We could not find any results for:
Make sure your spelling is correct or try broadening your search.
Register for Free to get streaming real-time quotes, interactive charts, live options flow, and more.
| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Standard Life Investments Property Income Trust Ld | LSE:SLI | London | Ordinary Share | GB0033875286 | ORD 1P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 79.00 | 79.00 | 79.40 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
Hot Features
Premium
TIDMSLI
27 May 2020
STANDARD LIFE INVESTMENTS PROPERTY INCOME TRUST LIMITED
LEI: 549300HHFBWZRKC7RW84
RESULTS IN RESPECT OF THE YEARED 31 DECEMBER 2019
2019 Financial Highlights
* Strong NAV total return in the year of 4.1% (2018: 9.6%) above that of the
Company's peer group, the AIC Property Direct - UK sector total return of
2.5%. Company has outperformed peer group over 1, 3, 5 and 10 years with a
10 year total return of 202.2% compared to peer group total return of 51.5%
over the same period.
* Share price total return in the year was 18.0% (2018: -8.3%) compared to
peer group total return of 13.4%. Company's shares moved to a premium in
the year. Over ten years the Company has delivered a share price total
return of 162.2% compared with peer group average of 39.1% and FTSE
All-Share REIT index of 149.0% and the FTSE All-Share Index of 118.3%.
* GBP37 million available for investment at year end which, when utilised, will
further enhance earnings and dividend cover.
* 24.6% (2018: 24.4%) - Prudent loan to value remains one of the lowest in
the Company's peer group and wider REIT sector.
* A fully covered dividend in the year (2018: 89%) representing EPRA earnings
per share of 4.76p (2018: 4.22p), an increase of 12.8% as successful asset
management and investment activity boosted earnings.
2019 Portfolio Highlights
* Portfolio value of GBP493.2 million (2018: GBP499.1 million) with 51% of the
portfolio in the favoured industrial sector and only 9% in the retail
sector.
* 2019 Portfolio total return of 4.8% (2018: 8.5%) significantly ahead of
benchmark total return of 1.3% (2018: 6.8%).
* Occupancy rate of 93.4% (2018: 94.1%) compared to benchmark occupancy rate
of 92.4% as successful asset management initiatives in the year maintained
a relatively high occupancy rate in the year.
* 13% reduction in carbon emissions associated with landlord procured energy.
* In 2019, 20 new lettings securing GBP3.69m per annum in rent and restructured
15 leases to secure longer term income on GBP1.35m per annum of rent.
PERFORMANCE SUMMARY
31 31
Earnings & Dividends December December
2019 2018
IFRS earnings per share 3.98 7.68
EPRA earnings per share (p) (excluding capital items & swap movements)* 4.76 4.22
Dividends declared per ordinary share (p) 4.76 4.76
Dividend cover (%) 100 89
Dividend yield (%)** 5.2 5.9
FTSE All-Share Real Estate Investment Trusts Index Yield (%) 3.9 4.7
FTSE All-Share Index Yield (%) 4.1 4.5
Ongoing Charges***
As a % of average net assets including direct property costs 2.0 2.0
As a % of average net assets excluding direct property costs 1.2 1.1
Capital Values & Gearing 31 31
December December
2019 2018 Change %
Total assets (GBPmillion) 505.8 512.2 (1.2)
Net asset value per share (p) (note 20) 89.9 91.0 (1.2)
Ordinary Share Price (p) 91.0 81.1 12.2
Premium/ (Discount) to NAV (%) 1.2 (10.9)
Loan to Value (%)? 24.6 24.4
Total Return 1 year % 3 year % 5 year % 10 year %
return return return return
NAV? 4.1 30.5 57.3 202.2
Share Price? 18.0 23.1 52.1 162.2
FTSE All-Share Real Estate Investment Trusts Index 30.8 28.5 32.2 149.0
FTSE All-Share Index 19.2 22.0 43.8 118.3
Property Returns & Statistics (%) 31 31
December December
2019 2018
Property income return 5.2 5.0
IPD benchmark income return 4.7 4.6
Property total return 4.8 8.5
IPD benchmark total return 1.3 6.8
Void rate 6.6 5.9
*Calculated as profit for the period before tax (excluding capital items &
swaps costs) divided by weighted average number of shares in issue in the
period. EPRA stands for European Public Real Estate Association.
**Based on an annual dividend of 4.76p and the share price at 31 December 2019
of 91.0p.
***Calculated as investment manager fees, auditor's fees, directors' fees and
other administrative expenses divided by the average NAV for the year.
?Calculated as bank borrowings less all cash as a percentage of the open market
value of the property portfolio as at the end of each year.
? Assumes re-investment of dividends excluding transaction costs.
Sources: Aberdeen Standard Investments, MSCI.
Alternative Performance Measures ("APMs") including NAV total return, share
price total return, dividend cover, Loan to Value, dividend yield and portfolio
total return are defined in the Annual report which will be available shortly
on the Company's website www.slipit.co .uk.
Chairman's Statement
BACKGROUND
Since March 2020 the world has been enveloped in a gIobal COVID-19 pandemic
which, at the time of writing, has resulted in a huge human and economic cost.
In the UK, lockdown measures are still in place/being eased slowly with
unprecedented government support effectively underwriting up to 80% of wages
plus interest rates being cut to an all-time low of 0.1%. The economic impact
of this pandemic on most tenants cannot be understated with the ability to pay
rent, at least in the short term, severely curtailed. As if this is not enough
to concern us all, we have the added uncertainty of an unknown outcome to the
next round of Brexit talks scheduled for completion by the end of the year at a
time when the bandwidth available within the UK Government for considered
thought is limited.
REVIEW OF 2019
In the light of these extraordinary circumstances, it seems that 2019 was a
different and distant world, but it is incumbent upon me to report on the
performance of your Company and its assets during the year.
For the majority of 2019 uncertainty prevailed as the ongoing negotiations
around the UK's exit from the European Union caused political consternation.
This fed directly into a weak UK economy as investment was held back until a
clearer outcome was in sight. The clear election victory of the Conservative
party in December 2019 did provide some measure of political certainty with a
resultant bounce in economic activity in the short term.
Given this background, commercial real estate returns remained positive but
were relatively muted compared to historical levels.
The Company's benchmark, the MSCI UK Monthly Index Funds Quarterly Property
Index, produced a total return of 1.3% for the year as the strong income return
generated by UK commercial real estate of 4.7% was partially offset by capital
value falls of 3.3%. Continuing the theme from previous years, there was a
sharp divergence of returns at a sector level with the Industrial sector
producing a total return of 6.8% as the structural change away from physical to
online retailing continued. This is demonstrated by the -7.7% total return in
the retail sector as more retailers continued to struggle, impacting rental
levels and occupier demand. The office sector produced a positive total return
of 4.3% underpinned by continued occupational demand across the UK and a
limited supply pipeline.
POSITIVE PORTFOLIO AND CORPORATE PERFORMANCE - CONTINUED OUTPERFORMANCE
Your Company continued to produce above benchmark returns in the year. The
portfolio produced a total return of 4.8% driven by the Company's strategic
overweight position in the Industrial sector which now accounts for 51% of the
portfolio compared to the benchmark weighting of 30.7%. The Company's limited
exposure to the retail sector (8.6% versus a benchmark weighting of 28.5%) also
boosted relative returns. It is also pleasing to note that the portfolio
produced a positive total return across all the sectors it invests in,
including the retail sector, and this reflects well on stock selection
decisions.
This portfolio performance, combined with the use of the Company's flexible
gearing facilities, helped deliver a NAV total return of 4.1% in the year which
compared favourably to the AIC Property - UK Commercial peer group of 2.5%. It
should be highlighted that this total return was delivered despite a negative
movement in the Company's interest rate swap valuation of GBP1.4m which will
reverse as the loan facilities approach maturity.
The total return to shareholders in the year was 18.0% as the discount at which
the Company's shares traded to NAV moved to a premium of 1.2% at the year end.
This return again compared favourably to the AIC Property - UK Commercial peer
group total return of 13.4%. This move to a premium rating continued into 2020
allowing the Company to issue 1 million new shares at a price of over 6% above
NAV in February 2020.
The Company has also produced positive relative returns over the longer term
with a NAV total return of 57.3% over five years compared to the peer group
total return of 39.4%. The share price has similarly outperformed with a share
price total return of 52.1% which compares to the peer group total return of
31.0%, the FTSE All-Share REIT Index of 32.2% and the wider equity market FTSE
All-Share Index return of 43.8%.
EARNINGS & DIVIDS
The Company produced EPRA earnings in the year of 4.76p, an increase of 12.8%
compared to 2018. This equated to dividend cover of 100% in the year (2018:
89%). This increase has been achieved through successful asset management
initiatives at various properties across the portfolio and annualised income
coming on-stream from assets purchased in 2018. As mentioned in previous
statements, a key focus of the Board has been a fully covered dividend and
hence it is pleasing to see this was achieved in 2019, delivered with prudent
gearing levels. Going forward, there will be inevitable fluctuations in
earnings due to COVID-19 as well as both investment and occupational activity
which may affect the Company's dividend policy.
These earnings underpinned the attractive dividend paid by the Company of 4.76p
in the year, equating to a yield on the Company's shares of 5.2% based on a
year-end share price of 91.0p. This compares to the yield on the FTSE All-Share
REIT Index of 3.9% and FTSE All-Share Index of 4.1% on the same date.
Where possible, given the current environment, the Company's current policy is
to pay four interim dividends quarterly in March, May, August and November.
FINANCIAL RESOURCES
One of the most pleasing aspects of the dividend being covered in 2019 was that
it was achieved while gearing was kept relatively low. As at 31 December 2019,
the Loan to Value was 24.6%, a marginal increase compared to the 24.4% at the
end of December 2018, and at an attractive blended cost of 2.64%.
During the year the Company also increased its low cost revolving credit
facility ("RCF") to GBP55 million with only GBP18 million of this drawn at the
year-end. This resulted in the Company having significant financial resources
of GBP37 million to invest in income accretive opportunities.
BOARD CHANGES
In November 2019, the Board was pleased to announce the appointment of Sarah
Slater as a Non-Executive Director. Sarah has over 25 years of experience in
the real estate sector, including listed REIT experience, and will prove to be
a valuable addition to the Board.
As previously announced it was my intention to retire from the Board at the AGM
in 2020. However, the Board has identified there is a need for continuity in
the current situation especially given the decisions that will need to be made
later in the year relating to the dividend. It has therefore been agreed that I
will stay on as Chair for the time being. Post my retirement James
Clifton-Brown will succeed me as Chair and Sarah Slater will take over as the
Chair of the Property Valuation Committee.
ANNUAL GENERAL MEETING
This year's Annual General Meeting will be in held on 30 June 2020 at 10:30am
at the offices of the Company's lawyer, Dickson Minto, 16 Charlotte Square,
Edinburgh EH2 4DF.
Given current UK Government Guidelines surrounding the COVID-19 pandemic,
Members are likely to be restricted from attending the Company's AGM in person
or by attorney or by corporate representative this year. Only the formal
business set out in the Notice will be considered, with no presentation by the
Investment Manager and no refreshments. The Board, therefore, encourages all
shareholders to exercise their votes in respect of the meeting in advance to
ensure that your votes are registered and counted at the meeting.
However, the Board welcomes questions from our shareholders and, given the
format and the prevailing circumstances, I would ask shareholders to submit
their questions to the Board prior to the AGM (and in any event by no later
than Friday, 26 June 2020).
The Board and/or the Investment Manager will respond to all such questions
received. You may submit questions to the Board and Manager by email at
Property.Income@aberdeen-asset.com.
OUTLOOK
The short-term outlook for the UK economy is exceptionally poor given the
impact of COVID-19. Our Investment Manager forecasts a GDP decline of 14.2% in
2020, even given the unprecedented government intervention, although it is then
forecast to grow by 11.8% in 2021. All this is before the outcome of Brexit is
known and whether a satisfactory trade deal can be struck between the UK and
the EU. The longer term impact remains the subject of much debate and depends
on future government intentions on lockdowns, social distancing and the
discovery of a vaccine for COVID-19.
The commercial real estate sector is one area where COVID-19 has the potential
to hit the hardest. Before this crisis, the fundamentals underlying the sector
remained strong with historically low gearing and muted vacancy. However, since
the lockdown, the ability of tenants to pay rent has been curtailed with rent
collection statistics across the sector for Quarter 2, 2020 under pressure and
forecast to get worse if the lockdown continues in its current form. While
government support will help, both vacancy and gearing levels are expected to
rise in the short term and may accelerate the current trend of a move away from
traditional high street retail to online retailing.
Your Company is not immune to the growing negative effect of COVID-19
especially if it leads to serious and widespread business defaults and hence
increased voids and reduced rental income. On 23 April 2020 the Company
announced that rental collections statistics for Quarter 2, 2020 were 66% (74%
if ongoing monthly rents are included). The rent collection statistics for Q1
were 95% plus. Cognisant of the importance of the dividend to our shareholders
it was also announced that the dividend payable in May 2020 would be maintained
at 1.19p for the quarter to 31 March 2020. Future dividends will be kept under
constant review given expected rent collections statistics in Quarter 3 and
beyond. Valuations as at 31 March were down by 4.9% on a like for like basis
and included a material uncertainty clause by the valuer which is being
included in all current commercial real estate valuations. Finally, as at 30
April the Company's shares traded on a 13.6% discount to the last published
NAV, compared to the peer group average of 18.1%. However, it should be
highlighted that the portfolio has good defensive characteristics, with
diversification of risk in terms of geography, sector and tenant exposure. In
addition, the Company remains prudently geared with an LTV of 24.4% and GBP
47million of its RCF still to utilise with significant headroom on its loan
covenants as at 31 March 2020.
In summary, there will undoubtedly be challenges ahead for your Company. The
Board will work closely with the Company's various stakeholders to ensure it is
able to manage its way through the current environment with the aim of
continuing to deliver the outperformance that has been delivered over the last
decade.
Robert Peto
Chairman
26 May 2020
STRATEGIC REPORT - STAKEHOLDER ENGAGEMENT
The Board wishes to describe to the Company's shareholders how the Directors
have discharged their duties and responsibilities over the course of the
financial year.
This section, which serves as the Company's section 172 statement as requested
by the AIC Code on Corporate Governance, explains how the Directors have
promoted the success of the Company for the benefit of its members as a whole
during the financial year to 31 December 2019, taking into account the likely
long term consequences of decisions, the need to foster relationships with all
stakeholders and the impact of the Company's operations on the environment.
THE ROLE OF THE DIRECTORS
The Company is a REIT and has no executive directors or employees and is
governed by the Board of Directors. Its main stakeholders are Shareholders, the
Investment Manager, Tenants, Service Providers, Debt Providers, and the
Community.
As set out in the Corporate Governance Report, the Board has delegated
day-to-day management of the assets to the Investment Manager and either
directly or through the Investment Manager, the Company employs key suppliers
to provide services in relation to property management, health and safety,
valuation, legal and tax requirements, auditing, depositary obligations and
share registration, amongst others. All decisions relating to the Company's
investment policy, investment objective, dividend policy, gearing, corporate
governance and strategy in general are reserved for the Board. The Board meets
quarterly, with numerous other ad-hoc meetings, and receives full information
on the Company's performance, financial position and any other relevant
information. At least once a year, the Board also holds a meeting specifically
to review the Group's strategy.
The Board regularly reviews the performance of the Investment Manager, and its
other service providers, to ensure they manage the Company, and its
stakeholders, effectively and that their continued appointment is in the best
long term interests of the stakeholders as a whole.
The Board also reviews its own performance annually to ensure it is meeting its
obligations to stakeholders. Engagement with key stakeholders is considered
formally as part of the annual evaluation process.
STRATEGIC ACTIVITY DURING THE YEAR
The Investment Manager's Report details the key investment decisions taken
during the year and subsequently. Notable transactions where the interests of
stakeholders were actively considered include:
- the sale of the industrial unit in Milton Keynes, given the income risks to
the Company, and the reinvestment of the sale proceeds into two buildings with
rental income growth opportunities;
- the disposal of a logistics unit close to Derby to reduce the income
concentration risk to the Company; and
- The extension of the Company's Revolving Credit Facility with The Royal Bank
of Scotland International Limited (RBSI) by GBP20m to take advantage of
opportunities that might become available in the near future.
Subsequent to the financial year end, stakeholder considerations have been
fundamental to the Board's decision making during the Company's response to the
COVID-19 pandemic.
The Board's primary focus is to promote the long term success of the Company
for the benefit of its stakeholders as a whole. The Board oversees the delivery
of the investment objective, policy and strategy, as agreed by the Company's
shareholders. As set out above, the Board considers the long term consequences
of its decisions on its stakeholders to ensure the long term sustainability of
the Company.
SHAREHOLDERS
Shareholders are key stakeholders and the Board places great importance on
communication with them. The Board welcomes all shareholders' views and aims to
act fairly to all shareholders. The Board believes that the Company's
shareholders seek an attractive and sustainable level of income, the prospect
of growth of income and capital in the longer term, a well-executed sustainable
investment policy, responsible capital allocation and value for money.
The Investment Manager and Company's Broker regularly meet with shareholders,
and prospective shareholders, to discuss Company initiatives and seek feedback.
The views of shareholders are discussed by the Board at every Board meeting,
and action taken to address any shareholder concerns. The Investment Manager
provides regular updates to shareholders and the market through the Annual
Report, Half-Yearly Report, Quarterly Net Asset Value announcements, Company
Factsheets and its website.
The Chair offers to meet with key shareholders at least annually, and other
Directors are available to meet shareholders as required. This allows the Board
to hear feedback directly from shareholders on the Company's ongoing strategy.
During the financial year to 31 December 2019, the Investment Manager undertook
several meetings with large shareholders to provide reports on the progress of
the Company and receive feedback, which was then provided
to the full Board.
The Company's AGM provides a forum, both formal and informal, for shareholders
to meet and discuss issues with the Directors and Investment Manager of the
Company. The Board would ordinarily encourage as many shareholders as possible
to attend the Company's AGM to engage directly with the Board. However, as set
out in the Chair's Statement, in light of the COVID-19 pandemic, shareholders
are discouraged from attending the AGM but are encouraged to engage with the
Company and the Board. Details on how to submit a question in advance of the
AGM are set out in the Chairman's Statement.
TENANTS
Another key stakeholder group is that of the underlying tenants that occupy
space in the properties that the Company owns. The Investment Manager works
closely with tenants to understand their needs through regular communication
and visits to properties.
The Board believes that tenants want a positive, trusting and long term working
relationship with the Investment Manager, sustainable buildings and tenancies,
value for money and a focus on the community, health and safety and the
environment.
The Investment Manager consults with tenants and, on the Board's behalf,
invests in our buildings to improve the quality and experience for our
occupiers as well as reduce voids and improve values, helping to produce
stronger returns. The Board receives reports on tenant engagement and
interaction at every Board meeting. The Board also expects the Investment
Manager to undertake extensive financial due diligence on potential tenants to
mitigate the risk of tenant failure or inability to let properties.
Following the outbreak of the Covid-19 pandemic, the Company's Investment
Manager has worked closely with tenants to understand their needs. The Board
believes that this is a crisis that impacts on individuals as much as companies
and we take the Social aspects of ESG very seriously. The Board firmly believes
that by helping tenants now and building relationships the Company will have
better occupancy over future months and years, which will in turn benefit the
Company's cash flow.
INVESTMENT MANAGER
The Chairman's Statement and Investment Manager's Report details the key
investment decisions taken during the year and subsequently. The Investment
Manager has continued to manage the Company's assets in accordance with the
mandate provided by shareholders, with the oversight of the Board. The Board
receives presentations from the Investment Manager at every Board meeting to
help it to exercise effective oversight of the Investment Manager and the
Company's Strategy. The Board formally reviews the performance of the
Investment Manager, and the fees it receives, at least annually.
THE COMMUNITY AND THE ENVIRONMENT
The Board and the Investment Manager are committed to investing in a
responsible manner. There are a number of geopolitical, technological, social
and demographic trends underway globally that can, and do, influence real
estate investments - many of these changes fall under the umbrella of ESG
considerations. As a result, the Investment Manager fully integrates ESG
factors into its investment decision making and governance process.
The Board has adopted the Investment Manager's ESG Policy and associated
operational procedures and is committed to environmental management in all
phases of the investment process.
The Company aims to invest responsibly, to achieve environmental and social
benefits alongside returns. By integrating ESG factors into the investment
process, the Company aims to maximise the performance of the assets and
minimise exposure to risk.
DEBT PROVIDER
The Company has a term loan facility and revolving credit facility with The
Royal Bank of Scotland International Limited ("RBSI"). RBSI seeks responsible
portfolio management and ongoing compliance with the Company's loan covenants.
The Company maintains a positive working relationship with RBSI and provides
regular updates on business activity and compliance with its loan covenants.
OTHER SERVICE PROVIDERS
The Board via the Management Engagement Committee also ensures that the views
of its service providers are heard and at least annually reviews these
relationships in detail. The aim is to ensure that contractual arrangements
remain in line with best practice, services being offered meet the requirements
and needs of the Company and performance is in line with the expectations of
the Board, Investment Manager and other relevant stakeholders. Reviews will
include those of the company secretary, broker, share registrar and auditor.
Robert Peto
Chairman
26 May 2020
STRATEGIC REPORT - STRATEGIC OVERVIEW
OBJECTIVE
The objective, and purpose, of the Group is to provide shareholders with an
attractive level of income together with the prospect of income and capital
growth.
INVESTMENT POLICY AND BUSINESS MODEL
The Board intends to achieve the investment objective by investing in a
diversified portfolio of UK commercial properties. The majority of the
portfolio will be invested in direct holdings within the three main commercial
property sectors of retail, office and industrial although the Group may also
invest in other commercial property such as hotels, nursing homes and student
housing. Investment in property development and investment in co-investment
vehicles, where there is more than one investor, is permitted up to a maximum
of 10% of the property portfolio.
In order to manage risk, without compromising flexibility, the Board applies
the following restrictions to the property portfolio, in normal market
conditions:
- No property will be greater by value than 15% of total assets.
- No tenant (excluding the Government) will be responsible for more than 20% of
the Group's rent roll.
- Gearing, calculated as borrowings as a percentage of gross assets, will not
exceed 65%. The Board's current intention is that the Group's loan to value
ratio (calculated as borrowings less all cash as a proportion of property
portfolio valuation) will not exceed 45%.
As part of its strategy, the Board has contractually delegated the management
of the property portfolio, and other services, to Aberdeen Standard Fund
Managers Limited ("the Investment Manager").The Investment Manager was
appointed in place of Standard Life Investments (Corporate Funds) Limited on 10
December 2018 following the merger of Standard Life plc and Aberdeen Asset
Management PLC in August 2017. The Investment Manager was appointed on
identical terms to the arrangements previously in place with Standard Life
Investments (Corporate Funds) Limited, and there have been no changes to the
way the investment management services are provided to the Group.
STRATEGY
Each year the Board undertakes a strategic review, with the help of its
Investment Manager and other advisers.
The overall intention is to continue to distribute an attractive income return
alongside growth in the NAV and a good overall total return relative to the
peer group.
At the property level, it is intended that the Group remains primarily invested
in the commercial sector, while keeping a watching brief on other classes such
as student accommodation and care homes. The Group is principally invested in
office, industrial and retail properties and intends to remain so. The Board's
preference is to buy into good, but not necessarily prime, locations, where it
perceives there will be good continuing tenant demand, and to seek out
properties where the asset management skills of the Investment Manager can be
used to beneficial effect. The Board will continue to have very careful regard
to tenant profiles.
As part of this investment strategy, the Group recognises that tenants are a
key stakeholder and aims to foster a culture whereby the experience of tenants
is seen as paramount to the future success of the Group. The Investment Manager
works closely with tenants to understand their needs through regular
communication and visits to properties.
Where required, and in consultation with tenants, the Group refurbishes and
manages the owned assets to improve the tenants' experience, including
consideration of Health & Safety and environmental factors, with the aim being
to generate greater tenant satisfaction and retention and hence lower voids,
higher rental values and stronger returns.
The Board continues to seek out opportunities for further, controlled growth in
the Group. During 2019 and up to 31 March 2020, the Group raised an additional
GBP960,000 through new share issues, as detailed in the Chairman's Statement.
The Group continues to maintain a tax efficient structure, having migrated its
tax residence to the UK and becoming a UK REIT on 1 January 2015.
THE BOARD
As at 31 December 2019, the Board consisted of a non-executive Chairman and
five non-executive Directors. The names and biographies of those directors who
held office at 31 December 2019 and at the date of this report appear in the
Annual Report and indicate their range of property, investment, commercial and
financial experience. There is also a commitment to achieve the proper levels
of diversity.
To assist the Board with orderly succession planning, the Board announced the
appointment of Sarah Slater as an additional non-executive Director on 27
November 2019. A resolution to elect Sarah Slater as a Director will be
proposed to shareholders at the Annual General Meeting ("AGM") on 30 June 2020.
As reported in the Chairman's Statement, Robert Peto intends to step down from
the Board in due course. James Clifton-Brown will succeed Robert Peto as Chair
of the Company.
KEY PERFORMANCE INDICATORS
The Board meets quarterly and at each meeting reviews performance against a
number of key measures which are considered to be alternative performance
measures ("APMs"). These APMs are in line with recognised industry performance
measures both in the Real Estate and Investment Trust industry and help to
assess the overall performance of the portfolio and the wider Group:
Property income and total return against the Quarterly Version of the IPD
Balanced Monthly Funds Index ("the Index").
The Index provides a benchmark for the performance of the Group's property
portfolio and enables the Board to assess how the portfolio is performing
relative to the market. A comparison is made of the Group's property returns
against the Index over a variety of time periods (quarter, annual, three years
and five years).
Property voids.
Property voids are unlet properties. The Board reviews the level of property
voids within the Group's portfolio on a quarterly basis and compares the level
to the market average, as measured by the IPD. The Board seeks to ensure that,
when a property becomes void, the Investment Manager gives proper priority to
seeking a new tenant to maintain income.
Rent collection dates.
The Board assesses rent collection by reviewing the percentage of rents
collected within 21 days of each quarter end.
Net asset value total return.
The net asset value ("NAV") total return reflects both the net asset value
growth of the Group and also the dividends paid to shareholders. The Board
regards this as the best overall measure of value delivered to shareholders.
The Board assesses the NAV total return of the Group over various time periods
(quarter, annual, three years, five years) and compares the Group's returns to
those of its peer group of listed, closed-ended property investment companies.
Premium or discount of the share price to net asset value.
The Board closely monitors the premium or discount of the share price to the
NAV and believes that a key driver for the level of the premium or discount is
the Group's long-term investment performance. However, there can be short-term
volatility in the premium or discount and the Board takes powers at each Annual
General Meeting ("AGM") to enable it to issue or buy back shares with a view to
limiting this volatility.
Dividend per share and dividend cover.
A key objective of the Group is to provide an attractive, sustainable level of
income to shareholders and the Board reviews, at each Board meeting, the level
of dividend per share and the dividend cover, in conjunction with detailed
financial forecasts, to ensure that this objective is being met and is
sustainable.
The Board considers the performance measures both over various time periods and
against similar funds.
A record of these measures is disclosed in the Financial and Property
Highlights, Chairman's Statement and Investment Manager's Report.
PRINCIPAL RISKS AND UNCERTAINTIES
The Board ensures that proper consideration of risk is undertaken in all
aspects of the Group's business on a regular basis. During the year, the Board
carried out an assessment of the risk profile of the Group, including
consideration of risk appetite, risk tolerance and risk strategy. The Board
regularly reviews the principal and emerging risks of the Group, seeking
assurance that these risks are appropriately rated and ensuring that
appropriate risk mitigation is in place.
The Group's assets consist of direct investments in UK commercial property. Its
principal risks are therefore related to the commercial property market in
general, but also the particular circumstances of the properties in which it is
invested, and their tenants. The Board and Investment Manager seek to mitigate
these risks through a strong initial due diligence process, continual review of
the portfolio and active asset management initiatives. All of the properties in
the portfolio are insured, providing protection against risks to the properties
and also protection in case of injury to third parties in relation to the
properties.
The overarching risk that has emerged is COVID-19, the global pandemic that has
impacted all areas of society in the UK and abroad. This pandemic has caused
significant loss of life and global economic disruption. It arguably affects
all areas of risk on which the Company reports and has increased the risk
profile of the Company. In the section below particular consideration has been
given to how COVID-19 is impacting on the specific risks that are reviewed at
each Board meeting.
The Group and its objectives become unattractive to investors, leading to
widening of the discount.
This risk is mitigated through regular contact with shareholders, a regular
review of share price performance and the level of the discount or premium at
which the shares trade to net asset value and regular meetings with the Group's
broker to discuss these points and address any issues that arise. COVID-19 has
increased the volatility of the Company's share price and, reflecting wider
market sentiment, has resulted in the Company's shares trading at a discount to
prevailing NAV of 13.6% as at 30 April 2020. The average discount of the peer
group at this date was 18.1%.
Net revenue falls such that the Group cannot sustain its level of dividend, for
example due to tenant failure or inability to let properties.
This risk is mitigated through regular review of forecast dividend cover and of
tenant mix, risk and profile. Due diligence work on potential tenants is
undertaken before entering into new lease arrangements and tenants are kept
under constant review through regular contact and various reports both from the
managing agents and the Investment Manager's own reporting process.
Contingency plans are put in place at units that have tenants that are believed
to be in financial trouble. The Group subscribes to the Investment Property
Databank Iris Report which updates the credit and risk ranking of the tenants
and income stream, and compares it to the rest of the UK real estate market. An
emerging risk in the year was the poor performance of the retail sector due to
a number of high profile administrations and store closures in this sector.
The Group has partially mitigated this risk by having an underweight position
to the retail sector with only 8.6% exposure to this sector against the
benchmark weighting of 28.5% as at end of December.
The lockdown of many businesses as a result of COVID-19 has resulted in a
significant fall of rental collection rates. As at 20 April, only 66% of rents
billed for Quarter 2, 2020 had been collected. The usual rate is in excess of
95%. This trend is expected to continue and potentially worsen as long as the
lockdown is in place. As a result of this net revenue will fall. On 23 April
the Company announced it will be paying the full dividend relating to Quarter
1, 2020 but will keep its dividend policy under review given the likely
continued fall in rental collection statistics.
Uncertainty or change in the macroeconomic environment results in property
becoming an undesirable asset class, causing a decline in property values.
This risk is managed through regular reporting from, and discussion with, the
Investment Manager and other advisers. Macroeconomic conditions form part of
the decision making process for purchases and sales of properties and for
sector allocation decisions.
The result of the UK general election on 12 December eased the political
uncertainty, and in the short term the economic uncertainty, with a bounce in
economic activity pre COVID-19. The impact of COVID-19 on the macroeconomic
picture both in the UK and abroad will be severe in the short term with our
Investment Manager forecasting a 14.2% fall in GDP in 2020 with an 11.8%
increase in 2021. This macroeconomic impact has affected the UK commercial real
estate sector. As well as having an impact on tenants' ability to pay rent,
valuations have fallen with the Company reporting a 4.9% like for like
valuation fall in Quarter 1, 2020. In addition a material uncertainty clause
has been inserted in all Quarter 1, 2020 valuations. Looking further ahead, the
long term impact on the real estate sector will be dependent on the length of
any lockdown and any social distancing measures put in place post the lockdown
being eased.
One other issue that could potentially affect the macroeconomic picture and
hence property values is the result of the trade negotiations with the EU.
Breach of loan covenants.
This risk is mitigated by the Investment Manager monitoring the loan covenants
on a regular basis and providing a quarterly certificate to the bank confirming
compliance with the covenants. Compliance is also reviewed by the Board each
quarter and there is regular dialogue between the Investment Manager and RBS,
the lending bank, on Group activity and performance. As at 31 March, based on
the rent collections statistics mentioned above the loan covenants were
comfortably met with interest cover of 455% (limit of 175%) and a Loan to value
ratio of 28.4% (limit of 60%). In addition there were over GBP52 million of
assets unencumbered at this date.
Environmental.
Environmental risk is considered as part of each purchase and monitored on an
ongoing basis by the Investment Manager. However, with extreme weather events
both in the UK and globally becoming a more regular occurrence due to climate
change, the impact of the environment on the property portfolio and on the
wider UK economy is seen as an emerging risk.
Other risks faced by the Group include the following:
- Strategic - incorrect strategy, including sector and property allocation and
use of gearing, could all lead to a poor return for shareholders.
- Tax efficiency - the structure of the Group or changes to legislation could
result in the Group no longer being a tax efficient investment vehicle for
shareholders.
- Regulatory - breach of regulatory rules could lead to the suspension of the
Group's Stock Exchange Listing, financial penalties or a qualified audit
report.
- Financial - inadequate controls by the Investment Manager or third party
service providers could lead to misappropriation of assets. Inappropriate
accounting policies or failure to comply with accounting standards could lead
to misreporting or breaches of regulations.
- Operational - failure of the Investment Manager's accounting systems or
disruption to the Investment Manager's business, or that of third party service
providers, could lead to an inability to provide accurate reporting and
monitoring, leading to loss of shareholder confidence.
- Cyber Risk - Business continuity risk to any of the Company's service
providers or properties, following a catastrophic event e.g. terrorist attack,
cyber- attack, power disruptions or civil unrest, leading to disruption of
service, loss of data etc.
The merger of Standard Life plc and Aberdeen Asset Management PLC has created
additional operational risk for the Group. The Group appointed Aberdeen
Standard Fund Managers Limited as its alternative investment fund manager
("AIFM") in December 2018. The appointment was on identical terms to the
arrangements previously in place with Standard Life Investments (Corporate
Funds) Limited. There have been no changes so far to the way the Investment
Manager provides its services to the Group but the Board is keeping under close
review any potential implications for the Group arising from the merger and the
integration process The Board seeks to mitigate and manage all risks through
continual review, policy setting and enforcement of contractual obligations. It
also regularly monitors the investment environment and the management of the
Group's property portfolio, levels of gearing and the overall structure of the
Group.
SOCIAL, COMMUNITY AND EMPLOYEE RESPONSIBILITIES
The Group has no direct social, community or employee responsibilities. The
Group has no employees and accordingly no requirement to report separately in
this area as the management of the portfolio has been delegated to the
Investment Manager. In light of the nature of the Group's business there are no
relevant human rights issues and hence there is no requirement for a human
rights policy. The Board, through its Investment Manager, does, however,
closely monitor the policies of its suppliers to ensure that proper provision
is in place.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE POLICY
Approach to ESG
The Company adopts the Investment Manager's policy and approach to integrating
ESG and this has been used as the basis for establishing the Company's ESG
objectives.
The Investment Manager views the management of ESG issues as a fundamental part
of its business. Whilst real estate investment provides valuable economic
benefits and returns for investors it has - by its nature - the potential to
affect environmental and social outcomes, both positively and negatively.
The Investment Manager's approach is underpinned by the following three
overarching principles:
* Transparency, Integrity and Reporting: being transparent in the ways in
which we communicate and discuss our strategy, approach and performance
with our investors and stakeholders.
* Capability and Collaboration: drawing together and harnessing the
capabilities and insights of our platforms, with those of our investment,
supply chain and industry partners.
* Investment Process and Asset Management: integrating ESG into decision
making, governance, underwriting decisions and asset management approach.
This includes the identification and management of material ESG risks and
opportunities across the portfolio.
Of particular focus is responding to climate change, both in terms of
resilience to climate impacts and in reducing emissions from the Company's
activities. The Investment Manager has committed to achieving net-zero
emissions across its global portfolio by 2050 as part of the Better Building
Partnership's Climate Change Commitment. Over the course of the next year the
focus will be on benchmarking the Company's assets and appraising necessary
improvement measures in the context of this goal.
EPRA Sustainability Best Practice Recommendations Guidelines
The Board, through its Investment Manager, has adopted the 2017 EPRA
Sustainability Best Practice Recommendations Guidelines (sBPR) to inform the
scope of indicators we report against. The Company has reported against all
EPRA sBPR indicators that are material to the Company. Additional data has also
been reported not required by the EPRA sBPR where we believe it to be relevant
(e.g. like-for-like greenhouse gas emissions).
A full outline of the scope of reporting and materiality review in relation to
EPRA sBPR indicators is included in the Annual Report.
Operational Performance Summary
Processes have been put in place to ensure operational sustainability
performance is monitored and actions are implemented to drive continual
improvement. Like-for-like landlord electricity and gas consumption reduced
year-on-year across the Company's assets, by 4% and 10% respectively. This
helped drive a 13% reduction in like-for- like greenhouse gas emissions
associated with landlord-procured energy. Like-for-like water consumption
increased by 12% year-on-year.
Full details of performance against material EPRA sBPR indicators are included
in the Annual Report.
2019 GRESB Assessment
The GRESB Assessment is the leading global sustainability benchmark for real
estate vehicles. The Company has submitted data to GRESB since 2012. In the
2019 assessment, its score improved to 74/100; a 4% improvement on 2018. The
Company achieved a Green Star rating and a Three Star ranking.
HEALTH & SAFETY
Alongside these environmental principles the Group has a Health & Safety policy
which demonstrates commitment to providing safe and secure buildings that
promote a healthy working/customer experience that supports a healthy
lifestyle. The Group, through the Investment Manager, manages and controls
Health & Safety risks systematically as any other critical business activity
using technologically advanced systems and environmentally protective materials
and equipment. The aim is to achieve a Health & Safety performance the Group
can be proud of and allow the Group to earn the confidence and trust of
tenants, customers, employees, shareholders and society at large. The Board
reviews health and safety on a regular basis in Board meetings.
VIABILITY STATEMENT
The Board considers viability as part of its ongoing programme of financial
reporting and monitoring risk. The Board continually considers the prospects
for the Company over the longer term. Based on the Company's current financial
position, its operating model, and the diversified constituents of its
portfolio, as well as the strong initial due diligence processes, the continued
review of the portfolio and the active asset management initiatives, the Board
believes that the Company has a sound basis upon which to continue to deliver
returns over the long term.
In terms of viability, the Board has considered the nature of the Group's
assets and liabilities and associated cash flows and has determined that five
years is the maximum timescale over which the performance of the Group can be
forecast with a material degree of accuracy and so is an appropriate period
over which to consider the Group's viability.
The Board has also carried out a robust assessment of the principal and
emerging risks faced by the Group. The main risks which the Board considers
will affect the business model are; future performance, solvency, liquidity,
tenant failure leading to a fall in dividend cover and macroeconomic
uncertainty. These risks have all been considered in light of the financial and
economic impact arising from COVID-19. The Board takes any potential risks to
the ongoing success of the Group, and its ability to perform, very seriously
and works hard to ensure that risks are consistent with the Group's risk
appetite at all times.
In assessing the Group's viability, the Board has carried out thorough reviews
of the following:
* Detailed NAV, cash resources and income forecasts, prepared by the
Company's Investment Manager, for a five year period under both normal and
stressed conditions;
* Additional modelling that has been undertaken around the potential impact
of COVID-19 on rent collection, cash flow, dividend cover, Net Asset Value
and loan covenants;
* The Group's ability to pay its operational expenses, bank interest, tax and
dividends over a five year period;
* Future debt repayment dates and debt covenants, in particular those in
relation to LTV and interest cover;
* Demand for the Company's shares and levels of premium or discount at which
the shares trade to NAV;
* Views of shareholders; and
* The valuation and liquidity of the Group's property portfolio, the
Investment Manager's portfolio strategy for the future and the market
outlook.
Despite the uncertainty in the UK regarding both the impact of the COVID-19
pandemic and also Brexit, the Board has a reasonable expectation that the Group
will be able to continue in operation and meet its liabilities as they fall due
over the next five years. This assessment is based on the current financial
position of the Company, its performance track record and feedback it receives
from shareholders.
APPROVAL OF STRATEGIC REPORT
The Strategic Report comprises the Financial and Portfolio Highlights,
Performance Summary, Chairman's Statement, Strategic Overview and Investment
Manager's Report. The Strategic Report was approved by the Board and signed on
its behalf by:
Robert Peto
Chairman
26 May 2020
STRATEGIC REPORT - INVESTMENT MANAGER'S REPORT
A lot has happened since the end of 2019. Set out below is our review of 2019
and some thoughts on how the events of the first quarter of 2020 might affect
the market and the performance of your Company based on the knowledge available
at the time of writing.
MARKET REVIEW
UK GDP growth slowed materially in 2019 as Brexit- related uncertainty, the
general election and slower global growth weighed on the UK economy. Despite an
upward revision to third quarter GDP growth to 0.5%, UK GDP was flat in the
final quarter of the year resulting in an annual growth rate of 1.1% in 2019.
The UK labour market remained at historically tight levels and the general
election outcome removed one layer of uncertainty for the UK, resulting in a
recovery in business and household sentiment towards the end of 2019.
Returns in the real estate market moderated in 2019, with a total return of
1.3% for the calendar year as capital growth turned negative over this period.
However, returns were markedly different at the sector level with industrial
real estate recording another strong year, delivering total returns of 6.8%,
whilst offices returned 4.3%. Retail on the other hand continued to weigh on
overall commercial property returns, with capital values declining 12.9% over
the year and delivering a total return of -7.7% according to the MSCI IPD
Quarterly Index.
The FTSE UK REIT index experienced a late relief rally towards the end of 2019
resulting in a total return of 30.8% for the year as the December election
result was viewed positively by the market. This was markedly ahead of the
wider stock market, where the FTSE 100 and FTSE All Share indices returned
17.3% and 19.2% respectively. Whilst retail property orientated companies
continued to trade at large discounts to net asset value (NAV), London office
developers traded at closer to NAV. This was as a result of better than
expected leasing activity and a modest upward movement in rents. Some
income-focused and industrial orientated names traded at premiums to NAV.
Occupational markets had largely been unfazed by prevailing uncertainty and a
lack of clarity on the UK's future trading relationships. Take-up in the office
sector remained strong, with Central London leasing volumes falling only
marginally short of the 10 year annual average level. Regionally, headline
rents rose and vacancy rates fell across the big six office markets. The retail
sector remained the exception, as structural changes continued to hamper the
outlook for the sector. The industrial sector, now driven by logistics rather
than manufacturing, continued to be a key beneficiary of the structural changes
playing out in the UK real estate sector.
The uncertainty created by ongoing Brexit negotiations and the UK general
election was felt most acutely through the investment market in 2019. UK real
estate investment volumes reached GBP52 billion in 2019 according to property
data, down on the GBP63 billion recorded in 2018, but in line with the 10 year
average. Once again, the alternative space (such as leisure, hotels, student
accommodation, private residential schemes etc) gained investment market share
on the previous year, accounting for one-third of all investment activity by
value in 2019. Meanwhile, the office sector recorded investment volumes of GBP
17.4 billion as a number of large deals in central London bolstered the overall
number.
Regional offices were the best performing part of the office sector in 2019,
delivering a total return of 5.6%, followed by City offices returning 5.1%,
West End offices 4.5%, and South East offices 3.4%. Occupational demand for
London offices remained resilient in spite of the political uncertainty created
by the general election and Brexit negotiations. Leasing activity was strong
in the final quarter of the year which helped bring the full-year take-up total
to 12.8 million square feet, marginally below the 10-year annual average of
13.1 million square feet according to CBRE. Availability of second hand and
Grade A. space both fell over the course of the year, with the squeeze being
felt most acutely in newly constructed Grade A. space. New lettings focussed on
the best quality Grade A. space, with secondary space becoming more challenging
to let. Strong take-up, declining levels of availability and a limited forward
supply pipeline supported rental value growth of 1.3% for London offices in
2019. In the regional office markets, the 'Big Six' in particular, corporate
and public sector consolidation drove demand for the best quality space. In a
similar vein to Central London offices, supply and pipeline of Grade A. office
buildings in the 'Big Six' remained well balanced. As the year drew to a close,
the political clarity derived from the election result prompted a noticeable
increase in the level of optimism from agents in the market, particularly
towards Central London offices.
The retail sector returned -7.7% in 2019, with values falling by 12.9% and,
anecdotally, some pricing continuing to fall in 2020. Shopping centres were in
the eye of this retail storm, with values across the MSCI Quarterly Index
sample falling by 15.7% in 2019, bringing the cumulative fall to 27% over the
last two years. Retail warehouses lost 14.0% of their value in 2019 and have
now fallen 21% since their last peak at the beginning of 2018. Regional shops
fell by a similar amount over the year. Supermarkets, protected by long
index-linked leases to strong covenants, and Central London shops were the only
retail segments to show any stability. In line with the weak performance of
large-format retail, liquidity was highly constrained in 2019. Less than GBP700
million of shopping centres transacted - comfortably the lowest volume on
record - and retail warehouse activity only picked up with greater price
transparency towards the end of the year.
Ultimately, sentiment was weak and rents, in aggregate, were under intense
downward pressure as retailers sought to rationalise portfolios through lease
events, direct negotiations with landlords or the more drastic option of
company voluntary arrangements. Even before COVID-19, further falls in value
were anticipated in 2020.
The industrial sector maintained its position as the best performing UK
commercial real estate sector in 2019, outperforming the wider market by over
500 bps with a total return of 6.8%. This is the eighth consecutive year that
the sector has outperformed the wider market. Despite moderating from the
levels witnessed in 2018, rents grew by a robust 2.9% at the headline level in
2019, continuing to provide support for pricing in the sector. In a similar
vein to last year, the more space constrained South East industrial market
recorded the strongest rental value growth with rents growing by 3.8%, whilst
rental growth in the regions grew by a more modest 1.6%. The structural
transition to online retailing continues unabated, resulting in another strong
year of take-up by third-party logistics providers and retailers. In fact, with
more than 35 million square feet of positive net absorption, 2019 was the
strongest year since 2015 according to Co- star. As a result, vacancy rates
trended lower over the course of the year and ended 2019 at approximately 3%.
Prior to COVID-19 market fundamentals remained supportive for continued rental
value growth in the industrial sector, particularly in London, the South East
and the best urban locations across the UK. At this stage it is unclear whether
the effects of the virus will cause a short term delay to this rental growth,
or have a larger impact.
The UK real estate investment market remained highly polarised in 2019, with
the alternative sectors clearly in vogue once again. The sector, categorised as
"Other Property" by MSCI IPD, outperformed the market average in 2019 with a
total return of 4.5%. Alternative property types possess a number of appealing
facets for income focused investors, most notably the long indexed leases which
are common practice and values which tend to be less volatile than the
traditional commercial sectors. The sector has grown in prominence in recent
years and 2019 was no exception as alternative property types accounted for
close to a third of all investment activity in UK real estate: the sector's
greatest share of the UK real estate market on record. The Purpose Build
Student Accommodation (PBSA) and hotel sectors, the most established
alternative sectors for institutional investors in the UK, accounted for over
50% of the GBP16.5 billion that was invested in alternative property types last
year, with the former benefitting from a number of large portfolio transactions
and M&A activity. There was a noticeable increase in interest in retirement
living and the Build to Rent sectors during 2019. This follows a more general
trend emerging in UK real estate where investors are increasing allocations to
more operational sectors, which provides greater exposure to the underlying
performance of income-generating assets. There remains a considerable weight of
money targeting such assets and this is likely to put further downward pressure
on yields.
MARKET OUTLOOK
The general election result removed one layer of uncertainty in the UK which
resulted in a noticeable improvement in sentiment in early 2020. Near-term
uncertainties facing businesses and households eased, surveys of business
activity picked up, admittedly from a low base and investment intentions
appeared to have improved. All other things being equal, we would have expected
that a more stable political backdrop and increased levels of optimism, at
least in the near-term, would have translated into a modest recovery in the UK
real estate investment market throughout 2020.
As this is written, however, our everyday life has been thrown into turmoil as
we grapple with COVID-19. Despite massive Government intervention, it is clear
that COVID-19 is going to have a material impact on every part of the economy
in 2020. It is still too early to provide a reliable guide to the next 12 - 18
months; however we do believe the recovery will be prolonged, as it will take
some considerable time for a new "normal" life to become re-established. As
easing of restrictions begins, and some shops start to reopen we are still
going to have limited travel - either because of centrally imposed restrictions
or reluctance to use public transport.
Retailers and leisure operators will see a protracted recovery with normal
trading only possible once a vaccine is in place. The viability of many
companies only operating at limited capacity is debatable, and with heightened
unemployment and a reluctance to visit busy spaces, consumer spending is likely
to remain subdued.
Office functions are being undertaken from home, with varying degrees of
success (not least linked to the presence of young children in the house!) and
home working is likely to remain popular. Early return to work will be in
reduced numbers, and it is possible we will see longer term changes in occupier
demand towards having a hub and spoke model where there is a greater diversity
of workplace, and reduced commuting to a centralised point. We might even see a
resurgence in out of town office parks, as the ability to drive to work, and
experience fresh air without dense population at lunchtime becomes more
appealing than a vibrant city centre.
The logistics sector is likely to be the first to recover, and if some
projections of permanently increased online shopping are correct, there could
be a shortage of accommodation. That is not to say challenges don't remain for
the sector. Tenant failure in the short term is quite possible as logistics is
a low margin business, and we have seen a significant reduction in freight
movement, and some sectors, such as car manufacturing, are especially exposed
to an economic downturn.
PERFORMANCE
There are a number of measures that can be used to consider the Company's
performance.
At the most basic level investors can compare the performance of the Company's
investment portfolio to the MSCI / IPD quarterly benchmark. This measure does
not represent the return investors obtain, but it does demonstrate how the
underlying portfolio is performing compared to the wider market on a like for
like basis. We use the MSCI / IPD quarterly index as a benchmark for
performance comparison only. We remain agnostic about the benchmark
composition. Indeed, the Company's sector allocation is significantly different
to the benchmark, reflecting our investment outlook and strategy. It is
pleasing to note that the portfolio has outperformed the benchmark over 1, 3,
5, and 10 years.
Perhaps a better reflection of performance is the NAV total return. The NAV
total return takes into account all aspects of the Company - the impact of
debt, management fees, costs of running the Company, as well as the costs of
managing / refurbishing the assets. This is therefore the best measure of the
performance that represents what is under the Board and manager's influence.
The benchmark return has none of these additional costs in it.
Portfolio Total Return 1 Year 3 Years 5 Years 10 Years
Portfolio total return % (per 4.8 8.4 8.8 10.0
annum)
Benchmark return % (per annum) 1.3 6.2 6.7 8.3
NAV total return % (per annum) 4.1 9.3 9.5 11.7
Source: Aberdeen Standard Investments, MSCI IPD
In the table below we also compare the NAV total return of the company to the
AIC property direct UK sector and to the open-ended property funds. Again, the
NAV total return compares favourably to the investment company peer group and
the Investment Association open-ended sector performance.
For shareholders the share price total return is potentially a more relevant
measure. As Manager it is the one we can influence least as it is affected,
sometimes quite materially by movements in the premium/discount at which the
company's shares trade compared to the NAV. The share price total return is
shown in the table below against several other measures.
Both the Manager and the Board continuously monitor the share price and whether
the Company is trading at a premium or a discount and how that compares to its
peers. During the year the rating has fluctuated reflecting investor sentiment
towards the sector often driven by wider uncertainties such as Brexit, the
political situation, and the state of the economy.
NAV Total Returns to 31 December 2019 1 year (%) 3 year (%) 5 year 10 year (%)
(%)
Standard Life Investments Property Income 4.1 30.5 57.3 202.2
Trust
AIC Property Direct - UK sector (weighted 2.5 19.8 39.4 51.5
average)
Investment Association Open Ended Commercial 0.2 12.3 22.0 66.9
Property Funds sector
Company's ranking in AIC Property Direct 5 3 2 1
sector
Source: AIC, Aberdeen Standard Investments
Share Price Total Returns to 31 December 1 year (%) 3 year (%) 5 year 10 year (%)
2019 (%)
Standard Life Investments Property Income 18.0 23.1 52.1 162.2
Trust
FTSE All-Share Index 19.2 22.0 43.8 118.3
FTSE All-Share REIT Index 30.8 28.5 32.2 149.0
AIC Property Direct - UK sector (weighted 13.4 14.1 31.0 39.1
average)
Source: AIC, Aberdeen Standard Investments
VALUATION
The investment portfolio is valued quarterly by Knight Frank LLP. As at 31
December 2019 the portfolio was valued at GBP493.2 million (GBP499.1 million as at
31 December 2018). Cash stood at GBP6.5 million, compared to GBP8.3 million a year
earlier. During the course of the year the amount drawn under the revolving
credit facility varied, but at year end stood at GBP18 million compared to GBP20
million at 31 December 2018.
The report and accounts relate to the period to the end December 2019, however
since then there has been a significant change to UK valuations such that all
UK valuers applied a Material Uncertainty clause to their valuations in March
2020. This meant that open ended funds based on the fund NAV had to suspend
trading, and reflected the lack of transactional evidence valuers could rely
on. As at the valuation date of 31 March 2020 the Company's portfolio saw a
like for like reduction of 4.9% from the end December valuation, with the NAV
standing at 83.2p. Every asset in the portfolio reduced in value, demonstrating
the scale of the impact of COVID 19, and the valuer's desire to reflect the
market sentiment as well as to rely on transactional evidence.
INVESTMENT STRATEGY
The Company has a clear investment strategy that the Board and Investment
Manager use to focus their efforts.
The Company's objective is to provide investors with an attractive level of
income with the prospect of income and capital growth, delivered through
investing in a diversified portfolio of UK Commercial real estate. We believe
that the dividend should be fully covered by rental income over the medium
term.
When constructing the portfolio we start by looking at the macro themes and
drivers affecting UK real estate to undertake a top down review of what sectors
we want to be invested in. We believe that having the correct sector allocation
is likely to enhance performance. An example would be identifying the changing
consumer habits in the retail sector that led us to reduce our retail exposure
and increase the industrial weighting a few years ago, and in the office sector
it identified the changing ways offices are being and will be used.
The top down approach helps us focus our efforts, but no two properties are the
same so it is vitally important that we take a bottom up approach to analysing
every asset we own and every asset we consider investing in.
We seek to invest in assets that we believe will perform over the medium to
long term and help meet the Company's income requirement. We look to acquire
assets that will appeal to occupiers and future purchasers and are happy to
invest in assets that require asset management and some investment, or have
some vacancy, as we believe an active approach to managing assets generates
superior returns. By investing in good quality assets that are in good
locations and let to quality tenants we are less concerned about lease
duration, as we manage the tenant relationships to maintain and grow income
through lease events. Also key to this is Environmental, Social and Governance
considerations which are set out in more detail below.
PURCHASES
During the reporting period the Company completed three purchases totalling GBP
25.8 million. We had expected to be net investors over the year, however, with
the high levels of uncertainty we took a cautious approach to appraising
opportunities. We are strongly of the belief that it is better to only invest
in assets we truly believe in rather than buying assets because we have the
cash to do so.
Broadoak, Manchester
The Company acquired a small industrial unit that is adjacent to an estate
already owned by the Company, which means the holding now forms a site for
potential future development on Trafford Park. The purchase price was GBP3.5
million and the property is let for a further 8 years, with good potential for
rental growth.
160 Causewayside, Edinburgh
The Company acquired this asset for GBP8.8 million. The property is located to
the South of Edinburgh City Centre close to the University. The ground floor is
let to Tesco and a pharmacy, whilst the four floors of offices above are let to
a variety of tenants. There is one vacant suite, which we have good interest
in. The offices provide a good opportunity for rental growth through asset
management.
Badentoy, Aberdeen
The Company acquired a single let industrial / logistics unit for GBP13.55
million. The unit only covers 22% of the site, which gives scope for future
expansion, although at present the whole site is let on a lease with 9 years
remaining to a strong covenant.
SALES
Four sales were undertaken during the year totalling GBP35.3 million, with a
further sale completed in January 2020 for GBP10.7 million. Sales are undertaken
where we believe an asset is not going to perform in-line with our
requirements, or if we think the risk profile is not suitable. We are happy to
realise profits and reduce future risk. We regularly review our holdings to
challenge our belief that they will continue to perform in line with
expectations.
Silbury Court, Milton Keynes
We sold a small office for GBP6 million that we believed would require
significant capital expenditure on expiry of the lease and potentially a
prolonged void. Although we like the Milton Keynes office market, we felt this
was a good example of taking a profit whilst mitigating risk.
Mansfield
We sold a small industrial unit for GBP920,000 to the tenant, who had an option
on the unit. We had previously sold the remainder of the estate and this was
the smallest asset in the fund.
Michigan Drive, Milton Keynes
Although the Milton Keynes market is strong for industrial units we sold this
asset for GBP9.3 million due to serious concerns over the future viability of the
tenant's business. We believed there was far greater downside risk than upside.
Denby 242, Derby
This asset represented the single largest tenant exposure and, although we
liked the unit, we felt there was too much risk around the lease expiry in 5
years' time and the potential impact on the company's revenue account. The sale
was timed to take advantage of the strength of demand for logistics investments
to realise a profit.
Bourne House, Staines
In January 2020 we completed the sale of this single let office asset for GBP10.7
million. The property had recently been re-let and was fully valued. We were
also cognisant of increased flood risk on future modelling for this location.
ASSET MANAGEMENT
Asset management is the bread and butter of the Company's activities, and -
takes a very active approach to dealing with our tenants to optimise value. The
Company benefits from having a dedicated and experienced team focused on asset
management. They engage with tenants on a one to one basis, and ensure that the
Company uses best in class agents where appropriate. One of the main focuses in
2019 has been to ensure the Company's office properties address tenants' needs.
We have fully fitted several suites and developed shorter more user friendly
leases to ease the challenges of relocating for smaller businesses. This has
started to reap rewards, with a noticeable pick up in viewings, especially from
companies that have grown up in serviced offices but now want dedicated space.
Although many commentators refer to serviced offices as a threat to traditional
landlords, we have found they have helped us attract new tenants. Companies
typically only made decisions to move or expand if they had to in 2019 with so
much negative press and uncertainty around UK politics and economic outlook.
After the general election in December we saw a noticeable pick up in enquiries
and viewings.
Highlights of the team's achievements are:
* Over the course of 2019 20 new lettings were completed generating GBP3.69
million rent per annum.
* 7 lease renewals were completed securing GBP1.02 million per annum.
* 8 rent reviews agreed, showing an increase in annual rent of GBP330,600 per
annum (14.2%) from the previously agreed rent.
DEBT
The Company utilises debt, with two facilities from the Royal Bank of Scotland.
The main term loan is for GBP110 million and matures in April 2023. There is also
a Revolving Credit Facility ("RCF") of GBP55 million which matures on the same
date. At the year-end GBP18 million was drawn on the RCF, however, following the
sale of Bourne House, Staines in January 2020 a further GBP10 million was repaid,
leaving just GBP8 million drawn.
The LTV as at 31 December was 24.6% (December 2018: 24.4%). The all in-cost of
the debt as at 31 December was 2.6%.
The Company entered into an interest rate swap when the term loan was taken
out. At 31 December 2019 the interest rate swap had a liability of GBP2.2 million
(2018 -GBP0.8 million) which is reflected in the NAV. This liability will reduce
to zero on maturity.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE
ESG is an integral part of how we manage the Company. That is of course a very
easy statement to make, and we are continually refining what we do, and
learning. We believe that "doing the right thing" in ESG terms, is increasingly
aligned with the goals and ideals of our corporate occupiers, as well as the
individuals who occupy and use our buildings. This is a relatively new
phenomenon, and getting it right will be an essential part of delivering
performance in the future. We report more fully on the ESG Metrics separately
in the annual report, however within the Investment Manager's report we wanted
to explain the practical approach we take when managing the portfolio as ESG
can mean different things to different people.
Environmental
This element is related to energy efficiency and waste. Much of what we do is
very simple, for example:
* We have worked with our managing agents to reduce waste to land fill
through improved recycling in the buildings.
* We always use energy efficient lightbulbs (LED) in refurbishments to reduce
consumption.
* We calibrate and monitor the operation of mechanical and electrical plant
to ensure it runs as efficiently as possible.
These measures have helped the company achieve a 4% and 10% reduction in
landlord like-for-like electricity and gas consumption respectively in 2019.
All of the electricity purchased by the Company is designated as green energy.
In addition there has been a 13% reduction in carbon emissions associated with
landlord procured energy.
We have engaged with tenants on most of the assets in the portfolio about
installing photo voltaic (PV) cells on the roof, where the Company pays for the
installation and then sells the power to the tenant. We currently have 5
buildings where this has occurred (with a capacity of 241kwp) and are working
on a further 4 schemes that could have a capacity of circa 2,000kwp.
Climate change presents both physical risks to real estate assets (e.g. from
flooding) and transition risks associated with an asset's ability to
decarbonise. We assess flood risk on all of our potential purchases and
existing assets, and are fortunate to have in house expertise as well as
utilising the Environment Agency data.
Aberdeen Standard Investments has recently partnered with Vivid Economics to
better understand climate risks across all asset classes. As part of this work,
we will assess the physical risk posed to assets in the Company's portfolio
under a range of future climate scenarios out to 2040, ranging from a 1.5°C
global temperature increase (i.e. consistent with the Paris Agreement) to a +4°
C temperature increase. Results of this assessment will be available later in
2020.
Transition risk for real estate assets depends on their ability to transition
to net-zero greenhouse gas emissions before 2050. Importantly, there is
consensus in the UK real estate industry that it should not be possible to
claim net-zero status by simply off-setting all emissions and that a standard
of energy efficiency must be met first. Assessing transition risk at the asset
level involves benchmarking energy performance and establishing the cost of
improvements to meet levels consistent with a net-zero pathway. Where the
Company (as landlord) is in control of utilities and has full energy data for
office assets, our M&E/Sustainability consultants have started this
benchmarking exercise.
This process will follow for other assets in due course and is dependent on
obtaining energy consumption data from tenants.
Social
The Social aspect of ESG is not as easy to identify as the Environmental, but
is an area of great focus for us, because it directly relates to how our
buildings are used. It is most prevalent within our office portfolio as that is
where we have more multi-let occupation.
We seek to invest in buildings where we can create amenities for the occupier,
including things like high quality showers and changing rooms, secure bike
racks, space for organised yoga classes, break out / relaxation space with
coffee machines.
Our on-site reception teams seek to create a sense of community through tenant
engagement. This includes organising food banks, competitions, local charity
stalls etc., and in a couple of our buildings we have been able to assist
tenants with provision of training and seminars to help people upskill.
We are convinced that we can improve the performance of our assets by getting
the social aspect right. If we provide a working environment that resonates
with the beliefs of the people who use our assets then that will increase the
appeal to the corporates who employ them. We aim to provide accommodation that
enhances productivity and therefore improves the cost efficiency for our
tenants.
Governance
Engaging in the environmental and social aspects of ESG is in itself not
enough. We need to be able to measure it, and provide tenants and investors
with reliable information about our buildings. We subscribe to the GRESB
benchmarking service and are looking at various forms of certification.
OUTLOOK AND FUTURE STRATEGY
The positive environment of early 2020 has quickly changed into what is likely
to be a greater economic contraction than the Great Financial Crisis. We are
fortunate to have a limited exposure to retail assets which are likely to
continue to struggle, and we have a greater exposure to the industrial sector,
which looks relatively resilient. In a market of sudden change, opportunities
will arise. Our focus is to ensure longer term sustainability and positive
progress for the Company; and hence we will look at opportunities as they
arise. In the meantime, all our effort continues to be focused on providing
tenants with accommodation that meets their needs. Our basic philosophy of
investing in good quality assets, in strong locations, let to good tenants
remains as valid now as it ever has.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report and the Group
Consolidated Financial Statements for each year which give a true and fair
view, in accordance with the applicable Guernsey law and those International
Financial Reporting Standards ("IFRSs") as adopted by the European Union.
In preparing those Consolidated Financial Statements, the Directors are
required to:
* select suitable accounting policies in accordance with IAS 8: Accounting
Policies, Changes in Accounting Estimates and Errors and then apply them
consistently;
* make judgement and estimates that are reasonable and prudent;
* present information, including accounting policies, in a manner that
provides relevant, reliable, comparable and understandable information;
* provide additional disclosures when compliance with the specific
requirements in IFRSs as adopted by the European Union is insufficient to
enable users to understand the impact of particular transactions, other
events and conditions on the Group's financial position and financial
performance; - state that the Group has complied with IFRSs as adopted by
the European Union, subject to any material departures disclosed and
explained in the Group Consolidated Financial Statements; and
* prepare the Group Consolidated Financial Statements on a going concern
basis unless it is inappropriate to presume that the Group will continue in
business.
The Directors confirm that they have complied with the above requirements in
preparing the Consolidated Financial Statements.
The Directors are responsible for keeping adequate accounting records, that are
sufficient to show and explain the Group's transactions and disclose with
reasonable accuracy at any time, the financial position of the Group and to
enable them to ensure that the Financial Statements comply with The Companies
(Guernsey) Law, 2008. They are also responsible for safeguarding the assets of
the Group and hence for taking reasonable steps for the prevention and
detection of fraud, error and non-compliance with law and regulations.
The maintenance and integrity of the Company's website is the responsibility of
the Directors through its Investment Manager; the work carried out by the
auditors does not involve considerations of these matters and, accordingly, the
auditors accept no responsibility for any change that may have occurred to the
Consolidated Financial Statements since they were initially presented on the
website. Legislation in Guernsey governing the preparation and dissemination of
the consolidated financial statements may differ from legislation in other
jurisdictions.
Responsibility Statement of the Directors in respect of the Consolidated Annual
Report under the Disclosure and Transparency Rules.
The Directors each confirm to the best of their knowledge that:
* the Consolidated Financial Statements, prepared in accordance with IFRSs as
adopted by the European Union, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Group; and
* the management report, which is incorporated into the Strategic Report,
Directors' Report and Investment Manager's Report, includes a fair review
of the development and performance of the business and the position of the
Group, together with a description of the principal risks and uncertainties
that they face.
Statement under the UK Corporate Governance Code.
The Directors each confirm to the best of their knowledge and belief that the
Annual Report and Consolidated Financial Statements taken as a whole are fair,
balanced and understandable and provide the information necessary to assess the
Group's position and performance, business model and strategy.
Approved by the Board on
26 May 2020
Robert Peto
Chairman
FINANCIAL STATEMENTS
Consolidated Statement of Comprehensive Income for the year ended 31
December 2019
Notes 2019 2018
GBP GBP
Rental income 29,878,646 27,773,205
Service charge income 3,313,463 1,665,737
Surrender premium 580,000 -
Valuation (loss)/gain from investment properties 7 (3,613,836) 12,057,044
Gain on disposal of investment properties 7 427,304 1,861,161
Investment management fees 4 (3,492,880) (3,381,779)
Valuer's fees 4 (97,668) (91,396)
Auditor's fees 4 (81,850) (78,500)
Directors' fees and subsistence 22 (227,276) (202,298)
Service charge expenditure (3,313,463) (1,665,737)
Other direct property expenses (2,935,023) (3,154,578)
Other administration expenses (530,862) (426,768)
Operating profit 19,906,555 34,356,091
Finance income 5 15,856 58,411
Finance costs 5 (3,778,280) (3,468,125)
Profit for the period before taxation 16,144,131 30,946,377
Taxation
Tax charge - -
Profit for the period, net of tax 16,144,131 30,946,377
Other Comprehensive Income
Valuation (loss)/gain on cash flow hedge 14 (1,416,653) 1,440,836
Total other comprehensive gain/(loss) (1,416,653) 1,440,836
Total comprehensive gain for the period, net of tax 14,727,478 32,387,213
Earnings per share 2019 (p) 2018 (p)
Basic and diluted earnings per share 18 3.98 7.68
EPRA earnings per share 18 4.76 4.22
All items in the above Consolidated Statement of Comprehensive Income derive
from continuing operations.
The following notes are an integral part of these Consolidated Financial
Statements
Consolidated Balance Sheet as at 31 December 2019
ASSETS Notes 2019 2018
GBP GBP
Non-current assets
Investment properties 7 477,855,299 495,245,556
Lease incentives 7 5,523,822 2,896,409
Rental deposits held on behalf of tenants 1,298,364 840,633
484,677,485 498,982,598
Current assets
Investment properties held for sale 8 10,700,000 -
Trade and other receivables 10 3,913,519 4,939,071
Cash and Cash equivalents 11 6,475,619 8,264,972
21,089,138 13,204,043
Total Assets 505,766,623 512,186,641
LIABILITIES
Current liabilities
Trade and other payables 12 9,232,072 11,906,363
Interest rate swap 14 644,465 451,714
9,876,537 12,358,077
Non-current liabilities
Bank borrowings 13 127,316,886 129,249,402
Interest rate swap 14 1,576,151 352,249
Obligations under finance leases 15 904,121 -
Rent deposits due to tenants 1,298,364 840,633
131,095,522 130,442,284
Total liabilities 140,972,059 142,800,361
Net assets 364,794,564 369,386,280
EQUITY 2019 GBP 2018 GBP
Capital and reserves attributable to Company's equity holders
Share capital 17 227,431,057 227,431,057
Retained earnings 18 6,168,350 6,156,881
Capital reserves 18 33,356,785 37,959,970
Other distributable reserves 18 97,838,372 97,838,372
Total equity 364,794,564 369,386,280
Approved and authorised for issue by the Board of Directors on 26 May 2020 and
signed on their behalf by Robert Peto.
The below notes are an integral part of these Consolidated Financial Statements
Consolidated Statement of Changes in Equity
for the year ended 31 December 2019
Other
Share Retained Capital Distributable
Capital earnings reserves Reserves Total equity
Notes GBP GBP GBP GBP GBP
Opening balance 1 January 2019 227,431,057 6,156,881 37,959,970 97,838,372 369,386,280
Profit for the year - 16,144,131 - - 16,144,131
Other comprehensive income - - (1,416,653) - (1,416,653)
Total comprehensive income for the period - 16,144,131 (1,416,653) - 14,727,478
Ordinary shares issued net of issue costs 17 - - - - -
Dividends paid 20 - (19,319,194) - - (19,319,194)
Valuation loss from investment properties 7 - 3,613,836 (3,613,836) - -
Gain on disposal of investment properties 7 - (427,304) 427,304 - -
Balance at 31 December 2019 227,431,057 6,168,350 33,356,785 97,838,372 364,794,564
Consolidated Statement of Changes in Equity
for the year ended 31 December 2018
Other
Share Retained Capital Distributable
Capital earnings reserves Reserves Total equity
Notes GBP GBP GBP GBP GBP
Opening balance 1 January 2018 217,194,412 8,364,603 22,600,929 97,838,372 345,998,316
Profit for the year - 30,946,377 - - 30,946,377
Other comprehensive income - - 1,440,836 - 1,440,836
Total comprehensive income for the period - 30,946,377 1,440,836 - 32,387,213
Ordinary shares issued net of issue costs 17 10,236,645 - - - 10,236,645
Dividends paid 20 - (19,235,894) - - (19,235,894)
Valuation gain from investment properties 7 - (12,057,044) 12,057,044 - -
Gain on disposal of investment properties 7 - (1,861,161) 1,861,161 - -
Balance at 31 December 2018 227,431,057 6,156,881 37,959,970 97,838,372 369,386,280
The below notes are an integral part of these Consolidated Financial
Statements.
Consolidated Cash Flow Statement for the year ended 31 December
2019
Cash flows from operating activities Notes 2019 2018
GBP GBP
Profit for the year before taxation 16,144,131 30,946,377
Movement in lease incentives (1,881,958) (735,921)
Movement in trade and other receivables (400,215) 16,441,217
Movement in trade and other payables (2,216,558) 1,243,386
Finance costs 5 3,778,280 3,524,503
Finance income 5 (15,856) (58,411)
Valuation loss/(gain) from investment properties 7 3,613,836 (12,057,044)
Gain on disposal of investment properties 7 (427,304) (1,861,161)
Net cash inflow from operating activities 18,594,356 37,442,946
Cash flows from investing activities
Interest received 5 15,856 58,411
Purchase of investment properties 7 (25,808,526) (64,023,051)
Additions through business acquisition - (23,913,188)
Capital expenditure on investment properties 7 (4,628,353) (8,170,795)
Net proceeds from disposal of investment properties 7 35,067,304 44,861,161
Net cash inflow/(outflow) from investing activities 4,646,281 (51,187,462)
Cash flows from financing activities
Proceeds on issue of ordinary shares 16 - 10,314,000
Transaction costs of issue of shares 16 - (77,355)
Bank borrowing 13 1,000,000 20,000,000
Repayment of RCF 13 (3,000,000) -
Bank borrowing arrangement costs 13 (150,000) (52,490)
Interest paid on bank borrowing 5 (2,986,775) (2,546,435)
Payments on interest rate swaps 5 (574,021) (726,842)
Dividends paid to the Company's shareholders 20 (19,319,194) (19,235,894)
Net cash (outflow)/inflow from financing activities (25,029,990) 7,674,984
Net decrease in cash and cash equivalents (1,789,353) (6,069,532)
Cash and cash equivalents at beginning of year 11 8,264,972 14,334,504
Cash and cash equivalents at end of year 11 6,475,619 8,264,972
The following notes are an integral part of these Consolidated Financial
Statements
Notes to the Consolidated Financial Statements for the year ended 31 December
2019
1 GENERAL INFORMATION
Standard Life Investment Property Income Trust Limited ("the Company") and its
subsidiaries (together "the Group") carries on the business of property
investment through a portfolio of freehold and leasehold investment properties
located in the United Kingdom. The Company is a limited liability company
incorporated in Guernsey, Channel Islands. The Company has its listing on the
London Stock Exchange.
The address of the registered office is P.O. Box 255, Trafalgar Court, Les
Banques, St Peter Port, Guernsey. These audited Consolidated Financial
Statements were approved for issue by the Board of Directors on 26 May 2020.
2 ACCOUNTING POLICIES
2.1 Basis of preparation
The audited Consolidated Financial Statements of the Group have been prepared
in accordance with International Financial Reporting Standards as adopted by
the European Union ("IFRS"), and all applicable requirements of The Companies
(Guernsey) Law, 2008. The audited Consolidated Financial Statements of the
Group have been prepared under the historical cost convention as modified by
the measurement of investment property and derivative financial instruments at
fair value.
The Consolidated Financial Statements are presented in pounds sterling and all
values are not rounded except when otherwise indicated.
The Directors have considered the basis of preparation of the accounts given
the COVID 19 pandemic and believe that it is still appropriate for the accounts
to be prepared on the going concern basis.
Changes in accounting policy and disclosure
IFRS 16 Leases
IFRS 16 Leases ("IFRS 16") replaces IAS 17 Leases ("IAS 17") and is effective
for annual periods beginning on or after 1 January 2019. The key changes are
the lessee and lessor accounting models are no longer symmetrical.
For lessees, the accounting for leases will change to a new single lessee
accounting model, requiring recognition of a right-of-use asset (right to use
underlying leased asset) and a lease liability (obligation to make lease
payments) for a lease with a term greater than 12 months, exclusion to
recognition is if the underlying asset is of a low value when new.
For lessors, this remains relatively unchanged - IFRS 16 retains IAS 17's
distinction of finance and operating lease however, IFRS 16 has introduced
changes for the lessor where the lessor acts as an intermediate lessor in the
lease contract.
The Group has made an assessment of the leases, where the Group acts as
intermediate lessor in the lease agreement, and has identified that the Group
has one investment property held on leased land which has a material impact on
the accounts. The standard permits a modified retrospective approach in the
year of adoption by recognising a cumulative catch up adjustment to opening
retained earnings. The Group intends utilising this modified retrospective
approach for this contract.
New and amended standards and interpretations not applied
IFRIC 23 Uncertainty over Income Tax Treatments ("IFRIC 23") is effective for
annual periods beginning on or after 1 January 2019. IFRIC 23 clarifies the
recognition and measurement requirements in IAS 12 Income Taxes when there is
uncertainty over income tax treatments. The Group has made no adjustments to
its financial statement following adoption of IFRIC 23 and hence not discussed
further.
Annual Improvements to IFRS
The Group has made no adjustments to its financial statements following
adoption of the amendments to the IFRS Standards detailed in the annual
Improvements to IFRS 2015-2017 Cycle (1 January 2019). The amendments were not
applicable to the Group and hence not discussed.
New standards, amendments and Interpretation not yet effective
There are a number of amended standards issued which are effective from annual
periods beginning on or after 1 January 2020. The Group does not anticipate
these to have a material impact on the annual consolidated financial statements
of the Group and hence not discussed and are detailed below:
* Amendments to IAS 1 Presentation of Financial Statements ("IAS 1") and IAS
8 Accounting Policies, Changes in Accounting Estimates and Errors ("IAS 8")
definition of material.
* An amendment of IFRS 3 Business combinations (" IFRS 3") definition of
business.
2.2 Significant accounting judgements, estimates and assumptions
The preparation of the Group's Financial Statements requires management to make
judgements, estimates and assumptions that affect the reported amounts of
revenues, expenses, assets and liabilities, and the disclosure of contingent
liabilities, at the reporting date. However, uncertainties about these
assumptions and estimates could result in outcomes that could require a
material adjustment to the carrying amount of the asset or liability affected
in the future periods. The most significant estimates and judgements are set
out below. There were no critical accounting judgements.
Fair value of investment properties
Investment properties are stated at fair value as at the Balance Sheet date.
Gains or losses arising from changes in fair values are included in the
Consolidated Statement of Comprehensive Income in the year in which they arise.
The fair value of investment properties is determined by external real estate
valuation experts using recognised valuation techniques. The fair values are
determined having regard to any recent real estate transactions where
available, with similar characteristics and locations to those of the Group's
assets.
In most cases however, the determination of the fair value of investment
properties requires the use of valuation models which use a number of
judgements and assumptions. The only model used was the income capitalisation
method. Under the income capitalisation method, a property's fair value is
judged based on the normalised net operating income generated by the property,
which is divided by the capitalisation rate (discounted by the investor's rate
of return).
Under the income capitalisation method, over (above market rent) and under-rent
situations are separately capitalised (discounted).
The sensitivity analysis in note 7 details the decrease in the valuation of
investment properties if equivalent yield increases by 50 basis points or
rental rates (ERV) decreases by 5% which the Board believes are reasonable
sensitivities to apply given historical movements in valuations.
Fair value of financial instruments
When the fair value of financial assets and financial liabilities recorded in
the Consolidated Balance Sheet cannot be derived from active markets, they are
determined using a variety of valuation techniques that include the use of
mathematical models.
The input to these models are taken from observable markets where possible, but
where this is not feasible, a degree of judgement is required in establishing
fair value. The judgements include considerations of liquidity and model inputs
such as credit risk (both own and counterparty's), correlation and volatility.
Changes in assumptions about these factors could affect the reported fair value
of financial instruments. The models are calibrated regularly and tested for
validity using prices from any observable current market transactions in the
same instrument (without modification or repackaging) or based on any available
observable market data.
The valuation of interest rate swaps used in the Balance Sheet is provided by
The Royal Bank of Scotland. These values are validated by comparison to
internally generated valuations prepared using the fair value principles
outlined above.
The sensitivity analysis in note 3 details the increase and decrease in the
valuation of interest rate swaps if market rate interest rates had been 100
basis points higher and 100 basis points lower.
2.3 Summary of significant accounting policies
A Basis of consolidation
The audited Consolidated Financial Statements comprise the financial statements
of Standard Life Investments Property Income Trust Limited and its material
wholly owned subsidiary undertakings.
Control is achieved when the Group is exposed, or has rights, to variable
returns from its involvement with subsidiaries and has the ability to affect
those returns through its power over the subsidiary.
Specifically, the Group controls a subsidiary if, and only if, it has:
* Power over the subsidiary (i.e. existing rights that give it the current
ability to direct the relevant activities of the subsidiary)
* Exposure, or rights, to variable returns from its involvement with the
subsidiary
* The ability to use its power over the subsidiary to affect its returns
The Group assesses whether or not it controls a subsidiary if facts and
circumstances indicate that there are changes to one or more of the three
elements of control. Consolidation of a subsidiary begins when the Group
obtains control over the subsidiary and ceases when the Group loses control of
the subsidiary.
Assets, liabilities, income and expenses of a subsidiary acquired or disposed
of during the year are included in the consolidated statement of other
comprehensive income from the date the Group gains control until the date when
the Group ceases to control the subsidiary.
The financial statements of the subsidiaries are prepared for the same
reporting period as the parent company, using consistent accounting policies.
All intra-group balances, transactions and unrealised gains and losses
resulting from intra-group transactions are eliminated in full.
B Functional and presentation currency
Items included in the financial statements of each of the Group's entities are
measured using the currency of the primary economic environment in which the
entity operates ("the functional currency"). The Consolidated Financial
Statements are presented in pound sterling, which is also the Company's
functional currency.
C Revenue Recognition
Revenue is recognised as follows;
i) Bank interest
Bank interest income is recognised on an accruals basis.
ii) Rental income
Rental income from operating leases is net of sales taxes and value added tax
("VAT") recognised on a straight line basis over the lease term including lease
agreements with stepped rent increases. The initial direct costs incurred in
negotiating and arranging an operating lease are recognised as an expense over
the lease term on the same basis as the lease income. The cost of any lease
incentives provided are recognised over the lease term, on a straight line
basis as a reduction of rental income. The resulting asset is reflected as a
receivable in the Consolidated Balance Sheet. The valuation of investment
properties is reduced by the total of the unamortised lease incentive balances.
Any remaining lease incentive balances in respect of properties disposed of are
included in the calculation of the profit or loss arising at disposal.
Contingent rents, being those payments that are not fixed at the inception of
the lease, for example increases arising on rent reviews, are recorded as
income in periods when they are earned. Rent reviews which remain outstanding
at the year end are recognised as income, based on estimates, when it is
reasonable to assume that they will be received.
The surrender premiums received for the year ended 2019 were GBP580,000 (2018: GBP
nil) as detailed in the Statement of Comprehensive Income and related to a
tenant break during the year.
iii) Property disposals
Where revenue is obtained by the sale of properties, it is recognised once the
sale transaction has been completed, regardless of when contracts have been
exchanged.
D Expenditure
All expenses are accounted for on an accruals basis. The investment management
and administration fees, finance and all other revenue expenses are charged
through the Consolidated Statement of Comprehensive Income as and when
incurred. The Group also incurs capital expenditure which can result in
movements in the capital value of the investment properties. The movements in
capital expenditure are reflected in the Statement of Comprehensive Income as a
valuation gain/(loss). In 2019, there were no non-income producing properties
(2018: nil).
E Taxation
Current income tax assets and liabilities are measured at the amount expected
to be recovered from or paid to taxation authorities. The tax rates and tax
laws used to compute the amount are those that are enacted or substantively
enacted by the reporting date. Current income tax relating to items recognised
directly in other comprehensive income or in equity is recognised in other
comprehensive income and in equity respectively, and not in the income
statement. Positions taken in tax returns with respect to situations in which
applicable tax regulations are subject to interpretation, if any, are reviewed
periodically and provisions are established where appropriate.
The Group recognises liabilities for current taxes based on estimates of
whether additional taxes will be due. When the final tax outcome of these
matters is different from the amounts that were initially recorded, such
differences will impact the income and deferred tax provisions in the period in
which the determination is made.
Deferred income tax is provided using the liability method on all temporary
differences at the reporting date between the tax bases of assets and
liabilities and their carrying amounts for financial reporting purposes.
Deferred income tax assets are recognised only to the extent that it is
probable that taxable profit will be available against which deductible
temporary differences, carried forward tax credits or tax losses can be
utilised. The amount of deferred tax provided is based on the expected manner
of realisation or settlement of the carrying amount of assets and liabilities.
In determining the expected manner of realisation of an asset the Directors
consider that the Group will recover the value of investment property through
sale. Deferred income tax relating to items recognised directly in equity is
recognised in equity and not in profit or loss.
F Investment property
Investment properties comprise completed property and property under
construction or re-development that is held to earn rentals or for capital
appreciation or both. Property held under a lease is classified as investment
property when the definition of an investment property is met.
Investment properties are measured initially at cost including transaction
costs. Transaction costs include transfer taxes, professional fees for legal
services and initial leasing commissions to bring the property to the condition
necessary for it to be capable of operating. The carrying amount also includes
the cost of replacing part of an existing investment property at the time that
cost is incurred if the recognition criteria are met.
Subsequent to initial recognition, investment properties are stated at fair
value. Fair value is based upon the market valuation of the properties as
provided by the external valuers as described in note 2.2. Gains or losses
arising from changes in the fair values are included in the Consolidated
Statement of Comprehensive Income in the year in which they arise. For the
purposes of these financial statements, in order to avoid double counting, the
assessed fair value is:
i) Reduced by the carrying amount of any accrued income resulting from the
spreading of lease incentives and/or minimum lease payments.
ii) Increased by the carrying amount of any liability to the superior
leaseholder or freeholder (for properties held by the Group under operating
leases) that has been recognised in the Balance Sheet as a finance lease
obligation.
Acquisitions of investment properties are considered to have taken place on
exchange of contracts unless there are significant conditions attached. For
conditional exchanges acquisitions are recognised when these conditions are
satisfied.
Investment properties are derecognised when they have been disposed of or
permanently withdrawn from use and no future economic benefit is expected from
their disposal. Any gains or losses on the retirement or disposal of investment
properties are recognised in the Consolidated Statement of Comprehensive Income
in the year of retirement
or disposal.
Gains or losses on the disposal of investment properties are determined as the
difference between net disposal proceeds and the carrying value of the asset in
the previous full period financial statements.
G Investment properties held for sale
Non-current assets (and disposal groups) classified as held for sale are
measured at the lower of carrying amount and fair value (except for investment
property measured using fair value model).
Non-current assets and disposal groups are classified as held for sale if their
carrying amount will be recovered through a sale transaction rather than
through continuing use. This condition is regarded as met only when the sale is
highly probable and the asset (or disposal group) is available for immediate
sale in its present condition. Management must be committed to the sale which
should be expected to qualify for recognition as a completed sale within one
year from the date of classification.
When the Group is committed to a sale plan involving loss of control of a
subsidiary, all of the assets and liabilities of that subsidiary (i.e. disposal
group) are classified as held for sale when the criteria described above are
met, regardless of whether the Group will retain a non-controlling interest in
its former subsidiary after the sale.
H Trade and other receivables
Trade receivables are recognised and carried at the lower of their original
invoiced value and recoverable amount. Where the time value of money is
material, receivables are carried at amortised cost. A provision for impairment
of trade receivables is established when there is objective evidence that the
Group will not be able to collect all amounts due according to the original
terms of the receivables. Significant financial difficulties of the debtor,
probability that the debtor will enter bankruptcy or financial reorganisation,
and default or delinquency in payments (more than 30 days overdue) are
considered indicators that the trade receivable is impaired. The amount of the
provision is the difference between the asset's carrying amount and the present
value of estimated future cash flows, discounted at the original effective
interest rate. The carrying amount of the asset is reduced through use of an
allowance account, and the amount of the loss is recognised in the Consolidated
Statement of Comprehensive Income. When a trade receivable is uncollectible, it
is written off against the allowance account for trade receivables. Subsequent
recoveries of amounts previously written off are credited in the Consolidated
Statement of Comprehensive Income.
I Cash and cash equivalents
Cash and cash equivalents are defined as cash in hand, demand deposits, and
other short-term highly liquid investments readily convertible within three
months or less to known amounts of cash and subject to insignificant risk of
changes in value.
J Borrowings and interest expense
All loans and borrowings are initially recognised at the fair value of the
consideration received, less issue costs where applicable. After initial
recognition, all interest-bearing loans and borrowings are subsequently
measured at amortised cost. Amortised cost is calculated by taking into account
any discount or premium on settlement. Borrowing costs are recognised within
finance costs in the Consolidated
Statement of Comprehensive Income as incurred.
K Accounting for derivative financial instruments and hedging activities
Interest rate swaps are initially recognised at fair value on the date a
derivative contract is entered into and are subsequently remeasured at their
fair value.
The method of recognising the resulting gain or loss depends on whether the
derivative is designated as a hedging instrument, and if so, the nature of the
item being hedged. The Group documents at the inception of the transaction the
relationship between hedging instruments and hedged items, as well as its risk
management objective and strategy for undertaking various hedging transactions.
The Group also documents its assessment both at hedge inception and on an
ongoing basis of whether the derivatives that are used in hedging transactions
are highly effective in offsetting changes in fair values or cash flows of
hedged items. The effective portion of changes in the fair value of derivatives
that are designated and qualify as cash flow hedges are recognised in other
comprehensive income in the Consolidated Statement of Comprehensive Income. The
gains or losses relating to the ineffective portion are recognised in operating
profit in the Consolidated Statement of Comprehensive Income.
Amounts taken to equity are transferred to profit or loss when the hedged
transaction affects profit or loss, such as when the hedged financial income or
financial expenses are recognised.
When a derivative is held as an economic hedge for a period beyond 12 months
after the end of the reporting period, the derivative is classified as
non-current consistent with the classification of the underlying item. A
derivative instrument that is a designated and effective hedging instrument is
classified consistent with the classification of the underlying hedged item.
L Service charge
The Group has appointed a managing agent to deal with the service charge at the
investment properties and the Group is acting as an agent for the service
charge and not a principal. As a result the Group recognises net service charge
and void expenses in the Consolidated Statement of Comprehensive Income. The
table in note 21 is a summary of the service charge during the year. It shows
the amount the service charge has cost the tenants for the 12 months to 31
December 2019, the amount the tenants have been billed based on the service
charge budget and the amount the Group has paid in relation to void units over
the year. The table also shows the balancing service charge that is due from
the tenants as at the Balance Sheet date.
M Other financial liabilities
Trade and other payables are recognised and carried at invoiced value as they
are considered to have payment terms of 30 days or less and are not interest
bearing. The balance of trade and other payables are considered to meet the
definition of an accrual and have been expensed through the Income Statement or
Balance Sheet depending on classification. VAT payable at the Balance Sheet
date will be settled within 31 days of the Balance Sheet date with Her
Majesty's Revenue and Customs ("HMRC") and deferred rental income is rent that
has been billed to tenants but relates to the period after the Balance Sheet
date. Rent deposits recognised in note 12 are those that are due within one
year as a result of upcoming tenant expiries.
3 FINANCIAL RISK MANAGEMENT
The Group's principal financial liabilities are loans and borrowings. The main
purpose of the Group's loans and borrowings is to finance the acquisition and
development of the Group's property portfolio. The Group has rent and other
receivables, trade and other payables and cash and short-term deposits that
arise directly from its operations.
The Group is exposed to market risk (including interest rate risk and real
estate risk), credit risk, capital risk and liquidity risk. The Group is not
exposed to currency risk or price risk. The Group is engaged in a single
segment of business, being property investment in one geographical area, the
United Kingdom. Therefore the Group only engages in one form of currency being
pound sterling. The Group currently invests in direct non-listed property and
is therefore not exposed to price risk.
The Board of Directors reviews and agrees policies for managing each of these
risks which are summarised below.
Market risk
Market risk is the risk that the fair values of financial instruments will
fluctuate because of changes in market prices. The financial instruments held
by the Group that are affected by market risk are principally the interest rate
swap.
i) Interest Rate risk
The Group invests cash balances with RBS and Citibank. These balances expose
the Group to cash flow interest rate risk as the Group's income and operating
cash flows will be affected by movements in the market rate of interest. There
is considered to be no fair value interest rate risk in regard to these
balances.
The bank borrowings as described in note 13 also expose the Group to cash flow
interest rate risk. The Group's policy is to manage its cash flow interest rate
risk using interest rate swaps, in which the Group has agreed to exchange the
difference between fixed and floating interest amounts based on a notional
principal amount (see note 14). The Group has floating rate borrowings of GBP
128,000,000. GBP110,000,000 of these borrowings has been fixed via an interest
rate swap.
The bank borrowings are carried at amortised cost and the Group considers this
to be a close approximation to fair value. The fair value of the bank
borrowings is affected by changes in the market interest rate. The fair value
of the interest rate swap is exposed to changes in the market interest rate as
their fair value is calculated as the present value of the estimated future
cash flows under the agreements. The accounting policy for recognising the fair
value movements in the interest rate swaps is described in note 2.3.
At 31 December 2019, if market rate interest rates had been 100 basis points
higher, which is deemed appropriate given historical movements in interest
rates, with all other variables held constant, the profit for the year would
have been GBP115,244 lower (2018: GBP117,350 lower) as a result of the higher
interest income on cash and cash equivalents off set by the higher interest
expense on the RCF. Other Comprehensive Income and the Capital Reserve would
have been GBP3,851,254 higher (2018: GBP3,136,020 higher) as a result of an
increase in the fair value of the derivative designated as a cash flow hedge of
floating rate borrowings.
At 31 December 2019, if market rate interest rates had been 100 basis points
lower with all other variables held constant, the profit for the year would
have been GBP115,244 higher (2018: GBP117,350 higher) as a result of the lower
interest income on cash and cash equivalents off set by the lower interest
expense on the RCF. Other Comprehensive Income and the Capital Reserve would
have been GBP3,898,889 lower (2018: GBP4,985,212 lower) as a result of a decrease
in the fair value of the derivative designated as a cash flow hedge of floating
rate borrowings.
Trade and other receivables and trade and other payables are interest free and
have settlement dates within one year and therefore are not considered to
present a fair value interest rate risk.
The tables below set out the carrying amount of the Group's financial
instruments excluding the amortisation of borrowing costs as outlined in note
13. Bank borrowings have been fixed due to an interest rate swap and is
detailed further in note 14
At 31 December 2019 Fixed Rate Variable Rate Interest Rate
GBP GBP
Cash and cash equivalents - 6,475,619 0.020%
Bank borrowings 128,000,000 - 2.640%
At 31 December 2018 Fixed Rate Variable Rate Interest Rate
GBP GBP
Cash and cash equivalents - 8,264,972 0.020%
Bank Borrowings 130,000,000 - 2.650%
ii) Real estate risk
The Group has identified the following risks associated with the real estate
portfolio. The risks below, in particular b and c and also credit risk, have
increased given the COVID 19 pandemic and the resultant affect on tenants
ability to pay rent:
a) The cost of any development schemes may increase if there are delays in the
planning process.
The Group uses advisers who are experts in the specific planning requirements
in the scheme's location in order to reduce the risks that may arise in the
planning process.
b) A major tenant may become insolvent causing a significant loss of rental
income and a reduction in the value of the associated property (see also credit
risk below). To reduce this risk, the Group reviews the financial status of all
prospective tenants and decides on the appropriate level of security required
via rental deposits or guarantees.
c) The exposure of the fair values of the portfolio to market and occupier
fundamentals. The Group aims to manage such risks by taking an active approach
to asset management (working with tenants to extend leases and minimise voids),
capturing profit (selling when the property has delivered a return to the Group
that the Group believes has been maximised and the proceeds can be reinvested
into more attractive opportunities) and identifying new investments (generally
at yields that are accretive to the revenue account and where the Group
believes there will be greater investment demand in the medium term).
Credit risk
Credit risk is the risk that a counterparty will be unable to meet a commitment
that it has entered into with the Group. In the event of default by an
occupational tenant, the Group will suffer a rental income shortfall and incur
additional related costs. The Investment Manager regularly reviews reports
produced by Dun and Bradstreet and other sources, including the IPD IRIS
report, to be able to assess the credit worthiness of the Group's tenants and
aims to ensure that there are no excessive concentrations of credit risk and
that the impact of default by a tenant is minimised. In addition to this, the
terms of the Group's bank borrowings require that the largest tenant accounts
for less than 20% of the Group's total rental income, that the five largest
tenants account for less than 50% of the Group's total rental income and that
the ten largest tenants account for less than 75% of the Group's total rental
income. The maximum credit risk from the tenant arrears of the Group at the
financial year end was GBP2,599,862 (2018: GBP2,937,105) as detailed in note 10
below.
With respect to credit risk arising from other financial assets of the Group,
which comprise cash and cash equivalents, the Group's exposure to credit risk
arises from default of the counterparty bank with a maximum exposure equal to
the carrying value of these instruments. As at 31 December 2019 GBP3,393,849
(2018: GBP5,709,167) was placed on deposit with The Royal Bank of Scotland plc
("RBS"), GBP3,081,770 (2018: GBP2,555,805) was held with Citibank. The credit risk
associated with the cash deposits placed with RBS is mitigated by virtue of the
Group having a right to off -set the balance deposited against the amount
borrowed from RBS should RBS be unable to return the deposits for any reason.
Citibank is rated A-2 Stable by Standard & Poor's and P-2 Stable by Moody's.
RBS is rated A-3 Stable by Standard & Poor's and NP Positive by Moody's.
Liquidity risk
Liquidity risk is the risk that the Group will encounter difficulties in
realising assets or otherwise raising funds to meet financial commitments. The
investment properties in which the Group invests are not traded in an organised
public market and may be illiquid.
As a result, the Group may not be able to liquidate its investments in these
properties quickly at an amount close to their fair value in order to meet its
liquidity requirements.
The following table summarises the maturity profile of the Group's financial
liabilities based on contractual undiscounted payments.
The disclosed amounts for interest -bearing loans and interest rate swaps in
the below table are the estimated net undiscounted cash flows.
The Group's liquidity position is regularly monitored by management and is
reviewed quarterly by the Board of Directors.
On demand 12 months 1 to 5 years >5 years Total
Year ended 31 December 2019 GBP GBP GBP GBP GBP
Interest-bearing loans - 20,387,418 115,371,691 - 135,759,109
Interest rate swaps - 610,082 1,372,685 - 1,982,767
Trade and other payables 3,177,865 26,068 104,271 2,658,921 5,967,125
Rental deposits due to tenants - 320,878 514,128 784,237 1,619,243
3,177,865 21,344,446 117,362,775 3,443,158 145,328,244
On demand 12 months 1 to 5 years >5 years Total
Year ended 31 December 2018 GBP GBP GBP GBP GBP
Interest-bearing loans - 22,435,855 117,792,177 - 140,228,032
Interest rate swaps - 599,907 1,949,698 - 2,549,605
Trade and other payables 4,322,482 - - - 4,322,482
Rental deposits due to tenants - 660,926 549,525 291,108 1,501,559
4,322,482 23,696,688 120,291,400 291,108 148,601,678
Capital risk
The Group's objectives when managing capital are to safeguard the Group's
ability to continue as a going concern in order to provide returns for
shareholders and benefits for other stakeholders and to maintain an optimal
capital structure to reduce the cost of capital.
In order to maintain or adjust the capital structure, the Group may adjust the
amount of dividends paid to shareholders, return capital to shareholders, issue
new shares, increase or decrease borrowings or sell assets to reduce debt.
The Group monitors capital on the basis of the gearing ratio. This ratio is
calculated as total borrowings divided by gross assets and has a limit of 65%
set by the Articles of Association of the Company. Gross assets are calculated
as non-current and current assets, as shown in the Consolidated Balance Sheet.
The gearing ratios at 31 December 2019 and at 31 December 2018 were as follows:
2019 2018
GBP GBP
Total borrowings (excluding unamortised arrangement fees) 128,000,000 130,000,000
Gross assets 505,766,623 512,186,641
Gearing ratio (must not exceed 65%) 25.31% 25.38%
The Group also monitors the Loan to Value ratio which is calculated as gross
assets divided by gross borrowings less cash. As at 31 December 2019 this was
24.6% (2018: 24.4%)
Fair values
Set out below is a comparison by class of the carrying amounts and fair value
of the Group's financial instruments that are carried in the financial
statements.
Carrying Amount Fair Value
2019 2018 2019 2018
Financial Assets GBP GBP GBP GBP
Cash and cash equivalents 6,475,619 8,264,972 6,475,619 8,264,972
Trade and other receivables 4,388,390 4,939,071 4,388,390 4,939,071
Financial Liabilities
Bank borrowings 127,316,886 129,249,402 130,066,813 130,055,982
Interest rate swaps 2,220,616 803,963 2,220,616 803,963
Trade and other payables 5,320,162 5,824,041 5,320,162 5,824,041
The fair value of the financial assets and liabilities are included at an
estimate of the price that would be received to sell a financial asset or paid
to transfer a financial liability in an orderly transaction between market
participants at the measurement date. The following methods and assumptions
were used to estimate the fair value:
* Cash and cash equivalents, trade and other receivables and trade and other
payables are the same as fair value due to the short-term maturities of
these instruments.
* The fair value of bank borrowings is estimated by discounting future cash
flows using rates currently available for debt on similar terms and
remaining maturities. The fair value approximates their carrying values
gross of unamortised transaction costs. This is considered as being valued
at level 2 of the fair value hierarchy and has not changed level since 31
December 2018.
* The fair value of the interest rate swap contract is estimated by
discounting expected future cash flows using current market interest rates
and yield curve over the remaining term of the instrument. This is
considered as being valued at level 2 of the fair value hierarchy and has
not changed level since 31 December 2018. The definition of the valuation
techniques are explained in the significant accounting judgements,
estimates and assumptions above.
The table below shows an analysis of the fair values of financial instruments
recognised in the Balance Sheet by the level of the fair value hierarchy.
Level 1 Quoted (unadjusted) market prices in active markets for identical
assets or liabilities.
Level 2 Valuation techniques for which the lowest level input that is
significant to the fair value measurement is directly or indirectly observable.
Level 3 Valuation techniques for which the lowest level input that is
significant to the fair value measurement is unobservable.
Please see note 7 for details on the valuation of Investment properties.
Year ended 31 December 2019 Level 1 Level 2 Level 3 Total fair
value
Interest rate swap - 2,220,616 - 2,220,616
Year ended 31 December 2018 Level 1 Level 2 Level 3 Total fair
value
Interest rate swap - 803,963 - 803,963
4 FEES
Investment management fees
On 19 December 2003 Standard Life Investments (Corporate Funds) Limited ("the
Investment Manager") was appointed as Investment Manager to manage the property
assets of the Group. A new Investment Management Agreement ("IMA") was entered
into on 7 July 2014, appointing the Investment Manager as the AIFM
("Alternative Investment Fund Manager"). On 10 December 2018, the Investment
Manager contract was novated on the same commercial terms to Aberdeen Standard
Fund Managers Limited.
Until 30 June 2019, under the terms of the IMA the Investment Manager was
entitled to 0.75% of total assets up to GBP200 million; 0.70% of total assets
between GBP200 million and GBP300 million; and 0.65% of total assets in excess of GBP
300 million. From 1 July 2019, under the terms of the IMA the Investment
Manager is entitled to 0.70% of total assets up to GBP500 million; and 0.60% of
total assets in excess of GBP500 million. The total fees charged for the year
amounted to GBP3,492,880 (2018: GBP3,381,779). The amount due and payable at the
year end amounted to GBP866,598 excluding VAT (2018: GBP875,512 excluding VAT).
Administration, secretarial fees
On 19 December 2003 Northern Trust International Fund Administration Services
(Guernsey) Limited ("Northern Trust") was appointed administrator, secretary
and registrar to the Group. Northern Trust is entitled to an annual fee,
payable quarterly in arrears, of GBP65,000. Northern Trust is also entitled to
reimbursement of reasonable out of pocket expenses. Total fees and expenses
charged for the year amounted to GBP65,000 (2018: GBP65,000). The amount due and
payable at the year end amounted to GBP16,250 (2018: GBP16,250).
Valuer's fee
Knight Frank LLP ("the Valuers"), external international real estate
consultants, were appointed as valuers in respect of the assets comprising the
property portfolio. The total valuation fees charged for the year amounted to GBP
97,668 (2018: GBP91,396). The total valuation fee comprises a base fee for the
ongoing quarterly valuation, and a one off fee on acquisition of an asset. The
amount due and payable at the year end amounted to GBP20,960 (2018: GBP20,356
excluding VAT).
The annual fee is equal to 0.017 percent of the aggregate value of property
portfolio paid quarterly.
Auditor's fee
During the year, Ernst & Young LLP resigned as independent auditor of the Group
and Deloitte LLP were appointed as independent auditor of the Group. The audit
fees for the year amounted to GBP81,850 (2018: GBP78,500) and relate to audit
services provided for the 2019 financial year. Deloitte LLP did not provide any
non-audit services in the year (2018: nil).
5 FINANCE INCOME AND COSTS
2019 2018
GBP GBP
Interest income on cash and cash equivalents 15,856 58,411
Finance income 15,856 58,411
Interest expense on bank borrowings 2,986,775 2,546,435
Payments on interest rate swap 574,021 726,842
Amortisation of arrangement costs (see note 217,484 194,848
13)
Finance costs 3,778,280 3,468,125
Of the finance costs above, GBP532,829 of the interest expense on bank borrowings
and GBP119,037 of payments on interest rate swaps were accruals at 31 December
2019 and included in Trade and other payables.
6 TAXATION
UK REIT Status
The Group migrated tax residence to the UK and elected to be treated as a UK
REIT with effect from 1 January 2015. As a UK REIT, the income profits of the
Group's UK property rental business are exempt from corporation tax as are any
gains it makes from the disposal of its properties, provided they are not held
for trading or sold within three years of completion of development. The Group
is otherwise subject to UK corporation tax at the prevailing rate.
As the principal company of the REIT, the Company is required to distribute at
least 90% of the income profits of the Group's UK property rental business.
There are a number of other conditions that also require to be met by the
Company and the Group to maintain REIT tax status. These conditions were met in
the period and the Board intends to conduct the Group's affairs such that these
conditions continue to be met for the foreseeable future.
Accordingly, deferred tax is no longer recognised on temporary differences
relating to the property rental business.
The Company and its Guernsey subsidiary have obtained exempt company status in
Guernsey so that they are exempt from Guernsey taxation on income arising
outside Guernsey and bank interest receivable in Guernsey.
A reconciliation between the tax charge and the product of accounting profit
multiplied by the applicable tax rate for the year ended 31 December 2019 and
2018 is as follows:
2019 2018
GBP GBP
Surplus before tax 16,144,131 30,946,377
Tax calculated at UK statutory corporate tax rate of 19% (2018: 19%) 3,067,385 5,879,812
UK REIT exemption on net income (3,672,826) (3,235,353)
Valuation (gain) in respect of investment properties not subject to tax 605,441 (2,644,459)
Current income tax charge - -
7 INVESTMENT PROPERTIES
UK Industrial UK Office UK Retail UK Other Total
2019 2019 2019 2019 2019
GBP GBP GBP GBP GBP
Market value at 1 January 259,150,000 159,630,000 46,530,000 33,800,000 499,110,000
Sector reallocation - - - - -
Purchase of investment properties 17,025,471 8,783,055 - - 25,808,526
Additions through business acquisition - - - - -
Capital expenditure on investment properties 2,455,684 2,172,669 - - 4,628,353
Opening market value of disposed investment (29,540,000) (5,100,000) - - (34,640,000)
properties
Valuation loss from investment properties 3,274,144 (3,644,062) (4,256,539) 1,012,621 (3,613,836)
Movement in lease incentives receivable 434,701 1,463,338 (3,461) (12,621) 1,881,957
Market value at 31 December 252,800,000 163,305,000 42,270,000 34,800,000 493,175,000
Investment property recognised as held for sale - (10,700,000) - - (10,700,000)
Market value net of held for sale at 31 December 252,800,000 152,605,000 42,270,000 34,800,000 482,475,000
Right of use asset recognised on leasehold - 904,121 - - 904,121
properties
Adjustment for lease incentives (1,999,983) (2,616,679) (301,447) (605,713) (5,523,822)
Carrying value at 31 December 250,800,017 150,892,442 41,968,553 34,194,287 477,855,299
The valuations were performed by Knight Frank LLP, accredited external valuers
with recognised and relevant professional qualifications and recent experience
of the location and category of the investment properties being valued. The
valuation model in accordance with Royal Institute of Chartered Surveyors
('RICS') requirements on disclosure for Regulated Purpose Valuations has been
applied (RICS Valuation - Professional Standards January 2014 published by the
Royal Institution of Chartered Surveyors). These valuation models are
consistent with the principles in IFRS 13. The market value provided by Knight
Frank at the year end was GBP493,175,000 (2018: GBP499,110,000) however an
adjustment has been made for lease incentives of GBP5,523,822 (2018: GBP3,864,444)
that are already accounted for as an asset. In addition, as required under IFRS
16 which became effective from 1 January 2019, a right of use asset of GBP904,121
has been recognised in respect of the present value of future ground rents. As
required under IFRS 16 an amount of GBP904,121 has also been recognised as an
obligation under finance leases in the balance sheet. Valuation gains and
losses from investment properties are recognised in the Consolidated Statement
of Comprehensive Income for the period and are attributable to changes in
unrealised gains or losses relating to investment properties held at the end of
the reporting period.
UK Industrial UK Office UK Retail UK Other Total
2018 2018 2018 2018 2018
GBP GBP GBP GBP GBP
Market value at 1 January 213,135,000 150,450,000 69,625,000 - 433,210,000
Sector reallocation - - (12,650,000) 12,650,000 -
Purchase of investment properties 32,038,597 12,740,385 (1,650) 19,245,719 64,023,051
Additions through business acquisition - 23,913,188 - - 23,913,188
Capital expenditure on investment properties 2,648,041 5,242,632 408 279,714 8,170,795
Opening market value of disposed investment (5,600,000) (32,100,000) (5,300,000) - (43,000,000)
properties
Valuation loss from investment properties 16,233,616 (586,989) (5,113,656) 1,524,073 12,057,044
Movement in lease incentives receivable 694,746 (29,216) (30,102) 100,494 735,922
Market value at 31 December 259,150,000 159,630,000 46,530,000 33,800,000 499,110,000
Investment property recognised as held for sale - - - - -
Market value net of held for sale at 31 December 259,150,000 159,630,000 46,530,000 33,800,000 499,110,000
Adjustment for lease incentives (1,787,864) (1,153,339) (304,908) (618,333) (3,864,444)
Carrying value at 31 December 257,362,136 158,476,661 46,225,092 33,181,667 495,245,556
In the Consolidated Cash Flow Statement, proceeds
from disposal of investment properties comprise:
2019 2018
GBP GBP
Opening market value of disposed investment 34,640,000 43,000,000
properties
Gain on disposal of investment properties 427,304 1,861,161
Net proceeds from disposal of investment 35,067,304 44,861,161
properties
Valuation methodology
The fair value of completed investment properties are determined using the
income capitalisation method.
The income capitalisation method is based on capitalising the net income stream
at an appropriate yield. In establishing the net income stream the valuers have
reflected the current rent (the gross rent) payable to lease expiry, at which
point the valuer has assumed that each unit will be re-let at their opinion of
ERV. The valuers have made allowances for voids where appropriate, as well as
deducting non recoverable costs where applicable. The appropriate yield is
selected on the basis of the location of the building, its quality, tenant
credit quality and lease terms amongst other factors.
No properties have changed valuation technique during the year. At the Balance
Sheet date the income capitalisation method is appropriate for valuing all
assets.
The Group appoints suitable valuers (such appointment is reviewed on a periodic
basis) to undertake a valuation of all the direct real estate investments on a
quarterly basis. The valuation is undertaken in accordance with the then
current RICS guidelines and requirements as mentioned above.
The Investment Manager meets with the valuers on a quarterly basis to ensure
the valuers are aware of all relevant information for the valuation and any
change in the investment over the quarter. The Investment Manager then reviews
and discusses the draft valuations with the valuers to ensure correct factual
assumptions are made. The valuers report a final valuation that is then
reported to the Board.
The management group that determines the Company's valuation policies and
procedures for property valuations is the Property Valuation Committee as
detailed in the Annual Report. The Committee reviews the quarterly property
valuation reports produced by the valuers (or such other person as may from
time to time provide such property valuation services to the Group) before its
submission to the Board, focusing in particular on:
* significant adjustments from the previous property valuation report;
* reviewing the individual valuations of each property;
* compliance with applicable standards and guidelines including those issued
by RICS and the UKLA Listing Rules;
* reviewing the findings and any recommendations or statements made by the
valuer;
* considering any further matters relating to the valuation of the
properties.
The Chairman of the Committee makes a brief report of the findings and
recommendations of the Committee to the Board after each Committee meeting. The
minutes of the Committee meetings are circulated to the Board. The Chairman
submits an annual report to the Board summarising the Committee's activities
during the year and the related significant results and findings.
All investment properties are classified as Level 3 in the fair value
hierarchy. There were no movements between levels during the year.
The table above outlines the valuation techniques and inputs used to derive
Level 3 fair values for each class of investment properties.
The table includes:
* The fair value measurements at the end of the reporting period.
* The level of the fair value hierarchy (e.g. Level 3) within which the fair
value measurements are categorised in their entirety.
* A description of the valuation techniques applied.
* Fair value measurements, quantitative information about the significant
unobservable inputs used in the fair value measurement.
* The inputs used in the fair value measurement, including the ranges of rent
charged to different units within the same building.
Country & Class Fair Value GBP Valuation Technique Key Unobservable Input Range (weighted average)
UK Industrial 252,800,000 Capitalisation - Initial Yield 0.00% to 7.87% (5.16%)
Rates
Level 3 - Reversionary Yield 4.26% to 9.33% (6.22%)
- Equivalent Yield 4.23% to 7.75% (6.07%)
- Estimated rental value per sq GBP2.75 to GBP218.50 (GBP187.78)
ft
UK Office 163,305,000 Capitalisation - Initial Yield 0.00% to 10.75% (4.60%)
Rates
Level 3 - Reversionary Yield 0.38% to 8.89% (6.95%)
- Equivalent Yield 4.78% to 8.38% (6.67%)
- Estimated rental value per sq GBP14.00 to GBP519.00 (GBP378.59)
ft
UK Retail 42,270,000 Capitalisation - Initial Yield 4.79% to 8.49% (8.65%)
Rates
Level 3 - Reversionary Yield 5.12% to 7.84% (8.10%)
- Equivalent Yield 5.63% to 8.05% (9.17%)
- Estimated rental value per sq GBP15.50 to GBP500.00 (GBP115.25)
ft
UK Other 34,800,000 Capitalisation - Initial Yield 4.91% to 6.89% (5.45%)
Rates
Level 3 - Reversionary Yield 5.03% to 6.90% (5.50%)
- Equivalent Yield 5.01% to 6.91% (5.58%)
- Estimated rental value per sq GBP18.68 to GBP120.50 (GBP41.68)
ft
493,175,000
Descriptions and definitions
The table above includes the following descriptions and definitions relating to
valuation techniques and key observable inputs made in determining
the fair values.
Estimated rental value (ERV)
The rent at which space could be let in the market conditions prevailing at the
date of valuation.
Equivalent yield
The equivalent yield is defined as the internal rate of return of the cash flow
from the property, assuming a rise or fall to ERV at the next review or lease
termination, but with no further rental change.
Initial yield
Initial yield is the annualised rents of a property expressed as a percentage
of the property value.
Reversionary yield
Reversionary yield is the anticipated yield to which the initial yield will
rise (or fall) once the rent reaches the ERV.
The table below shows the ERV per annum, area per square foot, average ERV per
square foot, initial yield and reversionary yield as at the Balance Sheet date.
2019 2018
ERV p.a. GBP34,224,876 GBP34,380,532
Area sq ft 4,102,486 4,374,342
Average ERV per sq ft GBP8.34 GBP7.86
Initial Yield 5.2% 5.1%
Reversionary Yield 6.7% 4.5%
The table below presents the sensitivity of the valuation to changes in the
most significant assumptions underlying the valuation of completed investment
property. The Board believe these are reasonable sensitivities given historic
movements in valuations.
2019 2018
GBP GBP
Increase in equivalent yield of 50 bps (53,790,866) (40,717,916)
Decrease of 5% in ERV (23,968,000) (16,563,503)
Below is a list of how the interrelationships in the sensitivity analysis above
can be explained. In both cases outlined in the sensitivity table the estimated
Fair Value would increase (decrease) if:
* The ERV is higher (lower)
* Void periods were shorter (longer)
* The occupancy rate was higher (lower)
* Rent free periods were shorter (longer)
* The capitalisation rates were lower (higher)
8 INVESTMENT PROPERTIES HELD FOR SALE
As at 31 December 2019, the Group was actively seeking a buyer for Bourne
House, Staines. The Group both exchanged contracts and completed this sale on 3
January 2020 for a price of GBP10,791,000.
As at 31 December 2018 the Group had no investment properties classified as
held for sale.
9 INVESTMENT IN SUBSIDIARY UNDERTAKINGS
The Company owns 100 per cent of the issued ordinary share capital of Standard
Life Investments Property Holdings Limited, a company with limited liability
incorporated and domiciled in Guernsey, Channel Islands, whose principal
business is property investment.
In 2015 the Group acquired 100% of the units in Standard Life Investments
SLIPIT Unit Trust, (formerly Aviva Investors UK Real Estate Recovery II Unit
Trust) a Jersey Property Unit Trust . The acquisition included the entire
issued share capital of a General Partner which held, through a Limited
Partnership, a portfolio of 22 UK real estate assets. The transaction completed
on 23 December 2015 and the Group has treated the acquisition as a Business
Combination in accordance with IFRS 3.
The Group undertakings consist of the following 100% owned subsidiaries at the
Balance Sheet date:
* Standard Life Investments Property Holdings Limited, a company with limited
liability incorporated in Guernsey, Channel Islands.
* Standard Life Investments (SLIPIT) Limited Partnership, a limited
partnership established in England.
* Standard Life Investments SLIPIT (General Partner) Limited, a company with
limited liability incorporated in England.
* Standard Life Investments SLIPIT (Nominee) Limited, a company with limited
liability incorporated and domiciled in England.
* Hagley Road Limited, a company with limited liability incorporated in
Jersey, Channel Islands.
10 TRADE AND OTHER RECEIVABLES
2019 2018
GBP GBP
Trade receivables 2,738,455 3,036,500
Less: provision for impairment of trade receivables (138,593) (99,395)
Trade receivables (net) 2,599,862 2,937,105
Rental deposits held on behalf of tenants 320,878 660,926
Other receivables 992,779 1,341,040
Total trade and other receivables 3,913,519 4,939,071
Reconciliation for changes in the provision for impairment of trade
receivables:
2019 2018
GBP GBP
Opening balance (99,395) (2,875)
Charge for the year (39,198) (96,520)
Reversal of provision - -
Closing balance (138,593) (99,395)
The estimated fair values of receivables are the discounted amount of the
estimated future cash flows expected to be received and approximate their
carrying amounts.
The trade receivables above relate to rental income receivable from tenants of
the investment properties. When a new lease is agreed with a tenant the
Investment manager performs various money laundering checks and makes a
financial assessment to determine the tenant's ability to fulfil its
obligations under the lease agreement for the foreseeable future. The majority
of tenants are invoiced for rental income quarterly in advance and are issued
with invoices at least 21 days before the relevant quarter starts. Invoices
become due on the first day of the quarter and are considered past due if
payment is not received by this date. Other receivables are considered past due
when the given terms of credit expire.
Amounts are considered impaired when it becomes unlikely that the full value of
a receivable will be recovered. Movement in the balance considered to be
impaired has been included in other direct property costs in the Consolidated
Statement of Comprehensive Income. As of 31 December 2019, trade receivables of
GBP138,593 (2018: GBP99,395) were considered impaired and provided for.
The ageing of these receivables is as
follows:
2019 2018
GBP GBP
0 to 3 months (118,416) (55,115)
3 to 6 months (1,427) (21,619)
Over 6 months (18,750) (22,661)
Closing balance (138,593) (99,395)
As of 31 December 2019, trade receivables of GBP2,599,862 (2018: GBP2,937,105) were
less than 3 months past due but considered not impaired.
11 CASH AND CASH EQUIVALENTS
2019 2018
GBP GBP
Cash held at bank 3,081,770 2,555,805
Cash held on deposit with RBS 3,393,849 5,709,167
6,475,619 8,264,972
Cash held at banks earns interest at floating rates based on daily bank deposit
rates. Deposits are made for varying periods of between one day and three
months, depending on the immediate cash requirements of the Group, and earn
interest at the applicable short-term deposit rates.
12 TRADE AND OTHER PAYABLES
2019 2018
GBP GBP
Trade and other payables 2,796,799 4,322,482
VAT payable 381,068 751,530
Deferred rental income 5,733,327 6,171,425
Rental deposits due to tenants 320,878 660,926
9,232,072 11,906,363
Trade payables are non-interest bearing and are normally settled on 30-day
terms.
13 BANK BORROWINGS
2019 2018
GBP GBP
Loan facility and drawn down outstanding balance 128,000,000 130,000,000
Opening carrying value 129,249,402 109,107,044
Borrowings during the year 1,000,000 20,000,000
Repayment of RCF (3,000,000) -
Arrangements costs of additional facility (99,997) (52,520)
Amortisation of arrangement costs 167,481 194,878
Closing carrying value 127,316,886 129,249,402
On 28 April 2016 the Company entered into an agreement to extend GBP145 million
of its existing GBP155 million debt facility with RBS. The debt facility
consisted of a GBP110 million seven year term loan facility and a GBP35 million
five year RCF which was extended by two years in May 2018 with the margin on
the RCF now at LIBOR plus 1.45%. Interest is payable on the Term Loan at 3
month LIBOR plus 1.375% which equates to a fixed rate of 2.725% on the Term
Loan.
In June 2019, the Company also entered into a new arrangement with the Royal
Bank of Scotland International Limited (RBSI) to extend its Revolving Credit
Facility (RCF) by GBP20 million. The Company currently has GBP18 million undrawn
from its existing facility, and has not drawn the new facility, which has an
expiry coterminous with the existing debt provided by RBSI, in April 2023. The
new facility has a margin of 1.60% above Libor.
Under the terms of the loan facility there are certain events which would
entitle RBS to terminate the loan facility and demand repayment of all sums
due. Included in these events of default is the financial undertaking relating
to the LTV percentage. The loan agreement notes that the LTV percentage is
calculated as the loan amount less the amount of any sterling cash deposited
within the security of RBS divided by the gross secured property value, and
that this percentage should not exceed 60% for the period to and including 27
April 2021 and should not exceed 55% after 27 April 2021 to maturity.
2019 2018
GBP GBP
Loan amount 128,000,000 130,000,000
Cash (6,475,619) (8,264,972)
121,524,381 121,735,028
Investment property valuation 493,175,000 499,110,000
LTV percentage 24.6% 24.4%
Other loan covenants that the Group is obliged to meet include the following:
* that the net rental income is not less than 150% of the finance costs for
any three month period;
* that the largest single asset accounts for less than 15% of the Gross
Secured Asset Value;
* that the largest ten assets accounts for less than 75% of the Gross Secured
Asset Value;
* that sector weightings are restricted to 55%, 45% and 55% for the Office,
Retail and Industrial sectors respectively;
* that the largest tenant accounts for less than 20% of the Group's annual
net rental income;
* that the five largest tenants account for less than 50% of the Group's
annual net rental income;
* that the ten largest tenants account for less than 75% of the Group's
annual net rental income.
During the year, the Group complied with its obligations and loan covenants
under its loan agreement.
The loan facility is secured by fixed and floating charges over the assets of
the Company and its wholly owned subsidiaries, Standard Life Investments
Property Holdings Limited and Standard Life Investments (SLIPIT) Limited
Partnership.
14 INTEREST RATE SWAP
As part of the refinancing of loans (see note 13), on 28 April 2016 the Group
completed an interest rate swap of a notional amount of GBP110,000,000 with RBS.
The interest rate swap effective date is 28 April 2016 and has a maturity date
of 27 April 2023. Under the swap the Company has agreed to receive a floating
interest rate linked to 3 month LIBOR and pay a fixed interest rate of 1.35%.
2019 2018
GBP GBP
Opening fair value of interest rate swaps at 1 January (803,963) (2,244,799)
Valuation (loss)/gain on interest rate swaps (1,416,653) 1,440,836
Closing fair value of interest rate swaps at 31 (2,220,616) (803,963)
December
The split of the swap liability is listed below.
2019 2018
GBP GBP
Current liabilities (644,465) (451,714)
Non-current liabilities (1,576,151) (352,249)
Interest rate swap with a start date of 28 April 2016 (2,220,616) (803,963)
maturing on 27 April 2023
15 OBLIGATIONS UNDER FINANCE LEASES
Minimum Interest Present
lease value of
payments minimum
lease
payments
2019 2019 2019
GBP GBP GBP
Less than one year 26,068 (24,592) 1,476
Between two and five years 104,271 (97,956) 6,315
More than five years 2,658,921 (1,762,591) 896,330
Total 2,789,260 (1,885,139) 904,121
The above table shows the present value of future lease payments in relation to
the ground lease payable at Hagley Road, Birmingham as required under IFRS 16.
A corresponding asset has been recognised and is part of Investment properties
as shown in note 7.
16 LEASE ANALYSIS
The Group has granted leases on its property portfolio. This property portfolio
as at 31 December 2018 had an average lease expiry of six years and two months.
Leases include clauses to enable periodic upward revision of the rental charge
according to prevailing market conditions. Some leases contain options to break
before the end of the lease term.
Future minimum rentals receivable under non-cancellable operating leases as at
31 December are as follows:
2019 2018
GBP GBP
Within one year 25,806,303 28,144,983
After one year, but not more than five years 79,140,128 75,726,933
More than five years 94,344,918 71,988,615
Total 199,291,349 175,860,531
The largest single tenant at the year end accounts for 4.5% (2018: 4.5%) of the
current annual passing rent.
17 SHARE CAPITAL
Under the Company's Articles of Incorporation, the Company may issue an
unlimited number of ordinary shares of 1 pence each, subject to issuance limits
set at the AGM each year. As at 31 December 2019 there were 405,865,419
ordinary shares of 1p each in issue (2018: 405,865,419). All ordinary shares
rank equally for dividends and distributions and carry one vote each. There are
no restrictions concerning the transfer of ordinary shares in the Company, no
special rights with regard to control attached to the ordinary shares, no
agreements between holders of ordinary shares regarding their transfer known to
the Company and no agreement which the Company is party
to that affects its control following a takeover bid.
Allotted, called up and fully paid:
2019 2018
GBP GBP
Opening balance 227,431,057 217,194,412
Shares issued - 10,314,000
Issue costs associated with new ordinary shares - (77,355)
Closing balance 227,431,057 227,431,057
In February 2020 the Company issued a further 1 million shares. As at 31 March
2020 the Company's issued share capital stood at 406,865,419.
2019 2018
Number of Number of
shares shares
Opening balance 405,865,419 394,865,419
Issued during the year - 11,000,000
Closing balance 405,865,419 405,865,419
18 RESERVES
The detailed movement of the below reserves for the years to 31 December 2019
and 31 December 2018 can be found in the Consolidated Statement of Changes in
Equity.
Retained earnings
This is a distributable reserve and represents the cumulative revenue earnings
of the Group less dividends paid to the Company's shareholders.
Capital reserves
This reserve represents realised gains and losses on disposed investment
properties and unrealised valuation gains and losses on investment properties
and cash flow hedges since the Company's launch.
Other distributable reserves
This reserve represents the share premium raised on launch of the Company which
was subsequently converted to a distributable reserve by special resolution
dated 4 December 2003. This balance has been reduced by the allocation of
preference share finance costs.
19 EARNINGS PER SHARE
Basic earnings per share amounts are calculated by dividing profit for the year
net of tax attributable to ordinary equity holders by the weighted average
number of ordinary shares outstanding during the year. As there are no dilutive
instruments outstanding, basic and diluted earnings per share are identical.
The earnings per share for the year is set out in the table below. In addition
one of the key metrics the Board considers is dividend cover. This is
calculated by dividing the net revenue earnings in the year (surplus for the
year net of tax excluding all capital items and the swaps breakage costs)
divided by the dividends payable in relation to the financial year. For 2019
this equated to a figure of 100% (2018: 89%).
The following reflects the income and share data used in the basic and diluted
earnings per share computations:
2019 2018
GBP GBP
Surplus for the year net of tax 16,144,131 30,946,377
2019 2018
GBP GBP
Weighted average number of ordinary shares outstanding 405,865,419 403,172,131
during the year
Earnings per ordinary share (p) 3.98 7.68
Surplus for the year excluding capital items 19,330,662 17,028,172
EPRA earnings per share (p) 4.76 4.22
20 DIVIDS AND PROPERTY INCOME DISTRIBUTION GROSS OF INCOME TAX
Non Property Income Distributions 2019 2018
GBP GBP
0.125p per ordinary share paid in March 2019 relating to the quarter ending 31 507,333 2,692,811
December 2018 (2018: 0.668p)
0.474p per ordinary share paid in November 2019 relating to the quarter ending 1,923,802 1,708,693
30 September 2019 (2018:0.421p)
Property Income Distributions
1.065p per ordinary share paid in March 2019 relating to the quarter ending 31 4,322,467 2,104,262
December 2018 (2018: 0.552p)
1.19p per ordinary share paid in May 2019 relating to the quarter ending 31 4,829,798 4,797,073
March 2019 (2018: 1.19p)
1.19p per ordinary share paid in August 2019 relating to the quarter ending 30 4,829,798 4,811,949
June 2019 (2019: 1.19p)
0.716p per ordinary share paid in November 2019 relating to the quarter ending 2,905,996 3,121,106
30 September 2019 (2017:0.769p)
19,319,194 19,235,894
On 31 March 2019 a dividend in respect of the quarter to 31 December 2019 of
1.19 pence per share was paid. This dividend was split as a property income
dividend of 0.629 pence per share and a non property income dividend of 0.561
pence per share.
21 RECONCILIATION OF CONSOLIDATED NAV TO PUBLISHED NAV
The NAV attributable to ordinary shares is published quarterly and is based on
the most recent valuation of the investment properties.
2019 2018
Number of ordinary shares at the reporting date 405,865,419 405,865,419
2019 2018
GBP GBP
Total equity per audited consolidated financial 364,794,564 369,386,280
statements
NAV per share (p) 89.9 91.0
22 RELATED PARTY DISCLOSURES
Directors' remuneration
The remuneration of key management personnel is detailed below which includes
pay as you earn tax and national insurance contributions. Further details on
the key management personnel can be found in the Directors' Remuneration Report
and the Corporate Governance Report in the Annual Report.
2019 2018
Robert Peto 44,000 42,000
Sally-Ann Farnon 17,850 37,500
Huw Evans 35,000 33,500
Mike Balfour 37,000 33,500
James Clifton-Brown 35,000 33,500
Jill May 28,135 -
Sarah Slater 3,455 -
Employers national insurance contributions 16,276 12,363
216,716 192,363
Directors expenses 10,560 9,935
227,276 202,298
Aberdeen Standard Fund Managers Limited, as the Manager of the Group from 10
December 2018, (previously Standard Life Investments (Corporate Funds)
Limited), received fees for their services as investment managers.
23 SEGMENTAL INFORMATION
The Board has considered the requirements of IFRS 8 'operating segments'. The
Board is of the view that the Group is engaged in a single segment of business,
being property investment and in one geographical area, the United Kingdom.
24 EVENTS AFTER THE BALANCE SHEET DATE
On 3 January 2020, the Company completed the sale of Bourne House, Staines for
GBP10.8 million.
On 4 February 2020 the Company issued 1 million shares under its blocklisting
authority.
Post Balance Sheet Event Disclosure
The outbreak of COVID-19 in 2020 has resulted in significant loss of life,
adversely impacted global commercial activity and contributed to significant
volatility in certain equity and debt markets. The global impact of the
outbreak evolved rapidly and on 11th March 2020, the World Health Organization
declared a pandemic. Many countries have reacted by instituting quarantines,
prohibitions on travel and the closure of offices, businesses, schools, retail
stores and other public venues. Businesses are also implementing similar
precautionary measures. Such measures, as well as the general uncertainty
surrounding the dangers and impact of COVID-19, are creating significant
disruption in supply chains and economic activity and are having a particularly
adverse impact on transportation, hospitality, tourism, entertainment and other
industries. The impact of COVID-19 has led to significant volatility and
declines in the global public equity markets and it is uncertain how long this
volatility will continue. As COVID-19 continues to spread, the potential
impacts, including a global, regional or other economic recession, are
increasingly uncertain and difficult to assess.
The outbreak of COVID-19 and the resulting financial and economic market
uncertainty could have a significant adverse impact on the Group, including the
fair value of its investments. The most significant conditions arising from
COVID-19 arose after the reporting period and as a result the Group considers
the emergence of the COVID-19 pandemic to be a non-adjusting post balance sheet
event. Any future impact on the Group is likely to be in connection with the
assessment of the fair value of investments and stability of rental income at
future dates. The Company announced a fall in like for like portfolio values of
4.9% as at 31 March 2020 with a NAV of 83.2p, a fall of 7.5% as announced on 12
May 2020. The independent valuation prepared by Knight Frank at 31 March 2020
also included a material uncertainty clause. At the date of reporting it is not
possible to quantify the future financial impact of COVID-19 on the Company's
investments or rental income with any degree of certainty. The Board will
continue to closely analyse and review the impact of COVID-19 on the Fund and
will take appropriate action as required.
This Annual Financial Report announcement is not the Company's statutory
accounts for the year ended 31 December 2018. The statutory accounts for the
year ended 31 December 2019 received an audit report which was unqualified.
The Annual Report will be posted to shareholders in June 2020 and additional
copies will be available from the Manager (Tel. 07717543309) or by download
from the Company's webpage (www.slipit.co.uk).
Please note that past performance is not necessarily a guide to the future and
that the value of investments and the income from them may fall as well as
rise. Investors may not get back the amount they originally invested.
All enquiries to:
The Company Secretary
Northern Trust International Fund Administration Services (Guernsey) Limited
Trafalgar Court
Les Banques
St Peter Port
Guernsey
GY1 3QL
Tel: 01481 745001
Fax: 01481 745051
For further information:-
Jason Baggaley - Real Estate Fund Manager, Aberdeen Standard Investments
Tel: 07801039463 or jason.baggaley@aberdeenstandard.com
Oli Lord - Deputy Fund Manager, Aberdeen Standard Investments Tel: 07557938803 or oli.lord@aberdeenstandard.com Graeme McDonald - Senior Fund Control Manager, Aberdeen Standard Investments Tel: 07717543309 or graeme.mcdonald@aberdeenstandard.com END END
(END) Dow Jones Newswires
May 29, 2020 06:24 ET (10:24 GMT)
1 Year Standard Life Investment... Chart |
1 Month Standard Life Investment... Chart |
It looks like you are not logged in. Click the button below to log in and keep track of your recent history.
Support: +44 (0) 203 8794 460 | support@advfn.com
By accessing the services available at ADVFN you are agreeing to be bound by ADVFN's Terms & Conditions
