30 Jan 2009 12:14
30 January 2009
INVISTA EUROPEAN REAL ESTATE SICAF (the "Company")
Posting of Annual Report & Accounts 2008
Further to the announcement by the Company of its prelims on 22 January 2009 in respect of the year ended 30 September 2008, the Company is pleased to announce that the Annual Report & Accounts has been dispatched to shareholders today. A copy of the Annual Report and Accounts can be found on the Company's website at www.ieret.eu and the full text is otherwise given below.
Invista European Real Estate Trust SICAF
Annual Report and Accounts 2008
For the year ended 30 September 2008
Financial Summary
Net Asset Value per share
€2.34
Investment property
€687.4million 1
Net Asset Value 2 per share decreased by €0.77 to €2.34
Loss per share of €0.55
The Group has declared and paid total dividends amounting to €0.089 per share
Net Asset Value total return of -19.9%
| 30/09/08 | 30/09/07 | |
| Net Asset Value ('NAV') 2 | €267.7m | €355.1m |
| NAV per share 2 | €2.34 | €3.11 |
| NAV per share 2,3 | 186p | 216p |
| Share price | 51.75p | 199.75p |
| Share price discount to NAV | 72.2% | 7.5% |
| NAV total return 4 | (19.9%) | 11.8% |
| Total Group assets less current liabilities 5 | €713.2m | €780.3m |
Sources: Invista Real Estate Investment Management Limited; Datastream.
1 Direct property valuation includes €55.8 million in respect of two assets in Lyon, France sold in October 2008.
2 NAV is calculated using International Financial Reporting Standards and adjusted to add back deferred tax.
3 €:£ exchange rate used €1.2582 as at 30 September 2008; €1.4359 as at 30 September 2007.
4 NAV total return for the year ended 30 September 2007 is the return from IPO on 20 December 2006 assuming a pro forma NAV of €2.82.
5 Current liabilities exclude banking facilities.
Company Summary
As at 30 September 2008, Invista European Real Estate Trust SICAF (the 'Company') and its subsidiaries (together the 'Group') held a diversified real estate portfolio comprising 51 commercial properties across seven Continental European countries and were committed to acquire one further property. The combined aggregate value of these properties was €697.9 million (€687.4 million of which were owned 1).
The Company's objective is to provide shareholders with an attractive level of income return together with the potential for income and capital growth through investing in diversified commercial real estate in Continental Europe. The investment strategy of the company has been predominantly focused on the Western European countries due to the relative stability, transparency and liquidity of these markets.
Performance summary
Property performance
| | 30/09/08 | 30/09/07 |
| | Total | Total |
| | €’m | €’m |
| Value of Property Assets 1 | 687.4 | 724.3 |
| Current annualised rental income including rental guarantees | 50.7 | 48.4 |
| Estimated open market rental value | 49.9 | 48.3 |
Summary consolidated income statement
| Year ended | Year ended | |
| 30/09/08 | 30/09/07 | |
| €'m | €'m | |
| Net rental and other income | 45.4 | 31.8 |
| Net valuation (loss)/gains on investment property | (65.9) | 23.1 |
| Expenses | (14.6) | (16.5) |
| Net finance costs | (26.4) | (15.8) |
| (Loss)/profit before tax | (61.5) | 22.6 |
| Taxation | (1.7) | (12.4) |
| (Loss)/profit for the year | (63.2) | 10.2 |
| Earnings and dividends | ||
| Earnings per share (Euro) | (0.55) | 0.12 |
| Dividends declared per share (Euro) | 0.0887 | 0.1377 |
| Dividend yield on 30 September share price 1 | 13.6% | 6.2% |
| Bank borrowings | ||
| Borrowings 2 | 445.5 | 427.5 |
| Borrowings as percentage of total assets less current liabilities 2 | 62.5% | 54.8% |
| Borrowing as percentage of market value of property assets 2 | 64.8% | 59.0% |
| Loan covenant of borrowings as percentage of market value of property assets | 70.0% | 70.0% |
| Estimated annualised total expense ratio | ||
| As percentage of total assets less current liabilities 3 | 2.11% | 1.64% |
| As percentage of shareholders' funds 3 | 6.07% | 3.88% |
1 Share price converted to Euro at exchange rate of €:£ of 1.2582 prevailing at 30 September 2008 and 1.4359 as at 30 September 2007.
2 As at 30 September 2008, borrowings include €32.5 million in respect of two assets in Lyon, France sold in October 2008.
3 The Total Expense Ratio ('TER') for the year to 30 September 2008 excludes exceptional costs of €1.7 million relating to abortive transactions in the year ended 30 September 2008 and €5.4 million relating to the issuing costs and performance fees in the year ended 30 September 2007.
Chairman's Statement
Tom Chandos
Chairman
Invista European Real Estate Trust
"The Company is now on a firmer footing having removed the uncertainty over the refinancing and with the completion of the recent sales."
This is a challenging environment marked by a high degree of stock market volatility as investors grapple with the combined effect of government intervention and a weakening economic environment. Real estate has traditionally exhibited more defensive characteristics in times of high stock market volatility, however, in this cycle it is clear that the asset class has been significantly affected by the withdrawal of debt and credit from the market. More usually a property market downturn has been driven by property factors such as over-development or rapid rental growth. However, none of these characteristics caused this downturn or have been exhibited thus far during this cycle.
The independent property valuations of the Company's portfolio as at 30 September 2008 showed a like-for-like fall in value of 5.7% during the quarter June-September 2008 which contributed towards a full financial year decrease of 9.5%. This
decrease followed a period of relatively stable valuation performance in 2007, which to a large extent reflected the long leases and good quality tenants in the portfolio. The lack of liquidity in the market has however accelerated asset value declines. In the short term it is therefore inevitable that property values will continue to decrease as the markets adjust to the less favourable outlook. Despite this, we remain optimistic about the quality of our current portfolio and its long term prospects.
Results
The Company's second financial year following its listing on 20 December 2006 has again been an active period. The gradual slowdown in the property markets of Continental Europe has heightened the efforts of our Investment Manager to preserve income through applying active management techniques to the properties in the portfolio. The priority for the second half of the year has been on securing long term refinancing and realising asset sales, and both of these activities have been successfully achieved after the year end.
During the financial year, the Group's audited Net Asset Value ('NAV') adjusted to add back deferred tax decreased by €0.77 per share to €2.34 or by 24.8%. Reducing property valuations during the year was the greatest contributor towards this outcome and revaluations of the interest rate swap also caused some volatility in NAV. The net rental yield on valuation did, however, remain relatively high at 6.70% as at 30 September 2008 and is expected to rise further as valuations decline. Including the interim dividend totalling €0.089 per share, the Group's total NAV return per share over the period was -8.6% in Sterling and -19.9% in Euro terms. This compares with an annualised total NAV return of 15.1% in Sterling as at 30 September 2007. Over the 12 month period the positive effect of Euro appreciation resulted in gains in Sterling of 14.1%. The Group has not hedged currency.
The Board is in discussions with the Investment Manager with respect to an adjustment to the Investment Management fee. Further details will be announced subject to regulatory requirements.
Property Portfolio
The portfolio discipline of the Investment Manager has been to construct the property portfolio using a bottom up approach, identifying good quality assets in the most established and mature markets of Western Europe, which were let on longer leases to financially sound tenants. In more testing economic times, the quality of the portfolio and its diversity means that the Company is less exposed to possible relative underperformance of certain sectors, industries, regions or countries.
In an environment where preserving cash is becoming increasingly important our Investment Manager is continually monitoring the activity and performance of our clients - the tenants occupying the properties in the portfolio. There is no current evidence of increased tenant defaults or rent arrears, although it is anticipated that tenants will become more focused on occupational cost during 2009-2010. Vacancy across the portfolio remains low at 3.8% and good progress has been made during the year in letting up void accommodation. Against the background of the slowing economy the financial strength of our tenants will be carefully monitored to ensure income performance is maintained.
Two properties were sold in October 2008 post the year end in Lyon, France for a total consideration of €55.8 million, 0.36% above the 30 September 2008 valuation. The fully let properties comprised three office buildings leased to IBM, Scotts and BASF in Ecully and an office building of 6,372 sq m let on a long term basis to Merial.
Borrowings
I am pleased to report that following the reporting period, the Company has agreed terms with its existing lender, the Bank of Scotland, for a three year extension of its existing senior debt facility. The Company has drawn down facilities of €410 million, representing 65% LTV, for a three year term expiring on 31 December 2011 at a margin of 2.75% per annum over three month EURIBOR. All debt is fully hedged against changes in European interest rates until January 2013 at a weighted average swap rate of 4.055%.
In an environment where there is precious little new debt available, we are pleased to have been able to secure an extension of the entire facility with the Bank of Scotland and remove an issue which we believe had weighed heavily on the Company during 2008.
Whilst this facility will provide the Company with certainty of debt funding and a fixed cost of financing for a further three years the debt is extremely expensive and constrains the amount of free cash flow generated post interest payments. It is the Board's intention to refinance this debt to a lower cost of longer term financing once financial markets improve but in the meantime further sales will be used to reduce debt.
Dividends
In such turbulent markets it is important for the Company to preserve cash with a view to de-leveraging during 2009 using surplus cash flow and proceeds from sales. Post the year end the Board therefore decided to suspend dividends in respect of the second interim dividend for the financial year ended 30 September 2008 and for the entire financial year ending 30 September 2009. The Board will review this dividend policy regularly in light of the health of the financial markets, the volume of cash flow and progress on implementing the de-gearing strategy.
Market Outlook
Economic growth slowed across the Eurozone during 2008 and prospects for 2009-2010 are for flat or even slightly negative GDP growth 1. Against this more challenging background, the Investment Manager believes that leasing activity in Europe will weaken in 2009, leading to rental declines in some markets. Total returns are expected to fall below long term average levels and are likely to be materially lower than in the past few years.
The Investment Manager also expects property market performance to become increasingly divergent between countries, regions and sectors, with the more volatile Spanish, Irish and Scandinavian markets at the weaker end of the spectrum. Against this, the more stable economies of Belgium, France, Germany and the Netherlands are still expected to benefit from constrained supply and therefore experience less downward pressure on rental levels. However, significant downward pressure on prices will be in evidence for the whole of 2009.
We expect market conditions to remain challenging for the foreseeable future. The Company will not be immune from the current market dislocation, however it is now on a firmer footing having removed the uncertainty over the refinancing and with the completion of the recent sales. The unprecedented events in the global financial markets in the last few months will mean property valuations remain under pressure in the short term; however government intervention in the banking market should begin to ease liquidity in the debt markets over time. The Company will continue to work diligently through the agreed strategy of effecting asset disposals, reducing borrowings, preserving income and adding value to assets with the aim of returning long term value to shareholders.
I would like to thank the Board for their continued support and contribution in these challenging times.
Tom Chandos
Chairman
20 January 2009
'Economic Forecast, Autumn 2008' European Commission.
Investment Manager's Report
Tony Smedley
Head of Continental European Funds
Invista Real Estate Investment Management
"The Company will continue to work diligently through the agreed strategy of effecting asset disposals, reduce borrowings, preserving income and adding value to assets."
Introduction
Operating conditions in the European property market are difficult and are expected to remain so in 2009. The severe lack of new credit in the capital markets substantially reduced investment activity and was the major factor causing property values to weaken considerably during the year. This restriction has now led to greater levels of economic uncertainty for 2009 and an expectation of falling growth in some European countries, although we expect our tactical decision to invest in mature, relatively transparent and less volatile geographic markets will remain of long term benefit to the Group.
As a consequence the Company experienced a fall in the value of the underlying property portfolio by 9.5% in the year ended 30 September 2008. This was, nevertheless, in line with expectations and we anticipate further value falls in 2009.
Performance
During the last financial year, the adjusted Net Asset Value ('NAV') decreased by €0.77 per share to €2.34 (186 pence), a fall of 24.8% in Euro terms. Including the first interim dividend the total NAV return on a sterling basis over the last 12 months has been -8.6%. This compares with an increase of 15.1% in the previous year. The decrease in NAV was largely caused by falling property valuations which gained momentum towards the end of the period, the last quarter recording a 5.7% fall. It is difficult to predict future valuation falls across seven markets and three sectors in which the Company is invested but we anticipate at least a further average 15% decrease in property values over the course of 2009.
Operationally the property assets continue to perform well with a relatively high income return, low vacancy and limited tenant default. The net initial yield on valuation as at 30 September 2008 was 6.70% (7.25% gross initial yield) and vacancy remained low at 3.8%. The like-for-like income growth during the year was 3.4% and going forward, in an environment where capital performance is weak, we will continue our work to preserve the income performance of the properties.
Objective and Strategy
The European commercial property market has moved into a phase where rental growth and total returns are expected to be below the long term average. In this more challenging environment we expect property market performance to become increasingly divergent across country, region and sector. However, by remaining tactically overweight in large, liquid and transparent property markets such as Belgium, France, Germany and the Netherlands, the Company remains better positioned to protect income and capital.
We favour those countries and sectors which have historically displayed 'low-beta' performance characteristics, where for instance rental growth has been less cyclically volatile and vacancy rates remain in line with long term averages. By contrast, property markets in weaker economies characterised by higher rent volatility are expected to underperform as rents begin to experience downward pressure. We will continue to implement value accretive asset management initiatives in order to enhance the income profile of the Group's property portfolio, such as lengthening leases, reducing vacancy and increasing the overall net income to the Group.
The Market
There has been substantial turmoil in the property and capital markets during the period and the Group has not been immune to its effects. Concerns about the performance of sub-prime mortgages led rapidly to a capital markets downturn, causing a credit market crisis and the need for significant government funded re-capitalisation. In this environment property, being a very capital intensive industry began to suffer price falls as investment demand became limited to equity funded purchasers only. Current market conditions are unusual in that property market pricing falls have to date been capital market driven and not property market driven. This is unlike the last property market cycle in 2000 when over development was the main driver of a property correction. Supply risks in most markets currently appear to be well contained in this phase of the property cycle.
Although economic performance is weakening across our target markets we remain of the view that the extent of the downturn in Continental European property markets may not be as deep as that which has occurred (and still is occurring) in the UK. Quantitatively the markets in Continental Europe did not experience the same capital value growth as the UK with income yields remaining higher and interest rates remaining lower. Data from the independent research house Property Market Analysis ('PMA') does, however, suggest that the time lag between UK and Continental European yield shift is less significant than is widely perceived with the second quarter of calendar year 2007 marking the point at which yields in both markets started to rise. However, the rate of outward yield shift (i.e. increase in property yields) in Continental Europe continues to lag behind the UK as there is less yield driven capital growth from the 2004-2007 period to unwind. We forecast that most of the outward yield shift in Europe will have occurred by the end of 2009.
Inflation across Continental Europe is now falling rapidly and as a result bond yields are lower and expected to remain under downward pressure during 2009. By contrast, property yields in Continental Europe have been rising since the second quarter of calendar year 2007 and currently stand at a premium to the risk-free rate (long term government bond yields).
There were signs that property leasing activity and rental growth began to slow in the second half of calendar year 2008. However, the full impact of economic weakness will not be felt until the second half of calendar year 2009 due to the lag between the economy and property market. Headline rents have so far generally remained stable, although the requirement to provide incentives (e.g. rent-free periods) is increasing in a clear sign that the leasing market is becoming more tenant-friendly. Disparities between countries will also become more apparent, favouring the large and relatively stable leasing markets in Germany and France (although Paris Central Business District has the potential to experience rental declines). The downturn is expected to be most severe in Ireland, Norway, Spain and parts of Eastern Europe, where according to the real estate agency firm CBRE prime office rents started to decline in the third quarter of calendar year 2008. Prime retail and industrial rents have so far generally remained stable across the Continent.
The Portfolio
As at 30 September 2008, the Company owned a portfolio of 52 assets (including the conditionally committed asset at Girona in Spain) which was valued at €697.9 million reflecting an average lot size of €13.4 million. The valuation is carried out on a quarterly basis by DTZ Debenham Tie Leung in accordance with the guidance issued by the Royal Institution of Chartered Surveyors. This valuation compares with a property portfolio value of €736.3 million and 47 assets as at 30 September 2007. The valuation has decreased by 9.5% on a like-for-like basis over the year. In December 2007, the Group completed the purchase of five office assets located in and around central Brussels for a total of €32 million. The portfolio was acquired based on a business plan of active management including leasing vacancy, undertaking selective capital improvements and re-gearing leases. One of the properties is conditionally committed to be sold at above valuation and 34% of the vacancy has been leased since purchase.
Top 10 properties by value* - Table 1
| Location | Sector | % |
| Heusenstamm, Frankfurt, Germany | Office | 11.4 |
| Riesa, Germany | Retail | 7.9 |
| Ecully, Lyon, France | Office | 4.7 |
| Cergy, Paris, France | Office | 4.5 |
| Lutterberg, Germany | Logistics | 4.4 |
| Madrid, Spain | Logistics | 3.7 |
| Monteux, France | Logistics | 3.1 |
| Villeurbanne, Lyon, France | Office | 3.0 |
| Grenoble, France | Office | 3.0 |
| Marseille, France | Logistics | 2.9 |
| Total | 48.6 |
* Percentage of aggregate asset value plus cash (including one committed asset) as at 30 September 2008 prior to the sale of two properties in Lyon, France in October 2008.
Top 10 tenants by income** - Table 2
| Tenant | % |
| Norbert Dentressangle | 19.0 |
| Deutsche Telekom | 10.9 |
| DHL Exel Supply Chain | 7.1 |
| Tech Data | 3.7 |
| Valeo | 3.6 |
| Bax Global | 3.4 |
| Merial | 3.0 |
| Carrefour | 2.8 |
| AVA Marktkauf | 2.4 |
| Real SB-Warenhaus GmbH | 2.1 |
| Total | 58.0 |
** Percentage of aggregate gross rent (including one committed asset) as at 30 September 2008 prior to the sale of two properties in Lyon, France in October 2008.
Table 1 opposite shows the Company's 10 largest properties by value calculated as a proportion of the open market value of the portfolio as at 30 September 2008 including cash. These assets account for 48.6% by value of the portfolio which has remained largely unchanged during the year (48.7% as at September 2007). The largest property in the portfolio is located near Frankfurt, Germany and is fully let to Deutsche Telekom with over 12 years remaining on the lease. The largest retail property is located in Riesa, Germany (between Leipzig and Dresden) and accounts for 7.9% of the portfolio value. The property is a 50,263 sq m retail park anchored by Real, Toom and MediMax with significant potential for reconfiguration of the retail units and possible adjacent development.
As at 30 September 2008 the Group's portfolio generated a gross income of €50.6 million per annum (net €49.8 million) from 196 individual leases and 175 tenants with 6.3 years weighted average lease length to expiry and 4.2 years until the next break. The portfolio produced a net initial yield of 6.70% on valuation (gross initial yield of 7.25%). The credit rating of the tenants within the portfolio is 69/100 which is classified as 'low-medium risk' (source: Experian July 2008). This has improved slightly during the year from 68/100 as at December 2007.
Table 2 opposite shows the Group's 10 largest tenants by income, calculated as a proportion of the gross annual rental income receivable by the Group as at 30 September 2008. The French logistics business Norbert Dentressangle generated 19.0% of the portfolio's rental income compared with 14.3% last year. This increase was as a result of their acquisition of the Copal Logistics and Christian Salvesen businesses both of whom were existing tenants in the portfolio. Norbert Dentressangle has a low-medium risk rating of 75/100 (source: Experian, July 2008). Norbert Dentressangle occupies a total of 12 assets, mainly located in France with one asset in The Netherlands as a result of the acquisition of Christian Salvesen, with varying lease terms and durations. The weighted average unexpired lease term of the properties occupied by Norbert Dentressangle is currently 4.6 years (1.7 years to first break) in comparison with last year which was 4.5 years (2.7 years to first break). Post year end we have negotiated the termination of two leases to Norbert Dentressangle which will result in a reduction in their weighting to 17.4%. There are operational advantages in having Norbert Dentressangle as tenant in a number of the Group's properties however we will continue to seek to reduce the Company's weighting to this tenant over time.
Our second largest tenant, Deutsche Telekom, accounts for 10.9% of the portfolio income (9.9% as of 30 September 2007) and has a low risk rating of 91/100 (source: Experian, July 2008). Our third largest tenant, DHL (owned by Deutsche Post), occupies two properties in the portfolio and has a low-medium risk rating of 79/100 (source: Experian, July 2008).
Expiry Dates of Lease Contracts
| Year | Percentage of income subject to lease expiry in the year |
| 2009 | 4.4 |
| 2010 | 3.6 |
| 2011 | 8.7 |
| 2012 | 8.1 |
| 2013 | 10.9 |
| 2014 | 4.1 |
| 2015 | 25.9 |
| 2016 | 7.6 |
| 2017 | 6.3 |
| 2018 | 6.8 |
| 2019 + | 13.6 |
Years correspond to the financial year of the Company
Break Dates of Lease Contracts
| Year | Percentage of income subject to lease break in the year |
| 2009 | 20.5 |
| 2010 | 12.7 |
| 2011 | 15.9 |
| 2012 | 16.8 |
| 2013 | 6.2 |
| 2014 | 4.2 |
| 2015 | 2.9 |
| 2016 | 2.5 |
| 2017 | 2.5 |
| 2018 | 2.2 |
| 2019 + | 13.6 |
Years correspond to the financial year of the Company
The charts on the previous page show the income expiry profile of the properties in the Company's portfolio. The percentages are calculated as a proportion of the Group's gross annual rental income (receivable as at 30 September 2008) which expires within the stated period. The weighted average lease length until expiry of the portfolio is 6.3 years compared with 6.8 years in 2007.
The chart on the previous page (right) showing the lease break analysis warrants further explanation. It is apparent from the chart that a large proportion of the income is subject to a lease break event in the next four years but this is largely a feature of the traditional 3/6/9 year lease structure used in France, our largest market. To that extent therefore this profile is not unusual. Nevertheless, we are working hard to limit any risks attached to this through advancing lease negotiations and approaching tenants to discuss operational strategy ahead of due dates. For example, we are already engaged in negotiations with tenants in respect of over 75% of the income which is subject to a lease break in the next 12 months. Furthermore, we believe occupiers are less likely in the current weak economic environment to incur the very significant costs of undertaking a move unless there are other factors influencing their decision such as occupying space at a rent which is above market level. We nevertheless maintain the active strategy to negotiate lease extensions with tenants in an environment where occupational costs are expected to come under increasing pressure.
The chart, below left, shows the Group's weighting to each property sector. The percentages are calculated as a proportion of the open market value of the properties (including the committed asset in Girona, Spain) within the portfolio as at 30 September 2008.
As at 30 September 2008, the Company's portfolio was weighted positively towards the logistics sector. This is consistent with the Investment Manager's strategy of owning relatively high yielding assets to provide additional support to the income characteristics of the Company. The intention is to reduce the weighting from the logistics sector over time in order to benefit from medium term upside in other sectors - particularly offices in a recovery phase from 2010 onwards.
Sector Weightings
Percentages
1 50.5 Logistics
2 35.8 Offices
3 13.8 Retail
Country Weightings
Percentages
1 49.4 France
2 32.3 Germany
3 6.8 Belgium
4 5.4 Spain
5 3.4 Netherlands
6 1.6 Czech Republic
7 1.2 Poland
The chart, above right, shows the Group's weighting to each country in Continental Europe in which it is invested. The percentages are calculated as a proportion of the open market value of the properties within the Group as at 30 September 2008.
As at 30 September 2008, the portfolio was positively weighted towards the French and German markets. This is in line with the Group's strategy to target the largest and most liquid markets in Western Europe as they have well established occupational and investment markets. Such markets are considered to have 'low beta' characteristics and do not exhibit the high growth, high volatility of some of the less stable markets such as Spain, Ireland and parts of Central and Eastern Europe. The Group has limited exposure to those higher volatility markets and as such is benefiting from the strategic decision to remain positively weighted in Western Europe.
Portfolio statistics
| Czech | ||||||||
| Portfolio Statistics 1 | France | Germany | Spain | Netherlands | Belgium | Republic | Poland | Total |
| Number of Tenants 6 | 37 | 105 | 2 | 2 | 27 | 1 | 1 | 175 |
| Number of Leases 6 | 52 | 108 | 3 | 2 | 29 | 1 | 1 | 196 |
| 10 Largest Tenants 6 | 68.8% | 91.0% | 100.0% | 100.0% | 80.9% | 100.0% | 100.0% | 58.0% |
| Gross Rent (€'000) 6 | 25,613 | 16,001 | 2,609 | 1,773 | 3,020 | 952 | 634 | 50,603 |
| Net Rent (€'000) 5 | 25,567 | 15,313 | 2,563 | 1,739 | 3,020 | 952 | 621 | 49,775 |
| Potential Rent 5 | 27,070 | 16,046 | 2,609 | 1,773 | 3,526 | 952 | 634 | 52,611 |
| ERV (€'000) 5 | 25,269 | 15,348 | 2,653 | 1,774 | 3,411 | 814 | 679 | 49,949 |
| Over/Under Rent 2,7 | 6.66% | 4.35% | (1.68%) | (0.09%) | 3.26% | 14.46% | (7.12%) | 5.06% |
| Average Occupancy Rate 3 | 94.6% | 99.7% | 100.0% | 100.0% | 85.6% | 100.0% | 100.0% | 96.2% |
| Number of Properties 6 | 34 | 6 | 2 | 2 | 6 | 1 | 1 | 52 |
| Average Lot Size (€'000) 5 | 6,622 | 57,427 | 18,715 | 11,820 | 7,915 | 11,000 | 8,630 | 13,421 |
| Net Equivalent Yield 2 | 7.20% | 6.48% | 6.77% | 6.13% | 7.25% | 6.98% | 7.41% | 6.91% |
| Net Initial Yield 2 | 6.85% | 6.44% | 6.59% | 6.86% | 6.27% | 8.65% | 7.20% | 6.70% |
| Lettable Floor Space | ||||||||
| (sq m) 6 | 418,900 | 196,976 | 48,398 | 30.048 | 25,038 | 17,147 | 20,849 | 757,356 |
| Lettable Floor Space 6 | 55.31% | 26.01% | 6.39% | 3.97% | 3.31% | 2.26% | 2.75% | 100.0% |
| Sector 4,5 | ||||||||
| Office | 34.5% | 36.9% | 0.0% | 0.0% | 100.0% | 0.0% | 0.0% | 35.8% |
| Logistics | 65.5% | 20.5% | 100.0% | 100.0% | 0.0% | 100.0% | 100.0% | 50.5% |
| Retail | 0.0% | 42.7% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 13.8% |
1 As at 30 September 2008, includes committed property in Girona, Spain.
2 Weighted average by property.
3 Calculated as a percentage of ERV on vacancy as a percentage of the sum of passing rent and ERV on vacancy.
4 Calculated as a percentage of market valuation as at 30 September 2008.
5 Source: DTZ Debenham Tie Leung valuation as at 30 September 2008.
6 Source: Invista Real Estate Investment Management Limited.
7 Positive figures represent over-rented, negative figures represent under-rented.
Disposals
During the period the Company conditionally committed to sell two office properties in Lyon, France for a total consideration of €55.8 million. The fully let properties comprised three office buildings leased to IBM, Scotts and BASF and an office building of 6,372 sq m, let on a long term basis to Merial. The transaction completed after the year end on 22 October 2008 at a price which reflected 0.36% above the 30 September 2008 valuation. These sales represented an excellent result for the Group and enabled net sale proceeds (post repayment of debt and transaction costs) of €16.1 million to be retained by the Company.
We are currently engaged in negotiations with respect to the sale of additional assets. However, execution risk remains high in this environment as a result of the challenges of purchasers securing appropriate debt financing. We will continue to realise assets where we have concerns about future performance and/or business plan objectives have been met. Surplus proceeds from sales are likely to be used to further reduce the level of debt in the Company.
Finance
As at 30 September 2008, the Company had drawn down €445.5 million of senior debt in respect of its €460 million facility with the Bank of Scotland; in addition the Company had available cash balances (excluding tenant deposits) of €24.6 million. The Company's gross Loan To Value ('LTV') (gross debt divided by market value of properties) at that date was 64.8% against a gross LTV covenant of 70%. Following the disposal of the two assets in Lyon, France in October 2008, drawn down debt reduced to €412.9 million against an equivalent portfolio value of €631.6 million on the basis of the 30 September 2008 valuation.
Following the reporting period, the Company agreed terms with its existing lender, the Bank of Scotland, for an extension of its existing senior debt facility. The extension is in respect of €416.5 million senior debt for a three year term expiring on 31 December 2011 and the margin is 2.75% per annum over three month EURIBOR. All debt is hedged against changes in European interest rates until January 2013 at a weighted average swap rate of 4.05% therefore giving a fixed interest rate cost of 6.80% per annum. The facility is subject to an upfront arrangement fee of 1.5% of the facility amount and an exit fee payable on expiry of the loan term or subsequent refinancing date of between 1.5% to 3.0% of the facility amount. The terms provide for an interest cover covenant of 1.30x and an LTV covenant of 75% in year one and 65% in years two and three. The refinancing completed on 28 November 2008 and drawn down debt at that time was €410 million with the remainder reserved for part funding the outstanding committed asset at Girona in Spain.
This extension will provide the Company with certainty of debt funding and a fixed cost of financing for a further three years. The financing cost is however higher than anticipated and it is the Board's intention to refinance the debt to a lower cost of longer term financing once financial markets improve. We will also be working hard to achieve sales and reduce operational costs during 2009 so as to preserve as much cash as possible with which to de-leverage.
Asset Management
Good progress continues to be made on the implementation of active management initiatives. The discipline of working through asset level business plans is of even greater importance in an economic slowdown. Successes during the year include pre-leasing a large development site in South West Paris, leasing a total of 23,963 sq m of accommodation of which 9,478 sq m (40%) was previously vacant and reducing the overall portfolio vacancy to a low level of 3.8%. We have also placed great emphasis on maintaining covenant strength of our tenants which has helped generate strong like-for-like income growth of 3.4%.
We are also seeking to minimise capital expenditure as far as possible so as to preserve cash flow. Where capital expenditure is required, priority will be given to existing development commitments and any works needed to comply with local regulations.
Looking forward, we expect income performance to remain relatively strong, although we will monitor tenant covenant strength and the ability of our tenants to meet their payment obligations. Vacancy is expected to rise slightly to 5.0% over the next six months however transactional activity already in hand should ensure this reduces again during the year. Much of the short term income risk relates to logistics assets where occupiers tend to operate on short term distribution contracts and are therefore reluctant to sign long leases on the premises they occupy.
Against the background of a worsening European economy, we would expect occupiers to become more selective about the quality of the properties they occupy, the rent they pay and the duration of their occupational leases. The Company benefits from long weighted average lease lengths which should provide an effective hedge against significant changes to the income
performance of the Company. To date, the Group has not experienced any material change in the activity of the main tenants in the portfolio, the leasing potential of its properties or the level of arrears. This is encouraging, although the situation will be monitored closely because of potential downside risks to the economic outlook and the likelihood that tenants will be seeking to reduce occupational overheads.
Office
We have been successful in achieving lettings ahead of business plan in two of the office properties in Belgium. In Rue du Luxembourg (located opposite the European Parliament) income has been increased by 4.2% and lease security improved by regearing leases that expired during 2008. In addition the office property in Waterloo Business Park is now fully let, having been only one third let at the time of acquisition in December 2007. The weighted average lease length in that property is now 8.3 years.
In France we continue efforts to lease vacant space in the office building in Cergy, West Paris, however the occupational markets remain challenging in this location. We are also working with the existing tenants to rationalise their use of available space. In the South of France we undertook a successful lease surrender and renewal in Grenoble with Sun Microsystems and Euromaster and now have a stabilised 6/9 year lease on the majority of the accommodation. A marketing campaign is under way to lease the remaining area.
Logistics
The logistics properties in the portfolio generate an income return which is accretive to cash flow providing a net initial yield on valuation of 7.11% whereas the portfolio level net initial yield is 6.70%. We work very closely with our largest tenant, Norbert Dentressangle, who is the tenant at 11 assets across France.
Logistics assets are less specialist in construction than retail or office buildings and providing they are in good locations are generally attractive to a wider range of occupiers. We do not therefore tend to suffer long void periods in our logistics portfolio. The current void rate is below our portfolio average at only 1.5%.
In addition, a number of the logistics properties in the portfolio benefit from significant land reserves - notably the sites in Trappes (South West Paris) and Entraigues (near Avignon), France. The site in Trappes is an excellent case study where planning consent was obtained post acquisition authorising the construction of a new 16,558 sq m unit which was subsequently pre-leased to national retailer Nature et Découvertes (who were rated low risk by Experian at 95/100 in July 2008) on the basis of a long term lease at a prime rental level. A similar strategy is being investigated at the site in Entraigues as well as a potential change of use in one of the older logistics warehouses where, subject to planning consent, there could be significant value appreciation from conversion to retail warehousing.
We continue to work on a feasibility study to determine the cost/benefit of installing solar panels on the roofs of our logistics properties as an efficient way of producing electricity, particularly in those warehouses located in Southern France and Spain. The power generated by the panels may be used by the unit itself and/or sold to the local electricity grid. Installation costs have fallen since we began this study and this strategy may now make a more compelling business case than previously.
There have also been active negotiations to reduce vacancy at four warehouses in Amiens, France from 21,500 sq m to 9,440 sq m - with ongoing discussions to lease the remainder. Such initiatives should improve both the cash flow and valuation of these assets.
Retail
Approximately 14% of the portfolio is invested in German retail, let to tenants including OBI, Real, Toom and AVA Marktkauf. German leases tend to be of longer duration but they do provide opportunities for active management as lease breaks and expiries arise. Together with a local specialist firm, we are in the process of undertaking a feasibility study for reconfiguring the 50,263 sq m retail park owned by the Company in Riesa, Germany. The property has significant potential for repositioning through lease re-negotiation with the anchor stores, changing the layout of the existing units, improving access and building upon surplus land. We will be unlikely to pursue such a substantial re-development project in this economic environment although it is important that we explore all angles by which to generate long term value from the scheme.
Investment Manager's Report
Case Studies
Grenoble, France
Acquired October 2008 for €30.6 million
As at September 2008, increase in value of
6.5%
The negotiation of a lease surrender and renewal with Euromaster and Sun Microsystems has now been completed. A leasing campaign has been initiated in respect of the vacancy in the Nova building.
Trappes, France
Acquired April 2007 for €9.9 million
As at September 2008, development project IRR is
10.4%
New lease signed with Nature et Découvertes above market rent on a 6/9 year lease for a new development project. This represents an excellent achievement in the current environment. Construction delivery is expected end of June 2009.
Amiens, France
Acquired April 2007 for €38.7 million
As at September 2008, increase in value of
5.3%
The Company owns 12 logistics properties on the 'Zone Industrial Nord' of Amiens, in France. As a result of an active marketing campaign over 56% of the vacancy existing at the time of purchase has been let at a rent above market level. Negotiations continue to lease the remainder.
Brussels, Belgium
Acquired December 2007 for €9.6 million
As at September 2008, increase in value of
3.0%
This office property in central Brussels located opposite the European parliament is now fully income producing following the letting of the last remaining vacant space at 9% above market rental level.
Brussels, Belgium
Acquired December 2007 for €2.7 million
As at September 2008, increase in value of
16.8%
Upon acquisition of this 1,990 sq m office in Waterloo Business Park, South of Brussels, vacancy was 66%. Following an aggressive marketing campaign the vacancy has been fully let with a long weighted average lease length of 8.3 years.
Pocking, Germany
Acquired March 2007 for €18.4 million
As at September 2008, decrease in value of
2.2%
This retail park is anchored by an OBI DIY store (with a lease until 2020) and a separate Plus supermarket (lease till 2016). Even though the valuation has recently fallen, the property has outperformed other assets acquired at a similar period due to its relatively defensive income qualities and the active asset management initiatives implemented during the year.
Prospects
This is a difficult time for the global economy and the property market, like most other asset classes, is being affected. Further declines in property values are inevitable and we are therefore focusing on active asset management, preserving the income performance of the properties, actively managing cash flow and continuing the programme of asset sales to raise equity with which to de-leverage. We will also be working hard to re-set the financing to a lower cost longer term facility.
We remain positive about the long term prospects for the Company which was created to provide long term income and capital performance from a diversified commercial property portfolio in Continental Europe. We are operating in challenging times which will mean relatively weak performance in the short term our markets will become more attractive later in the economic cycle as yields are expected to peak at above long run average levels and rents begin to rise. In the short term the focus will be on stabilising the Company so as to provide the best possible conditions for future recovery.
Tony Smedley
Head of Continental European Funds
Invista Real Estate Investment Management
20 January 2009
Board of Directors
Tom Chandos
Aged 55, is chairman of the real estate group Capital & Regional plc and the specialist investment company Queen's Walk Investment Limited and sits on the board of a number of other publicly traded and private companies. He has a background in investment banking and venture capital, originally at a predecessor firm of Dresdner Kleinwort. He is a Trustee of the Esmee Fairbairn Foundation and a member of its investment committee. He is a Labour member of the House of Lords.
Michael Chidiac
Aged 42, is the Founder and Managing Director of RealCorp Luxembourg SA, a real estate services company in Luxembourg. Since 1987, Michael has held various London based roles, consulting in residential and commercial real estate. From 1998 to 1999 he was a valuer and investment adviser at Jones Lang LaSalle in Luxembourg. In 1999 he was a co-founder of Property Partners S.A. in Luxembourg, an associate office of Cushman Wakefield Healey & Baker. Michael is resident in Luxembourg and a member of the Royal Institution of Chartered Surveyors.
Robert DeNormandie
Aged 64, is a member and founder of The Directors' Office in Luxembourg, organised in 2004. He was previously Chief Financial Officer in Pioneer Global Asset Management SPA, Milan, a subsidiary of UniCredito Group, and was an audit partner in the Boston Office of Coopers & Lybrand/PricewaterhouseCoopers in the USA. He is a director of several Luxembourg-based investment entities.
John Frederiksen
Aged 60, is chairman of the Danish Property Federation and of several major Danish property companies. He established and was managing director of Bastionen A/S, one of the largest Danish property investment companies from 1986 to 2001, and was Chairman of ASC, the largest property management company in Denmark, from 1990 to 1998.
Jaap Meijer
Aged 43, is a director of several Luxembourg-based investment entities. He worked previously at Mourant Luxembourg SA as Finance Manager and has also worked at Aberdeen Investment Services in Luxembourg as a Financial Controller and Management Accountant. Prior to this he was an Auditor at Deloitte Touche Tomatsu International in Dusseldorf, Germany. He is authorised to practise independently as an 'Expert Comptable' (Accountant) and 'Conseil Economique' (Consultant) and is a member of the Luxembourg 'Ordre des Expert-Comptables' (Order of Accountants).
Duncan Owen
Aged 40, is the Chief Executive Officer of Invista. Invista was formed in September 2006 from the demerger of the property investment division of Insight Investment Management Limited. He joined Insight Investment in October 2003 from the specialist real estate fund management boutique, Gatehouse Investment Management, which he cofounded in 2001. He was a director at LaSalle Investment Management and a partner at Jones Lang Wootton. He is a member of the Royal Institution of Chartered Surveyors, a member of the Investment Property Forum in the UK, sits on the British Property Federation Policy Committee and is an FSA Approved Person.
Report of the Directors
The Directors of the Company (the 'Directors' or the 'Board') present their report and the Audited Statements of the Company and the Group Financial Statements for the year ended 30 September 2008.
Investment objective and policy
Investment objective
The investment objective of the Company is to provide shareholders with an attractive level of income return together with the potential for income and capital growth through investing in commercial real estate in Continental Europe. The Company's focus has predominantly been in Western European countries due to the relative stability, transparency and liquidity of these markets.
Diversification
The Board believes that in order to maximise the stability of the Group's income, the optimal strategy for the Group is to be invested in a portfolio of assets which (a) is diversified by location, sector, asset size and tenant exposure and (b) has low vacancy rates and creditworthy tenants. While there will be no predefined limit on exposures to location, sector, asset size, vacancy rates and tenant types, the Company's portfolio will be invested and managed, as is currently required by the Listing Rules, in a way which is consistent with its object of spreading investment risk and taking into account the Company's investment objective, policy and restrictions.
Asset allocation
The Group currently owns, and intends to continue to own, a diversified portfolio of commercial real estate. Its sector focus will be office, retail, logistics and light industrial. From time to time the Group may acquire modest exposure to other types of real estate, for example leisure or residential. There will be no predetermined limits on investment per sector and no predetermined geographical limit on investment. Asset allocation will be determined taking into account current Listing Rule requirements (see below under 'Investment Restrictions') and the Company's investment objective, policy and restrictions.
Borrowings
The Company's Articles of Association limit its borrowings to 65% of the Group's gross assets, calculated at the time of drawdown. However. Luxembourg legal and regulatory provisions require that the Company must comply with its borrowing limit at all times and for this reason the Directors concluded at the time of the Company's IPO in December 2006 that it would be prudent for the ongoing borrowing limit to be set at 70% of the Group's gross assets. If the 70% limit is breached at any time the Directors will be required to adopt as their priority objective for the Group sales transactions to bring borrowings within the 70% limit while taking due account of the interests of shareholders. Accordingly, corrective measures may not have to be taken immediately if this would be detrimental to shareholder interests.
Investment strategy
The Investment Manager targeted assets for acquisition which it believes exhibit some or all of the following characteristics:
• well-located for its purpose;
• modern or recently refurbished;
• let to tenants of good creditworthiness on market standard leases;
• freehold or long leasehold;
• low vacancy;
• net initial yields higher than those available on prime properties;
• opportunity to enhance value through active asset management; and
• a value in excess of €10 million.
The degree to which the Group's current or future properties exhibit some or all of these characteristics depends on conditions in the local real estate market and the specific property. The Investment Manager will continue to identify relative outperforming or underperforming property markets in different countries, regions and sectors with a view to recycling capital where appropriate to do so.
The strategy for ownership of the Group's properties is to actively manage investment performance through lease re-negotiation, stabilising rents and, amongst other initiatives, developing surplus or ancillary land reserves.
Investment restrictions
1.1 The Company and, where relevant, its subsidiaries will observe the following restrictions in compliance with the current Listing Rules:
1.1.1 distributable income will be principally derived from investment. Neither the Company nor any subsidiary will conduct a trading activity which is significant in the context of the Group as a whole;
1.1.2 the Company will invest and manage its assets in a way which is consistent with its object of spreading investment risk;
1.1.3 the Company will only use financial derivatives instruments for hedging purposes.
1.2 As the Company is a closed-ended investment fund for the purposes of the Listing Rules, the Group will also adhere to the Listing Rules applicable from time to time to closed-ended investment funds. The Company or, where relevant, the Group will observe the following restrictions in compliance with the current Listing Rules for closed-ended investment funds:
1.2.1 the borrowings of the Group (excluding intra group loans) are limited by the Articles to 65% of the gross assets of the Group (consolidated where applicable). This limit is tested at the time any borrowing is made. (In addition, the Company is subject to a limit on borrowing of 70% of gross assets which, in accordance with Luxembourg legal and regulatory requirements, applies at all times);
1.2.2 no one property (including all adjacent or contiguous properties) shall at the time of Admission or, if later, at the time of acquisition, represent more than 15%, of the gross assets of the Group (consolidated where applicable).
In relation to the investment restriction set out in 1.2.2 above, the Company has received a waiver of this restriction from the UKLA in respect of the initial assembly of the Property Portfolio. However, in accordance with Luxembourg regulatory requirements, the Company will comply with this investment restriction at the latest four years after its conversion into a SICAF.
1.3 No more than 20% of the gross assets of the Company may be exposed to the creditworthiness or solvency of any one counterparty (including its subsidiaries or affiliates).
1.4 The total amount of loans granted by the Company to entities which are not part of the Group may not represent more than 20%. of the gross assets of the Company (consolidated where appropriate) at a time a loan is made.
1.5 Ancillary holding of liquid assets by the Group is subject to the following restrictions:
1.5.1 the Company may not invest more than 10% of its net assets in money market instruments or debt securities of one single issuer;
1.5.2 the Company may not hold more than 10% of any single class of money market instrument or debt security of a single issuer nor may it invest more than 10% of its net assets in money market instruments or debt securities which are neither listed on a stock exchange nor dealt on a Regulated Market.
The above restrictions are, however, not applicable to securities issued by companies which are wholly or partly owned and controlled by the Company.
1.6 Where amendments are made to the Listing Rules, the restrictions applying to the Company will, subject to the prior approval of the CSSF, be amended so as to reflect the new Listing Rules. In this instance the Board will consider the revised investment restrictions applicable to the Company and, if considered suitable, will subject to the prior approval of the CSSF adopt the new Listing Rules investment restrictions.
1.7 Where any change in the above investment restrictions and limits is determined to be material, and subject to the approval of the CSSF, such change will take effect on the quarter date subsequent to the quarter date on or before which a notice informing the Shareholders of such material change was sent.
1.8 In case of non-compliance with the investment restrictions laid down under this section 13, corrective and compensatory actions will be undertaken in accordance with the CSSF Circular 02/77 and an announcement of such action shall be made through a regulatory information service.
Business review
Business of the Company
The Company was incorporated on 6 June 2005 as Insight European Real Estate Trust SA. On 17 November 2006 the Company's name was changed to its present name Invista European Real Estate Trust SICAF together with conversion of the Company into an investment company with fixed capital (société d'investissement à capital fixe). The Company has been listed on the main market of the London Stock Exchange since 20 December 2006.
Invista European Real Estate Trust SICAF is a public limited closed-ended capital company managed by Invista Real Estate Investment Management Limited. A review of the business during the year is contained in the Chairman's Statement and the Investment Manager's Report.
Investments
The independent valuation of the Company's property portfolio excluding the committed asset as at 30 September 2008 was €687.4 million and consisted of 51 properties located in France, Germany, The Netherlands, Spain, Belgium, Czech Republic and Poland.
Disposals
On 21 October 2008 the Company successfully closed the disposals of two real estate assets in Lyon, France for a total consideration of €55.8 million.
Strategic outlook
The Company will continue to actively manage the existing property portfolio to improve the income characteristics of the Group and maximise property level returns. This will include regular reviews of the relative performance of the countries, regions and sectors in which the Company is invested and managing tenant relationships. In light of anticipated valuation falls in 2009, the Group will seek to divest of further properties.
Key performance indicator
The Board uses the absolute Net Asset Value ('NAV') return of the Company to monitor and assess the performance of the Company. As at 30 September 2008, the Company's audited NAV (adjusted to add back deferred taxation) was €2.34 per share. Over the 12 months to 30 September 2008, the Company's audited adjusted NAV has decreased by €0.77 per share or 24.8%. The principal reason for the decline in NAV is the fall in valuation of the Group's property portfolio.
Important events post year end
The Chairman's Statement and the Investment Manager's Report, where appropriate, both contain information on the important events of the Company occurring since the end of the financial year and the Company's likely future development.
Dividend
As at the date of this report, the Company has declared and paid the following dividends to the ordinary shareholders during the financial year:
| Dividends | Date Declared | Rate |
| 1 April 2007-29 September 2007 | 29 November 2007 | €0.089 per share |
| 1 October 2007-31 March 2008 | 22 May 2008 | €0.089 per share |
All dividends are declared and paid as interim dividends. The Directors do not therefore recommend a final dividend.
Dividends will be declared in Euros but will be converted into Sterling on the payment date and paid in Sterling to shareholders.
The completion of negotiations with respect to the refinancing of the Company's debt facility has provided the Board with a greater level of clarity as to the Company's ongoing financial position. In an environment of higher financing costs and weakening property valuations the Board considers it prudent to conserve cash as far as possible with a view to de-gearing the Company and reducing debt through the application of excess cash flow and proceeds from sales. Against this background the Board has decided to suspend dividend payments in respect of the second interim dividend for the financial year ended 30 September 2008 and for the entire financial year ending 30 September 2009. The Board will review this dividend policy regularly.
Principal risks
The Board considers key risks to the Company. These key risks fall broadly under the following categories:
Investment and strategy
Market circumstances can introduce volatility into investment returns arising from factors such as market sentiment, an excess supply of accommodation relative to occupier demand, macro economic factors impacting on the capability of tenants to pay rents, or fiscal and legislative changes. The Investment Manager and the Board seek to mitigate these risks through research-based investment decisions, regularly reviewing portfolio strategy, swift execution and through owning a well diversified and balanced portfolio.
To enable the Board to ensure that the portfolio does not become overly concentrated or reliant on individual assets, sectors or tenants, the Investment Manager reports quarterly on asset concentration, sector and regional diversification and the number of tenants including an independent analysis of tenant quality.
The primary control is that no single property (including all adjacent or contiguous properties) shall represent more than 15% of the gross assets of the Group. Furthermore income receivable from any tenant, or tenants within the same group, in any one financial year shall not exceed 20% of the total rental income of the Group in that financial year.
Borrowings
The Group seeks to enhance NAV total returns through borrowing. There is risk associated with third party borrowings and the Board adopts a prudent approach to mitigate these risks. The principal risk control is an upper borrowing limit of 65% of the Group's gross assets on a fully consolidated basis. This limit is tested at the time any borrowing is made. In addition, the Group is subject to a limit on borrowing of 70% of gross assets which, in accordance with Luxembourg legal and regulatory requirements, applies at all times.
At 30 September 2008 the Group had access to a €460 million credit facility from Bank of Scotland of which the Group had drawn down a total of €445.5 million. The Group seeks to avoid significant exposure to unforeseen upward interest rate movements, with all third party debt currently hedged.
In addition to investments and borrowings in the normal course of business, the Board has acknowledged that from time to time it may be appropriate for the Group to invest as a joint venture investor in certain property owning entities in which other investors may participate. This is to enable a particular property strategy to be executed more effectively.
Accounting, legal and regulatory
The Group has processes in place to ensure that accurate accounting records are maintained and that evidence to support the accounts is available to the auditors upon request. The Administrator also operates established accounting systems that address issues of control and completeness. Procedures are in place to ensure that the quarterly NAV and Gross Asset Value are calculated properly by the Administrator, and the Group's property assets are valued quarterly by a specialist property valuation firm who is provided with regular updates on portfolio activity by the Investment Manager.
The Administrator monitors legal requirements in Luxembourg to ensure that adequate procedures and reminders are in place to meet the Group's legal requirements and obligations. The Investment Manager undertakes full legal due diligence with advisers when transacting and managing the Company's assets. All contracts entered into by the Group are reviewed by the Company's legal and the Group's other advisers.
Processes are in place to ensure that the Group complies with the conditions applicable to property investment companies set out in the Listing Rules of the London Stock Exchange and the Luxembourg financial supervisory authority, the Commission de surveillance de secteur financier ('CSSF').
The Administrator attends all Board meetings to be aware of all announcements that need to be made and the Group's advisers are aware of their obligations to advise the Administrator, and where relevant the Board, of any notifiable events.
Finally, the Board is satisfied that the Investment Manager and Administrator have adequate procedures in place to ensure continued compliance with regulatory requirements of the Financial Services Authority and the CSSF.
Management
The Company has retained the services of Invista Real Estate Investment Management Limited ('Invista') as Investment Manager. Invista is the largest listed real estate fund manager in the UK with HBOS plc holding a 55% stake. Under an investment management agreement dated 17 November 2006 (the 'Investment Management Agreement'), Invista is responsible for advising the Group on the overall management of the Group's investments and for managing the Group's investments in accordance with the Group's investment objective and policy and subject to the overall supervision of the Directors.
The team dealing with the Company is led by Duncan Owen, CEO of Invista who chairs their bi-monthly investment committees. The other members of that committee are Tim Francis and Veronica Gallo-Alvarez, Chris Ludlam and Tony Smedley. The Board continues to be satisfied that Invista has sufficient resources available to deliver the investment objective.
Management fees
The Investment Manager is entitled to a base fee and a performance fee together with all reasonable expenses incurred in the performance of its duties. The base fee is equal to 0.95% per annum of the Adjusted Gross Assets of the Group. The management fee is payable monthly in arrears and is subject to a re-calculation provision designed to allocate any increase or decrease in Adjusted Gross Assets from quarter-to-quarter on a straight-line basis. Prior to 17 November 2006 this fee was 1.0% per annum.
The Investment Manager is also entitled to an annual performance fee where the total NAV return per share during the relevant financial period exceeds an annual rate of 10% (the 'performance hurdle'). Where the performance hurdle is met, a performance fee will be payable in an amount equal to 15% of any aggregate total return over and above the performance hurdle. A performance fee will only be payable where the annualised total NAV return over the period from IPO to the end of the relevant financial period (in the first three year period) and on a rolling three year basis (thereafter) is equal to or greater than 10%. A performance fee can be paid in each of the first two years on the to-date performance. The conditions for payment of a performance fee were not met during the year and accordingly no performance fee is due to Invista.
The Investment Management Agreement may be terminated by either the Company or the Investment Manager giving no less than 18 months' written notice.
The Board is of the opinion that the continuing appointment of Invista as Investment Manager on the terms agreed is in the interest of the Company's shareholders as a whole. The Directors have formed this opinion having regard to the terms of the Investment Management Agreement and the positive performance by Invista of their services to the Group.
Administration
Citco, as Administrator, is responsible for the performance of the general administrative functions required by the Investment Funds Act of Luxembourg and, in particular, for the calculation of the NAV per share, the performance and oversight of the bookkeeping and the preparation and drafting of the Company's annual accounts and the periodical financial statements and reports.
The Administration Agreement may be terminated by either party giving to the other not less than 120 days notice in writing.
Going concern
The Directors have examined significant areas of possible financial risk and have satisfied themselves that the Group has adequate resources to continue in operational existence for the foreseeable future. After due consideration the Board believes it is appropriate to adopt the going concern basis in preparing the financial statements.
Creditor payment policy
It is the Group's policy to ensure settlement of supplier invoices in accordance with stated terms.
Directors
The Directors of the Company (who together with their beneficial interests in the Company's ordinary share capital as at 30 September 2008) are listed below:
| Number | ||
| Director | of Shares | % |
| Tom Chandos (Chairman) | 60,000 | 0.0525 |
| Duncan Owen | 7,500 | 0.0066 |
| John Frederiksen | 31,000 | 0.0271 |
| Michael Chidiac | 0 | 0 |
| Robert DeNormandie | 0 | 0 |
| Jaap Meijer | 0 | 0 |
None of the Directors had a service contract with the Company during the year.
The appointment/resignation dates and gross remuneration of the Directors during the financial year was as follows:
| Director | Date of appointment | Date of Resignation | € |
| Tom Chandos (Chairman) | 17 November 2006 | - | 52,000 |
| Duncan Owen | 17 November 2006 | - | 30,000 |
| John Frederiksen | 17 November 2006 | - | 30,000 |
| Michael Chidiac | 17 November 2006 | - | 35,000 |
| Robert DeNormandie | 26 April 2007 | - | 40,000 |
| Jaap Meijer | 16 November 2007 | - | 30,660 |
| Robert Kimmels | 17 November 2006 | 16 November 2007 | 0 |
| Total | 217,660 |
The Directors receive a base fee of €30,000 per annum, and the Chairman receives €52,000 per annum. The Chairman of the Audit Committee receives an additional fee of €5,000 per annum, reflecting his additional responsibilities and workload. All Luxembourg based Directors also receive an additional €5,000 per annum in recognition of their additional work.
Disclosure of information to auditors
As far as each of the Directors is aware, there is no relevant audit information of which the Company's auditors are unaware, and each of the Directors has taken all of the steps that they each ought to have taken to be aware of relevant audit information and to establish that the Company's Directors are aware of that information.
Substantial shareholdings
At 31 December 2008 the Board was aware that the following shareholders owned 3% or more of the issued shares of the Company.
| Number of | ||
| Ordinary Shares | % | |
| Rensburg Sheppards Plc | 11,734,893 | 10.4 |
| F & C Asset Management | 10,084,000 | 8.9 |
| Schroder Investments | 8,836,532 | 7.8 |
| Ashcourt Asset Management | 6,382,666 | 5.6 |
| HSBC Investments Ltd | 5,755,656 | 5.1 |
| JPMorgan Asset Management | 5,700,000 | 5.0 |
| Newton Investment Management Ltd | 5,389,739 | 4.8 |
| Cazenove Capital Management | 5,093,152 | 4.5 |
| Legal & General Investment Management Ltd | 4,665,749 | 4.1 |
| Gerrard Investment Management Ltd | 3,997,606 | 3.5 |
| Sand Aire Invest's Plc | 3,917,705 | 3.5 |
Independent auditors
KPMG Audit S.à.r.l. has been appointed as independent auditor of the Company with effect from 17 November 2006 and for a duration of six years.
Corporate governance
There is no generally applicable Luxembourg corporate governance code for Luxembourg companies. Whilst the Luxembourg stock exchange has issued a corporate governance code based on international precedents, this code is not applicable to the Company. The relevant Luxembourg corporate governance rules are the statutory rules of the Luxembourg Companies Act, which are, in essence, reflected in the constitutional documents of the Company.
The Company's application of the Combined Code is discussed in the following paragraphs.
Principles statement
The Directors are committed to high standards of corporate governance and have made it Company policy to comply with best practice in this area, insofar as the Directors believe it is relevant and appropriate to the Company, to comply with the Combined Code published by the Financial Reporting Council or to otherwise state areas of non-compliance.
Role of the Board
The Board has determined that its role is to consider and determine the following principal matters which it considers are of strategic importance to the Company:
1. The overall objectives of the Company as described under Investment Policy above and the strategy for fulfilling those objectives within an appropriate risk framework.
2. The strategy it considers may be appropriate in light of market conditions.
3. The capital structure of the company including consideration of an appropriate use of borrowings both for the Company and in any joint ventures in which the Company may invest from time to time.
4. The appointment of the Investment Manager, Administrator and other appropriately skilled service providers and monitor their effectiveness through regular reports and meetings.
5. The key elements of the Company's performance including NAV growth and the payment of dividends.
Board decisions
At Board meetings, matters listed under the Role of the Board above are considered and resolved by the Board. Generally issues associated with implementing the Company's strategy are considered by the Board to be non-strategic in nature and are delegated either to the Investment Manager or the Administrator, however the Board considers there may be implementation matters significant enough to be of strategic importance to the Company and believes these should be reserved to the Board. Generally these are defined as large property decisions affecting either 5% or more of the Group's assets and decisions affecting the Group's financial gearing.
Board performance evaluation
The Board undertook a review of its performance in respect of the financial year. The Board's procedure for evaluating the performance of the Board, its Committees and the individual Directors in respect of the year ended 30 September 2008 has been through a combination of questionnaire and discussion. The evaluation process is designed to show whether individual Directors continue to contribute effectively to the Board and to clarify the strengths and weaknesses of the Board's composition and processes. The Chairman takes the lead in acting on the results of the evaluation process. In respect of the Chairman, a meeting of Directors was held, without the Chairman present, to evaluate his performance.
This review concluded that the Board was operating effectively and that the members of the Board had the breadth of skills required to fulfil their role.
Accordingly, the individual performance of the respective Directors continues to be effective and the attendance by all Directors at meetings of the Board during the last financial year (see 'Board meetings') demonstrates the continued commitment of all Directors to their respective roles. The Board therefore considers that all Directors standing for re-election at the Annual General Meeting on 17 March 2008 should be re-elected.
Non-Executive Directors, rotation of Directors and Directors' tenure
The Combined Code recommends that Directors should be appointed for a specified period. The re-election period of the Directors is one year.
John Frederiksen is a Non-Executive Director of Invista Foundation Property Trust Limited. Invista Foundation Property Trust Limited is managed by the Investment Manager and Mr Frederiksen is therefore considered to be a non-independent director under the Listing Rules.
Duncan Owen is the Chief Executive Officer of Invista and therefore a Director of the Investment Manager. Pursuant to the Listing Rules, as a Director of the Investment Manager Duncan Owen is considered to be a non-independent director.
The remaining Directors (Tom Chandos, Michael Chidiac, Robert DeNormandie and Jaap Meijer) are considered independent.
Board meetings
The Board meets quarterly and as required from time to time to consider specific issues reserved for the Board.
At the Board's quarterly meetings it considers papers circulated in advance including reports provided by the Investment Manager and the Administrator. The Investment Manager's report comments on the Continental European commercial property market, performance, strategy, transactional and asset management and the Group's financial position including relationships with its bankers and lenders.
These reports enable the Board to assess the success with which the Group's property strategy and other associated matters are being implemented and also to consider any relevant risks and how they can be properly managed. The Board also considers reports provided from time to time by its various service providers reviewing their internal controls.
The table below shows the attendance at the Board's quarterly meetings during the financial year to 30 September 2008:
| Audit | ||
| Board | Committee | |
| Tom Chandos (Chairman) | 4 | 1 |
| Duncan Owen | 4 | 1 |
| John Frederiksen | 4 | 1 |
| Michael Chidiac | 4 | 4 |
| Robert DeNormandie | 4 | 4 |
| Jaap Meijer | 3 | 4 |
| Robert Kimmels | 1 | 0 |
| Number of meetings during the year | 4 | 4 |
In between its regular quarterly meetings, the Board has also met on a number of occasions during the year to consider specific transactions. It has not always been possible for all Directors to attend these meetings. The Company maintains liability insurance for its Directors and Officers.
Committees of the Board
The Audit Committee
The Audit Committee is chaired by Robert DeNormandie with John Frederiksen, Michael Chidiac and Jaap Meijer as voting members. Non-voting members are Tom Chandos and Duncan Owen. The Company considers that Robert DeNormandie's experience makes him suitably qualified to chair the Audit Committee. If required, meetings can also be attended by the Investment Manager, the Administrator and the Independent Auditor. Jaap Meijer became a voting member of the Committee on 4 January 2008.
The primary tasks of the Company's Audit Committee are to assist the Board in fulfilling its oversight responsibilities relating to the integrity of the financial statements of the Company, including periodically reporting to the Board on its activities and to make recommendations for the appointment, compensation, retention and oversight of, and consider the independence of the Company's external auditors and perform such other duties imposed by applicable laws and regulations of the regulated market or markets on which the shares are listed, as well as any other duties entrusted to the Committee by the Board.
The Audit Committee is responsible for reviewing the half-year and annual financial statements before their submission to the Board. In addition the Committee is specially charged under its terms of reference to advise the Board on the terms and scope of the appointment of the auditors, their remuneration, the independence and objectivity of the auditors, and reviewing with the auditors the results and effectiveness of the audit. Members of the Committee may also meet with the Company's valuer to discuss the scope and conclusions of their work.
During the year the Company's auditors were involved in a limited review of the interim financial statements. The Company's audited accounts for the year ended 30 September 2008, audited by the Independent Auditor, and the report of the Independent Auditor are included in this document. No other audit work was performed.
Other Committees
The Company does not have a remuneration committee or a nomination committee, since the Company does not have any executive Directors. New appointments to the Board and remuneration issues are considered by the Board as a whole from time to time.
There is also no management committee. Review of the Investment Manager's performance and the contractual arrangement with the Investment Manager are instead conducted by the Board as a whole, as described above.
Shareholder relations
Shareholder communications are a high priority for the Board. The Investment Manager produces a quarterly fact sheet which is posted on the Company's website (www.ieret.eu). Members of the Investment Manager's Investment Committee make themselves available at all reasonable times to meet with shareholders and sector analysts. Feedback from these sessions is provided by the Investment Manager to quarterly Board meetings.
In addition, the Board is also kept fully appraised of all market commentary on the Company by the Investment Manager and other professional advisers including the Company's brokers. Through this process the Board seeks to monitor the views of shareholders and to ensure an effective communication programme. The Chairman and Directors also hold meetings with shareholders in response to invitations to do so.
Details of the resolutions to be proposed at the Annual General Meeting on 17 March 2009 can be found in the Notice of the Meeting.
Statement of Directors' responsibilities
The Directors are responsible for ensuring proper preparation of the Directors' Report, Annual Report and Financial Statements for each financial period which give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group as at the end of the financial period and of the profit or loss of the Group for that period in accordance with International Financial Reporting Standards and that they are in accordance with applicable laws.
In preparing those financial statements the Directors are required to:
1. Select suitable accounting policies and apply them consistently.
2. Make judgements and estimates that are reasonable and prudent.
3. State whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the Financial Statements.
4. Prepare the Financial Statements on the 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 to enable them to ensure that the Financial Statements comply with all relevant regulations. 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:
1. Ensuring that the Report of the Directors and other information included in the Annual Report is prepared in accordance with applicable company law.
2. Ensuring that the Annual Report includes information required by the Listing Rules of the Financial Services Authority.
3. The Group's system of internal controls is designed to meet the Group's particular needs and the risks to which it is exposed.
Internal control
The Directors are responsible for the determination of the Company's investment objective and policy and have overall responsibility for the Group's activities including the review of investment activity and performance.
The Combined Code requires the Directors annually to review the effectiveness of the Group's system of internal controls and to report to shareholders that they have done so. Although such a system can only provide reasonable assurance and not absolute assurance against material misstatement or loss, as it is designed to manage rather than eliminate the risk of failure.
The Board considers risk management and internal control on a regular basis during the year.
The key reviews conducted by the Directors are described as follows:
1. The Board has reviewed a report prepared by Invista's risk team on Invista (Investment Manager), Citco (Administrator), PIA (French Accountant), RBC Dexia (Custodian) and Maitland (Registrar) and has been satisfied that their approach is appropriate for the Group.
2. The Board meets regularly at the offices of the Administrator for its formal quarterly Board meetings and for ad-hoc Board meetings. The Board is therefore familiar with the environment in which the Administrator is operating and has the opportunity to meet the staff responsible for providing administrative services to the Company. This enables the Board to view at first hand the level of resources made available to the Company by the Administrator.
The Group's system of internal control therefore is substantially reliant on Invista's and Citco's own internal controls and their internal audit. The Board considers risk management and internal control on a regular basis during the year. The processes implemented to identify, evaluate and manage risk that are described in the following paragraphs have been in place throughout the financial year to the date of this document and accord with the Revised Turnbull Guidance issued by the Financial Reporting Council, a guidance document relating to the principles under Combined Code.
The key elements designed to provide effective control are as follows:
1. Regular review of relevant financial data including management accounts and performance projections.
2. Contractual documentation with appropriately regulated entities which clearly describes responsibilities for the two principal service providers concerned.
3. The Investment Manager's system of internal controls is based on clear written processes, a formal investment committee, clear lines of responsibility and reporting all of which are monitored by Invista's internal risk team. Invista is regulated by the Financial Services Authority in the UK.
4. The Company's strategy is authorised by the Board which also monitors regularly the Investment Manager's effectiveness in its implementation.
The Board meets regularly at the offices of the Administrator for its formal quarterly Board meetings and for ad-hoc Board meetings. The Board is therefore familiar with the environment in which the Administrator is operating and has the opportunity to meet the staff responsible for providing administrative services to the Company. This enables the Board to view at first hand the level of resources made available to the Company by the Administrator.
Status for taxation
The Company is not liable to any Luxembourg tax on profits or income, nor are distributions paid by the Company subject to any Luxembourg withholding tax. The Company is, however, liable in Luxembourg to a subscription tax of 0.05% per annum of its Net Asset Value, such tax being payable quarterly on the basis of the value of the aggregate net assets of the Company at the end of the relevant calendar quarter. No stamp duty or other tax is payable in Luxembourg on the issue of Shares. No Luxembourg tax is payable on the realised capital appreciation of the assets of the Company.
Tom Chandos, Chairman
20 January 2009
Robert DeNormandie, Chairman of the Audit Committee
20 January 2009
Consolidated Income Statement
For the year ended 30 September 2008
| 30/09/08 | 30/09/07 | ||
| Notes | €'000 | €'000 | |
| Rental income | 47,283 | 33,491 | |
| Property operating expenses | 4 | (2,188) | (1,708) |
| Net rental and related income | 45,095 | 31,783 | |
| Net change in the value of investment property | 10 | (65,927) | 23,071 |
| Other income | 271 | 56 | |
| Expenses | |||
| Investment management fees | 5 | (7,362) | (5,916) |
| Performance fees | 5 | - | (2,201) |
| Professional fees | 6 | (2,079) | (2,404) |
| Abortive fees | 6 | (1,656) | (646) |
| Administrative fees | 7 | (2,747) | (1,694) |
| Directors' fees | (222) | (158) | |
| Issuing Shares | - | (2,591) | |
| Other expenses | (458) | (888) | |
| Total expenses | (14,524) | (16,498) | |
| Net operating (loss)/profit | (35,085) | 38,412 | |
| Finance income | 3,442 | 2,807 | |
| Finance expenses | (29,862) | (18,579) | |
| Net finance costs | 8 | (26,420) | (15,772) |
| (Loss)/Profit before tax | (61,505) | 22,640 | |
| Deferred taxation | 9 | 4,651 | (10,481) |
| French restructuring income tax | (4,319) | - | |
| Other taxation | (2,026) | (1,959) | |
| Total taxation | 9 | (1,694) | (12,440) |
| (Loss)/profit for the year attributable to the equity holders of the Company | (63,199) | 10,200 | |
| Basic and diluted (loss)/earnings per share (Euro) | 19 | (0.55) | 0.12 |
The accompanying notes 1 to 28 form an integral part of these consolidated financial statements.
Consolidated Balance Sheet
As at 30 September 2008
| 30/09/08 | 30/09/07 | ||
| Notes | €'000 | €'000 | |
| Assets | |||
| Investment property | 10 | 631,569 | 724,270 |
| Deferred tax assets | 16 | 1,447 | 727 |
| Total non-current assets | 633,016 | 724,997 | |
| Trade and other receivables | 11 | 17,163 | 14,985 |
| Derivative financial instruments | 12 | 8,990 | 7,619 |
| Cash and cash equivalents | 13 | 29,915 | 68,687 |
| Non-current assets classified as held for sale | 27 | 57,559 | - |
| Total current assets | 113,627 | 91,291 | |
| Total assets | 746,643 | 816,288 | |
| Share capital | 142,829 | 142,829 | |
| Reserves | 157,608 | 175,696 | |
| Retained earnings | (52,264) | 10,192 | |
| Total equity attributable to equity holders of the Company | 14 | 248,173 | 328,717 |
| Liabilities | |||
| Interest-bearing loans and borrowings | 15 | - | 424,500 |
| Deferred tax liabilities | 16 | 18,506 | 27,098 |
| Total non-current liabilities | 18,506 | 451,598 | |
| Interest-bearing loans and borrowings | 15 | 411,715 | - |
| Trade and other payables | 17 | 22,522 | 31,861 |
| Current taxation payable | 8,740 | 4,112 | |
| Liabilities directly associated with non-current assets classified held for sale | 27 | 36,987 | - |
| Total current liabilities | 479,964 | 35,973 | |
| Total liabilities | 498,470 | 487,571 | |
| Total equity and liabilities | 746,643 | 816,288 | |
| Net Asset Value per share (Euro) | 18 | 2.17 | 2.88 |
The financial statements were approved by the Board of Directors on 20 January 2009 and signed on its behalf by:
Tom Chandos, Chairman
Robert DeNormandie, Chairman of Audit Committee
The accompanying notes 1 to 28 form an integral part of these consolidated financial statements.
Consolidated Statement of Changes in Equity
For the year ended 30 September 2008
| Currency | |||||||
| Share | Share | Hedging | Restricted | translation | Retained | Total | |
| capital | premium | reserve | reserves | adjustment | earnings | equity | |
| €'000 | €'000 | €'000 | €'000 | €'000 | €'000 | €'000 | |
| Balance as at 30 September 2006 | 6,921 | - | 854 | - | - | (8) | 7,767 |
| Effective portion of changes in fair value of | |||||||
| cash flow hedges, net of tax | - | - | 4,526 | - | - | - | 4,526 |
| Restricted reserve | - | - | - | 101 | - | - | 101 |
| Total income and expense recognised | |||||||
| directly in equity | - | - | 4,526 | 101 | - | - | 4,627 |
| Profit for the year | - | - | - | - | - | 10,200 | 10,200 |
| Total recognised income and expense | - | - | 4,526 | 101 | - | 10,200 | 14,827 |
| Issue of shares | 135,908 | 182,480 | - | - | - | - | 318,388 |
| Issuing fees | - | (6,662) | - | - | - | - | (6,662) |
| Dividends to equity holders | - | (5,603) | - | - | - | - | (5,603) |
| Balance as at 30 September 2007 | 142,829 | 170,215 | 5,380 | 101 | - | 10,192 | 328,717 |
| Effective portion of changes in fair value of | |||||||
| cash flow hedges | - | - | 3,610 | - | - | - | 3,610 |
| Translation differences | - | - | - | - | 743 | - | 743 |
| Restricted reserve | - | - | - | (787) | - | - | (787) |
| Total income and expense recognised | |||||||
| directly in equity | - | - | 3,610 | (787) | 743 | - | 3,566 |
| Loss for the year | - | - | - | - | - | (63,199) | (63,199) |
| Total recognised income and expense | - | - | 3,610 | (787) | 743 | (63,199) | (59,633) |
| Issuing fees | - | (749) | - | - | - | - | (749) |
| Dividends to equity holders | - | (20,162) | - | - | - | - | (20,162) |
| Balance as at 30 September 2008 | 142,829 | 149,304 | 8,990 | (686) | 743 | (53,007) | 248,173 |
The accompanying notes 1 to 28 form an integral part of these consolidated financial statements.
Consolidated Cash Flow Statement
For the year ended 30 September 2008
| 30/09/08 | 30/09/07 | |
| €'000 | €'000 | |
| Operating Activities | ||
| (Loss)/profit for the year before taxation | (61,505) | 22,640 |
| Adjustments for: | ||
| Net change in value of investment property | 65,927 | (23,071) |
| Net finance costs | 26,420 | 14,732 |
| Unrealised foreign currency exchange | 192 | (67) |
| Operating profit before changes in working capital and provisions | 31,034 | 14,234 |
| Increase in trade and other receivables | (2,950) | (10,476) |
| (Decrease)/increase in trade and other payables | (7,658) | 26,804 |
| Cash generated from operations | 20,426 | 30,562 |
| Interest paid | (25,989) | (11,815) |
| Interest received | 3,413 | 2,807 |
| Tax paid | (1,433) | (1,340) |
| Cash flows from/(to) operating activities | (3,583) | 20,214 |
| Investing Activities | ||
| Acquisition of investment properties | (29,472) | (491,348) |
| Cash flows from/(to) investing activities | (29,472) | (491,348) |
| Financing Activities | ||
| Proceeds on issue of shares | - | 318,388 |
| Dividends | (20,162) | (5,603) |
| Issuing fees | (749) | (6,662) |
| Repayment of shareholder loans | - | (50,218) |
| Draw down of interest-bearing loans | 17,945 | 280,614 |
| Finance costs paid on arrangement of long term loan | (1,840) | (955) |
| Cash flows from/(to) financing activities | (4,806) | 535,564 |
| Net (decrease)/increase in cash and cash equivalents for the year | (37,861) | 64,430 |
| Opening cash and cash equivalents | 68,687 | 4,257 |
| Closing cash and cash equivalents | 30,826 | 68,687 |
| Cash directly associated with non-current assets held for sale | (911) | - |
| Closing cash and cash equivalents | 29,915 | 68,687 |
The accompanying notes 1 to 28 form an integral part of these consolidated financial statements.
Company Income Statement
For the year ended 30 September 2008
| 30/09/08 | 30/09/07 | ||
| Notes | €'000 | €'000 | |
| Expenses | |||
| Investment management fees | 5 | (2,465) | (2,516) |
| Performance fees | 5 | - | (2,201) |
| Professional fees | 6 | (823) | (268) |
| Abortive fees | (1,592) | (270) | |
| Administrative fees | 7 | (831) | (539) |
| Directors' fees | (223) | (158) | |
| Issuing fees | - | (2,591) | |
| Other expenses | - | (269) | |
| Total expenses | (5,934) | (8,812) | |
| Net operating loss | (5,934) | (8,812) | |
| Finance income | 4,845 | 4,907 | |
| Finance expenses | (919) | (2,038) | |
| Net finance income/(cost) | 8 | 3,926 | 2,870 |
| Loss for the year before tax | (2,008) | (5,942) | |
| Taxation | (124) | (147) | |
| Loss for the year attributable to the equity holders of the Company | (2,132) | (6,089) | |
| Basic and diluted earnings per share (Euro) | (0.02) | (0.05) |
All items in the above statement are derived from continuing operations.
The accompanying notes 1 to 28 form an integral part of these consolidated financial statements.
Company Balance Sheet
As at 30 September 2008
| 30/09/08 | 30/09/07 | ||
| Notes | €'000 | €'000 | |
| Assets | |||
| Investment in subsidiaries | 292,277 | 276,005 | |
| Non-current assets | 292,277 | 276,005 | |
| Amount due from subsidiaries | 8,173 | 10,610 | |
| Trade and other receivables | 11 | 66 | 1,747 |
| Derivative financial instruments | 12 | 8,990 | 7,619 |
| Cash and cash equivalents | 13 | 2,653 | 30,471 |
| Current assets | 19,882 | 50,447 | |
| Total assets | 312,159 | 326,452 | |
| Share capital | 142,829 | 142,829 | |
| Reserves | 158,294 | 175,595 | |
| Retained earnings | (15,352) | (13,220) | |
| Total equity attributable to equity holders of the Company | 14 | 285,771 | 305,204 |
| Liabilities | |||
| Loans from subsidiaries | 14,100 | - | |
| Deferred tax liabilities | 16 | - | 2,238 |
| Non-current liabilities | 14,100 | 2,238 | |
| Amount due from subsidiaries | 9,739 | 12,462 | |
| Trade and other payables | 17 | 2,549 | 6,548 |
| Current liabilities | 12,288 | 19,010 | |
| Total liabilities | 26,388 | 21,248 | |
| Total equity and liabilities | 312,159 | 326,452 | |
| Net Asset Value per Share (Euro) | 2.50 | 2.67 |
The financial statements were approved by the Board of Directors on 20 January 2009 and signed on its behalf by:
Tom Chandos, Chairman
Robert DeNormandie, Chairman of Audit Committee
The accompanying notes 1 to 28 form an integral part of these consolidated financial statements.
Company Statement of Changes in Equity
For the year ended 30 September 2008
| Share | Share | Hedging | Retained | Total | |
| capital | premium | reserve | earnings | equity | |
| €'000 | €'000 | €'000 | €'000 | €'000 | |
| Balance as at 30 September 2006 | 6,921 | - | 854 | (7,131) | 644 |
| Effective portion of changes in fair value of cash flow hedges, net of tax | - | - | 4,526 | - | 4,526 |
| Total income and expense recognised directly in equity | - | - | 4,526 | - | 4,526 |
| Loss for the year | - | - | - | (6,089) | (6,089) |
| Total recognised income and expense | - | - | 4,526 | (6,089) | (1,563) |
| Issue of shares | 135,908 | 182,480 | - | - | 318,388 |
| Issuing fees | - | (6,662) | - | - | (6,662) |
| Dividends to equity holders | - | (5,603) | - | - | (5,603) |
| Balance as at 30 September 2007 | 142,829 | 170,215 | 5,380 | (13,220) | 305,204 |
| Effective portion of changes in fair value of cash flow hedges | - | - | 3,610 | - | 3,610 |
| Total income and expense recognised directly in equity | - | - | 3,610 | - | 3,610 |
| Loss for the year | - | - | - | (2,132) | (2,132) |
| Total recognised income and expense | - | - | 3,610 | (2,132) | 1,478 |
| Issue of shares | - | - | - | - | - |
| Issuing fees | - | (749) | - | - | (749) |
| Dividends to equity holders | - | (20,162) | - | - | (20,162) |
| Balance as at 30 September 2008 | 142,829 | 149,304 | 8,990 | (15,352) | 285,771 |
The accompanying notes 1 to 28 form an integral part of these consolidated financial statements.
Company Cash Flow Statement
For the year ended 30 September 2008
| 30/09/08 | 30/09/07 | |
| €'000 | €'000 | |
| Operating Activities | ||
| Loss for the year before taxation | (2,008) | (5,942) |
| Adjustments for: | ||
| Net finance cost | (3,926) | (3,460) |
| Unrealised foreign currency exchange | 83 | (67) |
| Operating profit before changes in working capital and provisions | (5,851) | (9,469) |
| Increase in trade and other receivables | 3,776 | (10,761) |
| Increase in trade and other payables | (6,261) | 14,860 |
| Cash generated from operations | (8,336) | (5,370) |
| Interest paid | (300) | (112) |
| Interest received | 2,252 | 4,907 |
| Tax paid | (124) | (21) |
| Cash flows from operating activities | (6,508) | (596) |
| Investing Activities | ||
| Acquisition of subsidiary properties | (14,499) | (224,437) |
| Cash flows from investing activities | (14,499) | (224,437) |
| Financing Activities | ||
| Proceeds on issue of shares | - | 318,388 |
| Dividends | (20,162) | (5,603) |
| Issuing fees | (749) | (6,662) |
| Loan relating to Subsidiaries/Shareholders | 14,100 | (50,218) |
| Finance costs paid on arrangement of long term loan | - | (461) |
| Cash flows from financing activities | (6,811) | 255,444 |
| Net increase in cash and cash equivalents for the year | (27,818) | 30,411 |
| Opening cash and cash equivalents | 30,471 | 60 |
| Closing cash and cash equivalents | 2,653 | 30,471 |
The accompanying notes 1 to 28 form an integral part of these consolidated financial statements.
Notes to the Consolidated Financial Statements
1. Significant accounting policies
Statement of compliance
Invista European Real Estate Trust SICAF (the 'Company') was incorporated as a 'société anonyme' under the laws of Luxembourg on 6 June 2005. On 17 November 2006 the Company was converted into an investment company with fixed capital 'société d'investissement à capital fixe' ('SICAF'). Through its subsidiaries (together the 'Group') its main activity is to evaluate, make and actively manage direct and indirect investments in real estate in Continental European countries. During the year ended 30 September 2008 the Group has increased its investment portfolio through acquisitions in Belgium.
The Company is a public limited liability company incorporated for an unlimited term. The registered office of the Company is established at 25B, Boulevard Royal, L-2449 Luxembourg.
These consolidated financial statements have been approved for issue by the Board of Directors on 20 January 2009 and have been prepared in accordance with International Financial Reporting Standard ('IFRS') and interpretations adopted by the International Accounting Standards Board ('IASB'), as adopted by the European Union ('EU').
Information pertaining to the Company is included to the extent required by the London Stock Exchange listing rules. This information should not deem to represent statutory annual accounts, which are separately prepared under Luxembourg General Accepted Accounting Principles.
Basis of measurement
The consolidated financial statements have been prepared on the historical cost basis except for the following:
• Derivative financial instruments measured at fair value
• Investment properties measured at fair value
The methods used to measure fair values are discussed further in note 3.
Basis of preparation
These consolidated financial statements are presented in Euro, which is the Company's functional currency. All financial information presented in Euro has been rounded to the nearest thousand.
The financial statements have been prepared on the going concern basis which the Directors of the Company believe to be appropriate for the following principal reasons:
• As at 30 September 2008, the Company had drawn down debt of €445.5 million against a senior debt facility of €460 million with Bank of Scotland which was due to expire on 31 December 2008. On 28 November 2008, this facility was extended until 31 December 2011 for an amount of €416.5 million.
• The LTV covenant was increased from 70% to 75% which prevails until 31 December 2009. On 28 November 2008, the LTV for the investment property portfolio ('portfolio') was 65% based on the 30 September 2008 valuation. During the period to 30 September 2008 (and as at the date the latest test of the covenants being the date of the senior debt refinancing with Bank of Scotland on 28 November 2008), the Company was in compliance with all of its debt servicing and loan-to-value ('LTV') covenants. If the composition of the Group's portfolio remained unchanged and there was no reduction in debt, a 5% reduction in the value of the portfolio would equate to an increase of 3.4% in its LTV ratio.
• The Company has stated its intention to reduce Group debt through the application of sale proceeds arising from the implementation of an active disposal programme as well as surplus cashflow from operations.
• Detailed cash flow models are maintained and regularly reviewed to ensure that the Company can continue to meet its liabilities as they fall due, including interest payments on loan facilities.
• Certain capital expenditure can be deferred until cash flow permits.
Use of estimates and judgements
The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected.
In particular, information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the financial statements is included in the note 3 'Determination of fair values'.
Basis of consolidation
The consolidated financial statements comprise the accounts of the Company and all of its subsidiaries drawn up to 30 September each year. Subsidiaries are those entities over which the Company has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. Subsidiaries are fully consolidated from the date on which control is transferred to the Company. They are de-consolidated from the date control ceases.
The Group's acquisitions of subsidiaries are primarily accounted for as acquisitions of assets as the subsidiaries are special purpose vehicles established for the sole purpose of holdings companies. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition.
The assets and liabilities of the subsidiaries and their results are fully reflected in the consolidated financial statements. Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Company.
Investment property
Investment property is property that is held to earn rental income together with potential for capital growth. Investment property comprises freehold land, freehold buildings and land held under operating leases.
Investment property is initially recognised on completion of contracts at cost, including related transaction costs associated with the investment property. After initial recognition, investment properties are measured at fair value, with unrealised gains and losses recognised in the Consolidated Income Statement (see note 2).
Property acquisitions are recognised in the Balance Sheet at their contractual value where unconditional commitments have been entered into prior to the Balance Sheet date.
A property interest under an operating lease is classified and accounted for as an investment property on a property by property basis when the Group holds it to earn rentals or for capital appreciation or both. Any such property interest under an operating lease classified as an investment property is carried at fair value.
This accounting policy is also applied for assets held for sale.
Investment in subsidiaries (Company only)
Investments in subsidiaries of the Company are held at cost, or at realisable value where a permanent impairment in value has arisen.
Financial Instruments
Non derivative financial instruments
Non-derivative financial instruments comprise trade and other receivables, cash and cash equivalents, loans and borrowings, and trade and other payables.
Non-derivative financial instruments are recognised initially at fair value plus, for instruments not at fair value through the Consolidated Income Statement, any directly attributable transaction costs.
Subsequent to initial recognition non-derivative financial instruments are measured as described below.
Cash and cash equivalents
Cash and cash equivalents include cash in hand, deposits held at call with banks, other short term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts that are repayable on demand and that form an integral part of the Group's cash management are included as a component of cash and cash equivalents for the purpose of the cash flow statement.
Loans and borrowings
Borrowings are recognised initially at fair value of the consideration received, less attributable transaction costs. Subsequent to initial recognition, interest bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the income statement over the period of the borrowings on an effective interest basis.
Financing costs incurred in obtaining a debt facility are capitalised and amortised over the period of the facility using the effective interest rate method.
Other
Other non-derivative financial instruments are measured at amortised cost using the effective interest method, less any impairment loss.
Derivative financial instruments
The Group uses derivative financial instruments to hedge its exposure to interest rate risks arising from financing activities.
Derivatives are initially recognised at fair value; attributable transaction costs are recognised in the Consolidated Income Statement when incurred. Subsequent to initial recognition, derivative financial instruments are measured and stated at fair value, and changes therein are accounted for as described below:
Cash flow hedges
Changes in the fair value of the derivative hedging instrument designated as a cash flow hedge are recognised directly in equity to the extent that the hedge is effective. To the extent that the hedge is ineffective, changes in fair value are recognised in the Consolidated Income Statement.
If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated or exercised, then hedge accounting is discontinued prospectively. The cumulative gain or loss previously recognised in equity remains there until the forecast transaction occurs. When the hedged item is a non-financial asset, the amount recognised in equity is transferred to the carrying amount of the asset when it is recognised. In other cases the amount recognised in equity is transferred to the Consolidated Income Statement in the same period that the hedged item affects profit or loss.
Share capital
Ordinary shares are classified as equity. External costs directly attributable to the issue of new shares, other than on a business combination, are shown as a deduction, net of tax, in equity from the proceeds. Share issue costs incurred directly in connection with a business combination are included in the cost of acquisition. Dividends are recognised in the period in which they are paid.
The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company.
Issuing fees
Costs relating to issue of new shares are deducted from the share premium account.
Impairment
Financial assets
A financial asset is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset.
An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount, and the present value of the estimated future cash flows discounted at the original effective interest rate.
Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics. All impairment losses are recognised in the Consolidated Income Statement.
An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognised. For financial assets measured at amortised cost, the reversal is recognised in the Consolidated Income Statement.
Non-financial assets
The carrying amounts of the Group's non-financial assets, other than investment property, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset's recoverable amount is estimated.
The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to that asset.
For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the 'cash-generating unit').
An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its estimated recoverable amount. Impairment losses are recognised in the Consolidated Income Statement.
Revenue
Rental income
Rental income from investment properties is accounted for on a straight-line basis over the term of the ongoing leases and is shown gross of any income tax. Any material premiums or rent-free periods are spread evenly over the lease term.
Finance income and expenses
Finance income comprises interest income on funds invested and gains on hedging instruments that are recognised in the Consolidated Income Statement. Interest income is recognised on an accruals basis.
Finance expenses comprise interest expense on borrowings, and losses on hedging instruments that are recognised in the Consolidated Income Statement.
Expenses
Operating Expenses
All expenses are accounted for on an accruals basis. The Group's investment management and administration fees and all other expenses are charged through the Consolidated Income Statement.
Attributable transaction costs incurred in establishing the Group's credit facilities are deducted from the fair value of borrowings on initial recognition and are amortised over the lifetime of the facilities through the Consolidated Income Statement.
Taxation
According to the Luxembourg regulations regarding SICAF companies the Group is not subject to capital gains taxes in Luxembourg. It is, however, liable to an annual subscription of 0.05% (taxe d'abonnement) of its total net assets, payable quarterly, and assessed on the last day of each quarter.
Real estate revenues, or capital gains derived thereon, may be subject to taxes by assessment, withholding or otherwise in the countries where the real estate is situated.
The subsidiaries of the Group are subject to taxation in the countries in which they operate. Current taxation is provided for at the current applicable rates on the respective taxable profits.
Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements.
Deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the Balance Sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.
Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.
Deferred income tax is provided on temporary differences arising on investments in subsidiaries, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future.
Other financial assets and liabilities
The carrying amounts of financial assets and liabilities with a maturity of less than one year (including trade and other receivables, cash and cash equivalents, trade and other payables and provisions) are assumed to approximate their fair values because of the short period to maturity. All other financial assets and liabilities are discounted to determine their fair value.
Non-derivative financial liabilities
Fair value, which is determined for disclosure purposes, is calculated based on the present value of future principal and interest cash flow, discounted at the market rate of interest at the reporting date. As 30 September 2008, the Group's non-derivative financial liabilities with maturity of greater than 12 months relate to non-current loans and borrowings.
Earnings per share
The Group presents earnings per share ('EPS') data for its ordinary shares. EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the period.
Capital management
The objective of the Company is to provide shareholders with an attractive level of income return together with the potential for income and capital growth through investing in commercial real estate in Continental Europe. Investment decisions are made following a process of submission through an Investment Committee operated by the Investment Manager and the Board of Directors of the Company.
2. New standards and interpretations not yet adopted
A number of new standards, amendments to standards and interpretations have been issued by the International Auditing Standards Board but are not yet effective for the year ended 30 September 2008:
• Amended IAS 1 Presentation of Financial Statements.
• Amended IAS 23 Borrowing Costs.
• IFRIC 12 Service Concession Arrangements.
• IFRIC 13 Customer Loyalty Programmes.
• IFRIC 14 IAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction.
• Amended IFRS 3 Business Combinations.
• Amended IAS 27 Consolidated and Separate Financial Statements.
• IFRIC 16 Hedges of a net investment in a foreign operation.
• Amended IAS 32 and IAS 1 Amendments to IAS 32 Financial instruments: presentation and IAS 1: presentation of financial statements - puttable financial instruments and obligations arising on liquidation.
• Amended IFRS 2 Share based payments - vesting conditions and obligations arising on liquidation.
• Amended IAS 39 Hedging of portions of financial instruments.
• Amended IFRS 1 and IAS 27 Costs on investment.
The Group is in the process of analysing the impact of these revised standards on the Group's financial statements.
3. Determination of fair values
A number of the Group's accounting policies and disclosures require the determination of fair value, for both financial and non financial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes based on the following methods. When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability.
Investment property
Fair value is based on the open market valuations of the properties as provided by an independent expert, DTZ Debenham Tie Leung, in accordance with the guidance issued by the Royal Institution of Chartered Surveyors (the 'RICS'). Market valuations are carried out on a quarterly basis.
The fair values are based on market values, being the estimated amount for which a property could be exchanged on the date of the valuation between a willing buyer and a willing seller in an arm's length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.
In the absence of current prices in an active market, the valuations are prepared by considering the aggregate of the estimated cash flows expected to be received from renting out the property. A yield that reflects the specific risks inherent in the net cash flows is then applied to the net annual cash flows to arrive at the property valuation.
Valuations reflect, when appropriate the type of tenants actually in occupation or responsible for meeting lease commitments or likely to be in occupation after letting vacant accommodation, and the market's general perception of their creditworthiness, the allocation of maintenance and insurance responsibilities between the Group and the lessee and the remaining economic life of the property. When rent reviews or lease renewals are pending with anticipated reversionary increases, it is assumed that all notices, and when appropriate counter-notices, have been served validly and within the appropriate time.
Derivatives
The fair value of the Group's derivatives is the estimated amount that the Group would receive or pay to terminate the derivative at the balance sheet date, taking into account current interest rates and the current creditworthiness of the derivative counterparties.
4. Property operating expenses
| 30/09/08 | 30/09/07 | |
| €'000 | €'000 | |
| Insurance | 111 | 349 |
| Property management fees | 719 | 352 |
| Property service charge | 310 | 135 |
| Property maintenance | 314 | 185 |
| Property tax | 544 | 254 |
| Other miscellaneous expenses | 190 | 433 |
| Total | 2,188 | 1,708 |
5. Investment management and performance fees
The Investment Manager is entitled to a base fee and a performance fee together with reasonable expenses incurred by it in the performance of its duties. The base fees payable is calculated as at each quarter end date by the Company based on 0.95% per annum of gross assets prorated from the date of acquisition.
The base fee from 1 October 2006 to 17 November 2006 was calculated at a rate of 1% per annum of gross assets pro rated from the acquisition date of the assets. This rate was changed to 0.95% per annum, from 17 November 2006.
In addition, and subject to the conditions below, the Investment Manager is entitled to an annual performance fee where the total NAV per share during the relevant financial period exceeds an annual rate of 10% (the 'performance hurdle'). Where the performance hurdle is met, a performance fee will be payable in an amount equal to 15% of any aggregate total return over and above the performance hurdle. The performance hurdle is calculated on a three year rolling basis. This requires that the annualised total return over the period from IPO on 20 December 2006 to the end of the relevant financial period in the first three year period, and on a rolling three year basis thereafter, is equal to or greater than 10% per annum. The performance fee can be paid in each of the first two years on the to-date performance.
As the conditions for receipt of a performance fee were not met during the year, no charge has been recognised in the Consolidated Income Statement (2007: €2,201,062).
6. Professional and abortive fees
Included in professional fees are auditors' remuneration of €536,384 (2007: €481,000) for the year ended 30 September 2008 and other professional and audit fees of €368,966 for the prior years not accrued.
The abortive fees represent costs relating to aborted transactions.
7 Administrative fees
| 30/09/08 | 30/09/07 | |
| €'000 | €'000 | |
| Group | ||
| Accounting and administrative fees | 1,217 | 1,096 |
| Investment property valuation fees | 169 | 258 |
| Custodian, registrar and other fees | 1,361 | 340 |
| Total | 2,747 | 1,694 |
| Company | ||
| Accounting and administrative fees | 22 | 306 |
| Investment property valuation fees | 130 | - |
| Custodian, registrar and other fees | 679 | 233 |
| Total | 831 | 539 |
8. Net finance costs
| 30/09/08 | 30/09/07 | |
| €'000 | €'000 | |
| Group | ||
| Finance income | ||
| Interest income on bank deposits | 768 | 2,742 |
| Swap interest income | 2,674 | 65 |
| Total finance income | 3,442 | 2,807 |
| Finance expenses | ||
| Amortisation on loan related transaction costs | (4,153) | (2,878) |
| Interest expense on bank loans | (25,989) | (14,850) |
| Interest expenses on shareholder loans | - | (112) |
| Swap interest expenses | (29) | - |
| Other finance charges | 309 | (739) |
| Total finance expenses | (29,862) | (18,579) |
| Net finance cost | (26,420) | (15,772) |
| Company | ||
| Finance income | ||
| Interest income | 1,953 | 2,937 |
| Amortisation on loan related transaction costs recharged to subsidiaries | 2,892 | 1,970 |
| Total finance income | 4,845 | 4,907 |
| Finance expenses | ||
| Interest expenses on shareholder loans | (421) | (112) |
| Other finance charges | (498) | (1,925) |
| Total finance expenses | (919) | (2,037) |
| Net finance income | 3,926 | 2,870 |
Amortisation of transaction costs incurred in relation to bank loans are further disclosed in note 15. Such costs are amortised till the maturity date of the bank loans (31 December 2008).
9. Taxation
| 30/09/08 | 30/09/07 | |
| €'000 | €'000 | |
| Current tax income/(expense) | ||
| French restructuring income tax | (4,319) | - |
| Other taxes | (2,026) | (1,959) |
| Total current tax income/(expense) | (6,345) | (1,959) |
| Deferred tax income/(expense) | ||
| Change in unrecognised temporary difference | 4,651 | (10,481) |
| Total tax income/(expense) | (1,694) | (12,440) |
A charge of €4.3 million was paid during the year for a tax liability in respect of restructuring of finance leases in a number of French property owning companies. A corresponding net tax benefit of approximately €4.0 million will be recognised in local entity statutory accounts but which cannot be recognised in the consolidated NAV given the Group's accounting policies which must comply with IFRS.
| 30/09/08 | 30/09/07 | |
| €'000 | €'000 | |
| Reconciliation of effective tax rate | ||
| (Loss)/profit for year | (63,199) | 10,200 |
| Total income tax | 1,694 | 12,440 |
| (Loss)/profit excluding income tax | (61,505) | 22,640 |
| Income tax gain/(expense) using the Company's domestic tax rate, which is 28.45% | 17,498 | (6,909) |
| Tax adjustments | 144 | 539 |
| Minimum taxable net margin | (69) | (252) |
| Differences in tax rates | (1,227) | (857) |
| Tax losses arising/used in the year | (5,386) | 80 |
| Permanent differences | (4,158) | (1,147) |
| Short term differences | (359) | 103 |
| Differences due to IFRS and tax reporting | (8,724) | (3,379) |
| Differences due to consolidation | 1,052 | - |
| Other taxes | (465) | (618) |
| Total | (1,694) | (12,440) |
10. Investment properties
| 30/09/08 | 30/09/07 | |
| €'000 | €'000 | |
| At beginning of year | 724,270 | 210,590 |
| Acquisitions of investment property and related costs | 29,026 | 490,609 |
| Net change in value of investment properties | (65,927) | 23,071 |
| Investment property classified as held for sale | (55,800) | - |
| At end of year | 631,569 | 724,270 |
At 30 September 2008, all properties of the portfolio were subject to registered mortgages in order to secure bank loans.
The carrying amount of investment property is the market value of the property, as determined by DTZ Debenham Tie Leung, a registered independent appraiser having appropriate recognised professional qualifications, and experience in the location and category of the properties being valued. Market values were determined having regards to recent market transactions for similar properties in the same location as the Group's investment property and/or considering the aggregate of the estimated cash flows expected to be received from renting out the property.
Investment property comprises a number of commercial properties that are leased to third parties.
As at 30 September 2008 the Group was conditionally contracted to acquire an investment property in Girona, Spain (see note 24).
Of the property operating expenses included in note 4, €76,778 is related to an investment property that did not generate income during the year.
11. Trade and other receivables
| 30/09/08 | 30/09/07 | |
| €'000 | €'000 | |
| Group | ||
| Rent receivable | 9,225 | 9,177 |
| VAT receivable | 2,428 | 2,374 |
| Swap interest receivables | 723 | - |
| Security deposits | 73 | 466 |
| Prepayments | 994 | 413 |
| Other receivables | 2,446 | 2,555 |
| Service charge advances | 1,274 | - |
| Total | 17,163 | 14,985 |
| Company | ||
| VAT receivables | - | 344 |
| Prepayments | 66 | 105 |
| Other receivables | - | 1,298 |
| Total | 66 | 1,747 |
Of the €9.2 million rent receivables included in the table above, €4.7 million are receivables related to period after 30 September 2008 (see deferred income in note 17).
Trade and other receivables are organised as follows:
| 30/09/08 | 30/09/07 | |
| €'000 | €'000 | |
| Not past due | 12,592 | 13,082 |
| past due 30-120 days | 594 | 1,179 |
| past due 120 days-one year | 1,387 | 715 |
| More than one year | 2,590 | 9 |
| 17,163 | 14,985 |
12. Derivatives financial instruments
The financial derivatives relate to Euro interest rate swaps, to hedge the interest rate risks arising from the floating rate borrowings (see note 15). As at 30 September 2008 the fair value of the interest rate swaps was €8,990,291 (2007: €7,618,726). The notional amount of the interest rate swaps amounted to €445,472,247 (2007: €427,527,250).
Hedge accounting has been applied to the interest rate swaps, with the effective portion of changes in its fair value recognised in the consolidated statement of changes in equity (see note 26 for discontinuing of hedge accounting).
The weighted average swap rate on Group debt was 4.053% per annum (2007: 4.035%).
13. Cash and cash equivalents
| 30/09/08 | 30/09/07 | |
| €'000 | €'000 | |
| Group | ||
| Bank balances | 28,415 | 68,687 |
| Term deposits | 1,500 | - |
| Total | 29,915 | 68,687 |
| Company | ||
| Bank balances | 1,153 | 30,471 |
| Term deposits | 1,500 | - |
| Total | 2,653 | 30,471 |
The cash balance mentioned above includes tenants deposits of an amount of €5.6 million (2007: €5.9 million).
As at the balance sheet date, an amount of €29.9 million has been pledged in favour of Bank of Scotland ('BOS') under the terms of account pledge agreements. These are related to loan agreements concluded by subsidiaries of the Company and BOS for the purposes of financing acquisitions of investment property. No restrictions on the utilisation of these pledged bank accounts have been imposed.
14. Issued capital and reserves
Share capital
The Company has an issued share capital of €142,829,093.75 consisting of 114,263,275 shares with a par value of €1.25 per share, all of which have been fully paid up.
The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company. All shares rank equally with regard to the Company's residual assets.
No shares have been issued during the year ended 30 September 2008.
Authorised capital
The Company has an authorised capital of €938,463,133.75 consisting of 750,770,507 shares of a par value of €1.25 per share.
Dividends
On 29 November 2007 a dividend of €0.089 per share was declared giving a total dividend of €10,026,317.
On 6 June 2008 a further dividend of €0.089 per share was declared giving a total dividend of €10,135,610.
Hedging reserve
The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to the hedge of variability in cash flows arising from interest rate risk, net of deferred tax.
Restricted reserve
A legal reserve subject to profit of the Subsidiaries and the Company has been allocated in the different jurisdictions where applicable. This reserve is not available for dividend distributions.
15. Interest bearing loans and borrowings
The Company contracted a debt facility with Bank of Scotland for €450 million in July 2005. Amounts drawn down under the agreement are secured against the Group's investment properties.
At listing on 20 December 2006 the facility was decreased to €420 million in order to reduce loan to value gearing and the maturity was extended to 31 December 2008.
In April 2007 the facility was increased to €460 million, in part to finance and secure the acquisition of the portfolio of 27 logistics properties located in France.
As at 30 September 2008, the Company had €445.5 million of outstanding indebtedness. The Company's loan to value ('LTV') (gross debt divided by market value of properties) at that date was 64.8% against a covenant of 70%. Following the disposal of two real estate assets in Lyon, France in October 2008, and a refinancing of the debt facility with the Bank of Scotland in November 2008, drawn down debt reduced to €410 million against an equivalent portfolio value of €631.6 million on the basis of the 30 September 2008 valuation. This equates to a LTV of 65.0%.
On 28 November 2008, the Company finalised an agreement with the Bank of Scotland to extend its existing debt facility for a further three years to 31 December 2011. The extension is in respect of a €416.5 million senior debt facility and the margin is 2.75% per annum over three month EURIBOR. The facility was subject to an upfront arrangement fee of 1.5% of the facility amount and an exit fee payable on expiry of the loan term or subsequent refinancing date of between 1.5 to 3.0% of the facility amount. The terms provide for an interest cover covenant of 1.30x and a LTV covenant of 75% until and including 31 December 2009 and 65% thereafter.
This extension will provide the Company with certainty of debt funding and a fixed cost of financing for a further three years. It is the Board's intention to refinance this debt to a lower cost of longer term financing once financial markets improve.
| 30/09/08 | 30/09/07 | |
| €'000 | €'000 | |
| Current | ||
| Bank loans | 445,472 | 427,527 |
| Less finance costs incurred | (12,044) | (9,891) |
| Amortised in years | 10,810 | 6,835 |
| Balance to amortise | (1,234) | (3,056) |
| Liability to property vendor | - | 29 |
| Net bank loans | 444,238 | 424,500 |
Transaction costs incurred in arranging the above loans are initially deducted from the above loan balance and are being amortised over the period of the loan. Amortisation of transaction costs recognised as finance costs amounted to €4,152,609 (€392,087 relating to assets classified as held for sale) for the year ended 30 September 2008. The finance costs include debt arrangement, structuring and utilisation fees paid in arranging the debt facility.
All borrowings are denominated in Euro.
Of the above loan amount of €32.5 million, less transaction fees of €0.1 million, are classified as held for sale (see note 27).
The weighted average interest rate at 30 September 2008 on the bank borrowings was 6.16%.
The interest rate risk with regards to the bank loan is hedged by floating to fixed interest rate swaps (see note 12).
The loan is collateralised by all properties of the portfolio included under 'Investment property' account (see note 10).
Terms and debt repayment schedule
| 30/09/08 | 30/09/07 | ||||||
| Nominal | Face | Carrying | Face | Carrying | |||
| interest | Date of | value | amount | value | amount | ||
| Currency | rate | maturity | €'000 | €'000 | €'000 | €'000 | |
| Secured bank loan | Euro | 3M Euribor +1.2% | 31/12/08 | 412,848 | 412,848 | 427,527 | 427,527 |
The above totals exclude the liabilities related to non-current assets held for sale and the balance of unamortised transaction costs of €1,133,000. This amount is arrived at by deducting the transaction fees related to the assets held for sale of €101,000 from the total balance of unamortised transaction costs of €1,234,000. This totals to €411,715,000 as per the balance sheet.
16. Deferred tax assets and liabilities
Deferred tax assets and liabilities are attributable to the following:
| Assets | Assets | Liabilities | Liabilities | Net | Net | |
| 2008 | 2007 | 2008 | 2007 | 2008 | 2007 | |
| €'000 | €'000 | €'000 | €'000 | €'000 | €'000 | |
| Investment properties | 1,447 | 727 | (18,506) | (24,860) | (17,059) | (24,133) |
| Interest rate swaps | - | - | - | (2,238) | - | (2,238) |
| Net tax assets/(liabilities) | 1,447 | 727 | (18,506) | (27,098) | (17,059) | (26,371) |
Movement in temporary differences during the year
| Reclassified | Recognised | ||||
| Balance at | to property | in profit | Recognised | Balance at | |
| 30/09/07 | held for sale | or loss | in equity | 30/09/08 | |
| €'000 | €'000 | €'000 | €'000 | €'000 | |
| Investment property | (24,133) | 3,014 | 4,060 | - | (17,059) |
| Investment property classified as held for sale | - | (3,014) | 591 | - | (2,423) |
| Interest rate swaps | (2,238) | - | - | 2,238 | - |
The deferred tax assets of the Group, amounting to €1,446,908 are recognised as in the opinion of the Directors the loss made in the year ended 30 September 2008 is expected to be compensated by future profits.
Recognised deferred tax assets/(liabilities)
| 30/09/08 | 30/09/07 | |
| €'000 | €'000 | |
| Tax losses | 66 | (212) |
| Short term timing differences | (58) | (87) |
| Deferred tax on derivatives | - | (2,238) |
| Inherent gains | (17,067) | (23,834) |
| Total | (17,059) | (26,371) |
Unrecognised deferred tax assets
| 30/09/08 | 30/09/07 | |
| €'000 | €'000 | |
| Tax losses | 10,232 | - |
| Short term timing differences | 25 | - |
| Inherent gains | 74 | - |
| Total | 10,331 | - |
17. Trade and other payables
| 30/09/08 | 30/09/07 | |
| €'000 | €'000 | |
| Group | ||
| Accounts payable | 2,652 | 4,094 |
| Accruals and other creditors | 3,991 | 12,151 |
| Deferred income less than one year | 4,888 | 5,491 |
| Interest payable on bank loans | 5,373 | 4,430 |
| Tenant deposits | 5,618 | 5,695 |
| Total | 22,522 | 31,861 |
| Company | ||
| Accounts payable | 783 | 365 |
| Accruals and other creditors | 333 | 3,326 |
| Deferred income less than one year | - | 2,649 |
| Taxes payable | 1,433 | 208 |
| Total | 2,549 | 6,548 |
The trade and other payables indicated in the table above equal their contractual amounts and are payable in less than six months except for tenants deposits, which are due at the termination of the related lease contracts.
18. Net asset value per ordinary share
The net asset value per ordinary share is based on the net assets of €248,172,928 (2007: €328,716,823) and 114,263,275 ordinary shares (2007: 114,263,275) in issue at the Balance Sheet date.
19. Earnings per ordinary share
The calculation of basic earnings per share at 30 September 2008 was based on the loss attributable to ordinary shareholders of €63,198,829 (2007: profit of €10,199,164), and a weighted average number of ordinary shares outstanding of 114,263,275 (2007: 86,940,035), calculated as follows:
Weighted average number of ordinary shares
| 2008 | 2007 | |
| Balance at beginning of the period | 114,263,275 | 692,151 |
| Issue of new ordinary shares during the year | - | 114,263,275 |
| Weighted average number of ordinary shares per year | 114,263,275 | 86,940,035 |
20. Financial instruments
Financial risk factors
The Group is exposed by its operations to financial risks, including effects from change in market prices and interest rates.
The Group holds cash and liquid resources as well as having debtors and creditors that arise directly from its operations. The Group has entered into interest rate swaps which are used to manage the exposure to interest rate risks but does not have any other derivative instruments.
The main risks arising from the Group's financial instruments and properties are market price risk, credit risk, liquidity risk and interest rate risk. Market risk embodies the potential for both losses and gains and includes price risks, interest rate risk and currency risk.
The nature and extent of the investments and the financial instruments outstanding at the balance sheet date and the risk management policies employed by the Group are discussed opposite.
Market price risk
Rental income and the market value for properties are generally affected by overall conditions in the local economy, such as changes in gross domestic product, employment trends, inflation and changes in interest rates. Changes in gross domestic product may also impact employment levels, which in turn may impact the demand for premises. Furthermore, movements in interest rates may also affect the cost of financing for real estate companies.
Both rental income and property values may also be affected by other factors specific to the real estate market, such as competition from other property owners, the perceptions of prospective tenants of the attractiveness, convenience and safety of properties, the inability to collect rents because of bankruptcy or the insolvency of tenants or otherwise, the periodic need to renovate, repair and re-lease space and the costs thereof, the costs of maintenance and insurance, and increased operating costs.
The Investment Manager also analyses portfolio and investment risks under the following categories:
| Criteria | Risk control |
| Rental income | Ongoing review of vacancy - at least on a quarterly basis |
| Term of rental agreements | Ongoing review and at least on a quarterly basis |
| Quality of tenants | Verified on a semi-annual basis by means of the credit rating performed by Experian |
| Sector diversification | Quarterly formal comparison with strategy and review with the Board of Directors |
| Geographic diversification | Quarterly formal comparison with strategy and review with the Board of Directors |
| Sizes of individual properties | Quarterly monitoring of the proportion of individual properties in the portfolio in accordance with |
| Stock Exchange regulations | |
| Payments in arrears | Ongoing review supported by quarterly review of property management reports |
By monitoring assets under these categories using the risk controls outlined, and by diversifying the portfolio in different property sectors, countries, regions and tenants industries the Group expects to lower the risk profile of the portfolio.
Interest rate risk
The Group's exposure to market risk for changes in interest rates relates primarily to the Group's variable-rate borrowings (see note 15).
The Group has an exposure to the effects of fluctuations of market interest rates on its financial position and cash flows, interest costs may increase as a result of such changes. This may reduce or create loss in the event risk for changes in interest that unexpected movement arises.
The Group adopts a policy of ensuring that all of its exposure to changes in interest rates on borrowings is on a fixed rate basis. Interest rate swaps, denominated in Euro, have been entered into to achieve this.
The net fair value of the interest rate swaps at 30 September 2008 is €8,990,291 (2007: €7,618,726)
The following table indicates the periods in which the cash flows associated with the interest rate swaps are expected to occur and how they will impact the future income statements:
| Expected | |||||||
| cash flows | |||||||
| Carrying | to be | 6 months | 6-12 | 1-2 | 2-5 | More than | |
| amount | received | or less | months | years | years | 5 years | |
| As at 30/09/08 | €'000 | €'000 | €'000 | €'000 | €'000 | €'000 | €'000 |
| Interest rate swap | 8,990 | 9,404 | 2,117 | 379 | 321 | 6,587 | - |
| Expected | |||||||
| cash flows | |||||||
| Carrying | to be | 6 months | 6-12 | 1-2 | 2-5 | More than | |
| amount | received | or less | months | years | years | 5 years | |
| As at 30/09/07 | €'000 | €'000 | €'000 | €'000 | €'000 | €'000 | €'000 |
| Interest rate swap | 7,619 | 8,404 | 1,269 | 540 | 795 | 4,733 | 1,067 |
Cash flow sensitivity analysis for variable rate instruments
A change of 100 basis points in interest rates at the reporting date would have increased (decreased) equity and profit or loss by the amounts shown below. This analysis assumes that all other variables remain constant. The analysis is performed on the same basis for the year ended 30 September 2007.
| Profit or loss | ||
| 100 bp | 100 bp | |
| Increase | decrease | |
| €'000 | €'000 | |
| Cash and cash equivalents | +299 | -299 |
| Weighted average floating secured bank loan | - | - |
Currency risk
The Group's exposure to foreign exchange risk is minimal. There are only a small number of transactions which are not in the Group's reporting currency.
The Group has two subsidiaries which have another functional currency than Euro. Currency translation differences are directly booked in equity.
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. In the event of default by an occupational tenant, the Group will suffer a rental income shortfall and incur additional costs, including legal expenses, in maintaining, insuring and re-letting the property. The Investment Manager reviews reports prepared by Experian, or other sources, to assess the credit quality of the Group's tenants and aims to ensure there are no excessive concentrations of risk and that the impact of any default by a tenant is minimised.
Investments, other than those in property, are held only in liquid securities and only with counterparties that have a credit rating equal to or better than the Group. Transactions involving derivatives are with the counterparty Bank of Scotland Treasury. The Group does not expect any counterparty to fail to meet its obligations.
Credit risk for tenants
The Group's income would be adversely affected if a significant number of tenants were unable to pay rent or its properties could not be rented on favourable terms. Certain significant expenditure associated with each equity investment in real estate is generally not reduced when circumstances cause a reduction in income from properties.
Credit risk management for tenants and property managers
Receivables from tenants are the main credit risks for the Group. A credit evaluation is performed on the financial condition of prospective new tenants and a deposit is taken depending on the credit worthiness of the tenant.
Credit risk management for financial instruments
The credit risk on liquid funds and on interest rate hedges is limited because the counterparty is a bank with a high credit rating assigned by international credit rating agencies.
Liquidity risk
Liquidity risk is the risk that the Group will encounter in realising assets or otherwise raising funds to meet financial commitments.
The Group's investments comprise Continental European commercial property. Property and property related assets are inherently difficult to value due to the individual nature of each asset. As a result, valuations are subject to uncertainty. There is no assurance that the estimates resulting from the valuation process will reflect the actual sales price even where such sales occur shortly after the valuation date. Investments in property are relatively illiquid. However, the Group has endeavoured to mitigate this risk by investing in properties let to good quality tenants with the potential for income and capital growth.
Group
| 6 months | 6 months | 1-5 | ||
| Total | or less | to 1 year | years | |
| As at 30/09/08 | €'000 | €'000 | €'000 | €'000 |
| Cash and cash equivalents | 29,915 | 29,915 | - | - |
| Weighted average floating secured bank loan | (411,715) | (411,715) | - | - |
| Total | (381,800) | (381,800) | - | - |
| 6 months | 6 months | 1-5 | ||
| Total | or less | to 1 year | years | |
| As at 30/09/07 | €'000 | €'000 | €'000 | €'000 |
| Cash and cash equivalents | 68,687 | 68,687 | - | - |
| Weighted average floating secured bank loan | (424,500) | - | - | (424,500) |
| Total | (355,813) | 68,687 | - | (424,500) |
Company
| 6 months | 6 months | 1-5 | ||
| Total | or less | to 1 year | years | |
| As at 30/09/08 | €'000 | €'000 | €'000 | €'000 |
| Cash and cash equivalents | 2,653 | 2,653 | - | - |
| Amount due from subsidiaries | ||||
| Current assets | 8,173 | 8,173 | - | - |
| Non-current liabilities | 14,100 | 5,000 | 5,100 | 4,000 |
| Current liabilities | 9,739 | 9,739 | - | - |
| Total | 34,665 | 25,565 | 5,100 | 4,000 |
| 6 months | 6 months | 1-5 | ||
| Total | or less | to 1 year | years | |
| As at 30/09/07 | €'000 | €'000 | €'000 | €'000 |
| Cash and cash equivalents | 30,471 | 30,471 | - | - |
| Total | 30,471 | 30,471 | - | - |
The maturity date of the interest bearing loans in the table above is 31 December 2008. On 28 November 2008 the Company finalised an agreement with the Bank of Scotland to extend it for a further three years to 31 December 2011, as described in note 15.
The contractual cash flows for loans and borrowings presented in the above table reflect only the expected principal cash flows. Given that these loans and borrowings bear floating interest rates based on the benchmark rate of EURIBOR, the Directors deem that an estimate of the associated interest cash flows based on prevailing interest rates at the balance sheet date, does not provide additional meaningful information on the liquidity risk.
Fair value determination
Investment property
The portfolio is valued on a quarterly basis by DTZ, an independent valuer. DTZ undertake the process by operating within the guidelines issued by the Royal Institution of Chartered Surveyors and reach an estimation of fair value having regard to comparable transactions and discounted cash flow projections. Such projections are based on estimates of future cash flows from the terms of any existing lease(s) and other contracts and (where possible) from external evidence such as current market rents for similar properties in the same location and condition and using discount rates that reflect current market assessments of the uncertainty in the amount and timing of the cash flows.
If information on current or recent market prices based on recent transactions is not available, the independent valuer uses the cash flow approach to value the investment properties.
The Directors have reviewed the above valuation, have accepted the underlying assumptions as being appropriate in the current market conditions and have adopted it in the presentation of the consolidated financial statements.
Interest rate swap
An interest rate swap can be viewed as a series of cash flows occurring at known future dates. The value of the swap is the present value of these cash flows. To calculate the present value of each cash flow, both the future cash flows and an appropriate discount factor for each period on which a cash flow occurs are estimated. Future cash flows are calculated from a forward interest rate curve constructed using market prices for similar interest rate instruments independently sourced from mid-market broker quotes for the relevant market. The discount factor is the factor by which the future cash flow must be adjusted to obtain the present value. Discount factors are derived from an assessment of interest rates in the future and are calculated using forward rates such as EURIBOR. Interest rates used for calculating discount factors are independently sourced from mid-market broker quotes for the relevant market at the valuation date.
21. Operating leases
The Group leases out its investment property under operating leases. The future minimum lease receipts under non-cancellable leases are as follows:
| 30/09/08 | 30/09/07 | |
| €'000 | €'000 | |
| Less than one year | 44,878 | 46,108 |
| Between one and five years | 122,209 | 112,970 |
| More than five years | 64,211 | 80,471 |
| Total | 231,298 | 239,549 |
The Investment Manager's report of this annual report and accounts provides further description of the contingent rent recognised and the leasing arrangements.
22. Related party transactions
The Company and the Group have related party transactions with its subsidiaries, shareholders and directors.
Directors of the Company and its subsidiaries were paid a total of €222,498 (2007: €157,681) in directors' fees during the year.
Invista Real Estate Investment Management Limited ('Invista') acts as the Investment Manager of the Group. Invista has received an investment management fee of €7,361,692 (2007: €5,915,948).
As disclosed in note 5, the conditions for payment of a performance fee to the Investment Manager were not met during the year. Thus during the financial year no payment for performance fees was made (2007: €2,201,062).
As disclosed in note 15, the Group has obtained a credit facility from the Bank of Scotland and has entered into interest swap transactions with Bank of Scotland Treasury.
The Company also operates an inter-group trading account facility with its subsidiaries whereby it may receive income on behalf of its subsidiaries or pay expenses on their behalf. These balances are non-interest bearing and are settled on demand.
23. Segment reporting
Geographical segments
Segment information is presented in respect of the Group's geographical segments. This primary format is based on the Group's management and internal reporting structure. The Group's business is investing in commercial properties. All the existing properties are located in the Continental European region.
Business segments
Business segment reporting has not been prepared because the Group invest predominantly in one business segment which is property investment of commercial properties.
| Other | ||||
| France | Germany | Europe | Total | |
| 30/09/08 | €'000 | €'000 | €'000 | €'000 |
| Gross rental income | 23,765 | 15,859 | 7,659 | 47,283 |
| Property operating expenses | (854) | (857) | (477) | (2,188) |
| Segment net rental income | 22,911 | 15,002 | 7,182 | 45,095 |
| Change in value of investment properties | (34,477) | (22,612) | (8,838) | (65,927) |
| Finance income | 1,452 | 999 | 991 | 3,442 |
| Finance expenses | (16,356) | (9,419) | (4,087) | (29,862) |
| Other net expenses | (4,793) | (1,662) | (7,798) | (14,253) |
| Profit before tax | (31,263) | (17,692) | (12,550) | (61,505) |
| Taxation | (131) | 2,568 | (4,131) | (1,694) |
| Profit after tax | (31,394) | (15,124) | (16,681) | (63,199) |
| Other | ||||
| France | Germany | Europe | Total | |
| 30/09/08 | €'000 | €'000 | €'000 | €'000 |
| Assets and Liabilities | ||||
| Segment assets | 375,695 | 234,237 | 136,711 | 746,643 |
| Segment liabilities (excluding equity components) | (253,608) | (144,655) | (100,197) | (498,460) |
| Other | ||||
| France | Germany | Europe | Total | |
| 30/09/07 | €'000 | €'000 | €'000 | €'000 |
| Gross rental income | 17,183 | 12,522 | 3,786 | 33,491 |
| Property operating expenses | (874) | (570) | (264) | (1,708) |
| Segment net rental income | 16,309 | 11,952 | 3,522 | 31,783 |
| Change in value of investment properties | 7,741 | 7,187 | 8,143 | 23,071 |
| Finance income | 322 | 81 | 2,404 | 2,807 |
| Finance expenses | (12,209) | (6,077) | (293) | (18,579) |
| Other net expenses | (3,954) | (2,649) | (9,839) | (16,442) |
| Profit before tax | 8,209 | 10,494 | 3,937 | 22,640 |
| Taxation | (7,529) | (1,442) | (3,469) | (12,440) |
| Profit after tax | 680 | 9,052 | 468 | 10,200 |
| Other | ||||
| France | Germany | Europe | Total | |
| 30/09/07 | €'000 | €'000 | €'000 | €'000 |
| Assets and Liabilities | ||||
| Segment assets | 425,336 | 266,041 | 124,911 | 816,288 |
| Segment liabilities (excluding equity components) | (263,945) | (149,770) | (73,856) | (487,571) |
24. Commitments
As at 30 September 2008 the Group was conditionally contracted to acquire an investment property in Girona, Spain, for an estimated total gross cost of €10.8 million.
25. Contingencies
Certain subsidiaries of the Group are involved in litigation resulting from operating activities. These legal disputes and claims for damages are routine resulting from the normal course of business. None of these legal disputes and claims are expected to have a material effect on the balance sheet, profits or liquidity of the Group.
26. Events after the balance sheet date
Future property values
Property prices have continued to decline since the Balance Sheet date which is expected to have a material impact on the carrying value of the Company's investment property portfolio. If the value of the Company's portfolio were to fall more than 13.4%, this could cause the Company to breach its LTV bank covenant in the course of 2009 should it be unsuccessful in reducing levels of debt. There can be no certainty in relation to the actions that may be taken by the Company's lender in the event of a future breach of covenants.
Refinancing
On 28 November 2008, the Company finalised an agreement with Bank of Scotland to extend its existing debt facility for a further three years to 31 December 2011. The extension is in respect of a €416.5 million senior debt facility and the margin is 2.75% pa over three month EURIBOR. The facility was subject to an upfront arrangement fee of 1.5% of the facility amount and an exit fee payable on expiry of the loan term or subsequent refinancing date of between 1.5 to 3.0% of the facility amount. The terms provide for an interest cover covenant of 1.30x and an LTV covenant of 75% until 31 December 2009 and 65% thereafter.
Hedge accounting
Due to the difference in the maturity of the extended loan facility (2011) and the related hedging contracts/derivative financial instruments (2013), the hedge accounting relationship is discontinued with effect from 1 October 2008, since the derivative financial instruments no longer meet the hedging criteria.
Future movements in the valuations of the derivative financial instruments will be included in the income statement. The related reserve of €9.0 million, which has been credited to the reserves as at 30 September 2008 will be amortised to the income statements over the life of the new credit facility.
Subsequent sale
On 21 October 2008, assets in Lyon, France, were sold for €55.8 million. The related interest bearing loan of €32.5 million interest bearing loan was been repaid (see note 15).
The Board of the Group approved the annual report and accounts for the year 30 September 2008 on 20 January 2009.
27. Non-Current assets held for sale
Two assets located in Lyon, France, in the portfolio were sold on 21 October 2008
| 30/09/08 | |
| €'000 | |
| Assets classified as held for sale | |
| Investment properties | 55,800 |
| Trade and other receivables | 848 |
| Cash and cash equivalents | 911 |
| Total | 57,559 |
| Liabilities classified as held for sale | |
| Deferred tax liabilities | 2,423 |
| Loans and borrowings | 32,422 |
| Trade and other payables | 1,858 |
| Current tax payable | 284 |
| Total | 36,987 |
28. List of the fully consolidated subsidiaries
| Ownership | ||
| interest | ||
| Subsidiary | Domicile | 30/09/08 |
| Invista European Real Estate Holdings S.à.r.l. | Luxembourg | 100% |
| Invista European Real Estate Finance S.à.r.l. | Luxembourg | 100% |
| Invista European RE Heusenstamm Propco S.à.r.l. | Luxembourg | 100% |
| Invista European RE Marseille Propco S.à.r.l. | Luxembourg | 100% |
| Invista European RE Solingen Propco S.à.r.l. | Luxembourg | 100% |
| Invista European RE Nanteuil Propco S.à.r.l. | Luxembourg | 100% |
| Invista European RE Monheim Propco S.à.r.l. | Luxembourg | 100% |
| Invista European RE Lutterberg Propco S.à.r.l. | Luxembourg | 100% |
| Invista European RE Lutterberg Logistics GmbH | Germany | 100% |
| Invista European RE Villeurbanne Holdco S.à r.l. | Luxembourg | 100% |
| Invista European RE Delta Holdco S.à.r.l. | Luxembourg | 100% |
| Invista European RE Delta Propco S.à.r.l. | Luxembourg | 100% |
| Invista European RE Delta Propco II S.à.r.l. | France | 100% |
| Invista European RE Grodzisk Sp.zo.o. | Poland | 100% |
| Invista European RE Riesapark Propco S.à.r.l. | Luxembourg | 100% |
| Invista European RE Roth Propco S.à.r.l. | Luxembourg | 100% |
| Invista European RE Monbonnot Holdco 1 S.à.r.l. | Luxembourg | 100% |
| Invista European RE Monbonnot Holdco 2 S.à.r.l. | France | 100% |
| Invista European RE Germany GmbH | Germany | 100% |
| Invista RE Dutch Holdings B.V. | The Netherlands | 100% |
| Canal Business Park N.V. | Belgium | 100% |
| Centaurus Logistics S.A. | Luxembourg | 100% |
| Invista European RE Pocking Propco S.à.r.l. | Luxembourg | 100% |
| Invista European RE Sun Propco SARL | France | 100% |
| Invista European RE Nova Propco SARL | France | 100% |
| Invista European Real Estate Spanish Propco S.L. | Spain | 100% |
| Invista European Bel-Air RE Holdings S.à.r.l. | Luxembourg | 100% |
| Invista European Bel-Air France S.A.S. | France | 100% |
| Compagnie Francesca SARL | France | 100% |
| Fonciere Vauclusienne Fova SARL | France | 100% |
| Jerry SCI | France | 100% |
| Anjoly Affretement Stockage (Anjolyas) SARL | France | 100% |
| Juleo SCI | France | 100% |
| Cabrimmo SARL | France | 100% |
| Malabar Societe de Manutention Logistique SARL | France | 100% |
| Cemga Logistics SARL | France | 99% |
| Les Merisiers SARL | France | 99% |
| Mirasud SARL | France | 100% |
| Compagnie Fonciere de Fos Coffos SARL | France | 100% |
| Nelson SARL | France | 100% |
| Compagnie frigorifique et immobilere Cofrinor | France | 100% |
| Montowest SARL | France | 100% |
| Pole Logistique Vanclusien Poloval SARL | France | 100% |
| Societe du Pole Nord SAS | France | 100% |
| Compagnie Vauclusienne Covadis EURL | France | 100% |
| Prolog SARL | France | 100% |
| DBA Czech SRO | Czech Republic | 100% |
| Hades Logistics BV | The Netherlands | 100% |
| Atena Logistics BV | The Netherlands | 100% |
| Finimmagri SA | Belgium | 100% |
| KP IH SA | Belgium | 100% |
| KP RR SA | Belgium | 100% |
| KP HH SA | Belgium | 100% |
| Ownership | ||
| interest | ||
| Assets held for sale | Country | 30/09/08 |
| Invista European RE Lyon Propco S.à.r.l. | Luxembourg | 100% |
| Invista European RE Villeurbanne Propco S.à.r.l. | Luxembourg | 100% |
| Invista European RE Villeurbanne Propco II S.à.r.l. | France | 100% |
Independent Auditor's Report to the shareholders of the Company
Report of the reviseur d'entreprises
We have audited the accompanying consolidated financial statements of Invista European Real Estate Trust SICAF (the 'Company') and its subsidiaries (the 'Group'), which comprise the consolidated balance sheet of the Group and the balance sheet of the Company as at 30 September 2008 and the consolidated income statements, the consolidated statement of changes in equity and the consolidated statements of cash flows of the Group as well as the income statement, the statement of changes in equity and the cash flow statement of the Company for the year then ended, and a summary of significant accounting policies and other explanatory notes.
Board of Directors of the SICAF responsibility for the consolidated financial statements
The Board of Directors of the SICAF is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Luxembourg legal and regulatory requirements relating to the preparation of the consolidated financial statements. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.
Responsibility of the Réviseur d'Entreprises
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing as adopted by the Institut des Réviseurs d'Entreprises. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the judgement of the Réviseur d'Entreprises, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the Réviseur d'Entreprises considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control.
An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Board of Directors of the SICAF, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements give a true and fair view of the financial position of Invista European Real Estate Trust SICAF and its subsidiaries, and of the results of their operations and changes in their net assets for the year then ended in accordance with the Luxembourg legal and regulatory requirements relating to the preparation of the consolidated financial statements.
Emphasis of matter
Without qualifying our opinion, we draw attention to notes 1 and 26 in the consolidated financial statements. Property prices have continued to decline since the Balance Sheet date which is expected to have a material impact on the carrying value of the Company's investment property portfolio. In the absence of any debt reduction whether by means of assets sales or otherwise, the Company could face a banking loan-to-value ('LTV') covenant breach in the course of 2009, if the Company were to experience a fall of more than 13.4% in its portfolio valuation. Given the current volatile and uncertain environment in the commercial property market, it is difficult to ascertain whether the Company will breach its banking LTV covenant and what the reaction of the Company's lender will be in the event of a future breach. The Investment Manager is currently marketing a number of properties for sale in order for the Company to reduce its bank debt. Although potential sales are at an advanced stage, sales completion cannot be determined at this date.
Consequently, these conditions indicate the existence of a material uncertainty which may cast significant doubt about the Company's ability to continue as a going concern.
Other matter
Supplementary information included in the annual report has been reviewed in the context of our mandate but has not been subject to specific audit procedures carried out in accordance with the standards described above. Consequently, we express no opinion on such information. However, we have no observation to make concerning such information in the context of the consolidated financial statements taken as a whole.
Luxembourg, 20 January, 2009
KPMG Audit S.à.r.l.
Réviseurs d'Entreprises
D.G. Robertson
Corporate Information
Registered Address
25B Boulevard Royal
L-2449 Luxembourg
Directors
Tom Chandos (Chairman)
Michael Chidiac
Robert DeNormandie
John Frederiksen
Jaap Meijer
Duncan Owen
(all Non-Executive Directors)
Investment Manager
Invista Real Estate Investment Management LimitedExchequer Court33 St Mary AxeLondon, EC3A 8AA, UK
European Investment Committee
Duncan Owen (Chairman)
Tim Francis
Veronica Gallo-Alvarez
Chris Ludlam
Tony Smedley
Fund Administrator
Citco REIF Services (Luxembourg) SA
Carré Bonn
20 rue de la PostePO Box 47
L-2010 Luxembourg
Solicitors to the Company
As to English Law:
Herbert Smith LLP
Exchange House
Primrose StreetLondon, EC2A 2HS, UK
as to Luxembourg Law:
Allen & Overy Luxembourg
33 avenue JF Kennedy
L-1855 Luxembourg
Website
The Company's website is www.ieret.eu
Auditors
KPMG Audit S.à.r.l.
9 allée Scheffer
L-2520 Luxembourg
Property Valuers
DTZ Debenham Tie Leung LimitedOne Curzon StreetLondon, W1A 5PZ, UK
UK Sponsor and Broker
JPMorgan Cazenove Limited
20 MoorgateLondon, EC2R 6DA, UK
Citi33 Canada Square
London, E14 5LB, UK
Tax Advisers
Deloitte & Touche LLP
180 StrandLondon, WC2R 1BL, UK
Custodian Bank
RBC Dexia Investor Services Bank SA
14 rue Porte de France
Esch-sur-Alzette
L-4360Luxembourg
Registrar
Maitland Luxembourg SA
58 rue Charles Martel
L-2123 Luxembourg
Depositary
Capita IRG Trustees Limited
The Registry34 Beckenham Road
BeckenhamKent
BR3 4TU, UK
Glossary
Adjusted gross assets is the aggregate value of all of the assets of the Group, including net distributable but undistributed income, less current liabilities of the Group (excluding from current liabilities any proportion of monies borrowed for investment whether or not treated under accounting rules as current liabilities), as shown in the consolidated accounts of the Group.
Earnings per share ('EPS') is the profit after taxation divided by the weighted average number of shares in issue during the period.
Net equivalent yield is the time weighted average yield between the Net initial yield and the Reversionary yield.
Estimated rental value ('ERV') is the Group's external valuers' reasonable opinion as to the open market rent which, on the date of valuation, could reasonably be expected to be obtained on a new letting or rent review of a property.
Gearing is the Group's net debt as a percentage of adjusted net assets.
Gross rental income or gross rent is the annualised rental income receivable in the period, prior to payment of non-recoverable expenditure such as ground rents and property outgoings.
Gross initial yield ('GIY') is the Gross rent expressed as a percentage of the net valuation of property portfolio.
Group is Invista European Real Estate Trust SICAF and its subsidiaries.
Internal rate of return ('IRR') for an investment is the discount rate that makes the net present value of the investment's income stream total to zero.
Listing fees are related to the Initial Public Offering of the Company and admission to listing on the main market of the London Stock Exchange of the Company's shares on 20 December 2006.
Listing rules are rules made by the UK Listing Authority under section 74 of the UK Financial Services and Markets Act 2000.
Net asset value ('NAV') are shareholders' funds, plus the surplus of the open market value over the book value of both development and trading properties, adjusted to add back deferred tax.
Net initial yield ('NIY') is the Net rental income expressed as a percentage of the gross valuation of property portfolio.
Net rental income or net rent is the annualised rental income receivable in the period after payment of non-recoverable expenditure items such as ground rents and property outgoings.
Potential rent is the rent achievable if all the remaining vacant space is let at the Estimated rental value and added to the current Gross rental income.
Regulated market is a market referred to in article 1, point 13 of the Council Directive 93/22 EEC on investment services in the securities field, as amended.
Reversionary yield is the anticipated yield, which the Net initial yield will rise to once the rent reaches the Estimated rental value.
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Issued by Invista Real Estate Investment Management Limited, authorised and regulated by the Financial Services Authority.
Registered in England and Wales. Registered Number 04459443. Registered office Exchequer Court, 33 St. Mary Axe, London EC3A 8AA United Kingdom.
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