SLI.L Regulatory News (SLI)

16 Mar 2005 09:25

Standard Life Invs Property Inc Tst16 March 2005 16 March 2005 STANDARD LIFE INVESTMENTS PROPERTY INCOME TRUST LIMITEDRe Preliminary Profits Announcement Highlights: Published Net Asset Value per share has increased by 8.4% Share price has increased by 8.75% to 108.75 pence Dividend of 6.5 pence per share £62.6m of property acquired Chairman's Statement 2004 proved to be another good year for commercial property investors, improvingon the healthy returns shown over the last few years in absolute terms andrelative to equity, gilt and cash investments. Investor demand for commercialproperty was particularly strong in 2004 as debt backed investors maintainedtheir appetite for property's relatively attractive income yield and pensionfunds increased their exposure to the asset class. In its first period of existence the Company has performed strongly. TheCompany's Published Net Asset Value and share price have increased by 8.4% and8.75% respectively over the reporting period and the Company's total dividendsin its first period of 6.5p per share have been paid to shareholders. The increase in the Published Net Asset Value of the Company over the reportingperiod was primarily attributable to increasing capital values across theproperty portfolio but was also due to the Company's financial gearing in arising property market. In a very competitive market for property investments, your Company acquired 12properties at a cost of £62.6m thereby increasing property assets undermanagement to £164.1m from £93.5m at launch on 19th December 2003. Assetmanagement opportunities have been implemented resulting in a number of newlettings and reducing the non-income producing element of the portfolio to 0.4%of total portfolio income. Looking forward, there are potential risks and opportunities to future returnsfrom UK commercial property. The Company's property portfolio has limitedexposure to those sectors most likely to be adversely impacted by any slowdownin consumer demand. On the other hand, the Company has been increasing itsexposure to the Central London office market to benefit from an expected upturnin that market. Whilst for 2005 the Company does not expect the UK commercial property marketsto deliver the same level of returns as that experienced in 2004, theenvironment for attractive high single digit or possibly double digit returnsfrom those markets remains in place. David MooreChairman of the BoardDate: 15 March 2005 Investment Manager's Commentary UK Property Market With returns of around 18% from UK commercial property, 2004 has added to analready respectable track record for property beating equities, gilts and cashover 1, 3, 5, 10 & 15 years. 2004 looks to have been a record year for net investment in UK commercialproperty, with purchase activity exceeding £36bn for the year to end Decembercompared to £29bn for 2003. At the start of the year we anticipated thatinstitutional investors, particularly pension funds, would replace any privateinvestors that were forced out of the market on the back of higher borrowingcosts. Although the renewed demand from pension funds did occur as expected,demand for commercial property was compounded as debt funded investors remainedas active as they were in 2003 on the back of lower debt finance rates in thesecond half of the year. Retail property proved to be the strongest sector in the UK market for the 3rdconsecutive year in 2004. The strong performance shown by retail property wasdriven by continued growth in consumer spending and by strong investor demandfor all retail property types. Whilst not exhibiting the same level of rentalgrowth, industrial property also fared well with investors bidding up values asthey sought the relatively attractive income yield shown by the sector. Theoffice sector proved to be the laggard again in 2004. However, the last year hasseen a marked change in the fortunes for office property with rents showingsigns of stabilising, and growing in some areas, after 3 years of falling rentalvalues for the sector. The gradual increase in the official interest rate by the Monetary PolicyCommittee of the Bank of England (MPC) during 2003 and 2004 appeared to have hadlimited impact on the voracious appetite shown by the UK consumer. However,during the last quarter of 2004 evidence began emerging that the consumer cyclewas slowing with house prices static and a poorer reporting season fromretailers. Whilst we do not anticipate a collapse in UK private consumption, wedo expect expenditure growth to moderate further during 2005. Portfolio Activity The Company's property portfolio continues to be significantly underweight inHigh Street shops and overweight to offices, in general, and central Londonoffices, in particular. This reflects our concerns about the pricing of HighStreet shops and the likelihood of reduced rental growth prospects given thepoorer outlook for retail sales. We believe the downturn in the central Londonoffice market rental cycle is coming to an end. We have been actively increasingthe Company's exposure to this market in order to benefit from an expectedrecovery already underway in certain areas. In an increasingly competitive market a further 12 properties were acquired bythe Company during 2004 at a total cost of £62.6m and producing a running incomeyield of 7.7%. Whilst we were disappointed that around £19m of the debt facilityremained uninvested at the period end we are pleased with the quality and yieldprofile of the properties acquired. A number of initiatives during the period have enhanced the portfolio. AtWellington House, London, a new letting was achieved to Tesco Stores Limited,where a 15 year lease was granted incorporating a minimum fixed uplift of 2.5%per annum compounded every 5 years. In addition we enjoyed a successful lettingcampaign at Eurolink Industrial Estate, Normanton where all the vacant unitswere let by the period end. The void rate on the Company's portfolio was reducedto 0.4% of total income from 1.8% at 30th June 2004, which compares favourablyto the void rate on the IPD Monthly Index of 8.2% at the end of 2004. We werealso able to agree rent reviews at Telelink Swansea and Halfords Paisley abovethat assumed in the valuations. As at 31st December 2004, the Company's portfolio included 25 properties with acombined value of £164.1m. The average unexpired lease term on the portfolio was11.1 years at the end of 2004. Investment Outlook Continuing the trend of strong investor appetite for UK commercial property,2005 is likely to experience some further lowering of income yields as capitalvalues are pushed higher, primarily in the office and industrial markets, asinvestors buy into improving occupier activity in these sectors and an expectedrecovery in rents. We believe the exposure of the Company's portfolio to thesesectors will enhance returns to shareholders over the next few years. During 2004, the volume of investment demand lowered income yields across allproperty markets. Although, in aggregate, we view this as a fundamentalre-rating of property yields, we have become concerned about keen pricing insome secondary and tertiary markets, particularly for High Street shops. Some ofthese segments of the market could potentially disappoint investors over thenext few years resulting in a reversal of some of the recent upward pressure oncapital values, and consequently may result in falling capital values. Bylimiting the Company's exposure to these sectors we believe we have reduced thepotential for such risks to affect what we believe remains a benign environmentfor commercial property investors over the next couple of years. Directors' Report The Directors of Standard Life Investments Property Income Trust Limited ("theCompany") and its subsidiary Standard Life Investments Property Holdings Limited(together "the Group") present their Annual Report and Audited FinancialStatements for the period from 19 December 2003 to 31 December 2004. Background Standard Life Investments Property Income Trust Limited was incorporated inGuernsey on 18 November 2003 and commenced activities on 19 December 2003. TheCompany is a closed ended Investment Company and is registered under theprovisions of The Companies (Guernsey) Law, 1994. Principal Activity The principal activity of the Company is property investment with the objectiveof providing Ordinary Shareholders with an attractive level of income along withthe prospect of income and capital growth from investing in a diversified UKcommercial property portfolio. Listings The Company is listed on the London Stock Exchange and the Channel Island StockExchange. Listings Requirements The Company has complied with the relevant provisions of paragraphs 21.2 to21.25 and the requirements set out in paragraphs 21.27 to 21.34 of the UnitedKingdom Listing Authority regulations and also the relevant provisions ofChapter 7 of the Channel Islands Stock Exchange throughout the period underreview. Substantial Shareholding At 31 December 2004, the Company had notification that the followingshareholders had a beneficial interest of 3% or more of the Company's issuedshare capital. % of holdingStandard Life Investments 21.77M&G Investment Management 10.00Rensburg Fund Management Ltd 5.78Brewin Dolphin 5.27Carr Sheppards Crosthwaite 4.00HSBC Investment Management 3.09Scottish Friendly Assurance 3.00 Results and Dividends The results for the period are set out in the Consolidated Income Statement.Details of all dividends paid or payable are set out in the FinancialStatements. Directors The Directors of the Company during the period and at the date of this Reportare set out below. Directors' and Other Interests The Directors each hold the following number of ordinary shares in the Company: David Moore 15,000Richard Barfield 15,000John Hallam 15,000Shelagh Mason 15,000Paul Orchard-Lisle 25,000 The shareholdings of the Directors have not changed from the original amountspurchased on 19 December 2003. Statement of Directors' Responsibilities The Directors are required by The Companies (Guernsey) Law, 1994, to prepareFinancial Statements for each financial period, which give a true and fair viewof the state of affairs of the Group as at the end of the financial period. Inpreparing those Financial Statements the Directors are required to: - select suitable accounting policies and then apply them consistently;- make judgements that are reasonable and prudent;- state whether applicable accounting standards have been followed, subject toany material departures disclosed and explained in the Financial Statements;- prepare the Financial Statements on a going concern basis unless it isinappropriate to presume that the Group will continue in business; and The Directors confirm that they have complied with the above requirements inpreparing the Financial Statements. The Directors are responsible for keeping proper accounting records, whichdisclose with reasonable accuracy at any time the financial position of theGroup and to enable them to ensure that the Financial Statements comply with TheCompanies (Guernsey) Law, 1994. They are also responsible for safeguarding theassets of the Group and hence for taking reasonable steps for the prevention anddetection of fraud and other irregularities. Going Concern After making enquiries, the Directors have reasonable expectation that the Grouphas adequate resources to continue in operational existence for the foreseeablefuture. For this reason they continue to adopt the going concern basis inpreparing the Financial Statements. Corporate Governance The Directors report on Corporate Governance is detailed in the annual report.As a Company incorporated in Guernsey, the Company is not required to complywith the Combined Code on Corporate Governance. However, it is the Company'spolicy to comply with best practice on good corporate governance that isapplicable to investment companies. The Board believes that the Company hascomplied throughout the accounting period with the provisions set out in theCombined Code on Corporate Governance (the "Code") issued by the FinancialReporting Council in July 2003, subject to the statements made in the CorporateGovernance Report. Auditors Following the conversion of our auditors PricewaterhouseCoopers to a LimitedLiability Partnership (LLP) from 1 October 2004, PricewaterhouseCoopers resignedon 3 November 2004 and the directors appointed its successor,PricewaterhouseCoopers CI LLP, as auditors. A resolution to reappointPricewaterhouseCoopers CI LLP as auditors will be proposed at the annual generalmeeting. Approved by the board on 15 March 2005 John Hallam David MooreDirector Director CONSOLIDATED INCOME STATEMENTFOR THE PERIOD ENDED 31 DECEMBER 2004 Note £ IncomeUnrealised profit on revaluation of investmentproperties 8 3,719,949Rental income 10,038,141 --------Total income and capital gains 13,758,090 ======== ExpenditureSet-up costs 3 (432,525)Investment management fees 3 (1,012,818)Head lease payments 2 (285,125)Valuation fees 3 (102,297)Other direct property costs (117,154)Directors' fees and subsistence 5 (81,739)Other administration expenses (412,305) -------- (2,443,963) ======== Operating profit 11,314,127 Finance costsInterest payable 6 (2,115,136)Loan arrangement fee (240,000)Interest receivable 338,217 --------Profit before taxation 9,297,208 Taxation 7 - -------- (2,016,919) --------Profit for the period 9,297,208 ======== Earnings per share for the period attributable tothe equity holders of the company Basic and diluted 22 9.30 pence BALANCE SHEETAS AT 31 DECEMBER 2004 Note £ ASSETSNon-current assetsFreehold investment properties 8 138,946,422Leasehold investment properties 8 29,663,013Interest rate swap asset 16 1,494,912 --------- 170,104,347 =========Current assetsTrade and other receivables 9 2,679,982Cash and cash equivalents 11 7,557,113 --------- 10,237,095 ========= ---------Total assets 180,341,442 ========= EQUITYCapital and reserves attributableto Company's equity holdersShare capital 17 1,000,000Share premium 18 -Retained earnings 19 702,259Capital reserves 20 5,214,861Other distributable reserves 21 96,692,892 ---------Total equity 103,610,012 ========= LiabilitiesNon-current liabilitiesBank borrowings 12 60,709,776Redeemable preference shares 13 6,373,591Leasehold obligations 14 4,643,013 --------- 71,726,380 ========= Current liabilitiesTrade and other payables 10 5,005,050Income tax payable 7 - --------- 5,005,050 ========= Total liabilities 76,731,430 ========= Total equity and liabilities 180,341,442 ========= CONSOLIDATED STATEMENT OF CHANGES IN EQUITYFOR THE PERIOD ENDED 31 DECEMBER 2004 Share Share Retained Capital Other Total capital premium earnings reserve distributable equity Note reserve £ £ £ £ £ £ Issue ofordinaryshare 17 1,000,000 1,000,000capitalShare premiumon issue ofordinaryshare 18 99,000,000 99,000,000capitalUnrealisedprofit onrevaluationof interestrate swap 16 1,494,912 1,494,912Profit forperiod 9,297,208 9,297,208Unrealisedprofit onrevaluationof investmentproperties 8 (3,719,949) 3,719,949 -Dividends 23 (4,875,000) (4,875,000)Share issuecosts 18 (2,307,108) (2,307,108)Transfer tootherdistributablereserves 18 (96,692,892) 96,692,892 - ------- -------- -------- -------- ---------- ---------Balance at 31December 2004 1,000,000 - 702,259 5,214,861 96,692,892 103,610,012 ======= ======== ======== ======== ========== ========= CONSOLIDATED CASH FLOW STATEMENTFOR THE PERIOD ENDED 31 DECEMBER 2004 Note £ Cash flows from operating activitiesCash generated from operations 25 9,751,927Interest paid (1,741,545) -----------Net cash generated from operating activities 8,010,382 ----------- Cash flows from investing activitiesAcquisition of shares in subsidiaries 5 (16,554,209)Loan repayments made to related parties 5 (80,285,282)Other loans repaid 5 (812,146)Purchase of investment properties 8 (62,427,517)Interest received 338,217 -----------Net cash used in investing activities (159,740,937) ----------- Cash flows from financing activitiesProceeds from issuing of new ordinary shares 18 97,775,951Proceeds from issuing of redeemable preference shares 13 6,000,000Share issue costs (83,059)Dividends paid 23 (4,875,000)Debt issue costs (240,000)Proceeds from bank borrowings 12 60,709,776 -----------Net cash generated from financing activities 159,287,668 ----------- Net increase in cash and cash equivalents 7,557,113Cash and cash equivalents at beginning of period - ----------Cash and cash equivalents at end of period 7,557,113 =========== NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE PERIOD ENDED 31 DECEMBER 2004 1 GENERAL INFORMATION Standard Life Investments Property Income Trust Limited ("the Company") and itssubsidiaries (together the "Group") carry on the business of property investmentthrough a portfolio of freehold and leasehold investment properties located inthe United Kingdom. The Company is a limited liability company incorporated anddomiciled in Guernsey, Channel Islands. The Company has its primary listing onthe Channel Islands Stock Exchange with a secondary listing on the London StockExchange. These audited consolidated financial statements have been approved forissue by the Board of Directors on 15th March 2005. The address of the registered office is Trafalgar Court, Les Banques, St PeterPort, Guernsey. 2 ACCOUNTING POLICIES Basis of preparation The audited consolidated financial statements of the Group have been prepared inaccordance with and comply with International Financial Reporting Standards("IFRS"), and all applicable requirements of Guernsey Company Law. The Companyhas chosen to early adopt all IFRS issued as at the period end. The auditedconsolidated financial statements have been prepared under the historical costconvention as modified by the measurement of investment property and derivativefinancial instruments at fair value. Segmental reporting A business segment is a group of assets and operations engaged in providingproducts or services that are subject to risk and returns that are differentfrom those of other business segments. A geographical segment is engaged inproviding products or services within a particular environment that are subjectto risks and returns that are different from those of segments operating inother economic environments. Segregated analysis is shown in note 26. Basis of consolidation The audited consolidated financial statements comprise the financial statementsof Standard Life Investments Property Income Trust Limited and its only materialwholly owned subsidiary undertaking, Standard Life Investments Property HoldingsLimited, a company with limited liability incorporated and domiciled in Guernsey, Channel Islands. Subsidiaries are all entities over which the Group has the power to govern thefinancial and operating polices generally accompanying a share holding of morethan one half of the voting rights. The existence and effect of potential votingrights that are currently exercisable or convertible are considered whenassessing whether the Group controls another entity. Subsidiaries are fullyconsolidated from the date on which control is transferred to the Group and theyare deconsolidated from the date that control ceases. The cost of an acquisition is measured as the fair value of the assets givenplus costs directly attributable to the acquisition including equity instrumentsissued and liabilities assumed or incurred at the date of exchange. Intercompany transactions, balances and unrealised gains on transactions betweenGroup companies are eliminated. Accounting policies of subsidiaries have beenchanged where necessary to ensure consistency with the policies adopted by theGroup. Functional and presentation currency Items included in the financial statements of each of the Group's entities aremeasured using the currency of the primary economic environment in which theentity operates ("the functional currency"). The consolidated financialstatements are presented in pounds sterling, which is the Company's and Groupsfunctional and presentation currency. Revenue recognition Revenue is recognised as follows; a) Bank interest Bank interest income is recognised on an accruals basis. b) Rental income Rental income from operating leases is net of sales taxes and VAT and isrecognised on a straight line basis over the lease term. The cost of any leaseincentives provided are recognised over the lease term, on a straight line basisas a reduction of rental income. Expenditure All expenses are accounted for on an accruals basis. The investment managementand administration fees, formation and set up costs, finance and set up costs(including interest on the bank facility and the finance cost of the redeemablepreference shares) and all other expenses are charged through the incomestatement. Share issue costs Costs directly attributable to the issue of equity that would otherwise havebeen avoided are written off against share premium and reflected in theStatement of Changes in Equity. Taxation The Company and its wholly owned Guernsey registered subsidiary, Standard LifeInvestments Property Holdings Limited, have obtained exempt company status inGuernsey under the terms of the Income Tax (Exempt Bodies) (Guernsey) Ordinance,1989 so that they are exempt from Guernsey taxation on income arising outsideGuernsey and bank interest receivable in Guernsey. Each Company is, therefore,only liable to a fixed fee of £600 per annum. No charge to Guernsey taxationwill arise on capital gains derived from the disposal of the investmentproperties. The Directors intend to conduct the Group's affairs such that the Company andits Guernsey registered subsidiary continue to remain eligible for exemption. Standard Life Investments Property Holdings Limited is subject to United Kingdomincome tax on assessable income arising on the United Kingdom investmentproperties held. Deferred income tax Deferred income tax is provided for in full, using the liability method, ontemporary differences arising between the tax bases of assets and liabilitiesand their carrying amounts in the financial statements. Deferred income tax isdetermined using tax rates (and laws) that have been enacted or substantiallyenacted by the balance sheet date and are expected to apply when the relateddeferred income tax asset is realised or the deferred income tax liability issettled. Freehold investment properties Freehold investment properties are initially recognised at cost, being the fairvalue of the consideration given, including transaction costs associated withthe acquisition of the investment property.After initial recognition, freehold investment properties are measured at fairvalue, with movements in the unrealised gains and losses recognised in theIncome Statement. Fair value is based upon the market valuations of theproperties as provided by DTZ Debenham Tie Leung Limited, a firm of independentchartered surveyors, at the balance sheet date. Leasehold investment properties Leasehold investment properties held which meet the criteria of an investmentproperty as defined by IAS 40 but are held by the Group under a finance lease,are initially recognised at cost, being the fair value of the considerationgiven together with the discounted present value of all minimum lease payments(ie. Head lease payments). After initial recognition, leasehold investmentproperties are measured at market value with movements in the unrealised gainsand losses recognised in the Income Statement. Fair value as disclosed in thefinancial statements is based on the market valuations of the properties asprovided by DTZ DebenhamTie Leung Limited, a firm of independent chartered surveyors, as at the balancesheet date as adjusted for recognised lease liabilities. Cash and cash equivalents Cash and cash equivalents are defined as cash in hand, demand deposits, andhighly liquid investments readily convertible within three months or less toknown amounts of cash and subject to insignificant risk of changes in value. Share capital Ordinary shares are classified as equity. Preference shares, which areredeemable on a specific date, are classified as liabilities. Dividends Dividend distributions to the Group's shareholders are recognised as a liabilityin the Group's consolidated financial statements in the period in which thedividends are approved by the Board of Directors. The redeemable preferenceshareholders are not entitled to payment of any dividends. Borrowings All loans and borrowings are initially recognised at fair value of theconsideration received, less issue costs where applicable. After initialrecognition, all interest-bearing loans and borrowings are subsequently measuredat amortised cost. Amortised cost is calculated by taking into account anydiscount or premium on settlement. Finance costs relating to the preferenceshares are recognised in the income statement using the effective interest ratemethod, the effective interest rate is 6% per annum. 3 FEES Investment management fees On 19 December 2003 Standard Life Investments (Corporate Funds) Limited ("theinvestment manager") was appointed as investment manager to manage the propertyassets of the Group. Under the terms of the Investment Management Agreement theInvestment Manager is entitled to receive a fee at the annual rate of 0.85% ofthe total assets (less any amounts drawn down underthe facility agreement but not yet invested in property assets), payablequarterly in arrears. Total fees charged for the period ended 31 December 2004amounted to £1,012,818. The amount due and payable at period end amounted to£nil. Administration, secretarial and registrar fees On 19 December 2003 Guernsey International Fund Managers Limited (GIFM) wereappointed administrators, secretary and registrar to the Group. GIFM areentitled to an annual fee from 1 January 2004, payable quarterly in arrears, of£65,000. GIFM are also entitled to reimbursement of reasonable out of pocketexpenses. Total fees charged for the period ended 31 December 2004 amounted to£81,397. The amount due and payable at period end amounted to £nil. Valuation fees On 19 December 2003, DTZ Debenham Tie Leung Limited ("The Valuer"), CharteredSurveyors, were appointed as valuers in respect of the assets comprising theproperty portfolio. The valuer is entitled to an annual fee of £2,500 perproperty together with all reasonable out of pocket expenses and a start up feeof 0.0275% of the value of each property added to the portfolio. Total feescharged for the period ended 31 December 2004 amounted to £102,297. The amountdue and payable at period end amounted to £29,375. Set-up costs Set-up costs not directly attributable to the issue of equity shares amounted to£432,525. These costs have been written off directly to the income statement.4 FINANCIAL INSTRUMENTS The Group's activities expose it to various financial risks, the adverse effectsof which the Group seeks to minimise through the use of financial instruments.The Group has not entered into any derivative transactions during the periodunder review other than the interest rate cap and interest rate swap contractsas hedges of interest rate exposure on the bank borrowings. It is the Group'spolicy that no trading in financial instruments will be undertaken. The mainfinancial risks arising from the Group's activities are credit risk, marketrisk, liquidity risk and interest rate risk. Credit risk Credit risk is the risk that a counter party will be unable to meet a commitmentthat it has entered into with the Group. In the event of default by anoccupational tenant, the Group will suffer a rental shortfall and incuradditional related costs. The Board receives regular reports on theconcentration of risk and any tenants in arrears. Market risk The Group's exposure to market risk is comprised mainly of movements in thevalue of the Group's property investments. The investment property portfolio ismanaged within the parameters disclosed in the Group's prospectus. Liquidity risk Liquidity risk is the risk that the Group will encounter in realising assets orotherwise raising funds to meet its financial commitments. In certaincircumstances, the terms of the Group's loan facility entitle the lender torequire early value repayment and under such circumstances the Group's abilityto maintain dividend levels and the net asset value attributable to the ordinaryshares, could be adversely affected. Interest rate risk Interest rate risk relates primarily to the Group's long term debt obligations.The Group's policy is to manage its interest cost using an interest rate swap,in which the Group has agreed to exchange the difference between fixed andvariable interest amounts based on a notional principal amount. The fair valueof the interest rate swap is calculated as the present value of the estimatedfuture cash flows. Accounting for derivative financial instruments and hedging activities Derivatives are initially recognised at cost on the date a derivative contractis entered into and are subsequently remeasured at their fair value. The methodof recognising the resulting gain or loss depends on whether the derivative isdesignated as a hedging instrument, and if so, the nature of the item beinghedged. The Group documents at the inception of the transaction therelationship between hedging instruments and hedged items, as well as its riskmanagement objective and strategy for undertaking various hedge transactions.The Group also documents its assessment both at hedge inception and on anongoing basis of whether the derivatives that are used in hedging transactionsare highly effective in offsetting changes in fair values or cash flows ofhedged items. The effective portion of changes in the fair value of derivativesthat are designated and qualify as cash flow hedges are recognised as gains orlosses in equity. The gains or losses relating to the ineffective portion arerecognised immediately in the income statement. Fair value estimation Property and related assets are inherently difficult to value due to theindividual nature and as a result, valuations can be subject to substantialuncertainty. Valuation will not necessarily reflect the actual sales price, evenif a sale were to occur shortly after the valuation date. The fair value offinancial instruments not traded in active markets (for example over-the counterderivatives)is determined by using valuation techniques. The Group uses a variety of methodsand makes assumptions that are based on market conditions existing at eachbalance sheet date. Other techniques, such as estimated discounted cash flows,are used to determine fair value of the remaining financial instruments. Thefair value of interest rate swaps is calculated as the present value ofestimated cash flows. The nominal value less estimated credit adjustments of trade receivables andpayables are assumed to be their fair values. 5 RELATED PARTY DISCLOSURES Parties are considered to be related if one party has the ability to control theother party or exercise significant influence over the other party in makingfinancial or operational decisions Acquisition of initial portfolio On the 19 December 2003 the Company purchased the wholly owned interest in thefollowing companies from The Standard Life Assurance Company with the netconsideration of £16,755,576 being satisfied by a cash payment of £16,554,209and included within creditors as at the period end an amount of £201,367: Telelink Swansea Investments LimitedDrakes Way Investments LimitedBathgate Retail Park Investments LimitedWellesley House Investments LimitedPaisley Investments LimitedWellington House Investments LimitedShire Park Welwyn Investments LimitedViscount Way Investments LimitedHollywood Green Investments LimitedClough Road Hull Investments LimitedProperty Investments Eleven Limited These companies which were acquired in order to obtain the initial propertyportfolio have not been consolidated as they were acquired with the intention ofliquidation and / or disposal within twelve months of purchase. As at 31December 2004, assets and liabilities have been transferred from these companiesand the liquidation processes have been initiated. The net assets acquired on acquisition of the companies shown overleaf were asfollows; £ Investment properties at valuation 97,651,636Loan from The Standard Life Assurance Company (80,285,282)Other assets and liabilities (610,778) ---------- 16,755,576 ========== The loan from the Standard Life Assurance Company was repaid on initialacquisition of the companies. No fair value adjustment to the book value of the net assets was required onacquisition and no goodwill arose on the acquisition. The properties were valued independently by DTZ Debenham Tie Leung Limited at£93,500,000. The difference between the independent valuation and the fair valueamount noted above is £4,151,636. This amount represents an estimate of coststhat would have been incurred had the properties been purchased on the openmarket. On 29 December 2003, the Company transferred all of the investment propertiesheld within these companies to its wholly owned subsidiary, Standard LifeInvestments Property Holdings Limited at the fair value of £97,651,636. Redeemable preference shares On 29 December 2003 the Company issued 6,000,000 25p redeemable zero dividendpreference shares for £6,000,000 to The Standard Life Assurance Company. Theseshares have a nominal value of £1,500,000 and are redeemable by the Company at aprice of £1.7908. These shares do not carry any voting rights. See note 13. Ordinary share capital Standard Life unit linked property funds hold 21,769,609 of the issued ordinaryshares. The maximum number of ordinary shares held in the period under reviewwas 28,700,000 and the minimum was 21,769,609. Those parties related to theInvestment Manager waived their rights to commission on the initial purchase of28,700,000 ordinary shares in order to maintain the fairness of the transactionsto all parties. Directors The Directors each hold the following number of Ordinary Shares in the Company: David Moore 15,000Richard Barfield 15,000John Hallam 15,000Shelagh Mason 15,000Paul Orchard-Lisle 25,000 No Director has any interest in any transactions which are or were unusual intheir nature or conditions or significant to the business of the Group and whichwere effected by any member of the Group since its date of incorporation. Totalfees relating to the directors in the period under review were £81,739, being£78,000 in respect of emoluments and £3,739 in respect of subsistence. Investment Manager Standard Life Investment (Corporate Funds) Limited is the Investment Manager.Transactions with the Investments Manager in the period are detailed on note 3. 6 INTEREST PAYABLE £ Interest payable in relation to redeemable preference shares 373,591Other interest payable 1,741,545 ---------- 2,115,136 ========== 7 TAXATION Current tax A reconciliation of the income tax charge applicable to the profit from ordinaryactivities at the statutory income tax rate to income tax expense at the Groupseffective income tax rate for the period is as follows: £ Profit before taxation 9,297,208Tax calculated at UK statutory income tax rate of 22% 2,045,386Holding company profits not subject to tax (446,230)Interest income not subject to tax (74,408)Capital allowances and other allowances (1,524,748) ----------Current income tax charge - ========== The Group tax policy is to exchange all written down allowances on disposal for£1. Based upon the current allowances available the Group does not believe itappropriate to provide for Deferred Taxation. 8 FREEHOLD AND LEASEHOLD INVESTMENT PROPERTIES £ £ £Cost of properties transferred fromsubsidiary companies 77,170,946 20,480,690 97,651,636Cost of properties purchased 58,526,291 4,068,546 62,594,837Gain arising on adjustment to fairvalue of investment properties 3,249,185 470,764 3,719,949 --------- --------- ----------Market value at period end 138,946,422 25,020,000 163,966,422 --------- --------- ---------- Discounted present value of minimumlease payments - 4,643,013 4,643,013 --------- --------- ----------Fair value at 31 December 2004 138,946,422 29,663,013 168,609,435 --------- --------- ---------- Investment properties were revalued at period end by DTZ Debenham Tie LeungLimited, Chartered Surveyors on the basis of the market value for existing use.In accordance with the accounting policy in note 2, the market values ofleasehold investment properties have been adjusted to reflect the discountedpresent value of minimum lease payments to reflect their fair value inaccordance with IFRS. The market for existing use provided by DTZ Debenham TieLeung Limited at the period end was £164,135,000 however an adjustment has beenmade for lease incentives of £168,578 that are already accounted for. 9 TRADE AND OTHER RECEIVABLES £ Trade debtors 582,350Other debtors 335,061Rental deposits held on behalf of tenants 1,069,397VAT receivable 693,174 ----------- 2,679,982 =========== 10 TRADE AND OTHER PAYABLES £ Trade creditors 403,839Rental deposits due to tenants 1,069,397Sundry creditors 669,250Deferred rental income 2,695,244Retentions relating to property purchase 167,320 ----------- 5,005,050 =========== 11 CASH AND CASH EQUIVALENTS £ Cash held at bank 7,557,113 =========== 12 BANK BORROWINGS £ Loan facility 80,000,000 =========== Bank borrowings drawn down 60,709,776 =========== On 4 December 2003 the Company entered into a term loan facility with the RoyalBank of Scotland plc for an amount not exceeding the lower of £80 million and76% of the gross proceeds of the ordinary share issue and the issue of theredeemable preference shares. Interest is payable by the Company at a rate equalto the aggregate of LIBOR, a margin of 0.675% per annum and a mandatory costrate of 0.0164% per annum. A non-utilisation fee of 0.15% is payable on anyundrawn amounts under the loan facility. The interest rate on the loan drawndown at the balance sheet date of £60,709,776 was 5.5862%. The loan is due to berepaid on 29 December 2013. Under the terms of the loan facility there are certain events which wouldentitle the Royal Bank of Scotland plc to terminate the loan facility and demandrepayment of all sums due. Included in these events of default are financialundertakings relating to the loan to value percentage and the amount of interestcover available. The Group has undertaken to ensure that the loan to valuepercentage does not at any time exceed 55% and also that net rental income isnot less than 170% of the projected finance costs for any three month period. The loan facility is secured by fixed and floating charges over the assets ofthe Company and it's wholly owned subsidiary, Standard Life Property HoldingsLimited. The amortised cost noted above is considered to be a close approximation to fairvalue and is deemed by the directors to be the fair value. 13 REDEEMABLE PREFERENCE SHARES The Company issued 6,000,000 25p redeemable zero dividend preference shares at avalue of £1 on 19 December 2003.The preference shares will be redeemed by the company on the tenth anniversaryof admission at a redemption price of £1.7908. The preference shares cannot beredeemed earlier. The redemption price represents a redemption yield of 6% perannum on the issue price of £1. £ Proceeds from issue of redeemable preference shares 6,000,000Accrued finance cost charges to income statement 373,591 ----------- 6,373,591 =========== As a return of capital the holders of the preference shares are entitled to thepayment of 25p per share increased at the rate of 21.8% per annum compoundeddaily from the date of admission up to the tenth anniversary of admission. The capital liability for the purpose of calculation of the net asset value atthe balance sheet date is as follows: £ Par value of preference shares 1,500,000Compounded daily interest 339,962 ----------- 1,839,962 =========== 14 LEASEHOLD OBLIGATIONS At 31 December 2004 the Group owned three leasehold properties at an open marketvalue of £25,020,000 as valued by the independent valuers DTZ Debenham Tie LeungLimited. In accordance with the accounting policy for leasehold investmentproperty an adjustment is required to reflect the discounted present value ofminimum lease payments. This adjustment effectively values the leaseholdproperties as if they were held as freeholds. £ Leasehold Obligations 4,643,013 =========== 15 LESSOR ANALYSIS Lessor Length At the period end the total contractually agreed rental income based on theleases in operation isas follows: £ Less than one year 11,655,628Between one and five years 46,620,420Over five years 89,903,455 ----------- Total 148,179,503 =========== The largest single tenant at the period end accounts for 10.72% of the annualrent income. 16 INTEREST RATE SWAP The Company entered into swap agreements with the Royal Bank of Scotland plc forthe initial drawdown of £5,000,000 from 29 December 2003 to 29 December 2004,and for 90% of the total £80,000,000 debt facility (£72,000,000) from 29December 2004 to 29 December 2013. The Company also entered into a cap agreementwith RBS on £67,000,000 of the loan facility from 29 December 2003 to 29December 2004. The Swap qualifies as a cashflow hedge and fair value changes aretaken to capital reserves. The effective interest rate of the Swap was 5.115% inthe period to 31 December 2004. Fair Value of the financial instruments £ Interest rate swap - £72,000,000 from 29/12/04 to 29/12/13 1,494,912 ----------- 1,494,912 =========== 17 SHARE CAPITAL £Authorised130,000,000 ordinary shares of 1p each 1,300,000 =========== Allotted, called up and fully paid:100,000,000 ordinary shares of 1p each 1,000,000 =========== 18 SHARE PREMIUM The share premium received on the initial offering of shares wasas follows: £ Premium received on issue of ordinary shares 99,000,000Premium received on issue of preference shares 4,500,000 ----------- 103,500,000 =========== The net amount received from the issue of ordinary shares amounted to£97,775,951. (£100,000,000 less issue costs deducted on placing of £2,224,049.)On 6 September 2004 the Royal Court of Guernsey granted an application to cancelthe share premium account of the company and re-classify the following amountsas a distributable reserve. After reclassification £96,692,892 was transferred to other reserves £ 100,000,000 ordinary shares carrying a premium of 99p each 99,000,0006,000,000 preference shares carrying a premium of 75p each 4,500,000Share issue costs (2,307,108)Preference share premium treated as a liability (4,500,000)Transfer to other distributable reserves (96,692,892) ----------- - ========== 19 RETAINED EARNINGS £Profit for the period 9,297,208Unrealised profit on revaluation of investment properties (3,719,949)Dividends (4,875,000) -----------At 31 December 2004 702,259 =========== This is a distributable reserve. 20 CAPITAL RESERVES £ Unrealised profit on revaluation of interest rate swap 1,494,912Unrealised profit on revaluation of investment properties 3,719,949 -----------At 31 December 2004 5,214,861 =========== This reserve will not be used to make distributions to the equity shareholders. 21 OTHER DISTRIBUTABLE RESERVES £ Share premium reclassified as other distributable reserve 96,692,892 ----------- 96,692,892 =========== 22 EARNINGS PER SHARE Basic and diluted earnings per share is calculated by dividing the profitattributable to equity holders of the Companyby the weighted average number of ordinary shares issued in the period. £ Profit for the period 9,297,208Ordinary shares issued 100,000,000 -----------Earnings per ordinary share (pence) 9.30 ========== There is no difference between the basic earnings per share and the dilutedearnings per share. 23 DIVIDENDS The interim dividends paid to date in 2004 are as follows: £1,625,000 (1.625p per ordinary share) paid in May relating to the quarterending 31 March 2004£1,625,000 (1.625p per ordinary share) paid in September relating to the quarterending 30 June 2004£1,625,000 (1.625p per ordinary share) paid in November relating to the quarterending 30 September 2004 A further interim dividend of 1.625p per share in respect of the quarter to 31December 2004 is to be proposed. These consolidated financial statements do notreflect this dividend, however, the Published Net Asset Value does. 24 RECONCILIATION OF CONSOLIDATED NET ASSET VALUE TO PUBLISHED NET ASSET VALUE The net asset value attributable to Ordinary Shares is published quarterly andis based on the properties' most recent valuations and calculated on an adjustedcapital basis under United Kingdom Generally Accepted Accounting Principles (UKGAAP)and practice for investment trust companies taking into account the prevailingcapital entitlement from time to time of the Preference Shares under theArticles of the Company. £ Net asset value per audited consolidated financial statements 103,610,012Adjustments:Re-classification of redeemable preference shares as equity 6,373,591Unrealised profit on revaluation of interest rate swap (1,494,912)Preference share adjustment to reflect capital redemptionrights (1,839,962)