LSR.L Regulatory News (LSR)

The Local Shopping REIT plc

Results for the Year Ending

30 September 2015

The Local Shopping REIT plc ("the Company") today announces its audited results for the year ended 30 September 2015.

The information set out below is extracted from the Company's Annual Report and Accounts for the year ended 30 September 2015, which will be published today on the Company's website www.localshoppingreit.co.uk. A copy will also be submitted to the National Storage Mechanism and will be available for inspection at: http://www.Hemscott.com. Printed copies will shortly be dispatched to shareholders. Cross-references in the extracted information below refer to pages and sections in the Annual Report and Accounts for the year ended 30 September 2015.

Highlights

· Recurring profit* for the period of £0.23m or 0.3 pence per share ("pps") (2014: £0.68m or 0.8 pps).

· Profit for the financial period of £0.02m or 0.02 pps (2014: £1.21m or 1.5 pps).

· Portfolio valued at 30 September 2015 at £81.20M, reflecting an equivalent yield (excluding the residential element) of 9.30% (30 September 2014: £87.6m, equivalent yield 9.25%).

· Net Asset Value (NAV): £34.9m or 42 pps (30 September 2014: £34.8m or 42 pps).

· Adjusted NAV: £37.1m or 45 pps, excluding liabilities arising from derivative financial instruments (30 September 2014: £38.8m, 47 pps).

· Cash holdings at 30 September 2015 of £12.74m.

· Total net debt (taking account of cash reserves) of £42.95m, reflecting an LTV of 52.89% (2014: 56.12%).

· Sales completed on 37 properties for a combined consideration of £5.33m, at a gross premium of 9.1% of the aggregate valuations at the time the properties went under offer.

· 71 vacant commercial units let at an aggregate annual rental income of £533,170 per annum.

· 33 rent reviews with an aggregate rental uplift of £54,593 (9.83%) above passing rent.

· 47 lease renewals secured at an aggregate net rental decrease of £8,666 (1.76%) to previous passing rent, but 8.42% above Market Rent.

· HSBC debt facility restructured, removing 'payment in kind' interest accrual for debt repayment of £6.9m.

· Overall debt repayment for the year of £9.12m.

*Recurring profit is explained in the Finance section below.

Investment Policy

The Company's Directors, together with its investment manager INTERNOS Global Investors Limited, continue to execute the following investment policy, adopted by shareholders in July 2013.

The Company's investment objective is to maximise value for its shareholders from its existing portfolio of local real estate assets, comprising local shops in urban and suburban areas, as well as neighbourhood and convenience properties throughout the UK.

The Company seeks to achieve this through:

· realising its assets progressively in accordance with prevailing market conditions with a view to repaying the Company's existing debt facilities (where consistent with the protection of value) and ultimately returning value to shareholders;

· exploiting the potential of its remaining property portfolio through active asset management; and

· making further investments in properties only where such investment is deemed by the Board, in consultation with INTERNOS, to be significant to protect or enhance the realisable value of an existing property asset. In such circumstances the Company may seek to purchase assets intrinsically linked to existing assets in its core local retail portfolio (such as flats situated above local convenience stores in order to exploit marriage value).

Significant progress has been made towards these objectives over the two accounting periods following the change in investment strategy, as shown below:

We continue to execute the investment strategy, actively pursuing all disposal opportunities including portfolio transactions, private treaty, owner-occupier sales and auctions. The improvement in the operational performance of the assets continues to assist the disposal programme.

For further information:

The Local Shopping REIT plc +44 20 7355 8800

Steve Faber, Director

Bill Heaney, Company Secretary

Or visit www.localshoppingreit.co.uk.

Performance Review

Market Context

Official statistics released throughout the year indicated that the UK economy continued its slow but steady emergence from the aftermath of the economic crisis of 2008, with the Office for National Statistics reporting that gross domestic product per head at 30 June 2015 had exceeded its pre-recession high. UK employment levels are also at an all-time high. However, GDP growth slowed during Q3 2015, with a fall in construction output restricting expansion during the quarter to 0.5%, down from 0.7% in Q2. Whilst services continued to perform well, manufacturing was also identified as a problem area, showing a drop in output of 0.9% during the first three quarters of 2015, as producers struggled with falling demand from overseas markets such as China and other emerging economies.

More positively for the retail sector, household disposable income has continued to rise and this appears to be feeding through into retail spending, with the Office for National Statistics reporting retail sales figures 6.5% ahead of September 2014. This was against a background of a fall in average store prices of 3.6% and an increase in on-line sales of 15.2% over the year.

Within this mixed environment, local and independent retailers continue to perform well, with the Association of Convenience Stores reporting 5% year-on-year sales growth amongst local shops. This research indicates that the most successful convenience traders are those that offer add-on services, such as mobile phone top-up, re-cycling services and internet shopping collection facilities. We seen this reflected amongst our own tenants, with good performance also amongst retailers offering health and beauty services and takeaway operators.

With a benign economic environment and apparent liquidity in the funding markets the succession of high profile collapses so evident in the downturn has continued to abate; albeit examples can still be found in fashion chain USC, streaming service Blinkbox; and Doncaster-based baker, Cooplands.

Despite the continuing improvement in consumer fundamentals, retail has lagged the other main property investment sectors, with rental and yield performance weaker than office and industrial markets. It appears that investors are still exercising a degree of caution towards a sector which has experienced a recent structural adjustment arising from the impact of internet shopping, which has led to a significant rebasing of rents to more affordable levels. Recent well publicised concerns regarding excess space capacity amongst supermarket operators may also have tainted investor attitudes.

Recently reported auction results (for example from Allsop LLP) indicate that for Grade B retail the trend of softening of yields which took hold in from 2006 has finally abated, with yields now stable. However, this is over a year later than stabilisation for Grade A retail and the approximate 250bp spread between Grade A and Grade B retail auction transactions compares with a 15 year historical average of nearer 150bp.

Operating Results & Portfolio Performance

Comparisons of operating results and portfolio performance during the year with the previous year should take account of the sale of two of the Company's property-holding subsidiaries, NOS 2 Limited and NOS 3 Limited in August 2014, shortly prior to the reporting period. This reduced the net rental income of the portfolio by circa 46% between the two years.

Profit before tax for the year was £0.02 million, or 0.02 pps, (2014: profit of £1.21 million, or 1.47 pps).

The recurring profit was £0.23 million, or 0.3 pps (2014: £0.68 million, or 0.8 pps). The recurring profit equated to 4.03% of net rental income (2014: 4.9%). Property operating expenses were £1.96 million, compared with £3.86 million in 2014. The principal reasons for these changes was the sale of properties in accordance with the investment policy (principally those held by NOS 2 Limited and NOS 3 Limited shortly before the beginning of the year). This had the effect of reducing rental income whilst removing the associated direct property expenses, but increasing the proportion of overheads to rental income.

Other factors included a reduction in bad debt charges, which was £0.25 million in the year compared (2014: £0.99 million) and non-recoverable service charges, which reduced to £35,000 compared with £287,000 in 2014. The profit before tax also incorporates a charge of £0.22 million representing an adjustment to the consideration for the disposal of NOS 2 Limited and NOS 3 Limited in relation to debtor balances.

Revaluation

The profit before tax reflected the movement in fair value of the property portfolio, which was valued at £81.2 million at 30 September 2015 (30 September 2014: £87.6m). The movement during the period reflected a combination of the reduction in portfolio value as a result of property disposals and value movements within the ongoing portfolio. On a like-for-like basis the portfolio reduced in value by 1.50%.

The investment property portfolio valuation as at 30 September 2015, reflected an equivalent yield (excluding the residential element) of 9.30% (30 September 2014, like-for-like: 9.25%).

As at 30 September 2015, the portfolio comprised 353 properties with an annual rental income, net of head rents payable, of £7.49 million (30 September 2014: 387 properties; annual rental income £7.92 million). The portfolio included 1,076 letting units (30 September 2014: 1,190 letting units).

Investment Property Portfolio as at 30 September 2015

*Net of head rents payable

All yields quoted exclude the residential element which is valued at a discount to vacant possession value.

The table above illustrates the range of property values throughout the portfolio. The average property value is £230,017 and the median is £125,000. The residential element of the portfolio has been valued at £11.53 million, typically based on 85% of vacant possession value. The average value of the residential units in our portfolio is £51,463.

Portfolio - Like-for-like Comparison

All yields quoted exclude the residential element which is valued at a discount to vacant possession value.

*Net of head rents payable

Regional variations for market rents and yields across the portfolio are illustrated by the table below.

All yields quoted exclude the residential element which is valued at a discount to vacant possession value.

Property Sales

During the year sales were completed on a further 37 properties at a combined gross sale price of £5.33 million. This produced a premium of 9.1% on a gross proceeds basis to the aggregate valuations at the time the properties went under offer. Based on the carrying valuation at the time of sale the premium was 3.5%. The difference reflects revaluations during the sale process.

At the year end a further 21 properties were under offer at an aggregate price of £2.58 million, of which 5 properties have since been sold for a total of £649,000.

As at the date of this report, total property sales since the change in the Company's investment strategy in July 2013 have reached £90.21 million. A further 20 properties are currently under offer at an aggregate price of £3.16 million. Our target remains to complete the asset disposal and loan repayment process by the end of 2017 and return cash to shareholders as soon as possible thereafter.

Portfolio Performance and Asset Management

During the period we let 71 commercial units at a combined rent of £533,170 per annum against aggregate Market Rent of £578,990. Of these new lettings, eleven incorporated stepped rent increases whereby the aggregate initial rent will typically rise to exceed the current Market Rent over the first two years of the leases. Our average rent free period on lettings completed during the period was 94 days. At 30 September 2015 ten units were under offer for letting.

Rent reviews, which were completed on 33 units resulting in an increase in aggregate rental income of £54,593 per annum and a premium of 11.15% to Market Rent. Existing leases were renewed on 47 units, resulting in an aggregate net rental decrease of £8,666 (1.76%), but £37,510 (8.42%) ahead of Market Rent.

The portfolio rental income (after the deduction of head rent payments) at the year-end was £7.49 million, compared with a like-with-like net rental income of £7.53 million in 2014, a reduction of 0.54%. The like-for-like aggregate Market Rent declined by 0.40% over the period.

During the year consent was obtained for one change of use, for the replacement of a redundant pub unit with seven houses.

The overall void rate within the portfolio at 30 September 2015 was 10.47% of portfolio Market Rent, equivalent to Market Rent of £0.85 million (30 September 2014: 11.94% and £1.03 million). The Market Rent for void commercial properties was £0.74m million, with £0.11 million attributable to residential units (30 September 2014: £0.91m and £0.12m).

We continue our policy of taking early possession of units for re-letting where tenants are in financial difficulties, unless there is a good prospect of working with tenants to clear the arrears. The bad debt charge reduced significantly during the period compared with the previous year.

Our policy is to seek rent deposits for new lettings or assignments wherever appropriate. As at 30 September 2015, deposits held in respect of commercial tenants equated to 23.0% of our quarterly rent roll (30 September 2014: 27.76%), providing a measure of protection against tenant default. Further deposits, typically equating to one month's rent, are held by our managing agents and the Deposit Protection Service in respect of residential tenancies.

During the year the joint venture in which the Company participated entered members' voluntary liquidation, the properties held by the joint venture having been sold towards the end of the previous year. During the year the Company received distributions totalling £0.29 million arising from its equity stake. The Company now has no joint venture interests.

Finance Review

The financial statements contained in this report have been prepared in accordance

with International Reporting Standards ("IFRS"). No new accounting policies were adopted during the year.

Results

The Group has recorded an IFRS profit for the financial year of £0.02m (2014: £1.21m). The principal factors in the IFRS result were:

· the reduction of property activity levels following the disposal of NOS 2 Limited and NOS 3 Limited immediately prior to the year together with a further 37 properties during the year;

· the reduction in administrative expenses during the year, which moved from £2.2m to £1.7m; and

· the reduction in the fair value of the property portfolio by £1.6m over the year.

Key Performance Indicators

The following financial key performance indicators are monitored by the directors to review the performance of the business, in addition to the specific measures described in the Business Review which are used to monitor the performance of the property portfolio.

* Based on rental income compared to interest payable

† Net of cash held

‡ Based on 82,505,853 shares in issue at 30 September 2015 (2014: 82,505,853)

§ Adjusted to exclude the fair value of financial derivatives

Recurring Profit

The recurring profit for the year was £0.23m (2014: £0.69m), the calculation of which remains consistent with previous years. A reconciliation of the profit before tax to the recurring profit is set out in the table below:

The calculation remains consistent with previous periods.

The recurring profit per share for the year was 0.3 pence (2014: 0.8 pence).

In accordance with the dividend distribution policy adopted by the Board in 2013, no dividend will be paid for the year (2014: nil).

Significant factors affecting recurring profit were:

Net Asset Value ("NAV")

During the period NAV rose to £34.85 million or £0.42 per share, based on 82.5 million shares in issue, excluding those held in Treasury (30 September 2014: £34.83 million, £0.42 per share).

The adjusted NAV of the Company as at 30 September 2015, excluding liabilities arising from derivative financial instruments, was £37.14 million or £0.45 per share (30 September 2014: £38.8 million, £0.47 per share).

As at 30 September 2015 the Group held £12.74 million of cash.

The Group's revaluation policy remains unchanged. At the half year and year end, 25% of the portfolio, plus all properties purchased in these two six-month periods (2014: none), are valued by Allsop LLP, a firm of Chartered Surveyors, acting as external valuers, who are experienced in property types held by the Group. The remainder of the portfolio is valued on the basis of Market Value by the directors who have relevant experience and professional qualifications with the benefit of outline advice provided by Allsop LLP

Financing

During the year, the Group operated using the loan facilities provided by HSBC Bank plc ("HSBC"). The facilities in place as at 30 September 2015 were as set out below.

At 30 September 2015 the debt outstanding was £56.0m (30 September 2014: £65.1m).

The two facilities provided by HSBC Bank plc ("HSBC") are subject to cross-collateralisation of the corresponding property portfolios, and on each quarterly interest payment date, the loan facilities are subject to actual and forecast interest cover tests. At each testing date during the period the loans were determined to be compliant. The ICR covenant required for the combined loan facility is listed below (each reporting period includes an actual and forecast ratio).

In April 2015 the facilities provided by HSBC were restructured, with the removal of the payment in kind (PIK) margin that had applied from January 2015. This considerably reduced the interest payable over the lifetime of the facility. In order to facilitate this change certain amendments were made to the loan to value ("LTV") and interest cover ratio ("ICR") covenants. Additionally a loan repayment of £6.9 million was made, immediately reducing the LTV ratio to 72.5% compared with the revised default LTV level of 82.5%.

Other changes to the facilities included the introduction of an LTV ratchet which unlocks lower interest margins and reduced amortisation requirements at lower levels of gearing. Amortisation instalments are paid on each interest payment date, currently calculated at 0.45% of the aggregate loan balance outstanding.

Additionally, the restructuring removed the obligation to hedge interest rate exposure, subject to continuing to satisfy the ICR covenant. In October 2015, this facilitated the termination of the interest rate swap which was due to expire in January 2017. Only cash trapped in accounts controlled by the lender, comprising sales proceeds of geared assets, was used for this purpose. This will reduce future interest payments, increase future ICR, and allow more cash to be released from the loan pool through higher operating cash flow.

The savings in interest payments (PIK and cash margins) from debt renegotiation and swap termination, are estimated at £2.3 million over the remainder of the loan period, compensating for the small reduction in covenant headroom, and the £1.0 million swap termination payment. The Group also holds a considerable amount of cash which could be deployed to repay debt in the unlikely event that a loan covenant is at risk of being breached. Furthermore, the revised debt terms and the optionality provided by the LTV ratchet improves the attractiveness of the portfolio to potential purchasers.

Immediately following the refinance and swap termination, the average cost of debt, including margin was 5.3%. Were the restructuring of the HSBC facilities not undertaken, the cost of debt would have risen to 7.2% immediately and higher thereafter as the PIK interest ratchet increased. The two remaining interest rate swaps expire in July 2016 following which all debt will attract interest of 3 month LIBOR plus a margin of between 1.75-2.0% dependent on the prevailing LTV. Current LIBOR forecasts suggest the cost of debt will fall below 3.0% at this time.

At 30 September 2015 the Group held property assets valued at £5.31 million with no debt secured against them together with cash of £12.7 million (30 September 2014: £15.7 million). The repayment date for both facilities is 30 April 2018.

Joint Ventures and Investments

Investments in joint ventures are equity accounted for during the period of the Group's ownership. During the year the Group continued to hold an interest in the small property joint venture with a financial institution. The joint venture entered members' voluntary liquidation during the year and at the year-end the Group had received distributions totalling £0.29 million in respect of its equity holding. Following the dissolution of the joint venture the Company no longer has any investment interests outside it wholly-owned subsidiaries.

Taxation

The Group continued to operate as a REIT throughout the year. Accordingly, any profits and gains from the property investment business should be exempt from Corporation Tax provided certain conditions continue to be met. Amounts estimated at £0.1m included in tax relief available for REIT status may become subject to Corporation Tax under s543 CTA 2010 if relief is not granted. In this event, the Company's future tax charge is likely to increase by up to £0.1m.

Dividend

In line with the Company's current dividend distribution policy no interim dividend will be paid. The Board will continue to review the dividend policy in line with progress with the investment strategy.

Outlook

Since shareholders approved the sale of the Group's property assets with a view to paying down debt and returning surplus cash we have sold £90.2m of property at prices reflecting a small premium to book value. As a result the Group is now relatively financially stable with debt gearing having dropped significantly, which has allowed us to restructure the remaining debt to good advantage. In addition the Group has a sensible cash balance and (if still relevant) will have reasonable cash flow at the expiry of the remaining interest rate swaps in 2016. However, the Board remains very mindful of the need to expedite the sale of the remaining property assets whilst preserving as much shareholder value as is reasonably possible. To that end, although there can be no guarantees, it would not be unreasonable to anticipate further portfolio sales in addition to our ongoing programme of individual property disposals, and shareholders will be updated at the appropriate moment.

S J East

Chairman

Financial Statements

Consolidated Income Statement

for the year ended 30 September 2015

* Excluding movement in the fair value of financial derivatives.

Consolidated Statement of Comprehensive Income

for the year ended 30 September 2015

Consolidated Balance Sheet

as at 30 September 2015

Consolidated Statement of Cash Flows

for the year ended 30 September 2015

Consolidated Statement of Changes in Equity

for the year ended 30 September 2015

Notes to the Financial Statements

for the year ended 30 September 2015

1. Accounting Policies

Basis of Preparation

The Local Shopping REIT plc ("the Company") is a company incorporated and domiciled in the UK. The Group's financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the EU (adopted "IFRS") and in accordance with the provisions of the Companies Act 2006.

The financial statements are prepared in pounds sterling, rounded to the nearest thousand. They have been prepared under the historical cost convention except for the following assets which are measured on the basis of fair value: investment properties, derivative financial instruments, other investments and investment properties held for sale.

The directors have considered whether it is appropriate to prepare the financial statements on a going concern basis. During the preceding year the Group disposed of a number of properties. During the current year 37 properties were sold individually. The directors are pursuing a number of approaches for selling down the property portfolio and note that this may take several years to achieve, depending on market conditions. The directors review progress with the investment strategy on a regular basis. The directors note that a number of alternative strategies remain available to the Company, such as selling the Company as a going concern or continuing t trade as a going concern. They will continue to evaluate these, and will make recommendations to shareholders on alternative strategies if appropriate.

The directors have prepared profit and cash flow forecasts for the period to 30 September 2018 which include assumptions relating to the sale of properties under the current investment strategy which the directors consider to be reasonable. These forecasts project that the Group's and Company's funding needs will be comfortably met by the existing banking facility agreements without any breach of related covenants over the remaining life of the facilities which expire in April 2018. The directors have a reasonable expectation that the banking facilities can be renewed on comparable terms sufficient to continue to trade as a going concern after April 2018, if necessary.

On the basis of these projections the directors consider that the Group will continue to be compliant with its banking covenants and sufficient resources will be available to enable it to continue as a going concern for at least the next 12 months. The financial statements do not include the adjustments that would result from the going concern basis of preparation being inappropriate.

The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these financial statements.

Basis of Consolidation

The consolidated financial statements include the financial statements of the Company and all its subsidiary undertakings up to 30 September 2015. Subsidiaries are consolidated from the date on which the Group obtains control, being the power to govern the financial and operating policies of the entity so as to obtain benefit from its activities. They continue to be consolidated until the date that such control ceases. The financial statements of subsidiaries are prepared using consistent accounting policies. Inter-company transactions and balances are eliminated.

Investment Property

Investment properties are those properties owned by the Group that are held to earn rental income or for capital appreciation or both and are not occupied by the Company or any of its subsidiaries.

The fair value of investment properties is based on market values being an estimated amount for which a property could be exchanged on the date of valuation under an arm's length transaction between a willing buyer and seller after proper marketing wherein the parties had acted knowledgeably, prudently and without compulsion. Professional external valuers have valued a sample selected by themselves of 25% of the existing portfolio at the half year and year end and all new purchases since the previous valuation to the half year and to the year end. The remainder of the portfolio has been valued on the basis of market value at the year end by the directors who have appropriate recognised professional qualifications and recent experience of the location and category of the property being valued. 

Investment properties are treated as acquired at the point the Group assumes the significant risks and returns of ownership. Subsequent expenditure is charged to the asset's carrying value only when it is probable that future economic benefits associated with the expenditure will flow to the Group and the cost of each item can be reliably measured. All other repairs and maintenance costs are charged to the Income Statement during the period in which they are incurred.

Disposals of investment properties are recognised on completion; profits and losses arising are recognised through the Income Statement, the profit is determined as the difference between the sales proceeds and the carrying amount of the asset at the last valuation date plus any additional expenditure incurred since that date.

Interest on loans associated with acquiring investment properties is expensed on an effective interest rate basis.

Rental income from investment properties is accounted for as described below.

Investment Properties Held for Sale

Investment properties held for sale are included in the Balance Sheet at their fair value. In determining whether assets no longer meet the investment criteria of the Group, consideration has been given to the conditions required under IFRS 5.

An investment property shall classify a non-current asset as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use.

The asset must be available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets and its sale must be highly probable as at the year end.

Head Leases

Where a property is held under a head lease and is classified as an investment property, it is initially recognised as an asset based on the sum of the premium paid on acquisition and if the remaining life of the lease at the date of acquisition is considered to be material, the net present value of the minimum ground rent payments. The corresponding rent liability to the leaseholder is included in the Balance Sheet as a finance obligation in current and non-current liabilities.

The payment of head rent reduces the gross liability and the interest element of the finance lease is charged to the Income Statement. Head leases considered not to have a material life remaining at the date of acquisition are accounted for as operating leases with the head rent paid being expensed through the Income Statement.

Joint arrangements 

The Group undertakes a business activity through a joint arrangement. Joint arrangements exist where two or more parties have joint control. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control. The Group's joint arrangement is a joint venture. 

Joint Ventures

Joint ventures are joint arrangements in which the parties with joint control of the arrangement have rights to the net assets of the arrangement. A separate vehicle, not the parties, will have rights to the assets and obligations to the liabilities, relating to the arrangement.

Joint ventures are accounted for using the equity method. Under the equity method, the interests in the joint venture are carried in the Balance Sheet at cost plus post-acquisition changes in the Group's share of their net assets, less distributions received and less any impairment in value of the individual investment. The Income statement reflects the Group's share of the joint venture's results after interest and tax. 

During the year, the joint venture commenced the process of members' voluntary liquidation.

 Trade and Other Receivables

Trade and other receivables are initially recognised at fair value and subsequently held at amortised cost less impairment. Impairment is made where it is established that there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivable. The impairment is recorded in the Income Statement.

Cash and Cash Equivalents

Cash and cash equivalents comprise cash balances and deposits held on call. Cash equivalents are short-term, highly liquid investments with original maturities of three months or less.

Derivative Financial Instruments and Hedging

The Group uses derivative financial instruments such as interest rate swaps to economically hedge risks associated with interest rate fluctuations. The Group does not hold or issue derivatives for trading purposes.

Such instruments are initially measured at fair value on the date on which a contract is entered into and are subsequently re-measured at fair value. Financial derivatives are recognised as current and non-current based on the maturity profile of the associated cash flows.

The Group has determined that the derivative financial instruments held did not qualify as effective for hedge accounting under the criteria set out in IAS 39 and consequently any gains or losses arising from changes in their fair value are taken to the Income Statement. In the future and on an ongoing basis as new derivative financial instruments are entered into, the directors will review the derivative contracts to consider whether they qualify for hedge accounting.

Financial Assets

Financial assets are impaired when there is objective evidence that the cash flows from the financial asset are reduced.

Trade and Other Payables

Trade and other payables are initially recognised at fair value and subsequently held at amortised cost less impairment.

Ordinary Share Capital

External costs directly attributable to the issue of new shares are shown in equity as a deduction from the proceeds.

Shares which have been repurchased are classified as treasury shares and shown in retained earnings. They are recognised at the trade date for the amount of consideration paid, together with directly attributable costs. This is presented as a deduction from total equity. Shares held by the Employee Benefit Trust are treated as being those of the Group until such time as they are distributed to employees, when they will be expensed in the profit and loss account.

The nominal value of shares cancelled has been taken to a capital redemption reserve.

Rental Income

Rental income from investment properties leased out under operating leases is recognised in the Income Statement on a straight-line basis over the term of the lease. When the Group provides lease incentives to its tenants the cost of incentives are recognised over the lease term, on a straight-line basis, as a reduction to income.

Other Income

Other income comprises administration fees charged on lease renewals.

Taxation

Corporation tax on the profit or loss for the year comprises current and deferred tax. Corporation tax is recognised in the Income Statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.

As a REIT, the Group will be exempt from corporation tax on the profits and gains from its property investment business, provided it continues to meet certain conditions. Non-qualifying profits and gains of the Group (the residual business) continue to be subject to corporation tax. Therefore, current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date and any adjustment to tax payable in respect of previous years. The REIT entry charge is expensed on the date of entry to the REIT regime. Deferred tax is provided using the balance sheet liability method. Provision is made for temporary differences between the carrying amounts of assets and liabilities in the financial statements for financial reporting purposes and the amounts used for taxation purposes. Deferred income tax is calculated after taking into account any indexation allowances and capital losses on an undiscounted basis. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities using tax rates enacted or substantially enacted at the balance sheet date. Deferred tax assets are recognised only to the extent that it is probable that future profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Deferred tax assets and liabilities are only offset if there is a legally enforceable right of set-off.

Pensions

The Company has no pension arrangements in operation.

Share-based Payments

There were no share-based payment arrangements during the period.

Employee Benefit Trust

The Group operates an Employee Benefit Trust in order to hedge its obligations under the CSOP and LTIP schemes. The Group either purchases its own shares directly or it funds the trust to acquire shares in the Company. Transactions of the Employee Benefit Trust are treated as being those of the Company and are therefore reflected in the Group financial statements.

Use of Estimates and Judgements

To be able to prepare accounts according to generally accepted accounting principles, management must make estimates and assumptions that affect the asset and liability items and revenue and expense amounts recorded in the financial statements. These estimates are based on historical experience and various other assumptions that management and the Board of directors believe are reasonable under the circumstances. The results of these considerations form the basis for making judgements about the carrying value of assets and liabilities that are not readily available from other sources.

The areas requiring the use of estimates and judgements that may significantly impact the Group's earnings and financial position include the estimation of: the fair value of investment properties, derivative financial instruments and trade receivables.

The valuation of the Group's investment properties is the main area of judgement exercised by the Board in respect of the Group's results. The Board obtains an external valuation of the portfolio carried out by professionally qualified valuers in accordance with the Appraisal and Valuation Standards of the Royal Institution of Chartered Surveyors in respect of all properties purchased during each financial year and a further 25% of the portfolio at the half year and year end as selected by the valuers. The valuers were acting as independent valuers and have good information and experience of the current market prices for properties similar to those owned by the Group. Their opinion of Market Value was primarily derived using comparable recent market transactions on an arm's length basis. The tone of their valuation has been adopted by the directors to value the remainder of the portfolio. The assumptions underlying the valuation of the commercial properties within the portfolio include: future rental income, an appropriate discount rate, any planned capital expenditure and the strength of the local letting market in relation to the Market Rent of any letting voids. In addition to these assumptions, in respect of the residential element of the portfolio, a discount of 85% is typically applied to reflect vacant possession.

The valuation of derivative financial instruments and the fixed rate loan are also areas where judgement has been exercised by the Board. These assets and liabilities have been valued by the Group's bankers. These valuations have been relied upon by the Board.

The Group is required to assess whether there is sufficient objective evidence to require the impairment of individual trade receivables. It does this through a regular review of arrears with consideration given to any specific circumstances relating to the receivable.

Segmental reporting

IFRS 8 requires operating segments to be identified on the basis of internal reports that are regularly reported to the chief operating decision maker to allocate resources to the segments and to assess their performance.

Since the strategy review in July 2013 the Group has identified one operation and one reporting segment which is reported to the Board of directors on a quarterly basis. The Board of directors is considered to be the chief operating decision maker.

New Standards and Interpretations Not Yet Adopted As at September 2015, the following standards and interpretations or amendment there to, which have not been applied in these financial statements, were in issue but not yet effective. The effect of their adoption on the financial statements in future periods has not yet been ascertained.

Applicable for the year

 commencing on or after:

2. Disposal of subsidiary companies

During the preceding year the company disposed of two subsidiaries, NOS 2 Limited and NOS 3 Limited by the sale of their entire share capital.

The loss on sale was calculated as follows:

3. Administrative Expenses

a) The following fees have been paid to the Group's Auditors: 

The other services supplied related to the disposal under project Minard of NOS 2 Limited and NOS 3 Limited in 2014 and in 2015 relate to professional advice received in connection with a transaction which did not proceed.

b) Included in administrative expenses is directors' remuneration as disclosed in the Remuneration Report. The company has no other paid employees.

Directors' emoluments are disclosed separately in the Remuneration Report.

c) Share Awards

There were no material share-based payment arrangements during the period.

d) Non-recurring items

IAS 1 (Revised) - "Presentation of financial statements" requires material items of income and expenditure to be disclosed separately. The amounts are items which, in management's opinion, need to be disclosed by virtue of their size or incidence in order for the user to obtain a proper understanding of the financial information. These amounts are considered to be £nil (2014: £nil).

4. Net Other Income

5. Net Financing Costs

6. Taxation

Factors that may affect future current and total tax charges

Reductions in the UK corporation tax rate from 23% to 21% (effective from 1 April 2014) and 20% (effective from 1 April 2015) were substantively enacted on 2 July 2013. Further reductions to 19% (effective 1 April 2017) and to 18% (effective 1 April 2020) were substantively enacted on 26 October 2015. This will reduce the company's future current tax charge accordingly and reduce the deferred tax asset at 30 September (which has been calculated based on the rate of 20% substantively enacted at the balance sheet date) by £0.23m. From 11 May 2007, the Group elected to join the UK REIT regime. As a result, the Group will be exempt from corporation tax on the profits and gains from its property investment business from this date, provided it continues to meet certain conditions. Non-qualifying profits and gains of the Group (the residual business) continue to be subject to corporation tax. The directors consider that all the rental income post-11 May 2007 originates from the Group's tax exempt business.

Due to the availability of losses no provision for corporation tax has been made in these accounts. The deferred tax asset not recognised relating to these losses can be carried forward indefinitely. It is not anticipated that sufficient profits from the residual business will be generated in the foreseeable future to utilise the losses carried forward as the current year losses will be adequate to cover foreseeable profits. The non-provided deferred tax asset at 30 September 2015 was £2.35 m (2014: £3.22m). Amounts estimated at £0.1m included in tax relief available for REIT status may become subject to Corporation Tax under s543 CTA 2010 if relief is not granted. In this event, the Company's future tax charge is likely to increase by up to £0.1m.

7. Investment Properties

The investment properties have all been revalued to their fair value at 30 September 2015.

At the half year and year end, all properties acquired in those six months, together with a sample selected by the valuers of 25% of the portfolio, at the half year and at the year end have been valued by Allsop LLP, a firm of independent Chartered Surveyors. The valuations were undertaken in accordance with the Royal Institution of Chartered Surveyors Appraisal and Valuation Standards on the basis of market value. Market value is defined as the estimated amount for which a property should exchange on the date of 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.

The disposals balance at 30 September 2014 includes properties at carrying value of £78.2m that were disposed of as part of the NOS 2 and NOS 3 transaction.

The remainder of the portfolio has been valued on the basis of market value by the directors who have an appropriate recognised professional qualification and recent experience in the location and category of the property being valued.

All rental income recognised in the Income Statement is generated by the investment properties held and all direct operating expenses incurred resulted from investment properties that generated rental income.

A reconciliation of the portfolio valuation to the total value given in the Balance Sheet for investment properties is as follows:

8. Investment in Joint Venture

The Group has the following investment in a joint venture:

On 28 September 2011 an agreement was entered into with Gracechurch Commercial Investments Limited ("Gracechurch"), a newly incorporated entity. The initial investment made was £500,000. The principal activity of the entity was to manage properties for investment purposes. During the 2014 year the entire portfolio of Gracechurch was disposed of, and Gracechurch went into voluntary liquidation. During the current year this liquidation was finalised.

The summarised financial information in respect of the Group's share of the jointly controlled entities is shown below.

Year ended 30 September 2014

9 Trade and Other Receivables

10. Cash

Included in bank balances are amounts held pending the next interest payment due in October 2015. Until the interest payment has been deducted from these balances the cash is not available for use by the Group. At the year end the amount held on such account was £1,289,294(2014: £1,240,306) with accruals for interest due of £633,355 (2014: £676,647)

11. Interest Bearing Loans and Borrowings

All bank borrowings are secured by fixed charges over certain of the Group's property assets and floating charges over the companies which own the assets charged.

For more information about the Group's exposure to interest rate risk, see note 18.

12. Trade and Other Payables

Other payables include rent deposits held in respect of commercial tenants of £430,000 (2014: £469,000).

13. Leasing

Obligations Under Finance leases

Finance lease liabilities on head rents are payable as follows:

In the above table, interest represents the difference between the carrying amount and the contractual liability/cash flow.

All leases expire in more than five years.

14. Capital and Reserves

Share Capital

Investment in Own Shares

At the year end, 9,164,017 shares were held in treasury (2014: 9,164,017).

The number of shares held by the Company's Employee Benefit Trust, LSR Trustee Limited at the year end was 1,096,545 (2014: 1,096,545). During the year the EBT transferred no shares (2014: Nil) to employees on the vesting of awards under the Long Term Incentive Plan. During the year the EBT transferred no shares to employees on the exercise of awards under the Company's Share Option Scheme.

Reserves

The value of shares issued to purchase Gilfin Property Holdings Limited in excess of their nominal value has been shown as a separate reserve in accordance with the Companies Act 2006.

Capital Redemption Reserve

The capital redemption reserve arose in prior years on the cancellation of 8,822,920 Ordinary 20p Shares.

Calculation of Net Asset Value Per Share (NAV)

15. Dividends

No dividends were paid during the current and previous year.

16. Earnings Per Share

Basic Earnings Per Share

The calculation of basic earnings per share was based on the loss attributable to Ordinary Shareholders and a weighted average number of Ordinary Shares outstanding, calculated as follows:

Profit/(Loss) Attributable to Ordinary Shares

Weighted Average Number of Ordinary Shares

Diluted Earnings Per Share

There is no difference between basic and diluted earnings per share in the prior year and no difference in the current year.

17. Derivative Financial Instruments

Derivative financial instruments held by the Group are interest rate swaps used to manage the Group's interest rate exposure. These are shown in the Balance Sheet as follows:

At 30 September 2015 and 30 September 2014 these derivative financial instruments did not qualify as effective swaps for hedge accounting under the criteria set out in IAS 39.

A summary of the swaps and their maturity dates are as follows:

The interest rate receivable on each swap is LIBOR. The notional value of the £20,178,000 swap amortises at a rate of £200,000 per quarter. Prior to the year end it was agreed that this swap would be terminated on 30th October 2015, and accordingly has been treated as a current liability.

The derivative financial instruments included in the above tables are stated at their fair value based on quotations from the Group's bank.

More details of the Group's policy regarding the management of interest rate risk are given in note 18.

18. Financial Instruments and Risk Management

The Board of directors has overall responsibility for the establishment and oversight of the Group's risk management framework.

As described in the Corporate Governance report, this responsibility has been assigned to the executive directors with support and feedback from the Audit Committee. The Audit Committee oversees how management monitors compliance with the Group's risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks faced by the Group.

The Group has identified exposure to the following financial risks from its use of financial instruments: capital management risk, market risk, credit risk and liquidity risk.

Capital Management Risk

The Group's capital consists of long-term borrowings, cash and equity attributable to the shareholders. The Board's policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain the future development of the business. The Board regularly reviews the Group's capital structure, cost of capital, gearing levels and other specific measures. From time to time, the Company purchases its own shares when the Board considers that this course of action would enhance the value of the Group for shareholders. The Group has had a policy of paying 100% of recurring profits as a dividend each year. Following the restructuring in July 2013 dividend policy will be reviewed half-yearly by the Board. No dividend has been paid during the year. There were no other changes in the Group's approach to capital management during the year.

Market Risk

Market risk is the risk that changes in market conditions, such as interest rates, foreign exchange rates and equity prices, will affect the Group's profit or loss and cash flows. The Group's exposure to market risks is restricted to interest rate risk only. The Group borrows at floating rates of interest and uses financial instruments to fix the floating rates of interest in accordance with its policy.

The Group and its jointly controlled entities do not speculate in financial instruments. They are only used to limit their exposure to interest rate fluctuations. The Group's policy is to hedge between 60% and 100% of its interest rate exposure. At 30 September 2015, 95% (2014: 83%) of the Group's debt was fixed or protected, as shown below.

The variable rate loan is protected by interest rate swaps which are carried at fair value. These have been identified as Level 2 in the fair value hierarchy. Level 2 is defined as inputs other than quoted prices included within Level 1 that are observable for the liability either directly (i.e. as prices) or indirectly (as derived from prices).

Sensitivity Analysis

IFRS 7 requires an illustration of the impact on the Group's financial performance of changes in interest rates. The following sensitivity analysis has been prepared in accordance with the Group's existing accounting policies and considers the impact on the Income Statement and on equity of an increase of 100 basis points (1%) in interest rates. As interest rates were below 1% in the current and previous year, it has not been possible to consider the impact of a decrease of 100 basis points on interest income and expense as it would result in a negative rate of interest. Therefore, the impact of a fall in interest rates has been restricted to 0%. It has been possible to consider the impact of a 1% change in rates on the fair value of derivatives as the contracted rates are greater than 1%. All other variables remain the same and any consequential tax impact is excluded. The analysis assumes that changes in market interest rates affect the interest income and interest expense of derivative financial instruments. Changes in the fair value of derivative financial instruments have been estimated by discounting future cash flows at appropriate market rates prevailing at each year end.

Actual results in the future may differ materially from these assumptions and as such, these tables should not be considered as a projection of likely future gains and losses.

Credit Risk

Credit risk is the risk of financial loss to the Group if a tenant, bank or counterparty to a financial instrument fails to meet its contractual obligations and arises principally from the Group's receivables from tenants, cash and cash equivalents held by the Group's banks and derivative financial instruments entered into with the Group's banks.

Trade and Other Receivables

The Group's exposure to credit risk is influenced mainly by the individual characteristics of each tenant. The Group has over 1,000 tenants in over 300 properties. There is no significant concentration of credit risk due to the large number of small balances owed by a wide range of tenants who operate across all retail sectors. Geographically there is no concentration of credit risk in any one area of the UK. An analysis of the business by region, user type and tenant grade is given on pages 2-3. The level of arrears is monitored monthly by the Group and more frequently on a tenant by tenant basis by the asset managers.

Cash, Cash Equivalents and Derivative Financial Instruments

Two major UK banks provide the majority of the banking services used by the Group. Financial derivatives are only entered into with these core banks

The Group's financial assets which are exposed to credit risk are classified as follows and are shown with their fair value:

30 September 2015

30 September 2014

For all classes of financial assets, the carrying amount is a reasonable approximation of fair value.

The ageing of trade receivables is as follows

Trade receivables that are not impaired are expected to be recovered.

Other receivables at 30 September 2015 and 30 September 2014 were not past due.

The movement in the trade receivables' impairment allowance during the year was as follows:

The impairment loss recognised relates to the movement in the Group's assessment of the recoverability of outstanding trade receivables.

The movement in the trade receivables impairment allowance in relation to NOS 2 and NOS 3 (disposed of during the preceding year) is a net write off of £178k.

Liquidity Risk

Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group's approach to managing liquidity risk is to ensure, as far as possible, that it will always have adequate resources to meet its liabilities when they fall due for both the operational needs of the business and to meet planned future investments. This position is formally reviewed on a quarterly basis or more frequently should events require it.

The Group's financial liabilities are classified and are shown with their fair value as follows:

30 September 2015

30 September 2014