SIR.L Regulatory News (SIR)

8 September 2016

Secure Income REIT Plc

(the "Company" or the "Group")

Interim results for the six months ended 30 June 2016

Secure Income REIT Plc (AIM: SIR), the specialist long term income UK REIT, today announces its interim results for the six months ended 30 June 2016.

Highlights

• Near doubling of adjusted EPRA EPS to 5.4p, up from 2.9p in the six months to 31 December 2015 and (0.3)p in the six months to 30 June 2015: significant impact of degearing and lower financing costs following 2015 refinancing

• 6.2% increase in EPRA NAV to 300.2 pence per share as at 30 June 2016

• Further reduction in net loan to value ratio to 59.5%, down from 61% at 31 December 2015 and 80% at listing in June 2014

• Portfolio valuation up 2.1% since 31 December 2015 to £1.38 billion; net initial yield 5.3% and equivalent yield 6.3%

• Weighted average unexpired lease term of 23.1 years with no breaks, one of the longest in the sector

• Passing rent of £78.5 million as at 30 June 2016 with annual fixed or RPI uplifts, secured entirely against major global multi-billion pound quoted businesses

• First distribution paid to shareholders in August 2016: 2.9375 pence per share as first quarterly payment, annualising at 11.75 pence per share and equating to a 3.9% yield on 30 June 2016 EPRA NAV

• The Company has also announced today its agreement to acquire a £192.6 million investment portfolio of 55 Travelodge hotels and a proposed placing of new ordinary shares to raise c. £140 million at a placing price (equivalent to the pro forma EPRA NAV, adjusted for the impact of the transaction) of 298.6 pence per share. The acquisition is conditional on the placing and should it complete, the Board estimates a 14% increase in the dividend yield to 4.5% on the placing price

Martin Moore, Independent Non-Executive Chairman of the Company, commented: "I am delighted to report a very positive first half for the Group. Our EPRA NAV per share has continued to rise, up 6.2% over the six months to 30 June 2016 to just over 300p, and we are pleased to have made our maiden quarterly dividend payment in August. We are very excited to have secured an opportunity to expand our business with the £193 million Travelodge transaction which, if supported by shareholders, will raise our dividend yield, lengthen our lease duration even further, degear the business and diversify our covenant profile."

ENQUIRIES:

Prestbury Investments LLP Tel: 020 7647 7647

Nick Leslau

Mike Brown

Sandy Gumm

FTI Consulting Tel: 020 3727 1000

Richard Sunderland

Claire Turvey

Stifel Nicolaus Europe (Nominated Adviser and Broker) Tel: 020 7710 7600

David Arch

Tom Yeadon

Mark Young

Notes to Editors

About Secure Income REIT

Secure Income REIT Plc is a UK REIT specialising in generating long term, inflation protected, secure income from real estate investments. Its investment strategy is designed to satisfy investors' growing requirements for high quality, secure, inflation protected income flows. The Group owns a freehold portfolio of 26 well established real estate assets including some of the UK's top visitor attractions and theme parks: namely Alton Towers theme park and hotel, Thorpe Park and Warwick Castle, as well as 20 private hospitals in the UK.

Forward looking statements

This document includes forward looking statements which are subject to risks and uncertainties. You are cautioned that forward looking statements are not guarantees of future performance and that if risks and uncertainties materialise, or if the assumptions underlying any of these statements prove incorrect, the actual results of operations and financial condition of the Group may differ materially from those made in, or suggested by, the forward looking statements. Other than in accordance with its legal or regulatory obligations, the Company undertakes no obligation to review, update or confirm expectations or estimates or to release publicly any revisions to any forward looking statements to reflect events that occur or circumstances that arise after the date of this document.

Chairman's Statement

Dear shareholder,

Following the £282 million secondary placing in March, representing 61.4% of the issued share capital, I am delighted to welcome our new shareholders onto the register and to report a very positive first half of 2016 for the Group.

Our highly resilient and growing long term income streams have so far proven a haven of stability at a time of volatility in the listed real estate sector; our shares have consistently held above the placing price despite the sector falling on average more than 20% immediately after the 23 June referendum result.

Our EPRA NAV per share has continued to rise, up 6.2% over the six months to 30 June 2016 to just over 300p, and we are pleased to have made our maiden quarterly dividend payment in August. We can be confident that our dividends will rise for a very long time due to our industry leading weighted average unexpired lease term of over 23 years, with two thirds of our income increasing by 2.8% per annum and the remaining third increasing annually by RPI. All of our tenants have continued to prosper, with Ramsay, Merlin and Orpea trading at or close to all-time share price highs with market capitalisations ranging from £4.1 billion to £9.3 billion.

Results and financial position

The 6.2% increase in the Group's EPRA NAV since 31 December 2015 arose as follows:

* including a £6.6 million (3.7 pence per share) adjustment to strip out the impact of spreading fixed rental uplifts over the term of the lease required by accounting standards - adjustment reduces rental income and increases revaluation movement in equal amounts.

In the six months to 30 June 2016, the portfolio valuation rose by 2.1% to £1.38 billion, showing a net initial yield of 5.3% and an equivalent yield of 6.3%.

Adjusted EPRA EPS for the six months to 30 June 2016 was 5.4 pence per share compared to a loss of 0.3 pence per share for the six months to 30 June 2015 as follows:

58% of our rent roll is guaranteed by Ramsay Health Care Limited, listed on the Australian Stock Exchange with a market capitalisation of £9.3 billion* and one of the five largest healthcare groups in the world. A further 39% of rents are guaranteed by Merlin Entertainments Plc, a FTSE 100 constituent with a market capitalisation of £5.0 billion*, the largest operator of visitor attractions in Europe and the second largest in the world. The remainder of our rent roll is guaranteed by Orpea SA, a European leader in dependency care, listed on Euronext Paris with a market capitalisation of £4.1 billion*. In addition, as we grow the Group we will diversify our income streams by acquiring assets which meet our investment criteria and deliver enhanced returns to shareholders in line with our strategy, such as the £193 million Travelodge hotel acquisition announced today.

* as at 7 September 2016

Chairman's Statement continued

Outlook

Since we last reported to shareholders in March the short term outlook for the UK may have changed significantly, but we anticipate that little of this shift in environment will adversely affect our business and much could prove supportive.

The referendum result led to the Bank of England slashing its economic growth forecast by the biggest margin on record (from 2.3% to 0.8% for 2017), recommencing QE and cutting interest rates. Much has been written about the impact on the commercial property market and particularly the redemptions from open ended funds. Our view is simply that buying pressure over the last two years had driven down the yields offered on most traditional commercial property to a level that seemed expensive when compared to historic trends, and that at some point a correction seemed likely. This has now been triggered by the outcome of the referendum but the extent of this correction is likely to be limited by the relatively small number of forced sellers as well as the valuation level of, and income returns available from, the alternative homes for investment in equities and bonds. Property crashes may be much talked about but are relatively scarce: over the last 50 years, they have only ever followed speculative development or bank lending booms, neither of which have been a feature of recent years.

We have always been keen to make a clear distinction between mainstream commercial property and the composition of our portfolio, which is entirely let to strong covenants on long leases with guaranteed uplifts in less cyclical alternative property sectors. Whereas the rental levels of traditional property assets tend to follow economic growth, both upwards and downwards, our cash flows are much more predictable and resilient. This is a critical feature as the search for yield has become more acute, with 20 year gilt yields halving from 2.5% to 1.2% and 10 year gilt yields plummeting from 2.0% to 0.7% over the last year. Very low bond yields provide a highly supportive backdrop for investments producing predictable income returns, as illustrated by the c. 20% rise in the value of infrastructure funds over the last year.

As the summer market lull followed the referendum outcome, property transactional evidence is relatively thin on the ground. However, we have certainly seen no evidence of a weakening in prices in our sector of the market and we sense that sentiment may well be firming given that investments with similar income characteristics outside the property market have risen in value in recent months. As a consequence we are very excited to have secured an opportunity to expand our business with the Travelodge transaction which, if supported by shareholders, will raise our dividend yield, lengthen our lease duration even further, degear the business and diversify our covenant profile.

Martin Moore

Chairman

8 September 2016

Investment Adviser's Report

Prestbury Investments LLP is the investment adviser to Secure Income REIT Plc and is pleased to report on the operations of the Group for the six months ended 30 June 2016.

The portfolio

The portfolio comprises 26 properties with secure, long term income and contractual uplifts offering inflation protection. The rent is derived from tenants whose businesses offer global spread and have demonstrated their strong defensive qualities in performing very well over many years, including the recession of 2008 - 2009. The Group's properties form an integral part of those businesses.

Healthcare assets (62% of portfolio value)

The healthcare assets comprise 20 freehold private hospitals: a portfolio of 19 located throughout England let to a subsidiary of Ramsay Health Care Limited, the listed Australian healthcare company, and one in central London let to a subsidiary of Groupe Sinoué, a French company specialising in mental health, with passing rent as follows:

The leases on the acute hospitals are all guaranteed by Ramsay Health Care Limited, one of the top five private hospital operators in the world and a constituent of the ASX 50 index of Australia's largest listed companies, with a market capitalisation at 7 September 2016 of £9.3 billion.

The Ramsay hospitals are let on full repairing and insuring leases with a term to expiry at 30 June 2016 of 20.9 years without break. The rent increases by a fixed 2.75% per annum throughout the lease term in May each year. In addition, every five years commencing in May 2017, the Group has the option to revise the rent to the higher of the then passing rent increased by 2.75% per annum calculated on a compounded basis (the "indexed rent") and the open market rental value, with a special assumption at the first open market review in May 2017 that the rental level is the higher of the indexed rent or the amount calculated by the formula 0.885 x 0.65 x "EBITDARH", where EBITDARH is calculated as earnings from each individual property before interest, tax, depreciation, amortisation, rent and head office costs. In subsequent five yearly reviews the rent is set to indexed rent or open market rent at the Group's option.

The lease on the London psychiatric hospital is guaranteed by Orpea SA, a leading European operator of nursing homes, post-acute care and psychiatric care, listed on Euronext Paris with a market capitalisation at 7 September 2016 of£4.1 billion. Orpea owns 45% of Groupe Sinoué, the parent company of the tenant. The hospital is let on a full repairing and insuring lease with a term to expiry at 30 June 2016 of 28.1 years without break, and the rent increases by a fixed 3.0% per annum throughout the lease term in May each year.

Leisure assets (38% of portfolio value)

The leisure assets are located in England and Germany and comprise four well known visitor attractions and two hotels, including two of the UK's top three theme parks. The English assets are Alton Towers theme park and the Alton Towers hotel, Thorpe Park theme park and Warwick Castle, while the German assets are Heide Park theme park (the largest in Northern Germany) and the Heide Park hotel, both located in Soltau, Saxony. Passing rent on the portfolio was as follows:

There are upwards only uncapped RPI-linked rent reviews every June throughout the term (based on RPI in the twelve months to April each year) for the English leisure portfolio, which in 2016 resulted in an increase of 1.3%. The German properties are subject to fixed annual increases of 3.34% every July throughout the term, as a result of which the German rents increased from £5.5 million to £5.7 million on 29 July 2016 (translated at the 30 June 2016 rate).

Investment Adviser's Report continued

The portfolio (continued)

Leisure assets (continued)

The properties are all let to substantial operating subsidiaries of Merlin Entertainments Plc, the guarantor of the leases. Merlin is a FTSE 100 company with a market capitalisation at 7 September 2016 of £5.0 billion. Measured by the number of visitors, it is Europe's largest and the world's second largest operator of leisure attractions. The average unexpired lease term of the leisure assets is 26.0 years and the tenants have two successive rights to renew these leases for 35 years at the end of each term. The leases are on full repairing and insuring terms.

Portfolio valuation yields at 30 June 2016

The healthcare valuation yields include the effect of the fixed rental uplifts that took effect in May 2016 and the English leisure valuation yields include the effect of the 1.3% RPI-linked rental uplifts that took effect in June 2016. The German leisure valuation yield of 6.1% reflects the passing rent at 30 June 2016, and so has since increased to 6.3% following the July 2016 fixed rental uplifts.

Portfolio valuation

The portfolio valuation uplift in the period comprised:

Investment Adviser's Report continued

The portfolio (continued)

Portfolio valuation (continued)

The favourable currency translation movements of £9.6 million have arisen on the German properties in the period to 30 June 2016, reflecting the strength of the Euro against Sterling: the 31 December 2015 exchange rate was €1:£0.7350 and at 30 June 2016 was €1:£0.82775. This gain is offset by equivalent movements in the value of the Euro-denominated debt secured on those properties (and other Euro-denominated assets and liabilities) to leave a net currency translation gain of £2.7 million on the Group's German investments.

In addition to these movements, a rent smoothing adjustment arises on investment property revaluations from the Group's accounting policy, as required by International Financial Reporting Standards, to spread the impact of fixed rental uplifts evenly over the term of the relevant lease. The adjustments relate to those rents on the healthcare assets which increase by 2.75% (58% of the Group's rent roll) and 3.0% (3% of the Group's rent roll) every May, and those rents on the German leisure assets which increase by 3.34% every July (7% of the Group's rent roll).

The impact of this accounting treatment is to reflect a receivable, which is included in the book value of investment property, for the amount of rent included in the income statement ahead of actual cash receipts. This receivable increases over the first half of each lease term then unwinds, reducing to zero over the second half of each lease term. The impact over time for each of the rental income flows subject to smoothing is as follows:

* at the period end Euro conversion rate of €1:£0.82775

In order that the rent smoothing receivable does not, in combination with the book value of the investment properties, overstate the value of the property portfolio, any movement in the receivable is offset against property revaluation movements. As a result, this adjustment affects only the income statement presentation, increasing rental income and reducing property revaluation gains, and does not change the Group's net assets.

The annual impact of this adjustment is known with certainty unless there are acquisitions, disposals or lease variations. The additional revenue and reduced valuation movement that is expected to be recognised on the existing portfolio during the current year and the next three financial years is as follows:

* at the year to date average Euro conversion rate of €1:£0.77881

Investment Adviser's Report continued

Financial review

EPRA NAV per share

The principal financial outcome that the Board seeks to achieve is attractive growth in total shareholder returns. Progress towards this objective is specifically measured through growth in EPRA NAV plus distributions paid. EPRA NAV is a measure of the fair value of a property company on a long term basis, ignoring the impact of hedging valuations and any deferred tax.

EPRA NAV per share at 30 June 2016 was 300.2 pence per share, a 6.2% increase since 31 December 2015. Distributions commenced after the balance sheet date.

* including a £6.6 million (3.7 pence per share) adjustment to strip out the impact of spreading fixed rental uplifts over the term of the lease required by accounting standards - adjustment reduces rental income and increases revaluation movement in equal amounts.

Adjusted EPRA earnings per share

In order to monitor the Group's recurring profitability and its ability to make distributions, the Board uses the Group's adjusted EPRA earnings per share ("EPRA EPS") as a key performance indicator. EPRA EPS excludes investment property revaluations, fair value movements and early termination costs on interest rate derivatives, and the relevant deferred tax to give a measure of underlying earnings from core operating activities. Adjusted EPRA EPS further excludes:

· the effect of smoothing the fixed rental income, as the EPRA adjustments already exclude the rent smoothing impact on revaluations but not the impact on rental income, and in order not to distort dividend cover calculations; and

· certain non-recurring costs, as the Board believes this enables a more consistent comparison of underlying recurring earnings.

The non-recurring costs charged in the period and excluded in the adjusted EPRA EPS calculation relate to:

• the £2.1 million cost to the Group of the secondary placing of 61.4% of the Company's existing share capital in March 2016, to broaden the Company's investor base, to create additional liquidity in share trading and to provide improved flexibility for financing future transactions; and

• £1.4 million of costs incurred in exploring the feasibility of the proposed Travelodge acquisition, principally legal fees and other due diligence costs. The costs have been expensed in the period as the decision to acquire the portfolio had not been made at the balance sheet date. Should the acquisition complete, these costs are expected to remain as an expense in the income statement.

Adjusted EPRA EPS is therefore calculated as follows:

Investment Adviser's Report continued

Financial review (continued)

Income statement

The rental income profile and the credit strengths of the businesses paying the rent are disclosed in the Portfolio section of this report, along with details of the investment property revaluations.

The Group's administrative expenses are analysed below:

The majority of the Group's overheads are borne by the Investment Adviser and are compensated for by way of advisory fees payable to the Investment Adviser under an agreement by which it is entitled to receive cash fees calculated on a sliding scale relative to the Group's EPRA NAV. Fees are payable at 1.25% per annum on EPRA NAV up to £500 million, plus 1.0% on EPRA NAV from £500 million to £1,000 million and 0.75% thereafter. Until 10 July 2016, the cash required to satisfy this advisory fee was subsidised by the pre-listing shareholders of the Company up to a maximum of £1.3 million per quarter and £1.5 million in the extended period to 10 July 2016. During the period, cash of £2.8 million was received from those shareholders towards the £3.6 million of fees payable.

Corporate costs are those costs necessarily incurred as a result of the Company being listed and comprise:

· the cost of the board of seven Directors, four of whom received fees totalling £0.1 million in the period. The other three Directors are partners in the Investment Adviser and receive no remuneration from the Company; and

· other costs of being listed, including listing fees, nominated advisers' fees and registrars' fees, which totalled £0.2 million in the period.

Irrecoverable VAT, which is included as appropriate in each of the line items above, arises on the proportion of expenses relating to the healthcare portfolio, as VAT is not chargeable or recoverable on the healthcare assets. The VAT disallowed averaged 61% across the Group in the period.

The average interest rate paid across the Group's three secured debt facilities during the period was 5.2% per annum, significantly down from 6.8% per annum in the period to 2 October 2015 when the last of the new facilities arranged in the second half of 2015 was drawn. All facilities are fixed rate loans, so this rate is expected to apply to these facilities in future years until the first debt maturity in October 2022.

Tax

The Group operates under the UK REIT regime, so its UK and German rental operations are exempt from UK corporation tax, subject to the Group's continuing compliance with the UK REIT rules. The Group is otherwise subject to UK corporation tax.

Realised profits from the Group's German rental operations are taxable in Germany, in respect of which a tax charge of £0.1 million arose in the period. As the Group's German operations are subject to German tax, the results also include a deferred tax liability of £6.9 million relating to unrealised German capital gains tax on those investment properties.

In the event that a UK REIT has financing costs arising on its UK property rental business that are not covered at least 1.25 times by property rental business profits, tax is payable at the UK corporation tax rate on the excess interest over that level, up to a cap of 20% of the taxable profit. In the prior year the Group incurred a £1.3 million tax charge as a result but, following completion of the Group's debt refinancing in October 2015, no such excess interest has arisen so there is no tax charge in the current period and none is expected on the current portfolio in future.

Investment Adviser's Report continued

Financial review (continued)

Currency translation

The majority of the Group's assets are located in the UK and the financial statements are therefore presented in Sterling. Just under 4% of the Group's EPRA NAV relates to assets and liabilities relating to properties located in Germany, valued in and generating net earnings in Euros. The fact that both assets and liabilities are Euro denominated acts as a partial hedge of the currency risk, but the Group remains exposed to translation differences on the net results and net assets of these operations, with movements recognised in the statement of other comprehensive income. The assets are held for long term investment and the net currency exposure is not hedged.

The German properties are valued at €103.4 million as at 30 June 2016, with the Euro tranches of the Group's secured debt facilities amounting to €71.8 million. The Euro strengthened against Sterling over the period by nearly 13% and as a result there was a net currency translation gain of £2.7 million in EPRA NAV in relation to the German net assets.

Cash flow

The movement in cash over the period comprises:

The investment properties of the Group are let on full repairing and insuring terms, with each tenant obliged to keep the premises in good and substantial repair and condition, including rebuilding, reinstating, renewing or replacing premises where necessary. Consequently, no capital expenditure, property maintenance or insurance costs have been incurred in the period and it is not expected that material costs of that nature will be incurred on the current portfolio in future.

Investment Adviser's Report continued

Financing

The key terms of the Group's secured loan facilities are as follows:

* comprising £316.8 million of senior and mezzanine Sterling loans secured on the English assets and €71.8 million of senior and mezzanine Euro denominated loans secured on the German assets (translated at the 30 June 2016 exchange rate of €1:£0.82775) with these Sterling and Euro loans cross-collateralised.

The Group's gross and net debt at 30 June 2016 was as follows:

Following scheduled amortisation payments in July 2016, total gross debt at the date of this report, including Euro denominated debt at the 30 June 2016 exchange rate, is £908.2 million.

Nick Leslau

Chairman, Prestbury Investments LLP

8 September 2016

Group Income Statement

All amounts relate to continuing activities.

The notes form part of this interim report.

Group Statement of Other Comprehensive Income

The notes form part of this interim report.

Group Statement of Changes in Equity

The notes form part of this interim report.

Group Balance Sheet

The notes form part of this interim report.

Group Cash Flow Statement

The notes form part of this interim report.

Notes to the Interim Report

 1. General information about the Group

The financial information set out in this report covers the six month period to 30 June 2016, with comparative amounts relating to the year to 31 December 2015 and the six month period to 30 June 2015, and includes the results and net assets of the Company and its subsidiaries, together referred to as the Group.

The Company is incorporated in the United Kingdom. The address of the registered office and principal place of business is Cavendish House, 18 Cavendish Square, London, W1G 0PJ.

The Company is listed on AIM. Further information about the Group can be found on its website, www.SecureIncomeREIT.co.uk.

2. Basis of preparation and accounting policies

The financial information contained in this report has been prepared in accordance with IAS 34 "Interim Financial Reporting" as adopted by the European Union, and on a going concern basis. The accounting policies adopted in this report are consistent with those applied in the Group's statutory accounts for the period ended 31 December 2015 and are expected to be consistently applied in the year to 31 December 2016.

At the end of the interim reporting period, the Directors are required to assess whether it is appropriate to make provision for an incentive fee payable at the end of the current financial year as a result of the Group's performance in that interim period. In making this assessment, the Directors estimate the EPRA NAV per share of the Group at the end of the financial year. As described in note 17, this estimate does not constitute a forecast but represents an estimated illustrative case only, and is considered to provide a reasonable basis for estimating whether an incentive fee will be payable while recognising the limitations inherent in any estimate of future values.

Euro denominated results for the German assets have been converted to Sterling at an average exchange rate for the period of €1:£0.77881 and period end balances converted to Sterling at the 30 June 2016 exchange rate of €1:£0.82775.

The condensed financial statements for the period are unaudited and do not constitute statutory accounts for the purposes of the Companies Act 2006. The annual report and financial statements for 2015 have been filed with Companies House. The independent auditor's report on the annual report and financial statements for 2015 was unqualified, did not draw attention to any matters by way of emphasis, and did not contain a statement under sections 498 (2) or 498 (3) of the Companies Act 2006.

The Group's financial performance is not subject to material seasonal fluctuations.

3. Operating segments

IFRS 8 "Operating Segments" requires operating segments to be identified on the basis of internal reports about components of the Group that are reviewed by the chief operating decision maker to make decisions about resources to be allocated between segments and assess their performance. The Group's chief operating decision maker is considered to be the Board as a whole.

The Group owns two property portfolios. Although these are described individually within the Investment Adviser's report, the Board receives quarterly management accounts prepared on a basis which aggregates the performance of the portfolios and focuses on Total Shareholder Return. The Board has therefore concluded that the Group has operated in and was managed as one business segment, being property investment, in both the current and prior periods.

Notes to the Interim Report continued

3. Operating segments (continued)

The geographical split of revenue and applicable non-current assets required by IFRS 8 was as follows:

Revenue, which reflects the impact of rent smoothing adjustments, includes £26.9 million (year to 31 December 2015: £55.3 million; six months to 30 June 2015: £28.1 million) relating to the Group's largest tenant, and £16.2 million (year to 31 December 2015: £41.8 million; six months to 30 June 2015: £23.6 million) relating to the Group's second largest tenant. No other single tenant or guarantor contributed more than 10% of the Group's revenue in any reporting period.

4. Revenue

Revenue comprised:

The rent smoothing adjustment arises through the Group's accounting policy in respect of leases, which requires the recognition of rental income on a straight line basis over the lease term in certain circumstances, including for the 68% (31 December 2015 and 30 June 2015: 67%) of passing rent as at 30 June 2016 which increases by a fixed percentage each year. At this stage in the lease terms, this results in an increase in revenue and an offsetting entry is recognised in the income statement as a reduction in the gains on investment property revaluation.

 5. Finance costs

Notes to the Interim Report continued

6. Tax

The tax assessed for the period varies from the standard rate of corporation tax in the UK applied to the profit before tax. The differences are explained below:

The Company and its subsidiaries operate as a UK Group REIT. Subject to continuing compliance with certain rules, the UK REIT rules exempt the profits of the Group's UK and German property rental business from UK corporation tax. Gains on the Group's UK and German properties are also generally exempt from UK corporation tax, provided they are not held for trading or in certain circumstances sold in the three years after completion of a development.

To remain a UK REIT, there are a number of conditions to be met in respect of the Company, the Group's qualifying activity and the Group's balance of business. Since entering the UK REIT regime the Group has continued to meet these conditions. The condition requiring that the Company must not be a close company includes a grace period of three years from entry into the UK REIT regime, which expires in June 2017. The Company was a close company when it entered the UK REIT regime but the secondary share placing in March 2016 has widened the Company's ownership such that it now complies with the relevant condition.

Notes to the Interim Report continued

6. Tax (continued)

Furthermore, one of the ongoing REIT tests is an interest cover test which requires the profits of the tax exempt property rental business of the Group to be at least 1.25 times its cost of financing. If this condition is not met, the Company remains within the UK REIT regime but is required to pay UK corporation tax on an amount equivalent to the excess interest costs or 20% of the tax exempt property rental business profits if that is less. The Group has met this test in the period to 30 June 2016 so no tax was payable, but did not meet it in the prior year when it incurred a tax charge of £1.3 million (six months to 30 June 2015: £0.3 million).

The Group is subject to German corporation tax on its German property rental business at a rate of 21%, resulting in a tax charge of £0.1 million (year to 31 December 2015: £0.2 million; six months to 30 June 2015: £0.1 million). In the prior year, a German tax credit of £0.2 million (year to 31 December 2015: £0.2 million; six months to 30 June 2015: £0.2 million) also arose following the conclusion of a tax audit relating to the years between 2007 and 2012. A deferred tax liability of £6.9 million (31 December 2015: £5.7 million; 30 June 2015: £5.4 million) is recognised for the German capital gains tax that would potentially be payable on the sale of the relevant investment properties.

7. Earnings per share

Earnings per share is calculated as profit attributable to ordinary shareholders of the Company for each period divided by the weighted average number of ordinary shares in issue throughout the relevant period and is adjusted in diluted EPS to reflect any shares to be issued. Where shares are issued in one reporting period relating to the results of the prior period, the shares are treated, for the purposes of calculating the weighted average of shares in issue, as having been issued at the end of that prior period regardless of the actual date of issue.

Notes to the Interim Report continued

7. Earnings per share (continued)

The European Public Real Estate Association ("EPRA") publishes guidelines for calculating adjusted earnings designed to represent core operational activities. As well as the standard EPRA earnings figure, an adjusted EPRA earnings calculation has also been presented, excluding any incentive fee, which is largely derived from investment property revaluations, and any non-recurring costs. EPRA earnings have also been adjusted to exclude the effect of smoothing fixed rental uplifts in order not to distort dividend cover calculations. This results in a restatement of the prior period comparatives for 30 June 2015 shown in the table below.

Notes to the Interim Report continued

As at 30 June 2016 the properties were externally valued at £1,378.5 million (31 December 2015: £1,349.5 million; 30 June 2015: £1,346.9 million) by CBRE Limited, Commercial Real Estate Advisors, in their capacity as external valuers. The valuation was prepared on a fixed fee basis, independent of the portfolio value, and was undertaken in accordance with RICS Valuation - Professional Standards January 2014 on the basis of fair value, supported by reference to market evidence of transaction prices for similar properties.

The valuation report included the following statement from the valuer highlighting the potential future impact on property values of the result of the EU referendum: "Following the Referendum held on 23 June 2016 concerning the UK's membership of the EU, a decision was taken to exit. We are now in a period of uncertainty in relation to many factors that impact the property investment and letting markets. Since the Referendum date it has not been possible to gauge the effect of this decision by reference to transactions in the market place. The probability of our opinion of value exactly coinciding with the price achieved, were there to be a sale, has reduced. We would, therefore, recommend that the valuation is kept under regular review and that specific market advice is obtained should you wish to effect a disposal."

The historic cost of the Group's investment properties as at 30 June 2016 was £1,063.6 million (31 December 2015 and 30 June 2015: £1,063.6 million).

Included within the carrying value of investment properties at 30 June 2016 is £166.2 million (31 December 2015: £156.6 million; 30 June 2015: £153.7 million) in respect of the smoothing of fixed contractual rental uplifts as described in note 4. The difference between rents on a straight line basis and rents actually receivable is included within, but does not increase, the carrying value of investment properties. The effect of this adjustment on the revaluation movement was as follows:

All of the investment properties are held, within three ring-fenced security pools, as security under fixed charges in respect of secured debt.

The Board determines the Group's valuation policies and procedures, and is responsible for overseeing the valuations. Valuations are based on information provided from the Group's financial and property reporting systems, such as current rents and the terms and conditions of lease agreements, together with assumptions used by the valuer (based on market observation and their professional judgement) in the valuation model.

Notes to the Interim Report continued

8. Investment properties (continued)

At each reporting date, certain partners of the Investment Adviser, who have recognised professional qualifications and are experienced in valuing the types of property owned by the Group, initially analyse the external valuer's assessment of movements in the property valuations from the prior reporting date. Fair value changes (positive or negative) over a certain materiality threshold are considered. Changes in fair value are also compared to external sources (such as the Investment Property Databank or other relevant benchmarks) for reasonableness. Once the Investment Adviser has considered the valuations, the results are discussed with the Group's external valuers, focusing on properties with unexpected fair value changes and, if applicable, properties undergoing significant refurbishment. The Audit Committee also considers the valuation process as part of its overall responsibilities, and reports on its assessment of the procedures to the Board.

The fair value of the investment property portfolio has been determined using an income capitalisation technique, whereby contracted and market rental values are capitalised with a market capitalisation rate. This technique is consistent with the principles in IFRS 13 and uses significant unobservable inputs, such that the fair value measurement of each property within the portfolio has been classified as level 3 in the fair value hierarchy as defined in IFRS 13. There have been no transfers to or from other levels of the fair value hierarchy during the year.

The key inputs for the level 3 valuations were as follows:

The principal sensitivity of measurement to variations in the significant unobservable outputs is that decreases in net initial yield, decreases in reversionary yield and increases in RPI will increase the fair value (and vice versa).

Notes to the Interim Report continued

Secured cash is held in accounts over which the providers of secured debt have fixed security. As the Company is considered to be an internally managed Alternative Investment Fund, it is also required by the Financial Conduct Authority to hold a balance of regulatory capital in liquid funds, which is maintained in cash.

The movements in deferred tax balances in each period were as follows:

Notes to the Interim Report continued