order to meet its liquidity requirements. The following
table summarises the maturity profile of the Group's financial liabilities
based on contractual undiscounted payments.
Year ended 31 December 2016 On demand 12 months 1 to 5 > 5 years Total
years
GBP GBP GBP GBP GBP
Interest-bearing loans - 2,151,250 8,605,000 127,689,063 138,445,313
Interest rate swaps - 1,081,300 4,325,200 1,351,625 6,758,125
Trade and other payables 1,642,956 - - - 1,642,956
Rental deposits due to tenants - 186,673 492,576 444,092 1,123,341
1,642,956 3,419,223 13,422,776 129,484,780 147,969,735
Year ended 31 December 2015
On demand 12 months 1 to 5 > 5 years Total
years
GBP GBP GBP GBP GBP
Interest-bearing loans - 2,565,213 140,715,298 - 143,280,511
Interest rate swaps - 1,201,368 2,398,705 - 3,600,073
Trade and other payables 5,309,804 - - - 5,309,804
Rental deposits due to tenants - 173,072 611,458 10,825 795,355
5,309,804 3,939,653 143,725,461 10,825 152,985,743
The disclosed amounts for interest-bearing loans and interest rate swaps in the
above table are the estimated net undiscounted cash flows.
The Group's liquidity position is regularly monitored by management and is
reviewed quarterly by the Board of Directors.
Capital risk
The Group's objectives when managing capital are to safeguard the Group's
ability to continue as a going concern in order to provide returns for
shareholders and benefits for other stakeholders and to maintain an optimal
capital structure to reduce the cost of capital.
In order to maintain or adjust the capital structure, the Group may adjust the
amount of dividends paid to shareholders, return capital to shareholders, issue
new shares, increase or decrease borrowings or sell assets to reduce debt.
The Group monitors capital on the basis of the gearing ratio. This ratio is
calculated as net debt divided by gross assets. Net debt is calculated as total
borrowings (excluding unamortised arrangement fees) less cash and cash
equivalents. Gross assets is calculated as non-current and current assets, as
shown in the Consolidated Balance Sheet.
The gearing ratios at 31 December 2016 and at 31 December 2015 were as follows:
2016 2015
GBP GBP
Total borrowings (excluding unamortised arrangement 125,000,000 139,432,692
fees)
Less: cash and cash equivalents (13,054,057) (12,395,516)
Net debt 111,945,943 127,037,176
Gross assets 445,722,814 467,328,709
Gearing ratio (must not exceed 65%) 25% 27%
The Board's current intention is that the Company's LTV ratio (calculated as
borrowings less all cash as a proportion of the property portfolio valuation)
will not exceed 45% (see note 14).
Fair values
Set out below is a comparison by class of the carrying amounts and fair value
of the Group's financial instruments that are carried in the financial
statements.
Carrying Amount Fair Value
2016 2015 2016 2015
GBP GBP GBP GBP
Financial assets
Cash and cash equivalents 13,054,057 12,395,516 13,054,057 12,395,516
Trade and other receivables 2,723,757 2,858,851 2,723,757 2,858,851
Financial liabilities
Bank borrowings 124,001,828 139,048,848 124,440,019 139,415,524
Interest rate swaps 3,562,542 2,085,292 3,562,542 2,085,292
Trade and other payables 2,766,297 6,105,159 2,766,297 6,105,159
The fair value of the financial assets and liabilities are included at an
estimate of the price that would be received to sell a financial asset or paid
to transfer a financial liability in an orderly transaction between market
participants at the measurement date. The following methods and assumptions
were used to estimate the fair value:
- Cash and cash equivalents, trade and other receivables and trade and other
payables are the same as fair value due to the short-term maturities of these
instruments.
- The fair value of bank borrowings is estimated by discounting future cash
flows using rates currently available for debt on similar terms and remaining
maturities. The fair value approximates their carrying values gross of
unamortised transaction costs. This is considered as being valued at level 2 of
the fair value hierarchy and has not changed level since 31 December 2015.
-The fair value of the interest rate swap contract is estimated by discounting
expected future cash flows using current market interest rates and yield curve
over the remaining term of the instrument. This is considered as being valued
at level 2 of the fair value hierarchy and has not changed level since 31
December 2015.
The following table shows an analysis of the fair values of financial
instruments recognised in the Balance Sheet by the level of the fair value
hierarchy*:
Year ended 31 December 2016 Level 1 Level 2 Level 3 Total fair
value
Interest rate swap - 3,562,542 - 3,562,542
Year ended 31 December 2015 Level 1 Level 2 Level 3 Total fair
value
Interest rate swaps - 2,085,292 - 2,085,292
*Explanation of the fair value hierarchy:
Level 1 - Quoted (unadjusted) market prices in active markets for identical
assets or liabilities.
Level 2 - Valuation techniques for which the lowest level input that is
significant to the fair value measurement is directly or indirectly observable.
Level 3 - Valuation techniques for which the lowest level input that is
significant to the fair value measurement is unobservable.
4 FEES
Investment management fees
On 19 December 2003 Standard Life Investments (Corporate Funds) Limited ("the
Investment Manager") was appointed as Investment Manager to manage the property
assets of the Group. A new Investment Management Agreement ("IMA") was entered
into on 7 July 2014, appointing the Investment Manager as the AIFM
("Alternative Investment Fund Manager").
Under the terms of the IMA the Investment Manager is entitled to 0.75% of total
assets up to GBP200 million; 0.70% of total assets between GBP200 million and GBP300
million; and 0.65% of total assets in excess of GBP300 million. The total fees
charged for the year amounted to GBP3,157,399 (2015: GBP2,105,104). The amount due
and payable at the year end amounted to GBP772,290 excluding VAT (2015: GBP400,767
excluding VAT).
Administration, secretarial and registrar fees
On 19 December 2003 Northern Trust International Fund Administration Services
(Guernsey) Limited ("Northern Trust") was appointed administrator, secretary
and registrar to the Group. Northern Trust is entitled to an annual fee,
payable quarterly in arrears, of GBP65,000. Northern Trust is also entitled to
reimbursement of reasonable out of pocket expenses. Total fees and expenses
charged for the year amounted to GBP75,472 (2015: GBP82,046). The amount due and
payable at the year end amounted to GBPnil (2015:GBP18,331).
Valuer's fee
JLL and Knight Frank ("the Valuers"), external international real estate
consultants, were appointed as valuers in respect of the assets comprising the
property portfolio. The total valuation fees charged for the year amounted to GBP
99,001 (2015: GBP92,324) of which minimum fees of GBP2,500 per property (2015: GBP
2,500) were incurred due for new properties added to the portfolio. The amount
due and payable at the year end amounted to GBP18,458 excluding VAT (2015: GBP
12,727 excluding VAT).
Auditor's fee
At the year end date Ernst & Young LLP continued as independent auditor of the
Group. The audit fees for the year amounted to GBP73,695 (2015: GBP82,308) and
relate to audit services provided for the 2016 financial year. Ernst & Young
LLP also provided non-audit services in 2016 in respect of taxation advice
amounting to GBP4,500 (2015; GBP1,100). In 2015 Ernst & Young LLP also provided tax
advice in relation to the UK REIT distribution rules amounting to GBP950. Ernst &
Young LLP also provided non-audit services in respect of due diligence costs
for asset acquisitions and tax accounting advice for the prospectus in 2015
amounting to GBP110,000 and GBP47,000 respectively. Total non-audit fees incurred
up to the Balance Sheet date amounted to GBP4,500 (2015: GBP159,050) and are
included within other administration expenses in the Statement of Comprehensive
Income.
5 FINANCE INCOME AND COSTS
2016 2015
GBP GBP
Interest income on cash and cash equivalents 30,536 68,186
Finance income 30,536 68,186
Interest expense on bank borrowings 2,594,070 1,869,338
Payments on interest rate swap 929,394 1,213,528
Amortisation of arrangement costs (see note 14) 524,130 241,916
Finance costs 4,047,594 3,324,782
6 TAXATION
UK REIT Status
The Group migrated tax residence to the UK and elected to be treated as a UK
REIT with effect from 1 January 2015. As a UK REIT, the income profits of the
Group's UK property rental business are exempt from corporation tax as are any
gains it makes from the disposal of its properties, provided they are not held
for trading or sold within three years of completion of development. The Group
is otherwise subject to UK corporation tax at the prevailing rate.
As the principal company of the REIT, the Company is required to distribute at
least 90% of the income profits of the Group's UK property rental business.
There are a number of other conditions that also require to be met by the
Company and the Group to maintain REIT tax status. These conditions were met in
the period and the Board intends to conduct the Group's affairs such that these
conditions continue to be met for the foreseeable future.
The Company and its Guernsey subsidiary have obtained exempt company status in
Guernsey so that they are exempt from Guernsey taxation on income arising
outside Guernsey and bank interest receivable in Guernsey.
A reconciliation between the tax charge and the product of accounting profit
multiplied by the applicable tax rate for the year ended 31 December 2016 and
2015 is, as follows:
2016 2015
GBP GBP
Profit before tax 14,198,646 31,939,653
Tax calculated at UK statutory corporation tax rate of 2,839,729 6,467,780
20% (2015: 20.25%)
UK REIT exemption on net income and gains (3,963,833) (3,304,893)
Valuation loss/(gain) in respect of investment 1,060,198 (3,571,487)
properties not subject to tax
Profit on disposal of investment properties not subject - 15,244
to tax
Expenditure not allowed for corporation tax/income tax 63,906 393,356
purposes
Current income tax charge - -
7 INVESTMENT PROPERTIES
Country UK UK UK
Class Industrial Office Retail
Total
2016 2016 2016 2016
GBP GBP GBP GBP
Market value as at 1 January 187,070,000 164,065,000 100,850,000 451,985,000
Capital expenditure on investment properties 969,776 53,563 456,449 1,479,788
Opening market value of disposed investment properties (7,950,000) (8,675,000) (2,500,000) (19,125,000)
Valuation loss from investment properties 1,261,400 (4,868,783) (1,693,609) (5,300,992)
Movement in lease incentives receivable 383,824 (99,780) 622,160 906,204
Market value at 31 December 181,735,000 150,475,000 97,735,000 429,945,000
Investment property recategorised as held for sale - (29,975,000) - (29,975,000)
Market value net of held for sale at 31 December 181,735,000 120,500,000 97,735,000 399,970,000
Adjustment for lease incentives (721,099) (2,212,708) (1,253,412) (4,187,219)
Carrying value at 31 December 181,013,901 118,287,292 96,481,588 395,782,781
The valuations were performed by JLL and Knight Frank, accredited external
valuers with recognised and relevant professional qualifications and recent
experience of the location and category of the investment properties being
valued. The valuation model, in accordance with Royal Institute of Chartered
Surveyors ('RICS') requirements on disclosure for Regulated Purpose Valuations
has been applied (RICS Valuation - Professional Standards January 2014
published by the Royal Institution of Chartered Surveyors). These valuation
models are consistent with the principles in IFRS 13. The market value provided
by JLL and Knight Frank at the year end was GBP429,945,000 (2015: GBP451,985,000)
however an adjustment has been made for lease incentives of GBP4,187,219 (2015: GBP
3,368,246) that are already accounted for as an asset. Valuation gains and
losses from investment properties are recognised in the Consolidated Statement
of Comprehensive Income for the period and are attributable to changes in
unrealised gains or losses relating to investment properties held at the end of
the reporting period.
Country UK UK UK
Class Industrial Office Retail
Total
2015 2015 2015 2015
GBP GBP GBP GBP
Market value as at 1 January 108,660,000 114,265,100 47,125,000 270,050,100
Purchase of investment properties 11,217,775 19,005,390 21,974,958 52,198,123
Acquired through business combination (note 10) 69,050,000 59,850,000 36,100,000 165,000,000
Capital expenditure on investment properties 1,034,205 72,989 37,240 1,144,434
Opening market value of disposed investment properties (11,405,000) (38,325,100) (5,100,000) (54,830,100)
Valuation gain from investment properties 8,404,316 8,529,645 703,012 17,636,973
Movement in lease incentives receivable 108,704 666,976 9,790 785,470
Market value as at 31 December 187,070,000 164,065,000 100,850,000 451,985,000
Adjustment for lease incentives* (353,854) (2,383,140) (631,252) (3,368,246)
Carrying value at 31 December 186,716,146 161,681,860 100,218,748 448,616,754
*In 2015, lease incentives are split between non-current assets of GBP3,457,588
and current liabilities of GBP89,342 (note 13).
In the Consolidated Cash Flow Statement, proceeds from disposal of investment
properties comprise:
2016 2015
GBP GBP
Opening market value of disposed investment properties 19,125,000 54,830,100
Profit on disposal of investment properties 1,067,395 3,024,748
Net proceeds from disposal of investment properties 20,192,395 57,854,848
Valuation Methodology
The fair value of completed investment properties are determined using the
income capitalisation method.
The income capitalisation method is based on capitalising the net income stream
at an appropriate yield. In establishing the net income stream the valuers have
reflected the current rent (the gross rent) payable to lease expiry, at which
point the valuer has assumed that each unit will be re-let at their opinion of
ERV. The valuers have made allowances for voids where appropriate, as well as
deducting non recoverable costs where applicable. The appropriate yield is
selected on the basis of the location of the building, its quality, tenant
credit quality and lease terms amongst other factors.
No properties have changed valuation technique during the year. At the Balance
Sheet date the income capitalisation method is appropriate for valuing all
assets.
The Group appoints suitable valuers (such appointment is reviewed on a periodic
basis) to undertake a valuation of all the direct real estate investments on a
quarterly basis. The valuation is undertaken in accordance with the then
current RICS guidelines and requirements as mentioned above.
The Investment Manager meets with the valuers on a quarterly basis to ensure
the valuers are aware of all relevant information for the valuation and any
change in the investment over the quarter. The Investment Manager then reviews
and discusses the draft valuations with the valuers to ensure correct factual
assumptions are made. The valuers report a final valuation that is then
reported to the Board.
The management group that determines the Company's valuation policies and
procedures for property valuations is the Property Valuation Committee. The
Committee reviews the quarterly property valuation reports produced by the
valuers (or such other person as may from time to time provide such property
valuation services to the Company) before its submission to the Board,
focussing in particular on:
- significant adjustments from the previous property valuation report
- reviewing the individual valuations of each property
- compliance with applicable standards and guidelines including those issued by
RICS and the UKLA Listing Rules
- reviewing the findings and any recommendations or statements made by the
valuer
- considering any further matters relating to the valuation of the properties
The Chairman of the Committee makes a brief report of the findings and
recommendations of the Committee to the Board after each Committee meeting. The
minutes of the Committee meetings are circulated to the Board. The Chairman
submits an annual report to the Board summarising the Committee's activities
during the year and the related significant results and findings.
All investment properties are classified as Level 3 in the fair value
hierarchy. There were no movements between levels during the year.
There are currently no restrictions on the realisability of investment
properties or the remittance of income and proceeds of disposal.
The table below outlines the valuation techniques and inputs used to derive
Level 3 fair values for each class of investment properties. The table
includes:
- The fair value measurements at the end of the reporting period.
- The level of the fair value hierarchy (e.g. Level 3) within which the fair
value measurements are categorised in their entirety.
- A description of the valuation techniques applied.
- Fair value measurements, quantitative information about the significant
unobservable inputs used in the fair value measurement.
- The inputs used in the fair value measurement, including the ranges of rent
charged to different units within the same building.
Country & Class Fair Value Valuation Technique Key Unobservable Input Range (weighted average)
GBP
UK Industrial 181,735,000 Income Capitalisation Initial Yield 0% to 9.26% (5.88%)
Level 3 Reversionary Yield 5.52% to 10.92% (6.89%)
Equivalent Yield 5.73% to 8.74% (6.55%)
Estimated rental value per Sq. GBP20.20 to GBP152.78 (GBP61.34)
m
UK Office Level 3 150,475,000 Income Capitalisation Initial Yield 4.86% to 8.89% (6.67%)
Reversionary Yield 5.57% to 8.86% (7.05%)
Equivalent Yield 5.19% to 8.74% (6.43%)
Estimated rental value per Sq. GBP138.98 to GBP669.67 (GBP280.15)
m
UK Retail Level 3 97,735,000 Income Capitalisation Initial Yield 4.87% to 8.96% (6.56%)
Reversionary Yield 3.87% to 7.93% (5.81%)
Equivalent Yield 5.37% to 7.94% (6.49%)
Estimated rental value per Sq. GBP95.24 to GBP281.94 (GBP158.49)
m
429,945,000
Descriptions and definitions
The following descriptions and definitions relate to valuation techniques and
key observable inputs made in determining the fair values.
Estimated rental value (ERV)
The rent at which space could be let in the market conditions prevailing at the
date of valuation.
Equivalent yield
The equivalent yield is defined as the internal rate of return of the cash flow
from the property, assuming a rise or fall to ERV at the next review or lease
termination, but with no further rental change.
Initial yield
Initial yield is the annualised rents of a property expressed as a percentage
of the property value.
Reversionary yield
Reversionary yield is the anticipated yield to which the initial yield will
rise (or fall) once the rent reaches the ERV.
The table below shows the ERV per annum, area per square foot, average ERV per
square foot, initial yield and reversionary yield as at the Balance Sheet date.
2016 2015
ERV p.a. GBP GBP
31,037,488 32,111,174
Area sq. ft. 3,745,069 3,933,195
Average ERV per sq. ft. GBP8.29 GBP8.16
Initial yield 6.3% 6.0%
Revisionary yield 7.2% 7.2%
The table below presents the sensitivity of the valuation to changes in the
most significant assumptions underlying the valuation of completed investment
property.
2016 2015
GBP GBP
Increase in equivalent yield of 25 bps. (17,901,800) (18,600,000)
Decrease in rental rates of 5% (ERV) (21,464,055) (17,700,000)
Below is a list of how the interrelationships in the sensitivity analysis above
can be explained.
In both cases outlined in the sensitivity table the estimated Fair Value would
increase (decrease) if:
· The ERV is higher (lower)
· Void periods were shorter (longer)
· The occupancy rate was higher (lower)
· Rent free periods were shorter (longer)
· The capitalisation rates were lower (higher)
8 INVESTMENT PROPERTIES HELD FOR SALE
As at 31 December 2016 the Group had exchanged contracts with third parties for
the sale of The Quadrangle, Cheltenham for a price of GBP11,075,000. The sale of
The Quadrangle completed on 10 January 2017. As at 31 December 2016, the Group
was actively seeking a buyer for White Bear Yard. The Group exchanged contracts
and completed this sale on 22 March 2017 for a price of GBP19,000,000.
As at 31 December 2015 the Group had no investment properties classified as
held for sale.
9 INVESTMENT IN SUBSIDIARY UNDERTAKINGS
The Company owns 100 per cent of the issued ordinary share capital of Standard
Life Investments Property Holdings Limited, a company with limited liability
incorporated and domiciled in Guernsey, Channel Islands, whose principal
business is property investment.
The Group, through its subsidiary, owns 100 per cent of the issued ordinary
share capital of Huris (Farnborough) Limited, a company incorporated in the
Cayman Islands whose principal business is property investment.
The acquisitions of Huris (Farnborough) Limited and HEREF Eden Main Limited
were accounted for as acquisitions of assets in 2014 which generated a loss of
GBPnil (2015: GBP75,181 loss) in the year ended 31 December 2016 as detailed in the
Consolidated Statement of Comprehensive Income. During the year to 31 December
2016, HEREF Eden Main Limited was liquidated. The Group intends to liquidate
Huris (Farnborough) Limited in the next financial year.
In 2015 the Group acquired 100% of the units in Standard Life Investments
SLIPIT Unit Trust, (formerly Aviva Investors UK Real Estate Recovery II Unit
Trust) a Jersey Property Unit Trust. The acquisition included the entire issued
share capital of a General Partner which holds, through a Limited Partnership,
a portfolio of 22 UK real estate assets. The transaction completed on 23
December 2015 and the Group has treated the acquisition as a Business
Combination in accordance with IFRS 3 (see note 10).
During the year ended 31 December 2016, the Group liquidated the following
entities:
? Standard Life Investments SLIPIT Unit Trust.
? Ceres Court Properties Limited, a company with limited liability incorporated
and domiciled in the United Kingdom.
? HEREF Eden Main Limited, a company incorporated in Jersey, Channel Islands.
The Group Undertakings consist of the following 100% owned subsidiaries at the
Balance Sheet date:
- Standard Life Investments Property Holdings Limited, a company with limited
liability incorporated in Guernsey, Channel Islands.
- Standard Life Investments (SLIPIT) Limited Partnership, a limited partnership
established in England.
- Standard Life Investments SLIPIT (General Partner) Limited, a company with
limited liability incorporated in England.
- Standard Life Investments SLIPIT (Nominee) Limited, a company with limited
liability incorporated and domiciled in England.
- Huris (farnborough) Limited, a company incorporated in the Cayman Islands.
10 BUSINESS COMBINATIONS
On 23 December 2015, the Group acquired 100% of the shares of Standard Life
Investments SLIPIT Unit Trust (formerly Aviva Investors UK Real Estate Recovery
II Unit Trust), a Jersey Property Unit Trust, through the Group's property
subsidiary, Standard Life Investments Property Holdings Limited. The
acquisition included the entire issued share capital of Standard Life
Investments SLIPIT (General Partner) Limited which holds, through a Limited
Partnership, a portfolio of 22 UK real estate assets. Standard Life Investments
(SLIPIT) Limited Partnership (previously Aviva Investors UK Real Estate
Recovery II Limited Partnership) holds a portfolio of retail, office and
industrial buildings let under operating leases and the acquisition was made to
give the Group access to those assets. The existing strategic management
function and associated processes were acquired with the property and, as such,
the Directors consider this transaction as an acquisition of a business, rather
than an asset acquisition.
The fair value of the identifiable assets and liabilities of Standard Life
Investments SLIPIT Unit Trust as at the date of acquisition were:
Fair value
recognised
on
acquisition
2015
GBP
Investment property 165,000,000
Trade receivables 1,428,495
Cash and cash equivalents 132,045
166,560,540
Trade payables (1,368,037)
165,192,503
The purchase consideration of GBP165,192,503 for the 100% interest acquired
consisted of GBP75,027,974 raised from issuing new shares net of costs,
borrowings of GBP54,826,550 net of loan arrangement costs and GBP35,337,979 from
cash reserves. The due diligence costs of GBP1,942,498 incurred in connection
with the acquisition have been expensed and were included in the 2015
Consolidated Statement of Comprehensive Income. In 2015, from the date of
acquisition, Standard Life Investments SLIPIT Unit Trust contributed GBP582,685
to the profit after tax of the Group and revenues of GBP350,212 in the form of
property rental income. If the acquisition had occurred on 1 January 2015 the
Standard Life Investments SLIPIT Unit Trust would have contributed GBP29,053,934
to the profit after tax of the Group and GBP11,013,373 revenues in the form of
property rental income.
11 TRADE AND OTHER RECEIVABLES
2016 2015
GBP GBP
Trade receivables 992,099 1,710,199
Less: provision for impairment of trade receivables (33,952) (13,495)
Trade receivables (net) 958,147 1,696,704
Rental deposits held on behalf of tenants 1,123,341 795,355
Other receivables 642,269 366,792
Total trade and other receivables 2,723,757 2,858,851
Reconciliation for changes in the provision for impairment of trade
receivables:
2016 2015
GBP GBP
Opening balance (13,495) (6,941)
Charge for the year (33,952) (13,495)
Reversal of provision 13,495 6,941
Closing balance (33,952) (13,495)
The estimated fair values of receivables are the discounted amount of the
estimated future cash flows expected to be received and approximate their
carrying amounts.
The trade receivables above relate to rental income receivable from tenants of
the investment properties. When a new lease is agreed with a tenant the
Investment manager performs various money laundering checks and makes a
financial assessment to determine the tenant's ability to fulfil its
obligations under the lease agreement for the foreseeable future. The majority
of tenants are invoiced for rental income quarterly in advance and are issued
with invoices at least 21 days before the relevant quarter starts. Invoices
become due on the first day of the quarter and are considered past due if
payment is not received by this date. Other receivables are considered past due
when the given terms of credit expire.
Amounts are considered impaired when it becomes unlikely that the full value of
a receivable will be recovered. Movement in the balance considered to be
impaired has been included in other direct property costs in the Consolidated
Statement of Comprehensive Income. As of 31 December 2016, trade receivables of
GBP33,952 (2015: GBP13,495) were considered impaired and provided for.
The ageing of these receivables is as follows:
2016 2015
GBP GBP
0 to 3 months 8,625 12,905
3 to 6 months 5,625 352
Over 6 months 19,702 238
33,952 13,495
As of 31 December 2016, trade receivables of GBP958,147 (2015: GBP1,696,704) were
less than 3 months past due but considered not impaired.
12 CASH AND CASH EQUIVALENTS
2016 2015
GBP GBP
Cash held at bank 9,565,055 4,574,353
Cash held on deposit with RBS (see note 14) 3,489,002 7,821,163
13,054,057 12,395,516
Cash held at banks earns interest at floating rates based on daily bank deposit
rates. Deposits are made for varying periods of between one day and three
months, depending on the immediate cash requirements of the Group, and earn
interest at the applicable short-term deposit rates.
13 TRADE AND OTHER PAYABLES
2016 2015
GBP GBP
Trade and other payables 1,642,956 5,309,804
VAT payable 888,553 680,674
Deferred rental income 6,066,035 6,536,107
Rental deposits due to tenants 186,673 173,072
Lease incentives due within one year - 89,342
8,784,217 12,788,999
Trade payables are non-interest bearing and are normally settled on 30-day
terms.
14 BANK BORROWINGS
2016 2015
GBP GBP
Loan facility and drawn down outstanding balance 125,000,000 139,432,692
Opening carrying value 139,048,848 83,980,382
Repayment of 2015 loan (139,432,692) -
Borrowings during the year 145,000,000 55,000,000
Repayment of RCF (20,000,000) -
Arrangements costs of additional facility (1,138,458) (173,450)
Amortisation of arrangement costs 524,130 241,916
Closing carrying value 124,001,828 139,048,848
On 20 January 2012 the Company completed the drawdown of GBP84,432,692 loan with
The Royal Bank of Scotland plc ("RBS"). The facility was repayable on 16
December 2018, however this date was re-negotiated during the year to 31
December 2015 as detailed below. Interest was payable at a rate equal to the
aggregate of 3 month LIBOR, a margin of 1.65% (below 40% LTV) or 1.75% (40% to
60% LTV inclusive) or 1.95% (above 60% LTV) until 21 December 2015.
On 22 December 2015, the Company increased its borrowing facilities from GBP
84,432,692 to GBP139,432,692 and completed the drawdown of an additional GBP
55,000,000 loan with RBS. The additional borrowing was in the form of an
additional term loan of GBP40,567,308 and a RCF of GBP14,432,692 (with the
potential to draw a further GBP15,567,308 of the
RCF). The entire debt facility and the drawn down balance of GBP139,432,692 were
then repayable on 27 June 2017. Interest from 22 December 2015 was payable at a
rate equal to the aggregate of 3 month LIBOR and a margin of 1.25%
On 28 April 2016 the fully drawn down balance of GBP139,432,692 was repaid.
On 28 April 2016 the Company entered into an agreement to extend GBP145 million
of its existing GBP155 million debt facility with RBS. The debt facility consists
of a GBP110 million seven year term loan facility and a GBP35 million five year
RCF. The RCF may by agreement be extended by one year on two occasions. During
the year GBP20 million of the RCF was repaid, with the balance of GBP15million
remaining drawn down by the Group at 31 December 2016. Interest is payable on
the Term Loan at 3 month LIBOR plus 1.375% and on the RCF at LIBOR plus 1.2%.
This equates to a rate of 2.725% on the Term Loan and 1.58% on the RCF which
together give an attractive blended rate of 2.6%.
Under the terms of the loan facility there are certain events which would
entitle RBS to terminate the loan facility and demand repayment of all sums
due. Included in these events of default is the financial undertaking relating
to the LTV percentage. The new loan agreement notes that the LTV percentage is
calculated as the loan amount less the amount of any sterling cash deposited
within the security of RBS divided by the gross secured property value, and
that this percentage should not exceed 60% for the period to and including 27
April 2021 and should not exceed 55% after 27 April 2021 to maturity.
2016 2015
GBP GBP
Loan amount 125,000,000 139,432,692
Cash deposited within the security of RBS (3,489,002) (7,821,163)
121,510,998 131,611,529
Investment property valuation 429,945,000 451,985,000
LTV percentage 28.3% 29.1%
LTV percentage covenant 60.0% 65.0%
LTV percentage if all cash is deposited within the security of RBS 26.0% 28.1%
Other loan covenants that the Group is obliged to meet include the following:
- that the net rental income is not less than 150% of the finance costs for any
three month period
- that the largest single asset accounts for less than 15% of the Gross Secured
Asset Value
- that the largest ten assets accounts for less than 75% of the Gross Secured
Asset Value
- that sector weightings are restricted to 55%, 45% and 55% for the Office,
Retail and Industrial sectors respectively
- that the largest tenant accounts for less than 20% of the Group's annual net
rental income
- that the five largest tenants account for less than 50% of the Group's annual
net rental income
- that the ten largest tenants account for less than 75% of the Group's annual
net rental income
During the year, the Group did not default on any of its obligations and loan
covenants under its loan agreement.
The loan facility is secured by fixed and floating charges over the assets of
the Company and its wholly owned subsidiaries, Standard Life Investments
Property Holdings Limited and Standard Life Investments (SLIPIT) Limited
Partnership.
15 INTEREST RATE SWAP
On 20 January 2012 the Company completed an interest rate swap of a notional
amount of GBP12,432,692 with RBS. This interest rate swap had a maturity of 16
December 2018. Under the swap the Company had agreed to receive a floating
interest rate linked to 3 month LIBOR and pay a fixed interest rate of
1.77125%.
On 20 January 2012 the Company completed an interest rate swap of a notional
amount of GBP72,000,000 with RBS which replaced the interest rate swap entered
into on 29 December 2003. This interest rate swap effective date was 29
December 2013 and had a maturity date of 16 December 2018. Under the swap the
Company had agreed to receive a floating interest rate linked to 3 month LIBOR
and pay a fixed interest rate of 2.0515%.
On 28 April 2016, both of the above interest rate swaps were repaid at a cost
of GBP2,735,000.
As part of the refinancing of loans (see note 14), on 28 April 2016 the Company
completed an interest rate swap of a notional amount of GBP110,000,000 with RBS.
The interest rate swap effective date is 28 April 2016 and has a maturity date
of 27 April 2023. Under the swap the Company has agreed to receive a floating
interest rate linked to 3 month LIBOR and pay a fixed interest rate of 1.35%.
2016 2015
GBP GBP
Opening fair value of interest rate swaps at 1 January (2,085,292) (2,674,939)
Valuation (loss)/gain on interest rate swaps (4,212,250) 589,647
Swaps breakage costs 2,735,000 -
Closing fair value of interest rate swaps at 31 December (3,562,542) (2,085,292)
The individual swap assets and liabilities are listed below:
2016 2015
GBP GBP
Interest rate swap with a start date of 20 January 2012 maturing on 16 - (220,107)
December 2018
Interest rate swap with a start date of 29 December 2013 maturing on 16 - (1,865,185)
December 2018
Interest rate swap with a start date of 28 April 2016 maturing on 27 April (3,562,542) -
2023
(3,562,542) (2,085,292)
16 LEASE ANALYSIS
The Group has entered into leases on its property portfolio. This property
portfolio as at 31 December 2016 had an average lease expiry of 5 years and 6
months. Leases include clauses to enable periodic upward revision of the rental
charge according to prevailing market conditions. Some leases contain options
to break before the end of the lease term.
Future minimum rentals receivable under non-cancellable operating leases as at
31 December are as follows:
2016 2015
GBP GBP
Within one year 26,641,958 26,596,634
After one year, but not more than five years 69,213,166 85,580,067
More than five years 57,451,817 52,490,484
Total 153,306,941 164,667,185
The largest single tenant at the year end accounts for 4.6% (2015: 4.6%) of the
current annual passing rent.
17 SHARE CAPITAL
Under the Company's Articles of Incorporation, the Company may issue an
unlimited number of ordinary shares of 1 pence each, subject to issuance limits
set at the AGM each year. As at 31 December 2016 and 31 December 2015 there
were 380,690,419 ordinary shares of 1p each in issue. All ordinary shares rank
equally for dividends and distributions and carry one vote each. There are no
restrictions concerning the transfer of ordinary shares in the Company, no
special rights with regard to control attached to the ordinary shares, no
agreements between holders of ordinary shares regarding their transfer known to
the Company and no agreement which the Company is party to that affects its
control following a takeover bid.
Allotted, called up and fully paid: 2016 2015
GBP GBP
Opening balance 204,820,219 96,188,648
Shares issued between 25 February 2015 and 21 December 2015 at a price of - 110,462,680
between 78.1p and 82.0p per share
Issue costs associated with new ordinary shares - (1,831,109)
Closing balance 204,820,219 204,820,219
2016 2015
Number of Number of
shares shares
Opening balance 380,690,419 244,216,165
Issued during the year - 136,474,254
Closing balance 380,690,419 380,690,419
18 RESERVES
The detailed movement of the below reserves for the years to 31 December 2016
and 31 December 2015 can be found in the Consolidated Statement of Changes in
Equity.
Retained earnings
This is a distributable reserve and represents the cumulative revenue earnings
of the Group less dividends paid to the Company's shareholders.
Capital reserves
This reserve represents realised gains and losses on disposed investment
properties and unrealised valuation gains and losses on investment properties
and cash flow hedges since the Company's launch.
Other distributable reserves
This reserve represents the share premium raised on launch of the Company which
was subsequently converted to a distributable reserve by special resolution
dated 4 December 2003. This balance has been reduced by the allocation of
preference share finance costs.
19 EARNINGS PER SHARE
Basic earnings per share amounts are calculated by dividing profit for the year
net of tax attributable to ordinary equity holders by the weighted average
number of ordinary shares outstanding during the year. As there are no dilutive
instruments outstanding, basic and diluted earnings per share are identical.
The earnings per share for the year is set out in the table below. In addition
one of the key metrics the Board considers is dividend cover. This is
calculated by dividing the net revenue earnings in the year (profit for the
year net of tax excluding all capital items and the swaps breakage costs)
divided by the dividends payable in relation to the financial year. For 2016
this equated to a figure of 117% (2015: 104%).
The following reflects the income and share data used in the basic and diluted
earnings per share computations:
2016 2015
GBP GBP
Profit for the year net of tax 14,198,646 31,939,653
2016 2015
Weighted average number of ordinary shares outstanding during the year 380,690,419 280,330,039
Earnings per ordinary share (pence) 3.73 11.39
EPRA publishes guidelines for calculating adjusted earnings that represent
earnings from the core operational activities. Therefore, it excludes the
effect of movements in the fair value of, and results from sales of, investment
properties together with the effect of movements in the fair value of financial
instruments.
2016 2015
GBP GBP
Profit for the year net of tax 14,198,646 31,939,653
Loss/(gain) on revaluation movements on investment properties 5,300,992 (17,636,973)
Loss on asset acquisition - 75,181
Profit on disposal of investment properties (1,067,395) (3,024,748)
Loss on derecognition of interest rate swaps 2,735,000 -
Adjusted (EPRA) profit for the year 21,167,243 11,353,113
2016 2015
Weighted average number of ordinary shares outstanding during the year 380,690,419 280,330,039
Adjusted (EPRA) earnings per share (pence) 5.56 4.05
20 DIVIDS AND PROPERTY INCOME DISTRIBUTION GROSS OF INCOME TAX
2016 2015
GBP GBP
Non Property Income Distributions
1.161p per ordinary share paid in February 2015 relating to the quarter ending - 2,835,350
31 December 2014
1.161p per ordinary share paid in November 2015 relating to the quarter ending -
30 September 2015 2,220,581
0.561p per ordinary share paid in March 2016 relating to the quarter ending 31 1,679,695 -
December 2015
Property Income Distributions
0.60p per ordinary share paid in March 2016 relating to the quarter ending 31 1,796,781 -
December 2015
1.19p per ordinary share paid in May 2016 relating to the quarter ending 31 4,530,216 3,213,406
March 2016 (2015: 1.161p)
1.19p per ordinary share paid in August 2016 relating to the quarter ending 30 4,530,216 3,348,175
June 2016 (2015: 1.161p)
1.19p per ordinary share paid in November 2016 relating to the quarter ending 4,530,216 1,127,594
30 September 2016 (2015: 1.161p)
17,067,124 12,745,106
On 31 March 2017 a dividend in respect of the quarter to 31 December 2016 of
1.19 pence per share will be paid. This dividend will be split as a property
income dividend of 0.35 pence per share and a non property income dividend of
0.84 pence per share.
On 1 January 2015 the Company converted to a UK REIT from a Guernsey Investment
Company (GIC). The payment in February 2015 is the dividend relating to the
period prior to REIT conversion for the quarter ended 31 December 2014 and
relates to when the Company was a GIC. The payment in May 2015 was the first
property income distribution (gross of income tax) following REIT conversion
for the quarter ended 31 March 2015.
21 RECONCILIATION OF CONSOLIDATED NAV TO PUBLISHED NAV
The NAV attributable to ordinary shares is published quarterly and is based on
the most recent valuation of the investment properties.
2016 2015
Number of ordinary shares at the reporting date 380,690,419 380,690,419
2016 2015
GBP GBP
Total equity per audited consolidated financial statements 308,437,559 312,783,287
NAV per share (pence) 81.0 82.2
The EPRA publishes guidelines for calculating adjusted NAV. EPRA NAV represents
the fair value of an entity's equity on a long-term basis. Items that EPRA
considers will have no impact on the long term, such as fair value of
derivatives, are therefore excluded.
2016 2015
GBP GBP
Total equity per consolidated financial statements 308,437,559 312,783,287
Adjustments:
Add: fair value of derivatives 3,562,542 2,085,292
EPRA NAV 312,000,101 314,868,579
EPRA NAV per share (pence) 82.0 82.7
22 SERVICE CHARGE
The Company has appointed a managing agent to deal with the service charge at
the investment properties. The table below is a summary of the service charge
during the year. The table shows the amount the service charge costs the
tenants, the amount the tenants have been billed based on the service charge
budget and the amount the Company has paid in relation to void units over the
year. The table also shows the balancing service charge that is due back from
the tenants as at the Balance Sheet date.
2016 2015
GBP GBP
Total service charge expenditure incurred 1,888,993 1,685,569
Total service charge billed to tenants excluding void units and service charge 1,550,599 1,492,339
caps
Service charge billed to the Group in respect of void units and service charge 135,432 74,448
caps
Service charge due from tenants as at 31 December 202,962 118,782
1,888,993 1,685,569
23 RELATED PARTY DISCLOSURES
Directors' remuneration
The remuneration of key management personnel is detailed below which includes
pay as you earn tax and national insurance contributions. Further details on
the key management personnel can be found in the Directors' Remuneration Report
and the Corporate Governance Report.
2016 2015
GBP GBP
Robert Peto (appointed Chairman 2 June 2016) 34,558 26,000
Sally-Ann Farnon (appointed 16 July 2010) 33,250 28,500
Huw Evans (appointed 11 April 2013) 30,000 26,000
Mike Balfour (appointed 10 March 2016) 24,723 -
James Clifton-Brown (appointed 17 August 2016) 12,061 -
Richard Barfield (retired 2 June 2016) 14,808 33,000
Employers national insurance contributions 7,866 5,872
157,266 119,372
Directors expenses 6,959 4,924
164,225 124,296
Investment Manager
Management of the property portfolio is contractually delegated to Standard
Life Investments (Corporate Funds) Limited as Investment Manager and the
contract with the Investment Manager can be terminated by the Company.
Transactions with the Investment Manager in the year are detailed out in note
4.
24 SEGMENTAL INFORMATION
The Board has considered the requirements of IFRS 8 'operating segments'. The
Board is of the view that the Group is engaged in a single segment of business,
being property investment and in one geographical area, the United Kingdom.
25 EVENTS AFTER THE BALANCE SHEET DATE
Dividends
On 31 March 2017 a dividend in respect of the quarter to 31 December 2016 of
1.19 pence per share will be paid. This dividend will be split as a property
income dividend of 0.35 pence per share and a non property income dividend of
0.84 pence per share.
Purchases
On 20 February 2017 the Group completed the purchase of SNOP, Washington, an
industrial property for GBP5.5 million excluding costs.
Sales
On 10 January 2017 the Group completed the sale of The Quadrangle, Cheltenham for GBP11.075 million excluding costs. On 22 March 2017 the Group completed the sale of White Bear Yard for GBP19million excluding costs. Share Issues During the period from 1 February 2017 to 15 March 2017 the Group has raised GBP 6.2million through the issue of 7.275 million new ordinary shares. This Annual Financial Report announcement is not the Company's statutory accounts for the year ended 31 December 2016. The statutory accounts for the year ended 31 December 2016 received an audit report which was unqualified. The Annual Report will be posted to shareholders in April 2017 and additional copies will be available from the Manager (Tel. 0131 245 3151) or by download from the Company's webpage (www.slipit.co.uk). Please note that past performance is not necessarily a guide to the future and that the value of investments and the income from them may fall as well as rise. Investors may not get back the amount they originally invested. All enquiries to: The Company Secretary Northern Trust International Fund Administration Services (Guernsey) Limited Trafalgar Court Les Banques St Peter Port Guernsey GY1 3QL Tel: 01481 745001 Fax: 01481 745051 Jason Baggaley Standard Life Investments Limited Tel: 0131 245 2833 Graeme McDonald Standard Life Investments Limited Tel: 0131 245 3151 END END
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March 23, 2017 03:00 ET (07:00 GMT)
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