UK COMMERCIAL PROPERTY REIT LIMITED
21 April 2016
UK Commercial Property Trust Limited
("UKCPT or the "Company")
ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 DECEMBER 2015
UK Commercial Property Trust Limited (LSE: UKCM), the largest Guernsey based,
UK focused commercial property investment company, announces its final results
for the year ended 31 December 2015.
Financial Highlights
* 4.5% rise in NAV per share to 86.7p as at 31 December 2015 (2014 - 83.0p),
driven by capital value growth in the portfolio and the successful
implementation of asset management initiatives;
* NAV total return of 9.1%, outperforming the FTSE All-Share Index of 1.0%
and the ten year gilt index of 0.8% as commercial real estate continued to
be the strongest performer of all the main asset classes in 2015;
* Over the longer term the Company continues to deliver a strong performance
with the NAV total return of 57.6% since inception ahead of both the MSCI
IPD Balanced Monthly & Quarterly Funds benchmark ("IPD benchmark") of 48.4%
and the FTSE REIT index of -8.4%;
* Following the successful refinancing in April 2015, gross gearing is 18.2%
at a blended rate of 2.89% as at 31 December 2015, both rates being the
lowest in the Company's Guernsey peer group;
* Significant resources remain available for new investment and further
portfolio repositioning with £34 million in uncommitted cash, as well as a
£50 million revolving credit facility agreed as part of the debt
refinancing referred to above;
* Sustainable dividend of 3.68p per share paid in relation to the year ending
31 December 2015, resulting in a yield of 4.3%, higher than the FTSE REIT
Index (3.0%) and the FTSE All-Share Index (3.7%)
Property Highlights
* Portfolio valued at £1.32 billion at the 31 December 2015 reflecting a 4.1%
capital return for the year, with increases across all the main sectors but
particularly in offices and industrials;
* Portfolio total return of 9.2% in the year (IPD benchmark 12.7%) and
significant progress made in repositioning the portfolio, with assets to
the value of over £300 million traded in the year;
* £164 million of sales, including two retail assets (Weston-super-Mare and
Kensington High street), one office asset (Pall Mall Court, Manchester) and
one industrial asset (Brackmills, Northampton) sold at above the most
recent valuations, reducing exposure to the retail sector and aimed at
removing future underperformance;
* In total £145 million of assets acquired including Eldon House, a City of
London office building, an industrial estate at Ventura Park, Radlett on
the M25, a city centre office building in Newcastle and a cinema leisure
complex in Glasgow, boosting the income profile of the Company while also
providing the opportunity for future asset management;
* A number of successful asset management initiatives undertaken during the
year including:
* Negotiated lease surrender of the ground and basement floors at Arlington
Street in London's St James's and subsequent re-letting to the Skarstedt
Gallery at a rent of £350,000 pa, significantly ahead of the former rental
income for the unit;
* Completed the redevelopment of surplus car park spaces at Junction 27,
Leeds, into a new restaurant let to Zizzi on a 20 year lease adding an
average £140,000 per annum to the rent roll over 5 years after lease
incentives and a profit of £1million;
* Achieved full occupancy at the Newton's Court industrial estate in Dartford
having secured new lettings ahead of ERV to Steinhoff UK Group and
Worldstores Ltd helping to increase value by over 8.5% in 2015;
* Renewal of the Adidas store lease in Market Street, Manchester, for a
further 10 years delivering capital growth of 17% (£1.2 million);
* The letting of a 30,300 sq ft (net sales area) store over two levels at
the Charles Darwin Shopping Centre, Shrewsbury to international fashion
retailer, Primark. The confirmation of the centre's new anchor tenant
triggers a £13 million investment programme by the Company over the next
year that will include a fit out of the new store and transform the
shopping centre's public areas with new floors, ceilings and lighting;
* Void rate of 2.8% at 31 December 2015 (2.6% in 2014), significantly below
the benchmark figure of 6.7%;
* Continuing strong rent collection rates of 98% within 28 days highlighting
the continued strength of tenant covenants within the Company's ownership.
Commenting on the results, Christopher Hill, Chairman of UKCPT, said:
"UKCPT delivered steady growth in 2015 and a significant amount has been
achieved in terms of the repositioning of the portfolio in preparation of the
next phase of the cycle with the Company's NAV total return outperforming both
the FTSE All-Share and gilt indices. As we reach the tenth anniversary of
UKCPT's inception, it is worth highlighting that the Company has delivered an
NAV total return of 57.6%, ahead of both the IPD Benchmark and the FTSE
All-Share REIT index, reflecting the long term investment opportunity that
UKCPT presents."
Will Fulton, Fund Manager at Standard Life Investments Limited (UKCPT's
Investment Manager) added:
""The progress we have made with the portfolio strategy this year is
gratifying, especially given that current trends are showing a clear move away
from yield compression and the fundamental attributes of property are
reasserting themselves. Income and income growth are likely to play a more
prominent role in returns and, in this context, UKCPT is well positioned to
meet its objective of providing shareholders with an attractive level of
income, together with the potential for capital and income growth. We have
funds at our disposal for further portfolio improvements and we expect to
continue this activity in 2016."
For further information:
Will Fulton/Graeme McDonald, Standard Life Investments
Tel: 0131 245 3272/0131 245 2799/0131 245 3151
Richard Sunderland /Claire Turvey/Clare Glynn, FTI Consulting
Tel: 020 3727 1000
PERFORMANCE SUMMARY
Capital Values & Gearing 31 December 31 December % Change
2015 2014
Total assets less current liabilities (excl 1,375,032 1,316,850 4.4
Bank loan & swap) (£'000)
Net asset value per share (p) 86.7 83.0 4.5
Ordinary Share Price (p) 85.25 88.20 (3.3)
(Discount)/Premium to net asset value (%) (1.7) 6.3
Gearing (%): Gross* 18.2 17.5
Net** 13.4 13.3
Total Return % 1 year 3 year 5 year Since
Inception
(Sep 2006)
NAV*** 9.1 47.9 53.6 57.6
Share Price*** 0.8 52.5 40.7 51.8
MSCI Investment Property Databank 12.7 46.6 61.4 48.4
(IPD) Balanced Monthly & Quarterly
Funds Benchmark
FTSE Real Estate Investment Trusts 10.6 63.6 94.8 (8.4)
Index
FTSE All-Share Index 1.0 23.4 33.8 56.2
31 December 31 December
Earnings & Dividends 2015 2014
Dividends paid per ordinary share 3.68 4.0725
(p)
Dividend Yield (%)**** 4.3 4.2
IPD Benchmark Yield (%) 5.0 5.3
FTSE Real Estate Investment Trusts 3.0 3.0
("REIT) Index Yield (%)
FTSE All-Share Index Yield (%) 3.7 3.4
Ongoing Charges
(as a % of average net assets) † 1.5 1.5
Void (%) 2.8 2.6
European Public Real Estate Association ("EPRA") NAV at 31 December 2015
(excluding swap asset) - 86.7p (2014 - 83.7p).
* Calculated as gross borrowings (excl swap valuation) divided by total
assets less current liabilities (excl borrowings and swaps).
** Calculated as net borrowings (gross borrowings less cash, excl swap
valuation) divided by total assets less current liabilities (excl cash,
borrowings and swaps).
*** Assumes re-investment of dividends excluding transaction costs.
**** Based on an annual dividend of 3.68p per share.
† Annualised costs including direct property costs expressed as % of
average net assets. Sources: Standard Life Investments, MSCI Investment
Property Databank ("IPD")
Chairman's Statement
I am pleased to report that your Company continued to deliver steady growth in
2015 as the UK commercial property market index again outperformed the major
equity and bond indices. UKCPT delivered a NAV total return of 9.1% over the 12
month period, outperforming the FTSE All- Share Index return of 1.0% and the
ten year gilt index of 0.8%. While this return from UKCPT was behind that of
the IPD benchmark return, it was achieved against a background of significant
ongoing portfolio repositioning, with the inevitable 'one-off' costs. The total
value of assets traded was over £300 million resulting in a portfolio now
valued at £1.32 billion.
Economic and Property Market Review
The performance of the UK economy in 2015 was unspectacular with GDP growing by
2.2%. However, compared to the other major developed economies, this was a good
performance with only the United States bettering this figure. As in previous
years, UK growth was predominantly fuelled by the services sector with the
economy showing little sign of rebalancing away from the consumer.
One noticeable theme throughout the year was a shift in the risks faced by the
economy both in the UK and worldwide. Arguably, the economy was held back in
the first few months of 2015 by both the uncertainty surrounding the outcome of
the UK general election and the flux in the Eurozone as Greece teetered on the
brink of "Grexit". Following a decisive UK election result and a deal that
avoided a Greek exit from the Euro, risk concerns began to focus on Emerging
Markets, reflecting anxiety over the strength of the Chinese economy and the
dramatic fall in commodity prices which has continued into 2016. These worries
resulted in unusual movements in the Chinese markets and sharp volatility in
financial markets more generally. Combined with the uncertainty caused by the
EU referendum in June 2016, growth in the UK economy is forecast to remain
unexceptional this year at 2.2% according to current International Monetary
Fund estimates. One benefit of the continued risks facing the economy is that
the expectation for any interest rate rise has moved out considerably as
inflation has ceased to be a concern for the time being.
As with the overall economy the UK commercial property market continued to grow
in the year, albeit with returns moderating as the year went on. Over the
twelve months to 31 December 2015 All Property, as measured by the MSCI IPD
Quarterly benchmark, recorded a 12.7% total return compared to 17.4% in 2014.
This moderation in returns was attributable to a slowdown in the rate of
capital growth as yield compression, while still evident in some
sectors, became less prevalent and rental growth became more of a contributor
to returns, something that should benefit the Company.
Significant Property Transactions
There was significant turnover in the portfolio in 2015. Over the course of the
year, three retail properties were sold in Weston- super-Mare, Brighton and
Kensington High Street, London. In addition, the Company also sold a Manchester
office and an industrial unit in Brackmills, the latter as part of a swap
transaction. In total these sales were above their most recent valuation. The
majority of cash raised from these sales was deployed into the following
properties:
* Eldon Street, a City of London office purchased for £27.5 million* which
provides the Company with exposure to the vibrant City office market and a
property in which some successful asset management has already been
achieved by our Investment Manager.
* Ventura Park, Radlett, an industrial estate purchased for £67.1 million*
within close proximity of the M25 and offering opportunities for rental
growth.
* Central Square office complex purchased for £21.6 million* in Newcastle
upon Tyne, located in the city centre and providing a secure income stream
with a good tenant base.
* Cineworld leisure complex, Glasgow purchased for £29.2 million*; this is
one of the UK's busiest cinemas with a strong anchor tenant on a long lease
and the property also offers asset management opportunities.
*excluding costs & stamp duty
This historically high turnover of assets was undertaken in line with the
portfolio strategy of removing assets that had limited future return prospects
and reducing exposure to the retail sector, which is now below benchmark. The
assets that have been purchased will provide strong, sustainable income returns
but also offer the opportunity for capital growth from successful asset
management initiatives in the future.
Further details on the portfolio can be found in the Investment Manager's
report
Share price
The share price at the year end stood at 85.25p resulting in a share price
total return of 0.8% in the year. In line with the peer group and the wider
listed Real Estate sector, the shares now trade at a discount to NAV of 3.7%
(as at 31 March 2016). While this is disappointing in the short term, since
inception the Company's share price total return of 51.8% has outperformed the
MSCI benchmark (48.4%) and the FTSE REIT Index (-8.4%), underlining the
attractiveness of the Company as a longer term investment.
Borrowing
Following the refinancing in April 2015, the Company continues to have both the
lowest gearing levels and cost of debt in its Guernsey peer group. As at 31
December 2015 gross gearing stood at a prudent 18.2% (net gearing 13.4%) with
an attractive blended rate of interest of 2.89%. In addition, the Company still
has the ability to utilise a £50 million revolving credit facility. With the
current £34 million uncommitted cash, the Company retains significant firepower
for the Investment Manager to actively consider further investment
opportunities.
Dividends
The Company declared and paid the following dividends during the year:
Payment Date (2015) Dividend per share (p)
4th interim for prior Feb 0.92
period
1st interim May 0.92
2nd interim Aug 0.92
3rd interim Nov 0.92
Total 3.68
A fourth interim dividend of 0.92p was paid on 26 February 2016.
Based on an annual dividend of 3.68p and the share price at 31 March 2016 of
83.45p, the Company's shares produce a dividend yield of 4.4% which remains
attractive when compared to equities (3.8%) and also the FTSE REIT Index
(3.3%). Importantly, this yield is underpinned by a prime portfolio of UK
commercial property that has strong income characteristics and a tenant base
which compares favourably to the benchmark.
Base Erosion and Profit Shifting
The Company notes the recent announcement in the 2016 UK Budget proposing to
limit interest deductibility, which was driven by the OECD guidance published
in October 2015 on Base Erosion and Profit Shifting. This subject may be
relevant to UKCPT as a result of the inter-company loans in place between its
different subsidiaries. Whilst full details of the proposals have yet to be
published, the Board along with its advisers is currently reviewing how this
will impact the future taxation position of the Company, although it should be
highlighted that the Company has
significant tax losses to utilise should they be required. As previously stated
the Board continues to keep the possibility of REIT conversion under review.
Investment Manager
Following the takeover of Ignis Asset Management by Standard Life plc in 2014,
the Company formally appointed Standard Life Investments (Corporate Funds)
Limited as the Company's Investment Manager and Alternative Investment Fund
Manager on 29 December 2015 on existing terms. As previously indicated, this
appointment will not impact the full protection that shareholders currently
receive under the Alternative Investment Fund Managers Directive.
Board Changes
At the end of 2015, the Board had five directors, three of whom had held office
since the establishment of the Company in September 2006, with the other two
directors joining the Board during 2013. The Directors have carefully
considered the appropriate balance between experience of the Company and the
need to refresh the Board from time to time; continuity is important and
succession planning for a relatively young company like UKCPT needs to
recognise that shareholders will not be well-served if a large proportion of
the Board retires at the same time. Bearing this in mind, the Board has
established a policy of renewal whereby directors retired at the AGMs of 2013
and 2014 and new directors with appropriate skills were selected by an
independent search.
As recently announced, having led the Company as Chairman since its launch, I
have decided to step down at the Annual General Meeting in June 2016. It is the
intention of the Board to appoint Mr Andrew Wilson, currently the Company's
Senior Independent Director, to become Chairman upon my departure. His
knowledge of the Company and of the property sector generally, combined with
his leadership and energy, equip him particularly well for this role.
I am pleased to report the appointment of Mr Michael Ayre to the Board since
the year end, taking the number of directors up to six for a short time. Mr
Ayre, a Guernsey resident, is a qualified accountant and the skills he brings
to the Board, particularly in relation to taxation matters, will complement the
existing skill set of the Board.
The Board intend to continue with a phased programme to replace the long
serving directors over the next few years; this ensures a gradual refreshment
of the Board without sudden loss of collective experience.
Investment Outlook
Total returns for UK real estate appear to have peaked for this cycle and it is
anticipated that more normalised returns are in prospect for the next few
years. Further, income is likely to be the main component of returns relative
to capital growth which has been a key element of returns over the past few
years. Despite heightened global uncertainty, consensus projections for UK
economic growth remain relatively firm and provide a reasonable backdrop for
the UK commercial real estate outlook. Relative to longer term government
bonds, the differential in yield between real estate and other asset classes
remains significant by historic standards especially with the diminishing
prospect of interest rate increases in the near future. The sector remains
attractive from a fundamental point of view with robust economic drivers and a
relatively limited pipeline of new developments. Our Investment
Manager's forecasts point to positive total returns for investors on a three
year hold period due to the elevated yield and improving income growth
prospects.
If, as expected, income becomes the main driver of performance then the
Company's portfolio, which is geared towards income generation and underpinned
by a strong tenant base and low void rate, should continue to provide
shareholders with relatively attractive returns. Combined with a low cost of
debt, significant resources still available to invest and a portfolio that
offers opportunities for successful asset management, your Company is well
positioned to deliver attractive, income focused returns in the next phase of
the real estate cycle.
Christopher M.W. Hill
Chairman
20 April 2016
Strategic Overview
The purpose of the Strategic Overview is to provide shareholders with details
of the Company's strategy and business model, as well as the principal risks
and uncertainties faced by the Company.
Investment Strategy
The Company's investment strategy is set out in its investment objective and
policy below.
The Company's investment objective is to provide ordinary shareholders with an
attractive level of income together with the potential for capital and income
growth from investing in a diversified UK commercial property portfolio.
Investment risks to the Company and its subsidiaries (the "Group") are managed
by investing in a diversified portfolio of freehold and long leasehold UK
commercial properties. The Group invests in income producing assets in four
commercial property sectors: office, retail, industrial and leisure. The Group
has not set any maximum geographic exposures within the UK nor any maximum
weighting limits in the principal property sectors. No single property shall,
however, exceed at the time of acquisition 15 per cent. of the gross assets of
the Group.
The Group is currently permitted to invest up to 15 per cent. of its total
assets in indirect property funds including in other listed investment
companies. The Group is permitted to invest cash, held by it for working
capital purposes and awaiting investment, in cash deposits, gilts and money
market funds.
At an EGM of the Company on 28 April 2011 the shareholders of the Company
approved a revised gearing policy of the Group amended to read as follows:
"Gearing, calculated as borrowings as a percentage of the Group's gross assets,
may not exceed 65 per cent. The Board intends that borrowings of the Group at
the time of draw down will not exceed 25 per cent. of the Total Assets of the
Group. The Board receives recommendations on gearing levels from the Investment
Manager and is responsible for setting the gearing range within which the
Investment Manager may operate".
The Group's performance in meeting its objective is measured against key
performance indicators as set out in the Performance Summary. A review of the
Group's returns during the year, the position of the Group at the end of the
year, and the outlook for the coming year is contained in the Chairman's
Statement and the Investment Manager Review.
Board
The Board of Directors is responsible for the overall stewardship of the
Company, including investment and dividend policies, corporate strategy,
corporate governance, and risk management. Biographical details of the
Directors, all of whom are non- executive, can be found in the annual report
and indicate their range of property, investment, commercial and professional
experience. The Company has no executive Directors or employees.
Management of Assets and Shareholder Value
The Board has contractually delegated the management of the investment
portfolio and other services to Standard Life Investments (Corporate Funds)
Limited.
The Company invests in properties which the Investment Manager believes will
generate a combination of long-term growth in income and capital for
shareholders. Investment decisions are based on analysis of, amongst other
things, prospects for future capital growth, sector and geographic prospects,
tenant covenant strength, lease length and initial yield.
Investment risks are spread through investing in a range of geographical areas
and sectors, and through letting properties to low risk tenants. A list of all
the properties held as at 31 December 2015 is contained later on and further
analysis can be found in the Investment Manager Review. At each Board meeting,
the Board receives a detailed portfolio, financial, risk and shareholder
presentation from the Investment Manager together with a comprehensive analysis
of the performance of the portfolio during the reporting period.
The Board and the Investment Manager recognise the importance of managing the
premium/discount of share price to net asset value in enhancing shareholder
value. One aspect of this involves appropriate communication to gauge investor
sentiment. The Investment Manager meets with current and potential new
shareholders, and with stockbroking analysts who cover the investment company
sector, on a regular basis. In addition, communication of quarterly portfolio
information is provided through the Company's website, www.ukcpt.co.uk, and the
Company also utilises a public relations agency to enhance its profile among
investors.
Borrowings
As at 31 December 2015 the Group had total borrowing facilities drawn of £250
million, representing a gearing level of 18.2 per cent. of the year end total
assets with a blended fixed interest rate of 2.89% per annum.
In April 2015, the Company repaid its £80 million facility with Lloyds and
entered into a £100 million secured twelve year loan with Cornerstone Real
Estate Advisors Europe LLP at an all-in rate of 3.03%. In addition, the Company
obtained a £50 million revolving credit facility from Barclays at a margin of
1.5% over 1 month LIBOR, maturing in April 2020, and extended its existing £150
million facility with Barclays to April 2020 with the margin reduced to 1.5%.
Key Performance Indicators
The Company's benchmark is the MSCI Investment Property Databank (IPD) Monthly
and Quarterly Funds. This benchmark incorporates all monthly and quarterly
valued property funds and the Board believes this is the most appropriate
measure to compare the performance of a quarterly valued property investment
Company with a balanced portfolio.
The Board uses a number of performance measures to assess the Company's success
in meeting its objectives. The key performance indicators are as follows:
* Net asset value and share price total return against the IPD
benchmark and other selected comparators.
* Premium/(Discount) of share price to net asset value.
* Dividend per share and dividend yield.
* Ongoing Charges.
These indicators for the year ended 31 December 2015 are set out in the
Performance Summary.
In addition the Board considers specific property KPIs such as void rates, rent
collection levels and weighted average lease length on a regular basis.
Principal Risks and Risk Uncertainties
The Board confirms that it frequently carries out a robust assessment of the
principal risks facing the Company. These risks and how they are mitigated are
set out below.
The Company's assets consist of direct investments in UK commercial property.
Its principal risks are therefore related to the commercial property market in
general, but also to the particular circumstances of the properties in which it
is invested and their tenants. The Manager seeks to mitigate these risks
through continual review of the portfolio utilising research produced by the
Manager's in-house research team, detailed reports on the performance of the
portfolio, setting of annual asset plans for each asset in the portfolio and
also through asset management initiatives. All of the properties in the
portfolio are insured, providing protection against risks to the properties and
also protection in case of injury to third parties in relation to the
properties.
The Board has also identified a number of specific risks that are reviewed at
each quarterly Board meeting. These are as follows:
* The Company and its objectives become unattractive to investors which may
lead to a persistent discount and a continuation vote which may threaten
the future solvency and liquidity of the Group. This is mitigated through
regular performance reviews of the Company's portfolio, contact with
shareholders, a regular review of share price performance and the level of
discount at which the shares trade to NAV and regular meetings with the
Company's broker to discuss these points and address any issues that arise.
At an Extraordinary General Meeting ("EGM") held on 31 March 2015
shareholders approved the continuation of the Company by approving a
special resolution to amend the Company's Articles of Association to
replace the previous continuation vote with a vote in 2020 and at least
seven yearly thereafter.
* Company indebtedness - The largest liabilities the Company has are the loan
facilities. The Board recognises that being unable to service or indeed
repay these debts would threaten the future solvency and liquidity of the
Group. This risk is mitigated by two factors. First of all the Investment
Policy of the Company limits gearing to 25 per cent. of total assets at the
time of draw down. This low gearing limit means it is expected that,
barring any unforeseen circumstances, the Group will have adequate assets
to service and repay the debt if required. Secondly, the underlying assets
themselves are mainly invested in a diversified, prime UK commercial
property portfolio underpinned by a strong tenant base. This means that,
even in a significant economic downturn, the Board is confident that the
assets will still be of sufficient value and generate sufficient income to
meet future liabilities.
* Tenant failure or inability to let property which would impact future
performance. Due diligence work on potential tenants is undertaken before
entering into new lease agreements. In addition, tenants are kept under
constant review through regular contact and various reports both from
managing agents and from the Manager's own reporting processes. Finally,
contingency plans are put in place at units that have tenants that are
believed to be in financial trouble.
* Taxation - The Group is currently structured in a tax efficient method
which results in rental income the Group generates being offset by expenses
and internal loan interest. The terms on the internal loan notes, namely
interest rates and loan to value ratios, are crucial in preserving the tax
efficiency of the group and any material change in these could pose a risk
to future performance. To mitigate this risk the Group has agreed the terms
of the vast majority of the loan notes in place with HMRC and also goes
through a rigorous process when setting new loan notes to ensure they
represent commercially available terms. The majority of these loan notes
are due to expire in September 2016 and sensitivity analysis has been
performed on the impact on the Group should these terms materially change
bearing in mind that the Company currently has over £33 million of
unutilised tax losses. The impact on the Company's performance will depend
on the terms that these internal loan notes can be re-financed. Linked to
this is the recently published OECD guidance relating to base erosion and
profit shifting ("BEPS"). This subject may be relevant to the Group as a
result of the inter-company loans the Group has in place between
subsidiaries. With any UK legislation scheduled for 2017, it is too early
to be definitive as to the impact, if any, that BEPS will have on the Group
but it should be noted as a potential risk to future returns. No deferred
tax asset has been recognised on the losses mentioned above as it is not
certain that these losses will be utilised.
Other risks faced by the Company include the following:
* Economic - inflation or deflation, economic recessions and movements in
interest rates could affect property valuations, and its bank borrowings.
* Strategic - incorrect strategy, including sector and property allocation
and use of gearing, could lead to poor returns for shareholders.
* Regulatory - breach of regulatory rules could lead to suspension of the
Company's London Stock Exchange Listing, financial penalties or a qualified
audit report.
* Management and control - changes that cause the management and control of
the Company to be exercised in the United Kingdom could lead to the Company
becoming liable to United Kingdom taxation on income and capital gains.
* 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 a loss of shareholders' confidence.
The Board seeks to mitigate and manage these risks through continual review,
policy setting and enforcement of contractual obligations. It also regularly
monitors the investment environment and the management of the Company's
property portfolio and levels of gearing, and applies the principles detailed
in the UK Corporate Governance Code. Details of the Company's internal controls
are described in more detail in the Corporate Governance Report.
Viability Statement
The Board considers viability as part of its ongoing programme of monitoring
risk. The Board considers five years to be a reasonable time horizon over which
to review the continuing viability of the Company, although it does have regard
to viability over the longer term, in particular to key points outside this
time frame, such as the due dates for the repayment of long-term debt.
The Board has considered the nature of the Company's assets and liabilities and
associated cash flows and has determined that five years is the maximum
timescale over which the performance of the Company can be forecast with a
material degree of accuracy and so is an appropriate period over which to
consider the Company's viability.
The Board has also carried out a robust assessment of the principal risks faced
by the Company including periodic continuation votes. The main risks which the
Board consider will affect the business model, future performance, solvency,
and liquidity are ongoing discounts leading to a continuation vote, company
indebtedness, tenant failure and taxation. The Board takes any potential risks
to the ongoing success of the Company, and its ability to perform, very
seriously and works hard to ensure that risks are kept to a minimum at all
times.
In assessing the Company's viability, the Board has carried out thorough
reviews of the following:
* Detailed NAV, cash resources and income forecasts, prepared by the
Company's Manager, for a five year period under both normal and stressed
conditions;
* The Company'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 and;
* The valuation and liquidity of the Company's property portfolio, the
Manager's portfolio strategy for the future and the market outlook.
Based on the results of the analysis outlined above, the Board has a reasonable
expectation, assuming the continuation vote in 2020 is passed, that the Company
will be able to continue in operation and meet its liabilities as they fall due
over the five year period of its assessment.
Environmental, Ethical & Bribery Policy
The Investment Manager acquires, develops and manages properties on behalf of
the Company. It is recognised that these activities have both direct and
indirect environmental and social impacts. The Board has adopted the Investment
Manager's own Sustainable Real Estate Investments Policy and associated
Environmental Management Systems and are committed to environmental management
in all phases of an asset's cycle - from acquisition through demolition,
redevelopment and operational management to disposal. The focus is on energy
conservation, mitigating greenhouse gases emissions, maximising waste recycling
and water conservation. To facilitate this, the Manager works in partnership
with contractors, suppliers, tenants and consultants to minimise those impacts,
seeking continuous improvements in environmental performance and conducting
regular reviews.
The Company was awarded a Green Star ranking from the Global Real Estate
Sustainability Benchmark 2015.
In conjunction with these environmental principles the Company has a health and
safety policy which demonstrates commitment to providing safe and secure
buildings that promote a healthy working/customer experience that supports a
healthy lifestyle. The Company, through the Manager, manages and controls
health and safety risks systematically as any other critical business activity
using technologically advanced systems and environmentally protective materials
and equipment. The aim is to achieve a health and safety performance the
Company can be proud of and allow the Company to earn the confidence and trust
of tenants, customers, employees, shareholders and society at large. In
addition the Board has adopted an ethical policy which highlights the need for
ethical considerations to be considered in the acquisition and management of
both new and existing properties.
It is the Company's Policy to prohibit and expressly forbid the offering,
giving or receiving of a bribe in any circumstances. This includes those
instances where it may be perceived that a payment, given or received, may be a
bribe. The Company has adopted this Anti-Bribery and Corruption Policy to
ensure robust compliance with The UK Bribery Act 2010. The Company has made
relevant enquiries of its Manager and has received assurances that appropriate
anti-bribery and corruption policies have been formulated and communicated to
their employees.
The Strategic Report of the Company comprises the Financial and Property
Highlights, Performance Summary, Chairman's Statement, Strategic Overview,
Investment Manager Review and Portfolio Information.
Approved by the Board on 20 April 2016.
Christopher M.W. Hill
Director
Ken McCullagh
Director
Investment Manager Review
Market Review
The UK economic cycle continued to mature in 2015 with the economy recording
reasonable GDP growth and at a level which, albeit marginally above trend,
remains in a relatively strong position compared to many other developed
countries. However, increased uncertainty in the global economy has latterly
slowed the rate of GDP quarterly growth. Despite the continuation of low
interest rates, falling unemployment and reasonable wage growth, the momentum
of the recovery has softened due to the erosion of spare capacity. Weaker
global growth is also impacting the UK's export capability. Households,
however, have enjoyed the lower inflation environment as well as having a
stronger pound against the Euro, with consumer spending up a significant 3% in
2015.
For UK real estate, despite the inward yield movement, pricing remains
favourable on a relative basis. At 31 December 2015 the IPD initial yield for
real estate was 4.8% which compared favourably to the yield on ten year
government bonds of 2.0%, a margin of 280 basis points against this proxy for a
risk-free rate. Recent sharpening of market pricing in gilts has widened this
yield gap even further.
UK listed real estate investment trusts generated total returns of 10.6% in
2015, significantly outperforming the FTSE All Share, which barely returned 1%
over the same period. Despite the heightened volatility emanating from the
equity markets since last year, the expectation that interest rates will remain
lower for longer is likely to ensure the relative margin remains at
historically high levels for some time yet. Our main concern would be if
financial markets were signalling a downturn in economic activity, which would
impact real estate tenant demand and ultimately, therefore, income. While we
remain positive on the return outlook, volatility is increasing. The upward
progression in rents has, however, continued, with rental growth picking up
over the course of 2015. Offices continue to lead, with Retail lagging at a
broader sector level. Industrial estates in London and Offices in non-core
London locations experienced the most significant rental growth in 2015.
Encouragingly though for good Retail locations - where format is also important
- rents are improving.
In a world of low yields on a range of assets, real estate remains very
attractive. This is reflected in £71 billion of transactions recorded in 2015
by Property Data, which is significantly above the level of £63 billion
achieved in 2014. Central London Offices continued to be the main focus,
attracting nearly 30% of money invested, although leisure and other alternative
assets, predominantly student accommodation, have increased their share of the
market with large portfolio transactions having taken place over the course of
the year. Overseas investors and UK institutions remained the driving force in
2015, investing £35billion and £15billion respectively.
Finally, after the year end and as a surprise to the market, the Government
effectively reduced the value of commercial property in England and Wales by 1%
when it raised the cost of purchase by 1% through an increase in the rate of
Stamp Duty Land Tax in the March 2016 Budget.
Market Performance Review
The IPD benchmark delivered an impressive total return of 12.7% in 2015.
Capital growth at 7.5%, driven by yield compression, was the principal
component of return, with income adding a further 4.9%.
In response to the improved economic outlook, rental value growth gained
momentum over the year, reaching a broad level of 3.7% and helping to fuel
total returns. As has been the case for the last few years, Central London
Office markets were the strongest performing sub-sector during 2015, delivering
a 19.1% total return (11.1% rental growth), followed by South East Industrials
at 17.3% (5.9% rental growth), and South East Offices at 17.2% (6.9% rental
growth).
Regionally, Office rental growth picked up at 3.1% for 2015, contributing to a
total return of 12.2%. Against a backdrop of increased demand and decreasing
supply, rental growth in regional industrials was an encouraging 3.3% (15.0%
total return).
Ongoing structural change within the Retail sector is reflected in a mixed
picture for rental growth and total return. Only South East High Street Retail
(including Central London) recorded any significant rental growth (2.9%) but
saw a total return of 11.5% as yields compressed; Retail Warehouses generated a
total return of 7.5% whilst Shopping Centres and rest of UK High Street
delivered 7.9% and 6.4% respectively, both experiencing marginally negative
rental growth.
Portfolio Performance
The Company's direct property portfolio provided a total return of 9.2% for the
year 2015. Whilst positive compared to many other asset classes it was somewhat
disappointing when compared to its IPD benchmark total return of 12.7%. The
Company's income return matched the benchmark at 4.9%, but capital growth
lagged at 4.1% versus 7.5%. Significant portfolio repositioning and ongoing
asset management activity is underway aimed at improving performance as
outlined below. Projecting forward to a period of slowing capital growth
across the whole market, the more prime nature of the Company's portfolio
should stand it in good stead to deliver sustainable income and capital
appreciation through active asset management.
All sectors of the portfolio increased in value. The external portfolio
valuation as at 31 December 2015 was £1.32 billion (excluding lease incentive
adjustment). The Company's relatively small exposure to High Street Retail
outside the South East was its highest performing sub-sector. With more weight
in the portfolio, the second best performers were the Company's clutch of South
East Industrial assets, where the Company has benefited from its strategy of
increasing exposure to that sector over the past few years.
The Company's Office investments, previously its strongest performing sector,
fell behind its Industrial exposure as capital growth tailed off, combined with
a lower income component from the London Office portfolio. We reduced the
Company's Retail exposure throughout the year and, whilst this sector has
lagged, the value of the assets retained has grown with a positive impact from
active asset management initiatives at, for example, St. Georges Retail Park,
Leicester, and Market Street, Manchester.
The table below sets out the components of total return of the Company and of
the benchmark in each sector for the year to 31 December 2015:
Total Return Income Return Capital Growth
Fund Benchmark Fund Benchmark Fund Benchmark
% % % % % %
Industrials 12.8 16.3 5.1 5.3 7.4 10.5
Offices 10.5 17.0 4.6 4.2 5.7 12.3
Retail 6.9 8.3 5.1 5.2 1.7 2.9
Other 6.6 12.2 4.6 5.2 2.0 6.7
Commercial
(incl
leisure)
Total 9.2 12.7 4.9 4.9 4.1 7.5
Source: IPD, assumes reinvestment of income in capital gain/loss
Industrial
In common with the wider market, the Industrial sector was the Company's
strongest performer in 2015. For some time, we have recognised the strong
income characteristics of the sector and, in recent times, this view has been
supported by other investors. With an imbalance between strong demand and
limited supply, both in the investment market and on the ground for tenants,
yields have compressed further. Within occupier markets, strong demand,
particularly from online businesses, led to healthy rental growth as well as to
the return, in certain locations, of speculative development.
The Company has a good mix of predominantly London focused "big box"
distribution warehouses and multi-let industrial estates which experienced
early-cycle capital growth given the prime nature of the assets. This helped to
deliver a total return of 12.8%. However, this is lower than the benchmark
figure of 16.3% which was driven by significant yield compression over
secondary assets. There are a number of asset management initiatives, notably
at Sunbury, Wembley (Neasden) and Lutterworth, which should deliver value when
completed.
Office
The Company has a well located portfolio of Office investments but performance
has been restrained by its lack of exposure to the dynamic markets of the City
of London and the South East and by the performance of its London West End
portfolio. In the West End, capital growth significantly lagged the benchmark
(6.3% v 14.7%) due to a lack of realised rental growth to which to apply
strongly compressed West End yields. Business plans are in hand for 2016 aimed
at redressing this position, particularly at Craven House, Carnaby Street and 6
Arlington Street, opposite the Ritz.
Outside London and the South East, the Company's Office portfolio outperformed
the benchmark.
Retail
Although the prospects for some elements of the Retail sector remain uncertain,
improving market sentiment and a far more positive, yet still polarised,
occupier environment was reflected in a stabilisation of rents and reduction of
voids within many principal locations in 2015. This provided a platform for an
improved performance from the Company's Retail portfolio.
This sector was again the greatest source of divergence across subsectors, with
Standard Retail within the Rest of the UK delivering the strongest total return
of 23.0%, fuelled by asset management and capital growth of 15.9% and an income
return of 6.1%. South East Standard Retail also benefited from further yield
compression, producing 2.4% capital growth and the next best total return of
6.4% within the Retail portfolio.
The Company's Shopping Centre investments lagged the market, however we were
able to dispose of the Sovereign Centre, Weston-super-Mare, at a price ahead of
valuation earlier in the year. At Shrewsbury, we expect to improve Net
Operating Income with the delivery of Primark in early 2017 and are analysing
wider strategic options for the asset.
We were pleased to deliver a new H&M store and experience improved footfall at
The Parade, Swindon, but rental values for other units remain under pressure.
We have an exposure to a large BHS store (1.1% of annual portfolio rent, our
only BHS exposure) which we have been monitoring closely following the sale of
that company. After the year end, in March 2016, BHS received majority
creditor approval to a Company Voluntary Arrangement (CVA) which it had filed.
The CVA procedure allows a retailer the flexibility, with creditor backing, to
close and cancel lease contracts on stores it deems unprofitable, or adjust the
rent downwards. BHS categorised its stores into three pots - profitable, rent
reduction required and unprofitable. They deemed 26%, or 46 of their 177
stores, as unprofitable which included UKCPT's Swindon unit - these leases are
now expected to terminate early, after 10 months of paying a reduced rent. We
are in discussion with a number of retailers to relet the space if that becomes
necessary or prudent. This will regrettably have a negative impact on valuation
although, in the medium term, there are plans for a new large-scale Office
development opposite The Parade which, if delivered, would bring many shoppers,
improving retail demand.
In the Retail Warehouse sector, investment yields remained relatively static
during the year, resulting in the Retail Warehouse portfolio producing a total
return of 7.4%, on a par with the benchmark.
Other Commercial - Leisure
The Company's Leisure investments - The Rotunda, Kingston-upon-Thames and
Regent Circus, Swindon - suffered some stubborn vacancies amongst the food
units which, together with the supermarket component at Swindon and an
ex-growth rent on the Odeon cinema, Kingston, inhibited capital growth.
The acquisition of the Cineworld cinema and leisure complex in Glasgow
increased the Company's exposure to the sector during the year but, with strong
fundamentals underlying that purchase, combined with an attractive appraisal
yield, this should prove accretive to the Company's income profile.
Investment Activity
Purchases
During the year the Company purchased assets worth £145 million.
Over the summer months, Eldon House in the City of London was acquired for £
27.5 million in an off-market acquisition, based on an initial yield of 4.6%
and an equivalent yield of 5.5%. The asset will benefit from the opening of
the Elizabeth Line, as Crossrail 1 has been named, with the Liverpool Street
station access just 150m away.
In addition, the £67.1 million acquisition of Ventura Park, Radlett took place.
Ventura Park is a multi-let industrial estate in Hertfordshire on the M25 to
the north of London. The transaction comprised a property swap - the sale of
an Asda distribution centre in Northampton for £31.0 million and a balancing
payment of £36.1 million from existing cash resources to complete the
acquisition of Ventura Park. The Company benefited from a net positive
investment and the transfer from a lower yielding investment to a higher yield
(increased income).
In December, the Company acquired the Central Square Office building in
Newcastle upon Tyne for £21.6 million, a price based off a yield of 6.4%. The
72,389 square feet grade A Office is multi-let to a range of corporate tenants,
producing a combined contracted rent of £1.5 million per annum and an average
unexpired lease term of 8.8 years. Located in central Newcastle's new
Stephenson Quarter, opposite Newcastle Central railway station, it has a BREEAM
"excellent" rating for sustainability and is expected to provide the Company
with a strong, secure income return.
Also in December, the Company acquired off-market a Cineworld leisure scheme in
Glasgow for £29.2 million. Located in Glasgow's city centre, the complex is
anchored by an 18 screen multiplex Cineworld cinema on a long-term lease, with
further leisure accommodation across three units. Purchased at an initial yield
of 5.1%, the asset currently generates annual rent of £1.7 million with scope
for further income growth through a range of asset management initiatives,
including re-letting the vacant basement leisure unit and reconfiguring the
first floor leisure unit.
Overall, these assets display good fundamental property attributes and support
our strategy to reposition the portfolio for sustainable and growing income.
Sales
In line with the Company's strategy to sell assets expected to underperform in
the short to medium term or where non-accretive capital expenditure had the
potential to undermine future performance, the Company sold five assets for £
164 million, ahead of valuation.
At the start of the year, the Company completed the sale of the Pall Mall Court
Office building in Manchester for £19.5 million and The Sovereign Shopping
Centre, Weston-super-Mare for £29.9 million. Both sales allowed the Company to
crystallise valuation uplifts from recent asset management activity and reduce
exposure to both the regional Office and Retail sectors, in-line with strategy,
while achieving an overall sale price ahead of valuation.
During the summer, terms were agreed for the sale of 176-206 Kensington High
Street, London and also 134-138 North Street, Brighton in two separate
transactions for a total consideration of £82.7 million, marginally ahead of
their aggregate valuation as at 31 March 2015. The sale of Kensington High
Street completed on 4 September 2015. In addition a logistics warehouse at
Brackmills, Northampton, was sold for £31.0 million as part of the swap
transaction mentioned above.
Asset Management Activity
During the year we continued our drive to strengthen the Company's income
streams, extend lease lengths and add value to the portfolio. A total of £4.6
million of annual income was generated after rent free periods and incentives
through 47 new leases, fixed rental increases and rent reviews representing a
net increase of £1.2 million per annum. The refinancing carried out earlier in
the year, £250 million at an effective fixed rate of 2.89% for a further 6.9
years from the year end, has also boosted net income by lowering the cost of
debt.
It was good to witness the majority of the 21 open market rent reviews within
the portfolio that were agreed during the year generate uplifts. Notable
increases took place with Furniture Village at Junction 27, Leeds, Fitness
First on Great Marlborough Street, London and at the ASDA distribution
warehouse in Northampton. In total, rent reviews helped to improve annualised
income by over £734,000 per annum.
In addition, there were 19 instances of stepped or fixed increases in rent
across the portfolio during the year at Dolphin Industrial Estate, Sunbury, The
Parade, Swindon, The Charles Darwin and Pride Hill Centres in Shrewsbury and
Emerald Park, Bristol all of which helped to improve rents by over £514,000 per
annum.
Taking into account the lease expiry profile and recognising the strategic
sales activity, it was pleasing to see the Company's continuing low void
position at 31 December 2015 of 2.8% (of ERV), compared to 2.6% at the end of
2014. Allowing for tenant failures through administrations, the void rate
increases to 2.9% (2014 - 3.1%); both figures comfortably below the IPD
benchmark void rate of 6.7%.
The Company is pleased to report that on average 98% of rent was collected
within 28 days of each quarterly payment date and a modest 0.7% of annual rent
was written off as bad debt for the year.
At The Parade, Swindon, contracts were satisfied with H&M and a new fashion
anchor store created for them at the north eastern entrance to the centre. H&M
is now committed to The Parade on a new 15 year lease at a rent of £325,000per
annum.
The introduction of H&M helps improve The Parade's position within the town's
retail hierarchy which is already resulting in encouraging discussions with
other retailers interested in taking further space in the Centre.
In May 2015, the Company announced that it had let a 30,300 square feet (net
sales area) store over two levels at the Charles Darwin Shopping Centre,
Shrewsbury, to international fashion retailer, Primark. Also during the year,
new leases were completed with Claire's Accessories, Timezone Inc., Dorothy
Perkins, Alan Turner, Burger King and Hawkins Bazaar. These lettings continue
our strategy of rebuilding income and footfall in the shopping centres.
Within the Retail Warehouse portfolio, lease contracts were completed with
Iceland, Mattressman and Maplin on St Georges Retail Park, Leicester. The
ongoing external cladding works continue to improve the property and the
lettings achieved full occupancy; this generated over £368,000 of additional
rent per annum after lease incentives and added £2.9 million of value over the
year.
On Junction 27, Retail Park, Leeds a new restaurant unit was created for
Azzurri Restaurants Ltd (trading as Zizzi), securing them on a new 20 year
lease at an average rent of over £140,000 per annum after lease incentives.
In St James's, London, we successfully negotiated a lease surrender of the
ground and basement floors at Arlington Street and subsequent re-let the unit
to the Skarstedt Gallery at a rent of £350,000 per annum, significantly ahead
of the former rental income for the unit.
Within the Industrial sector, lettings at Newton's Court, Dartford to
Worldstores and Stienhoff helped to amplify income, secure 100% occupation and
drive value during the year.
During the year we renewed for a further 10 years the Company's lease with
Adidas at Market Street, Manchester. The agreement secures a rent of £550,000
per annum and builds on the tenants new sponsorship arrangement with Manchester
United football club. This piece of asset management delivered capital growth
of 17% (£1.2 million).
At Tunbridge Wells we agreed to release DSG (PC World / Currys) from one of
their two retail park units. Simultaneously we relet the unit to two new
occupiers, Oak Furniture Land and Harvey's, on new 10 year leases at a combined
rent of over £500,000 per annum after rent free periods. This also allowed the
unit to be reconfigured with the installation of a mezzanine floor.
In Bristol, a sub-lease was granted to Ovo Energy at No. 1 Rivergate which may
be helpful for the continued future occupation of this prime building.
Market Outlook
With robust UK economic fundamentals, despite the heightened global
uncertainty, our projections are for a reasonably strong UK economic
environment in 2016 with consumer spending expected to provide the majority of
the impetus, alongside a further improvement in business investment. This
provides a solid base for real estate occupier demand, the driver of rental
growth. Key risks to our outlook are the forthcoming EU Referendum and weak
global growth, particularly among emerging markets. Rising interest rates will
be a risk at some stage in the future although yield curves suggest that
potential interest rate rises have been pushed out further, a sentiment which
is supported by recent comments from the Bank of England.
Total returns for UK real estate look to have peaked for this cycle and it is
anticipated that more normalised returns are in prospect for the next few
years. Income is likely to be the main component of returns, as opposed to the
strong capital growth we have seen in the recent past, and it is the
improvement in levels of rental growth, along with the ability of managers to
work their direct property portfolio, which will provide upside for many
investors. Despite heightened global uncertainty, projections for UK economic
growth remain firm and provide a reasonable backdrop for the domestic real
estate outlook. Relative to longer term government bonds, the yield gap of
280bps remains significant by historical standards. The sector remains
attractive from a fundamental point of view, with firm economic drivers and a
limited pipeline of future developments - we expect positive total returns for
investors on a three year hold period due to real estate's stable income
profile and improving income growth prospects.
Portfolio Strategy
The Company is generally well positioned to enter this phase in the property
market of modest capital growth with a greater focus on income and
income-generating asset management; it plays to its strengths of
diversification, low vacancy rates, internal investment opportunities and low
cheap gearing.
Although higher yields can be achieved in the secondary market, in many cases
these yields reflect the inherent risks within that sector. We believe that the
Company's investment objective to pursue a sustainable and growing income
stream with the potential for capital growth is best achieved by continuing its
focus towards the prime end of the property spectrum. Having deployed the bulk
of its cash during 2015, the Company has a modest surplus available for fresh
investment with the ability to draw on additional revolving credit should a
particular opportunity present itself. Our House view, together with the
existing portfolio structure, support the case for selective acquisition of:
1. Offices in Greater London and the South East, particularly if let to
multiple tenants where rental growth prospects continue to be strong;
2. Selective Retail High Street shops, but only in a limited number of the
UK's best shopping towns and cities where supply is limited and retailer
demand strong, driven by a good local economy and strong demographics
supporting consumption growth; and
3. Income dominated sectors, which might include a right-sized, and,
importantly, repriced supermarket with an element of index-linking in a
location with limited competition and good demand from a vibrant local
economy with strong demographics.
For new and existing investment, we aim to improve income yield and dividend
cover and to maintain or extend the average lease length within the portfolio.
In certain cases, given the Company's current low vacancy rate, in strong and
improving locations we may accept a degree of letting risk to enhance income
yield in the longer term.
We will seek to dispose of assets which we believe will not meet its income or
performance expectations, whether due to poor income growth expectations or
increasing need for non-accretive capital expenditure. Currently, the Company
has an investment programme to improve assets within its portfolio, mostly
through refurbishment upgrades designed to increase the rental potential of
these assets. There is an important distinction between non-accretive capital
expenditure, required to stand still, and capital expenditure for growth. This
ability to self-invest to upgrade assets is an important and rewarding facet of
property investment.
With this move away from yield compression to a market where the fundamental
attributes of property reassert themselves and income and income growth are
likely to take prominence, we believe that the Company is well positioned to
meet its objective of providing shareholders with an attractive level of
income, together with the potential for capital and income growth for
investment in a diversified portfolio of UK commercial property.
Will Fulton
Fund Manager
Standard Life Investments Limited
20 April 2016
Property Portfolio
As at 31 December 2015
Property Tenure Sector Principal Tenant Value Range
Junction 27 Retail Park, Birstall, Freehold Retail DSG Retail Ltd
Leeds Warehouse
The Parade, Swindon Freehold Shopping BHS Ltd
Centre
Over £50m
Ventura Park, Radlett Freehold Industrial B & Q Plc (representing
39% of the
Great Lodge Retail Park, Tunbridge Freehold Retail B & Q Plc portfolio
Wells Warehouse capital
value)
15 Great Marlborough Street, London, Freehold Office Sony Ltd
W1
The Rotunda, Kingston upon Thames Freehold Leisure Odeon Cinemas Ltd
Kew Retail Park, Richmond Freehold Retail Mothercare (UK) Ltd
Warehouse
Ocado Distribution Unit, Hatfield Freehold Industrial Ocado Ltd
Business Area, Hatfield
Dolphin Estate, Sunbury on Thames Freehold Industrial Access Self Storage
Properties Ltd
St Georges Retail Park, Leicester Freehold Retail Toys R Us Ltd
Warehouse £30m - £50m
(representing
Regent Circus, Swindon Freehold Leisure WM Morrison 24% of the
Supermarkets Plc portfolio
capital
Hannah Close, London, NW10 Leasehold Industrial Marks & Spencer Plc value)
Argos Unit, Magna Park, Lutterworth Leasehold Industrial Argos Ltd
6 Arlington Street, London, SW1 Freehold Office Skarstedt Gallery
Newton's Court, Dartford, Kent Freehold Industrial Gisela Graham Ltd
Total, Aberdeen Gateway, Aberdeen Freehold Industrial Total E&P UK Ltd
Emerald Park East, Emersons Green, Freehold Industrial Knorr-Bremse Systems
Bristol Ltd
Colmore Court, 9 Colmore Row, Leasehold Office BNP Paribas
Birmingham
Cineworld Complex, Glasgow Freehold Leisure Cineworld
13 Great Marlborough Street, London, Freehold Office Sony Ltd
W1
£20m-£29.9m
Eldon House, City of London, EC2 Freehold Office Stace LLP (representing
29% of the
B&Q, Roneo Corner, Romford Freehold Retail B & Q Plc portfolio)
Warehouse
Motor Park, Eastern Road, Portsmouth Freehold Industrial Pentagon Ltd
Broadbridge Retail Park, Horsham Freehold Retail Homebase Ltd
Warehouse
No 2 Temple Quay, Bristol Freehold Office Public Sector
81/85 George Street, Edinburgh Freehold Office Waterstones
Darwin Shopping Centre, Shrewsbury Freehold Shopping H&M Hennes & Mauritz
Centre UK Ltd
Craven House, Fouberts Place, London, Freehold Office WH Smith Retail
W1 Holdings Ltd
No 1 Temple Quay, Bristol Freehold Office British
Telecommunications Plc
Network House & Meadowside House, Freehold Office Public Sector
Hemel Hempstead
Central Square Offices, Forth Street, Freehold Office Ove Arup & Partners
Newcastle Upon Tyne
16/20 High Street & 1/3 Bedford Leasehold High St, H&M Hennes & Mauritz
Street, Exeter Retail UK Ltd
140/144 Kings Road, London, SW3 Freehold High St, French Connection UK
Retail Ltd
14 - 22 West Street, Marlow Freehold High St, Sainsbury's
Retail Supermarket Ltd
Gatwick Gate Industrial Estate, Freehold Industrial Signet Group Ltd Below £20m
Crawley (representing
8% of the
Pride Hill Shopping Centre, Freehold Shopping Next plc portfolio)
Shrewsbury Centre
52/56 Market Street, Manchester Freehold High St, Adidas (UK) Ltd
Retail
Tetra, Aberdeen Gateway, Aberdeen Freehold Industrial Tetra Technologies UK
Ltd
Crossways Cargo Depot, Dartford Freehold Industrial Veerstyle Ltd
Ensco, Aberdeen Gateway, Aberdeen Freehold Office Ensco Services Ltd
Knaves Beech Industrial Estate, Freehold Industrial Dreams Ltd
Loudwater
Riverside Shopping Centre, Shrewsbury Leasehold Shopping Wilkinson Hardware
Centre Stores Ltd
146 Kings Road, London SW3 Freehold High St, Telefonica O2 UK Ltd
Retail
Overall number of properties 43
Total number of tenancies 346
Total average property value £30.7m
Total floor area 4,538,054
sq.ft
Freehold/Leasehold (leases over 100 91%/9%
years)
Report of the Directors
Results and Dividends
The results for the year are set out in the attached accounts. The Company has
paid interim dividends in the year ended 31 December 2015 as follows:
Payment Date Rate per share (p)
Fourth Interim for prior Feb 2015 0.92
period
First Interim May 2015 0.92
Second Interim Aug 2015 0.92
Third Interim Nov 2015 0.92
Total 3.68
On 29 January 2016 the Company declared a fourth Interim dividend of 0.92 pence
per Ordinary Share with an ex-dividend date of 11 February 2016, which was paid
on 26 February 2016.
Principal Activity and Status
The Company is a Guernsey company and during the year carried on business as a
property investment company. The principal activity and status of the Company's
subsidiaries is set out in Note 9.
Listing Requirements
Throughout the period the Company complied (and intends to continue to comply)
with the conditions applicable to property investment companies set out in the
Listing Rules.
Share Capital
The issued Ordinary share capital at 31 December 2015 consisted of
1,299,412,465 Ordinary shares of 25p each. At 20 April 2016 these numbers were
unchanged. Each Ordinary share of the Company carries one vote at general
meetings of the Company. Save for the provision of the articles of association,
there are no restrictions on the transfer of Ordinary shares in the Company
other than certain restrictions which may from time to time be imposed by law
(for example, insider trading law).
Directors
The Directors who held office during the period and their interests in the
ordinary shares of the Company as at 31 December 2015 (all of which are
beneficial) were:
Date of Appointment As at 31 December As at 31 December
2015 2014
Christopher Hill Sep 2006 20,000 20,000
John Robertson Sep 2006 10,000 10,000
Andrew Wilson Sep 2006 75,000 75,000
Ken McCullagh Feb 2013 40,000 40,000
Sandra Platts Dec 2013 - -
There have been no changes in the above interests between 31 December 2015 and
31 March 2016. On 24 February 2016 the Board appointed Mr Michael Ayre as a
Director.
The Directors are also Directors of UK Commercial Property Holdings Limited, UK
Commercial Property GP Limited, UK Commercial Property Nominee limited, UK
Commercial Property Estates Holdings Limited, UK Commercial Property Estates
Limited and UK Commercial Property Finance Holdings Limited which are all
wholly owned subsidiary undertakings. In addition the Group wholly owns Brixton
Radlett Property Limited, a UK Limited Company, the Directors of which are Mr
Andrew Wilson and Mr John Robertson.
The Company maintains an appropriate level of insurance in respect of
Directors' & Officers' liabilities in relation to work undertaken on behalf of
the Company and all its subsidiaries. In addition, Individual Directors may, at
the expense of the Company, seek independent professional advice on any matter
that concerns them in the furtherance of their duties.
As recommended by the AIC Code of Corporate Governance and the UK Corporate
Governance Code, the Company's policy is for all Directors to retire and offer
themselves for re-election at the Annual General Meeting ("AGM") immediately
following their appointment and annually thereafter. Accordingly, Mr K
McCullagh, Mrs S Platts, Mr J Robertson and Mr A Wilson will retire and offer
themselves for re-election at the AGM. Mr M Ayre, having been appointed since
the last Annual General Meeting, will offer himself for election. Mr C Hill
will retire at the AGM and will be replaced as Chairman by Mr A Wilson.
Following formal performance evaluations for each individual Director and the
Board as a whole, as well as a review of the performance of the Chairman by the
other members of the Board, the performance of all of the Directors continues
to be effective with each making a positive contribution to the performance of
the Company. Therefore, the re-election and election of all the Directors who
are being put forward is recommended to shareholders at the 2016 AGM. An
external review of the Board was last carried out in 2014 and the action points
arising from this review have been addressed and, where appropriate, revised
practices have been adopted.
Alternative Investment Fund Manager ("AIFM")
Up until 29 December 2015, Ignis Fund Managers Limited (registered in the
United Kingdom) was the appointed AIFM of the Company undertaking the
management of the Company in accordance with the requirements of the
Alternative Investment Fund Managers Directors ("AIFMD"). On 29 December 2015,
Standard Life Investments (Corporate Funds) Limited was appointed as the
Company's AIFM.
Depositary
In accordance with the requirements of AIFMD, the Board appointed Citibank
International PLC as depositary to the Company on 18 July 2014. On 29 December
2015 this changed to Citibank International Limited.
Substantial Interests in Share Capital
At 31 December 2015 the following holdings, representing more than 3 per cent.
of the Company's issued share capital, had been notified to the Company.
Number of Ordinary Shares Percentage Held (%)
Held
Phoenix Life Limited 649,952,011 50.02
Investec Wealth Limited 140,797,236 10.84
Nestle Capital Management 56,137,385 4.32
Limited
Brewin Dolphin Ltd 53,733,048 4.14
Schroders plc 39,970,707 3.08
As at 31 March 2016 the Company had been notified that the Phoenix Life Limited
holding had been reduced to 48.86% and the Investec Wealth Limited holding had
been reduced to 10%.
No other changes to these holdings had been notified to the Company as at 31
March 2016.
As at 31 December the Company's ultimate parent entity was Phoenix Group
Holdings and immediate parent company was Phoenix Life Limited.
Going Concern
The Company's business activities, together with the factors likely to affect
its future development, performance and financial position are set out in the
Strategic Overview. In addition, Note 16 to the financial statements includes
the Company's objectives, policies and processes for managing its capital; its
financial risk management objectives; details of its financial instruments; and
its exposure to credit risk and liquidity risk.
At both the Company and Group levels comprehensive going concern assessments
have been performed. The Board has followed the Financial Reporting Council's
"Going Concern and Liquidity Risk: Guidance for Directors of UK Companies 2009"
when performing their going concern assessments and also considered the
recommendations on Risk Management and Control in the UK Corporate Governance
Code (September 2014).
The assessments performed include review of the valuation and liquidity of
investments as at the balance sheet date and forecasts of NAV, cash resources
and income under both normal and stressed conditions.
Having thoroughly considered the going concern assessment the Board has
concluded that there are no material uncertainties that may cast significant
doubt about the Company and Group's ability to continue as a going concern over
the next twelve months from the date of the annual report, barring any
unforeseen circumstances. The only qualification to this statement is that the
shares of the Company may trade at a discount to NAV of over 5% for 90
consecutive dealing days, thereby leading to a continuation vote. This risk is
considered, and mitigating actions addressed, in the Principal Risk and Risk
Uncertainties Review. The Directors have a reasonable expectation that the
Company and Group will be able to continue in operational existence and to have
adequate resources to meet its liabilities as they fall due over the next
twelve months. Therefore, the Board continue to adopt the going concern basis
of accounting in preparing the annual financial statements.
Non-Mainstream Pooled investments
The Company currently conducts its affairs so that the shares issued by the
Company can be recommended by IFAs to ordinary retail investors in accordance
with the FCA's rules in relation to non-mainstream investment products and
intends to continue to do so for the foreseeable future. The shares are
excluded from the FCA's restrictions which apply to non-mainstream investment
products because the Company would qualify as an investment trust if the
Company were based in the UK.
Annual General Meeting
Among the resolutions being put at the Annual General Meeting of the Company to
be held on 15 June 2016, the following resolutions will be proposed.
Disapplication of Pre-emption Rights
Resolution 11 gives the Directors, for the period until the conclusion of the
Annual General Meeting in 2016 or, if earlier, on the expiry of 15 months from
the passing of resolution 11, the necessary authority either to allot
securities or sell shares held in treasury, otherwise than to existing
shareholders on a pro-rata basis, up to an aggregate nominal amount of £
32,485,312. This is equivalent to approximately 10 per cent. of the issued
ordinary share capital of the Company as at 20 April 2016. There are no shares
currently held in treasury.
The Directors will allot new shares pursuant to this authority only if they
believe it is advantageous to the Company's shareholders to do so and in no
circumstances would this be done if it results in a dilution to the prevailing
net asset value per share.
Directors' Authority to Buy Back Shares
The current authority of the Board granted to it by shareholders at the 2015
AGM to buy back shares in the Company expires at the end of AGM to be held in
2016. The Board intends to renew such authority to buy back shares up to 14.99
per cent. of the number of Ordinary Shares in issue. This special resolution,
if approved, will enable the Company to buy back up to 194,781,928 shares based
on the current number of shares in issue (excluding any treasury shares). Any
buy back of Ordinary Shares will be made subject to Guernsey law and within
guidelines established from time to time by the Board, (which will take into
account the income and cash flow requirements of the Company), and the making
and timing of any buy backs will be at the absolute discretion of the Board.
Purchases of Ordinary Shares will only be made through the market for cash at
prices below the prevailing published net asset value of an Ordinary Share (as
last calculated, adjusted downwards for the amount of any dividend declared by
the Company upon the shares going ex-dividend), where the Directors believe
such purchases will enhance shareholder value. Such purchases will also only be
made in accordance with the rules of the UK Listing Authority which provide
that the price to be paid must not be more than the higher of (i) five per
cent. above the average of the middle market quotations for the Ordinary Shares
for the five business days before the purchase is made and (ii) the higher of
the last independent trade and the highest current independent bid on the
London Stock Exchange. The minimum price (exclusive of expenses) that may be
paid is 25 pence a share.
The Company may retain any shares bought back as treasury shares for future
re-issue, or transfer, or may cancel any such shares. During the period when
the Company holds shares as treasury shares, the rights and obligations in
respect of those shares may not be exercised or enforced by or against the
Company. The maximum number of shares that can be held as treasury shares by
the Company is 10 per cent. of the aggregate nominal value of all issued
Ordinary Shares. Ordinary Shares held as treasury shares will only be
re-issued, or transferred at prices which are not less than the published net
asset value of an Ordinary Share.
It is the intention of Directors that the share buy back authority may be used
to purchase Ordinary Shares, (subject to the income and cash flow requirements
of the Company), if the share price of an Ordinary Share is more than 5 per
cent. below the published net asset value for a continuous period of time. In
the event that such discount is more than 5 per cent. for 90 dealing days or
more, following the second anniversary of the Company's most recent
continuation vote, (31 March 2015), the Directors will convene an Extraordinary
General Meeting ("EGM") to be held within three months to consider an ordinary
resolution for the continuation of the Company. If this continuation resolution
is not passed, the Directors will convene a further extraordinary general
meeting to be held within six months of the first extraordinary meeting to
consider the winding up of the Company or a reconstruction of the Company which
offers all Shareholders the opportunity to realise their investment. If any
such continuation resolution is passed, this discount policy, save in respect
of share buy backs, would not apply for a period of two years thereafter.
At an EGM of the Company held on 31 March 2015 a resolution was passed which
effectively resulted in the following:
(a) The continuation vote required by the Company's Articles of Association
was brought forward from 2016 to 2015;
(b) Approved the Continuation of the Company;
(c) Set the next continuation vote for 2020 and seven yearly thereafter.
The purpose of this change was to facilitate the new debt facilities described
earlier in the report. It should be highlighted that the buyback authority and
discount management policy described above, including the provision for
continuation votes, will remain in place and are not affected by the changes to
the Company's Articles of Association.
The City Code on Takeovers and Mergers ("the Takeover Code")
Under Rule 9 of the Takeover Code, any person who acquires an interest in
shares which, taken together with shares in which he is already interested and
in which persons acting in concert with him are interested, carry 30% or more
of the voting rights of a company which is subject to the Takeover Code but
less than 50%, is normally required to make a general offer to all the
remaining shareholders to acquire their shares. Under Rule 37 of the Takeover
Code, when a company purchases its own shares, any resulting increase in the
percentage of shares carrying voting rights which a person or group of persons
acting in concert is interested will be treated as an acquisition for the
purposes of Rule
9 (although a shareholder who is neither a Director nor acting in concert with
a Director will not normally incur an obligation to make an offer under Rule 9
of the Takeover Code). Under Rule 37, however, the holding of an investment
manager of a company, together with the holdings of its concert parties, will
be treated in the same way as a Director.
Phoenix Life Limited notified the Company on 24 February 2016 that following
the sale of Ordinary Shares their holding in the Company had fallen below 50%.
If the Company were to utilise its proposed share buy back authority and the
Phoenix Concert Party's aggregate interest in the Ordinary Shares were to
increase between 30% and 50%, an obligation for the Phoenix Concert Party to
make a general offer to all shareholders in accordance with Rule 9 of the
Takeover Code may be triggered. The Directors are aware that a waiver from the
Panel on Takeovers and Mergers may be required to allow the Company to utilise
the share buy back authority and are in consultation with the Panel.
If a waiver is required, shareholders (other than members of the Phoenix
Concert Party) will be asked to approve a waiver of the obligation on the
Phoenix Concert Party to make a general offer for the entire issued share
capital which may otherwise arise as a result of a buy back of shares by the
Company. A separate circular will be sent to shareholders setting out full
details of the waiver if necessary.
Auditors
As detailed in the Corporate Governance Report, the Board have decided to
appoint Deloitte LLP as the auditors of the Group for the year ended 31
December 2016 and a resolution proposing their appointment will be submitted at
the Annual General Meeting.
So far as each of the Directors is aware, there is no relevant audit
information of which the Company's Auditor is unaware, and each has taken all
the steps he/she ought to have taken as a Director to make themself aware of
any relevant audit information and to establish that the Company's Auditor is
aware of that information.
Recommendations
The Directors believe that the resolutions to be proposed at the Annual General
Meeting are in the best interests of the Company and its shareholders as a
whole, and recommend that shareholders vote in favour of the resolutions, as
the Directors intend to do in respect of all their own beneficial
shareholdings.
Statement Regarding the Annual Report and Accounts
Following a detailed review of the Annual Report and Accounts by the Audit
Committee (and by any Directors who are not members of the Audit Committee),
full details of which can be found in the Audit Committee Report, the Board
consider that when taken as a whole, it is fair, balanced and understandable
and provides the information necessary for shareholders to assess the Company's
performance, business model and strategy.
The Board welcomes views from shareholders and company analysts on the Annual
Report and Accounts and, where practical, will incorporate any suggestions that
will improve the document.
Approved by the Board on 20 April 2016.
Christopher M.W. Hill Chairman
Ken McCullagh Director
Corporate Governance Report
Introduction
The Board has considered the principles and recommendations of the AIC Code of
Corporate Governance (AIC Code) by reference to the AIC Corporate Governance
Guide for investment Companies (AIC Guide) both of which can be found at
www.theaic.co.uk. The AIC Code, as explained by the AIC Guide, addresses all
the principles set out in the UK Corporate Governance Code which can be found
at www.frc.org.uk, as well as setting out additional principles and
recommendations on issues that are of specific relevance to the Company.
The Board considers that reporting against the principles and recommendations
of the AIC Code, and by reference to the AIC Guide (which incorporates the UK
Corporate Governance Code), will provide an appropriate and satisfactory level
of transparency to shareholders.
The Company has complied with the recommendations of the AIC Code and the
relevant provisions of the UK Corporate Governance Code, except as set out
below:
* the role of the chief executive;
* executive directors' remuneration;
* the need for an internal audit function.
For the reasons set out in the AIC Guide, and as explained in the UK Corporate
Governance Code, the Board considers these provisions are not relevant to the
position of the Company, being an externally managed investment company. In
particular, all of the Company's day-to-day management and administrative
functions are outsourced to third parties. As a result, the Company has no
executive directors, employees or internal operations. The Company has
therefore not reported further in respect of these provisions.
The Board
The Board consists solely of non-executive Directors of which Mr Christopher
Hill is Chairman and Mr Andrew Wilson is Senior Independent Director. All
Directors, other than Mr John Robertson, are considered by the Board to be
independent, with any potential conflicts considered at each Board meeting with
reference to the AIC Code. The Board's policy on tenure is that continuity and
experience are considered to add significantly to the strength of the Board
and, as all Directors will be subject to re-election on an annual basis, it is
not appropriate for the Board to have a limit on the overall length of service
of any of the Company's Directors, including the Chairman. The Board also
takes the view that independence is not compromised by length of tenure on the
Board and Mr Hill, Mr Robertson and Mr Wilson, who have been Directors since
2006, have not been compromised by length of service. In considering this,
the Board considered a number of factors including experience, integrity and
judgement of character. However, the Board has a clear strategy in place to
refresh the Board on an ongoing basis which is set out in the Chairman's
Statement. The Board undertakes formal performance evaluations set out in the
Report of the Directors.
The Company does not have a Remuneration Committee with the Board as a whole
being responsible for Director and Board remuneration levels.
New Directors follow an induction process, including input from the Investment
Manager, Secretary and Corporate Broker, on joining the Board and all Directors
receive other relevant training as necessary.
The Company has no executive Directors or employees. A management agreement
between the Company and its Investment Manager sets out the matters over which
the Investment Manager has authority and the limits beyond which Board approval
must be sought. All other matters, including strategy, investment and dividend
policies, gearing, and corporate governance procedures, are reserved for the
approval of the Board of Directors. The Board currently meets at least
quarterly and receives full information on the Company's investment
performance, assets, liabilities and other relevant information in advance of
Board meetings. In addition the Board has many ad
hoc meetings and an annual strategy day.
Board Committees
The Board has appointed four committees to cover specific operations: Audit
Committee, Management Engagement Committee, Nominations Committee and Property
Valuation Committee. Copies of the terms of reference of each committee are
available on the Company's website, or upon request from the Company.
Audit Committee
Information regarding the composition, responsibilities and activities of the
Audit Committee is set out in the Audit Committee Report.
Management Engagement Committee
The Management Engagement Committee comprises all independent Directors of the
Company and has been chaired by Mr Christopher Hill. The Management Engagement
Committee has met once in the past year preceding the date of the signing of
these accounts. The purpose of the Committee is to review the terms of the
agreements with the Manager including, but not limited to, the management fee
and also to review the performance of the Manager in relation to the
achievement of the Company's objectives. These reviews have been conducted
during the year and the outcomes are noted below.
Ignis Fund Managers Limited was appointed as the Alternative Investment Fund
Manager ("AIFM") of the Company from 18 July 2014. Following the takeover of
Ignis Asset Management by Standard Life Investments Limited in 2014, the Board
appointed Standard Life Investments (Corporate Funds) Limited as AIFM on 29
December 2015. A summary of the current contract between the Company and
Standard Life Investments (Corporate Funds) Limited in respect of management
services provided is given in note 2 to the accounts.
The Management Engagement Committee has considered the investment performance
of the Company and the capability and resources of the Investment Manager to
deliver satisfactory investment performance. They also considered the length
of the notice period of the investment management contract and the fees payable
to the Investment Manager, together with the standard of the other services
provided. It was noted that, last year, the Investment Manager had reduced the
level of fees charged from 1 July 2014.
Following this review, it is the Directors' opinion that the continuing
appointment of the Investment Manager on the terms agreed is in the interests
of shareholders as a whole due to the strength and quality of the management
team, performance achieved over the longer term and the Investment Manager's
commitment to the sector. The Management Engagement Committee have also
conducted reviews (where appropriate with the assistance of the Investment
Manager) of the Company's other service providers. The outcome of those reviews
has been satisfactory.
Nominations Committee
The Nominations Committee comprises all Directors of the Company and has been
chaired by Mr Christopher Hill. The Nominations Committee considers
appointments of new Directors, undertaking a thorough and open process
involving, where appropriate, professional recruitment consultants and
committee interviews with candidates whose skills have been identified as
complementary to the existing Board. The Board and Committee are cognisant of
the debate around the recommendations of the Davies Report on Women on Boards
and recognises the benefits of diversity in its broadest sense and the value
this brings to the Company in terms of skills, knowledge and experience. The
Nominations Committee did not require to meet during the year but did meet in
2016 to consider the appointment of Mr Ayre.
Property Valuation Committee
The Property Valuation Committee comprises all of the Directors and is chaired
by Mr Andrew Wilson, Chartered Surveyor. Committee members meet CBRE, the
independent valuer to the Company, and representatives of Standard Life
Investments at least twice a year and report back to the Board on the process
for arriving at independent valuations and on any issues that arise in relation
to this process.
Internal Controls
The Board is responsible for the Company's system of internal control and for
reviewing its effectiveness. The Board has therefore established an ongoing
process designed to meet the particular needs of the Company in managing the
risks to which it is exposed, consistent with the guidance in the Financial
Reporting Council publication 'Guidance on Risk Management, Internal Control
and Related Financial and Business Reporting'.
The process is based principally on the Investment Manager's existing
risk-based approach to internal control whereby a risk matrix is created that
identifies the key functions carried out by the Investment Manager and other
service providers, the individual activities undertaken within those functions,
the risks associated with each activity and the controls employed to minimise
those risks. A residual risk rating is then applied. The risk matrix is
regularly updated and the Board is provided with regular reports highlighting
all material changes to the risk ratings and confirmation of the action which
has been, or is being, taken. A formal annual review of these procedures is
carried out by the Board and includes consideration of ISAE 3402 and similar
reports issued by the Investment Manager and other service providers. In
addition, the Board also receives quarterly updates from both the Compliance
and Internal Audit departments of the Investment Manager on areas that
specifically affect the Company. Compliance reports are also received from the
administrator on a quarterly basis.
Director Meetings Attendance Summary
Board of Directors Audit Committee Management Property
Engagement Valuation
Committee Committee
Held Attended Held Attended Held Attended Held Attended
C Hill 4 4 3 3 1 1 4 4
K McCullagh 4 4 3 3 1 1 4 4
S Platts 4 4 3 3 1 1 4 4
J Robertson 4 4 n/a n/a n/a n/a 4 4
A Wilson 4 4 3 3 1 1 4 4
The table above sets out the number of Board and Committee meetings all held
during the year and the number attended by each Director post their appointment
date. In addition to the above, there were 57 ad hoc meetings held during the
year. All meetings were held outside the UK.
Internal control procedures have been in place throughout the period and up to
the date of approval of this Report, and the Board is satisfied with their
effectiveness. These procedures are designed to manage rather than eliminate
risk and, by their nature, can only provide reasonable, but not absolute,
assurance against material misstatement or loss. At each Board meeting the
Board monitors the investment performance of the Company in comparison to its
stated objective and against comparable companies. The Board also reviews the
Company's activities since the previous Board meeting to ensure that the
Investment Manager adheres to the agreed investment policy and approved
investment guidelines and, if necessary, approves changes to such policy and
guidelines. In addition, at each Board meeting, the Board receives reports from
the Secretary in respect of compliance matters and duties performed on behalf
of the Company including conflicts of interest.
The Company formerly appointed Ignis Fund Managers Limited (up until 29
December 2015) and now Standard Life Investments (Corporate Funds) Limited as
its AIFM and formerly Citibank International PLC (up until 29 December 2015),
now Citibank International Limited as its Depositary. The Depositary's
responsibilities include cash monitoring, safe keeping of the Company's
financial instruments and monitoring the Company's compliance with investment
limits and leverage requirements. The AIFM has a permanent risk management
function to ensure that effective risk management policies and procedures are
in place to monitor compliance with risk limits. The AIFM has a risk policy
which covers the risks associated with the management of the portfolio and the
adequacy and appropriateness of this policy is reviewed at least annually.
The Board has reviewed the need for an internal audit function. The Board has
decided that the systems and procedures employed by the Investment Manager and
the Secretary, including both their internal audit functions and the work
carried out by the Company's external auditors, provide sufficient assurance
that a sound system of internal control, which safeguards shareholders'
investments and the Company's assets, is maintained. An internal audit function
specific to the Company is therefore considered unnecessary.
Relations with Shareholders
The Company places great importance on communication with its shareholders and
welcomes the views of shareholders. The Manager and Broker of the Company meet
existing and potential shareholders on a regular basis and the Board receives
regular reports on the views of shareholders from these meetings. In addition
the Chairman, where possible, meets larger shareholders annually and other
Directors are available to meet shareholders if required. The Annual General
Meeting of the Company and also the annual and interim results presentations
provides a forum, both formal and informal, for shareholders to meet and
discuss issues with the Directors and Investment Manager of the Company.
Approved by the Board on 20 April 2016.
Christopher M.W. Hill
Director
Ken McCullagh
Director
Audit Committee Report
Composition
The Audit Committee, which is chaired by Mr Ken McCullagh, operates within
well-defined written terms of reference, which are available on the Company's
website. It comprises all of the Directors other than Mr John Robertson, who is
invited to attend meetings of the Committee unless, as a non-independent
director, a conflict of interest would exist. Given the non-executive nature of
the Board, the Committee also believe it is appropriate for the Chairman of the
Company to sit on the Audit Committee. Within the membership of the Committee,
Mr Ken McCullagh, the Chairman, is a chartered accountant.
Responsibilities
The main responsibilities of the Audit Committee are as follows:
* Review the Annual and Interim Accounts and challenge where necessary the
actions and judgements of the Company's Manager;
* Review and monitor the internal controls and risk management systems on
which the Company is reliant;
* Determine the terms of appointment of the auditor, together with its
remuneration;
* To advise the Board on whether the Annual Report and Accounts, taken as a
whole is fair, balanced and understandable and provide the information
necessary for shareholders to assess the Company's performance, business
model and strategy.
The Audit Committee is also the channel through which the auditor reports to
the Board of Directors. It meets at least three times a year to take account of
the requirements placed on audit committees by the 2014 UK Corporate Governance
Code and AIC Code dated February 2015. The Audit Committee considers any
matters which the auditor wishes to communicate to the Audit Committee and,
through them, to the Board of Directors. This provides a forum for the external
auditor to give their views about significant qualitative aspects of the
Company's accounting practices and to draw to the attention of the Audit
Committee any significant difficulties that they encountered during the audit,
any substantial uncorrected misstatements, any disagreements with management
and any other matters which they felt it appropriate to raise.
Significant Issues
At a planning meeting of the Audit Committee with the auditor, the scope and
timing of the audit were agreed and it was confirmed that the Directors had no
knowledge of any fraud within the Company; it was agreed that the significant
issues in the audit should be the valuations of the properties and the accuracy
of income recognition in the Company and set out below is how the Committee
considered these issues during its review of the financial statements.
Valuation of Properties - How was the issue addressed?
The valuation of properties is undertaken in accordance with the accounting
policy disclosed in note 1(h) to the accounts. The process adopted in the
valuation of the portfolio and the valuations themselves are considered by the
Property Valuation Committee, representatives of which met the external valuer,
along with the Manager, as part of the year end valuation process.
The Chairman of this Committee reported to the Audit Committee in March 2016
and indicated that the following issues were discussed in the meeting with the
external valuers:
* Market review and outlook;
* The level of yields on properties within the portfolio;
* Letting activity within the portfolio;
* Rental value and void changes;
* Comparable evidence relating to the valuation of the properties.
Particular focus was given to the underlying yields applied to a number of the
properties and whether they appropriately reflected the comparable evidence,
letting activity and the property market as a whole. Following this meeting and
subsequent discussions with the Investment Manager, a value of £1,311,695,000
was agreed as the valuation of the property portfolio as at 31 December 2015
(before lease incentive adjustment). The Audit Committee considered the report
by the Chairman of the Property Valuation Committee along with a summary of the
valuation and its key movements by the Investment Manager and agreed that this
valuation was appropriate for the financial statements and that a robust
process of analysis had been followed. In terms of existence of the
properties, the Committee noted the procedures that the Manager has in place to
ensure correct approval and title to all properties held which include any
property transaction documentation having to be approved and signed by the
Board irrespective of its value and the obligations on the Company's solicitors
to ensure good and marketable title. In addition, as part of the external
audit, the Committee sought assurance from the auditor prior to sign off of the
financial statements that the confirmation of all titles had been included as
part of the audit work undertaken.
Recognition of Rental Income - How was the issue addressed?
The recognition of rental income is undertaken in accordance with the
accounting policy disclosed in note 1(e) to the accounts. The Committee
considered the processes and controls the Manager has in place to ensure the
completeness and accuracy of income. These include data input checks, rent
demand reconciliations and rent arrear reconciliations. In addition the
Committee also considered the various reports provided by the Investment
Manager and reviewed on a quarterly basis during the year which included the
following:
* Portfolio Yield summaries;
* Movement in annualised contracted rent;
* Quarterly Income Changes with details of lease activity in the quarter;
* Rent collection percentages;
* Rental arrears;
* Detailed quarterly financial reporting detailing out the main reason for
revenue movements in the quarter.
The Audit Committee concluded that, given the controls and reporting in place
throughout the year, the rental income number included in the financial
statements of £69,558,000 was appropriate.
Review of Auditor
The objectivity of the auditor is reviewed by the Audit Committee, which also
considers the terms under which the external auditor is appointed to perform
non-audit services. The objectivity and independence of the auditor is
safeguarded by obtaining assurances from the auditor that adequate policies and
procedures exist within its firm to ensure the firm and its staff are
independent of the Company by reason of family, finance, employment, investment
and business relationships (other than in the normal course of the business)
and enforcing a policy concerning the provision of non-audit services by the
auditor which governs the types of work which are excluded. The Audit Committee
reviews the scope and results of the audit including the following areas:
* Quality of audit work including ability to resolve issues in a timely
manner;
* Working relationship with the Committee and Manager;
* Suitably qualified personnel involved in the audit;
* Cost effectiveness and the independence and objectivity of the auditors,
with particular regard to non-audit fees.
The performance and effectiveness of the auditors in relation to the above
points was considered through a formal evaluation template completed by the
Committee and the Managers.
The Audit Committee considers that it received all necessary information from
the Company's service providers as well as from the external auditor in order
for it to compile the necessary disclosures. The Committee noted the full
co-operation of all parties in producing the Annual Report and no difficulties
or disagreements was observed. Following the completion of the audit, the Audit
Committee and Board followed a systematic approach to evaluate the auditor and
the effectiveness of the audit process and found this to be satisfactory.
The Company's auditor, Ernst & Young LLP, was first appointed for the year
ended 31 December 2006. In accordance with regulatory requirements, Ernst &
Young LLP rotates the senior statutory auditor responsible for the audit every
five years and this was last changed in 2013. There are currently no
contractual obligations that restrict the Company's choice of auditor. However,
in light of recent FRC guidance on audit tenders, the requirement for a FTSE
350 Company to put its audit out to tender every ten years and EU rules on the
provision of non-audit services, the Audit Committee conducted an audit tender
process during 2015. This process involved the submission of a detailed tender
document followed by Committee interviews with Audit firms invited to tender.
Following the audit tender process, the Audit Committee recommended to the
Board that Deloitte LLP should be appointed as the auditor for the group for
the year ending 31 December 2016, subject to shareholders' approval. Details of
the amounts paid to Ernst & Young LLP during the year for audit fees is set out
in note 3 to the accounts.
In relation to non-audit fees, these amounted in aggregate to £60,250 (2014: £
54,000) for the year ended 31 December 2015 and related principally to costs in
connection with tax returns, tax structuring and due diligence on the purchase
of Brixton Radlett Property Limited, a UK Company acquired during the year
that owned the asset at Ventura Park, Radlett. All of these services were
deemed by the Committee to be beneficial to the operational and tax position of
the Group. Where any non-audit fee is expected to exceed £25,000, the Company
operates a policy under which specific prior approval must be given by the
Committee. Notwithstanding the provision of such non-audit services, the Audit
Committee considers Ernst & Young LLP to be independent, given the safeguards
put in place by Ernst & Young LLP to ensure independence.
Recommendation to the Board
Following its review of the Annual Report and Accounts for the year ended 31
December 2015, the Audit Committee has advised the Board that its considers
that the Annual Report and Accounts, taken as a whole, is fair, balanced and
understandable, and provides the information necessary for shareholders and
other users to assess the Company's position, performance, business model and
strategy.
The Audit Committee is able to give this advice on the basis that it has
carefully scrutinised the Annual Report and Accounts document, which is
prepared by the Manager and subsequently subject to external audit,
specifically focusing on the significant issues detailed in this Report. In its
consideration of the document, the members of the Audit Committee put
themselves in the position of a shareholder and considered carefully whether
the comments made are consistent with their view of the overall performance of
the Company during the period under consideration. Specifically, consideration
has been given to the Financial and Property Highlights section to ensure that
the points raised in this have been selected so as to give a fair picture of
the Company's position and that the performance data in the document has not
been selected so as to give a misleadingly optimistic view of the Company. The
Audit Committee has also critically reviewed the Investment Manager's report to
ensure that the comments made in this are consistent with their knowledge of
the Company and with the figures in the accounts. As with any Company, there
are some elements in the accounts that are inevitably more complex than others
and the Audit Committee has been at pains to have these expressed in clear
language so as to make them as understandable as possible.
Ken McCullagh
Chairman of the Audit Committee
20 April 2016
Directors' Responsibility Statement
The Directors are responsible for preparing the Annual Report and the Group
financial statements in accordance with applicable Guernsey law and those
International Financial Reporting Standards as have been adopted by the
European Union ("IFRS"). They are also responsible for ensuring that the Annual
Report includes information required by the Rules of the UK Listing Authority.
The Directors are required to prepare Group financial statements for each
financial year which give a true and fair view of the financial position of the
Group and the financial performance and cash flows of the Group for that
period. In preparing those Group 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;
* present information, including accounting policies, in a manner that
provides relevant, reliable, comparable and understandable information;
* provide additional disclosures when compliance with the specific
requirements in IFRS 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 IFRS, subject to any material
departures disclosed and explained in the financial statements; and
* prepare the financial statements on a going concern basis unless it is
inappropriate to presume that the Group will continue in business.
The Directors are responsible for keeping proper accounting records which
disclose with reasonable accuracy at any time the financial position of the
Group and enable them to ensure that the Group 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 and other irregularities.
The Directors are also responsible for ensuring that the Group complies with
the provisions of the Listing Rules and the Disclosure Rules and Transparency
Rules of the UK Listing Authority which, with regard to corporate governance,
require the Group to disclose how it has applied the principles, and complied
with the provisions, of the UK Corporate Governance Code applicable to the
Group.
We confirm that to the best of our knowledge:
* the Group financial statements, prepared in accordance with IFRS, as
adopted by the EU, give a true and fair view of the assets, liabilities,
financial position and profit or loss of the Group and comply with the
Companies Law;
* that in the opinion of the Board, the Annual Report and Accounts taken as a
whole, is fair, balanced and understandable and it provides the information
necessary to assess the Group's performance, business model and strategy;
and
* the Strategic Report includes a fair review of the progression and
performance of the business and the position of the Group together with a
description of the principal risks and uncertainties that it faces.
On behalf of the Board
Christopher M.W. Hill
Chairman
20 April 2016
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2015
Year ended Year ended
31 December 31 December
2015 2014
Notes £'000 £'000
Revenue
Rental income 69,558 70,576
Gains on investment properties 8 49,937 124,771
Interest income 606 456
Total income 120,101 195,803
Expenditure
Investment management fee 2 (8,832) (8,168)
Direct property expenses 3 (3,915) (3,653)
Other expenses 3 (3,669) (1,947)
Total expenditure (16,416) (13,768)
Net operating profit before finance 103,685 182,035
costs
Finance costs
Finance costs 4 (8,441) (9,327)
Loss on derecognition of interest (7,403) -
rate swaps
(15,844) (9,327)
Net profit from ordinary activities 87,841 172,708
before taxation
Taxation on profit on ordinary 5 (206) -
activities
Net profit for the year 87,635 172,708
Other comprehensive income
Other comprehensive income to be
reclassified to profit or loss in
subsequent periods
Net change in fair value of swap 12 7,403 -
reclassified to profit and loss
Gain/(loss) arising on effective 12 1,023 (1,348)
portion of interestrate swap
Other Comprehensive income 8,426 (1,348)
Total comprehensive income for the 96,061 171,360
year
Basic and diluted earnings per share 7 6.74p 13.96p
All of the profit and total comprehensive income for the year is attributable
to the owners of the Company. All items in the above statement derive from
continuing operations.
Consolidated Balance Sheet
As at 31 December 2015
Notes 2015 2014
£'000 £'000
Non-current assets
Investment properties 8 1,311,695 1,215,861
Interest rate swap 12 3,038 -
1,314,733 1,215,861
Current assets
Investment properties held 8 - 49,370
for sale
Trade and other 10 11,379 10,626
receivables
Cash and cash equivalents 75,786 63,379
87,165 123,375
Total assets 1,401,898 1,339,236
Current liabilities
Trade and other payables 11 (23,828) (22,386)
Interest rate swap 12 (2,879) (3,573)
Bank Loan 12 - (80,700)
(26,707) (106,659)
Long Term Liabilities
Bank Loan 12 (248,004) (148,937)
Interest rate swap 12 - (4,694)
(248,004) (153,631)
Total liabilities (274,711) (260,290)
Net assets 1,127,187 1,078,946
Represented by:
Share capital 13 539,872 539,872
Treasury shares 13 - -
Special distributable 587,284 597,406
reserve
Capital reserve (128) (50,065)
Revenue reserve - -
Interest rate swap reserve 159 (8,267)
Equity shareholders' funds 1,127,187 1,078,946
Net asset value per share 14 86.7p 83.0p
The accompanying notes are an integral part of this statement.
Consolidated Statement of Changes in Equity
For the year ended 31 December 2015
Share Treasury Special Capital Revenue Interest Total
Capital Shares Distributable Reserve Reserve Rate £'000
£'000 £'000 Reserve £'000 £'000 £'000 Swap
Reserve
£'000
At 1 January 2015 539,872 - 597,406 (50,065) - (8,267) 1,078,946
Net profit for the year - - - - 87,635 - 87,635
Other comprehensive - - - - - 8,426 8,426
income
Dividends paid - - - - (47,820) - (47,820)
Transfer in respect of - - - 49,937 (49,937) - -
gains on investment
properties
Transfer from special - - (10,122) - 10,122 - -
distributable reserve
At 31 December 2015 539,872 - 587,284 (128) - 159 1,127,187
For the year ended 31 December 2014
Special Interest
Share Treasury Distributable Capital Revenue Rate
Swap
Capital Shares Reserve Reserve Reserve Reserve Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000
At 1 January 2014 482,703 (25,264) 600,069 (174,836) - (6,919) 875,753
Issue of Ordinary Shares 49,776 - - - - - 49,776
Issue of Treasury Shares 7,393 25,264 - - - - 32,657
Issue costs - - - - (824) - (824)
Net profit for the year - - - - 172,708 - 172,708
Other comprehensive - - - - - (1,348) (1,348)
income
Dividends paid - - - - (49,776) - (49,776)
Transfer in respect of - - - 124,771 (124,771) - -
gains on investment
properties
Transfer from special - - (2,663) - 2,663 - -
distributable reserve
At 31 December 2014 539,872 - 597,406 (50,065) - (8,267) 1,078,946
The accompanying notes are an integral part of this statement.
Consolidated Cash Flow Statement
For the year ended 31 December 2015
Year ended Year ended
31 December 2015 31 December 2014
£'000 £'000
Cash flows from operating activities
Net profit for the year before taxation 87,841 172,708
Adjustments for:
Gains on investment properties (49,937) (124,771)
Movement in lease incentive (776) (1,106)
Movement in provision for bad debts (132) (790)
Decrease in operating trade and other 155 172
receivables
Increase in operating trade and other 790 1,885
payables
Finance costs 8,280 9,345
Loss on derecognition of interest rate swaps 7,403 -
Net cash inflow from operating activities 53,624 57,443
Cash flows from investing
Purchase of investment properties (149,379) (97,033)
Sale of investment properties 163,999 3,610
Capital expenditure (11,147) (4,309)
Net cash (outflow)/inflow from investing 3,473 (97,732)
activities
Cash flows from financing activities
Issue of Ordinary Shares - 49,776
Reissue of Treasury Shares - 32,657
Issue Costs - (824)
Net proceeds from utilisation of bank loan 18,177 -
Dividends paid (47,820) (49,776)
Bank loan interest paid (5,285) (4,303)
Payments under interest rate swap (2,359) (4,596)
arrangement
Swap breakage costs (7,403) -
Net cash (outflow)/inflow from financing (44,690) 22,934
activities
Net increase/ (decrease) in cash and cash 12,407 (17,355)
equivalents
Opening balance 63,379 80,734
Closing cash and cash equivalents 75,786 63,379
Represented by:
Cash at bank 20,379 20,042
Short term deposits - 2,149
Money market funds 55,407 41,188
75,786 63,379
Notes to the Accounts
1. Accounting Policies
A summary of the principal accounting policies, all of which have been applied
consistently throughout the year, is set out below.
(a) Basis of Accounting
The consolidated accounts have been prepared in accordance with International
Financial Reporting Standards issued by the International Accounting Standards
Board (the IASB), interpretations issued by the IFRS Interpretations Committee
that remain in effect, and to the extent that they have been adopted by the
European Union, applicable legal and regulatory requirements of Guernsey law
and the Listing Rules of the UK Listing Authority. 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 pound sterling
New and amended standards and interpretations
The accounting policies adopted are consistent with those of the previous
financial year. There have been other new and amended standards issued or have
come into effect in the European Union from 1 January 2015 but either these
were not applicable or did not have a material impact on the annual
consolidated financial statements of the Group and hence not discussed and are
detailed below:
- Annual Improvements to IFRSs 2010-2012 Cycle
- Annual Improvements to IFRSs 2011-2013 Cycle
(b) 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 amounts recognised in the
financial statements. However, uncertainty about these judgements, 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.
Fair value of investment properties: Investment property is stated at fair
value as at the balance sheet date as set out in note 1(h) and note 8 to these
accounts.
The determination of the fair value of investment properties requires the use
of estimates such as future cash flows from the assets. The estimate of future
cash flows includes consideration of the repair and condition of the property,
lease terms, future lease events, as well as other relevant factors for the
particular asset.
These estimates are based on local market conditions existing at the balance
sheet date.
Fair value of interest rate swaps: The fair value of the interest rate swaps
are determined using mathematical models. The inputs to these models are taken
from observable market data where possible, but where this is not possible a
degree of judgement is required in estimating fair value. Changes in
assumptions used in the model could affect the reported fair value.
(c) Basis of Consolidation
The consolidated accounts comprise the accounts of the Company and its
subsidiaries drawn up to 31 December each year. Subsidiaries are consolidated
from the date on which control is transferred to the Group and cease to be
consolidated from the date on which control is transferred out of the Group.
The Jersey Property Unit Trusts ("JPUTS") are all controlled via voting rights
and hence these entities are consolidated.
(d) Functional and Presentation currency
Items included in the financial statements of the Group are measured using the
currency of the primary economic environment in which the entity operates ("the
functional currency") which is pounds sterling. The financial statements are
also presented in pounds sterling. All figures in the financial statements are
rounded to the nearest thousand unless otherwise stated.
(e) Revenue Recognition
Rental income, excluding VAT, arising from operating leases (including those
containing stepped and fixed rent increases) is accounted for in the Statement
of Comprehensive Income on a straight line basis over the lease term. Surrender
lease premiums paid and rent free periods granted, are recognised as assets and
are amortised over the period from the date of the lease commencement to the
lease termination date.
Interest income is accounted on an accruals basis and included in operating
profit.
(f) Expenses
Expenses are accounted for on an accruals basis. The Group's investment
management and administration fees, finance costs and all other expenses are
charged through the Statement of Comprehensive Income. Service charge costs, to
the extent they are not recoverable from tenants, are accounted for on an
accruals basis and included in operating profit.
(g) 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 equity is recognised in equity and not in profit or loss. Positions
taken in tax returns with respect to situations in which applicable tax
regulations are subject to interpretation are periodically evaluated and
provisions established where appropriate.
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.
(h) Investment Properties
Investment properties are initially recognised at cost, being the fair value of
consideration given, including transaction costs associated with the investment
property. Any subsequent capital expenditure incurred in improving investment
properties is capitalised in the period during which the expenditure is
incurred and included within the book cost of the property.
After initial recognition, investment properties are measured at fair value,
with the movement in fair value recognised in the Statement of Comprehensive
Income and transferred to the Capital Reserve. Fair value is based on the open
market valuation provided by CBRE Limited, chartered surveyors, at the Balance
Sheet date. The assessed market value is reduced by the carrying amount of any
accrued income resulting from the spreading of lease incentives and/or minimum
lease payments.
On derecognition, gains and losses on disposals of investment properties are
recognised in the Statement of Comprehensive Income and transferred to the
Capital Reserve.
Recognition and derecognition occurs on the unconditional exchange of signed
contracts between a willing buyer and a willing seller.
Investment property is transferred to non-current assets held for sale when it
is expected that the carrying amount will be recovered principally through sale
rather than from continuing use. For this to be the case, the property must be
available for immediate sale in its present condition, subject only to terms
that are usual and customary for sales of such property and its sale must be
highly probable.
The Group has entered into forward funding agreements with third party
developers in respect of certain properties. Under these agreements the Group
will make payments to the developer as construction progresses. The value of
these payments is assessed and certified by an expert.
Investment properties are recognised for accounting purposes upon completion of
contract. Properties purchased under forward funding contracts are recognised
at certified value to date.
(i) Operating Lease Contracts - the Group as Lessor
The Group has entered into commercial property leases on its investment
property portfolio. The Group has determined, based on an evaluation of the
terms and conditions of the arrangements that it retains all the significant
risks and rewards of ownership of these properties and so accounts for leases
as operating leases. Initial direct costs incurred in negotiating and arranging
an operating lease are added to the carrying amount of the leased asset and
recognised as an expense on a straight-line basis over the lease term.
(j) Share Issue Expenses
Incremental external costs directly attributable to the issue of shares that
would otherwise have been avoided are written off to revenue reserves.
(k) Segmental Reporting
The Directors are of the opinion that the Group is engaged in a single segment
of business being property investment in the United Kingdom.
(l) 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.
(m) Trade and Other Receivables
Trade receivables, which are generally due for settlement at the relevant
quarter end are recognised and carried at the original invoice amount less an
allowance for any uncollectable amounts. An estimate for doubtful debts is made
when collection of the full amount is no longer probable, debts are over 90
days old or relate to tenants in administration. Bad debts are written off
when identified.
(n) Trade and Other Payables
Rental income received in advance represents the pro-rated rental income
invoiced before the year end that relates to the period post the year end. VAT
payable is the difference between output and input vat at the year end. Other
payables are accounted for on an accruals basis and include amounts which are
due for settlement by the Group as at the year end and are generally carried at
the original invoice amount. An estimate is made for any services incurred at
the year end but for which no invoice has been received.
(o) Reserves
Special Distributable Reserve
The special reserve is a distributable reserve to be used for all purposes
permitted under Guernsey law, including the buyback of shares and the payment
of dividends.
Capital Reserve
The following are accounted for in this reserve:
- gains and losses on the disposal of investment properties
- increases and decreases in the fair value of investment properties held at
the year end
Revenue Reserve
Any surplus arising from the net profit on ordinary activities after taxation
and payment of dividends is taken to this reserve, with any deficit charged to
the special distributable reserve.
Interest Rate Swap Reserve
Any surplus/deficit arising from the marked to market valuation of the swap
instrument is credited/charged to this account.
Treasury Share Reserve
This represents the cost of shares bought back by the Company and held in
Treasury.
(p) Interest-bearing borrowings
All bank loans and borrowings are initially recognised at cost, being the fair
value of the consideration received net of arrangement costs associated with
the borrowing. After initial recognition, all interest bearing loans and
borrowings are subsequently measured at amortised cost. Amortised cost is
calculated by taking into account any loan arrangement costs and any discount
or premium on settlement.
On maturity, bank loans are recognised at par, which is equivalent to amortised
cost. Bank loans redeemed before maturity are recognised at amortised cost with
any charges associated with early redemptions being taken to the Statement of
Comprehensive Income.
(q) Derivative financial instruments
The Group uses derivative financial instruments to hedge its risk associated
with interest rate fluctuations.
Derivative instruments are initially recognised in the Balance Sheet at their
fair value. Fair value is determined by reference to market values for similar
instruments. Transaction costs are expensed immediately.
Gains or losses arising on the fair value of cash flow hedges in the form of
derivative instruments are taken directly to Other Comprehensive Income. Such
gains and losses are taken to a reserve created specifically for that purpose,
described as the Interest Rate Swap Reserve in the Balance Sheet.
On termination the unrealised gains or losses arising from cash flow hedges in
the form of derivative instruments, initially recognised in Other Comprehensive
Income, are transferred to profit or loss.
The Group considers its interest rate swap qualifies for hedge accounting when
the following criteria are satisfied:
- The instrument must be related to an asset or liability - It must change the
character of the interest rate by converting a variable rate to a fixed rate or
vice versa;
- It must match the principal amounts and maturity date of the hedged item; and
- As a cash flow hedge the forecast transaction (incurring interest payable on
the bank loan) that is subject to the hedge must be highly probable and must
present an exposure to variations in cash flows that could ultimately affect
the profit or loss. The effectiveness of the hedge must be capable of reliable
measurement and must be assessed as highly effective on an ongoing basis
throughout the financial reporting periods for which the hedge was designated.
If a derivative instrument does not satisfy the Group's criteria to qualify for
hedge accounting that instrument will be deemed as an ineffective hedge.
Should any portion of an ineffective hedge be directly related to an underlying
asset or liability, that portion of the derivative instrument should be
assessed against the Group's effective hedge criteria to establish if that
portion qualifies to be recognised as an effective hedge.
Where a portion of an ineffective hedge qualifies against the Group's criteria
to be classified as an effective hedge that portion of the derivative
instrument shall be accounted for as a separate and effective hedge instrument
and treated as other comprehensive income.
Gains or losses arising on any derivative instrument or portion of a derivative
instrument which is deemed to be ineffective will be recognised in profit or
loss. Gains and losses, regardless of whether related to effective or
ineffective hedges, are taken to a reserve created specifically for that
purpose described in the balance
sheet as the Interest Rate Swap Reserve.
(r) New standards, amendments and interpretation not yet effective
There are a number of new standards, amendments and interpretations that have
been issued but are not yet effective for this accounting year and have not
been adopted early. The impact of these standards has not yet been assessed by
the Group but will be in due course. Those standards which may affect the Group
are listed below.
As at the date of authorisation of these financial statements IFRS 9 , IFRS 15
and IFRS 16 have not yet been endorsed or adopted by the EU.
IFRS 9 Financial Instruments
IFRS 9, as issued in 2010, reflects the first phase of the IASB's work on the
replacement of IAS 39 and applies to classification and measurement of
financial assets and financial liabilities as defined in IAS 39. The standard
was initially effective for annual periods beginning on or after 1 January
2013. In November 2013, Chapter 6 of IFRS 9 on hedge accounting was
published. At the same time, Chapter 7 containing the effective date and
transition provisions was amended to remove the mandatory effective date of
IFRS 9. This was intended to provide sufficient time for preparers to make the
transition to the new requirements. Entities may still choose to apply IFRS 9
immediately, but are not required to do so with the effective date of 1 January
2018.
IFRS 15 - Revenue from Contracts
IFRS 15 Revenue from Contracts with Customers (effective
1 January 2017) specifies how and when an entity should recognise revenue and
enhances the nature of revenue disclosures.
IFRS 16 - Leases
IFRS 16 Leases (effective 1 January 2019) sets out the principle for the
recognition, measurement, presentation and disclosure of leases for both the
Lessee and Lessor.
Annual Improvements to IFRS
In addition to the above Annual Improvements to IFRS 2012-2014 Cycle (effective
1 January 2016) have not been adopted early.
2. Fees
Year ended Year ended
31 December 2015 31 December 2014
£'000 £'000
Investment management fee 8,832 8,168
The Group's Investment Manager for the majority of the year was Ignis Fund
Managers Limited, who received an aggregate annual fee from the Group at an
annual rate of 0.65 per cent. of the Total Assets. On 29 December 2015 a new
Investment Management Agreement was entered into with Standard Life (Corporate
Funds) Limited on the same fee basis. The Investment Manager is also entitled
to an administration fee which was reduced from £172,000 per annum to £100,000
per annum from 30 June 2015. The total paid in relation to this fee in the
year was £136,000 (2014: £172,000). Both fees are payable quarterly in arrears.
The Investment Management agreement is terminable by either of the parties to
it on 12 months' notice.
3. Expenses
Direct Property Expenses Year ended Year ended
31 December 2015 31 December
£'000 2014
£'000
Direct operating expenses arising 3,915 3,653
from investment property that
generated rental income during the
period
Other Expenses Year ended Year ended
31 December 2015 31 December 2014
£'000 £'000
Professional fees 2,886 1,984
Movement in bad debt provision (132) (790)
Directors' fees 196* 196
Administration fee 136 172
Administration and company 85 85
secretarial fees
Regulatory fees 318 140
Auditor's remuneration for:
Statutory audit 71 55
Non audit services 60 54
Other expenses 49 51
3,669 1,947
* This figure excludes £25,000 (2014: Nil) payable to directors for additional
work undertaken in relation to the debt refinancing. This cost has been
allocated to loan set up fees and will be amortised over the lifetime of the
loans.
4. Finance costs
Year ended Year ended
31 December 2015 31 December
£'000 2014
£'000
Interest on principal loan amount 5,677 4,281
Amounts payable in respect of 1,972 4,600
interest rate swap arrangement
Facility Fees 282 -
Amortisation of loan set up fees 510 446
8,441 9,327
5. Taxation
UK Commercial Property Trust Limited owns five Guernsey tax exempt
subsidiaries, UK Finance Holdings Limited (UKFH), UK Commercial Property GP
Limited (GP), UK Commercial Property Holdings Limited (UKCPH), UK Commercial
Property Estates Limited (UKCPEL) and UK Commercial Property Estates Holdings
Limited (UKCPEH). GP and UKCPH are partners in a Guernsey Limited Partnership
("the Partnership") and own five Jersey Property Unit Trusts. UKCPEL owns three
Jersey Property Unit Trusts. The Partnership, UKCPH and UKCPEL own a portfolio
of UK properties and derived rental income from those properties. As the
Partnership, GP, UKCPH, UKFH, UKCPEL and UKCPEH are considered tax transparent
in the UK, their taxable results are liable to UK income tax at the rate of 20
per cent. on their respective net rental income.
A reconciliation of the income tax charge applicable to the results from
ordinary activities at the statutory income tax rates to the charge for the
year is as follows:
Year ended Year ended
31 December 2015 31 December 2014
£'000 £'000
Net profit before tax 87,841 172,708
UK income tax at a rate of 20 17,568 34,542
per cent
Effect of:
Capital gains on investment (9,436) (25,143)
properties not taxable
Lease incentive adjustment not 155 221
allowable for tax purposes
Capital gains realised not (706) (32)
taxable
Income not taxable (121) (91)
Intercompany loan interest (13,373) (12,862)
Expenditure not allowed for 3,169 1,865
income tax purposes
Deferred tax asset not provided 2,950 1,500
for
Total tax charge 206 -
During the year the Group purchased a UK Limited Company, Brixton Radlett
Property Limited ("BRPL"). As the losses of the Group cannot be used to offset
the profits of BRPL, the profits of this Company are subject to corporation tax
in the UK. In addition, as the inter- company debt in BRPL is payable to a
Guernsey entity, withholding tax is suffered on the payment of this interest.
It is estimated that for the Group's period of ownership until the year end the
total amount payable in corporation tax and withholding tax is £206,000.
The Group has unused tax losses carried forward of £33,204,000 (2013/2014: £
30,047,000) based on the 2014/2015 tax returns.
The Company and its subsidiaries are exempt from Guernsey taxation under the
Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989 as amended. A fixed
annual fee of £1,200 per company is payable to the States of Guernsey in
respect of this exemption. No charge to Guernsey taxation will arise on capital
gains.
6. Dividends
Dividends on Ordinary Shares: Year ended Year ended
2014 Fourth interim of 0.92p per 31 December 2015 31 December 2014
share paid £'000 £'000
26 February 2015 (2013 Fourth 11,955 15,715
interim: 1.3125p)
2015 First interim of 0.92p per share
paid
29 May 2015 (2014 First interim: 11,955 11,016
1.3125p)
2015 Second interim of 0.92p per
share paid
28 August 2015 (2014 Second interim: 11,955 11,390
1.3125p)
2015 Third interim of 0.92p per share
paid
30 November 2015 (2014 Third interim: 11,955 11,655
1.3125p)
47,820 49,776
A fourth interim dividend of 0.92p was paid on 26 February 2016 to shareholders
on the register on 12 February 2016. Although this payment relates to the year
ended 31 December 2015, under International Financial Reporting Standards it
will be accounted for in the year ending 31 December 2016.
7. Basic and diluted Earnings per Share
The earnings per share (EPS) are based on the net profit for the year of £
87,635,000 (2014: profit £172,708,000) and on 1,299,412,465 (2014:
1,236,787,497) Ordinary Shares, being the weighted average number of shares in
issue during the year. As there are no dilutive instruments outstanding, basic
and diluted earnings per share are identical.
The EPRA EPS for the year ended 31 December 2015 is 2.33p per share (2014:
3.88p). This is calculated after excluding any gain/loss on investment
properties and losses arising on ineffective portions of interest rate swaps
from the Net profit/loss position for the year.
8. Investment Properties
Freehold and Leasehold properties Year ended 31 Year ended 31
December 2015 December 2014
£'000 £'000
Opening valuation 1,265,231 1,042,728
Purchases at cost 149,379 97,033
Capital expenditure 11,147 4,309
Gain on revaluation to market value 47,185 125,717
Disposals at prior year valuation (160,471) (3,450)
Adjustment for lease incentives (776) (1,106)
Fair value at 31 December 1,311,695 1,265,231
Less: reclassified as held for sale - (49,370)
Fair value as at 31 December 1,311,695 1,215,861
Gains/(Losses) on investment properties at
fair value Comprise
Valuation gains 47,185 125,717
Movement in provision for lease incentives (776) (1,106)
Gain on disposal 3,528 160
49,937 124,771
Losses on investment properties sold
Original cost of investment properties sold (152,457) (10,100)
Sale proceeds 163,999 3,610
Profit/(loss) on investment properties sold 11,542 (6,490)
Recognised in previous periods 8,013 (6,650)
Recognised in current period 3,529 160
11,542 (6,490)
Given the objectives of the Group and the nature of its investments, the
Directors believe that the Group has only one asset class, that of Commercial
Property.
CBRE Limited, Chartered Surveyors (the "Property Valuer") completed a
valuation of Group investment properties at 31 December 2015 on an open market
basis in accordance with the requirements of the Valuation Standards issued by
the Royal Institution of Chartered Surveyors, which is deemed to equate to
market value (one asset was valued by Knight Frank LLP). The Property Valuer,
in valuing the portfolio, is acting independently and external to it. Market
value is determined by reference to market based evidence, which is the amount
for which each asset could be exchanged between a knowledgeable, willing buyer
and a knowledgeable, willing seller in an arms length transaction as at the
valuation date. The market value of these investment properties amounted to £
1,319,555,000 (2014 -£1,272,315,000). The difference between the market value
and the fair value at 31 December 2015 consists of accrued income relating to
the pre-payment for rent-free periods recognised over the life of the lease
totalling £7,860,435 (2014 - £7,084,000) which is separately recorded in the
accounts as a current asset.
The Group has entered into leases on its property portfolio as lessor (See note
18 for further information). No one property accounts for more than 15 per
cent. of the gross assets of the Group. All leasehold properties have more than
60 years remaining on the lease term. There are no restrictions on the
realisability of the Group's investment properties or on the remittance of
income or proceeds of disposal. However, the Group's investments comprise UK
commercial property, which may be difficult to realise. Property and property
related assets are inherently difficult to value due to the individual nature
of such property. As a result, valuations are subject to substantial
uncertainty. There is no assurance that the estimates resulting from the
valuation process will reflect the actual sales price even where the actual
sales occur shortly after the valuation date.
In addition to the above, the property portfolio market value as at 31 December
2015 is based on the following:
* The Estimated Net Annual Rent for each property, which is based on the
current rental value of each of the properties, which reflects the terms of
the leases where the property, or part of the property, are let at the date
of valuation. If the property, or parts thereof, are vacant at the date of
valuation, the rental value reflects the rent the valuer considers would be
obtainable on an open market letting as at the date of valuation.
* The valuer has assumed that all rent reviews are to be assessed by
reference to estimated rental value. Also there is the assumption that all
tenants will meet their obligations under their leases, and are responsible
for insurance, payment of business rates, and all repairs, whether directly
or by means of a service charge.
* The valuer has not made any adjustments to reflect any liability to
taxation that may arise on disposal, nor any costs associated with
disposals incurred by the owner however, normal acquisition costs are
included in the valuation.
* The valuer assumes an initial yield in the region of 3 to 7 per cent. for
the majority of the properties, with the reversionary yield being in the
region of 4 to 7 per cent.
* The property valuer takes account of deleterious materials included in the
construction of the investment properties in arriving at its estimate of
open market valuation when the Investment Manager advises of the presence
of such materials.
The majority of the leases are on a full repairing basis and as such the Group
is not liable for costs in respect of repairs or maintenance to its investment
properties.
The following disclosure is provided in relation to the adoption of IFRS 13
Fair Value Measurement. All properties are deemed Level 3 for the purposes of
fair value measurement and the current use of each property is considered the
highest and best use. The fair value of completed investment property is
determined using a yield methodology. Under this method, a property's fair
value is estimated using explicit assumptions regarding the benefits and
liabilities of ownership over the asset's life including an exit or terminal
value. As an accepted method within the income approach to valuation, this
method involves the projection of a series of cash flows on a real property
interest. To this projected cash flow series, an appropriate, market-derived
discount rate (capitalisation rate) is applied to establish the present value
of the cash inflows associated with the real property. The duration of the cash
flow and the specific timing of inflows and outflows are determined by events
such as rent reviews, lease renewal and related lease up periods, re-letting,
redevelopment, or refurbishment. The appropriate duration is typically driven
by market behaviour that is a characteristic of the class of property. In the
case of investment properties, periodic cash flow is typically estimated as
gross income less vacancy, non- recoverable expenses, collection losses, lease
incentives, maintenance cost, agent and commission costs and other operating
and management expenses. The series of periodic net cash inflows, along with an
estimate of the terminal value anticipated at the end of the projection period,
is then discounted. Set out below are the valuation techniques used for each
property sector plus a description and quantification of the key unobservable
inputs relating to each sector. There has been no change in valuation technique
in the year.
Sector Fair Value at Valuation Unobservable Range
techniques inputs
31/12/15 (£m) (weighted average)
Retail 464.2 Yield methodology Annual rent per sq £3-£324 (£67)
ft
Capitalisation 3.6%-11.7% (5.4%)
rate
Office 326.6 Yield methodology Annual rent per sq £13-£78 (£38)
ft
Capitalisation 3.9%-7.5% (5.0%)
rate
Industrial 394.1 Yield methodology Annual rent per sq £5-£19 (£8)
ft
Capitalisation 4.8%-7.3% (5.6%)
rate
Leisure 126.8 Yield methodology Annual rent per sq £12-£35 (£24)
ft
Capitalisation 5.1%-5.9% (5.3%)
rate
Sensitivity analysis
The table below presents the sensitivity of the valuation to changes in the
most significant assumptions underlying the valuation of investment property.
Sector Assumption Movement Effect on valuation
Retail Yield +50 basis points Decrease £42.2m
-50 basis points Increase £51.5m
Office Yield +50 basis points Decrease £34.6m
-50 basis points Increase £43.0m
Industrial Yield +50 basis points Decrease £33.7m
-50 basis points Increase £40.4m
Leisure Yield +50 basis points Decrease £11.6m
-50 basis points Increase £14.1m
Investment property valuation process
The valuations of investment properties are performed quarterly on the basis of
valuation reports prepared by independent and qualified valuers and reviewed by
the Property Valuation Committee of the Company.
These reports are based on both:
* Information provided by the Investment Managers such as current rents,
terms and conditions of lease agreements, service charges and capital
expenditure. This information is derived from the Investment Managers
financial and property management systems and is subject to the Investment
Managers overall control environment.
* Assumptions and valuation models used by the valuers - the assumptions are
typically market related, such as yields. These are based on their
professional judgment and market observation.
The information provided to the valuers and the assumptions and valuation
models used by the valuers are reviewed by the Investment Managers. This
includes a review of fair value movements over the period.
9. Investment in Subsidiary Undertakings
The Company owns 100 per cent. of the issued ordinary share capital of UK
Commercial Property Finance Holdings Limited (UKCFH), a company incorporated in
Guernsey whose principal business is that of a holding company.
The Company owns 100 per cent. of the issued share capital of UK Commercial
Property Estates Holdings Limited (UKCPEH), a company incorporated in Guernsey
whose principal business is that of a holding company. UKCPEH Limited owns 100
per cent. of the issued share capital of UK Commercial Property Estates
Limited, a company incorporated in Guernsey whose principal business is that of
an
investment and property company. UKCPEH also owns 100% of Brixton Radlett
Property Limited, a UK company, whose principal business is that of an
investment and property company.
UKCFH owns 100 per cent. of the issued ordinary share capital of UK Commercial
Property Holdings Limited (UKCPH), a company incorporated in Guernsey whose
principal business is that of an investment and property company.
UKCFH owns 100 per cent. of the issued share capital of UK Commercial Property
GP Limited, (GP), a company incorporated in Guernsey whose principal business
is that of an investment and property company.
UKCPT Limited Partnership, (GLP), is a Guernsey limited partnership, and it
holds a portfolio of properties. UKCPH and GP, have a partnership interest of
99 and 1 per cent. respectively in the GLP. The GP is the general partner and
UKCPH is a limited partner of the GLP.
UKCFH owns 100 per cent. of the issued share capital of UK Commercial Property
Nominee Limited, a company incorporated in Guernsey whose principal business is
that of a nominee company.
In addition the Group controls eight Jersey Property Unit Trusts (JPUTs) namely
176-206 High Street Kensington Unit Trust, Junction 27 Retail Unit Trust,
Charles Darwin Retail Unit Trust, St Georges Leicester Unit Trust, Kew Retail
Park Unit Trust, Pride Hill Retail Unit Trust, Riverside Mall Retail Unit Trust
and Rotunda Kingston Property Unit Trust. The principal business of the Unit
Trusts is that of investment in property.
UKCFH and UKCPEH also have various inter-company loans in place between
themselves and the various subsidiary companies and JPUTS. These loans have
interest rates attached to them at rates ranging from 5.39% per annum to 6.65%
per annum and have maturity dates that range from September 2016 to March 2027.
10. Trade and Other receivables
2015 2014
£'000 £'000
Rents receivable (net of
provision for bad debt - see 1,163 960
below)
Lease Incentive 7,860 7,084
Other Debtors and prepayments 2,356 2,274
VAT receivable - 308
11,379 10,626
Provision for Bad Debts as at
31 December 2013/2012 718 1,508
Movement in the year (132) (790)
Provision for Bad Debts as at 586 718
31 December 2014/2013
Other debtors include tenant deposits of £2,323,000 (2013 - £1,891,000). All
other debtors are due within one year. No other debts past due are impaired.
11. Trade and Other payables
2015 2014
£'000 £'000
Rental income received in 12,062 14,016
advance
Investment Manager fee payable 2,266 2,153
VAT payable 1,230 -
Other payables 8,270 6,217
23,828 22,386
The Group's payment policy is to ensure settlement of supplier invoices in
accordance with stated terms.
12. Bank Loan and Interest rate swaps
2015 2014
£'000 £'000
Total Facilities available 300,000 230,000
Drawn down:
Lloyds facility - 80,000
Barclays facility 150,000 150,000
Cornerstone facility 100,000
Set up costs incurred (4,627) (2,541)
Accumulated amortisation 1,964 1,454
of set up costs
Accrued variable rate 667 724
interest on bank loan
Total due 248,004 229,637
(i) Lloyds Facility
The Company had a seven year £80 million facility with Lloyds Banking Group plc
which was repaid in April 2015. The bank loan was secured on a proportion of
the property portfolio of the Group. Under bank covenants related to the loan
the Company was to ensure that at all times:
* The loan to value percentage does not exceed 50 per cent. (this is defined
as the ratio of the loan compared to the aggregate of the open market
property valuations plus any cash deposits);
* The qualifying adjusted net rental income for any calculation period (any 3
month period) is not less than 175 per cent. of the projected finance costs
for that period;
* No single tenant accounts for more than 30 per cent. of the total net
rental income;
* The five largest tenants do not account for more than 50 per cent. of total
net rental income;
* No single property accounts for more than 25 per cent. of the gross secured
asset value (this is defined as the sum of the value of the properties as
stated in the latest valuations plus any cash deposits).
The Company met all the covenant tests during the period the Company held the
loan.
Interest rate exposure was hedged by the purchase of two interest rate swap
contracts. The hedge was achieved by matching the notional amount of the swaps
with the loan principal and matching the swap term to the loan term. The hedge
was repaid in April 2015 when the loan was repaid. The sum paid in relation to
the swap was £361,000.
(ii) Barclays Facility
The Group also had a seven year £150 million facility which was due to mature
in May 2018, with Barclays Bank plc taken out in May 2011. In April 2015, the
loan was extended out to April 2020. As at 31 December 2015 this entire loan
was drawn down. The bank loan is secured on the property portfolio held by
UKCPEL. Under bank covenants related to the loan UKCPEL is to ensure that at
all times:
* The loan to value percentage does not exceed 60 per cent.
* Interest cover at the relevant payment date is not less than 160 per cent.
UKCPEL met all covenant tests during the year.
Interest rate exposure was hedged by the purchase of three interest rate swap
contracts. These swaps were repaid in April 2015 at a cost of £7.04 million and
replaced by one interest rate swap. The notional amount of the swap and the
swap term matches the loan principal and the loan term.
As at 31 December 2015 the Group had in place one interest rate swap totalling
£150 million with Barclays bank plc (2014: £150 million). The interest rate
swap effectively hedges the current drawn down loan with Barclays Bank plc.
Interest on the swap is receivable at a variable rate calculated on the same
LIBOR basis as for the bank loan (as detailed below but excluding margins) and
payable at a fixed rate of 1.30per cent. per annum on the £150 million swap.
The fair value of the asset in respect of the interest rate swap contracts at
31 December 2015 is £159,000 (2014: Liability of £7.5 million) which is based
on the marked to market value.
Interest is payable by UKCPEL at a rate equal to the aggregate of LIBOR,
mandatory costs of the Bank and a margin. The applicable margin depends on the
ratio of all loans made available to the Company (under the Bank Facility or
otherwise) to the market value of the property portfolio in UKCPEL expressed as
a percentage (the "LTV Percentage") as well as any cash generated from the
sale of one of these properties. Up until April 2015 the following rates
applied: If the LTV percentage is equal to or less than 25 per cent., the
margin is 1.60 per cent. per annum. If the LTV Percentage is greater than 25
per cent. and does not exceed 35 per cent., the margin is 1.70 per cent. per
annum. If the LTV Percentage is greater than 35 per cent. and does not exceed
40 per cent., the margin is 1.85 per cent. Per annum. If the LTV Percentage is
greater than 40 per cent. and does not exceed 45 per cent., the margin is 1.95
per cent. per annum. If the LTV Percentage is greater than 45 per cent. and
does not exceed 60 per cent., the margin is 2.0 per cent. per annum.
Following the refinancing in April 2015 the margin was fixed at 1.5 per cent.
per annum and this was the applicable margin as at 31 December 2015 (2014-
1.70per cent.).
In addition to the above UKPCPEL secured a £50million revolving credit facility
("RCF") from Barclays at a margin of 1.50 per cent. above LIBOR available for
five years but cancellable at any time. The RCF has a non-utilisation fee of
0.6 per cent. per annum charged on the proportion of the RCF not utilised on a
pro-rata basis. At 31 December 2015 the RCF remained unutilised.
(iii) Cornerstone Facility
In April 2015 the Group took out a twelve year £100 million loan which is due
to mature in April 2027 with Cornerstone Real Estate Advisers LLP, a member of
the MassMutual Financial Services Group. The loan was taken out by UK
Commercial Property Finance Holdings Limited (UKCFH). As at 31 December 2015
this entire loan was drawn down. The bank loan is secured on the portfolio of
eight properties held within the wider Group. Under bank covenants related to
the loan UKCFH is to ensure that at all times:
* The loan to value percentage does not exceed 75 per cent.
* Interest cover at the relevant payment date and also projected over the
course of the proceeding 12 months is not less than 200 per cent.
UKCFH met all covenant tests during the year.
Interest is payable by UKCFH at a fixed rate equal to the aggregate of the
equivalent 12 year gilt yield, fixed at the time of drawdown and a margin.
This resulted in a fixed rate of interest payable of 3.03 per cent. per annum.
There are no interest rate swaps in place relating to this facility.
Swap Instruments
As at 31 December 2015 the Group had in place an interest rate swap instrument
totalling £150 million which was deemed to be an effective hedge as per note 1
(q).
The revaluation of this swap at the year end resulted in a gain on interest
rate swaps of £1.0 million (2014: loss £1.3 million). Of the total gain arising
on interest rate swaps, £1.0 million related to effective hedge instruments
(2014: loss £1.3 million) which is credited through Other Comprehensive Income
in the Statement of Comprehensive Income.
The valuation techniques applied to fair value the derivatives include the swap
models including the CVA/DVA swap models, using present value calculations. The
model incorporates various inputs including the credit quality of
counterparties and forward rates.
The fair value of the interest rate swaps as at 31 December 2015 amounted to an
asset of £159,000 (2014: Liability of £8.3 million). Based on current yield
curves and non-performance risk, £2.9 million of this value is a liability
which relates to the next 12 months and is therefore classified as a current
liability. The remainder is classified as a long term asset.
13. Share capital accounts
2015 2014
£'000 £'000
Share capital
Opening balance 539,872 482,703
18,999,527 Treasury Shares of 25 pence
each - 3,333
reissued on 7 May 2014
21,755,495 Treasury Shares of 25 pence - 3,925
each
reissued on 20 May 2014
690,120 Treasury Shares of 25 pence each
reissued 29 August 2014 - 135
17,694,149 Ordinary Shares of 25 pence
each - 14,244
issued 29 August 2014
10,320,260 Ordinary Shares of 25 pence
each - 8,308
issued 9 September 2014
32,604,056 Ordinary Shares of 25 pence
each - 27,224
issued 14 November,
Share Capital as at 31 December 2015 539,872 539,872
(number of shares in issue at the year end being 1,299,412,465 (2014:
1,299,412,465))
Treasury shares
Opening balance
- (25,264)
18,999,527 Treasury Shares of 25 pence
each - 11,581
reissued on 7 May 2014
21,755,495 Treasury Shares of 25 pence
each - 13,262
reissued on 20 May 2014
690,120 Treasury Shares of 25 pence
each - 421
reissued 29 August 2014
Share Capital as at 31 December 2015 - -
Ordinary shareholders participate in all general meetings of the Company on the
basis of one vote for each share held. The Articles of Association of the
Company allow for an unlimited number of shares to be issued. There are no
restrictions on the shares in issue.
14. Net Asset Value per Share
The net asset value per ordinary share is based on net assets of £1,127,187,000
(2014: £1,078,946,000) and 1,299,412,465 (2014: 1,299,412,465) Ordinary Shares,
being the number of Ordinary Shares in issue at the year end.
15. Related Party Transactions
No Director has an interest in any transactions which are or were unusual in
their nature or significant to the nature of the Group.
Ignis Fund Managers Limited, as the Manager of the Group for the majority of
the period and, as of 29 December 2015, Standard Life (Corporate Funds)
Limited, received fees for their services as investment managers. Further
details are provided in notes 2 and 3. The total management fee charged to the
Statement of Comprehensive Income during the year was £8,832,000 (2014: £
8,168,000) of which £2,266,000 (2014: £2,110,000) remained payable at the year
end. The Investment Manager also received an administration fee of £136,000
(2014: £172,000), of which £25,000 (2014: £43,000) remained payable at the year
end.
The Directors of the Company are deemed as key management personnel and
received fees for their services. Further details are provided in the
Directors' Remuneration Report (unaudited) on page •. Total fees for the year
were £221,000 (2014: £196,000) none of which remained payable at the year end
(2014: nil).
The Group invests in the Standard Life Investments Liquidity Fund which is
managed by Standard Life Investments Limited. As at 31 December 2015 the Group
had invested £55.4 million in the Standard Life Investments Liquidity Fund
(2014: £41.2 million). No additional fees are payable to Standard Life as a
result of this investment.
As at 31 December 2015 the Company's immediate parent was Phoenix Life Limited
and ultimate parent entity was Phoenix Group Holdings.
16. Financial Instruments and Investment Properties
The Group's investment objective is to provide Ordinary Shareholders with an
attractive level of income together with the potential for income and capital
growth from investing in a diversified UK commercial property portfolio.
Consistent with that objective, the Group holds UK commercial property
investments. The Group's financial instruments consist of cash, receivables and
payables that arise directly from its operations and loan facilities and swap
instruments.
The main risks arising from the Group's financial instruments are credit risk,
liquidity risk, market risk and interest rate risk. The Board reviews and
agrees policies for managing its risk exposure. These policies are summarised
below and remained unchanged during the year.
Fair values
The fair value of financial assets and liabilities is not materially different
from the carrying value in the financial statements.
Fair value hierarchy
The following table shows an analysis of the fair values of investment
properties recognized in the balance sheet by level of the fair value
hierarchy:
Investment Properties
31 December 2015 Level 1 Level 2 Level 3 Total fair
value
£'000 £'000 £'000 £'000
Investment properties - - 1,311,695 1,311,695
31 December 2014 Level 1 Level 2 Level 3 Total fair
value
£'000 £'000 £'000 £'000
Investment properties - - 1,265,231 1,265,231
The lowest level of input is the underlying yield on each property which is an
input not based on observable market data.
The following table shows an analysis of the fair values of loans recognised in
the balance sheet by level of the fair value hierarchy:
Bank Loans
31 December 2015 Level 1 Level 2 Level 3 Total fair
value
£'000 £'000 £'000 £'000
Bank loans - 245,009 - 245,009
31 December 2014 Level 1 Level 2 Level 3 Total fair
value
£'000 £'000 £'000 £'000
Bank loans - 229,591 - 229,591
The lowest level of input is the interest rate payable on each borrowing which
is a directly observable input.
The following table shows an analysis of the fair values of financial
instruments recognised in the balance sheet by level of the fair value
hierarchy:
31 December 2015 Level 1 Level 2 Level 3 Total fair
value
£'000 £'000 £'000 £'000
Interest rate swap - 159 - 159
31 December 2014 Level 1 Level 2 Level 3 Total fair
value
£'000 £'000 £'000 £'000
Interest rate swap - (8,267) - (8,267)
The lowest level of input is the three month LIBOR yield curve which is a
directly observable input.
Explanation of the fair value hierarchy:
Level 1 - Quoted prices (unadjusted) in active markets for identical assets or
liabilities that the entity can access at the measurement date.
Level 2 - Use of a model with inputs (other than quoted prices included in
level 1) that are directly or indirectly observable market data.
Level 3 - Use of a model with inputs that are not based on observable market
data.
The fair value of investment properties is calculated using unobservable inputs
as described in note 8.
The fair value of the derivative interest rate swap contract is estimated by
discounting expected future cash flows using current market interest rates and
yield curves over the remaining term of the instrument.
The fair value of the bank loans are estimated by discounting expected future
cash flows using the current interest rates applicable to each loan.
Real Estate Risk
The Group has identified the following risks associated with the real estate
portfolio:
• 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;
• 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;
• The exposure of the fair values of the portfolio to market and
occupier fundamentals such as tenants financial position.
Credit risk
Credit risk is the risk that an issuer or counterparty will be unable or
unwilling to meet a commitment that it has entered into with the Group.
At the reporting date, the maturity of the Group's financial assets was:
Financial Assets 2015 3 months More than More than Total
or less 3 months but one year
less
than one year
£'000 £'000 £'000 £'000
Cash 75,786 - - 75,786
Rent receivable 1,163 - - 1,163
Other debtors 2,356 - - 2,356
79,305 - - 79,305
Financial Assets 2014 3 months or less More than More than Total
£'000 3 months but one year £'000
less £'000
than one year
£'000
Cash 63,379 - - 63,379
Rent receivable 960 - - 960
Other debtors 2,232 - - 2,232
66,571 - - 66,571
In the event of default by a tenant, the Group will suffer a rental shortfall
and incur additional costs, including legal expenses, in maintaining, insuring
and re-letting the property until it is re-let. The Board receives regular
reports on concentrations of risk and any tenants in arrears. The Investment
Manager monitors such reports in order to anticipate and minimise the impact of
defaults by tenants.
The Company has a diversified tenant portfolio. The maximum credit risk from
the rent receivables of the Group at 31 December 2015 is £1,163,000 (2014: £
960,000). The Group holds rental deposits of £2,323,000 (2014: £1,891,000) as
collateral against tenant arrears/defaults. All tenant deposits are in line
with market practice. There is no residual credit risk associated with the
financial assets of the Group. Other than those included in the provision for
bad debts, no financial assets past due are impaired.
All of the cash is placed with financial institutions with a credit rating of A
or above. £55.4 million (2014: £41.2 million) of the year end cash balance is
held in the Standard Life Investments Liquidity Fund, which is a money market
fund and has a triple A rating. Bankruptcy or insolvency of a financial
institution may cause the Group's ability to access cash placed on deposit to
be delayed or limited. Should the credit quality or the financial position of
the banks currently employed significantly deteriorate, the Investment Manager
would move the cash holdings to another financial institution subject to
restrictions under the loan facility.
Liquidity Risk
Liquidity risk is the risk that the Group will encounter difficulty in
realising assets or otherwise raising funds to meet financial commitments.
While commercial properties are not immediately realisable, the Group has
sufficient cash resources to meet liabilities.
The Group's liquidity risk is managed on an ongoing basis by the Investment
Manager and monitored on a quarterly basis by the Board. In certain
circumstances, the terms of the Group's bank loan entitles the lender to
require early repayment, and in such circumstances the Group's ability to
maintain dividend levels and the net asset value attributable to the ordinary
shares could be adversely affected.
As at 31 December 2015 the cash balance was £75,786,000 (2014: £63,379,000).
At the reporting date, the maturity of the Group's liabilities was:
Financial Liabilities 2015 3 months More than More than Total
or less 3 months but one year £'000
£'000 less £'000
than one year
£'000
Bank loan and interest rate 1,803 5,423 292,390 299,616
swap
Other creditors 22,324 - - 22,324
24,127 5,423 292,390 321,940
Financial Liabilities 2014 3 months More than More than Total
or less 3 months but one year
less
than one year
£'000 £'000 £'000 £'000
Bank loan 2,234 85,296 164,769 252,299
Other creditors 22,386 - - 22,386
24,620 85,296 164,769 274,685
The amounts in the table are based on contractual undiscounted payments.
Interest rate risk
The cash balance as shown in the Balance Sheet, is its carrying amount and has
a maturity of less than one year.
Interest is receivable on cash at a variable rate ranging from 0.2 per cent. to
0.6 per cent. at the year end and deposits are re-priced at intervals of less
than one year.
An increase of 1 per cent. in interest rates as at the reporting date would
have increased the reported profit by £758,000 (2014: increased the reported
profit by £634,000). A decrease of 1 per cent. would have reduced the reported
profit by £758,000 (2014: decreased the reported profit by £634,000). The
effect on equity is nil (excluding the impact of a charge in retained earnings
as a result of a change in net profit).
As the Group's bank loans have been hedged by interest rate swaps or are at
fixed rates, these loans are not subject to interest rate risk.
As at 31 December 2015 the Group had in place a total of £150 million of
interest rate swap instruments (2014: £230 million). The values of these
instruments are marked to market and will change if interest rates change. It
is estimated that an increase of 1 per cent. in interest rates would result in
the swap asset increasing by £6.0 million (2014: £5.2 million) which would
increase the reported other comprehensive income by the same amount. A
decrease of 1 per cent. in interest rates would result in the swap asset
decreasing by
£6.3 million (2014: £5.2 million) which would decrease the reported other
comprehensive income by the same amount. The other financial assets and
liabilities of Group are non-interest bearing and are therefore not subject to
interest rate risk.
Foreign Currency Risk
There was no foreign currency risk as at 31 December 2015 or 31 December 2014
as assets and liabilities of the Group are maintained in pounds Sterling.
Capital Management Policies
The Group considers that capital comprises issued ordinary shares, net of
shares held in treasury, and long-term borrowings. The Group's capital is
deployed in the acquisition and management of property assets meeting the
Group's investment criteria with a view to earning returns for shareholders
which are typically made by way of payment of regular dividends. The Group also
has a policy on the buyback of shares which it sets out in the Directors'
Authority to Buy Back Shares section of the Directors' Report.
The Group's capital is managed in accordance with investment policy which is to
hold a diversified property portfolio of freehold and long leasehold UK
commercial properties. The Group invests in income producing properties. The
Group will principally invest in four commercial property sectors: office,
retail, industrial and Leisure. The Group is permitted to invest up to 15 per
cent. of its Total Assets in indirect property funds and other listed
investment companies. The Group is permitted to invest cash, held by it for
working capital purposes and awaiting investments, in cash deposits, gilts and
money market funds.
The Group monitors capital primarily through regular financial reporting and
also through a gearing policy. Gearing is defined as gross borrowings divided
by total assets less current liabilities. The Group's gearing policy is set out
in the Investment Policy section of the Report of the Directors. The Group is
not subject to externally imposed regulatory capital requirements but does have
banking covenants on which it monitors and reports on a quarterly basis.
Included in these covenants are requirements to monitor loan to value ratios
which is calculated as the amount of outstanding debt divided by the market
value of the properties secured. The Group's Loan to value ratio is shown
below.
The Group did not breach any of its loan covenants, nor did it default on any
other of its obligations under its loan arrangements in the year to 31 December
2015.
2015 2014
£'000 £'000
Carrying amount of interest-bearing loans and 248,004 229,637
borrowings
External valuation of completed investment 1,319,555 1,272,315
property
Loan to value ratio 18.8% 18.05%
The Group had contracted capital commitments as at 31 December 2015 of £13
million (31 December 2014 - nil) for capital works required relating to an
agreement for lease with Primark Stores Ltd at Shrewsbury.
17. Capital Commitments
The Group had contracted capital commitments as at 31 December 2015 of £13
million (31 December 2014 - nil) for capital works required relating to an
agreement for lease with Primark Stores Ltd at Shrewsbury.
18. Lease Length
The Group leases out its investment properties under operating leases.
The future income under non-cancellable operating leases, based on the
unexpired lease length at the year end was as follows (based on total rentals):
2015 2014
£000 £000
Less than one year 68,413 67,477
Between one and five 224,019 209,661
years
Over five years 341,092 341,578
------- -------
Total 633,524 618,716
------- -------
The largest single tenant at the year end accounted for 6.98 per cent. (2014:
3.74 per cent.) of the current annual rental income.
The unoccupied property expressed as a percentage of annualised total rental
value was 2.8 per cent. (2014: 2.6 per cent.) at the year end.
The Group has entered into commercial property leases on its investment
property portfolio. These properties, held under operating leases, are measured
under the fair value model as the properties are held to earn rentals. The
majority of these non-cancellable leases have remaining non-cancellable lease
terms of between 5 and 15 years.
19. Service charge
The Group's managing agents Jones Lang LaSalle manage service charge accounts
for all the Group's properties. The Group pays the service charge on any vacant
units. Service charges on rental properties are recharged to tenants. The total
service charge incurred in the year to 31 December 2015 was £5.4 million (2014:
£7.1 million). Of this figure, the service charge paid by the Group in respect
of void units was £1.4 million (2014: £1.7 million) and is included in direct
property expenses.
This Annual Financial Report announcement is not the Company's statutory
accounts for the year ended 31 December 2015. The statutory accounts for the
year ended 31 December 2015 received an audit report which was unqualified.
The Annual Report will be posted to shareholders in April 2016 and additional
copies will be available from the Manager (Tel. 0131 245 3151) or by download
from the Company's webpage (www.ukcpt.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.
UK COMMERCIAL PROPERTY : Annual Financial Report
April 21, 2016 at 02:01 am
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