Final Results

Standard Life Invs Property Inc Tst 29 March 2006 Annual Report and Financial Statements Year to 31 December 2005 Objective To provide shareholders with an attractive level of income together with the prospect of income and capital growth from investing in a diversified UK commercial property portfolio. Financial Highlights â€¢ Net Asset Value* per share increased by 17.87% â€¢ Property portfolio increased by 23.28% to Â£202.2m â€¢ Seven properties acquired, one sold â€¢ Annual dividend per share 6.5p â€¢ Retained profit before taxation Â£486,924 assuming payment of final dividend â€¢ Gearing (loan to value) 43% Financial Summary 31 December 2005 31 December 2004 % Change Price per share 118.1 108.8p 8.55% Published Net Asset Value per share* 124.0p 105.2p 17.87% Value of property portfolio** Â£202.2m Â£164.1m 23.28% Cumulative Dividend per share 6.5p 6.5p - IFRS Net Asset Value per share (restated)*** 113.6 103.0p 10.29% IFRS Net Asset Value per share **** 118.0 103.6p 13.90% * Calculated on a capital basis in line with the offering prospectus. ** Valued on a market value basis in accordance with the RICS Appraisal and Valuation Standards. *** Calculated under International Financial Reporting Standards. **** Calculated under International Financial Reporting Standards without adjustments for Deferred Taxation. Chairman's Statement I am delighted to report that 2005 proved to be another successful year for your Company, continuing the strong performance delivered in 2004. The Net Asset Value of the Company has grown by 17.87% over the full reporting period and the Company's total annual dividends of 6.5p per share have been paid to shareholders. Recent changes in the International Financial Reporting Standards mean that your Company is required to provide, in full, for deferred taxation on unrealised gains. The change to International Financial Reporting Standards has had an impact on both the 2004 and 2005 Financial Statements in terms of the calculation of the Company's Net Asset Value which is shown on page 1 of this report. The Board believes that this liability to deferred taxation is unlikely to crystallise. In order to ensure that the Company fully complies with accounting reporting standards provision has been made for Â£0.5m of deferred taxation as an adjustment to the figures stated in the 2004 Financial Statements and Â£3.9m of deferred taxation has been provided for the financial year ended 31 December 2005. Performance was primarily attributable to increasing capital values across the portfolio, as well as the benefits of financial gearing in a strong market. Capital values continue to be driven up by investor demand due to the persistent weight of money attempting to invest in the asset class. Low real interest rates and falling bond yields throughout the year also encouraged investors into commercial property in the search for higher income. Debt backed buyers, overseas investors and institutional investors all continued to buy actively in the market throughout the year. Despite this exceptionally competitive market, your Company acquired 7 new properties over the reporting period, at an aggregate cost of Â£27.4m. These properties complement the attractive income yield and high quality of tenants in the existing property portfolio and also positively contributed to the robust 10.2 years average unexpired lease term for the portfolio. Your Company also made one sale over the same period, the distribution warehouse in Walsall. Investment activity over the reporting period, coupled with valuation growth in the portfolio, resulted in assets under management for the Company increasing from Â£164.1m at the end of 2004, to Â£202.2m at the end of 2005. The Company continues to look at innovative ways to increase the size of the portfolio to drive future diversification and performance. The outlook for UK commercial property markets overall remains broadly positive, as sustained economic growth and increasing activity in financial and business sectors underpins corporate demand for commercial space. Although general expectations are that the exceptional performance over the past two years will not continue, expectations remain positive with investor demand expected to put further upward pressure on capital values. The Company's property portfolio is well placed to benefit from the expected divergence of sector performance and to continue to produce attractive investment returns to its shareholders. David Moore Chairman of the Board 28 March 2006 Investment Manager's Report UK Property Market All areas of the UK property market delivered exceptional performance in 2005. The UK direct property market recorded a total return of 18.8% in 2005 according to the Investment Property Databank (IPD) Monthly Index, while listed real estate companies recorded a return of 19.3% for the same period. Although considerably outperforming the 7.4% return from gilts over the year, UK property fell marginally behind the broader equity market which notched up an annual return of 22.0%. High double-digit returns from commercial property were recorded against a backdrop of declining interest rates. Over the year base rates were cut by 0.25% to 4.5% in August, while medium term interest rate swaps eased from 4.9% to 4.5% in December. Bond yields came under further pressure and ended the year at 4.1%, a fall of 0.4% from January. The persistent appetite for yield and regulatory pressure forcing institutional investors to invest in fixed interest assets has driven property capital values upwards to record levels under the weight of money. Each of the UK property market sectors delivered strong double-digit total returns in 2005. In December the range in returns between office, retail and industrials was just 1% p.a. This compared to the same time last year when the difference in annual returns between the best and worst performing sectors in the market was 8%. The office sector, and the Central London office market in particular, has continued to show signs of a sustainable recovery in demand. Tenants are beginning to take up more space, which is starting to drive rental growth in the sector. The industrial sector continues to perform steadily, albeit unspectacularly, with yields still the most attractive of the three main sectors. The retail sector has attracted the most headlines, and while some sectors such as Retail Warehousing continue to perform well, the High Street in particular continues to show signs of slower spending by consumers as retail sales numbers remain under pressure. Investment Manager's Report continued Portfolio Valuation The size of the investment portfolio increased in value by Â£38.2m over the reporting period, including Â£26.2m from new investment. Valuation increases were mainly attributable to yield compression, growth in office rental values and the letting of vacant space. On a like for like basis, the portfolio increased in value by Â£18.99m (12.2%) during 2005, with retail warehousing and central London offices delivering the strongest returns, closely followed by industrials. At the end of 2005, the investment portfolio comprised 30 directly held property investments amounting to Â£202.2m, with an average unexpired lease term of 10.16 years, assuming all lease breaks occur. The Company also held Â£8.5m in cash from the disposal of Green Lane, Walsall on 12 October 2005, which we are in the process of reinvesting. The portfolio void rate has been maintained at 0.7% at the year end, considerably below the IPD average of 7.6%. Income growth during the year, as a result of rent reviews amounted to Â£168,768. Property Portfolio Sector Valuation movement over the reporting period % Out of Town Retail Â£4,560,000 15.09% Leisure Â£1,850,000 9.53% High Street Retail Â£970,000 14.16% Â£7,380,000 13.07% Sector Total Value Offices Central London Â£4,390,000 14.60% Rest of UK Â£3,950,000 8.50% Acquisitions* Â£419,000 3.53% Sector Total Value Â£8,759,000 9.91% Industrial Â£3,270,000 14.33% Acquisitions* Â£845,000 5.90% Disposal** Â£220,000 2.66% Sector Total Value Â£4,335,000 9.54% Grand Totals Â£20,474,000 12.47% Source: Standard Life Investments * Difference between valuation at date of purchase and valuation at 31 December 2005. ** Difference between valuation at 29 September 2005 and disposal price. Investment Manager's Report continued Investment Activity During the year, we have invested the remainder of the debt facility. The total net investment amounted to Â£18.9m which has been directed at acquiring modern, well let income producing investments in both the office and industrial sectors. Purchases Seven purchases were made during the year representing a total investment of Â£27.4m and producing a net initial yield of 6.5%. Two offices were acquired at Queen Square, Bristol and Chancellor's Court, Chelmsford, representing an investment of Â£12.5m. Both are multi-let buildings with strong income profiles. The remaining five investments are all modern, well-let, rack-rented industrial properties, three of which have unexpired lease durations of at least 13.5 years and another benefits from annual rental increases in accordance with the Retail Price Index (RPI). Sales We disposed of Talbot Close, Green Lane, Walsall for Â£8.5m realising a net capital profit of Â£655k in just over 18 months. This transaction did not attract a taxation charge on the realised gain element of the disposal, which supports your Chairman's comments in relation to Deferred Taxation on page 2. The entire property was let to Powerhouse and we disposed of the asset due to the deteriorating covenant strength of the tenant. The decision has proven to be well founded with Powerhouse proposing a Company Voluntary Arrangement in February 2006. Asset Management We continue to actively manage the Company's assets to improve rental flow and enhance value. Five lettings have been completed in 2005, maintaining the Portfolio vacancy rate at under 1% for the majority of the year. Tenants defaults have been limited with the overall default rate since launch amounting to 0.07% reflecting the quality of the tenants within the portfolio. Gearing The gearing level at 31 December 2005 stood at 43% of the market value of Investment Properties. The company had borrowings of Â£84,432,692 from the Royal Bank of Scotland at the end of the reporting period, with a repayment date of 29 December 2013. The majority of the interest rate risk has been hedged by virtue of Â£72m fixed interest rate swap agreement at 5.115%, expiring on 29 December 2013. Investment Manager's Report continued Investment Outlook Although we anticipated upward pressure on commercial property values would ease back in 2006, we have upgraded our prediction for growth in capital values this year. This is underpinned by the assumption that low yields in the bond market, driven by investor appetite for fixed interest, continue throughout 2006. In turn, this will support persistent demand for commercial real estate from domestic institutions and pension funds as well as inflows from abroad. The spread in underlying drivers of the various sectors of the property market is likely to force divergence in sector performance going forward into 2006. The portfolio is well positioned to take advantage of this with offices expected to be the best performing sector in the year ahead. Added to the sector spreads, we anticipate the fortunes of prime best quality investments will outpace poorer quality secondary property given the keen recent pricing on the latter. The market as a whole should continue to provide returns ahead of cash and gilts over the next few years, albeit below the current unsustainable high double-digits returns. Directors' Report The Directors of Standard Life Investments Property Income Trust Limited ('the Company') and its subsidiary Standard Life Investments Property Holdings Limited (together 'the Group') present their Annual Report and Audited Financial Statements for the year ending 31 December 2005. Background The Company was incorporated in Guernsey on 18 November 2003 and commenced activities on 19 December 2003. The Company is a closed ended Investment Company and is registered under the provisions of The Companies (Guernsey) Law, 1994. Principal Activity The principal activity of the Company is property investment with the objective of providing Ordinary Shareholders with an attractive level of income along with the prospect of income and capital growth from investing in a diversified UK commercial property portfolio. Listings The Company is listed on the London Stock Exchange and the Channel Island Stock Exchange. Listings Requirements The Company has complied with the relevant provisions of paragraphs 21.2 to 21.25 and the requirements set out in paragraphs 21.27 to 21.34 of the United Kingdom Listing Authority regulations and also the relevant provisions of Chapter 7 of the Channel Islands Stock Exchange LBG Rules throughout the year under review. Substantial Shareholdings At 31 December 2005, the Company had notification that the following shareholders had a beneficial interest of 3% or more of the Company's issued share capital. % of holding Standard Life Assurance Co. 21.79 M&G Investment Management 10.00 Brewin Dolphin 5.06 Rensburg Fund Management Ltd 4.38 Turcan Connell Solicitors 3.18 Scottish Friendly Assurance 3.00 Results and Dividends The results for the year are set out in the Consolidated Income Statement on page 18. Details of all dividends paid or payable are set out in Note 23 to the Financial Statements. Directors' Report continued Directors The Directors of the Company during the year and at the date of this Report are set out on page 36. Directors' and Other Interests The Directors each hold the following number of ordinary shares in the Company: David Moore 15,000 Richard Barfield 15,000 John Hallam 15,000 Shelagh Mason 15,000 Paul Orchard-Lisle 25,000 The shareholdings of the directors have not changed from the original amounts purchased on 19 December 2003. Statement of Directors' Responsibilities The Directors are required by The Companies (Guernsey) Law, 1994, to prepare Financial Statements for each financial period, which give a true and fair view of the state of affairs of the Group as at the end of the financial period. In preparing 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 to any material departures disclosed and explained in the Financial Statements; - prepare the Financial Statements on a going concern basis unless it is inappropriate to presume that the Group will continue in business; and The Directors confirm that they have complied with the above requirements in preparing the Financial Statements. The Directors are responsible for keeping proper accounting records, which disclose with reasonable accuracy at any time the financial position of the Group and to enable them to ensure that the Financial Statements comply with The Companies (Guernsey) Law, 1994. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Going Concern After making enquiries, the Directors have reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing the Financial Statements. Directors' Report continued Corporate Governance The Directors report on Corporate Governance is detailed on pages 11-14 of the report. As a Company incorporated in Guernsey, the Company is not required to comply with the Combined Code on Corporate Governance. However, it is the Company's policy to comply with best practice on good corporate governance that is applicable to investment companies. The Board believes that the Company has complied throughout the accounting period with the provisions set out in the Combined Code on Corporate Governance (the 'Code') issued by the Financial Reporting Council in July 2003, subject to the statements made in the Corporate Governance Report on pages 11-14. Auditors The independent auditors, PricewaterhouseCoopers CI LLP, have indicated their willingness to continue in office, and a resolution that they will be reappointed will be proposed at the Annual General Meeting. Approved by the board on 28 March 2006 John Hallam David Moore Director Director Corporate Governance Report Combined Code One of the foremost concerns for the Board is to ensure that a sustainable and transparent model for corporate governance is created and that this environment is controlled and developed. As a company incorporated in Guernsey, the Company is not required to comply with the Combined Code on Corporate Governance. However, it is the Company's policy to comply with best practice on good corporate governance that is applicable to investment companies. To the extent considered appropriate the Board believes that the Company has complied throughout the accounting period with the provisions set out in the Combined Code on Corporate Governance (the 'Code') issued by the Financial Reporting Council in July 2003, subject as described in the following paragraphs. The Board and Board Committees All the Directors of the Company are Non-Executive Directors. Therefore, the Board does not feel it is appropriate to appoint a Chief Executive or Senior Independent Director. The Chairman, David Moore, is a partner with Ozannes Advocates and Notaries Public in Guernsey. Ozannes provides Guernsey legal advice to the Company and Ozannes Securities Limited, an associated company, is the Company's Guernsey sponsor in relation to the Company's listing on the Channel Islands Stock Exchange. Mr Moore is not directly involved in the provision of the sponsorship services by Ozannes Securities Limited and refrains from participation in and voting upon any board resolutions concerning the appointment or remuneration of Ozannes and Ozannes Securities Limited. The total fees payable to Ozannes and Ozannes Securities Limited for general services provided to the Group in the year ended 31 December 2005, excluding fees payable on the launch of the Company, amounted to Â£4,876. Mr Moore is independent of the Company's investment manager and its professional advisers. The Directors consider that the Chairman is independent for the purposes of the Combined Code. The Board considers that the Directors are all independent of the Investment Manager. The full Board meets four times a year as does the Property Valuation Committee. The Audit Committee meets at least twice a year and the Management Engagement Committee once or as required. All of the Directors are members of the Audit and Property Valuation Committees, all Directors other than Richard Barfield are members of the Management Engagement Committee. The number of meetings of the full Board and those committees attended by each Director is set out below. The Management Engagement Committee, chaired by David Moore, has reviewed the appointments made by the Board including the appointments of the Investment Manager, the Administrator, the Company Secretary and the Property Valuer. The Audit Committee reviews the Financial Statements and considers the continuing appointment of the Auditor. The Property Valuation Committee, chaired by David Moore, reviews the quarterly property valuation reports before their submission to the full board. Full Board Audit Management Property Valuation Committee Engagement Committee Committee Held Attended Held Attended Held Attended Held Attended David Moore 4 4 3 3 2 2 4 4 Richard Barfield 4 4 3 3 2 2 4 4 John Hallam 4 4 3 3 2 2 4 4 Shelagh Mason 4 3 3 2 2 1 4 3 Paul Orchard-Lisle 4 4 3 3 2 2 4 4 The Board does not believe it is appropriate for the Company, as an investment company with no Executive Directors, to have a Nomination Committee or a Remuneration Committee. All matters relating to appointment to, and remuneration of, the Board are considered by the full Board. The Directors received an induction from the Investment Manager on appointment and will receive such other training as may from time to time be appropriate. All the Directors are entitled to have access to independent professional advice at the Company's expense where they deem it necessary to discharge their responsibilities as Directors. The Board has delegated day-to-day management of the Group's assets to the Investment Manager. All decisions relating to the Company's investment policy, investment objective, dividend policy, gearing, corporate governance procedures and strategy in general are reserved to the Board. Performance of Board and proposal for re-election The performance of each Director has been appraised by his or her fellow Directors, led by the Chairman during the previous financial period. The performance of the Chairman was appraised by his fellow Directors. The performance of each Board committee was appraised by the Board as a whole. In accordance with the Combined Code, each Director stood for re-election at the Annual General Meeting in 2005, being the first Annual General Meeting following his or her appointment. Pursuant to the Articles of Association of the Company one third, or the number nearest to but not exceeding one third, of the Directors will retire and stand for re-election at the Annual General Meeting each year, provided that each Director shall retire and stand for re-election at intervals of no more than three years. Each Director is appointed subject to the provisions of the Articles of Association in relation to retirement as described above. Biographical details of each Director are set out on page 13. Corporate Governance Report continued Remuneration of Board Since all the Directors are non-executive, the provisions of the Code in respect of Directors' remuneration are not relevant to the Company except insofar as they relate to non-executive directors. The Directors who served during the period received the following emoluments in the form of fees over the period from 1 January 2005 to 31 December 2005: Year to 31 December 2005 David Moore Â£16,000 Richard Barfield Â£14,000 John Hallam Â£14,000 Shelagh Mason Â£14,000 Paul Orchard-Lisle Â£14,000 Total Â£72,000 There are no service contracts in existence between the Company and any Director but each of the Directors was appointed by letter of appointment which sets out the main terms of his appointment. Directors Information David Moore (Chairman), aged 45, is a resident of Guernsey. He is an advocate of the Royal Court of Guernsey and is a partner with Ozannes, the Company's lawyers in Guernsey. He has been with Ozannes since 1993 and before that spent 10 years in the City of London, predominantly with Ashurst Morris Crisp. He specialises in corporate and financial matters and is a non-executive director of a number of investment or insurance management companies, investment companies and insurance companies. Richard Barfield, aged 58, is a UK resident. Until 1996 he was the Chief Investment Manager of Standard Life. He is a non-executive director of Edinburgh Investment Trust plc, The Baillie Gifford Japan Trust plc, The Merchants Trust plc, The JP Morgan Fleming Overseas Investment Trust plc and a number of other companies. He is also a member of the Public Oversight Board for Accountancy. John Hallam, aged 57, is a resident of Guernsey. He is a chartered accountant and was managing partner of the Guernsey office of PricewaterhouseCoopers until 1999. He is chairman of Prodesse Investment Limited, EFG Private Bank (Channel Islands) Limited, M&G Recovery Investment Co. Limited and a non-executive director of a number of other companies. Shelagh Mason, aged 46, is a resident of Guernsey. She is a qualified English solicitor. She practices as a commercial property lawyer and was a partner of Edge & Ellison until 1999. She was also chief executive of Long Port Properties Limited until 2001. Paul Orchard-Lisle, CBE, aged 67, is a UK resident. He is a chartered surveyor and until 2000 he was the senior partner of Healey & Baker. He is chairman of Slough Estates plc and executive chairman of The Falcon Property Trust. He has been an advisor to the UK government on property matters and was formerly the President of The Royal Institution of Chartered Surveyors. Corporate Governance Report continued Going Concern The Directors believe that the Company has adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the Financial Statements. Audit and internal controls The Board reviewed the effectiveness of the Company's system of internal controls, including financial, operational and compliance controls and risk management systems and has put in place procedures for the review of such controls on an annual basis. This included the consideration of the FRAG 21 issued by the Investment Manager and similar reports issued by the Administrator. This process accords with the Turnbull guidance. The system is designed to manage rather than eliminate the risk of failure to achieve business objectives. The system can only provide reasonable not absolute assurance against material misstatement or loss. The audit committee meets at least twice a year and considers reports from the independent auditors, the Investment Manager and the Administrator. The main responsibilities of the audit committee include monitoring the integrity of the Company's Financial Statements and appropriateness of its accounting policies, reviewing the effectiveness of the internal control systems and making recommendations to the Board regarding the appointment and independence of the external auditor and the objectivity and effectiveness of the audit process, with particular regard to the level of non-audit fees, if any. Shareholders have the opportunity at each annual general meeting to vote on the election of the independent auditors for the forthcoming year. The Board has reviewed the need for an internal audit function. The Board considers that the systems and procedures put in place by the Investment Manager and the Administrator, including the internal audit activities of both, are adequate to safeguard shareholders' interests and investment and that the Company does not therefore require a separate internal audit function. Relations with shareholders The Board welcomes correspondence from shareholders, addressed to the Company's registered office. All shareholders have the opportunity to put questions to the Board at the Annual General Meeting. The Board hopes that as many shareholders as possible will be able to attend the meeting. The Board believes that sustainable financial performance and delivering on the objectives of the Company are indispensable measures in order to build trust with the Company's shareholders. In order to promote a clear understanding of the Company, its objectives and financial results the Board aims to ensure that information relating to the Company is disclosed in a timely manner and in a format suitable to the shareholders of the Company. The Board have also encouraged the Investment Manager to identify a sample of investors for meetings to encourage communication and to ensure the concerns of shareholders are addressed. Property Investments as at 31 December 2005 Name (Sector) Town Capital Value Â£ Wellington House (Office) London 18-20m Clough Road (Retail) Kingston upon Hull 18-20m Hollywood Green (Leisure) London 16-18m Wellesley House (Office) Harlow 8-10m Drakes Way (Industrial) Swindon 8-10m Solution Hall (Office) Welwyn City Garden 8-10m The Axys (Office) Nantgarw 8-10m 2-4 Bucknall Street (Office) London 8-10m Whitebear Yard (Office) London 8-10m Bathgate Retail Park (Retail Warehouse) Bathgate 6-8m Century Plaza (High Street Retail) Edgware 6-8m The Courtyard (Office) St Albans 6-8m Interfleet House (Offce) Derby 6-8m Chancellors Place (Office) Chelmsford 6-8m Phase II, Telelink (Office) Swansea 4-6m Viscount Way (Office) Swindon 4-6m Farah Unit, Crittal Road (Distribution Witham 4-6m Warehouse) Pit Hey Place (Industrial) Skelmersdale 4-6m 31/32 Queen Square (Office) Bristol 4-6m Crown Farm (Industrial) Mansfield 4-6m Esporta (Leisure) Chislehurst 4-6m Wardley Industrial Estate (Retail Warehouse) Manchester 2-4m Halfords (Retail Warehouse) Paisley 2-4m Coal Road (Industrial) Leeds 2-4m Eurolink Normanton (Industrial) Leeds 2-4m Lister House (Office) Leeds 2-4m Gemini Court (Industrial) Port Talbot 2-4m Unit 14 Interlink Park (Industrial) Bardon 2-4m Easter Park (Industrial) Bolton 2-4m Portrack Lane (Industrial) Stockton-on-Tees 1-2m Independent Auditors' report to the members of Standard Life Investments Property Income Trust Limited We have audited the Financial Statements of Standard Life Investments Property Income Trust Limited which comprise the Consolidated Income Statement, the Consolidated Balance Sheet, the Consolidated Statement of Changes in Equity, the Consolidated Cash Flow Statement and the related notes. These consolidated financial statements have been prepared under the accounting policies set out therein. Respective responsibilities of directors and auditors As described in the Directors' Report, the directors' are responsible for preparing the Annual Report and the Financial Statements in accordance with applicable Guernsey law and International Financial Reporting Standards. Our responsibility is to audit the Financial Statements in accordance with relevant legal and regulatory requirements, International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board and the Listing Rules of the Financial Services Authority. This report, including the opinion, has been prepared for and only for the Company's members as a body in accordance with Section 64 of The Companies (Guernsey) Law, 1994 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or in to whose hands it may come save where expressly agreed by our prior consent in writing. We report to you our opinion as to whether the Financial Statements give a true and fair view and have been properly prepared in accordance with The Companies (Guernsey) Law, 1994. We also report to you if, in our opinion, the Directors' Report is not consistent with the Financial Statements, if the Company has not kept proper accounting records, or if we have not received all the information and explanations we require for our audit. We read the other information contained in the Annual Report and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the Financial Statements. The other information comprises only the Objective and Financial Summary, the Directors' Report, the Chairman's Statement, the Corporate Governance Report, the Investment Manager's Report, the Property Investments and the Directors and Company Information. We review whether the Corporate Governance Statement reflects the Company's compliance with the nine provisions of the 2003 FRC Combined Code specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the board's statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the group's corporate governance procedures or its risk and control procedures. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the Financial Statements. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the Financial Statements, and of whether the accounting policies are appropriate to the Group's circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the Financial Statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the Financial Statements. Opinion In our opinion the Financial Statements give a true and fair view, in accordance with International Financial Reporting Standards, of the state of the Group's affairs at 31 December 2005 and of the profit and cash flows of the Group for the year then ended and have been properly prepared in accordance with The Companies (Guernsey) Law,1994. PricewaterhouseCoopers CI LLP Chartered Accountants Guernsey, Channel Islands 28 March 2006 Standard Life Investments Property Income Trust Limited Consolidated Income Statement for the year ended 31 December 2005 Restated 01-Jan-05 to 19-Dec-03 to 31-Dec-05 31-Dec-04 Note Â£ Â£ Income Unrealised gain arising on adjustment to fair value of investment properties 8 18,893,599 3,719,949 Realised gain on disposal of investment property 145,281 - Rental income 12,878,325 10,038,141 -------- Total income and fair value gains 31,917,205 13,758,090 -------- -------- Expenditure Set-up costs 3 - (432,525) Investment management fees 3 (1,584,607) (1,012,818) Head lease payments (283,572) (285,125) Valuation fees 3 (72,500) (102,297) Other direct property costs (109,734) (117,154) Directors' fees and subsistence 5 (75,547) (81,739) Other administration expenses (194,035) (412,305) -------- -------- (2,319,995) (2,443,963) -------- -------- Operating profit 29,597,210 11,314,127 Finance costs - net Interest payable 6 (4,397,047) (2,115,136) Loan arrangement fee - (240,000) Interest receivable 262,109 338,217 -------- -------- (4,134,938) (2,016,919) -------- -------- Profit for the year / period before tax 25,462,272 9,297,208 -------- -------- Taxation 7 (3,880,011) (566,286) -------- -------- Profit for the year / period 21,582,261 8,730,922 ======== ======== Earnings per share for the year / period attributable to the equity holders of the company Basic and diluted 22 21.58 8.73 pence pence (restated) All items in the above income statement derive from continuing operations. Standard Life Investments Property Income Trust Limited Consolidated Balance Sheet as at 31 December 2005 Restated 31-Dec-05 31-Dec-04 Note Â£ Â£ ASSETS Non-current assets Freehold investment 8 168,194,233 138,946,422 properties Leasehold investment 8 39,105,163 29,663,013 properties Interest rate swap 16 - 1,494,912 --------- ---------- 207,299,396 170,104,347 ---------- ---------- Current assets Trade and other 9 2,134,473 2,679,982 receivables Cash and cash 11 13,711,633 7,557,113 equivalents ---------- ---------- 15,846,106 10,237,095 ---------- ---------- --------- --------- Total assets 223,145,502 180,341,442 ========= ========= EQUITY Capital and reserves attributable to Company's equity holders Share capital 17 1,000,000 1,000,000 Retained earnings 19 (2,334,373) 135,973 Capital reserves 20 19,734,918 5,214,861 Other distributable 21 95,206,619 96,692,892 reserves ---------- ---------- Total equity 113,607,164 103,043,726 ---------- ---------- Liabilities Non-current liabilities Interest rate swap 16 3,023,911 - Bank borrowings 12 84,432,692 60,709,776 Redeemable preference 13 6,756,006 6,373,591 shares Leasehold obligations 14 5,085,163 4,643,013 Taxation 7 4,446,297 566,286 ---------- ---------- 103,744,069 72,292,666 ---------- ---------- Current liabilities Trade and other 10 5,794,269 5,005,050 payables --------- --------- 5,794,269 5,005,050 ---------- ---------- --------- --------- Total liabilities 109,538,338 77,297,716 ---------- ---------- --------- --------- Total equity and 223,145,502 180,341,442 liabilities ========= ========= Approved by the board of directors on 28 March 2006 John Hallam Shelagh Mason Director Director Standard Life Investments Property Income Trust Limited Consolidated Statement of Changes in Equity for the period ended 31 December 2004 Share Share Premium Retained Capital Other Total equity capital earnings reserve distributable reserves Note Â£ Â£ Â£ Â£ Â£ Â£ Issue of ordinary share capital 17 1,000,000 - - - - 1,000,000 Share premium on issue of ordinary share capital 18 - 99,000,000 - - - 99,000,000 Movement on revaluation of interest rate swap 16 - - - 1,494,912 - 1,494,912 Profit for the period - - 9,297,208 - - 9,297,208 Unrealised gain on adjustment to fair value of investment properties 8 - - (3,719,949) 3,719,949 - - Dividends 23 - - (4,875,000) - - (4,875,000) Share issue costs 18 - (2,307,108) - - - (2,307,108) Transfer to other distributable reserves 18 - (96,692,892) - - 96,692,892 - Balance at 31 December 2004 as previously reported 1,000,000 - 702,259 5,214,861 96,692,892 103,610,012 ======= ======= ======== ======= ========= ========== Prior year adjustment: Taxation - - (566,286) - - (566,286) Balance at 31 December 2004 ------- ------- -------- ------- --------- -------- as restated 1,000,000 - 135,973 5,214,861 96,692,892 103,043,726 ======= ======= ======== ======= ========= ======== Standard Life Investments Property Income Trust Limited Consolidated Statement of Changes in Equity for the year ended 31 December 2005 Share Share Retained Capital Other Total equity capital Premium earnings reserve distributable reserves Note Â£ Â£ Â£ Â£ Â£ Â£ Opening balance 1 January 2005 as restated 1,000,000 - 135,973 5,214,861 96,692,892 103,043,726 Movement on revaluation of interest rate swap 16 - - - (4,518,823) - (4,518,823) Profit for the year - - 21,582,261 - - 21,582,261 Transfer between reserves* - - 1,486,273 - (1,486,273) - Unrealised gain on adjustment to fair value of investment properties 8 - - (18,893,599) 18,893,599 - - Realised gain on disposal of property - - (145,281) 145,281 - - Dividends 23 - - (6,500,000) - - (6,500,000) ------- ------- -------- ------- --------- -------- Balance at 31 December 2005 1,000,000 - (2,334,373) 19,734,918 95,206,619 113,607,164 ======= ======= ======== ======= ========= ======== * this is a transfer to move preference share finance costs and launch costs from the retained earnings reserve to the other distributable reserve. Standard Life Investments Property Income Trust Limited Consolidated Cash Flow Statement for the year ended 31 December 2005 01-Jan-05 to 19-Dec-03 to 31-Dec-05 31-Dec-04 Note Â£ Â£ Cash flows from operating activities Cash generated from operations 25 11,960,434 9,550,560 Interest paid 6 (4,014,632) (1,741,545) --------- --------- Net cash generated from operating activities 7,945,802 7,809,015 --------- --------- Cash flows from investing activities Acquisition of shares in subsidiaries - (16,554,209) Loan repayments made to related parties - (80,285,282) Other loans repaid - (610,778) Purchase of investment properties (27,776,307) (62,427,518) Sale of investment properties 8,500,000 Interest received 262,109 338,217 --------- --------- Net cash used in investing activities (19,014,198) (159,539,570) --------- --------- Cash flows from financing activities Proceeds from issuing of new ordinary shares - 97,775,951 Proceeds from issuing of redeemable preference - 6,000,000 shares Share issue costs - (83,059) Dividends paid 23 (6,500,000) (4,875,000) Debt issue costs - (240,000) Proceeds from bank borrowings 12 23,722,916 60,709,776 --------- --------- Net cash generated from financing activities 17,222,916 159,287,668 --------- --------- -------- --------- Net increase in cash and cash equivalents in the 6,154,520 7,557,113 year / period ======== ========= Cash and cash equivalents at beginning of year / 7,557,113 - period -------- --------- Cash and cash equivalents at end of year / period 13,711,633 7,557,113 ======== ========= Standard Life Investments Property Income Trust Limited Notes to the Consolidated Financial Statements for the year ended 31 December 2005 1. General information Standard Life Investments Property Income Trust Limited ('the Company') and its subsidiaries (together the 'Group') carry on the business of property investment through a portfolio of freehold and leasehold investment properties located in the United Kingdom. The Company is a limited liability company incorporated and domiciled in Guernsey, Channel Islands. The Company has its primary listing on the Channel Islands Stock Exchange with a secondary listing on the London Stock Exchange. These audited consolidated financial statements have been approved for issue by the Board of Directors on 28 March 2006. The address of the registered office is Trafalgar Court, Les Banques, St Peter Port, Guernsey, GY1 3QL. 2. Accounting policies Basis of preparation The audited consolidated financial statements of the Group have been prepared in accordance with and comply with International Financial Reporting Standards ('IFRS'), and all applicable requirements of Guernsey Company Law. The audited consolidated financial statements have been prepared under the historical cost convention as modified by the measurement of investment property and derivative financial instruments at fair value. Segmental reporting A business segment is a group of assets and operations engaged in providing products or services that are subject to risk and returns that are different from those of other business segments. The directors consider that different business segments exist for different types of investment property. The four main investment types that the Group invests in are the retail, office, industrial and other sectors. The directors consider that the Group operates in one geographical area, the United Kingdom. Segmental analysis is shown in note 26. Basis of consolidation The audited consolidated financial statements comprise the financial statements of Standard Life Investments Property Income Trust Limited and its only material wholly owned subsidiary undertaking, Standard Life Investments Property Holdings Limited, 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 the financial and operating polices generally accompanying a share holding of more than one half of the voting rights. Subsidiaries are fully consolidated from the date on which control is transferred to the Group and they are deconsolidated from the date that control ceases. Functional and presentation currency Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates ('the functional currency'). The consolidated financial statements are presented in pounds sterling, which is the Company's and Group's functional 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 is recognised on a straight line basis over the lease term. The cost of any lease incentives provided are recognised over the lease term, on a straight line basis as a reduction of rental income. Expenditure All expenses are accounted for on an accruals basis. The investment management and administration fees, formation and set up costs, finance and set up costs (including interest on the bank facility and the finance cost of the redeemable preference shares) and all other expenses are charged through the income statement. Share issue costs Costs directly attributable to the issue of equity that would otherwise have been avoided are written off against share premium and reflected in the Consolidated Statement of Changes in Equity. Taxation The Company and its wholly owned Guernsey registered subsidiary, Standard Life Investments Property Holdings Limited, have obtained exempt company status in Guernsey under the terms of the Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989 so that they are exempt from Guernsey taxation on income arising outside Guernsey and bank interest receivable in Guernsey. Each Company is, therefore, only liable to a fixed fee of Â£600 per annum. No charge to Guernsey taxation will arise on capital gains derived from the disposal of the investment properties. The Directors intend to conduct the Group's affairs such that the Company and its Guernsey registered subsidiary continue to remain eligible for exemption. Standard Life Investments Property Holdings Limited is subject to United Kingdom income tax on assessable income arising on the United Kingdom investment properties held. Deferred income tax Deferred income tax is provided for in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Freehold investment properties Freehold investment properties are initially recognised at cost, being the fair value of the consideration given, including transaction costs associated with the acquisition of the investment property. After initial recognition, freehold investment properties are measured at fair value, with movements in the unrealised gains and losses recognised in the Income Statement. Fair value is based upon the market valuations of the properties as provided by DTZ Debenham Tie Leung Limited, a firm of independent chartered surveyors, at the balance sheet date. Leasehold investment properties Leasehold investment properties held which meet the criteria of an investment property 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 consideration given together with the discounted present value of all minimum lease payments (ie. Head lease payments). After initial recognition, leasehold investment properties are measured at market value with movements in the unrealised gains and losses recognised in the Income Statement. Fair value as disclosed in the financial statements is based on the market valuations of the properties as provided by DTZ Debenham Tie Leung Limited, a firm of independent chartered surveyors, as at the balance sheet date as adjusted for recognised lease liabilities. Cash and cash equivalents Cash and cash equivalents are defined as cash in hand, demand deposits, and highly liquid investments readily convertible within three months or less to known amounts of cash and subject to insignificant risk of changes in value. Share capital Ordinary shares are classified as equity. Preference shares, which are redeemable on a specific date, are classified as liabilities. Dividends Dividend distributions to the Group's shareholders are recognised as a liability in the Group's consolidated financial statements in the period in which the dividends are approved by the Board of Directors. The redeemable preference shareholders are not entitled to payment of any dividends. Borrowings All loans and borrowings are initially recognised at fair value of the consideration received, less issue costs where applicable. After initial recognition, all interest-bearing loans and borrowings are subsequently measured at amortised cost. Amortised cost is calculated by taking into account any discount or premium on settlement. Finance costs relating to the preference shares are recognised in the income statement using the effective interest rate method. The effective interest rate is 6% per annum. Borrowing costs are expensed to the income statement as incurred. 3. Fees Investment management fees On 19 December 2003 Standard Life Investments (Corporate Funds) Limited ('the Investment Manager') was appointed as investment manager to manage the property assets of the Group. Under the terms of the Investment Management Agreement the Investment Manager is entitled to receive a fee at the annual rate of 0.85% of the total assets (less any amounts drawn down under the facility agreement but not yet invested in property assets), payable quarterly in arrears. Total fees charged for the year ended 31 December 2005 amounted to Â£1,584,607 (period ended 31 December 2004: Â£1,012,818). The amount due and payable at year end amounted to Â£436,480 (period ended 31 December 2004: Â£nil). Administration, secretarial and registrar fees On 19 December 2003 Northern Trust International Fund Administration Services ( Guernsey) Limited ('Northern Trust'), formerly known as Guernsey International Fund Managers Limited, were appointed administrators, secretary and registrar to the Group. Northern Trust are entitled to an annual fee, payable quarterly in arrears, of Â£65,000. Northern Trust are also entitled to reimbursement of reasonable out of pocket expenses. Total fees charged for the year ended 31 December 2005 amounted to Â£69,281 (period ended 31 December 2004: Â£81,397). The amount due and payable at year end amounted to Â£17,979 (period ended 31 December 2004: Â£nil). Valuation fees On 19 December 2003, DTZ Debenham Tie Leung Limited ('the Valuer'), Chartered Surveyors, were appointed as valuers in respect of the assets comprising the property portfolio. The Valuer is entitled to an annual fee of Â£2,500 per property together with all reasonable out of pocket expenses and a start up fee of 0.0275% of the value of each property added to the portfolio. Total fees charged for the year ended 31 December 2005 amounted to Â£72,500 (period ended 31 December 2004: Â£102,297). The amount due and payable at year-end amounted to Â£31,000 (period ended 31 December 2004: Â£29,375). Set-up costs During the period ended 31 December 2004 set-up costs not directly attributable to the issue of equity shares amounted to Â£432,525. These costs were written off directly to the income statement. 4. Financial instruments The Group's activities expose it to various financial risks, the adverse effects of which the Group seeks to minimise through the use of financial instruments. The Group has not entered into any derivative transactions during the year under review other than the interest rate swap which is used to hedge interest rate exposure on the bank borrowings. It is the Group's policy that no trading in financial instruments will be undertaken. The main financial risks arising from the Group's activities are credit risk, market risk, liquidity risk and interest rate risk. Credit risk Credit risk is the risk that a counter party will be unable to meet a commitment that it has entered into with the Group. In the event of default by an occupational tenant, the Group will suffer a rental shortfall and incur additional related costs. The Board regularly reviews the concentration of risk on the portfolio and receives regular reports on any tenants in arrears. Market risk The Group's exposure to market risk is comprised mainly of movements in the value of the Group's property investments. The investment property portfolio is managed within the parameters disclosed in the Group's prospectus. Liquidity risk Liquidity risk is the risk that the Group will encounter in realising assets or otherwise raising funds to meet its financial commitments. In certain circumstances, the terms of the Group's loan facility entitle the lender to require early value repayment and under such circumstances the Group's ability to maintain dividend levels and the net asset value attributable to the ordinary shares, 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 and variable interest amounts based on a notional principal amount. The fair value of the interest rate swap is calculated as the present value of the estimated future cash flows. Accounting for derivative financial instruments and hedging activities Derivatives are initially recognised at cost on the date a derivative contract is entered into and are subsequently remeasured at their fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents its assessment both at hedge inception and on an ongoing basis of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognised as gains or losses in equity. The gains or losses relating to the ineffective portion are recognised immediately in the income statement. Fair value estimation Property and related assets are inherently difficult to value due to their individual nature and as a result, valuations can be subject to substantial uncertainty. Valuation will not necessarily reflect the actual sales price, even if a sale were to occur shortly after the valuation date. The fair value of financial instruments not traded in active markets (for example over-the counter derivatives) is determined by using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance sheet date. Other techniques, such as estimated discounted cash flows, are used to determine fair value of the remaining financial instruments. The fair value of interest rate swaps is calculated as the present value of estimated cash flows. The nominal value less estimated credit adjustments of trade receivables and payables 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 the other party or exercise significant influence over the other party in making financial or operational decisions. Acquisition of initial portfolio On the 19 December 2003 the Company purchased a number of companies from The Standard Life Assurance Company. On 29 December 2003, the Company transferred all of the investment properties held within these companies to its wholly owned subsidiary, Standard Life Investments Property Holdings Limited, at the fair value of Â£97,651,636. These companies have not been consolidated because, as at 31 December 2005, the assets and liabilities have been transferred from these companies and the liquidation processes have been initiated. These companies are no longer under the control of the Group. Redeemable preference shares On 29 December 2003 the Company issued 6,000,000 25p redeemable zero dividend preference shares for Â£6,000,000 to The Standard Life Assurance Company. These shares have a nominal value of Â£1,500,000 and are redeemable by the Company at a price of Â£1.7908 . These shares do not carry any voting rights. See note 13. Cash held on deposit with related parties As at 31 December 2005 Â£8,030,308 was held on deposit with Standard Life Investments Global Liquidity Funds Limited. This deposit was invested in AAA rated bonds and an interest accrued on this deposit daily. The interest earned on this deposit during the financial year was Â£30,308 representing an average rate of 4.5%. Standard Life Assurance Company is the ultimate controlling party to the Investment Manager, Standard Life Investments (Corporate Funds) Limited. Standard Life Investments Global Liquidity Funds Limited is an entity that is also managed within the Standard Life Assurance Company group. Ordinary share capital Standard Life Assurance Company has held 21,769,609 of the issued ordinary shares throughout the year on behalf of its Unit Linked Property Funds (period ended 31 December 2004: 21,769,609). Those parties related to the Investment Manager waived their rights to commission on the initial purchase of these shares in order to maintain the fairness of the transaction to all parties. Directors The Directors each hold the following number of ordinary shares in the Company: 2005 2004 David Moore 15,000 15,000 Richard Barfield 15,000 15,000 John Hallam 15,000 15,000 Shelagh Mason 15,000 15,000 Paul Orchard-Lisle 25,000 25,000 No Director has any interest in any transactions which are or were unusual in their nature or conditions or significant to the business of the Group and which were effected by any member of the Group since its date of incorporation. Total fees relating to the directors in the year under review were Â£75,547 (period ended 31 December 2004: Â£81,739), being Â£72,000 (period ended 31 December 2004: Â£78,000) in respect of emoluments and Â£3,547 (period ended 31 December 2004: Â£3,739) in respect of subsistence. Investment Manager Standard Life Investment (Corporate Funds) Limited is the Investment Manager. Transactions with the Investment Manager in the year/period are detailed in note 3. 6. Interest payable 2005 2004 Â£ Â£ Interest payable in relation to redeemable preference shares 382,415 373,591 Other interest payable 4,014,632 1,741,545 ----------- ------------ 4,397,047 2,115,136 =========== ============ 7. Taxation 2005 2004 Â£ Â£ Current income tax (a) - - Deferred tax (b) 3,880,011 566,286 ----------- ------------ 3,880,011 566,286 =========== ============ (a) Current income Tax A reconciliation of the income tax charge to the Consolidated Income Statement for the year/period at the statutory income tax rate to income tax expense at the Group's effective income tax rate for the year/period is as follows: 2005 2004 Â£ Â£ Profit before income tax 25,462,272 9,297,208 Tax calculated at UK statutory income tax rate of 22% 5,601,700 2,045,386 Unrealised gains arising on revaluation of investment property not subject to tax (4,156,592) - Holding company profits not subject to tax (1,296,690) (446,230) Income not subject to tax (78,377) (74,408) Expenditure not allowed for income tax purposes 7,549 - Capital allowances and other allowances (77,590) (1,524,748) ----------- ------------ Current income tax charge - - =========== ============ (b) Deferred tax 2005 2004 Â£ Â£ Unrealised gains arising on adjustment to fair value of investment properties 18,893,599 3,719,949 Schedule A losses utilised in the year / period (1,257,185) (1,145,924) ----------- ------------ Gains chargable in relation to deferred tax 17,636,414 2,574,025 Charge to the consolidated income statement in relation to deferred tax @ 22% 3,880,011 566,286 Opening provision for deferred taxation 566,286 - ----------- ------------ Closing provision for deferred taxation 4,466,297 566,286 =========== ============ At the balance sheet date provision has been made for deferred tax on all temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes, regardless of whether or not those temporary differences are expected to reverse. 8. Freehold and leasehold investment properties 31-Dec-05 31-Dec-05 31-Dec-05 Freehold Leasehold Total Â£ Â£ Â£ Market value as at 31 December 2004 138,946,422 25,020,000 163,966,422 Capital expenditure 21,722,416 5,986,515 27,708,931 Carrying value of disposed property (8,354,719) - (8,354,719) Unrealised gain arising on adjustment to fair value of investment properties 15,880,114 3,013,485 18,893,599 ---------- ---------- ----------- Market value at 31 December 2005 168,194,233 34,020,000 202,214,233 ---------- ---------- ----------- Discounted present value of minimum lease payments - 5,085,163 5,085,163 ---------- ---------- ----------- Fair value at 31 December 2005 168,194,233 39,105,163 207,299,396 ---------- ---------- ----------- 31-Dec-04 31-Dec-04 31-Dec-04 Freehold Leasehold Total Â£ Â£ Â£ Cost of properties transferred from subsidiary companies 77,170,946 20,480,690 97,651,636 Cost of properties purchased 58,526,291 4,068,546 62,594,837 Unrealised gain arising on adjustment to fair value of investment properties 3,249,185 470,764 3,719,949 ---------- ---------- ----------- Market value at 31 December 2004 138,946,422 25,020,000 163,966,422 ---------- ---------- ----------- Discounted present value of minimum lease 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 the year end by DTZ Debenham Tie Leung Limited, Chartered Surveyors on the basis of the market value for existing use. In accordance with the accounting policy in note 2, the market values of leasehold investment properties have been adjusted to reflect the discounted present value of minimum lease payments to reflect their fair value in accordance with IFRS. The market value for existing use provided by DTZ Debenham Tie Leung Limited at the year end was Â£202,305,000 (2004: Â£164,135,000) however an adjustment has been made for lease incentives of Â£90,767 (2004: Â£168,578). 9. Trade and other receivables 2005 2004 Â£ Â£ Trade debtors 392,770 582,350 Other debtors 589,952 335,061 Rental deposits held on behalf of tenants 1,151,751 1,069,397 VAT receiveable - 693,174 -------------- ------------- 2,134,473 2,679,982 ============== ============= 10. Trade and other payables 2005 2004 Â£ Â£ Trade creditors 500,153 403,839 Rental deposits due to tenants 1,151,751 1,069,397 Sundry creditors 459,047 669,250 VAT payable 542,157 - Deferred rental income 3,041,217 2,695,244 Retentions relating to property purchase 99,944 167,320 -------------- ------------- 5,794,269 5,005,050 ============== ============= 11. Cash and cash equivalents 2005 2004 Â£ Â£ Cash held at bank 5,681,325 7,557,113 Cash held on deposit with related party 8,030,308 - -------------- ------------- Sundry creditors 13,711,633 7,557,113 ============== ============= 12. Bank borrowings 2005 2004 Â£ Â£ Loan facility 85,000,000 80,000,000 Opening bank borrowings drawn down 60,709,776 - Amount drawdown during year/period 23,722,916 60,709,776 -------------- ------------- Closing bank borrowings drawn down 84,432,692 60,709,776 ============== ============= On 4 December 2003 the Company entered into a term loan facility with the Royal Bank of Scotland plc for an amount not exceeding the lower of Â£80 million and 76% of the gross proceeds of the ordinary share issue and the issue of the redeemable preference shares. Interest is payable by the Company at a rate equal to the aggregate of LIBOR, a margin of 0.675% per annum and a mandatory cost rate of 0.01% per annum. A non-utilisation fee of 0.15% is payable on any undrawn amounts under the loan facility. The above credit agreement was amended by a side letter dated 14 September 2005 to increase the available facility to Â£85 million. An arrangement fee of 0.05% was payable upon the drawing of funds which took the Company's total borrowings over Â£80 million, to the extent that the funds borrowed exceeded Â£80 million. If this additional facility is not repaid to RBS after the expiry of three months (from the drawdown date) then a further arrangement fee of 0.05% will be payable. If this additional facility is not repaid to RBS after the expiry of six months (from the drawdown date) then a further extension fee of 0.2% will apply to the amount advanced over Â£80 million. No prepayment fee is applicable to amounts drawn down under this additional facility that are then repaid. The interest rate on the loan drawn down at the balance sheet date of Â£84,432,692 was 5.3253% (2004: 5.5862%). The loan is due to be repaid on 29 December 2013. Under the terms of the loan facility there are certain events which would entitle the Royal Bank of Scotland plc to terminate the loan facility and demand repayment of all sums due. Included in these events of default are financial undertakings relating to the loan to value percentage and the amount of interest cover available. The Group has undertaken to ensure that the loan to value percentage does not at any time exceed 55% and also that net rental income is not 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 of the Company and it's wholly owned subsidiary, Standard Life Investments Property Holdings Limited. The amortised cost noted above is considered to be a close approximation to fair value 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 a value of Â£1 on 19 December 2003. The preference shares will be redeemed by the Company on the tenth anniversary of admission at a redemption price of Â£1.7908. The preference shares cannot be redeemed earlier. The redemption price represents a redemption yield of 6% per annum on the issue price of Â£1. 2005 2004 Â£ Â£ Proceeds from issue of redeemable preference 6,000,000 6,000,000 shares Accrued finance cost charges to income statement for 382,415 373,591 the year/period Accumulated finance cost charged to income statement 373,591 - in previous periods -------------- ------------- Closing liability to preference shareholders 6,756,006 6,373,591 ============== ============= As a return of capital the holders of the preference shares are entitled to the payment of 25p per share increased at the rate of 21.8% per annum compounded daily from the date of admission up to the tenth anniversary of admission. The capital liability for the purposes of calculation of the published net asset value at the balance sheet date is as follows: 2005 2004 Â£ Â£ Par value of preference shares 1,500,000 1,500,000 Compounded daily interest for year/period 400,045 339,962 Accumulated compounded daily interest for prior period 339,962 - -------------- ------------- Closing liability to preference shareholders 2,240,007 1,839,962 ============== ============= 14. Leasehold obligations At 31 December 2005 the Group owned five leasehold properties at a market value of Â£34,020,000 (2004: three properties at a market value of Â£25,020,000) as valued by the independent valuers DTZ Debenham Tie Leung Limited. In accordance with the accounting policy for leasehold investment property to be carried at fair value, an adjustment is required to reflect the discounted present value of minimum lease payments. 2005 2004 Â£ Â£ Leasehold obligations 5,085,163 4,643,013 15. Lessor analysis Lessor length At the year/period end the total contractually agreed rental income based on the leases in operation is as follows: 2005 2004 Â£ Â£ Less than one year 13,301,504 11,655,628 Between one and five years 50,360,197 46,620,420 Over five years 85,819,416 89,903,455 -------------- ------------- Total 149,481,117 148,179,503 ============== ============= The largest single tenant at the year end accounts for 8.96% of the annual rental income. 16. Interest rate swap The Company has a swap agreement in place with the Royal Bank of Scotland plc for 90% of the Â£80,000,000 permanent debt facility (Â£72,000,000) from 29 December 2004 to 29 December 2013. The swap qualifies as a cashflow hedge and fair value changes are taken to capital reserves. The effective interest rate of the swap was 5.115% in the year to 31 December 2005 (2004: 5.115%). 2005 2004 Â£ Â£ Opening fair value 1,494,912 - Movement in revaluation in interest rate swap (4,518,823) 1,494,912 ============== ============= Fair value of the financial instruments (based on the marked to market value) (3,023,911) 1,494,912 at 31 December ============== ============= The value of the interest rate swap was misstated at 31 December 2004. This was recorded as an asset of Â£1,494,912 when in fact the value was a liability of Â£1,494,912. As the fair value change in the swap was taken to capital reserves, the misstatement has resulted in the assets and equity reserves in the balance sheet being overstated by Â£2,989,824 at 31 December 2004. The misstatement has no effect on the income statement or on the published net asset values. The 2004 comparatives have not been restated. The movement between the value at 31 December 2004 and the current value is recognised through the Statement of Changes in Equity for the year ended 31 December 2005 (Â£4,518,823), effectively reversing in this year the incorrect movement that was recorded in the period to 31 December 2004. 17. Share capital 2005 2004 Â£ Â£ Authorised 130,000,000 ordinary shares of 1p each 1,300,000 1,300,000 Allotted, called up and fully paid: 100,000,000 ordinary shares of 1p each 1,000,000 1,494,912 18. Share premium On 6 September 2004 the Royal Court of Guernsey granted an application to cancel the share premium account of the Company and reclassify the following amounts as distributable reserves. 2005 2004 Â£ Â£ Opening Balance - - 100,000,000 ordinary shares carrying a premium of 99p - 99,000,000 each 6,000,000 preference shares carrying a premium of 75p - 4,500,000 each Share issue costs - (2,307,108) Preference share premium treated as a liability - (4,500,000) Transfer to other distributable reserves - (96,692,892) -------------- --------------- Closing balance - - ============== =============== 19. Retained earnings 2005 2004 Â£ Â£ Opening balance as at 1 January 2005 as previously reported 702,259 - Prior period adjustment in relation to deferred taxation (566,286) - -------------- --------------- Opening balance as at 1 January 2005 as restated 135,973 - Profit for the year / period 21,582,261 8,730,922 Transfer between reserves 1,486,273 - Unrealised gain on adjustment to fair value of investment properties transferred to capital reserve (18,893,599) (3,719,949) Realised gain arising on disposal of investment property transferred to capital reserve (145,281) - Dividends (6,500,000) (4,875,000) -------------- --------------- Closing balance (2,334,373) 135,973 ============== =============== Recent changes in the interpretation of International Financial Reporting Standards have led to full provision being made in relation to deferred taxation on unrealised gains on adjustment to fair value of investment properties in the financial year/period. This has led to the restatement of the 2004 Consolidated Income Statement as demonstrated above. This is a distributable reserve. 20. Capital reserves 2005 2004 Â£ Â£ Opening Balance 5,214,861 - Unrealised (loss) / gain on revaluation of interest (4,518,823) 1,494,912 rate swap Unrealised gain on adjustment to fair value of investment properties 18,893,599 3,719,949 Realised gain on disposal of investment property 145,281 - --------------- --------- Closing Balance 19,734,918 5,214,861 =============== ========== This reserve will not be used to make distributions to the equity shareholders. 21. Other distributable reserves 2005 2004 Â£ Â£ Opening balance 96,692,892 - Share premium reclassified as other distributable reserve - 96,692,892 Transfer between reserves* (1,486,273) - -------------- --------- Closing balance 95,206,619 96,692,892 ============== ========= *this is a transfer to move preference share finance costs and launch costs from the retained earnings reserve to the other distributable reserve 22. Earnings per share Basic and diluted earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares issued in the year/period. Restated 2005 2004 Â£ Â£ Profit for the year/period 21,582,261 8,730,922 Ordinary shares issued 100,000,000 100,000,000 Earnings per ordinary share (pence) 21.58 8.73 There is no difference between the basic earnings per share and the diluted earnings per share. 23. Dividends The interim dividends paid to date in 2005 are as follows (period ended 31 December 2004: Â£4,875,000) : Â£1,625,000 (1.625p per ordinary share) paid in February relating to the quarter ending 31 December 2004 Â£1,625,000 (1.625p per ordinary share) paid in May relating to the quarter ending 31 March 2005 Â£1,625,000 (1.625p per ordinary share) paid in September relating to the quarter ending 30 June 2005 Â£1,625,000 (1.625p per ordinary share) paid in November relating to the quarter ending 30 September 2005 Â£6,500,000 A further interim dividend of 1.625p per share in respect of the quarter to 31 December 2005 has been approved and was paid in February 2006. These consolidated financial statements do not reflect this dividend, however, the Published Net Asset Value prepared under UK GAAP does. 24. Reconciliation of total equity to published net asset value The net asset value attributable to Ordinary Shares is published quarterly and is based on the properties' most recent valuations and calculated on an adjusted capital basis under United Kingdom Generally Accepted Accounting Principles (UK GAAP) and practice for investment trust companies taking into account the prevailing capital entitlement from time to time of the Preference Shares under the Articles of the Company. Restated 2005 2004 Â£ Â£ Total equity per audited consolidated financial statements 113,607,164 103,043,726 Adjustments: Re-classification of redeemable preference shares as equity 6,756,006 6,373,591 Interest rate swap valuation 3,023,911 (1,494,912) Preference share adjustment to reflect capital redemption rights (2,240,007) (1,839,962) Proposed dividend (1,625,000) (1,625,000) Taxation 4,446,297 566,286 Adjustment to fair value of investment properties 90,767 168,578 Adjustment for accrued creditors (60,813) (35,490) --------------- ---------- Published Net Asset Value 123,998,325 105,156,817 =============== ========== 25. Cash generated from operations Restated 2005 2004 Â£ Â£ Profit for the year / period 21,582,261 8,730,922 Movement in debtors 545,509 (2,679,982) Movement in creditors 856,594 4,636,364 Interest payable 4,397,047 2,115,136 Interest receivable (262,109) (338,217) Unrealised gain arising on adjustment to fair value of investment properties (18,893,599) (3,719,949) Bank loan arrangement fees - 240,000 Movement in deferred tax provision 3,880,011 566,286 Realised gain on disposal of investment property (145,281) - -------------- --------- Cash generated from operations 11,960,433 9,550,560 ============== ========= 26. Segmental reporting The Group is organised into four main business segments determined in accordance with the type of investment property: Retail - Mainly shops and retail warehouse parks Office - Mainly in large cities Industrial - Distribution warehouses and industrial units Other - Leisure centres and cinema complexes Segmental analysis by business segment 2005 Retail Office Industrial Other Total Â£ Â£ Â£ Â£ Â£ Rental income 2,549,241 6,171,677 2,782,136 1,375,271 12,878,325 Unrealised gain arising on adjustment to fair value of investment properties 5,925,772 7,625,563 3,521,569 1,820,695 18,893,599 Realised gains on disposal of investment property - - 145,281 - 145,281 Property related expenditure (28,161) (380,664) (45,350) (11,631) (465,806) ---------- ---------- --------- --------- ----------- Segment result 8,446,852 13,416,576 6,403,636 3,184,335 31,451,399 Non-property related expenditure (1,854,189) ----------- Operating profit 29,597,210 Finance costs - net (4,134,938) ----------- Profit for the year before taxation 25,462,272 =========== Segmental assets 37,084,676 89,077,561 37,719,091 19,439,306 183,320,634 Unrealised gain arising on adjustment to fair value of investment properties 5,925,772 7,625,563 3,521,569 1,820,695 18,893,599 Discounted present value of minimum lease payments - 5,085,163 - - 5,085,163 ---------- ---------- --------- --------- ----------- Total segmental assets 43,010,448 101,788,287 41,240,660 21,260,001 207,299,396 Trade and other receivables 2,134,473 Cash and cash equivalents 13,711,633 ----------- Total Assets 223,145,502 =========== Leasehold obligations - (5,085,163) - - (5,085,163) Bank borrowings (84,432,692) Other current and non-current liabilities (20,020,483) ----------- Total liabilities (109,538,338) =========== There were no transactions between the business segments. Property related expenditure relates to head lease payments, valuation fees and other direct property costs. Other current and non-current liabilities relates to the interest rate swap, redeemable preference shares, taxation and trade and other payables. Restated 2004 Retail Office Industrial Other Total Â£ Â£ Â£ Â£ Â£ Rental income 2,033,326 5,112,241 1,607,384 1,285,190 10,038,141 Unrealised gain arising on adjustment to fair value of investment properties 2,606,849 (442,889) 1,130,954 425,035 3,719,949 Realised gains on disposal of investment property Property related expenditure (36,588) (352,891) (110,097) (5,000) (504,576) ---------- ---------- --------- --------- ----------- Segment result 4,603,587 4,316,461 2,628,241 1,705,225 13,253,514 Non-property related expenditure (1,939,387) ----------- Operating profit 11,314,127 Finance costs - net (2,016,919) ----------- Profit for the year before taxation 9,297,208 =========== Segmental assets 34,453,151 77,002,889 29,974,046 18,816,387 160,246,473 Unrealised gain arising on adjustment to fair value of investment properties 2,606,849 (442,889) 1,130,954 425,035 3,719,949 Discounted present value of minimum lease payments - 4,643,013 - - 4,643,013 ---------- ---------- --------- --------- ----------- Total segmental assets 37,060,000 81,203,013 31,105,000 19,241,422 168,609,435 Interest rate swap 1,494,912 Trade and other receivables 2,679,982 Cash and cash equivalents 7,557,113 ----------- Total Assets 180,341,442 =========== Leasehold obligations - (4,643,013) - - (4,643,013) Bank borrowings (60,709,776) Other current and non-current liabilities (11,944,927) ----------- Total liabilities (77,297,716) =========== There were no transactions between the business segments. Property related expenditure relates to head lease payments, valuation fees and other direct property costs. Other current and non-current liabilities relates to the interest rate swap, redeemable preference shares, taxation and trade and other payables. The segmental analysis has been restated to take account of the prior year adjustment for deferred tax. Standard Life Investments Property Income Trust Limited Directors and Company Information for the year ended 31 December 2005 Directors David Christopher Moore (Chairman) Richard Arthur Barfield John Edward Hallam Shelagh Yvonne Mason Paul David Orchard-Lisle CBE Registered Office Trafalgar Court Les Banques St. Peter Port Guernsey Administrator, Secretary and Registrar Northern Trust International Fund Administration Services (Guernsey) Limited Trafalgar Court Les Banques St. Peter Port Guernsey GY1 3QL Registered Number 41352 Investment Manager Standard Life Investments (Corporate Funds) Limited One George Street Edinburgh EH2 2LL Independent Auditors PricewaterhouseCoopers CI LLP National Westminster House Le Truchot St. Peter Port Guernsey GY1 4ND Solicitors Dickson Minto W.S. 16 Charlotte Square Edinburgh EH2 4DF Principal Banker The Royal Bank of Scotland plc 135 Bishopsgate London EC2M 3UR Property Valuer DTZ Debenham Tie Leung Limited 1 Curzon Street London W1A 5PZ Standard Life Investments Limited, tel. 0131 225 2345, is a company registered in Scotland (no. SC 123321) Registered Office 1 George Street Edinburgh EH2 2LL. The Standard Life Investments Group includes Standard Life Investments (Mutual Funds) Limited, SLTM Limited, Standard Life Investments (Corporate Funds) Limited and Standard Life Investments (Private Equity) Limited. Standard Life Investments Limited acts as Investment Manager for The Standard Life Assurance Company and Standard Life Pension Funds Limited. Standard Life Investments may record and monitor telephone calls to help improve customer service. All companies are authorised and regulated by the Financial Services Authority. (c)2006 Standard Life This information is provided by RNS The company news service from the London Stock Exchange

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