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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Secure Income Reit Plc | LSE:SIR | London | Ordinary Share | GB00BLMQ9L68 | ORD 10P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 461.00 | 461.00 | 461.50 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
From Jul 2019 to Jul 2024
TIDMSIR
RNS Number : 8728Q
Secure Income REIT PLC
03 March 2016
3 March 2016
Secure Income REIT Plc
(the "Company" or the "Group")
Results for the year ended 31 December 2015
Secure Income REIT Plc (AIM: SIR), the specialist long term income UK REIT, today announces its results for the year ended 31 December 2015.
Highlights
-- EPRA NAV as at 31 December 2015 of 282.8 pence per share, up 9.4% after incurring early debt repayment costs amounting to nearly 16% of EPRA NAV as at 31 December 2014
-- New long term debt financing arrangements totalling GBP903 million completed between August and October 2015:
- reducing interest cost by 23% from 6.8% to 5.2% per annum, saving c. GBP14 million on an annualised basis;
- extending term to maturity from less than two years to c. nine years on significantly improved terms; and
- facilitating payment of maiden distributions to shareholders
-- Intention to pay quarterly distributions commencing in August 2016, initially reflecting a yield of 4.2% on 31 December 2015 EPRA NAV, with highly predictable growth prospects underpinned by annual contractual rental uplifts, either at fixed rates or upwards only uncapped RPI
-- Net loan to value ratio of 61%, down from 70% at 31 December 2014 and 80% at listing in June 2014
-- Asset sales in the year of GBP382 million at c. 8% above 31 December 2014 book values, comprising the sales of the freehold of Madame Tussauds in London for GBP332 million and New Hall hospital in Salisbury for GBP50 million
-- Portfolio valuation up 6.3% since 31 December 2014 to GBP1.35 billion; net initial yield 5.3%, increasing to at least 5.45% on completion of 2016 fixed rental uplifts in July 2016
-- Weighted average unexpired lease term of 23.5 years with no breaks -- Passing rent of GBP76.3 million as at 31 December 2015, secured entirely against major global multi-billion pound quoted businesses
-- Announcement on 3 March 2016 of the intention to place a minimum of 43% of the existing issued share capital held by certain of the six founding shareholders of the Company, in order to:
- create more liquidity in share trading;
- better place the Company for expansion when new opportunities are identified for earnings accretive acquisitions; and
Hot Features
Premium
- enable continued compliance with the UK REIT rules
31 December 31 December
2015 2014 Change in year
--------------------------------- ------------- ------------- ----------------
EPRA net asset value GBP510.1m GBP466.2m 9.4%
EPRA net asset value per share 282.8p 258.5p 9.4%
Net asset value GBP504.4m GBP344.3m 47%
Adjusted EPRA earnings per share 2.6p 0.0p n/a
--------------------------------- ------------- ------------- ----------------
Martin Moore, Independent Non-Executive Chairman of the Company, commented: "The robustness of the Group's income streams and the less cyclical nature of its properties provide a great deal of comfort in turbulent markets. These market conditions also tend to be more fertile grounds for Prestbury to source and the Board to deliver favourable transactions. Our investment case remains that, at a time of historically low interest rates and bond yields, investors are faced with a shortage of places where they can obtain a healthy and growing income return combined with a good prospect of capital preservation. This is what we have set out to achieve with Secure Income REIT and, with the intention to pay maiden distributions in August this year, the Board views the future with confidence."
ENQUIRIES:
Prestbury Investments LLP Tel: 020 7647 7647
Nick Leslau
Sandy Gumm
FTI Consulting Tel: 020 3727 1000
Richard Sunderland
Claire Turvey
Stifel Nicolaus Europe (Nominated Adviser and Broker) Tel: 020 7710 7600
David Arch
Tom Yeadon
Notes to Editors
Secure Income REIT Plc is a UK REIT specialising in generating long term, inflation protected, secure income from real estate investments. Its investment strategy is designed to satisfy investors' growing requirements for high quality, secure, inflation protected income flows. The Group owns a freehold portfolio of 26 well established operating real estate assets including some of the UK's top visitor attractions and theme parks: namely Alton Towers theme park and hotel, Thorpe Park and Warwick Castle, as well as 20 private hospitals in the UK.
Forward looking statements
This document includes forward looking statements which are subject to risks and uncertainties. You are cautioned that forward looking statements are not guarantees of future performance and that if risks and uncertainties materialise, or if the assumptions underlying any of these statements prove incorrect, the actual results of operations and financial condition of the Group may differ materially from those made in, or suggested by, the forward looking statements. Other than in accordance with its legal or regulatory obligations, the Company undertakes no obligation to review, update or confirm expectations or estimates or to release publicly any revisions to any forward looking statements to reflect events that occur or circumstances that arise after the date of this document.
Chairman's Statement
Dear Shareholder,
During 2015 we have made significant progress at Secure Income REIT through a combination of selective disposals and a refinancing of all of the Group's debt, which have together reduced the Group's leverage and cost of debt. These initiatives have helped transform Secure Income REIT into a company which is in a position to begin making cash distributions as of August this year, thereby delivering on our objective at listing of creating a company which offers investors a growing distribution derived from a portfolio of high quality assets generating long term, secure income.
The two sales during the year were the freehold of Madame Tussauds in London, which was sold for GBP332.4 million reflecting a net initial yield of 4.5%, and New Hall hospital in Salisbury, which was sold for GBP49.8 million reflecting a net initial yield of 5.3%. The sale prices achieved were 8% above December 2014 book values and represented an important step on the way to securing new financing and positioning the Company to become a distribution paying REIT.
In August and September we secured over GBP900 million of new financing, completely replacing our original debt, extending our weighted average term to maturity by over seven years to nine years, reducing our annual interest cost by 23%, down to 5.2%, and reducing debt amortisation outflows.
These initiatives place the Company in a position where the Board intends to begin making quarterly cash distributions commencing with an interim payment in August 2016 at an annualised 11.75 pence per share, which equates to a distribution yield of 4.2% based on our 31 December 2015 EPRA NAV. Given that every property in our current portfolio has the benefit of an annual RPI review or fixed increase in rent, distributions should be able to grow reliably at an attractive rate.
As announced today, the Board is facilitating the intention of certain of the Company's six major shareholders to place a minimum of 77,514,509 shares in order to widen the investor base. This is intended to create more liquidity in the shares, ensure that the Company is better placed for expansion when the time is right, and enable it to continue to qualify under UK REIT rules.
Results and financial position
The EPRA NAV is 282.8 pence per share, which represents a 9.4% increase over the year as follows:
Pence per
GBPm share
---------------------------------------- ------ -----------
EPRA NAV at 1 January 2015 466.2 258.5
Investment property revaluation* 83.4 46.3
Profit on sale of investment properties 24.0 13.3
Rental income net of finance costs and
administrative expenses* 13.3 7.4
Tax (1.3) (0.8)
Currency translation movements (1.2) (0.7)
EPRA NAV excluding early debt repayment
costs 584.4 324.0
Early debt repayment costs (74.3) (41.2)
EPRA NAV at 31 December 2015 510.1 282.8
----------------------------------------- ------ -----------
* adjusted by GBP13.0 million (7.2 pence per share) to remove the effect of spreading fixed rental uplifts over the term of the lease - adjustment reduces rental income and increases revaluation movement in equal amounts.
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March 03, 2016 02:02 ET (07:02 GMT)
Adjusted EPRA EPS is 2.6 pence per share for the year as follows:
Nine months
Year to to 31 December
31 December 2014*
2015 Pence per
Pence per share share
----------------------------------------- ------------------ ---------------
Rental income net of property outgoings:
Portfolio owned at 31 December 2015 41.9 33.8
Sold properties 6.0 8.2
Net finance costs (40.0) (39.1)
Administrative expenses and corporate
costs (4.5) (2.2)
Tax (0.8) (0.7)
Adjusted EPRA EPS 2.6 -
------------------------------------------ ------------------ ---------------
* 2014 comparative figures include two months prior to listing. Shares issued in April 2015 in satisfaction of the 2014 incentive fees are treated as having been issued on the last day of 2014 in calculating the weighted average shares in issue.
Over the course of the year, the portfolio valuation rose by 6.3% to GBP1.35 billion, reflecting a net initial yield of 5.3% and an equivalent yield of 6.4%. The Group enjoys significant income security with financially strong covenants and a weighted average unexpired lease term of 23.5 years. 58% of our rent roll is guaranteed by Ramsay Health Care Limited, listed on the Australian Stock Exchange with a market capitalisation of GBP6.9 billion* and one of the five largest private healthcare groups in the world. A further 39% of rents are guaranteed by Merlin Entertainments Plc, a FTSE 100 constituent with a market capitalisation of GBP4.7 billion*, the largest operator of visitor attractions in Europe and the second largest in the world. The remainder of our rent roll is guaranteed by Orpea SA, the European leader in dependency care, listed on Euronext Paris with a market capitalisation of GBP3.6 billion*.
As important as the security of income is its potential to grow. Two thirds of our rent roll is subject to annual fixed uplifts (ranging from 2.75% to 3.34% and averaging 2.8% per annum) and the remaining third is subject to annual RPI-linked upward only reviews. This combination of long income duration with rising rents, underpinned by financially strong tenants, is not only well sought after in the current market but proved highly resilient in the last recession.
Outlook
2016 has so far brought turbulence to stock markets around the world as investors grapple with greater uncertainty. China's slowdown has spurred a dramatic fall in commodity and oil prices which should benefit UK consumers, putting more money into their pockets, but this will only boost the UK economy if they have the confidence to go out and spend it. The risk of a possible Brexit has pushed Sterling towards seven year lows and the chance of further depreciation may deter some overseas investors from buying real estate in London, at the very least until the outcome of the referendum is known. We have also seen the share prices of major REITs fall further and faster than the market indices this year which may have been prompted by concerns as to whether we are reaching the end of another cycle for conventional commercial property. It is interesting to note that the share prices of REITs specialising in alternative, less cyclical sectors have been much more resilient.
The robustness of the Group's income streams and the less cyclical nature of its properties provide a great deal of comfort in turbulent markets. These market conditions also tend to be more fertile grounds for the Investment Adviser to source and the Board to deliver favourable transactions. Our investment case remains that at a time of historically low interest rates and bond yields, investors are faced with a shortage of places where they can receive a healthy and growing income return combined with a good prospect of capital preservation. This is what we have set out to achieve with Secure Income REIT and with the intention to pay maiden distributions in August this year the Board views the future with confidence.
Martin Moore
Chairman
3 March 2016
* as at 2 March 2016
Strategic Report
Strategy and investment policy
The Group is a property investment business specialising in owning long term, secure income streams from real estate investments, offering inflation protection. A long term income stream is considered to have a weighted average term to maturity in excess of 15 years at the time of acquisition. Income security is assessed by reference either to the financial strength of the tenants or to the extent of asset cover provided by way of residual asset value.
There are no other UK REITs specialising in long leases across a range of property sectors. Against a backdrop of significant reduction in income security in the UK real estate market caused by a marked decline in the average term to first tenant lease break or expiry, and mindful of the growing requirement amongst investors for long term, secure income flows, the Board aims to fill this gap in the market and further build a substantial diversified long term income portfolio.
The existing portfolio comprises 26 freehold investment properties let for a weighted average term of 23.5 years from 31 December 2015. All properties are fully let on full repairing and insuring leases. The portfolio is considered by the Board to offer attractive geared returns from high quality real estate, with financially strong tenants operating with well established brands in industry sectors with strong defensive characteristics. Having listed in 2014 and refinanced the Group's entire secured debt in 2015 to reduce the cost of debt and extend its term to maturity, the Board proposes to build on its existing portfolio to create a diversified portfolio of long term, secure income streams from real estate investments across a range of property sectors, enhancing prospects for attractive total returns through earnings accretive acquisitions.
The Board believes that it will be able to seek acquisition opportunities from a range of sources including operating businesses, non-REITs with latent capital gains fettering sale prospects, and structures where the Company's shares may be used as currency to unlock value. Throughout this process, the Directors' intention is to exercise strong capital discipline, using equity accretively and debt prudently to enhance returns for shareholders.
Business review
Key performance indicator - EPRA NAV per share
The principal financial outcome that the Board seeks to achieve is attractive growth in shareholder returns. Progress towards this objective has been specifically measured through growth in EPRA NAV, which is a measure of the fair value of a company on a long term basis, ignoring the impact of hedging valuations and any deferred tax. Once distributions are paid, this measure will include distributions paid to encompass Total Shareholder Return.
The Group's EPRA NAV per share at 31 December 2015 was 282.8 pence, which represents a 9.4% increase over the year as follows:
Nine months
to 31 December
Year to 2014
31 December 2015 Pence per
Pence per share share
----------------------------------------------------- ----------------- ---------------
EPRA NAV per share at start of period 258.5 176.1
Investment property revaluation* 46.3 102.0
Profit on sale of investment properties 13.3 -
Rental income* less finance costs and administrative
expenses 7.4 1.8
Incentive fee - (20.1)
Tax (0.8) (0.9)
Currency translation movements (0.7) (0.4)
----------------------------------------------------- ----------------- ---------------
EPRA NAV excluding early debt repayment costs 324.0 258.5
Early debt repayment costs (41.2) -
EPRA NAV per share at end of period 282.8 258.5
----------------------------------------------------- ----------------- ---------------
* adjusted by 7.2 pence (2014: 6.7 pence) to remove the impact of rent smoothing adjustments, which arise from the Group's accounting policy to spread the impact of fixed rental uplifts evenly over the whole term of relevant leases. The rent smoothing adjustments reflected in the financial information currently increase rental income and reduce property valuation gains, and are excluded in this table to better reflect the Group's actual rental income flows.
Key performance indicator - adjusted EPRA earnings per share
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The Company will initiate quarterly payments of cash distributions to shareholders in August 2016. In order to monitor its ability to make distributions, the Board uses the Group's adjusted EPRA earnings per share ("EPS") as a key performance indicator. EPRA EPS excludes investment property revaluations, profits on sale of investment properties, fair value movements in any interest rate derivatives and deferred tax from the Group's reported earnings to give a measure of underlying earnings from core operating activities. Adjusted EPRA EPS excludes the incentive fee (largely derived from investment property revaluations) and the non-recurring costs of the reorganisation and listing (nil this year but expected to include the costs of the secondary placing, currently estimated at c. GBP2.0 million, in the 2016 financial year), and is further adjusted to remove the effect of smoothing the fixed rental uplifts in order not to artificially flatter dividend cover calculations now that distributions are to be initiated.
Since the Group's financing costs changed materially as a result of the refinancing, the table below shows adjusted EPRA EPS before and after completion of the refinancing to illustrate the position under the current capital structure:
Nine months
Year to to 31 December
31 December 2014
2015 Pence per
Pence per share share
-------------------------------------------------- ---------------- ---------------
Rental income net of property outgoings,
excluding rent smoothing 36.8 42.0
Net finance costs (33.2) (39.9)
Administrative expenses and corporate costs (3.4) (2.2)
Tax (0.8) (0.7)
Unwinding discount on shareholder loans
net of deferred tax - 0.8
Adjusted EPRA EPS prior to completion of
refinancing * (0.6) -
--------------------------------------------------- ---------------- ---------------
Rental income net of property outgoings,
excluding rent smoothing 11.1 -
Net finance costs (6.8) -
Administrative expenses and corporate costs (1.1) -
Tax - -
-------------------------------------------------- ---------------- ---------------
Adjusted EPRA EPS since completion of refinancing
* 3.2 -
--------------------------------------------------- ---------------- ---------------
Adjusted EPRA EPS for the period 2.6 -
--------------------------------------------------- ---------------- ---------------
* completion of final tranche of refinancing on 2 October 2015
Further details of the Group's financial performance are given in the Investment Adviser's Report.
Key performance indicator - net loan to value ratio
The Board monitors the Group's net loan to value ratio ("net LTV") with a view to managing the capital structure of the business throughout varying market conditions. During the year, the net LTV has fallen from 70% to 61% reflecting reduced debt levels following asset sales and the impact of unrealised property valuation surpluses.
Key performance indicator - uncommitted cash
The Board considers that the ability to manage potential debt covenant breaches is at least as important as the level of the net loan to value ratio. The Group has negotiated headroom on financial covenants considered appropriate to the business and also certain cure rights, including the ability to inject cash into ring-fenced financing structures in the event of actual or prospective breaches of loan to value covenants. Consequently, along with managing the execution risk inherent in arranging and documenting credit facilities, the Board regularly monitors the Group's levels of uncommitted cash. Uncommitted cash is measured as cash balances outside ring-fenced structures secured to lenders, net of any creditors or other cash commitments and net of any cash required to be retained under the regulatory capital rules of the AIFMD regime.
The Group's uncommitted cash was GBP52.7 million as at 31 December 2015, compared to GBP12.2 million as at 31 December 2014. The balance increased materially during the year following the new loan financing arrangements and asset sales.
Key performance indicator - headroom on debt covenants
The extent to which financial covenants are tested varies across the portfolio. Covenants have been negotiated with the aim of protecting the Group as far as possible from movements in investment property valuations which are not related to changes in the rental cash flows:
-- the Healthcare 2 loan is subject to LTV and interest cover tests throughout the loan term;
-- the Healthcare 1 loan is not tested for LTV until September 2019 but is subject to an interest cover cash trap test throughout the loan term; and
-- the Leisure loans are not subject to any LTV default covenant or interest cover tests throughout the loan term, though there are LTV levels which could trigger a cash trap or full cash sweep from August 2018.
The Board reviews the headroom on all financial covenants at least quarterly. As at 31 December 2015 the relevant positions were as follows, alongside the property net initial yield or the fall in projected rent that would be trigger the relevant covenant at the first test date:
Initial yield Rental headroom
triggering over ICR
Actual Covenant LTV test* test
----------------------------------------- ------- -------- ------------- ---------------
Leisure facility (GBP369.5 million
loan at 31 December 2015)
Cash trap LTV test (from August
2018 - 1% per annum loan amortisation) 71.7% <80.0% 6.6%
Cash trap LTV test (from August
2018 - full cash sweep) 71.7% <85.0% 7.0%
Healthcare facility 1 (GBP219.8
million loan at 31 December
2015)
LTV test (from September 2019) 59.1% <80.0% 8.3%
Cash trap projected interest
cover test 224% >150% 49%
Healthcare facility 2 (GBP315.6
million loan at 31 December
2015)
Cash trap LTV test 68.5% <80.0% 6.1%
LTV test 68.5% <85.0% 6.5%
Cash trap projected interest
cover test 157% >140% 12%
Projected interest cover test 157% >120% 31%
Historic interest cover test 154% >120% 28%
----------------------------------------- ------- -------- ------------- ---------------
* assuming UK leisure rents increase in line with the RPI swap curve as at 23 February 2016
Principal risks and uncertainties
Risk Impact on the Group Mitigation
--------------------------- -------------------------------- -------------------------------------
Property valuation
movements Investment properties The Group uses experienced
The Group invests make up the majority independent valuers, whose
in commercial property of the Group's assets, work is reviewed by suitably
and so is exposed so changes in their qualified members of the
to movements in property value can have a significant Board and the Investment
valuations which impact on EPRA NAV, Adviser, before being approved
are subjective and with valuation changes in the context of the accounts
may vary as a result magnified by the impact as a whole by the Audit
of a variety of factors, of gearing. Committee and the Board.
many of which are
outside the control The Board notes the The Board seeks to structure
of the Group. relative resilience the Group's capital such
in value demonstrated that gearing is appropriate
by the Group's assets having regard to market
through the wider capital conditions and covenant
market declines of levels, with appropriate
2008 to 2011. cure rights within debt
facilities.
--------------------------- -------------------------------- -------------------------------------
Tenant risk
During the year the A default of lease The lease guarantors are
Group derived its obligations would have all large listed companies
rental income from a material impact on with capital structures
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three tenant groups the Group's revenue considered strong by the
with three guarantors, and hence its EPRA Board and with impressive
two of which accounted EPS, particularly as long term earnings growth
for 98% of passing the specialised use and share price track records.
rent. of the properties may
mean that re-letting The Board reviews the financial
Although the Board takes time. position of the tenants
considers the tenant and guarantors at least
and guarantor groups Investment property every quarter, based on
to be financially valuations reflect publicly available financial
strong, there can the valuer's assessment information and any other
be no guarantee that of the future security trading information which
they will remain of income. A loss of may be obtained under the
able to comply with income would therefore terms of a lease.
their obligations impact EPRA NAV. It
throughout the term could also result in
of the relevant leases, penalties, restricted
and will not suffer cash flows out of secured
any insolvency events. debt groups or ultimately
default under secured
debt agreements.
--------------------------- -------------------------------- -------------------------------------
Borrowing
Certain Group companies In the event of a breach The Group's borrowing arrangements
have granted security of a lending covenant, comprise three ring-fenced
to lenders in the the Group may be required subgroups with no cross-guarantees
form of mortgages to pay higher interest between them and no recourse
over all of the Group's costs, to increase to other assets outside
investment property debt amortisation out the secured subgroups.
and fixed and floating of free cash flow or
charges over certain to make early repayment Only one facility has an
other assets. of debt, which would annual LTV default covenant
affect cash flows and and another has a default
EPRA EPS. In certain LTV covenant starting in
circumstances the Company's September 2019. Group borrowing
ability to make cash arrangements also include
distributions to shareholders interest cover or debt
may be curtailed. service cover tests.
Where the Group is The Board reviews compliance
unable to make loan with all financial covenants
repayments out of existing at least every quarter,
cash resources, it including look forward
may be forced to sell tests for at least twelve
assets to repay part months, and considers that
or all of the Group's there is sufficient headroom
debt. It may be necessary on relevant loan covenants.
to sell assets at below
book value, which would The Board reserves unsecured
impact EPRA NAV. Early cash outside ring-fenced
debt repayments are debt structures which would
likely to crystallise be available to be used
early repayment penalties. to cure certain covenant
defaults to the extent
of the uncommitted cash
available.
Exchange rate risk
The Group prepares There could be an adverse Exchange rate risk is partially
its financial statements impact on the Sterling hedged through the use
in Sterling but some valuation of unhedged of Euro denominated assets
of its assets are investments and income and liabilities, limiting
located in Germany, flows, which would the exposure to the Euro
where both assets affect cash flows, net asset value which at
and liabilities are EPRA NAV and EPRA EPS. the year end exchange rate
Euro denominated. amounts to c. 4% of EPRA
The surplus of Euro NAV as at 31 December 2015.
denominated asset
value over debt value
is subject to foreign
currency exchange
risk from exchange
rate movements. This
currency exposure
is not hedged.
--------------------------- -------------------------------- -------------------------------------
Tax risk
The Group is subject If subject to UK corporation The Board documents compliance
to the UK REIT regime. tax, the Group's current with the UK REIT rules
A failure to comply tax charge would increase, at least every quarter.
with UK REIT conditions impacting cash flows,
resulting in the EPRA NAV and EPRA EPS, The proposed placing announced
loss of this status and reducing cash available on 3 March 2016 is expected
would make the property for distributions. to result in the Company
income subject to no longer being considered
UK corporation tax. a close company.
In particular, the
Company is required
to cease being a
close company by
4 June 2017.
--------------------------- -------------------------------- -------------------------------------
Liquidity risk
Working capital must A breach of a lending Unless there is a tenant
be managed to ensure covenant, or the insolvency default (discussed under
that both the Group of the Group as a whole tenant risk above) the
as a whole and all or an individual entity, Group's cash flows are
individual entities could result in a loss generally highly predictable.
are able to meet of net assets, impacting The cash position is reported
their liabilities EPRA NAV and EPRA EPS, to the Board at least quarterly;
as they fall due. and reducing cash available projections at least two
for distributions. years ahead are included
With highly predictable in the Group budget and
income and costs, BEPS proposals could are updated for review
there is limited be implemented in such when the interim and annual
scope for unexpected a way as to increase reports are approved.
liquidity pressures the Group's Property
outside the main Income Distribution The Group has uncommitted
tenant risk. However, ("PID") requirement cash reserves out of which
there is a risk that beyond the surplus increases in required PIDs
the OECD's Base Erosion cash flow available. could be met in the medium
and Profit Shifting term, or a scrip dividend
("BEPS") proposals alternative could be offered.
could affect the
Group's cash flows.
--------------------------- -------------------------------- -------------------------------------
Following the refinancing during the year, the Directors consider that the access to financing risk previously reported is no longer significant as at 31 December 2014. Apart from the BEPS issue included under liquidity risk there are no new risks reported this year.
Investment Adviser's Report
Prestbury Investments LLP advises Secure Income REIT Plc and is pleased to report on the operations of the Group for the year ended 31 December 2015.
Portfolio
The portfolio comprises 26 properties with secure, long term income and contractual uplifts offering inflation protection. The rent is derived from tenants whose businesses offer global spread and have performed very well over many years, including the recent recession, demonstrating their strong defensive qualities.
Healthcare assets (62% of portfolio value)
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The healthcare assets comprise 20 freehold private hospitals: a portfolio of 19 located throughout England let to a subsidiary of Ramsay Health Care Limited, the listed Australian healthcare company, and a single property in central London let to Groupe Sinoue, a French company specialising in mental health. Passing rent on the current portfolio is as follows:
31 December 31 December
2015 2014*
GBPm GBPm
----------------------------------------------- ------------- -------------
Acute hospitals - guaranteed by Ramsay Health
Care Limited 44.4 43.2
Lisson Grove psychiatric hospital - guaranteed
by Orpea SA 1.9 1.8
46.3 45.0
----------------------------------------------- ------------- -------------
* excluding property sold in 2015
The leases on the Ramsay hospitals are all guaranteed by Ramsay Health Care Limited, the listed parent company of one of the top five private hospital operators in the world and a constituent of the ASX 50 index of Australia's largest companies, with a market capitalisation at 2 March 2016 of GBP6.9 billion.
The Ramsay hospitals are let on full repairing and insuring leases with a term to expiry at 31 December 2015 of 21.4 years without break. The rent increases by a fixed 2.75% per annum throughout the lease term in May each year. In addition, at Secure Income REIT's option rent could be increased in 2017 to the higher of 2.75% or 57.525% of site earnings before interest, tax, depreciation, amortisation, rent and head office costs, and every fifth year thereafter to the higher of a 2.75% uplift and open market rental value. As a result of the fixed uplift, the passing rent on this sub-portfolio will increase to GBP45.6 million on 3 May 2016.
The lease on the London psychiatric hospital in Lisson Grove is guaranteed by Orpea SA, the listed parent company of the Orpea Group, a leading European operator of nursing homes, post-acute care and psychiatric care, listed on Euronext Paris with a market capitalisation at 2 March 2016 of GBP3.6 billion. Orpea owns 45% of Group Sinoue, which is the parent company of the tenant.
The Lisson Grove hospital is let on a full repairing and insuring lease with a term to expiry at 31 December 2015 of 28.6 years without break. The rent increases by a fixed 3.0% per annum throughout the lease term in May each year and, as a result, the passing rent on the property will increase from GBP1.87 million to GBP1.92 million on 3 May 2016.
Leisure assets (38% of portfolio value)
The leisure assets comprise four well known visitor attractions and two hotels, located in England and Germany, including two of the UK's top three theme parks. The UK assets are Alton Towers theme park and the Alton Towers hotel, Thorpe Park theme park and Warwick Castle, while the German assets are Heide Park theme park (the largest in Northern Germany) and the Heide Park hotel, both located in Soltau, Saxony. Passing rent on the current portfolio is as follows:
31 December 31 December
2015 2014*
GBPm GBPm
--------------------------------------------- ------------- -------------
UK 25.1 24.9
Germany (at 31 December 2015 exchange rates) 4.9 4.8
Total leisure 30.0 29.7
--------------------------------------------- ------------- -------------
* excluding property sold in 2015
The properties are all let to substantial operating subsidiaries of Merlin Entertainments Plc, the guarantor of the leases. Merlin is a FTSE 100 company with a market capitalisation at 2 March 2016 of GBP4.7 billion. Measured by the number of visitors, it is Europe's largest and the world's second largest operator of leisure attractions.
The average unexpired lease term of the leisure assets is 26.5 years and the tenants have two successive rights to renew these leases for 35 years at the end of each term. The leases are on full repairing and insuring terms. There are upwards only uncapped RPI-linked rent reviews every June throughout the term (based on RPI in the twelve months to April each year) for the UK leisure portfolio, which in 2015 resulted in an increase of 0.9%. The German properties are subject to fixed annual increases of 3.34% every July throughout the term, as a result which the German rents will increase to GBP5.1 million on 29 July 2016 (translated at the 31 December 2015 rate).
Portfolio valuation yields at 31 December 2015
UK Germany Total
---------------------------------------- ---------- ---------- ----------
Healthcare:
Net initial yield 5.2% n/a 5.2%
Equivalent yield 6.4% n/a 6.4%
Reversionary yield 5.4% n/a 5.4%
Leisure:
Net initial yield 5.4% 6.3% 5.5%
Equivalent yield 6.4% 7.9% 6.6%
Reversionary yield 5.5% 6.5% 5.6%
Total portfolio:
Net initial yield 5.3% 6.3% 5.3%
Equivalent yield 6.4% 7.9% 6.4%
Reversionary yield 5.4% 6.5% 5.5%
Weighted average unexpired lease term 23.4 years 26.6 years 23.5 years
----------------------------------------- ---------- ---------- ----------
Portfolio valuation by location
Healthcare Leisure Total
---------------------- -------------------- --------------------------------
31 December 31 31 31 31 31 Fair value
2015 December December December December December change
GBPm 2014 * 2015 2014 * 2015 2014 * over the
GBPm GBPm GBPm GBPm GBPm year
--------------------- ----------- --------- --------- --------- --------- --------- ----------
England 834.4 767.0 441.6 431.0 1,276.0 1,198.0 6.5%
Germany at constant
Euro exchange
rate - - 77.9 72.1 77.9 72.1 8.1%
Movement in Euro
exchange rate - - (4.4) - (4.4) - (6.0)%
--------------------- ----------- --------- --------- --------- --------- --------- ----------
834.4 767.0 515.1 503.1 1,349.5 1,270.1 6.3%
--------------------- ----------- --------- --------- --------- --------- --------- ----------
* adjusted for sales in the year to exclude sold assets from comparative figures
Portfolio valuation uplift in the year
The healthcare valuations at 31 December 2015 reflect a weighted average net initial yield of 5.2% compared to 5.5% at 31 December 2014, resulting in a valuation uplift of GBP67.4 million (8.8%) in the year.
The UK leisure valuations at 31 December 2015 reflect a weighted average net initial yield of 5.4% compared to 5.5% at 31 December 2014, resulting in a valuation uplift of GBP10.6 million (2.4%) in the year. The German leisure valuations at 31 December 2015 reflect a weighted average net initial yield of 6.3% compared to 6.5% at 31 December 2014, resulting in a valuation uplift of EUR7.5 million (8.1%) in the year; currency translation movements have, however, reduced the Sterling equivalent resulting in a net valuation uplift of GBP1.4 million (2.1%) in those German leisure assets over the year. Across the whole leisure portfolio, there has therefore been a valuation increase of GBP12.0 million (2.4%) in the year.
As a result of these valuation movements, the total portfolio uplift comprises:
Year to Nine months
31 December to 31 December
2015 2014
GBPm GBPm
--------------------------------------------------- ------------ ---------------
Investment property revaluation movement 83.4 171.8
Currency translation movements on Euro denominated
investment properties (4.0) (3.8)
79.4 168.0
--------------------------------------------------- ------------ ---------------
In addition to these movements, a rent smoothing adjustment arises on investment property revaluations from the Group's accounting policy, consistent with International Financial Reporting Standards, to spread the impact of fixed rental uplifts evenly over the term of the relevant lease. The adjustments relate to those rents on the healthcare assets which increase by 2.75% (on 96% of healthcare rents) and 3.0% (on 4% of healthcare rents) every May, and those rents on the German leisure assets which increase by 3.34% every July.
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The impact of this accounting treatment is to reflect a receivable, included in the book value of investment property, for the amount of rent included in the income statement ahead of actual cash receipts. This receivable increases over the first half of each lease term then unwinds, reducing to zero over the second half of each lease term. The impact over time for each of the rental income flows subject to smoothing is as follows:
Maximum Midway
Receivable
at receivable point
31 December at midway in lease
2015 point term
GBPm GBPm
------------------------------ ----------- ------------ -------------
Healthcare - acute hospitals 128.1 165.2 May 2022
Healthcare - Lisson Grove 5.8 7.6 May 2022
German leisure* 22.7 34.5 Jan 2025
------------------------------ ----------- ------------ -------------
Total 156.6 207.3
------------------------------ ----------- ------------ -------------
* at the year end Euro conversion rate of EUR1:GBP0.7350
In order that the rent smoothing receivable does not, in combination with the book value of the investment properties, overstate the value of the property portfolio, any movement in the rent smoothing receivable is offset against property revaluation movements. As a result, this adjustment affects only the income statement presentation, increasing rental income and reducing property revaluation gains, and does not change the Group's net assets.
The annual impact of this adjustment is known with certainty unless there are acquisitions, disposals or lease variations. The additional revenue and reduced valuation movement recognised during the year and for each of the next three financial years is as follows:
Healthcare German leisure* Total
GBPm GBPm GBPm
------ ------------ ----------------- ----------
2015 10.9 2.1 13.0
2016 9.6 2.0 11.6
2017 8.3 1.8 10.1
2018 7.0 1.6 8.6
------ ------------ ----------------- ----------
* at the 2015 average Euro conversion rate of EUR1:GBP0.7256
Property sales in the year
During the year the Group sold Ramsay's New Hall Hospital in Salisbury and Madame Tussauds London. The sales raised funds at very attractive prices to repay debt and, in the case of Madame Tussauds, represented an opportunity to sell by far the largest asset by value in the portfolio.
New Hall Hospital was sold in March 2015 for GBP49.8 million, which represented a net initial yield of 5.3% and a sale price GBP3.8 million (8.2%) above its 31 December 2014 valuation. The sale completed in May 2015 and the net proceeds of GBP49.2 million were used in part repayment of secured debt and early debt repayment costs.
Madame Tussauds was sold in May 2015 for GBP332.4 million, which represented a net initial yield of 4.5% and a sale price GBP23.0 million (7.4%) above its 31 December 2014 valuation. The sale completed in August 2015 and the net proceeds of GBP330.1 million were used in part repayment of secured debt and early debt repayment costs, with surplus cash added to the Group's cash resources.
Financing
During the year and following repayment of a portion of the existing debt out of the proceeds of two asset sales, the Group's debt was refinanced with three new secured facilities, in order to provide a spread of risk and to better achieve improved financing terms. Following the refinancing, the Group's operations are financed by a combination of cash resources and non-recourse debt finance, where the assets at risk in the event of a loan default are limited to those within three ring-fenced sub-structures.
The impact of the sales and refinancing on the Group included:
-- weighted average cost of debt reduced by 23% from 6.8% to 5.2% per annum, saving c. GBP14 million on an annualised basis on the GBP902.6 million (at exchange rates at the time of drawdown) of new debt;
-- weighted average term to maturity at drawdown increased from under two years to nearly nine years;
-- term to first debt expiry at drawdown increased from under two years to seven years; and
-- while there remains some scheduled amortisation there are no full cash sweep arrangements, further freeing up cash flow to service distributions.
As noted in the Chairman's Statement in the 2014 annual report, accelerated repayment of the loan facilities previously in place resulted in various costs, including costs of termination of interest rate swaps. Prior to embarking on the early debt repayments, the Board first sought agreement with the previous lender, Bank of Scotland Plc, to share the early termination costs, mindful of the benefits to the lender of early repayment. Consequently, the total GBP88.1 million cash cost of early termination of the interest rate swaps as a result of the asset sales and refinancing was reduced by GBP27.5 million to a net GBP60.6 million. In addition, exit fees and other early termination costs payable in cash amounted to GBP8.4 million and a non-cash charge relating to the write off of the unamortised finance costs on the old loans amounted to GBP5.3 million, bringing total early repayment costs to GBP74.3 million.
As the balance sheet already recorded interest rate derivatives at their market values, there was minimal impact on the reported net asset value as a result of the swap terminations. However, since EPRA NAV excludes the market valuation of interest rate derivatives, the Group's EPRA NAV was reduced by GBP74.3 million or 41.2 pence per share in early debt repayment costs.
Each new facility is self-contained, with no cross default provisions between the three of them, and the key terms at drawdown were as follows:
Healthcare Healthcare
1 2 Leisure
--------------------------------- ---------- ------------ -------------
Loan principal GBP220.0m GBP315.6m GBP367.0m*
Number of assets securing loan 9 11 6
Fixed interest rate 4.29% 5.30% 5.72%
GBP3.7m
Amortisation per annum assuming (years 6 and
full covenant compliance GBP1.0m GBP3.2m 7)
September
Final repayment date 2025 October 2025 October 2022
--------------------------------- ---------- ------------ -------------
* comprising GBP316.8 million of senior and mezzanine sterling loans secured on the UK assets and EUR71.8 million of senior and mezzanine Euro denominated loans secured on the German assets (translated at the actual exchange rate of EUR1:GBP0.6992 at the date of drawdown) with all leisure loans cross-collateralised.
The Group's gross and net debt at 31 December 2015 was as follows:
Healthcare Healthcare Portfolio Group
1 2 Leisure total Unsecured total
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------ ---------- ---------- -------- --------- --------- ---------
Gross debt 219.8 315.6 369.5* 904.9 - 904.9
Secured and regulatory
cash (5.2) (12.7) (7.7) (25.6) (0.4) (26.0)
Free cash - - (1.6) (1.6) (54.0) (55.6)
------------------------ ---------- ---------- -------- --------- --------- ---------
Net debt 214.6 302.9 360.2 877.7 (54.4) 823.3
------------------------ ---------- ---------- -------- --------- --------- ---------
Property value 371.9 462.5 515.1 1,349.5 - 1,349.5
------------------------ ---------- ---------- -------- --------- --------- ---------
Net LTV 57.7% 65.5% 69.9% 65.0% 61.0%
------------------------ ---------- ---------- -------- --------- --------- ---------
* including EUR71.8 million of Euro loans translated at the year end exchange rate of EUR1:GBP0.7350
Following scheduled amortisation payments in January 2016, total gross debt at the date of this report, including Euro denominated debt at the 31 December 2015 exchange rate, is GBP903.6 million.
There have been no defaults or potential defaults in any facility during the year or since the balance sheet date.
Financial review
EPRA net asset value
The Board measures the Group's progress primarily through the growth in EPRA net asset value ("EPRA NAV") per share. EPRA NAV strips out the impact of any hedging revaluations and deferred tax on investment property revaluations to provide a measure of the fair value of a property company on a long term basis. Once distributions are initiated the measure monitored by the Board will include distributions paid so as to represent Total Shareholder Return.
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The EPRA NAV at 31 December 2015 of 282.8 pence per share represents a 9.4% increase over the year, which arose as follows:
Year to 31 December Nine months to 31 December
2015 2014
------------------------ ----------------------------
Pence per Pence per
GBPm share GBPm share
--------------------------------- -------- -------------- --------- -----------------
EPRA NAV at start of period 466.2 258.5 283.1 177.1
Investment property revaluation 83.4 46.3 160.6 95.3
Profit on sale of investment
properties 24.0 13.3 - -
Net results: rental income
less administrative expenses
and finance costs 13.3 7.4 14.1 8.5
Tax:
UK REIT excess interest
charge (1.3) (0.8) (0.7) (0.3)
Deferred tax charge - - (0.9) (0.6)
Currency translation movements (1.2) (0.7) (0.6) (0.4)
Incentive fee - - (3.1) (20.1)
Adjustments in relation
to listing - - 13.5 (1.0)
--------------------------------- -------- -------------- --------- -----------------
EPRA NAV excluding early
debt repayment costs 584.4 324.0 466.2 258.5
Early debt repayment costs (74.3) (41.2) - -
EPRA NAV at end of period 510.1 282.8 466.2 258.5
--------------------------------- -------- -------------- --------- -----------------
The movements in investment property valuations are described above in the Portfolio section of this report. The other elements of the Group's EPRA NAV movements for the year are explained in the Income Statement section below.
EPRA triple net asset value
The EPRA triple NAV includes the mark to market values of any debt and hedging instruments, and any inherent tax liabilities not provided for in the financial information. This is calculated as follows:
31 December 2015 31 December 2014
------------------ --------------------
Pence per Pence per
GBPm share GBPm share
------- --------- --------- ---------
EPRA NAV 510.1 282.8 466.2 258.5
Fair value of fixed rate debt (7.3) (4.0) - -
Deferred tax on German investment
property revaluations (5.7) (3.1) (4.9) (2.7)
Fair value of hedging instruments,
net of German deferred tax - - (117.0) (64.8)
EPRA triple NAV at end of period 497.1 275.7 344.3 191.0
------------------------------------ ------- --------- --------- ---------
EPRA earnings per share
In order to monitor the Group's recurring profitability and its ability to make appropriately covered distributions, the Board uses the Group's adjusted EPRA earnings per share ("EPRA EPS") as a key performance indicator. EPRA EPS excludes investment property revaluations, fair value movements and early termination costs of interest rate derivatives, and the relevant deferred tax on those items to give a measure of underlying earnings from core operating activities.
Adjusted EPRA EPS excludes the incentive fee (largely derived from investment property revaluations) and the non-recurring costs of the reorganisation and listing, and is further adjusted to exclude the effect of smoothing the fixed rental uplifts included in rental income (where the EPRA adjustments already exclude the rent smoothing impact in revaluations) in order not to artificially flatter dividend cover calculations now that distributions are to be initiated.
As a result, EPRA EPS and adjusted EPRA EPS are calculated as follows:
Year to 31 December Nine months to 31 December
2015 2014
------------------------ ----------------------------
Pence per Pence per
GBPm share GBPm share
----------------------------------- -------- -------------- ---------- ----------------
Rental income net of property
outgoings 99.4 55.1 80.9 48.7
Net finance costs (72.3) (40.0) (66.3) (39.9)
Administrative expenses
and corporate costs (8.1) (4.5) (6.6) (4.0)
Tax (1.3) (0.8) (1.2) (0.7)
Incentive fee - - (35.2) (21.1)
Unwinding discount on shareholder
loans net of deferred tax - - 1.4 0.8
----------------------------------- -------- -------------- ---------- ----------------
EPRA earnings 17.7 9.8 (27.0) (16.2)
Rent smoothing (13.0) (7.2) (11.3) (6.7)
Incentive fee - - 35.2 21.1
One-off costs of reorganisation
and listing - - 2.9 1.8
Adjusted EPRA earnings 4.7 2.6 (0.2) -
----------------------------------- -------- -------------- ---------- ----------------
Income statement
The rental income profile and the credit strengths of the businesses paying the rent are disclosed in the Portfolio section of this report, along with details of the investment property revaluations and profits on disposals.
Administrative expenses and corporate costs charged to the income statement in the year, as shown in the table below, are not directly comparable year on year because the prior period only included nine months; because the Group's cost base changed significantly at listing in June 2014, with two months of the prior period reflecting the different cost base; and because the Group incurred material one-off costs in 2014 in connection with the pre-listing corporate reorganisation and listing.
The Group's administrative expenses are largely accounted for by the Investment Adviser's fee:
Year to 31 December Nine months to 31 December
2015 2014
--------------------- ----------------------------
Pence per Pence per
GBPm share GBPm share
------------------------------- ----- -------------- ------- -------------------
Advisory fees 6.9 3.8 2.7 1.6
Other administrative expenses 0.7 0.4 0.7 0.4
Corporate costs 0.5 0.3 0.3 0.2
Costs of the reorganisation
and listing - - 2.9 1.8
------------------------------- ----- -------------- ------- -------------------
8.1 4.5 6.6 4.0
------------------------------- ----- -------------- ------- -------------------
Irrecoverable VAT, which is included as appropriate in each of the line items above, arises on the proportion of the advisory fees and any other expenses incurred by the healthcare portfolio. The VAT disallowed averaged 54% in the year and is currently c. 61%.
The majority of the Group's overhead is borne by the Investment Adviser and compensated for by way of advisory fees payable to the Investment Adviser under an agreement entered into prior to listing, by which it is entitled to receive cash fees based on a sliding scale relative to the Group's EPRA NAV: fees are payable at 1.25% per annum on EPRA NAV up to GBP500 million, plus 1.0% on EPRA NAV from GBP500 million to GBP1,000 million plus 0.75% thereafter. Until July 2016, the cash required to satisfy this advisory fee is subsidised by the pre-listing shareholders of the Company up to a maximum of GBP1.3 million per quarter. During the year GBP5.0 million of the cash required to fund advisory fee payments was met by those shareholders.
Corporate costs are those costs necessarily incurred as a result of the Company being listed and comprise:
-- the cost of the four Independent Directors, whose fees totalled GBP0.2 million in the year. The other three Directors are partners in the Investment Adviser and receive no remuneration from the Company; and
-- other costs of being listed, including nominated adviser fees, registrar fees and ongoing listing fees, which amounted to GBP0.3 million in the year.
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Finance costs reflect amounts payable on the new and old debt facilities as follows:
Year to 31 December Nine months to 31 December
2015 2014
------------------------ ----------------------------
Pence per Pence per
GBPm share GBPm share
-------- -------------- -------- ------------------
Interest payable on old facilities 54.3 30.2 59.4 35.9
Exit and covenant release fees
on old facilities 3.3 1.8 3.1 1.8
Loan cost amortisation on old
facilities (non cash) 1.7 0.9 2.2 1.6
Finance costs on old facilities 59.3 32.9 64.7 39.3
---------------------------------------- -------- -------------- -------- ------------------
Hedging break costs at refinancing 88.1 48.9 - -
Exit and covenant release fees
payable at refinancing 8.4 4.6 - -
Lender's credit against early
debt repayment costs (27.5) (15.2)
Loan costs written off at refinancing
(non cash) 5.3 2.9 - -
Early debt repayment costs 74.3 41.2 - -
---------------------------------------- -------- -------------- -------- ------------------
Interest payable on new facilities
since drawdown 12.5 6.9 - -
Loan cost amortisation on new
facilities since drawdown (non
cash) 0.5 0.3 - -
---------------------------------------- -------- -------------- -------- ------------------
Finance costs on new facilities 13.0 7.2 - -
---------------------------------------- -------- -------------- -------- ------------------
Finance income (0.1) - - -
Shareholder loans: unwinding
of discount to date of capitalisation
(non-cash) - - 1.7 1.0
---------------------------------------- -------- -------------- -------- ------------------
Net finance costs for the period 146.6 81.3 66.4 40.3
---------------------------------------- -------- -------------- -------- ------------------
The average interest rate paid across the old and new facilities during the year, excluding fees payable to lenders, was 6.4% per annum (2014: 6.8%). As at 31 December 2015, the average interest rate payable on the new facilities, which is expected to apply in future financial years until the first debt maturity in October 2022, was 5.2% per annum.
Currency translation
The majority of the Group's assets are located in the UK and the financial information is therefore presented in Sterling. Just over 4% of the Group's EPRA NAV relates to assets and liabilities relating to properties located in Germany, valued in and generating net earnings in Euros. The fact that assets and liabilities are Euro denominated acts as a partial hedge of the currency risk, but the Group remains exposed to translation differences on the net results and net assets of these operations which are not hedged, with movements recognised in the statement of other comprehensive income.
The German properties are valued at EUR100.1 million as at 31 December 2015, with the Euro tranches of the Group's secured debt facilities amounting to EUR71.8 million. The Euro weakened against Sterling over the year by 5.6% and as a result there was a net currency translation loss of GBP1.2 million in EPRA NAV in relation to the German operations.
Tax
The Group operates under the UK REIT regime, so its UK and German rental operations are exempt from UK corporation tax, subject to the Group's continuing compliance with the UK REIT rules. The Group is otherwise subject to UK corporation tax.
In the event that a UK REIT has financing costs within its exempt UK property business that are not covered at least 1.25 times by profits (calculated on a tax basis but before deducting financing costs and capital allowances), tax is payable at the UK corporation tax rate on the interest over that level, up to a cap of 20% of taxable property business profits before financing costs and capital allowances. During the year, the Group incurred a tax charge of GBP1.3 million (nine months to 31 December 2014: GBP0.7 million) on such excess interest at the average tax rate for the year of 20.25% (2014: 21%). The drawdown of the new financing facilities will result in this interest cover test being met, so this tax cost will reduce to zero at the start of the 2016 financial year.
German tax is payable on realised profits from the Group's German rental operations. The tax charge for the year of GBP0.2 million has been offset by a prior period credit of GBP0.2 million, which is the result of a number of historic adjustments to the tax charges up to and including 2014 following the conclusion of a tax audit relating to the years 2007 to 2012. The balance sheet also includes a deferred tax liability of GBP5.7 million (2014: GBP5.4 million) relating to unrealised German capital gains tax on the investment properties. A deferred tax asset of GBP0.5 million that previously arose on the Group's Euro interest rate swaps was written off during the year following the refinancing of the Euro loan facility and the termination of those swaps.
Cash flow
The movement in cash over the year comprised:
Year to 31 December Nine months to 31 December
2015 2014
------------------------------ ------------------------------
Pence Pence
GBPm per share GBPm per share
Cash from operating activities 69.8 38.7 66.1 39.2
Net proceeds from sale of investment
properties 379.3 210.3 - -
Net interest and finance costs
paid (86.7) (48.1) (60.9) (36.8)
Net repayment of secured debt
- accelerated (244.4) (135.5) - -
Repayment of secured debt -
scheduled amortisation (5.4) (3.0) (6.1) (3.7)
Early debt repayment costs (60.3) (33.4) - -
Loan costs on new facilities (14.4) (8.0) - -
Amounts received in respect
of advisory fee recovery 5.0 2.8 2.2 1.3
Proceeds of the share issue
on listing net of expenses - - 11.9 7.0
Cash flow in the period 42.9 23.8 13.2 7.0
Cash at the start of the period 38.8 23.0 25.4 15.9
Dilution from share issue - (1.5) - -
Effect of exchange rate movements (0.1) - 0.2 0.1
-------------------------------------- ----------- ----------------- ----------- -----------------
Cash at the end of the period 81.6 45.3 38.8 23.0
-------------------------------------- ----------- ----------------- ----------- -----------------
Pence Pence
Comprising: GBPm per share GBPm per share
-------------------------------------- ----------- ----------------- ----------- -----------------
Free cash 55.6 30.9 13.0 7.7
Cash reserved for regulatory
capital 0.4 0.2 0.5 0.3
Cash secured under lending
facilities 25.6 14.2 25.3 15.0
-------------------------------------- ----------- ----------------- ----------- -----------------
Cash at the end of the period 81.6 45.3 38.8 23.0
-------------------------------------- ----------- ----------------- ----------- -----------------
The investment properties of the Group are let on full repairing and insuring terms, with each tenant obliged to keep the premises in good and substantial repair and condition, including rebuilding, reinstating, renewing or replacing the premises where necessary. Consequently, no capital expenditure, property maintenance or insurance costs have been incurred and it is not expected that material costs of that nature will be incurred on the current portfolio in future.
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Group Income Statement
Nine months
Year to to
31 December 31 December
2015 2014
Notes GBP000 GBP000
---------------------------------------- ----- ------------- -------------
Revenue 4 99,479 80,946
Property outgoings (33) (19)
---------------------------------------- ----- ------------- -------------
Gross profit 99,446 80,927
Administrative expenses (7,656) (38,568)
Corporate costs (482) (294)
Costs of reorganisation and listing - (2,888)
----- ------------- -------------
Total administrative expenses (8,138) (41,750)
Investment property revaluation 10 70,435 160,608
Profit on sale of investment properties 7 23,962 -
---------------------------------------- ----- ------------- -------------
Operating profit 5 185,705 199,785
Finance income 6 61 36
Finance costs 6 (146,613) (66,366)
---------------------------------------- ----- ------------- -------------
Profit before tax 39,153 133,455
Tax (charge) / credit 8 (2,382) 114,291
---------------------------------------- ----- ------------- -------------
Profit for the period 36,771 247,746
---------------------------------------- ----- ------------- -------------
Pence per Pence per
Earnings per share share share
---------------------------------------- ----- ------------- -------------
Basic 9 20.4 149.7
Diluted 9 20.4 139.7
---------------------------------------- ----- ------------- -------------
All amounts relate to continuing activities.
The notes form part of this financial information.
Group Statement of Other Comprehensive Income
Nine months
Year to to
31 December 31 December
2015 2014
GBP000 GBP000
------------------------------------------------------- ------------- -------------
Profit for the period 36,771 247,746
Items that may subsequently be reclassified to
profit or loss:
Fair value adjustment of interest rate derivatives
in effective hedges 31,703 21,837
Reclassification of interest rate derivative
fair value adjustment to the income statement 88,125 -
Tax effect of interest rate derivative fair value
adjustment (147) (26,918)
Deferred tax written off following early termination
of interest rate derivatives (480) -
Currency translation differences (899) (370)
-------------------------------------------------------- ------------- -------------
Total comprehensive income for the period, net
of tax 155,073 242,295
-------------------------------------------------------- ------------- -------------
The notes form part of this financial information.
Group Statement of Changes in Equity
Share Capital Cash flow
Share premium Merger contribution Other hedging Retained
capital reserve reserve reserve reserves reserve earnings Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
----------------- -------- ---------- ---------- --------------- ----------- ----------- ----------- ---------
Year to 31 December 2015
At 1 January 2015 16,844 16,156 - - 33,929 (119,201) 396,577 344,305
----------------- -------- ---------- ---------- --------------- ----------- ----------- ----------- ---------
Profit for the
year - - - - - - 36,771 36,771
Other
comprehensive
income - - - - (899) 119,201 - 118,302
----------------- -------- ---------- ---------- --------------- ----------- ----------- ----------- ---------
Total
comprehensive
income, net of
tax - - - - (899) 119,201 36,771 155,073
Issue of shares 1,190 36,221 - - (32,378) - - 5,033
At 31 December
2015 18,034 52,377 - - 652 - 433,348 504,411
----------------- -------- ---------- ---------- --------------- ----------- ----------- ----------- ---------
Share Capital Cash flow
Share premium Merger contribution Other hedging Retained
capital reserve reserve reserve reserves reserve earnings Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
----------------- -------- ---------- ---------- --------------- ----------- ----------- ----------- ---------
Nine months to 31 December 2014
At 1 April 2014 - - - 23,530 1,921 (114,120) 17,387 (71,282)
----------------- -------- ---------- ---------- --------------- ----------- ----------- ----------- ---------
Profit for the
period - - - - - - 247,746 247,746
Other
comprehensive
income - - - - (370) (5,081) - (5,451)
----------------- -------- ---------- ---------- --------------- ----------- ----------- ----------- ---------
Total
comprehensive
income, net of
tax - - - - (370) (5,081) 247,746 242,295
Issue of shares
on
capitalisation
of
shareholder
loans 7,791 70,123 - (17,492) - - - 60,422
Issue of shares
on
acquisition of
the
Healthcare group 8,191 - 73,718 (18,435) - - - 63,474
Capital reduction
and cancellation - (70,123) (73,718) - - - 143,841 -
Reclassification
on
capitalisation
of shareholder
loans - - - 12,397 - - (12,397) -
Proceeds from
share
issues net of
capitalised
expenses 862 16,156 - - - - - 17,018
Shares to be
issued - - - - 32,378 - - 32,378
At 31 December
2014 16,844 16,156 - - 33,929 (119,201) 396,577 344,305
----------------- -------- ---------- ---------- --------------- ----------- ----------- ----------- ---------
The notes form part of this financial information.
Group Balance Sheet
31 December 31 December
2015 2014
Notes GBP000 GBP000
---------------------------- ----- ------------ -------------
Non-current assets
Investment properties 10 1,349,547 1,625,435
Deferred tax asset 14 - 627
---------------------------- ----- ------------ -------------
1,349,547 1,626,062
---------------------------- ----- ------------ -------------
Current assets
Trade and other receivables 12 114 103
Current tax recoverable - 401
Cash and cash equivalents 13 81,611 38,771
---------------------------- ----- ------------ -------------
81,725 39,275
Total assets 1,431,272 1,665,337
---------------------------- ----- ------------ -------------
Current liabilities
Trade and other payables 15 (29,293) (41,035)
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Secured debt 16 (2,707) (4,908)
Current tax payable (862) (166)
---------------------------- ----- ------------ -------------
(32,862) (46,109)
---------------------------- ----- ------------ -------------
Non-current liabilities
Secured debt 16 (888,312) (1,152,407)
Interest rate derivatives 16 - (117,578)
Deferred tax liability 14 (5,687) (4,938)
---------------------------- ----- ------------ -------------
(893,999) (1,274,923)
Total liabilities (926,861) (1,321,032)
---------------------------- ----- ------------ -------------
Net assets 504,411 344,305
---------------------------- ----- ------------ -------------
Equity
Share capital 17 18,034 16,844
Share premium reserve 18 52,377 16,156
Retained earnings 18 433,348 396,577
Cash flow hedging reserve 18 - (119,201)
Other reserves 18 652 33,929
Total equity 504,411 344,305
---------------------------- ----- ------------ -------------
Pence per Pence
share per share
---------------------------- ----- ------------ -------------
Basic NAV per share 20 279.7 204.4
Diluted NAV per share 20 279.7 190.9
EPRA NAV per share 20 282.8 258.5
---------------------------- ----- ------------ -------------
The notes form part of this financial information.
Group Cash Flow Statement
Year to Nine months
31 December to 31 December
2015 2014
Notes GBP000 GBP000
-------------------------------------------------------- ----- ------------- ----------------
Operating activities
Profit before tax 39,153 133,455
Adjustments for non-cash items:
Investment property revaluation 10 (70,435) (160,608)
Profit on sale of investment properties 7 (23,962) -
Movement in rent smoothing adjustment 10 (13,011) (11,287)
Administrative expenses settled in shares - 32,378
Finance income 6 (61) (36)
Finance costs 6 146,613 66,366
-------------------------------------------------------- ----- ------------- ----------------
Cash flows from operating activities before changes
in working capital 78,297 60,268
Changes in working capital:
Trade and other receivables (11) (194)
Trade and other payables (8,155) 6,770
-------------------------------------------------------- ----- ------------- ----------------
Cash generated from operations 70,131 66,844
Tax paid (316) (743)
-------------------------------------------------------- ----- ------------- ----------------
Cash flows from operating activities 69,815 66,101
-------------------------------------------------------- ----- ------------- ----------------
Investing activities
Proceeds from sale of investment properties 7 379,316 -
Interest received 6 61 36
-------------------------------------------------------- ----- ------------- ----------------
Cash flows from investing activities 379,377 36
-------------------------------------------------------- ----- ------------- ----------------
Financing activities
Drawdown of secured debt 905,158 -
Repayment of secured debt (1,154,923) (6,166)
Interest and finance costs paid (86,804) (60,882)
Costs of early termination of interest rate derivatives (60,289) -
Loan costs paid on new facilities (14,437) -
Net proceeds of share issues 5,033 14,131
-------------------------------------------------------- ----- ------------- ----------------
Cash flows from financing activities (406,262) (52,917)
-------------------------------------------------------- ----- ------------- ----------------
Increase in cash and cash equivalents 42,930 13,220
Cash and cash equivalents at the beginning of
the period 38,771 25,367
Effect of exchange rate changes (90) 184
-------------------------------------------------------- ----- ------------- ----------------
Cash and cash equivalents at the end of the period 81,611 38,771
-------------------------------------------------------- ----- ------------- ----------------
The notes form part of this financial information.
Notes to the Group Financial Information
1. General information about the Group
The financial information set out in this report covers the year to 31 December 2015, with comparative figures relating to the nine month period to 31 December 2014, and includes the results and net assets of the Company and its subsidiaries, together referred to as the Group.
The Company is incorporated in the United Kingdom. The address of the registered office and principal place of business is Cavendish House, 18 Cavendish Square, London, W1G 0PJ. The nature and scope of the Group's operations and principal activities are described in the Chairman's Statement, the Strategic Report, and the Investment Adviser's Report.
The Company has been listed on AIM since June 2014. Further information about the Group can be found on its website, www.SecureIncomeREIT.co.uk.
2. Basis of preparation and accounting policies a) Statement of compliance
Prior to 21 May 2014, the Company and SIR Hospital Holdings Limited (the holding company of the subgroup that owns the healthcare assets) were entities under common control but did not form a single legal group. On 21 May 2014, by way of a reorganisation, the groups headed by these two companies became a legal group headed by the Company. This reorganisation is deemed to be a "combination under common control" and as a result is outside the scope of IFRS 3 "Business Combinations". As such it is considered appropriate that the principles of merger accounting are used to account for the reorganisation and these entities are treated as if they had always been part of a single group. No fair value adjustments are required.
Accordingly, although these entities did not form a legal group for the comparative period reported herein, the comparatives comprise the net assets of all entities as if the subsequently formed legal group had been in existence throughout the nine month period ended 31 December 2014. In particular, earnings per share figures (including diluted, EPRA and adjusted EPRA EPS) have been calculated on the assumption that the capitalisation of shareholder loans which occurred in May 2014 had been in place throughout the nine month period from 1 April 2014 with a corresponding effect on earnings and number of shares used in the EPS calculations (see note 9).
Except for the calculation of the number of shares in issue for EPS purposes, the consolidated financial information has been prepared in accordance with the International Financial Reporting Standards adopted for use in the European Union ("IFRS").
The financial information contained in this announcement has been prepared on the basis of the accounting policies set out in the financial statements for the year ended 31 December 2015. Whilst the financial information included in this announcement has been computed in accordance with IFRS, as adopted by the European Union, this announcement does not itself contain sufficient information to comply with IFRS. The financial information does not constitute the Group's financial statements for the periods ended 31 December 2015 or 31 December 2014, but is derived from those financial statements. Those accounts give a true and fair view of the assets, liabilities, financial position and results of the Group. Financial statements for the period ended 31 December 2014 have been delivered to the Registrar of Companies and those for the year ended 31 December 2015 will be delivered following the Company's Annual General Meeting. The auditors' reports on both the 31 December 2015 and 31 December 2014 financial statements were unqualified; did not draw attention to any matters by way of emphasis; and did not contain statements under section 498 (2) or (3) of the Companies Act 2006.
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b) Basis of preparation
The Group financial information is presented in Sterling as this is the currency of the primary economic environment in which the Group operates. Amounts are rounded to the nearest thousand, unless otherwise stated.
Euro denominated results for the German assets have been converted to Sterling at an average exchange rate for the year of EUR1:GBP0.7256 (nine months to 31 December 2014: EUR1:GBP0.79916), which is not materially different from the actual rates at the time of the transactions. Year end balances have been converted to Sterling at the 31 December 2015 exchange rate of EUR1:GBP0.7350 (2014: EUR1:GBP0.77877).
The Directors have, at the time of preparing the financial information, a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future and therefore continue to adopt the going concern basis of accounting in preparing the financial information. Further details are given in the Strategic Report.
The financial information has been prepared on the historical cost basis except that investment properties and interest rate derivatives are stated at fair value. The accounting policies have been applied consistently in all material respects.
The preparation of financial information requires the Directors to make judgements, estimates and assumptions that may affect the application of accounting policies and reported amounts of assets and liabilities as at each balance sheet date and the reported amounts of revenue and expenses during the year. Any estimates and assumptions are based on experience and any other factors that are believed to be relevant under the circumstances and which the Board considers reasonable. Actual outcomes may differ from these estimates.
Accounting policies which have a significant bearing on the reported financial condition and results of the Group may require subjective or complex judgements. The principal ongoing area of judgement is the investment property valuation where, as described in note 10, the opinion of independent, external valuers has been obtained at each reporting date using recognised valuation techniques and the principles of IFRS 13 "Fair Value Measurement".
The Group's accounting policies for this matter, together with other policies material to the Group, are set out in paragraphs (c) to (j) below.
(i) Adoption of new and revised standards
No amended standard or interpretation issued by the International Accounting Standards Board ("IASB") or the IFRS Interpretations Committee ("IFRIC") has led to any material changes in the Group's accounting policies or disclosures during the year.
(ii) Standards and interpretations in issue not yet adopted
The IASB have issued the following standards that are mandatory for later accounting years, subject to endorsement by the EU, and which are relevant to the Group but have not been adopted early:
Effective date
------------------------------------- ---------------
IFRS 9 "Financial instruments" 1 January 2018
IFRS 15 "Revenue from contracts with
customers" 1 January 2018
IFRS 16 "Leases" 1 January 2019
------------------------------------- ---------------
IFRS 9 deals with the classification and measurement of financial instruments and the Directors do not anticipate that its adoption will have a material impact on the Group's financial statements assuming that the existing capital structure and financing arrangements remain in place at that time. The Group's revenue is derived entirely from leases, which are outside the scope of IFRS 15 but within the scope of IFRS 16. IFRS 15 is not therefore expected to have an impact on the Group. Since IFRS 16 will not result in significant changes of accounting policies for lessors, the Directors do not expect that the adoption of this standard will have a material impact on the Group's financial statements.
The IASB and IFRIC have also issued or revised IFRS 11, IAS 16, IAS 38 and IAS 41 but these are not expected to have a material effect on the operations of the Group.
c) Basis of consolidation
Subsidiaries are those entities controlled by the Group. The Group has control within the meaning of this policy when it has power over an entity, is exposed to or has rights to variable returns from its involvement with the entity, and has the ability to use its power over the entity to affect those returns.
The consolidated financial information includes the financial information of the Group's subsidiaries prepared to 31 December under the same accounting policies as the Group as a whole, using the acquisition method. All intra-group balances and transactions are eliminated on consolidation.
d) Property portfolio (i) Investment properties
Investment properties comprise properties owned by the Group which are held for capital appreciation, rental income or both. They are initially recorded at cost and subsequently valued at each balance sheet date at fair value as determined by professionally qualified independent external valuers.
Valuations are calculated, in accordance with RICS Valuation - Professional Standards January 2014, by applying capitalisation yields to current and future rental cash flows, with reference to data from comparable market transactions, together with an assessment of the security of income. Gains or losses arising from changes in the fair value of investment properties are recognised in the income statement in the period in which they arise. Depreciation is not provided in respect of investment properties.
Acquisitions and disposals of investment properties are recognised on unconditional exchange of contracts where it is reasonable to assume at the balance sheet date that completion of the acquisition or disposal will occur. Gains or losses on disposal are determined as the difference between the net disposal proceeds and the carrying value of the asset in the previous balance sheet adjusted for any subsequent capital expenditure or capital receipts.
(ii) Occupational leases
The Directors exercise judgement in considering the potential transfer of the risks and rewards of ownership in accordance with IAS 17 "Leases" for all properties leased to tenants and determines whether such leases are operating leases. A lease is classified as a finance lease if substantially all of the risks and rewards of ownership transfer to the lessee. If the Group substantially retains those risks, a lease is classified as an operating lease. All leases reflected in this financial information are classified as operating leases.
(iii) Rental income
Revenue comprises rental income exclusive of VAT. Rental income is recognised in the income statement on an accruals basis. Contingent income, arising from RPI-linked rent reviews, is recorded in the income statement in the period in which it is earned. Rental income from leases with fixed rent uplifts is recognised on a straight line basis over the term of the lease. Where income is recognised in advance of the related cash flows, an adjustment is made to ensure that the carrying value of the relevant investment property including accrued rent does not exceed the valuation.
e) Financial assets and liabilities
Financial assets and liabilities are recognised when the relevant Group entity becomes a party to the unconditional contractual terms of the instrument. Unless otherwise indicated, the carrying amounts of financial assets and liabilities are considered by the Directors to be a reasonable estimate of their fair values.
(i) Financial assets
Financial assets are recognised initially at their fair value. All financial assets currently constitute "loans and receivables", which are measured at amortised cost using the effective interest method, less any impairment.
(ii) Trade and other payables
Trade and other payables are recognised initially at their fair value and subsequently at amortised cost.
(iii) Cash and cash equivalents
Cash and cash equivalents comprise cash in hand and deposits held at call with banks and financial institutions, with original maturities of three months or less.
(iv) Borrowings and finance charges
Secured debt is initially recognised at its fair value, net of any transaction costs directly attributable to its issue. Subsequently, secured debt is carried at amortised cost. Transaction costs are amortised over the life of the loan and charged to the income statement as part of the Group's financing costs. Where there is a change in the terms of an existing loan that is not considered to be a substantial modification of that loan, any associated transaction costs are also amortised over the remaining life of the loan.
(v) Interest rate derivatives
The Group has used interest rate derivatives to hedge its exposure to cash flow interest rate risks. Derivatives are initially recognised at fair value on the date on which the derivative contract is entered into and subsequently measured at fair value.
Derivatives are classified either as derivatives in effective hedges or derivatives held for trading. It is anticipated that any hedging arrangements will generally be "highly effective" within the meaning of IAS 39 "Financial Instruments: Recognition and Measurement" and that the criteria necessary for applying hedge accounting will therefore be met. All derivatives held by the Group in the year met these criteria.
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Hedges are assessed on an ongoing basis to ensure they continue to be effective. The gain or loss on the revaluation of the portion of an instrument that qualifies as an effective hedge of cash flow interest rate risk is recognised directly in other comprehensive income through the cash flow hedging reserve. Amounts accumulated in equity will be reclassified to the income statement in the period when the hedged items affect the income statement. The gain or loss on the revaluation of any derivative financial instrument classified as held for trading because it is not an effective hedge is recognised directly in the income statement.
There has been no hedge ineffectiveness to recognise in the income statement in the current year or prior period, so all movements in the fair value of these instruments are reflected in other comprehensive income.
The Group ceases to use hedge accounting if the forecast transaction being hedged against is no longer expected to occur. In such circumstances, the cumulative amounts in other comprehensive income are then reclassified from equity to profit or loss.
(vi) Derecognition of financial liabilities
The Group derecognises financial liabilities when its obligations are discharged, cancelled or they expire. The difference between the carrying amount of those financial liabilities and the consideration paid, including any non-cash assets transferred and any new liabilities assumed is recognised in profit or loss.
f) Tax
Tax is included in the income statement except to the extent that it relates to income or expense items recognised through reserves, in which case the related tax is recognised either in other comprehensive income or directly in equity.
Current tax is the expected tax payable on taxable income for a reporting period, using tax rates enacted or substantively enacted at the balance sheet date, together with any adjustment in respect of previous periods. Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes.
The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised.
g) Foreign currency translation
The results of subsidiary undertakings with a functional currency other than Sterling are translated into Sterling at the actual exchange rates prevailing at the time of the transaction, unless the average rate for the reporting period is not materially different from the actual rate, in which case that average rate is used.
The gains or losses arising on the end of year translation of the net assets of such subsidiary undertakings at closing rates and the difference between translating the results at average rates compared to the closing rates are taken to Other reserves. Monetary assets and liabilities denominated in foreign currencies are translated into Sterling at the rates of exchange ruling at the balance sheet date with any gains or losses arising on translation recognised in the income statement.
h) Equity instruments
Equity instruments issued by the Company are recorded at the proceeds received, net of directly attributable issue costs. Costs not directly attributable to the issue are disclosed within administrative expenses in the income statement.
i) Share based payments
The fair value of payments that are to be settled by the issue of shares is determined on the basis of an estimate of the value of the services provided by non-employees over the relevant accounting period. The estimated number of shares to be issued in satisfaction of the services provided is calculated using the average daily closing share price of the Company for that period.
j) Fair value measurements
Fair value is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction takes place either in the principal market for the asset or liability, or in the absence of a principal market, in the most advantageous market. It uses the assumptions that market participants would use when pricing the asset or liability, assuming they act in their economic best interest. A fair value measurement of a non-financial asset takes into account the highest and best use for that asset.
3. Operating segments
IFRS 8 "Operating Segments" requires operating segments to be identified on the basis of internal reports about components of the Group that are reviewed by the chief operating decision maker to make decisions about resources to be allocated between segments and assess their performance. The Group's chief operating decision maker is considered to be the Board.
The Group owns two property portfolios. Although these are described individually within the Investment Adviser's report, the Board receives quarterly management accounts prepared on a basis which aggregates the performance of the portfolios and focuses on total shareholder returns. The Board has therefore concluded that the Group has operated in and was managed as one business segment, being property investment, in the current year and prior period.
The geographical split of revenue and applicable non-current assets required by IFRS 8 was as follows:
Nine months
Year to to
31 December 31 December
2015 2014
GBP000 GBP000
----------------------- ----------- -----------
Revenue
UK 92,587 75,251
Germany 6,892 5,695
----------------------- ----------- -----------
99,479 80,946
----------------------- ----------- -----------
Investment properties
UK 1,276,003 1,553,364
Germany 73,544 72,071
----------------------- ----------- -----------
1,349,547 1,625,435
----------------------- ----------- -----------
Revenue, which reflects the impact of rent smoothing adjustments, includes GBP55.3 million (nine months to 31 December 2014: GBP42.9 million) relating to the Group's largest tenant, and GBP41.8 million (nine months to 31 December 2014: GBP35.8 million) relating to the Group's second largest tenant. No other single tenant or guarantor contributed more than 10% of the Group's revenue in either reporting period.
4. Revenue
Revenue comprises:
Nine months
Year to to
31 December 31 December
2015 2014
GBP000 GBP000
---------------------------- ----------- -----------
Rental income 86,468 69,659
Rent smoothing adjustments 13,011 11,287
---------------------------- ----------- -----------
99,479 80,946
---------------------------- ----------- -----------
The rent smoothing adjustment arises through the Group's accounting policy in respect of leases, which requires the recognition of rental income on a straight line basis over the lease term in certain circumstances, including for the 67% (2014: 57%) of passing rent as at 31 December 2015 which increases by a fixed percentage each year. During the year, this resulted in an increase in revenue and an offsetting entry is recognised in the income statement as a reduction in the gains on investment property revaluation.
5. Operating profit
Operating profit is stated after charging fees for:
Nine months
Year to to
31 December 31 December
2015 2014
GBP000 GBP000
---------------------------------------------------- ----------- -----------
Audit of the Company's consolidated and individual
financial statements 67 75
Audit of subsidiaries, pursuant to legislation 99 90
Non-audit services in connection with the
listing - 273
---------------------------------------------------- ----------- -----------
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The Group had no employees in either the current year or the prior period. The Directors, who are the key management personnel of the Company, are appointed under letters of appointment for services. Directors' remuneration, all of which represents fees for services provided, was as follows:
Nine months
Year to to
31 December 31 December
2015 2014
GBP000 GBP000
--------------------------------------- ----------- -----------
Martin Moore 75 44
Leslie Ferrar 40 23
Jonathan Lane 35 21
Ian Marcus 35 21
--------------------------------------- ----------- -----------
Total charged to the income statement 185 109
--------------------------------------- ----------- -----------
Mike Brown, Sandy Gumm and Nick Leslau received no Directors' fees from the Group in either the current year or prior period.
6. Finance income and costs
Nine months
Year to to
31 December 31 December
2015 2014
GBP000 GBP000
--------------------------------------------- ----------- -----------
Recognised in the income statement:
Finance income
Interest on cash deposits 61 36
--------------------------------------------- ----------- -----------
Finance costs
Interest on secured debt (66,781) (59,387)
Amortisation of loan costs (non-cash) (7,561) (2,168)
Exit and other fees (11,646) (3,135)
Reclassification of fair value adjustment
of interest rate derivatives from the cash
flow hedging reserve net of lender's share
of early termination costs (60,625) -
Shareholder loans: unwinding of discount to
date of capitalisation (non-cash) - (1,676)
--------------------------------------------- ----------- -----------
Total finance costs (146,613) (66,366)
--------------------------------------------- ----------- -----------
Net finance costs recognised in the income
statement (146,552) (66,330)
--------------------------------------------- ----------- -----------
Included within interest on secured debt is an amount of GBP35.0 million (nine months to 31 December 2014: GBP40.7 million) which has been reclassified from other comprehensive income in respect of the Group's interest rate derivatives in effective hedges.
Nine months
Year to to
31 December 31 December
2015 2014
GBP000 GBP000
-------------------------------------------------------- ----------- -----------
Recognised in other comprehensive income:
Fair value adjustment of interest rate derivatives
in effective hedges 31,703 21,837
Reclassification of fair value adjustments
to the income statement 88,125 -
-------------------------------------------------------- ----------- -----------
Total finance income recognised in other comprehensive
income 119,828 21,837
-------------------------------------------------------- ----------- -----------
Net finance costs analysed by the categories of financial asset and liability shown in note 16 are as follows:
Nine months
Year to to
31 December 31 December
2015 2014
GBP000 GBP000
-------------------------------------------- ----------- -----------
Loans and receivables 61 36
Financial liabilities at amortised cost (50,982) (25,651)
Derivatives in effective hedges (95,631) (40,715)
-------------------------------------------- ----------- -----------
Net finance costs recognised in the income
statement (146,552) (66,330)
-------------------------------------------- ----------- -----------
The Group's sensitivity to changes in interest rates, calculated on the basis of a 10 basis point increase or decrease in LIBOR, was as follows:
Nine months
Year to to
31 December 31 December
2015 2014
GBP000 GBP000
------------------------------------------------- ----------- -----------
Effect on profit for the year 816 -
Effect on other comprehensive income and equity - 3,993
------------------------------------------------- ----------- -----------
The Group receives interest on its bank balances so an increase in interest rates would increase finance income. There would be no impact on finance costs from a change in interest rates because all of the secured debt in place since 2 October 2015 is at fixed rates.
At the previous balance sheet date, interest on secured debt was fixed through interest rate swaps and as a result, changes in interest rates had an impact on the valuation of those interest rate swaps through other comprehensive income and equity, such that an increase in interest rates would result in a credit to other comprehensive income. Since those interest rate swaps were terminated during the year, at 31 December 2015 there were therefore no longer any changes in interest rates that would directly affect other comprehensive income and equity.
7. Profit on sale
The profit on sale of investment properties arose as follows:
Nine months
Year to to
31 December 31 December
2015 2014
GBP000 GBP000
------------------------------- ----------- -----------
Sale proceeds 382,136 -
Sale costs (2,820) -
Book value of sold properties (355,354) -
------------------------------- ----------- -----------
23,962 -
------------------------------- ----------- -----------
8. Tax
Nine months
Year to to
31 December 31 December
2015 2014
Analysis of tax charge / (credit) for the
period GBP000 GBP000
---------------------------------------------- ----------- -----------
Current tax - UK
UK REIT excess interest charge 1,293 665
Adjustments in respect of prior periods 50 -
Current tax - Germany
Corporation tax charge / (credit) 242 (130)
Adjustments in respect of prior periods (226) -
Deferred tax
Deferred tax charge / (credit) (see note 14) 1,023 (114,826)
---------------------------------------------- ----------- -----------
2,382 (114,291)
---------------------------------------------- ----------- -----------
The tax assessed for the period varies from the standard rate of corporation tax in the UK applied to the profit before tax. The differences are explained below:
Nine months
Year to to
31 December 31 December
2015 2014
GBP000 GBP000
------------------------------------------------- ----------- -----------
Profit before tax 39,153 133,455
------------------------------------------------- ----------- -----------
Profit before tax multiplied by the standard
rate of corporation tax in the UK of 20.25%
(nine months to 31 December 2014: 21%) 7,928 28,026
Effects of:
Investment property revaluation not taxable (15,875) (34,275)
Movement in previously unrecognised tax losses 15,512 3,231
Profit on sale of investment properties not
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taxable (4,852) - Qualifying property rental business not taxable (3,633) 4,908 Expenses and finance costs not deductible 1,943 - UK REIT excess interest charge 1,293 665 German current tax charge / (credit) for the period 242 (130) Adjustments in respect of prior period (176) - UK deferred tax released on conversion to REIT status - (117,276) Costs of the reorganisation and listing not deductible for tax - 606 Double tax relief - (58) Other items - 12 Tax charge / (credit) for the period 2,382 (114,291) ------------------------------------------------- ----------- -----------
The Group elected into the UK REIT regime with effect from 5 June 2014. Subject to continuing compliance with certain rules, the UK REIT rules exempt the profits of the Group's UK and German property rental business from UK corporation tax. Gains on the Group's UK and German properties are also generally exempt from UK corporation tax, provided they are not held for trading or in certain circumstances sold in the three years after completion of a development.
To remain a UK REIT, there are a number of conditions to be met in respect of the Company, the Group's qualifying activity and the Group's balance of business. Since entering the UK REIT regime the Group has continued to meet these conditions. The condition requiring that the Company must not be a close company includes a grace period of three years from entry into the UK REIT regime. The Company was a close company when it entered the UK REIT regime and continues to be so, but has until 4 June 2017 to comply. The Board is seeking to widen its shareholder base with a view to meeting this requirement within the three year grace period.
One of the ongoing REIT tests is an interest cover test that requires the profits of the tax exempt property business of the Group (calculated on a tax basis, but before deducting financing costs and capital allowances) to be at least 1.25 times its cost of financing. If this condition is not met, the Company remains within the UK REIT regime but is required to pay UK corporation tax on an amount equivalent to the excess interest costs or 20% of the tax exempt business profits (calculated on a tax basis but before deducting financing costs and capital allowances) if that is less. The Group did not meet this test throughout the year, so tax of GBP1.3 million (nine months to 31 December 2014: GBP0.7 million) was payable. Following the debt refinancing during the year, the interest cover test is being met and therefore, assuming no material changes to the Group's capital structure, no such tax is expected to be payable in future financial years.
The Group is subject to German corporation tax on its German property rental business at a rate of 21%. During the year, the German tax charge of GBP0.2 million has been offset by a credit of GBP0.2 million arising from a tax audit relating to the years between 2007 and 2012 which has now been finalised, and further repayments relating to 2013 and 2014. This is expected to result in a net repayment of tax to the Group of GBP0.8 million, of which GBP0.7 million had been received by 31 December 2015. In addition, a deferred tax liability of GBP5.7 million (2014: GBP4.9 million) is recognised for the German capital gains tax that would potentially be payable on the sale of the relevant investment properties (see note 14).
9. Earnings per share
Earnings per share ("EPS") is calculated as profit attributable to ordinary shareholders of the Company for each period divided by the weighted average number of ordinary shares in issue throughout the relevant period. Diluted EPS reflects shares to be issued, including any to be issued in settlement of incentive fees that were earned in the relevant period. Where shares are issued in one reporting period relating to the results of the prior period, the shares are treated, for the purposes of calculating the weighted average of shares in issue, as having been issued at the end of that prior period regardless of the actual date of issue.
On 20 May 2014, the Company and SIR Hospital Holdings Limited (the "Combined Companies") became a legal group. During the prior period until that date, the Combined Companies were entities under common control. It is considered that the use of the actual number of shares of the Combined Companies in issue prior to 21 May 2014 as a denominator in the EPS calculation would not provide meaningful information. Instead, the weighted average number of shares in issue has been determined based on the number of shares that would have been in issue in the period had the shareholder loans to the Combined Companies been capitalised on the basis of one share for each GBP1 of shareholder loans at the time they were advanced. The profit attributable to the shareholders of the Combined Companies prior to 20 May 2014 has also been adjusted to remove the impact of the amount included in finance costs in respect of the shareholder loans together with the related deferred tax.
Nine months
Year to to
31 December 31 December
2015 2014
GBP000 GBP000
-------------------------------------------- ----------- -----------
Profit for the period 36,771 247,746
Unwinding of discount on shareholder loans
net of tax - 1,341
Adjusted profit for EPS 36,771 249,087
-------------------------------------------- ----------- -----------
Weighted average number of shares in issue Number Number
-------------------------------------------- ----------- -----------
Basic EPS 180,344,213 166,406,143
Diluted EPS 180,344,213 178,306,575
-------------------------------------------- ----------- -----------
Pence per Pence per
share share
------------- --------- ---------
Basic EPS 20.4 149.7
Diluted EPS 20.4 139.7
------------- --------- ---------
The European Public Real Estate Association ("EPRA") publishes guidelines for calculating adjusted earnings designed to represent core operational activities. As well as the standard EPRA earnings figure, an adjusted EPRA earnings calculation is presented, excluding the incentive fee, largely derived from investment property revaluations, and the non-recurring costs of the reorganisation and listing. EPRA EPS has also been adjusted in the current year and (for the first time this year) in the prior period to exclude the effect of smoothing fixed rental uplifts in order not to artificially flatter dividend cover calculations now that distributions are to be initiated. This results in a restatement of the prior period comparatives.
Restated
Nine months
Year to to
31 December 31 December
2015 2014
GBP000 GBP000
--------------------------------------------- ----------- -----------
Basic earnings attributable to shareholders 36,771 249,087
EPRA adjustments:
Investment property revaluation (70,435) (160,608)
Profit on sale of investment properties (23,962) -
Costs of early termination of interest rate
swaps 60,625 -
Other early debt repayment costs 13,666 -
German deferred tax on investment property
revaluation 1,023 1,823
UK deferred tax released on REIT conversion - (117,276)
EPRA earnings 17,688 (26,974)
Other adjustments:
Rent smoothing (13,011) (11,287)
Incentive fee - 35,186
Costs of the reorganisation and listing - 2,888
--------------------------------------------- ----------- -----------
Adjusted EPRA earnings 4,677 (187)
--------------------------------------------- ----------- -----------
Pence per Pence per
share share
--------------------------- ----------- ---------
EPRA EPS 9.8 (16.2)
Diluted EPRA EPS 9.8 (15.1)
Adjusted EPRA EPS 2.6 -
Diluted adjusted EPRA EPS 2.6 -
--------------------------- ----------- ---------
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10. Investment properties
Nine months
Year to to
31 December 31 December
2015 2014
Freehold investment properties GBP000 GBP000
-------------------------------- ----------- -----------
At the start of the period 1,625,435 1,457,374
Disposals (355,354) -
Revaluation movement 83,446 171,895
Currency translation movement (3,980) (3,834)
-------------------------------- ----------- -----------
At the end of the period 1,349,547 1,625,435
-------------------------------- ----------- -----------
As at 31 December 2015 the properties were independently valued at GBP1,349.5 million (2014: GBP1,625.4 million) by CBRE Limited, Commercial Real Estate Advisers, in their capacity as external valuers. The valuation was prepared on a fixed fee basis, independent of the portfolio value, and was undertaken in accordance with RICS Valuation - Professional Standards January 2014 on the basis of fair value, supported by reference to market evidence of transaction prices for similar properties.
The historic cost of the Group's investment properties as at 31 December 2015 was GBP1,063.6 million (2014: GBP1,315.1 million). The Group did not have any contractual investment property obligations at either balance sheet date and responsibility for property liabilities including repairs and maintenance resides with the tenants.
All of the investment properties are held as security under fixed charges in respect of secured debt.
Included within the carrying value of investment properties at 31 December 2015 is GBP156.6 million (2014: GBP154.4 million) in respect of the smoothing of fixed contractual rental uplifts as described in note 4. The difference between rents on a straight line basis and rents actually receivable is included within, but does not increase, the carrying value of investment properties. The effect of this adjustment on the revaluation movement is as follows:
Nine months
Year to to
31 December 31 December
2015 2014
GBP000 GBP000
---------------------------------------------- ----------- -----------
Revaluation movement 83,446 171,895
Rent smoothing adjustment (13,011) (11,287)
---------------------------------------------- ----------- -----------
Revaluation movement in the income statement 70,435 160,608
---------------------------------------------- ----------- -----------
The Board determines the Group's valuation policies and procedures, and is responsible for overseeing the valuations. Valuations are based on information provided from the Group's financial and property reporting systems, such as current rents and the terms and conditions of lease agreements, together with assumptions used by the valuer (based on market observation and their professional judgement) in the valuation model.
At each reporting date, certain partners and employees of the Investment Adviser, who have recognised professional qualifications and are experienced in valuing the types of property owned by the Group, initially analyse the independent valuer's assessment of movements in the property valuations from the prior reporting date. Fair value changes (positive or negative) over a certain threshold are considered. Changes in fair value are also compared to external sources (such as the Investment Property Databank or other relevant benchmarks) for reasonableness. Once the Investment Adviser has considered the valuations, the results are discussed with the Group's independent valuers, focusing on properties with unexpected fair value changes and, if applicable, properties undergoing significant refurbishment. The Audit Committee also considers the valuation process as part of its overall responsibilities, and reports on its assessment of the procedures to the Board.
The fair value of the investment property portfolio has been determined using an income capitalisation technique, whereby contracted and market rental values are capitalised with a market capitalisation rate. This technique is consistent with the principles in IFRS 13 and uses significant unobservable inputs, such that the fair value measurement of each property within the portfolio has been classified as level 3 in the fair value hierarchy as defined in IFRS 13. There have been no transfers to or from other levels of the fair value hierarchy during the year.
The key inputs for the level 3 valuations were as follows:
Inputs
----------------------------------
Fair value
Portfolio GBP000 Key unobservable input Range Weighted average
------------------- ----------- ----------------------- ---------------- ----------------
At 31 December
2015:
Healthcare 834,437 Net initial yield 4.5% - 5.8% 5.2%
Reversionary yield 4.6% - 5.9% 5.4%
Leisure - UK 441,560 Net initial yield 5.2% - 6.1% 5.4%
Reversionary yield 5.3% - 6.2% 5.5%
Future RPI assumption
per annum 2.0% 2.0%
Leisure - Germany 73,550 Net initial yield 6.3% 6.3%
Reversionary yield 6.5% 6.5%
------------------- ----------- ----------------------- ---------------- ----------------
At 31 December
2014:
Healthcare 812,981 Net initial yield 4.4% - 5.8% 5.6%
Reversionary yield 4.5% - 6.0% 5.7%
Leisure - UK 740,383 Net initial yield 4.8% - 6.5% 5.2%
Reversionary yield 4.9% - 6.6% 5.3%
Future RPI assumption
per annum 2.2% for 2015, 2.2% for 2015,
3.5% thereafter 3.5% thereafter
Leisure - Germany 72,071 Net initial yield 6.5% 6.5%
Reversionary yield 6.8% 6.8%
------------------- ----------- ----------------------- ---------------- ----------------
The principal sensitivity of measurement to variations in the significant unobservable outputs is that decreases in net initial yield, decreases in reversionary yield and increases in RPI will increase the fair value (and vice versa).
All of the Group's revenue as reflected in the income statement is derived from rental income on investment properties. Property outgoings arising on investment properties, all of which generated rental income in each period, were GBP33,000 (nine months to 31 December 2014: GBP19,000).
11. Subsidiaries
The companies listed below were the subsidiary undertakings of the Company at 31 December 2015, all of which are wholly owned and incorporated in England unless otherwise indicated.
Company name Nature of business
--------------------------------- --------------------------------------------------
SIR Theme Park Subholdco Limited Intermediate parent company and borrower
* under mezzanine secured debt facility
Charcoal Midco 2 Limited Intermediate parent company
SIR Theme Parks Limited Intermediate parent company and borrower
under senior secured debt facility
SIR ATH Limited Property investment - leisure
SIR ATP Limited Property investment - leisure
SIR HP Limited Property investment - leisure and borrower
under senior secured debt facility (registered
in England, operating in Germany)
SIR TP Limited Property investment - leisure
SIR WC Limited Property investment - leisure
SIR Hospital Holdings Limited Intermediate parent company
*
SIR Umbrella Limited Intermediate parent company
SIR Hospitals Propco Limited Intermediate parent company and borrower
under secured debt facility
SIR Downs Limited Property investment - healthcare
SIR Duchy Limited Property investment - healthcare
SIR Euxton Limited Property investment - healthcare
SIR Midlands Limited Property investment - healthcare
SIR Mt Stuart Limited Property investment - healthcare
SIR Oaklands Limited Property investment - healthcare
SIR Renacres Limited Property investment - healthcare
SIR Rivers Limited Property investment - healthcare
SIR Springfield Limited Property investment - healthcare
Thomas Rivers Limited Property investment - healthcare
SIR Healthcare 1 Limited Intermediate parent company
SIR Healthcare 2 Limited Intermediate parent company and borrower
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under secured debt facility
SIR Ashtead Limited Property investment - healthcare
SIR Fitzwilliam Limited Property investment - healthcare
SIR Fulwood Limited Property investment - healthcare
SIR Lisson Limited Property investment - healthcare
SIR Oaks Limited Property investment - healthcare
SIR Pinehill Limited Property investment - healthcare
SIR Reading Limited Property investment - healthcare
SIR Rowley Limited Property investment - healthcare
SIR Winfield Limited Property investment - healthcare
SIR Woodland Limited Property investment - healthcare
SIR Yorkshire Limited Property investment - healthcare
UK Healthcare Partners (General
Partner) Limited Dormant (in voluntary liquidation) (registered
in Guernsey)
SIR New Hall Limited * Dormant
SIR MTL Limited * Dormant
Charcoal Bidco Limited * Dormant
--------------------------------- --------------------------------------------------
* directly owned by the Company; all other entities are indirectly owned
The terms of the secured debt facilities may, in the event of a covenant default, restrict the ability of certain subsidiaries to transfer funds to the Company, which is outside the relevant security groups.
12. Trade and other receivables
31 December 31 December
2015 2014
GBP000 GBP000
-------------------------------- ----------- -----------
Prepayments and accrued income 114 103
-------------------------------- ----------- -----------
13. Cash and cash equivalents
31 December 31 December
2015 2014
GBP000 GBP000
-------------------- ----------- -----------
Secured cash 25,598 25,335
Regulatory capital 375 450
Free cash 55,638 12,986
-------------------- ----------- -----------
81,611 38,771
-------------------- ----------- -----------
Secured cash is held in accounts over which the providers of secured debt have fixed security. As the Company is considered to be an internally managed Alternative Investment Fund, it is also required by the Financial Conduct Authority to hold a balance of regulatory capital in liquid funds, which is maintained in cash.
14. Deferred tax
The movements in deferred tax balances in each period were as follows:
Unrealised Interest
gains on Tax losses rate derivatives
investment carried Shareholder at fair
properties forward loans value Total
GBP000 GBP000 GBP000 GBP000 GBP000
--------------------------------- ------------ ------------ ------------ -------------------- ----------
Balance at 1 January
2015 (4,938) - - 627 (4,311)
Charge to the income
statement (note 8) (1,023) - - - (1,023)
Movement in other comprehensive
income 274 - - (627) (353)
Balance at 31 December
2015 (5,687) - - - (5,687)
--------------------------------- ------------ ------------ ------------ -------------------- ----------
Unrealised Interest
gains on Tax losses rate derivatives
investment carried Shareholder at fair
properties forward loans value Total
GBP000 GBP000 GBP000 GBP000 GBP000
--------------------------------- ------------ ------------ ------------ -------------------- ----------
Balance at 1 April
2014 (120,636) 962 (9,317) 27,544 (101,447)
Credit / (charge) to
the income statement
(note 8) 115,453 (962) 335 - 114,826
Movement in other comprehensive
income 245 - - (26,917) (26,672)
Deferred tax released
on capitalisation of
shareholder loans credited
directly to equity - - 8,982 - 8,982
Balance at 31 December
2014 (4,938) - - 627 (4,311)
--------------------------------- ------------ ------------ ------------ -------------------- ----------
15. Trade and other payables
31 December 31 December
2015 2014
GBP000 GBP000
------------------------------ ----------- -----------
Trade payables 251 -
Tax and social security 1,347 5,163
Accruals and deferred income 27,695 35,872
------------------------------ ----------- -----------
29,293 41,035
------------------------------ ----------- -----------
16. Financial assets and liabilities
Borrowings
31 December 31 December
2015 2014
GBP000 GBP000
--------------------------------------------- ----------- -----------
Amounts falling due within one year
Secured debt - current portion of long term
facilities 4,387 6,853
Unamortised finance costs (1,680) (1,945)
--------------------------------------------- ----------- -----------
2,707 4,908
--------------------------------------------- ----------- -----------
Amounts falling due in more than one year
Secured debt 900,521 1,150,712
Exit fee - 3,978
Unamortised finance costs (12,209) (2,283)
--------------------------------------------- ----------- -----------
888,312 1,152,407
--------------------------------------------- ----------- -----------
As at 31 December 2015, the fair value of the Group's secured debt was GBP912.2 million (2014: GBP1,158.6 million). The Group had no undrawn, committed borrowing facilities at either balance sheet date.
The debt is secured by charges over the Group's investment properties and by fixed and floating charges over the other assets of certain Group companies, not including the Company itself save for a limited share charge over the parent company of one of the ring-fenced subgroups. There have been no defaults or breaches of any loan covenants during the current year or prior period.
The analysis of borrowings by currency is as follows:
31 December 31 December
2015 2014
GBP000 GBP000
---------------------------- ----------- -----------
Sterling:
Secured debt 852,150 1,106,109
Exit fee - 3,978
Unamortised finance costs (13,093) (4,008)
839,057 1,106,079
---------------------------- ----------- -----------
Euro:
Secured debt 52,758 51,456
Unamortised finance costs (796) (220)
---------------------------- ----------- -----------
51,962 51,236
---------------------------- ----------- -----------
Interest rate derivatives
The fair values of the Group's interest rate derivatives were as follows:
Notional amount Fair value
----------------------- ------------------------ ------------------------
31 December 31 December 31 December 31 December
2015 2014 2015 2014
GBP000 GBP000 GBP000 GBP000
----------------------- ----------- ----------- ----------- -----------
5.1% swap - 608,920 - (56,849)
5.4% amortising swap - 304,008 - (32,955)
5.4% swaps - 196,622 - (21,804)
4.4% amortising swap* - 33,091 - (3,579)
4.4% swaps* - 21,529 - (2,391)
- 1,164,170 - (117,578)
----------------------- ----------- ----------- ----------- -----------
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* denominated in Euros, converted at the relevant period end rate.
Categories of financial instruments
31 December 31 December
2015 2014
GBP000 GBP000
------------------------------------------ ----------- -----------
Financial assets
Loans and receivables:
Cash and cash equivalents (note 13) 81,611 38,771
------------------------------------------ ----------- -----------
81,611 38,771
------------------------------------------ ----------- -----------
Financial liabilities
Financial liabilities at amortised cost:
Accrued interest (9,592) (13,530)
Secured debt (904,908) (1,157,315)
Derivatives in effective hedges:
Interest rate derivatives - (117,578)
------------------------------------------ ----------- -----------
(914,500) (1,288,423)
------------------------------------------ ----------- -----------
At each balance sheet date, all financial assets and liabilities were measured at amortised cost except for interest rate derivatives which were measured at fair value. Secured debt, which comprises fixed rate loans, is measured at amortised cost but its fair value is also disclosed as required by IFRS 7. The derivatives and secured debt were valued in accordance with IFRS 13 by reference to interbank bid market rates as at the close of business on the balance sheet date by JC Rathbone Associates Limited. All interest rate derivatives and secured debt were classified as "level 2" as defined in IFRS 13 and their fair values were calculated using the present values of future cash flows, based on market forecasts of interest rates and adjusted for the credit risk of the counterparties. There were no transfers to or from other levels of the fair value hierarchy during the current year or the prior period.
Financial risk management
Through the Group's operations and use of debt financing it is exposed to certain risks. The Group's financial risk management objectives are to minimise the effect of these risks by using fixed rate debt or derivative financial instruments to manage exposure to fluctuations in interest rates. Any such derivative financial instruments are not employed for speculative purposes. Any use of any derivatives is approved by the Board, which monitors acceptable levels of interest rate risk, credit risk and liquidity risk.
The exposure to each financial risk considered potentially material to the Group, how it arises and the policy for managing it is summarised below.
Market risk
Market risk is defined as the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. The Group's market risk arises from open positions in interest bearing assets and liabilities and foreign currencies, to the extent that these are exposed to general and specific market movements.
(a) Market risk - interest rate risk
The Group's interest bearing assets comprise only cash and cash equivalents. Changes in market interest rates therefore affect the Group's finance income. The Group's borrowings since 2 October 2015 are all at fixed rates. Prior that date, the Group was exposed to cash flow interest rate risk as its borrowings were at variable rates. The Group's policy was to fix the interest rate on that debt by entering into interest rate derivatives in order to mitigate this risk. As a result, for both the year ended 31 December 2015 and the period ended 31 December 2014, after taking into account the effect of interest rate swaps, all of the Group's borrowings were at a fixed rate of interest. The Group's sensitivity to changes in interest rates is disclosed in note 6.
Trade and other payables are interest free and have payment terms of less than one year, so it is assumed that there is no interest rate risk associated with these financial liabilities.
(b) Market risk - currency risk
The Group prepares its financial information in Sterling. Some of the Group's assets are located in Germany and as a result the Group is subject to foreign currency exchange risk due to exchange rate movements between Sterling and the Euro, though this risk is partially hedged because both assets and liabilities are held in Euros, and both revenue and expenditure arise in Euros. An unhedged currency risk therefore remains on the value of the Group's net investment in, and returns from, its German operations.
The Group's sensitivity to changes in foreign currency exchange rates, calculated on the basis of a 10% increase or decrease in average and closing Sterling rates against the Euro, was as follows:
Nine months
Year to to
31 December 31 December
2015 2014
GBP000 GBP000
------------------------------------------------- ----------- -----------
Effect on profit 204 204
Effect on other comprehensive income and equity 1,862 1,046
------------------------------------------------- ----------- -----------
Credit risk
Credit risk is the risk of financial loss to the Group if a counterparty fails to meet its contractual obligations. The principal counterparties are the Group's tenants (in respect of trade receivables arising under operating leases) and banks (as holders of the Group's cash deposits).
The credit risk of trade receivables is considered low because the counterparties to the operating leases are considered by the Board to be high quality tenants with lease guarantors of appropriate financial strength, and rent over at least the last nine years has historically always been paid on or before its due date. Recovery details and statistics are benchmarked in Board reports to identify any problems at any early stage, and if necessary rigorous credit control procedures will be applied to facilitate the recovery of trade receivables. The Group does not hold any financial assets which are either past due or impaired. The credit risk on cash deposits is limited because the counterparties are banks with credit ratings which are acceptable to the Board and are kept under review each quarter or more often if required.
Liquidity risk
Liquidity risk arises from the Group's management of working capital and the finance costs and principal repayments on its secured debt. It is the risk that the Group will not be able to meet its financial obligations as they fall due.
The Group seeks to manage its liquidity risk by ensuring that sufficient cash is available to meet its foreseeable needs. These liquidity needs are relatively modest and are managed principally through the deduction of operating costs from rental receipts, before any surplus is applied in payment of interest and loan amortisation as required by the credit agreements relating to the Group's secured debt.
Before entering into any debt instrument, the Board assesses the resources that are expected to be available to the Group to meet the liabilities when they fall due. These assessments are made on the basis of both conservative and downside scenarios. The Group prepares budgets and working capital forecasts which are reviewed by the Board at least quarterly to assess ongoing cash requirements and compliance with loan covenants. The Board also keeps under review the maturity profile of the Group's cash deposits in order to have reasonable assurance that cash will be available for the settlement of liabilities when they fall due.
The following tables show the maturity analysis for financial assets and liabilities. The tables have been drawn up based on the undiscounted cash flows of financial liabilities, including future interest payments, based on the earliest date on which the Group can be required to pay.
Effective
interest Less than One to two Two to five More than
rate one year years years five years Total
31 December 2015 GBP000 GBP000 GBP000 GBP000 GBP000
--------------------------- --------- --------- ---------- ----------- ----------- -----------
Financial assets:
--------------------------- --------- --------- ---------- ----------- ----------- -----------
Cash and cash equivalents 0.3% 81,611 - - - 81,611
--------------------------- --------- --------- ---------- ----------- ----------- -----------
Financial liabilities:
Accrued interest (9,592) - - - (9,592)
Secured debt 5.2% (52,833) (51,093) (152,941) (1,043,396) (1,300,263)
(62,425) (51,093) (152,941) (1,043,396) (1,309,855)
--------------------------- --------- --------- ---------- ----------- ----------- -----------
Effective
interest Less than One to two Two to five More than
rate one year years years five years Total
31 December 2014 GBP000 GBP000 GBP000 GBP000 GBP000
--------------------------- --------- --------- ---------- ----------- ----------- -----------
Financial assets:
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--------------------------- --------- --------- ---------- ----------- ----------- -----------
Cash and cash equivalents 0.3% 38,771 - - - 38,771
--------------------------- --------- --------- ---------- ----------- ----------- -----------
Financial liabilities:
Accrued interest (13,530) - - - (13,530)
Secured debt 2.5% (22,420) (42,057) (1,172,006) - (1,236,483)
Interest rate derivatives 4.3% (42,978) (48,054) (26,546) - (117,578)
--------------------------- --------- --------- ---------- ----------- ----------- -----------
(78,928) (90,111) (1,198,552) - (1,367,591)
--------------------------- --------- --------- ---------- ----------- ----------- -----------
Capital risk management in respect of the financial year
The Board's primary objective when monitoring capital is to safeguard the Group's ability to continue as a going concern, while ensuring it remains within its debt covenants so as to safeguard secured assets and avoid financial penalties. Borrowings are secured on the property portfolio by way of fixed charges over property assets and over the shares in the parent company of each ring-fenced borrower subgroup, and also by floating charges on the assets of the relevant subsidiary companies.
The Group is subject to the externally imposed capital requirements under the AIFMD regime as disclosed in note 13. There have been no breaches of those capital requirements, which have been complied with at all times during the year and up to the date of this report.
At 31 December 2015 the capital structure of the Group consisted of debt (note 16), cash and cash equivalents (note 13), and equity attributable to the shareholders of the Company (comprising share capital, retained earnings and the other reserves referred to in note 18).
As part of the Group's management of its capital structure, consideration is given to the cost of capital. In order to maintain or adjust the capital structure, the Group keeps under review the amount of any dividends or other returns to shareholders, and monitors the extent to which the issue of new shares or the realisation of assets may be required.
Details of the significant accounting policies adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial asset, financial liability and equity instrument are disclosed in the accounting policies in note 2.
17. Share capital
Share capital represents the aggregate nominal value of shares issued. At 31 December 2015, the Company had an issued and fully paid share capital of 180,344,228 (2014: 168,443,772) ordinary shares of GBP0.10 each.
Under the terms of the Commitment Agreement described in note 21, the Company's shareholders prior to listing agreed to subscribe in cash for one ordinary share per quarter until 10 July 2016 to cover the fees payable to the Investment Adviser during the year. During the year, 24 ordinary shares of GBP0.10 each (nine months to 31 December 2014: 18 ordinary shares) were issued under this arrangement for total proceeds of GBP5.0 million (nine months to 31 December 2014: GBP2.2 million). The excess over nominal value was credited to the share premium reserve.
Under the terms of the Investment Advisory Agreement described in note 21, during the year the Company issued 11,900,432 ordinary shares of GBP0.10 each in settlement of incentive fees payable to the Investment Adviser in respect of services provided during the prior period.
As a result of these transactions, the movement in the number of shares in issue over the year was as follows:
Nine months
Year to to
31 December 31 December
2015 2014
Number Number
----------------------------------------------- ----------- -----------
At the start of the period 168,443,772 1
Issue of ordinary shares in settlement of
incentive fee 11,900,432 -
Issue of ordinary shares under the Commitment
Agreement 24 18
Subdivision of ordinary share - 9
Capitalisation of shareholder loans - 77,914,338
Issue of ordinary shares prior to listing - 81,908,717
Issue of ordinary shares on listing - 8,620,689
At the end of the period 180,344,228 168,443,772
----------------------------------------------- ----------- -----------
18. Reserves
The nature and purpose of each of the reserves included within equity at 31 December 2015 is as follows:
-- Share premium reserve: represents the surplus of the gross proceeds of share issues over the nominal value of the shares, net of the direct costs of equity issues.
-- Other reserves: represents the cumulative exchange gains and losses on the translation of the Group's net investment in its German operations, as well as the impact on equity of any shares to be issued after the balance sheet date, as described in note 21, under the terms of both the Commitment Agreement and the incentive fee arrangements.
-- Cash flow hedging reserve: represents cumulative gains or losses, net of tax, on effective cash flow hedging instruments. Following the termination of the interest rate swaps during the year, all amounts on this reserve were reclassified to retained earnings and the balance has therefore fallen to GBPnil.
-- Retained earnings: represent the cumulative profits and losses recognised in the income statement, together with any amounts transferred or reclassified from the other Group reserves.
19. Operating leases
The Group's principal assets are investment properties which are leased to third parties under non-cancellable operating leases. The average remaining lease term is 23.5 years (2014: 25.1 years) and the leases contain either fixed or RPI-linked uplifts, with no break options. Contingent rental income arises as a result of the RPI-linked uplifts and amounted to GBP0.6 million recognised in the income statement in the year (nine months to 31 December 2014: GBP1.0 million). The future minimum lease payments receivable under the Group's leases, translated at the relevant period end exchange rates, are as follows:
31 December 31 December
2015 2014
GBP000 GBP000
--------------------------------- ----------- -----------
Within one year 77,371 94,190
Between one year and five years 324,167 392,413
More than five years 1,845,457 2,355,051
--------------------------------- ----------- -----------
2,246,995 2,841,654
--------------------------------- ----------- -----------
20. Net asset value per share
The net asset value per share of 279.7 pence (2014: 204.4 pence) is calculated as the net assets of the Group attributable to shareholders divided by the number of shares in issue at the end of the year of 180,344,228 (2014: 168,443,772). Diluted NAV per share is adjusted for any shares that will be issued, including any in settlement of incentive fees payable, as explained in note 21. Since no incentive fee was payable at 31 December 2015, the number of shares for that calculation was 180,344,228 (2014: 180,344,204) and diluted NAV per share at that date was the same as the basic NAV per share at 279.7 pence (2014: 190.9 pence).
The European Public Real Estate Association ("EPRA") has issued guidelines aimed at providing a measure of net asset value on the basis of long term fair values. The EPRA measure excludes items that are considered to have no impact in the long term, such as the fair value of interest rate derivatives and deferred tax balances. The Group's EPRA NAV is calculated as follows:
31 December 2015 31 December 2014
---------------------------- ------------------ ------------------
Pence per Pence per
GBP000 share GBP000 share
---------------------------- ------- --------- ------- ---------
Basic NAV 504,411 279.7 344,305 204.4
EPRA adjustments:
Deferred tax on investment
property revaluations 5,687 3.1 4,938 2.7
Fair value of interest
rate derivatives - - 117,578 65.2
Deferred tax on interest
rate derivatives - - (627) (0.3)
Dilution from shares
issued for incentive
fee - - - (13.5)
---------------------------- ------- --------- ------- ---------
EPRA NAV 510,098 282.8 466,194 258.5
---------------------------- ------- --------- ------- ---------
21. Related party transactions and balances
Advisory fees payable
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