REPORT & AUDITED CONSOLIDATED FINANCIAL STATEMENTS

Transcription

1 REPORT & AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 OCTOBER 2012

2 TABLE OF CONTENTS For the year ended 31 October 2012 General Information 2 The Company 3 Chairman s Statement 4 Investment Manager s Report 5-6 Directors Report 7-9 Auditors Report Consolidated Statement of Comprehensive Income 12 Consolidated Statement of Changes in Equity 13 Consolidated Statement of Financial Position 14 Consolidated Statement of Cash Flows 15 Notes to the Financial Statements Notice of Annual General Meeting Form of Proxy for Annual General Meeting Page

3 GENERAL INFORMATION DIRECTORS: INVESTMENT MANAGER: INVESTMENT ADVISOR: PROPERTY ASSET MANAGER: ADMINISTRATOR, SECRETARY AND REGISTRAR: PRINCIPAL BANKERS: INDEPENDENT AUDITORS: Peter Tom, CBE Paul Bell Shelagh Mason Cenkos Channel Islands Limited Level 5 The Market Buildings Fountain Street St. Peter Port Guernsey GY1 4JG Riverside Capital Group Limited Liberty House 222 Regent Street London W1B 5TR Montagu Evans Channel Islands Limited 22 Smith Street St. Peter Port Guernsey GY1 2JQ Legis Fund Services Limited 11 New Street St. Peter Port Guernsey GY1 2PF HSBC Bank Plc PO Box 31 Arnold House St. Julian s Avenue St. Peter Port Guernsey GY1 3AT KPMG Channel Islands Limited 20 New Street St. Peter Port Guernsey GY1 4AN 2

4 THE COMPANY Channel Islands Property Fund Limited (the Company and together with its subsidiaries the Group ) was registered as an Authorised Closed-ended Collective Investment Scheme by the Guernsey Financial Services Commission under The Protection of Investors (Bailiwick of Guernsey) Law, 1987, on 26 October The ordinary shares of the Company were admitted to the Official List of the Channel Islands Stock Exchange on 17 November INVESTMENT SUMMARY The Company has been established with the objective of providing an investment opportunity that aims to provide a total return from a combination of capital growth and an appropriate dividend policy through the acquisition and active management of commercial property predominantly in the Channel Islands. Target properties are intended to be fully or partially let and provide a core income which may offer opportunities to add value through active asset management across all sectors of the property market. Subject thereto there are no geographical or other limitations or restrictions to which investment by the Company is subject. No material change to the above investment objectives and policies may be made within a period of 3 years from Admission without Shareholder approval. The Company may invest in derivatives, investments, funds, companies owning property and financial indices which are property related including, but not limited to, property development. 3

5 CHAIRMAN S STATEMENT For the year ended 31 October 2012 The Board of the Channel Islands Property Fund Limited (the Company and together with its subsidiaries the Group ) is pleased to report that the unaudited reported Net Asset Value of the Company has increased by 4% over the year to 104p reported at 31 st October During the year the Company also moved to quarterly dividend payments and a target net annual dividend of 6p per share was met and payable to shareholders. Dividends of 4.5p per share have been paid during the year, with the final payment of 1.5p per share being made in November Also during the year a payment of 4p per share was made in relation to the period ended 31 October The Channel Islands have unique property markets, which offer alternative and attractive investment opportunities. Our portfolio of property spans both Jersey and Guernsey and takes advantage of the Islands favourable supply and demand characteristics, strong covenants and favourable lease terms. Over the year outstanding rent reviews which were settled all resulted in rental uplifts, which accounts for the increase in the Company s income. This reflects rental trends in the prime commercial office sector. The increase in the total value of the portfolio since the valuation in October last year reflects the stable and resilient nature of the Channel Islands economies in challenging global economic times. We continue to maintain a cautious stance when reviewing all new investment opportunities. The protection of shareholder value is of utmost importance to us and all new investments must not only meet with the strict investment criteria of the Company but complement the current balance of the portfolio. It remains our intention, whilst meeting all of our regulatory obligations, to facilitate the growth of the Company through the acquisition of further properties and exploration of all asset management opportunities, including the settlement of tenant rent reviews, which will be due on all properties in Peter Tom, CBE 20 December

6 INVESTMENT MANAGERS S REPORT Unaudited Reported Net Asset Value as at 31 October 2012 is 104p (100p at 31 st October 2011) Current Share Price Spread 99p - 103p The Manager is pleased to report that the Channel Islands Property Fund Limited (the Company and together with its subsidiaries the Group ) continues to perform in line with the objectives stated in the offering document. As noted in the Interim Report and Accounts, the Company has increased the frequency of dividend payments from bi-annually to a quarterly basis. A final dividend in relation to the period ended 31 October 2011 of 4p per share was paid in November Interim net dividends of 1.5p each were paid to shareholders in February, May and September of this year. The payment of a further interim dividend of 1.5p was announced on 9 th November 2012, and this was paid on 30 th November Shares in the Company continue to provide liquidity with 4.47m shares traded on the secondary market in the calendar year to 31 October Trading values have been consistent and at a marginal discount to the Net Asset Value. The Channel Islands continue to display a general resilience to global economic volatility and commercial property prices have, in the main, remained broadly stable. There have however been few investment transactions across the islands commercial office property market over the past year. Those which have traded have been non-prime assets in secondary or tertiary locations with short leases and as such pricing has remained above 7%. These do not compare directly with the Company s portfolio which is of superior quality in prime locations on relatively long leases. Owners of properties have been reluctant to offer yielding assets for sale on the open market due to the lack of alternative investments available however we are aware that Ogier House, 44 Esplanade, St Helier is currently on the market. This prime property is contiguous with CIPF s Seaton Place asset where the tenant, Ogier, occupies both buildings. We believe that further opportunities to acquire prime buildings across both islands will manifest themselves over the next 12 months. Bank finance at sensible loan to value ratios continues to be available for this type of stock however borrowing margins have increased in line with the UK market, where the cost of capital is increasing as it becomes scarcer. This is partly offset by a reduction in the underlying five year swap rate which currently stands around 1.2%, resulting in broadly unchanged overall borrowing rates from those which the Company has in place across the portfolio. Desktop valuations for each of the portfolio assets were undertaken at 31 October Regency Court has been valued at 37.95m, a reduction of 0.13% from the previous year. This value reflects a net initial yield of 6.75% on current rental income. The next round of rent reviews for the tenants at Regency Court are due to commence in May We are confident in achieving an uplift in income on settlement of these reviews. Current evidence indicates that rents in Guernsey continue to move in an upwards direction, reflecting a firm occupational market. 5

7 INVESTMENT MANAGERS S REPORT (continued) Regency Court is one of the landmark office buildings in St Peter Port with a diverse and good quality tenant base. We will continue our approach of active asset management for the building over the next year, concentrating in particular on opportunities to increase the average term certain lease length. The value of Seaton Place, Ogier House in Jersey has increased by 450,000 to 11.75m at 31 October A notional but prudent rental uplift has been factored into the valuation as the Manager has now commenced the 2012 rent review process. The acquisition value, plus acquisition costs, of Seaton Investments Limited, which was acquired on 9 December 2011 and which owns Seaton Place, was 9.17m. The property valuation as at 31 October 2012 was 9.15m. This valuation however has been subject to an accounting adjustment in these financial statement by an amount equivalent to the remaining value of a rent free period within the existing lease. This property is also subject to a current rent review. The occupational rental market in Jersey has shown more activity than in Guernsey, predominantly through the letting of 37 Esplanade and pre-let activity for the new Waterfront scheme. 37 Esplanade has set a benchmark for office rents in Jersey by achieving headline pre-let agreements at rents of per sq. ft. During the year, the Board of Directors appointed Peel Hunt LLP as brokers to the Company. Peel Hunt is an independent broking house with a focus on UK mid and small caps and has a highly experienced and respected real estate team. We will work closely with Peel Hunt in our fundraising activities over the next 12 months and anticipate completing at least one acquisition in the first quarter of the next calendar year. Our target remains to continue to provide a stable, sustainable and fully covered dividend to investors by ensuring that both current investments and new acquisitions comply with the investment criteria, distribution policy and regulatory requirements of the Group. Cenkos Channel Islands Limited 20 December

8 DIRECTORS REPORT For the year ended 31 October 2012 Channel Islands Property Fund Limited (the Company and together with its subsidiaries the Group ) was incorporated on 25 August 2010 and registered on 26 October 2010 as an Authorised closed-ended investment company registered in Guernsey pursuant to the Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended, and the Authorised Closed-ended Investment Scheme Rules The Directors submit their Report and the Audited Consolidated Financial Statements of the Channel Islands Property Fund Limited for the year ended 31 October 2012, which have been prepared in accordance with International Financial Reporting Standards, and in accordance with any relevant enactment for the time being in force; and are in agreement with the accounting records, which have been properly kept in accordance with section 244 of The Companies (Guernsey) Law, The investment objective of the Group is to provide a total return from a combination of capital growth and an appropriate dividend policy through the acquisition and active management of commercial property predominantly in the Channel Islands. STATEMENT OF DIRECTORS RESPONSIBILITIES The Directors are responsible for preparing the Directors Report and the Consolidated Financial Statements in accordance with applicable law and regulations. Company law requires the Directors to prepare Financial Statements for each financial year. Under that law they have elected to prepare the Financial Statements in accordance with International Financial Reporting Standards and applicable law. The Financial Statements are required by law to give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these Financial Statements, the Directors are required to: select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable and prudent; state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the Financial Statements; and prepare the Financial Statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. 7

9 DIRECTORS REPORT (CONTINUED) For the year ended 31 October 2012 STATEMENT OF DIRECTORS RESPONSIBILITIES (continued) The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the Financial Statements comply with the Companies (Guernsey) Law, They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities. CORPORATE GOVERNANCE The Board has undertaken a detailed review of the effectiveness of its corporate governance practices for the Company. In the context of the nature, scale and complexity of the Company the directors are satisfied with the level of their governance oversight for the Company and their degree of compliance with the Finance Sector Code of Corporate Governance issued by the Guernsey Financial Services Commission on 30th September ACTIVITY The Group s principal activity is that of investment in commercial properties predominately in the Channel Islands. DIVIDENDS Interim dividends of 393,375 ( per share) were paid on 29 February 2012, 31 May 2012, 28 September 2012 and 30 November 2012 in relation to the year ended 31 October In relation to the period ended 31 October 2011 a dividend of 869,000 ( 0.04 per share) was paid on 30 November DIRECTORS The Directors during the year and to the date of this report are as stated on page 2. During the year the Directors received remuneration in the form of fees as stated in note 20. DIRECTORS INTERESTS At the year end, directors held the following shares in the Company: Mr P. Tom, CBE 500,000 Mr P. Bell 675,000 Mrs S. Mason Nil 8

10 DIRECTORS REPORT (CONTINUED) For the year ended 31 October 2012 DIRECTORS INTERESTS (continued) At no point during the year did any of the Directors hold an interest in any material contract or contract for provision of services to which the Company, or any subsidiary undertaking, is a party and in which any director is or was materially interested. DISCLOSURE OF INFORMATION TO AUDITORS The Directors who held office at the date of approval of this Directors Report confirm that, so far as they are each aware, there is no relevant audit information of which the Group s auditors are unaware; and each Director has taken all the steps that he ought to have taken as a Director to make himself aware of any relevant audit information and to establish that the Group s auditors are aware of that information. AUDITORS The Directors appointed KPMG Channel Islands Limited (the auditor ) as auditor of the Group on 26 January KPMG Channel Islands Limited have expressed their willingness to continue in office as auditor and a resolution to re-appoint them as auditors will be put to the members at the next Annual General Meeting. Approved by the Board of Directors on 20 December 2012 and signed on its behalf by: Peter Tom, CBE Director Paul Bell Director 9

11 Independent auditor s report to the members of Channel Islands Property Fund Limited We have audited the Consolidated financial statements (the financial statements ) of Channel Islands Property Fund Limited (the Group ) for the year ended 31 October 2012 which comprise the Consolidated Statement of Financial Position, Consolidated Statement of Comprehensive Income, Consolidated Statement of Changes in Equity, Consolidated Statement of Cash Flows and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards as issued by the IASB. This report is made solely to the Company s members, as a body, in accordance with section 262 of the Companies (Guernsey) Law, Our audit work has been undertaken so that we might state to the Company s members those matters we are required to state to them in an auditor s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditor As explained more fully in the Statement of Directors' Responsibilities set out on pages 7 and 8, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's (APB's) Ethical Standards for Auditors. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Board of Directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Opinion on financial statements In our opinion the financial statements: give a true and fair view of the state of the Group s affairs as at 31 October 2012 and of its profit for the year then ended; are in accordance with International Financial Reporting Standards as issued by the IASB; and comply with the Companies (Guernsey) Law,

12 Independent auditor s report to the members of Channel Islands Property Fund Limited (continued) Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies (Guernsey) Law 2008 requires us to report to you if, in our opinion: the Company has not kept proper accounting records; or the financial statements are not in agreement with the accounting records; or we have not received all the information and explanations, which to the best of our knowledge and belief are necessary for the purpose of our audit. KPMG Channel Islands Limited Chartered Accountants, Guernsey 20 December 2012 The maintenance and integrity of the electronic copy available on the Channel Islands Stock Exchange website is the responsibility of Legis Fund Services Limited; the work carried out by auditors does not involve consideration of these matters and accordingly, KPMG Channel Islands Limited accepts no responsibility for any changes that may have occurred to the financial statements or our audit report since 20 December KPMG Channel Islands Limited has carried out no procedures of any nature subsequent to 20 December 2012 which in any way extends this date. 11

13 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the year ended 31 October November August 2010 to to Notes 31 October October 2011 Income Rental income 5 3,924,043 3,178,400 Service charge recharged to tenants , ,614 Other operating income 5-61,062 Total operating income 4,418,805 3,677,076 Gains and losses on investments Unrealised gain on revaluation of investment property 8 254,499 1,169,274 Total gains on investments 254,499 1,169,274 Expenses Service charge costs 10 (494,762) (437,614) Property operating expenses 10, 11 (42,783) (10,861) Management expenses 19, 20 (360,907) (303,370) Other operating expenses 13 (274,869) (423,313) Total operating expenses (1,173,321) (1,175,158) Profit before finance costs and tax 3,499,983 3,671,192 Financing Interest income ,090 Interest expense 6 (1,614,179) (1,533,911) Total finance costs (net) (1,613,620) (1,532,821) Profit before tax 1,886,363 2,138,371 Taxation 7 - (1,113) Deferred tax 7 79,837 53,863 Total taxation 79,837 52,750 Profit for the period 1,966,200 2,191,121 Other comprehensive income Movement in fair value of interest rate swap Total comprehensive income 17 (608,322) (932,046) 1,357,878 1,259,075 Basic and diluted earnings per share The results for the year / period relate to continuing operations. The notes on pages 16 to 42 form an integral part of these consolidated financial statements. 12

14 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 31 October 2012 Hedging Retained Note Share Capital Reserve Earnings Total Balance at 25 August Profit for the period - - 2,191,121 2,191,121 Total other comprehensive income - (932,046) (932,046) Total comprehensive income for the period - (932,046) 2,191,121 1,259,075 Dividend paid (651,750) (651,750) Amounts received on issue of shares 18 21,725, ,725,000 Issue costs (651,750) - - (651,750) Balance at 31 October ,073,250 (932,046) 1,539,371 21,680,575 Profit for the year - - 1,966,200 1,966,200 Total other comprehensive income - (608,322) - (608,322) Total comprehensive income for the year 21,073,250 (1,540,368) 3,505,571 23,038,453 Dividend paid (2,049,125) (2,049,125) Amounts received on issue of shares 18 4,500, ,500,000 Issue costs (135,000) - - (135,000) Balance at 31 October ,438,250 (1,540,368) 1,456,446 25,354,328 The notes on pages 16 to 42 form an integral part of these consolidated financial statements. 13

15 CONSOLIDATED STATEMENT OF FINANCIAL POSITION As at 31 October October October 2011 Note Assets Investment properties 8 58,485,257 49,300,000 Non-current assets 58,485,257 49,300,000 Trade and other receivables 14 24,778 61,052 Receivable on rental incentives 8 364,743 - Cash and cash equivalents 1,453,910 1,666,873 Current assets 1,843,431 1,727,925 Total assets 60,328,688 51,027,925 Equity Share capital 18 25,438,250 21,073,250 Reserves 18 (1,540,368) (932,046) Retained earnings 1,456,446 1,539,371 Total equity 25,354,328 21,680,575 Liabilities Loans and borrowings 16 32,336,967 27,444,850 Interest rate swap 17 1,540, ,046 Deferred tax 7 156, ,951 Non-current liabilities 34,033,487 28,548,847 Other payables , ,503 Provisions 11 25,000 - Current liabilities 940, ,503 Total liabilities 34,974,360 29,347,350 Total equity and liabilities 60,328,688 51,027,925 Net asset value per Share The consolidated financial statements on pages 12 to 42 were approved by the Board of Directors on 20 December 2012 and are signed on its behalf by: Peter Tom, CBE Director Paul Bell Director The notes on pages 16 to 42 form an integral part of these consolidated financial statements. 14

16 CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 31 October November August 2010 to 31 October to 31 October Note Reconciliation of Total Return to Net Cashflow Operating activities Profit before tax 1,886,363 2,138,371 Adjusted for: Interest income (559) (1,090) Interest expense 1,614,179 1,533,911 Interest received 559 1,090 Interest paid (1,375,474) (1,261,928) Unrealised gain on investment properties 8 (254,499) (1,169,274) Increase in trade and other receivables (328,469) (61,052) Deferred tax resulting from acquisition 64,038 53,863 Increase in other payables 85, ,645 Increase in provisions 25,000 - Taxation paid (1,113) - Net cash inflow from operating activities 1,715,396 2,101,536 Investment Activities Property acquisition 8 (8,930,758) (48,130,726) Net cash outflow from investment activities (8,930,758) (48,130,726) Financing Activities Net proceeds from issue of Ordinary Shares 18 4,365,000 21,073,250 Net loans received 16 4,886,524 27,274,563 Loan repayments 16 (200,000) - Dividends paid 25 (2,049,125) (651,750) Net cash inflow from financing activities 7,002,399 47,696,063 NET CASH (OUTFLOW)/INFLOW FOR THE YEAR / PERIOD (212,963) 1,666,873 CASH AND CASH EQUIVALENTS AT THE START OF THE YEAR / PERIOD 1,666,873 - CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR / PERIOD 1,453,910 1,666,873 The notes on pages 16 to 42 form an integral part of these consolidated financial statements. 15

17 1 REPORTING ENTITY Channel Islands Property Fund Limited (the Company and together with its subsidiaries the Group ) was registered on 25 August 2010 and registered on 26 October 2010 as an Authorised closed-ended investment company in Guernsey pursuant to the Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended, and the Authorised Closed-ended Investment Scheme Rules. The consolidated financial statements of the Group as at and for the year ended 31 October 2012 comprise the Company and its subsidiaries. The Group s principal activity is that of investment in commercial properties predominately in the Channel Islands. 2 PRINCIPAL ACCOUNTING POLICIES The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the Group s financial statements. Statement of compliance The consolidated financial statements, which give a true and fair view, have been prepared in accordance with International Financial Reporting Standards ( IFRSs ), as adopted by IASB, and comply with the Companies (Guernsey) Law, The consolidated financial statements have been prepared on a going concern basis. The accounting policies adopted in the year are consistent with those of the previous financial period with the exception of standards adopted during the year. In the current year, the Group has adopted all of the new and revised Standards and Interpretations issued by the IASB and the International Financial Reporting Interpretations Committee (IFRIC) of the IASB, that are relevant to its operations and effective for annual reporting periods beginning on or after 1 November The only relevant standard adopted during the year was: IAS 24: Related party disclosures - for accounting periods commencing on or after 1 January 2011 New IFRS accounting standards and interpretations not yet adopted At the date of authorisation of these financial statements, the following standards and interpretations, which will become relevant to the Group but have not been applied in these financial statements, were in issue but not yet effective: 16

18 2 PRINCIPAL ACCOUNTING POLICIES (continued) New IFRS accounting standards and interpretations not yet adopted(continued) IFRS 9: Financial Instruments - Classification and Measurement - for accounting periods on or after 1 January IFRS 9 requires financial assets to be classified into two measurement categories: those measured as at fair value and those measured at amortised cost. The determination is made at initial recognition. The classification depends on the entity s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. For financial liabilities, the standard retains most of the IAS 39 requirements. The main change is that, in cases where the fair value option is taken for financial liabilities, the part of a fair value change due to an entity s own credit risk is recorded in other comprehensive income rather than the income statement, unless this creates an accounting mismatch. IFRS 10: Consolidated Financial Statement - replaces the consolidation guidance in IAS 27 - for accounting periods on or after 1 January Under IFRS 10 there is only one basis for consolidation and that basis is control. The standard provides additional guidance to assist in the determination of control where this is difficult to assess. IFRS 12: Disclosure of Interest in Other Entities - requires enhanced disclosure for related parties (consolidated and unconsolidated entities) - for accounting periods on or after 1 January IFRS 12 Establishes disclosure objectives and specifies the minimum disclosure that entities must provide to meet those objectives. IFRS 13: Fair value measurement - for accounting periods on or after 1 January IFRS 13 aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRSs. The requirements do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within IFRSs. Amendment to IAS 1: Presentation of Financial Statements - amends the presentation of items of other comprehensive income. This amendment is effective for accounting periods commencing on or after 1 July The amendments to IAS 1 require additional disclosures to be made in the other comprehensive income section such that items of other comprehensive income are grouped into 2 categories, a) items that will not be reclassified subsequently to profit and loss; b) items that may be reclassified subsequently to profit and loss where specific conditions are met. These standards and interpretations will be adopted when they become effective. The Directors anticipate that, with the exceptions of IFRS 9 and IFRS 13, the adoption of these Standards and Interpretations in future periods will not have a material impact on the financial statements of the Group. The Directors are considering, but have not yet concluded, on what the impact of IFRS 9 will be on the Group's Consolidated Statement of Financial Position but do not anticipate adopting the standard until the period commencing November IFRS 13 introduces significant additional disclosures for fair values of non financial assets and liabilities, however as the standard aims to reduce complexity the Directors consider that any significant changes will be presentational only. 17

19 2 PRINCIPAL ACCOUNTING POLICIES (continued) Basis of measurement The consolidated financial statements have been prepared on the historical cost basis except for the Investment Properties and Interest Rate Swaps that are measured at fair value Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries). Control is achieved where the Company has the power, directly and indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable are taken into account. The results of subsidiaries acquired during the year are included in the Consolidated Statement of Comprehensive Income from the effective date of acquisition. Where necessary, adjustments are made to the financial statements of subsidiaries on consolidation to bring their accounting policies into line with those used by other members of the Group. All intra-group transactions, balances, income and expenses are eliminated in full on consolidation. Cash and cash equivalents Cash and cash equivalents comprise cash balances with maturities of three months or less from the acquisition date that are subject to an insignificant risk of changes in their fair value, and are used by the Group in the management of its short-term commitments. Income and expenses Income and expenses are included in the Consolidated Statement of Comprehensive Income on an accruals basis. All of the Group s income and expenses are derived from continuing operations. Rental income and lease incentives from investment property leased out is recognised in the Consolidated Statement of Comprehensive Income on a straight line basis over the term of the lease. Revenue is recognised to the extent that it is probable that the economic benefit will flow to the Group and the revenue can be reliably measured. Property operating costs include the costs of professional fees on letting and other non-recoverable costs. Fees and expenses relating to the establishment of the Group will be borne by the Group. The Group will also incur on-going operational expenses. These expenses include audit costs, taxes and duties imposed by any fiscal authority and any other government fees, costs of valuing and pricing assets, expenses of publishing any reports or notices, bank charges and any other expenses relating to the making of any capital or income distributions, insurance premiums, legal and professional expenses which the Group incurs, whether in litigation on behalf of the Group or in connection with the ongoing administration of the Group or otherwise and any other costs of a similar nature. 18

20 2 PRINCIPAL ACCOUNTING POLICIES (continued) Income and expenses (continued) The income charged to tenants for property service charges and the costs associated with such service charges are shown separately in the Consolidated Statement of Comprehensive Income to reflect that the ultimate risk for paying and recovering these costs rests with the property owner. Interest income is generated from cash and cash equivalents. Interest income is recognised on an accruals basis. Interest expense comprise interest expense on loans and borrowings, including the effective portion of interest rate swaps. Attributable transaction costs incurred in establishing the Group s credit facilities are deducted from the fair value of borrowings on initial recognition and are amortised over the lifetime of the facilities through Consolidated Statement of Comprehensive Income. Interest expenses are accounted for on an effective interest basis. Formation expenses The placing fee has been set off against capital raised. All other formation expenses are taken to the Consolidated Statement of Comprehensive Income in full in the year in which they are incurred. Investment property Properties which are held for the long term, to earn rentals and / or for capital appreciation are accounted for under IAS 40: Investment Property. Such properties are initially stated at cost, including any related transaction costs. After initial recognition, investment properties are carried at their fair value based on professional valuations. The professional valuation of the investment property is largely based on estimates using property appraisal techniques and other valuation methods. Such estimates, further disclosed in note 3, are inherently subjective and actual values can only be determined in a sales transaction. Gains or losses arising from changes in the fair value of investment properties are included in the Consolidated statement of comprehensive income in the period in which they arise. Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of Ordinary shares are recognised as a deduction from equity. Financial assets and financial liabilities Financial assets and financial liabilities comprise trade and other receivables, cash and cash equivalents and other payables. These are recognised initially at fair value plus any directly attributable transaction costs. Financial assets and financial liabilities are recognised in the Consolidated Statement of Financial Position when the Group becomes party to the contractual provisions of the instrument. 19

21 2 PRINCIPAL ACCOUNTING POLICIES (continued) Financial assets and financial liabilities (continued) The Group classifies financial assets and financial liabilities into the following categories: Financial assets at amortised cost - Loans issued and receivables. This incorporates cash and cash equivalents and all trade receivables. Financial Liabilities at amortised cost - Other liabilities. This incorporates trade and other payables. The amortised cost of a financial asset or liability is the amount at which the financial assets or liability is measured at initial recognition adjusted for any impairment. The group derecognises a financial asset when it no longer bears the risk, nor is entitled to the rewards, of ownership. On derecognition the difference between the carrying amount of the asset and the consideration received is recognised in the Statement of Comprehensive Income. The group derecognises a financial liability when its contractual obligations are discharged or expire. Interest rate swaps Interest rate swaps are recognised initially at the fair value and subsequently re-measured to their fair value at each reporting date. Hedge accounting The Group designates certain financial instruments (principally interest rate swaps) as cash flow hedges, subject to the satisfaction of the criteria set out in IAS 39: Financial Instruments: Recognition and Measurement. For qualifying cash flow hedges, the effective portion of any change in fair value is recognised in other comprehensive income and presented in the hedging reserve in equity. Any ineffective portion of the change in fair value is recognised immediately in profit or loss. Loans and borrowings All loans and borrowings are initially recognised at fair value less directly attributable transaction costs. After initial recognition interest bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Set up costs associated with any borrowings are capitalised and charged to the Statement of Comprehensive Income over the period of the borrowings. Distributions Dividends paid during the year are disclosed as a movement in equity. Final dividends proposed by the Board and approved by the Shareholders prior to the year end are disclosed as a liability. Dividends proposed but not approved are disclosed in the notes to the Financial Statements. Operating leases The Group leases out investment properties on operating leases. 20

22 2. PRINCIPAL ACCOUNTING POLICIES (continued) Taxation The Company has applied for exemption from Guernsey Income Tax under the Income Tax (Exempt Bodies) (Guernsey) Ordinance It should be noted, however, that the Group is subject to Guernsey or Jersey taxation at 20% on its net rental income. Pursuant to the exemption granted under the above mentioned Ordinance, the Company is subject to an annual fee, currently 600, payable to the Guernsey Authorities. Deferred tax Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for: Temporary differences in initial recognition of assets and liabilities in a transaction that it is not a business combination and that affects neither accounting nor taxable profit or loss; Temporary differences related to investments in subsidiaries to the extent that it is likely that they will remain for the foreseeable future; and Taxable temporary differences arising on the recognition of goodwill. Deferred tax is measured at tax rates that are expected to be applied to temporary differences when they reverse, using tax rates enacted or substantively enacted at the reporting date. In determining the amount of current and deferred tax the Group takes into account the impact of uncertain tax positions and whether additional taxes and interest may be due. The Group believes that its accruals for tax liabilities are adequate for all open tax years based on its assessment of many factors, including interpretation of tax law and prior experience. This assessment relies on estimates and assumptions and may involve a series of judgements about future events. New information may become available that causes the Group to change its judgement regarding the adequacy of existing tax liabilities; such changes to tax liabilities will impact tax expense in the period such a determination is made. 3. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY Use of estimates and judgements The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and the reported amounts of assets and liabilities, income and expenses. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected. 21

23 3. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY (continued) Valuation of property In accordance with the accounting standard adopted by the Group s, investment property is stated at fair value as at the Consolidated Statement of Financial Position date. Fair value is defined as the estimated amount for which a property should exchange between a willing buyer and a willing seller in an arms-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. The standards dictate that this be determined by independent valuation experts using recognised valuation techniques. As at the year end the valuation of all properties have been prepared by Montagu Evans LLP, London, in accordance with the Royal Institute of Chartered Surveyors ( RICS ) Appraisal and Valuation Standards, seventh edition. At the prior period end Montagu Evans Channel Islands Limited prepared the valuation for Regency Court and the valuation of Seaton Place was prepared by CB Richard Ellis Limited. In order to ensure a consistent valuation basis across the Group it was deemed beneficial to appoint one valuation agent and as such Montagu Evans Channel Islands Limited and CB Richard Ellis Limited were replaced by Montagu Evans LLP, London. The fair value of investment property is based on valuations provided as described above. These values are determined by using recognised valuation techniques and taking into consideration any recent market transactions for similar properties in similar locations to the investment properties held by the Group and the anticipated future cash flows from rental income that the properties are expected to generate. Initial yield of between 6.68% and 7.25% on the estimated rental value of each property has been used in arriving at the valuation of property. This yield has been arrived at using comparable evidence, where available, and taking account of the nature of the individual investments including the occupational tenants, income stream and lease lengths. Full valuations are prepared on acquisition and then again every three years, with desktop valuations performed annually. Fair value of derivatives During the year and at the year end the fair value of derivatives, interest rate swaps being the only derivatives held, is based on valuation models run by the counterparty to the contracts, HSBC Bank plc. The object of the valuation model is to arrive at a fair value determination that reflects the price of the financial instrument at the reporting date that would have been determined by market participants acting at arm s length. The valuation models used for interest rate swaps are widely recognised as using only observable market data. As such they significantly reduce the level of management judgement and estimation required. 22

24 3. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY (continued) Functional currency The Directors considers Sterling the currency that most faithfully represents the economic effect of the underlying transactions, event and conditions. Sterling is the currency in which the Group measures its performance and reports its results, as well as the currency in which it receives subscriptions from its investors. This determination also considers the competitive environment in which the Group is compared to other Channel Island property investment products. Business combinations The Group acquires subsidiaries that own real estate. At the time of acquisition, the Group considers whether the acquisition represents the acquisition of a business. The Group accounts for an acquisition as a business combination where an integrated set of activities is acquired in addition to the property. More specifically, the following criteria are considered: The number of items of land and buildings owned by the subsidiary The extent to which significant processes are acquired and in particular the extent of ancillary services provided by the subsidiary Whether the subsidiary has allocated its own staff to manage the property and/or to deploy any processes, including provision of all relevant administration and information to the entity s owners When the acquisition of subsidiaries does not represent a business, it is accounted for as an acquisition of a group of assets and liabilities. The Board have considered the nature and activities of the subsidiaries acquired and have concluded that they do not represent the acquisition of a business and as such the cost of the acquisition is allocated to the assets and liabilities acquired based upon their relative fair values, and no goodwill or deferred tax is recognised. 4. SEGMENTAL INFORMATION The Board is charged with setting the Company's investment strategy in accordance with the Company's investment policy and overall objectives. They have delegated the day to day implementation of this strategy to the Investment Manager but retain responsibility to ensure that adequate resources of the Company are directed in accordance with their decisions. The operating activities of the Investment Manager are reviewed on a regular basis to ensure compliance with the policies and legal responsibilities of the Board. The Investment Manager has been given full authority to act on behalf of the Company in certain situations. Under the terms of the Investment Management Agreement, subject to the overall supervision of the Board, the Investment Manager advises on the investment strategy of the Company, advises the Company on its borrowing policy and advises on the use of, and management of, derivatives and hedging by the Company. 23

25 4. SEGMENTAL INFORMATION (continued) Whilst the Investment Manager may make operational decisions on a day to day basis regarding the property investments, any changes to the investment strategy or major allocation decisions have to be approved by the Board, even though they may be proposed by the Investment Manager. The Board therefore retains full responsibility for investment policy and strategy. The Investment Manager will always act under the terms of the Investment Management Agreement which cannot be changed without the approval of the Board. The Board has considered the requirements of IFRS 8 Operating Segments. The Board is of the opinion that the Group, is organised into one main business segment, focusing on achieving long-term total returns through acquisition and holding of commercial property interests. The Group's secondary segment is the geographical segment, based on the one main location of the investments, in the Channel Islands. 5. INCOME 1 November August 2010 to 31 October to 31 October Bank deposit interest 559 1,090 Rental income 3,924,043 3,178,400 Other income - 61,062 3,924,602 3,240,552 As part of the purchase of Seaton Place, rental income and top up rent was received covering the periods from acquisition to 7 August 2011 and 7 November 2012 respectively. These amounts are credited to the Statement of Comprehensive Income over the relevant periods. Other income in the period ended 31 October 2011 of 50,000 comprises of an amount received to grant access rights to a neighbouring property over part of the Regency Court premises. 6. INTEREST EXPENSE 1 November 2011 to 31 October August 2010 to 31 October 2011 Cornerstone Titan Plc - 272,943 HSBC Bank Plc Interest payable at amortised cost 1,614,179 1,260,968 1,614,179 1,533,911 The payments to HSBC Bank Plc. are in relation to the interest charged on the Facility Agreement and Swap Agreement for the period (see note 17 and note 18). 24

26 6. INTEREST EXPENSE (continued) The payment to Cornerstone Titan Plc was the interest accrued on the 29,000,000 loan facility which was repaid on 17 January This loan facility was provided to the previous owner of Regency Court Property to assist with the acquisition of Regency Court. 7. TAXATION The Company is exempt from Income Tax in Guernsey under the Income Tax (Exempt Bodies) (Guernsey) Ordinance The Company pays an annual fee to the States of Guernsey Income Tax Office, presently set at 600. Regency Court Property Limited is subject to Guernsey income tax on rental income arising after the deduction of allowable debt financing costs and allowable expenses. For the current year no tax is payable in relation to rental income received (2011: Nil). Seaton Place Property Limited and Seaton Investments Limited are subject to Jersey income tax on rental income arising after the deduction of allowable debt financing costs and allowable expenses. For the current year no tax is payable (31 October 2011: 1,113) in relation to rental income received. The Guernsey Income Tax Office has confirmed that a 20% tax credit can be attached to the dividends of the Company on the basis that tax has been previously paid by the subsidiaries in respect of their Guernsey and Jersey rental income. Therefore, dividends paid by the Company can be treated as net dividends. The amounts of deferred taxation provided in the financial statements are: 31 October October 2011 Accelerated capital allowances and unutilised management expense 156, ,951 The movement in the deferred tax balance is as follows: 1 November 2011 to 31 October , , August 2010 to 31 October 2011 At the beginning of the year / period 171,951 - Deferred tax on acquisition of subsidiary 64, ,814 Charged to the Consolidated Statement of Comprehensive Income (79,837) (53,863) At end of year / period liability 156, ,951 25