P h o e n i x S p r e e D e u t s c h l a n d A n n u a l R e p o r t a n d A c c o u n t s 2 0 1 7 Living Berlin Annual Report and Accounts 2017 Introduction Phoenix Spree Deutschland is an investment company founded in 2007 and listed on the London Stock Exchange. It is a long term investor in Berlin rental property, committed to improving the quality of accommodation to its customers. Over the past ten years, the Company has assembled an attractive portfolio of real estate assets which the Directors believe offers investors the potential for both reliable income as well as capital growth. PMM Partners has acted as the Property Advisor since the Company’s inception. It has an experienced team of property professionals with long-standing experience of the German residential property market. www.phoenixspree.com Contents Financial Statements Independent Auditor’s Report Consolidated Statement of Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Reconciliation of Net Cash Flow to Movement in Debt 45 50 51 52 53 54 Notes to the Financial Statements 55 Professional Advisors 82 Strategic Report Highlights of the Year At a Glance Chairman’s Statement Strategy and Business Model Key Performance Indicators Operating & Financial Review Berlin Repositioning the Portfolio Condominiums Corporate Responsibility Principal Risks Directors’ Report Board of Directors Directors’ Report Corporate Governance Statement Audit Committee Report Director’s Remuneration Report 2 4 6 10 11 12 18 20 22 24 26 28 30 33 40 43 Phoenix Spree Deutschland Annual Report and Accounts 2017 1 Financial StatementsDirectors’ ReportStrategic Report Highlights of the Year Our targeted acquisition and disposal strategy has created a pure play Berlin portfolio with potential for greater economies of scale. Financial highlights • EPRA NAV per share grew by 50.5% to €4.11 (£3.65) at 31 December 2017 (31 December 2016: €2.73 (£2.33)). Operational highlights • Portfolio value increased by 43.8% to €609.3 million (31 December 2016: €423.8 million), 40.1% on a like-for-like basis. • EPRA total return per share of 53.0% for the year (2016: 22.5%). • Berlin posted largest like-for-like valuation increase at 41.8%. • IFRS NAV per share grew by 56.5% to €3.96 (£3.52) at 31 December 2017 (31 December 2016: €2.53 (£2.16)). • Gross rental income up 13.5% year-on-year to €18.1 million (2016: €15.9 million). • Profit before tax up 183.3% to €138.5 million (2016: €48.9 million). • Net loan to value of 32.0% at 31 December 2017 (31 December 2016: 39.4%). All of the Group’s debt has been refinanced within previous 18 months. • Rent per sqm increased by 4.2% to €8.0 (31 December 2016: €7.6), 6.9% on a like-for-like basis. • Berlin like-for-like rent per sqm increased by 8.4% to €8.4 (31 December 2016: €7.7). • Rent on new lettings of €10.3 per sqm, a 7.9% increase over 2016. • €6.7 million invested in renovations and modernisations across the entire Portfolio during 2017, representing over one-third of rental income. • EPRA vacancy remains low • New debt of €57.8 million signed at 2.9% (31 December 2016 2.6%). during 2017. Average debt maturity now exceeds eight years. Average interest rate 2.1%. • Final dividend per share of €5.0 cents (GBP: 4.4p), giving a total dividend per share of €7.3 cents (GBP: 6.4p) for 2017 (2016: €6.3 cents (GBP: 5.3p)). • Condominium sale completion proceeds up 191.8% to €9.5 million with an average value per sqm of €3,868, a 20.1% premium to Berlin portfolio average value per sqm as at 31 December 2017. Portfolio now purely focused on the attractive Berlin market • Targeted acquisition and disposal strategy during 2017 has created a pure-play Berlin portfolio with potential for greater economies of scale and strategic benefits. • Disposal of Central and Northern Germany portfolio notarised in December 2017 for €73.0 million, a 26% premium to the Jones Lang LaSalle valuation as at 30 June 2017. • Sale of other non-Berlin assets during 2017, for combined proceeds of €48.3 million. All disposals at a significant premium to last reported book value. • Contracts to acquire 366 units notarised during 2017, representing an aggregate purchase price of €55.9 million and an average price per sqm of €2,224. • As at 20 April 2018, contracts to acquire a further 160 units in Berlin have been notarised since 31 December 2017 year end for an aggregate value of €24.8 million, representing an average price per sqm of €2,348. 2 Phoenix Spree Deutschland Annual Report and Accounts 2017 Financial StatementsDirectors’ ReportStrategic Report Outlook • Berlin residential demographics remain favourable, driven by strong population growth, job creation and the ongoing process of urbanisation. • Berlin residential property prices should continue to benefit from a lack of supply and growing demand from both owner- occupiers and investors. • High embedded value within Portfolio: Berlin new leases signed at 40.1% premium to in-place rents during 2017, and 45.7% in the fourth quarter of 2017. • Strong balance sheet, locking in long-term fixed rate debt at low interest rates, creates scope for further selective acquisitions. • Due to careful selection, acquisition prices remain below value of in-place housing stock within the Portfolio and cost of new build construction. • Further new condominium projects and sales are planned for the year ahead. Gross Rental Income €18.1m +13.5% Profit before tax €138.5m +183.3% EPRA NAV/share €4.11 +50.5% 2017 2016 2015 2014 2.73 2.28 2.06 Portfolio value €609.3m +43.8% 4.11 609.3 423.8 2017 2016 2015 2014 282.8 245.3 Rent per sqm €8.0 +4.2% Rent on new lettings (per sqm) €10.3 +7.9% Invested in modernisations €6.7m Berlin acquisitions notarised €55.9m Condominium sales notarised €9.1m +58.9% Phoenix Spree Deutschland Annual Report and Accounts 2017 3 Financial StatementsDirectors’ ReportStrategic Report At a Glance The Company acquires and manages German residential property. Since 2008, the aggregate value of the Portfolio (including the assets of sister fund PSPF) has risen from €167.8 million to €609.3 million as at 31 December 2017, with each year seeing an increase. S ince listing on the Main Market of the London Stock Exchange in June 2015, the Company has increased the Berlin focus of the Portfolio through a combination of carefully selected acquisitions and disposals, effectively creating a pure- play Berlin fund. The Portfolio mainly consists of classic ‘Altbau’ properties which were built before 1914. Typically, these five-storey buildings contain between 20 and 40 units, consisting of one to three- bedroom apartments, often with shops on the ground floor. PMM Partners has acted as property advisor and has an experienced team of property and investment professionals with an established record in the German residential property market. Reported property portfolio valuation 2010-2017 €m +43.8% €700 €600 €500 €400 €300 €200 €100 €0 609.3 423.8 186.1 190.3 219.0 233.1 245.3 282.8 2010 2011 2012 2013 2014 2015 2016 2017 Properties 122 Usable space (sqm) 214k Commercial units 179 Residential units 2,916 4 Phoenix Spree Deutschland Annual Report and Accounts 2017 Financial StatementsDirectors’ ReportStrategic Report “We are a long term investor in Berlin rental property, committed to improving the quality of accommodation available to our customers.” Phoenix Spree Deutschland Annual Report and Accounts 2017 5 Financial StatementsDirectors’ ReportStrategic Report Chairman’s Statement 2017 was another year of strong performance for the Company. Market conditions in the Berlin residential property sector have remained favourable. I am delighted to report that the Portfolio has recorded its best period of growth since Phoenix Spree was founded in 2007. Our financial results for the year provide further confirmation of our strategy of creating and actively managing a high-quality portfolio of Berlin assets. A more focused Portfolio We have made significant progress in our strategy to focus the Portfolio on Berlin, having disposed of a series of non-Berlin assets at a premium to book value. The proceeds from these disposals have been used to invest in the current portfolio and to fund further acquisitions in Berlin. Completion of the €73.0 million disposal of the Central and Northern Germany portfolio at a 26% premium to book value is expected in April 2018 whereupon Phoenix Spree will effectively become a pure-play Berlin fund, creating greater economies of scale. The Board is of the view that the Berlin market remains attractive with scope to continue the strategy of investing in the existing portfolio and to grow it further through the selective acquisition of residential assets. Although the competition for assets is intense, the expertise and strong local relationships of our property advisor have enabled the Company to identify a pipeline of attractive acquisition opportunities. We are pleased to have completed or notarised a further €75.8 million of acquisitions during 2017, all of which met our acquisition criteria. Enhancing the Portfolio The Company has continued to invest in its programme of renovations and modernisations throughout the year, as well as making a further outlay on the overall infrastructure of its properties. Many of the buildings acquired by the Company were over 100 years old and, at the time, were in a poor state of repair. The Board is committed to improving the quality of its accommodation, working in partnership with its tenants to make a positive contribution both to living standards and the environment in areas where our properties are located. Substantial investment has been made in projects encompassing outdated heating systems, plumbing, electrics, double glazing, hallways, building facades and outdoor communal areas. During 2017, the Company re-invested over a third of its rental income on improvement programmes, the highest level to date, and it is anticipated that this process will continue into 2018 as we maintain our focus on improving the overall standard of our tenanted buildings. Strong financial performance The Portfolio valuation has continued to benefit from strong market fundamentals in Berlin, with the ongoing undersupply of available rental property resulting in further yield compression. Portfolio and rental growth have also been driven by our active asset management strategy, including the modernisation and renovation of apartments. 6 Phoenix Spree Deutschland Annual Report and Accounts 2017 Financial StatementsDirectors’ ReportStrategic Report “The Board is of the view that the Berlin market remains attractive with scope to continue the strategy of investing in the existing Portfolio.” On a like-for-like basis, excluding the impact of acquisitions and disposals, the Portfolio value increased by 40.1% and Berlin rental income grew by 9.1%. Our EPRA Net Asset Value per share rose by 50.5% to €4.11 and the EPRA vacancy rate remains low, ending the year below 3%. The period closed with a strong balance sheet, with a net loan to value of 32% and cash balances of €27.2 million. The investment in the Portfolio continues to provide strong reversionary potential, with new leases in Berlin signed at an average 40.1% premium to in-place rents during the year. Rent levels for new tenants in fully refurbished apartments are set with reference to prevailing market levels and increases for existing tenants comply with the relevant regulations and local rent tables. The Property Advisor has also continued to identify opportunities to divide and resell a small number of carefully selected apartment blocks as condominiums, the proceeds of which part fund the dividend with the balance reinvested in further acquisitions and Portfolio improvements. The average price per sqm achieved for condominiums sold or notarised represented a 26.9% premium to the average valuation per sqm for the Berlin portfolio. Share price and dividend The year to 31 December 2017 provided the strongest period of share price performance since the Company’s stock market listing in 2015. Between 1 January 2017 and the end of the year, the share price rose from 232 pence to 393 pence, representing an increase of 69.4%. I am delighted that Phoenix Spree ended the year as not only the best-performing listed German residential fund, but also the best-performing UK listed real estate investment company in 2017. The Board is pleased to recommend a final dividend of €5.0 cents per share (GBP 4.4 pence per share), taking the full year dividend to €7.3 cents per share (GBP 6.4 pence per share), representing a 16% increase on the 2016 full year Euro-denominated dividend. This dividend growth is reflective of the increase in the Portfolio value during the year and is paid from operating cash flows, including the disposal proceeds from condominium projects. The Company has historically aimed to provide its Shareholders with a secure and progressive dividend over the medium term, and subject to the distribution requirements for Non-Mainstream Pooled Investments. Following the disposal of the non-core portfolio in Northern Germany, the Company’s portfolio is almost entirely focused on Berlin, where the Board continues to see significant potential for further acquisitions and capital growth, but where rental yields have historically been lower than in other parts of Germany. These factors may affect future dividend growth. The total dividend in respect of the 2017 financial year amounts to €7.1 million, covered from operating cash flows of €5.8 million and condominium disposal proceeds of €9.1 million (total: €14.9 million). Since listing on the London Stock Market in June 2015, and including the final dividend for 2017, €17.3 million been returned to Shareholders. Property Advisor The Group has continued to benefit from the expertise of its property advisor, PMM Partners (‘PMM’), which combines day-to-day asset management activities, capital structure management and a busy acquisition and disposal pipeline. During 2017, PMM has continued actively to manage the Portfolio, whilst simultaneously leveraging their local network and relationships to Read about our commitment to Corporate Responsibility on page 24 Phoenix Spree Deutschland Annual Report and Accounts 2017 7 Financial StatementsDirectors’ ReportStrategic Report Chairman’s Statement continued source and acquire an attractive pipeline of new Berlin properties, as well as completing the divestment of the remainder of the Company’s non-core buildings, at a premium to book value. On the basis of the Company’s strong performance over the three year’s ending 31 December 2017, and the impressive growth achieved in EPRA NAV over that period, resulting in a total shareholder return for the three-year period, after all fees, of 106.4%, a performance fee under the Property Advisory Agreement to the Property Advisor of c.€34.0 million has become due. The parties have agreed to settle the performance fee (but not any further performance fees that may become due) through the issuance by the Company to the Property Advisor of 8,260,065 new shares in the Company at EPRA NAV per share. 50% of the shares issued in settlement of this fee are subject to a 12-month restriction on disposal. Application will be made for the new shares, once issued, to be admitted to trading on the premium segment of the Official List and to trading on the Main Market of the London Stock Exchange. The Board would like to thank all at PMM for their valued contribution, which is a key component of our ongoing success. Corporate governance The Board remains fully committed to high standards of corporate governance and behaving as a responsible business, addressing its environmental and social impacts as encapsulated in developing the Company’s Corporate Responsibility Strategy. It takes very seriously its duties to operate with integrity, transparency and clear accountability towards its shareholders, tenants and other key stakeholders. Following the year end, the Company announced the appointments of Charlotte Valeur, Jonathan Thompson and Monique O’Keefe as Independent Non-executive Directors, and that Matthew Northover, Richard Prosser and Andrew Weaver were stepping down as a Non-executive Directors. As well as strengthening the Board’s independence, Charlotte, Jonathan and Monique bring with them a wealth of experience and insight across the real estate and advisory worlds which will be of great value to the Company as it continues to grow in years to come. Jonathan Thompson will also chair the Audit Committee. On behalf of the Board, I thank Matthew, Richard and Andrew for their invaluable contribution to the Company during a period of considerable growth and its transition to a listed company on the Main Market of the London Stock Exchange in 2015. The Company will continue to benefit from Matthew’s expertise through his ongoing involvement with PMM. The Board has considered the principles and recommendations of the UK Corporate Governance Code and is pleased to confirm that the Company complies with the provisions of the Code, where applicable. Market outlook The German economy continues to benefit from record high employment levels and historically low interest rates. Economic growth reached a six-year high in 2017 and government forecasts suggest this rate of growth will be sustained in 2018. Berlin’s economic growth continues to outstrip the broader economy, with strong growth in the business services, media and technology sectors likely to lead to job creation and net inward migration trends remaining strong. Against this backdrop, the fundamentals of the Berlin residential market remain attractive: strong demand combined with limited supply, and high levels of transaction activity likely to be sustained by demand from both investors and owner-occupiers. With our business now fully focused on Berlin, and underpinned by the Property Advisor’s active asset management strategy, the Board looks forward to the year ahead with confidence. Robert Hingley Chairman 26 April 2018 8 Phoenix Spree Deutschland Annual Report and Accounts 2017 Financial StatementsDirectors’ ReportStrategic Report Phoenix Spree Deutschland Annual Report and Accounts 2017 9 Financial StatementsDirectors’ ReportStrategic Report Strategy and Business Model The Company’s strategy is to manage and invest in our Portfolio in order to improve the overall standard of accommodation to our customers. Acquire Properties with potential in Berlin Improve Targeted and value-added investment Realign Increase lettable area and rental income Reinvest Properties revalued or sold as condominiums Reinvestment Improve Vacant units in poor condition are considered for full renovation and vacant attic space is reviewed for conversion to residential space. Depending on the level of historical underinvestment, apartment improvements can involve heating system and boiler upgrades, new insulation, double glazing, new plumbing, kitchen and bathroom renewal, new flooring, and redecoration. Communal areas, both indoor and outdoor, are also reviewed for potential improvement where investment has historically been lacking. A single apartment generally costs between €20,000 and €30,000 to renovate, while an entire building renovation might cost up to €2 million. Realign For properties considered to be core rental buildings, vacant units are re-let after refurbishment at the prevailing market rent. Tenant lists are reviewed carefully and, only where appropriate, rent increases are applied for, either where tenants are paying less than the statutory rent level (Mietspiegel), where modernisation has been undertaken (and these costs are allowed to be recouped), or where the lease contains provisions for indexation. In addition to its core rental business, the Company also selectively identifies a small number of condominium projects. The condominium process involves the sub-division and re-sale of these apartment blocks with the intention of augmenting returns to reinvest in the Portfolio. The Company is committed to operating within the relevant regulatory and planning frameworks at all times during the realignment process. Reinvest The properties within the portfolio are revalued each year with the investment being reflected in an uplift in property values. To the extent that additional borrowing can be secured on higher property values, the proceeds are reinvested by way of acquisitions and improvements in the existing portfolio of buildings. U nderpinning this strategy is a business model which involves the acquisition, renovation and optimisation of properties to drive further reinvestment into the Portfolio. Acquire The Company focuses on apartment buildings which offer the potential for medium-term value creation through modernisation and renovation. The Property Advisor has historically focused its acquisitions on properties built before 1914 (Altbau). Since listing in June 2015, all buildings acquired have been located in Berlin, and typically require reinvestment to bring them up to modern standards. Single properties, packages and portfolios are considered. 10 Phoenix Spree Deutschland Annual Report and Accounts 2017 Financial StatementsDirectors’ ReportStrategic Report Key Performance Indicators The Company has chosen a number of Key Performance Indicators, which the Board believes are relevant to help all stakeholders understand the performance of the Company and the underlying property portfolio. Our key performance metrics are stated below. In 2017, the value of the property portfolio grew by 40.1% on a like-for- like basis (2016: 19.4%). This increase was assisted by an increase in like-for- like average rent per let sqm of 6.9% (2016: 5.3%). The EPRA vacancy rate of 2.9% has remained relatively unchanged compared with prior year (2016: 2.6%), and in line with expectations. The Group continued with its targeted condominium programme, agreeing sales of €9.1 million during the financial year (2016: €5.7 million). EPRA NAV per share increased by 50.5% to €4.11 (2016: €2.73), and the total dividend for the year was €7.3 cents per share (GBP 6.4 pence per share) an increase of 16% (2016: €6.3 cents per share, GBP 5.3 pence per share). Net loan to value has reduced from 39.4% at 31 December 2016 to 32% at 31 December 2017. Like-for-like property portfolio value growth 2017 % 40.1% Like-for-like portfolio rent per sqm 2017 € EPRA vacancy 2017 % €8.1 2.9% 19.4 2017 2016 10.6 2015 40.1 2017 2016 2015 8.1 8.0 7.4 2017 2016 2015 2.9 2.6 3.9 Condominium sales notarised 2017 €m EPRA NAV per share 2017 € €9.1m €4.11 Dividend per share p 6.4p 9.1 4.11 2017 2016 2015 5.7 4.7 2017 2016 2015 2.73 2.28 2017 2016 2015 6.4 5.3 4.2 Phoenix Spree Deutschland Annual Report and Accounts 2017 11 Financial StatementsDirectors’ ReportStrategic Report Operating & Financial Review The Company delivered another positive set of financial results for the year to 31 December 2017. The Portfolio has recorded its best period of growth since Phoenix Spree was founded in 2007. Financial results Reported revenue for the period was 13.5% higher at €18.1 million (2016: €15.9 million). PBT grew to €138.5 million (2016: €48.9 million). The results include a significant net valuation gain of €157.4 million (2016: €55.2 million) and a performance fee due to the Property Advisor of €26.3 million. As previously mentioned, the cumulative fee due under the terms of the Property Advisory Agreement for the three-year measurement period from January 2015 to December 2017 amounts to €34.0 million, to be satisfied in new shares issued at EPRA Net Asset Value. Reported earnings per share for the period were €1.21c (2016: €0.42c). Positive pricing trends The year to December 2017 showed a continuation of the positive pricing trends in Berlin residential property, driven by an overall improvement in German economic growth, as well as the positive demographic trends in Berlin, creating an ongoing supply- demand imbalance of available rental properties within the city. The Portfolio has also benefitted from PMM’s active asset management strategy and, Rent per sqm by region 2013 to 2017 (€) Financial highlights € million (unless otherwise stated) Gross rental income Profit before tax (PBT) Reported EPS (€) Investment property value Net debt Net LTV IFRS NAV per share (€) IFRS NAV per share (£) EPRA NAV per share (€) EPRA NAV per share (£) Dividend per share (€ cents) Dividend per share (£ pence) EPRA NAV per share total return for period (€) EPRA NAV per share total return for period (£) following a targeted programme of non-core disposals and further Berlin acquisitions, the Company is now a pure-play Berlin investment, well positioned to benefit from these positive macro and demographic factors. Portfolio value rises by 40.1% The Portfolio value grew by 43.8% from €423.8 million to €609.3 million during the year. Excluding the impact of acquisitions and disposals, the €9.0 €8.0 €7.0 €6.0 €5.0 2013 Phoenix Spree Deutschland 2014 Berlin 12 Phoenix Spree Deutschland Annual Report and Accounts 2017 2015 2016 2017 Central & North Nuremberg & Fürth 31 December 2017 31 December 2016 18.1 138.5 1.21 609.3 195.1 32.0% 3.96 3.52 4.11 3.65 7.3 6.4 53.0% 57.7% 15.9 48.9 0.42 423.8 167.1 39.4% 2.53 2.16 2.73 2.33 6.3 5.3 22.5% 41.7% like-for-like increase was 40.1% (2016: 19.4%), representing the highest rate of growth in the funds’ ten-year history. At the year end, the Portfolio was valued at €2,853 per sqm (31 December 2016: €1,965) which represents a gross fully-occupied yield of 3.4% (31 December 2016: 4.8%) and a net yield, using EPRA methodology, of 2.8% (31 December 2016: 4.2%). All geographic markets registered valuation gains during the period, with Berlin seeing the largest like-for-like increase at 41.8%, followed by Central and North Germany 35.2%. EPRA NAV increases by 50.5% EPRA NAV per share increased by 50.5% in the period to €4.11 (£3.65) compared to €2.73 31 December 2016 (£2.33). Taking into account the dividends paid during 2017, EPRA total return per share was 53.0%, compared with 22.5% in 2016. Financial StatementsDirectors’ ReportStrategic Report Portfolio regional overview 31 December 2017 Market Berlin (incl. Greater Area)* Central & North Germany Baden-Wurttemberg Total % of fund by value Buildings Residential units Commercial units Total units Total sqm (‘000) Annualised Gross rent (€m) Valuation (€m) Value per sqm (€) Fully occupied gross yield % Vacancy % EPRA vacancy % 86.7 12.7 0.6 100 85 36 1 2,140 758 18 122 2,916 134 34 11 179 2,274 792 29 164.1 45.8 3.6 14.9 3.8 0.3 528.5 3,220.3 1,682.8 1,026.1 77.1 3.7 3,095 213.5 19.0 609.3 2,853.4 3.1 5.3 10.0 3.4 7.1 5.7 6.0 6.8 2.7 4.3 0 2.9 * Excludes eight properties (180 units) notarised between September 2017 and March 2018 which had not yet completed at 31 December 2017. “The Group has continued to grow in Berlin with a number of targeted acquisitions.” EPRA vacancy remains historically low Reported vacancy as at 31 December 2017 was 6.8%, down from 9.1% as at 31 December 2016. On an EPRA basis, which adjusts for units undergoing redevelopment or reserved for resale, vacancy was 2.9% as at 31 December 2017, compared to 2.6% as at 31 December 2016. This reflects the ongoing strength in the rental market as well as steps undertaken by the Property Advisor to reduce the time associated with re-letting. Rental income – Growth trend continues Gross rental income increased 13.5% to €18.1 million, compared with €15.9 million in 2016. On a like-for-like basis, rental income grew by 7.2% compared with 2016. Headline average in-place rent per sqm was €8.0 as at 31 December 2017, compared with €7.6 as at 31 December 2016. On a like-for-like basis, rent per sqm grew by 6.9% compared to 2016. Berlin saw a like-for-like increase in rent per sqm of 8.4%, and Central and North Germany 3.8%. Following the publication in May of the new Mietspiegel, or rent table, rent adjustment notifications were issued to the relevant Berlin tenants in the second half of the year. The majority of new leases signed with the Portfolio include annual indexation (or ‘Staffel’) increases. As at 31 December 2017, the Company annualised contracted rental income was €19.1 million. Recent letting prices achieve new highs for the Group The Group enjoyed another strong letting performance in 2017. A total of 382 new leases were signed, representing 13.4% of the average units owned during the period. In Berlin, average new letting prices grew by 9.4% to €11.3 per sqm (2016: €10.6 per sqm). The non-Berlin portfolio also witnessed growth, with new letting prices rising by 2.3% to €8.0 per sqm. Phoenix Spree Deutschland Annual Report and Accounts 2017 13 Financial StatementsDirectors’ ReportStrategic Report Operating & Financial Review continued Portfolio valuations by region €m 528.5 318.7 2017 77.1 3.7 2016 63.3 31.8 10.0 Berlin (including Greater Area) Central & North Germany Nuremberg & Fürth Other Significant reversionary rental potential remains The premiums achieved on new letting prices when compared to in place rents demonstrate the significant reversionary potential within the Berlin portfolio. During the final quarter of 2017, new lettings were signed at an average premium of 36.2% to passing rents and a record 45.7% in Berlin. The Group believes this reversionary gap should underpin rental growth in the medium term, providing a buffer against any potential slow-down in the rental market. Further investment in the Portfolio The Group continued with its programme of renovations and modernisations, investing €6.7 million across the entire Portfolio during 2017. In the Berlin rental portfolio, €3.7 million was invested across 117 vacant units, representing an average outlay of €301 per sqm. The average premium achieved on re-letting these vacant Berlin units was 60%. An additional €1.0 million was invested in the development of condominium projects with the remaining €2.0 million invested in the infrastructure of properties within the Portfolio for items such as heating system upgrades and improvements to indoor and outdoor communal areas. All of these are recorded in the accounts as capital expenditure. A further €1.4 million spent on repairs and maintenance was expensed through the profit and loss account, compared to €1.1 million in 2016. 14 Phoenix Spree Deutschland Annual Report and Accounts 2017 Targeted acquisitions The Group has continued to grow in Berlin with a number of targeted acquisitions. In total, 366 units (354 residential and 12 commercial) were notarised during 2017 for an aggregate purchase price of €55.9 million, at an average price per sqm of €2,224, and annual fully occupied rent of €2.0 million. As at 31 December 2017 €48.4 million of the notarised acquisitions had completed, with the remainder completing in the first quarter of 2018. Acquisitions have been financed using a combination of debt and equity, with a target net loan-to-value ratio of approximately 50%. In the period from listing in June 2015 to 31 December 2017, the properties acquired by the Group were valued at €240.6 million at 31 December 2017. Properties that had completed by December 2017 were revalued by Jones Lang LaSalle (‘JLL’) as at December 2017 at an average 48.1% premium to purchase prices. The Group intends to continue with its strategy of growing the Portfolio through selective Berlin acquisitions and, as at 20 April 2018, a further 160 units in Berlin had been notarised since the December 2017 year end for an aggregate value of €24.8 million, representing an average price per sqm of €2,348. Profitable non-core disposals The Group has also sold or notarised for sale a number of properties located outside Berlin, which had been classified as non-core. These disposals generated a profitable exit and release of capital which is expected to be re-deployed into further Berlin acquisitions and further investment in the Berlin portfolio. In April 2017, the Group completed Financial StatementsDirectors’ ReportStrategic Report the sale of a mixed-use property, with a high commercial component, located in Teltow, Brandenburg. The sale proceeds of €3.8 million represented a 19% premium to June 2016 book value. In July 2017, the Group completed the sale of a portfolio of 17 properties, located in Nuremberg and Fürth, for an aggregate consideration of €35.2 million. These properties were acquired in 2007 and 2008 for an aggregate purchase price of €13.9 million and the sale proceeds represented an 11% premium to the 31 December 2016 book value. In December 2017, the Group exchanged contracts to sell a portfolio of 34 properties located in Bremen, Hannover, Hildesheim, Verden, Delmenhorst, Kiel, Oldenburg, Lüneburg and Lübeck for an aggregate cash consideration of €73.0 million. These buildings were acquired in 2006/2007 for an aggregate purchase price of €38.7 million and the sale price represented a 26% premium to the Jones Lang LaSalle valuation as at 30 June 2017. Additionally, since 30 June 2017, a further four properties located in Central & North Germany were notarised for sale for a combined consideration of €6.7 million, 11% above the Jones Lang LaSalle valuation as at 30 June 2017. Dividend The Board is pleased to have declared a final dividend of €5.0 cents per share (GBP 4.4 pence per share), (2016 €4.3 cents) (GBP 3.7 pence per share), which is expected to be paid on or around 29 June 2018 to shareholders on the register at close of business on 8 June 2018, with an ex-dividend date of 7 June 2018. Taking into account the interim dividend paid in October 2017, the declared dividend for 2017 is €7.3 cents per share (GBP 6.4 pence per share), (2016: €6.3 cents per share) (GBP 5.3 pence per share). Phoenix Spree Deutschland Annual Report and Accounts 2017 15 Financial StatementsDirectors’ ReportStrategic Report Operating & Financial Review continued Financing As at 31 December 2017, the Group had gross borrowings of €222.3 million (31 December 2016: €185.6 million) and cash balances of €27.2 million (31 December 2016: €18.5 million) equating to a net debt of €195.1 million (31 December 2016: €167.1 million) and a net loan to value on the Portfolio of 32.0% (31 December 2016: 39.4%). Nearly all loans have fixed interest rates and, at 31 December 2017, the blended interest rate of all loans across the Portfolio was 2.1%. The average remaining duration of the loan book at 31 December 2017 was 8.4 years (31 December 2016: 6.3 years). By 31 December 2017, all the Group’s debt had been refinanced within the previous 18 months. During the course of 2017, the following ten-year loan facilities were entered into in order to finance newly acquired properties: March 2017, €13.0 million facility; September 2017, €8.7 million facility; November 2017, €14.2 million facility. All the funds available from these facilities had been drawn as at 31 December 2017. In February 2017, the Group successfully refinanced existing debt within Laxpan Mueller GmbH and Invador Grundbesitz GmbH, two companies acquired in 2016, which owned portfolios of Berlin properties. Existing debt of €11.2 million was repaid and a new ten year loan of €17.5 million was arranged, resulting in an equity release to the Group of €6.2 million before costs, all of which was drawn by 31 December 2017. In July 2017, the Group successfully refinanced €79.6 million of existing debt, while securing a further equity release of €15.7 million before costs on the same pool of properties by way of a new ten-year loan facility. With the exception of €0.6 million, all of these funds had been drawn by 31 December 2017. In April 2017, the Group announced the disposal of a non-core portfolio of 17 properties in Nuremberg and Fürth for €35.2 million. €18.3 million of the sale proceeds was used to repay debt. Further single property disposals amounting to €16.9 million were also completed during the year with related debt of €9.3 million being repaid. In December 2017, the Group announced that it had exchanged contracts to sell a portfolio of 34 properties located in Central and “The Portfolio is now effectively a pure play on the positive demographic and economic trends driving the Berlin residential market.” 16 Phoenix Spree Deutschland Annual Report and Accounts 2017 North Germany for a cash consideration €73.0 million. The transaction is due to complete in the first half of 2018 and it is expected that €41.2 million of the proceeds will be used to repay debt. Funds made available to the Group by way of equity releases or through disposals are used to invest in the existing portfolio and to fund new acquisitions. While currently well funded, the Group continues to assess its funding options for growth, including further debt, equity and joint ventures. Market outlook With the Portfolio now almost entirely focused in Berlin, it is now effectively a pure-play on the positive demographics and economic trends driving the performance of the Berlin residential market. The outlook for Germany’s economy has become increasingly favourable, with positive momentum underpinned by unprecedented European Central Bank stimuli. Thanks to record-low interest rates the Bundesbank calculates that the fiscal surplus in 2017 was the highest since the country’s reunification. The Ifo Institute for Economic Research estimates that the German economy will expand by 2.6% in 2018, pointing to a broad upswing that is generating record-high employment and buoyant tax revenues. Business sentiment surveys and industrial data also point towards a vibrant German performance for 2018. Focusing specifically on Berlin, the favourable supply-demand demographics look set to remain for the foreseeable future. JLL estimate that the Berlin population grew by Financial StatementsDirectors’ ReportStrategic Report 18,500 in H1 of 2017, with a similar trend expected in H2. Whilst population growth continues to fuel strong demand for Berlin residential property, scarcity of available development land, a shortage in new-build permits and high costs of construction continue to restrict supply. All-in new-build construction costs per sqm in Berlin are still estimated to be substantially higher than equivalent value per sqm of existing housing stock and the economic viability of new build projects by state-owned companies is constrained by the requirement to have at least 50% of new builds as social housing, with rents capped at €10 per sqm for at least the next five years. The Berlin residential rental sector remains well regulated, offering tenants higher levels of protection. Whilst many key elements of potential new rent and planning regulations still need to be clarified following the creation of a new Grand Coalition, the direction of travel is likely to be the same, focusing on a combination of conservation areas which limit the ability to split properties into condominiums, subsidies to stimulate new supply and further rent controls. Phoenix Spree remains fully committed to operating within the regulatory framework and the Company’s strategy will continue to evolve to ensure this is maintained. The reversionary potential within the Portfolio both for rental apartments and condominiums should continue to drive performance positively in the event of any slowdown in the broader market. The Company’s balance sheet remains strong, with scope for further refinancing following record appreciation in the value of our properties in 2017. We anticipate that the proceeds will be deployed into further enhancements to the existing Portfolio and, subject to the availability of properties which meet the Fund’s acquisition criteria, additional Berlin acquisitions. Phoenix Spree Deutschland Annual Report and Accounts 2017 17 Financial StatementsDirectors’ ReportStrategic Report Berlin The Berlin portfolio reported its best year to date. partially offset by the impact of recent purchases, which typically exhibit lower rental values upon acquisition. On a like-for-like basis (excluding the impact of acquisitions and disposals), the increase in rent per sqm was 8.4%. The Berlin EPRA vacancy rate remained low at 2.7% (31 December 2016: 2.6%). New leases were signed at an average rent of €11.3 per sqm during the year, a record high and a premium of 40.1% to the average in-place rent during 2017. Like-for-like portfolio value growth 41.8% Like-for-like rent per sqm growth 8.4% EPRA vacancy rate 2.7% rent growth 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% T he Berlin portfolio delivered its strongest performance since the fund’s inception, with a like-for-like uplift in value of 41.8% (31 December 2016: 19.4%). The Board continues to believe that Berlin offers excellent potential for further growth in property and rental values. The Group’s Berlin portfolio is valued at €3,220 per sqm on average. Reported average rent per sqm stood at €8.1, a year-on-year increase of 4.7% compared with 2016, reflecting strong underlying like-for-like rental growth, Berlin rent/rent growth €/sqm 9.0 8.0 7.0 6.0 5.0 4.0 2011 2012 2013 2014 2015 2016 2017 Berlin rents Berlin rent growth annual like-for-like 18 Phoenix Spree Deutschland Annual Report and Accounts 2017 Financial StatementsDirectors’ ReportStrategic Report Rent per sqm (€) 14.0 12.0 10.0 8.0 6.0 4.0 2011 2012 2013 2014 2015 2016 2017 JLL Berlin average asking rent/sqm Berlin average rent per sqm Berlin average new leases signed by quarter Phoenix Spree Deutschland Annual Report and Accounts 2017 19 Financial StatementsDirectors’ ReportStrategic Report Repositioning the Portfolio The Company has transitioned its geographic focus, disposing of non-core assets outside of Berlin. W hen Phoenix Spree listed on the main market of the London Stock Exchange in June 2015, 63% of the assets by value were located in Berlin. Since then, the Company has been transitioning the geographic focus of assets to create a larger, more focused Berlin portfolio offering greater economies of scale. This has involved a process of carefully selected Berlin acquisitions, combined with the disposal of non-Berlin assets. Since 2015, the Company has acquired €194.8 million of Berlin residential property, while disposing or notarising for sale assets outside of Berlin with an aggregate value of €130 million. The geographic transition was essentially completed at the end of 2017 with the notarisation of the Company’s remaining Northern Germany portfolio, the sale of which is expected to complete in the second quarter of 2018. At 31 December 2017, Berlin assets were valued at €528.5 million. Following completion of all acquisitions and disposals notarised to date, Berlin is expected to represent over 99% of the Company’s Portfolio value on a pro-forma basis. The Company will effectively be a pure play on Berlin’s positive demographics and attractive growth prospects. Berlin acquisitions since 2015 stock market listing (€m) 194.8 Non-core disposals since 2015 stock market listing (€m) 130.0 Berlin acquisitions 2017 (€m) 55.9 Disposal of properties 2017 (€m) 125.3 20 Phoenix Spree Deutschland Annual Report and Accounts 2017 Financial StatementsDirectors’ ReportStrategic Report “The Group intends to continue with its strategy of growing the Portfolio through selective Berlin acquisitions.” Acquisitions notarised since 2015 stock market listing Year 2015 2016 2017 2018 YTD Total Region Berlin Berlin Berlin Berlin Purchase price € 35,760,000 78,305,000 55,890,000 24,845,000 Units 227 634 366 160 sqm 18,197 41,406 25,135 10,583 194,800,000 1,387 95,321 2,044 Purchase price per sqm Fully occupied yield 1,963 1,891 2,224 2,348 4.3% 4.4% 3.6% 3.8% 4.0% Disposals notarised since 2015 stock market listing Region 2015 (€) 2016 (€) 2017 (€) Premium to prior FY book value Nuremberg & Fürth 870,000 Berlin (including Greater Area) 3,800,000 Baden-Wuerttemberg Central & North Germany Nuremberg & Fürth 6,100,000 84,050,000 35,170,000 Total 870,000 3,800,000 125,320,000 77% 19% 7% 33% 11% 26% Phoenix Spree Deutschland Annual Report and Accounts 2017 21 Financial StatementsDirectors’ ReportStrategic Report Condominiums The Group has continued with its strategy of crystallising latent value through selectively reselling apartment blocks as individual units at significant premiums to book values. splitting the freeholds in a small number of carefully selected buildings and the sales comprise a combination of vacant and occupied units. As at 31 December 2017, 29% of properties (41% of the Berlin portfolio) had been legally split to allow the Company the flexibility to decide on condominium projects, should the circumstances be advantageous. Across the Group’s three condominium projects, a total of 31 units were notarised for sale in 2017, with an aggregate sales value of €9.1 million, a 58.9% increase on 2016 notarisations. This represents an average price per sqm of €4,027, or €4,107 excluding commercial units and parking. Condominium sales proceeds during 2017 represented a 20.1% premium to 31 December 2017 book value and the average price achieved per sqm for notarised condominiums represents a 73.6% premium to the average valuation per sqm for properties in the Berlin portfolio as at 31 December 2016, confirming the potential for valuation creation that can be achieved through apartment privatisation. As at 31 December 2017, 65 units, representing aggregate proceeds of €17.0 million, had completed since condominium sales commenced in mid-2015. The Company expects to identify and prepare additional condominium projects for sale, either to tenants or new buyers, during 2018. T his strategy is designed to take advantage of the differential that exists between the market value of a rental unit within an apartment block and the resale value of a unit as a private apartment. The process involves legally Condominium sales (€m) 9.1 5.7 4.7 2017 2016 2015 2014 22 Phoenix Spree Deutschland Annual Report and Accounts 2017 Financial StatementsDirectors’ ReportStrategic Report “A total of 31 units were notarised for sale in 2017 with an aggregate value of €9.1m.” Phoenix Spree Deutschland Annual Report and Accounts 2017 23 Financial StatementsDirectors’ ReportStrategic Report Corporate Responsibility Being a responsible Company, balancing the different interests of our key stakeholders and addressing our environmental and social impacts is intrinsically linked to our Company Values and strategy, and ultimately the success and sustainability of our business. A s a Board, we recognise the increasing expectation from stakeholders for companies to demonstrate that they are operating responsibly and striking a meaningful balance between pursuing economic interests whilst managing their social and environmental impacts for the benefit of all stakeholders. Sustainability lies at the core of our business model. We often acquire properties that are in relatively poor condition and, through significant reinvestment, we modernise the apartments to improve the standard of accommodation for our customers and improve the look of the local neighbourhood. 24 Phoenix Spree Deutschland Annual Report and Accounts 2017 The Board and our property advisor, PMM, have reviewed how sustainability is managed within our business and aligned these with the views of our stakeholders and business priorities to create our ‘Better Futures’ Corporate Responsibility (‘CR’) Plan. This Plan provides a framework to measure existing activities better while adding new initiatives to improve our overall sustainability. Our CR Plan has four key pillars that are integrated throughout our business operations: Respecting our Environment, Investing in People, Valuing our Customers and Building our Communities. The day-to-day running of the Company’s operations is undertaken by our property advisor, PMM, who represent the majority of the operational headcount of the business, based out of offices in London and Berlin. We focus on PMM’s employees within our Investing in People pillar and their offices when reviewing our direct environmental impact. From a governance perspective, a CR Committee has been established to oversee the implementation of the Better Futures Plan, reporting on the progress to the Board and advising on any CR related material issues. We look forward to communicating our CR plans and progress to stakeholders, in due course. Financial StatementsDirectors’ ReportStrategic Report Phoenix Spree Deutschland Annual Report and Accounts 2017 25 Financial StatementsDirectors’ ReportStrategic Report Principal Risks The Board recognises that effective risk evaluation and management needs to be foremost in the strategic planning and the decision-making process. In conjunction with the Property Advisor, key risks and risk mitigation measures are reviewed by the Board on a regular basis and discussed formally during Board meetings. Risk Impact Mitigation Movement Risk trend Increasing Unchanged Decreasing Decline in property valuation Economic, political, fiscal and legal issues can have a negative effect on property valuations. A decline in Group property valuations could negatively affect the valuation of the Portfolio and the ability of the Group to sell properties within the Portfolio at valuations which satisfy the Group’s investment objective. Adverse interest rate movements Future interest rate rises could increase the borrowing costs to the Group which, in turn, could negatively affect the Group’s financial performance. Availability of new debt Inability to negotiate new debt facilities on satisfactory terms could restrict the Group’s ability to make future investment in new properties or refinance existing debt facilities as they reach maturity. Breach of covenant requirements Should any fall in revenues result in the Group breaching financial covenants given to any lender, the Group may be required to repay such borrowings in whole or in part, together with any related costs. Insufficient capital to support expansion Lack of capital may restrict the ability of the Group to pursue future investment opportunities consistent with the overall investment objectives. The Property Advisor believes German housing affordability metrics remain favourable relative to other European countries and that German residential supply-demand dynamics are supportive, with limited supply of rental stock in urban locations putting upward pressure on rents. The Property Advisor has a record of securing financing across the Portfolio. The Group mitigates its exposure to adverse interest rate movements through the use of interest rate swaps. New debt of €57.8 million has been signed during 2017; with an average debt maturity exceeding eight years; and average interest rate reduced to 2.1%. During the past 18 months, 100% of the Group’s debt has been refinanced. The Property Advisor regularly monitors debt funding requirements for future acquisitions as well as existing debt facilities as they reach maturity and is in ongoing discussions with a number of debt providers with a view to securing future debt on acceptable terms. The next maturity date of any debt held with the Group is February 2025. The Group has no loan to value covenants on debt held. The Group does have debt service coverage covenants on its finance with DG Hyp, which are assessed annually in January. Both DG Hyp loan covenant requirements were met in January 2018, with significant headroom. The Property Advisor regularly monitors all debt service coverage covenants and would seek to take remedial measures in advance of any covenant being breached. At year end the Group had cash reserves of €27.2 million, and has signed debt in the first half of 2018 of €21.6 million. The Group has also notarised for sale over €77 million of non-core properties which are due to complete in the first half of 2018. Additionally, the Performance Fee due to the Property Advisor will be settled by way of issuing new shares in the Company. The Group therefore considers itself to have sufficient capital to support expansion for the foreseeable future. The Group continues to look for methods to raise further capital on an ongoing basis. 26 Phoenix Spree Deutschland Annual Report and Accounts 2017 Financial StatementsDirectors’ ReportStrategic Report Risk Impact Mitigation Movement Insufficient investment opportunity Availability of potential investments which meet the Group’s investment objective can be negatively affected by supply and demand dynamics within the market for German residential property and the state of the German economy and financial markets more generally. The Property Advisor has been active in the German residential property market since 2004. It has specialised acquisition personnel and an extensive network of industry contacts including property agents, industry consultants and the principals of other investment funds. It is expected that future acquisitions will be sourced from these channels. Changes to property and tenant law Property laws remain under constant review by the coalition government in Germany and future changes to property regulation and rent controls for new tenancies could negatively affect rental values and property valuations. Occupancy and tenant risk Reliance on the Property Advisor and its key personnel Unexpected vacancy and tenant default trends across the Portfolio could lead to a rental income shortfall which, in turn, may adversely impact Group profitability and investment returns. The Group’s future performance depends on the success of the Property Advisor’s strategy, skill, judgement and reputation. The departure of one or more key employees may have an adverse effect on the performance of the Group and any diminution in the Property Advisors’ reputation may have an adverse effect on the Groups’ performance. Reputational risk Adverse publicity and inaccurate media reporting could reflect negatively on stakeholders’ perception of the Group, its strategy and its key personnel. Macro economic environment A deterioration in economic growth and a recessionary environment could adversely affect tenant demand and vacancy, leading to a reduction in rental and property values. Failure to identify and respond to the introduction of new financial regulation in a timely manner. Risk of reputational damage, penalties or fines. Non- compliance with new regulatory accounting and taxation legislation The Property Advisor regularly monitors the impact that existing and proposed regulation could have on future rental values and property planning applications. In order to reduce the dependency upon statutory rent increases, the majority of the new leases signed within the Portfolio include annual indexation (or ‘Staffel’) increases. The Property Advisor implements strict vetting and screening processes to improve tenant quality across the Portfolio. Since Listing on the London Stock Exchange, the Property Advisor has expanded headcount through the recruitment of several additional experienced Berlin-based personnel. Additionally, senior Property Advisor personnel and their families retain a stake in the Group, aligning their interests with other key stakeholders. The Group has retained an external public relations consultancy and press releases are approved by the Board prior to release. The Group maintains regular communication with key shareholders and conducts presentations and roadshows to provide investors with relevant information on the Group, its strategy and key personnel. Although the Board and Property Advisor cannot control external macroeconomic risks, economic indicators are constantly monitored by both the Board and Property Advisor and Group strategy is tailored accordingly. The Group employs external compliance and corporate governance advisor to provide updates and boardroom briefings on regulatory changes likely to impact the Group. The Group works closely with external accountants and tax advisors to keep up to date with changes to financial regulation in both the UK and Germany. Phoenix Spree Deutschland Annual Report and Accounts 2017 27 Financial StatementsDirectors’ ReportStrategic Report Board of Directors The Company has an experienced Non-executive Board, chaired by Robert Hingley. The Directors have a wealth of experience in real estate, corporate finance, investment funds and capital markets. Robert Hingley Non-executive Director and Chairman Quentin Spicer Non-executive Director Charlotte Valeur Non-executive Director Non-executive Director Quentin is a resident of Guernsey. He qualified as a Solicitor in England and Wales in 1968 with Wedlake Bell in London, where he became head of the property department. He moved to Guernsey in 1996 to become Senior Partner of Wedlake Bell Guernsey until retiring in 2011. He specialised in commercial property transactions, including funding for non-UK tax residents and associated low tax jurisdiction structures. He was Chairman of F&C UK Real Estate Investments Limited, standing down in November 2015. He is currently Chairman of Alternative Liquidity Fund Limited, both LSE listed companies’. He was also Chairman of Guernsey Housing Association LBG, standing down in June 2017; and is a non-executive director of a number of other funds including Summit Germany Limited. He is a member of the Institute of Directors. Charlotte has held a number of executive and non-executive roles in listed and private businesses. She was the Chair of the Board at both Kennedy Wilson Europe Real Estate Plc and a non-executive Director of 3i Infrastructure Plc. She is currently Chair of Blackstone GSO Loan Financing Ltd, as well as Non- Executive Director of JP Morgan Convertibles Income Fund Ltd and NTR Plc. She also serves as a trustee of Westminster University. Charlotte has over 30 years of experience in the Financial Services industry, working for a range of international investment banks in the City of London. She is also the Founder and CEO of GGG Ltd, trading as Global Governance Group. Robert acts as an independent Non-executive Director and Chairman of the Company. He had over 30 years’ experience as a corporate finance adviser, retiring as a partner at Ondra Partners LLP in 2017. He joined the Association of British Insurers as Director, Investment Affairs in September 2012 and, following the merger of ABI’s investment affairs with the Investment Management Association, acted as a consultant to the enlarged IMA until the end of 2014. From 2010 until January 2015, he was a Managing Director, and later Senior Advisor, at Lazard. He was previously Director General of The Takeover Panel from December 2007, on secondment from Lexicon Partners, where he was Vice Chairman. Prior to joining Lexicon Partners in 2005, he was Co-Head of the Global Financial Institutions Group and Head of German Investment Banking at Citigroup Global Capital Markets, which acquired the investment banking business of Schroders in 2000. He joined Schroders in 1985 after having qualified as a solicitor with Clifford Chance in 1984. 28 Phoenix Spree Deutschland Annual Report and Accounts 2017 Financial StatementsDirectors’ ReportStrategic Report Jonathan Thompson Non-executive Director Monique O’Keefe Non-executive Director Jonathan is a qualified accountant and spent 33 years with KPMG. He has extensive real estate and board-level experience, and is currently Chairman of the Investment Property Forum, Non-Executive Chairman of the Argent Group of investment and development businesses, Non- Executive Director and Chairman of the audit and valuation committee of Schroder European Real Estate Investment Trust Plc. Until September 2017 he was Non- Executive Board Member of Strutt & Parker and until December 2017 a Non-Executive Director of South West London & St George’s Mental Health Trust. Monique has over 20 years’ financial services and legal experience. She currently holds directorships at a number of companies, including Kairos Wealth Limited, an investment and business consultancy based in Jersey that she co-founded, and Actera Group Limited. Between 2016 and 2017 Monique acted as Board Observer at Kennedy Wilson Real Estate (Europe) Limited. Monique was previously an investment banker at Goldman Sachs and Merrill Lynch and a structured finance lawyer at Clifford Chance and Minter Ellison. Monique is regulated by the Jersey Financial Services Commission to act as a company director and has been appointed as Chairman of the Corporate Responsibility Committee. Phoenix Spree Deutschland Annual Report and Accounts 2017 29 Financial StatementsDirectors’ ReportStrategic Report Directors’ Report The Directors are pleased to present their Annual Report and the audited consolidated financial statements for the year ended 31 December 2017. General information The Company is a public limited company and incorporated in Jersey, Channel Islands under the Companies (Jersey) Law 1991. The Company was admitted to the premium segment of the Main Market of the London Stock Exchange on 15 June 2015. The Group’s objective is to generate an attractive return for Shareholders through the acquisition and active management of high quality pre-let properties in Germany. The Group is primarily invested in the residential market, supplemented with selective investments in commercial property. The majority of commercial property within the portfolio is located within residential and mixed-use properties. Dividends The Directors recommend a final dividend of €5.0 cents (2016: €4.3 cents) per Ordinary Share to be paid on or around 29 June 2018 to ordinary Shareholders on the register on 8 June 2018. The Directors declared a dividend of €4.3 cents per share on 26 April 2017, paid on 30 June 2017 to ordinary Shareholders on the register on 9 June 2017 and a further dividend of €2.28 cents per share on 26 September 2017, paid on 20 October 2017 to ordinary Shareholders on the register on 6 October 2017 (2016: €1.9 cents). Directors The Directors who served throughout 2017 and to date were as follows: Name of Director R Hingley Independent Non-executive Director, Chairman R Prosser (resigned 17 April 2018) M Northover (resigned 24 January 2018) Non-executive Director Non-executive Director Q Spicer Independent Non-executive Director A Weaver (resigned 17 April 2018) Non-executive Director C Valeur (appointed 24 January 2018) Independent Non-executive Director J Thompson (appointed 24 January 2018) Independent Non-executive Director M O’Keefe (appointed 17 April 2018) Independent Non-executive Director Directors’ indemnities The Company has made third-party indemnity provisions for the benefit of its Directors which were in place throughout the year and remain in force at the date of this report. Substantial shareholdings As at 20 April 2018, the Company has received the following notifications under chapter 5 of the Disclosure and Transparency Rules of shareholdings of more than 3% of the Company’s share capital: Name of holder Percentage of voting rights No. of Ordinary Shares Woodford Investment Management LLP Bracebridge Capital, LLC 19.4% 6.5% 17,952,197 6,038,503 Requirements of the Listing Rules The following table provides references to where the information required by the Listing Rule 9.8.4R is disclosed. 30 Phoenix Spree Deutschland Annual Report and Accounts 2017 Financial StatementsDirectors’ ReportStrategic Report Listing Rule requirement A statement of the amount of interest capitalised by the Group during the period under review with an indication of the amount and treatment of any related tax relief. Not applicable Any information required by LR 9.2.18 R (Publication of unaudited financial information). Not applicable Details of any long-term incentive schemes as required by LR 9.4.3 R. Details of any arrangements under which a Director of the Company has waived or agreed to waive any emoluments from the Company or any subsidiary undertaking. Where a director has agreed to waive future emoluments, details of such waiver together with those relating to emoluments which were waived during the period under review. Details required in the case of any allotment for cash of equity securities made during the period under review otherwise than to the holders of the Company’s equity shares in proportion to their holdings of such equity shares and which has not been specifically authorised by the Company’s shareholders. Not applicable No such waivers No such share allotments Where a listed company has listed shares in issue and is a subsidiary undertaking of another company, details of the participation by the parent undertaking in any placing made during the period under review. Not applicable Details of any contract of significance subsisting during the period under review: (a) to which the listed company, or one of its subsidiary undertakings, is a party and in which a director of the listed company is or was materially interested; and a) Notes 26,32 to the accounts b) No controlling (b) between the listed company, or one of its subsidiary undertakings, and a shareholder, not applicable controlling shareholder. Details of contracts for the provision of services to the listed company or any of its subsidiary undertakings by the controlling shareholder. No controlling shareholder, not applicable Details of any arrangement under which a shareholder has waived or agreed to waive any dividends, where a shareholder has agreed to waive future dividends, details of such waiver together with those relating to dividends which are payable during the period under review. No such agreements Board statement in respect of relationship agreement with the controlling shareholder. No controlling shareholder, not applicable Corporate governance The Directors have prepared a statement on how the UK Corporate Governance Code has been applied, which is set out on pages 33 to 39. Financial instruments Details of the financial risk management objectives and policies followed by the Directors can be found on pages 26 to 27. Post balance sheet events • In January 2018, the Company exchanged contracts for the acquisition of one individual property and a portfolio of four properties in Berlin with an aggregate consideration of €17.7 million. The Company also exchanged contracts to acquire two individual properties, one in February and the other in April, with an aggregate consideration of €7.1 million. These properties are still awaiting completion. • The Company had exchanged contracts for the acquisition of two properties in Berlin with an aggregate purchase price of €7.5 million prior to the balance sheet date, which as at the balance sheet date had not yet completed. Both properties completed in Q1 2018. • The Company exchanged contracts for the sale of nine condominiums in Berlin with an aggregate consideration of €3.5 million. Three of these condominium sales have subsequently completed at a value of €1.1 million. The remainder are expected to complete in Q2 2018. • The Company had exchanged contracts for the sale of five condominiums in Berlin with an aggregate sales price of €1.8 million prior to the balance sheet date, which as at the balance sheet date had not yet completed. These condominium sales have subsequently completed. In March 2018, the Company refinanced the debt held against a portfolio of buildings in Berlin. The new facility released equity of €7.8 million which was drawn in March 2018. • Phoenix Spree Deutschland Annual Report and Accounts 2017 31 Financial StatementsDirectors’ ReportStrategic Report Directors’ Report continued Post balance sheet events continued • The Company has signed for a €12 million loan secured against seven properties notarised for acquisition in Q4 2017 and Q1 2018. • The Company and the Property Advisor reached an agreement to settle the Performance Fee through the issuance of 8,260,065 new shares in the Company at EPRA NAV. The settlement is expected to take place in May 2018. Auditor Each of the Directors at the date of approval of this Annual Report has taken all the steps that he or she ought to have taken as a Director in order to make him or herself aware of any relevant audit information and to establish that the Group’s auditor is aware of that information. The Directors are not aware of any relevant audit information which has not been disclosed to the auditor. RSM UK Audit LLP has expressed their willingness to continue in office as auditor and a resolution to reappoint them will be proposed at the forthcoming Annual General Meeting. Viability Statement The Directors have assessed the viability of the Group over a three-year period, which is significantly longer than the 12-month period from the date of approval of the financial statements that was previously considered for going concern purposes. The Directors have chosen three years because that is the period over which the Group has sufficiently robust forecasts as part of its business plan. The Viability Statement is based on a robust assessment of those risks that would threaten the business model, future performance, solvency or liquidity of the Group. For the purposes of the Viability Statement the Directors have considered, in particular, the impact of the following factors affecting the projections of cash flows for the three-year period ending 31 December 2020: a) the potential operating cash flow requirement of the Group; b) seasonal fluctuations in working capital requirements; c) property vacancy rates; d) rent arrears and bad debts; e) capital and administration expenditure (excluding potential acquisitions as set out below) during the period; and f) condominium sales proceeds. The Directors recognise that the projections of cash flows do not include the impact of further potential property acquisitions over the three-year period, as these acquisitions are ad hoc and discretionary in nature. In this respect, the Directors complete a formal review of the working capital headroom of the Group for each potential acquisition. On the basis of the above, and assuming the principal risks are managed or mitigated as expected, the Directors have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the three-year period of their assessment. Registered office 13-14 Esplanade St Helier Jersey JE1 1EE Channel Islands The Directors’ Report was approved by the Board of Directors and authorised for issue and signed as follows: On behalf of the Board Monique O’Keefe Director 26 April 2018 32 Phoenix Spree Deutschland Annual Report and Accounts 2017 Financial StatementsDirectors’ ReportStrategic Report Corporate Governance Statement This Corporate Governance Statement comprises pages 33 to 39 and forms part of the Directors’ Report. To comply with the UK Listing Regime, the Company must comply with Listing Rule 9.8.6(5) R which requires the Company to apply the principles of the UK Corporate Governance Code (‘the Code’) most recently published in April 2016 and explain to Shareholders how they have done so or explain any departures therefrom. The Code is available for download from the Financial Reporting Council’s (‘FRC’) website www.frc.org.uk. the role of the Chief Executive and Executives of the Board; The Board has considered the principles and recommendations of the Code. Since Admission, the Company has complied with all of the provisions of the Code except as set out below: • • Executive Directors’ remuneration; the internal audit function; and • the composition of the Audit Committee and Risk Committee. • The Board considers that the provisions relating to the Chief Executive and Executive Directors’ remuneration are not relevant to the Group, as the running of the Group’s business is outsourced to third parties and there are no executive directors. The objective of the Code, to separate the roles of the Chairman who runs the Board, and the running of the Group, is achieved because the Chairman is independent from the third-party providers. The remuneration of the Directors and the third-party providers is disclosed and explained in the notes to the financial statements. The Group does not currently have an internal audit function, as the Board believes that it can ensure that the Group’s risk management, governance and internal control processes are operating effectively without this. This is because the Group’s business is conducted by relatively few individuals (through the outsourced service providers) who report to the Board, and its operations are not complex at present. However, if the Group increases in size, the appointment of an appropriately qualified and resourced internal audit department will be considered. Ultimately this role will be widened to encompass reviews of the efficiency of operations and to make recommendations on rationalisation of the business. Once established, such internal audit department would report directly to the Audit and Risk Committee. The members of the Audit and Risk Committees have been selected for their experience and expertise in relation to the risks, financial reporting and internal controls relating to the Group. The members bring specific experience in relation to the property investment sector and externally managed structures which has been found to be invaluable to the Committee in identifying risks and assessing the mitigating controls which have been established. Neither Matthew Northover nor Richard Prosser, up to the dates of their resignations, were considered to be independent members of the Board as a consequence of their relationship with the Property Advisor or the Administrator, respectively. However, subsequent to the year end, Jonathan Thompson, an independent Non-executive Director, has been appointed to chair the Audit Committee, and Charlotte Valeur the Risk Committee, meaning that the Company will comply with the Code principles and recommendation on the composition of the Committee in future periods. Following the changes to its composition, the Board is now wholly independent with no representation of external service providers on the Board. Leadership Composition, independence and role of the Board During the year, the Board comprised three Non-executive Directors and two independent Non-executive Directors, one of whom also acts as Chairman of the Company. The Chairman is Robert Hingley, who is considered to be independent for the purposes of Listing Rule 15 as he has neither current nor historical employment with the Property Advisor nor any current directorships in any other investment funds managed by the Property Advisor. Listing Rule 15 requires there to be a majority of independent Directors on the Board as a whole which were previously not in place. This has been satisfied with appointments of two new independent Directors in January 2018 and a further appointment in April 2018. Quentin Spicer is the senior independent Non-executive Director and has served on the Board since the incorporation of the Company. Quentin has served on the Board in excess of nine years, however, the Board does not consider that length of service affects his ability to act independently. The Board have evaluated his independence and consider him to remain independent for the same reasons listed above for Robert Hingley. Phoenix Spree Deutschland Annual Report and Accounts 2017 33 Financial StatementsDirectors’ ReportStrategic Report Corporate Governance Statement continued Subsequent to the year end, on 24 January 2018, the Company announced the appointments of two further independent Non-executive Directors, Charlotte Valeur and Jonathan Thompson. At the same time, Matthew Northover, a Non-independent Director, stepped down from the Board to focus on the business of the Property Advisor. Furthermore, on 17 April 2018, Monique O’Keefe was appointed as an independent Non-executive Director and Chair of the Corporate Responsibility Committee, and both Richard Prosser and Andrew Weaver stepped down from the Board. Effectiveness The Company holds a minimum of four Board meetings per year to discuss general management, structure, finance, corporate governance, marketing, risk management, compliance, asset allocation and gearing, contracts and performance. The reports provided by the outsourced providers are the principal source of regular information for the Board enabling it to determine policy and to monitor performance, compliance and controls, which are supplemented by communication and discussions throughout the year. Re-election There are provisions in the Company’s Articles of Association which require Directors to seek re-election on a periodic basis. There is no limit on length of service, nor is there any upper age restriction on Directors. The Board considers that there is significant benefit to the Group arising from continuity and experience among Directors, and accordingly does not intend to introduce restrictions based on age or tenure. It does, however, believe that shareholders should be given the opportunity to review membership of the Board on a regular basis. In accordance with the Company’s Articles of Association, at each AGM all Directors who held office at the two previous AGMs and did not retire shall retire from office and shall be available for re-election. After the most recent appointments, the Board is satisfied that all the Board members standing for re-election should be re-elected as they have the right skills and experience to continue to manage the Group; alongside those Directors who are deemed to be independent, in the Board’s opinion, continuing to be so. The Board maintains its right to appoint further members if deemed necessary. Committees of the Board The Board has established new committees, the terms of reference for which will be shared in due course. The terms of reference for existing committees are available on the Company website at www.phoenixspree.com. Audit and Risk Committee The Audit and Risk Committee was responsible for reviewing the half-year and annual financial statements before their submission to the Board. In addition, the Audit and Risk Committee was specifically charged under its terms of reference to advise the Board on the terms and scope of the appointment of the auditors, including their remuneration, independence and objectivity and reviewing with the auditors the results and effectiveness of the audit. In accordance with the Code, during the calendar year 2017, the Audit and Risk Committee was chaired by Richard Prosser, with Robert Hingley, Quentin Spicer (appointed April 2017) and Matthew Northover as members. The Board considered that Richard’s experience made him suitably qualified to Chair the Audit and Risk Committee despite not being independent. The Audit and Risk Committee met no less than twice a year (having met four times during 2017). On 24 January 2018, Richard Prosser, Robert Hingley and Matthew Northover stepped down and Jonathan Thompson and Charlotte Valuer joined the Committee with Jonathan Thompson appointed as Chair. On 17 April 2018, Monique O’Keefe joined the Committee and the Audit and Risk Committee split to become a separate Audit Committee and Risk Committee. Audit Committee The Audit Committee is chaired by Jonathan Thompson with Quentin Spicer, Charlotte Valeur and Monique O’Keefe as members. The Audit Committee meets no less than three times a year and, if required, meetings can also be attended by the Property Advisor and the external auditor. The Audit Committee is responsible for ensuring that the accounting policies of the Company are appropriate and being followed, disclosures provided are clear and reviewing the half-year and annual financial statements before their submission to the Board. In addition, the Audit Committee is specifically charged under its terms of reference to advise the Board on the terms and scope of the appointment of the auditors, including their remuneration, independence and objectivity 34 Phoenix Spree Deutschland Annual Report and Accounts 2017 Financial StatementsDirectors’ ReportStrategic Report and reviewing with the auditors the results and effectiveness of the audit. Where requested by the Board, the Committee shall review and provide advice on whether the content of the Annual Report and Accounts is fair, balanced and understandable and provides the information necessary for Shareholders to assess the Company’s performance, business model and strategy. Risk Committee The Risk Committee is chaired by Charlotte Valeur with Quentin Spicer, Jonathan Thompson and Monique O’Keefe as members. The Risk Committee meets no less than three times a year and, if required, meetings can also be attended by the Property Advisor. The Risk Committee is responsible for advising the Board on the Company’s overall risk appetite, tolerance and strategy. The Risk Committee will also oversee and advise the Board on the current risk assessment processes ensuring that both qualitative and quantitative metrics are used. Where requested by the Board, the Committee shall review and provide advice on whether the content of the Risk Management Report, as contained in the Annual Report, is fair, balanced and understandable and provides the information necessary for Shareholders to assess the Company’s performance, business model and strategy. The new committees which have been formed will have terms of reference to follow in due course. Property Valuation Committee The Company has established a Property Valuation Committee, which is chaired by Quentin Spicer, with Richard Prosser as a member, during the calendar year 2017. The Property Valuation Committee is responsible for reviewing the property valuations prepared by the valuer and any further matters relating to the valuation of the Portfolio. During 2018, the Property Valuation Committee’s composition has changed, following the appointment of the Board’s new independent Directors. It continues to be chaired by Quentin Spicer with Charlotte Valeur and Jonathan Thompson joining as members on 24 January 2018. Richard Prosser ceased to be a member of the Property Valuation Committee following his resignation from the Board on 17 April 2018 and Monique O’Keefe and Robert Hingley were both appointed. The Property Valuation Committee met twice during the year and reported to the Board on its duties, which are to: • • • review significant adjustments from the previous Property Valuation Report; review the individual valuations of each property; receive any commentary from the Property Advisor and/or Directors following the review meeting held with the external valuer; register and discuss with the Property Advisor any asset specific issues highlighted by the valuer; review material, unexplained, movements in the Group’s Net Asset Value and to recommend the release of the Net Asset Value announcement following that review; review compliance with applicable standards and guidelines including those issued by the Royal Institution of Chartered Surveyors and the UKLA Listing Rules; review the findings and any recommendations or statements made by the valuer; review at least annually, consider and make recommendations to the Board, in relation to the appointment, remuneration, re-appointment and removal of the Group’s valuer. The Committee shall oversee the selection process for a new valuer and if a valuer resigns the Committee shall investigate the issues leading to this and decide whether any action is required; and • • • • • • consider any further matters relating to the valuation of the properties. The Committee reported to the Board its findings on the property valuation and the Committee was satisfied with the Independent Valuation Report and values associated with all properties of the Group. Corporate Social Responsibility Committee On 17 April 2018, the Company formed a Corporate Social Responsibility Committee. The Corporate Social Responsibility Committee is chaired by Monique O’Keefe with Jonathan Thompson, Charlotte Valeur, Robert Hingley and Quentin Spicer as members. The Corporate Social Responsibility Committee meets no less than three times a year. The Corporate Social Responsibility Committee is responsible for approving a strategy for discharging the Company’s corporate and social responsibilities, overseeing the creation of appropriate policies and supporting measures along with ensuring that the policies are regularly reviewed and updated in line with national and international regulations. Where requested by the Board, the Committee shall review and provide advice on whether the content of the CR report, Phoenix Spree Deutschland Annual Report and Accounts 2017 35 Financial StatementsDirectors’ ReportStrategic Report Corporate Governance Statement continued as contained in the Company’s Annual Report, is fair, balanced and understandable and provides the information necessary for Shareholders to assess the Company’s performance, business model and strategy. The new committees which have been formed will have terms of reference to follow in due course. Management Engagement Committee In accordance with the Code, the Management Engagement Committee was established to review the performance of the Property Advisor on an annual basis. During the calendar year 2017, it was chaired by Robert Hingley, with Richard Prosser and Quentin Spicer as members. On 24 January 2018, the Management Engagement Committee’s composition has changed with Robert Hingley remaining as Chair but with Charlotte Valeur and Jonathan Thompson joining as members. Richard Prosser ceased to be a member of the Management Engagement Committee following his resignation from the Board on 17 April 2018 and Monique O’Keefe was appointed. • The Management Engagement Committee met once during the year and reported to the Board on its duties, which are to: • monitor and evaluate the Property Advisor’s performance and compliance with the terms of the Property Advisory Agreement and, if necessary, provide appropriate guidance, which may include considering the merit of obtaining an independent appraisal of the Property Advisor’s services on an annual basis; review the terms of the Property Advisory Agreement from time to time to ensure that the terms thereof conform with market and industry practice and remain in the best interests of shareholders and make recommendations to the Board on any variation to the terms of the Property Advisory Agreement which it considers necessary or desirable; review and making the appropriate recommendations to the Board as to whether the continuing appointment of the Property Advisor is in the best interests of the Group and Shareholders, and the reasons for this recommendation; review the level and method of remuneration, the basis on which the performance fees (if any) are calculated and the notice period of the Property Advisor, giving due consideration to the competitive position of the Group against its peer group; • consider whether the asset and estate management fee should be based on gross assets, net assets or market capitalisation; • ensure that the basis of any performance fee or performance related element does not encourage excessive risk and • • that it rewards demonstrably superior performance by the Property Advisor in managing the portfolio against the Group’s stated objectives when compared to a suitable benchmark or peer group; • ensure that a sound system of risk management and internal control is maintained and reviewed annually in order to • safeguard shareholders’ investment and the Group’s assets; review, consider and recommend any amendments to the terms of the appointment and remuneration of providers of other services to the Group; and • consider any points of conflict which may arise between the providers of services to the Group. The Committee keeps under review the performance of the Property Advisor and the level and terms of the management fee. In the opinion of the Directors, the continuing appointment of the Property Advisor on the terms agreed is in the interests of shareholders as a whole. The Performance Period as set out in the Property Advisory agreement ended on 31 December 2017. According to the agreement, the Performance Fee is settled and a new three-year Performance Period commences benchmarked from the EPRA Net Asset Value of the Company as at 31 December 2017. Board and Committee meetings The table below sets out the number of Board, Audit and Risk Committee, Property Valuation Committee, Management Engagement Committee and Nomination and Remuneration Committee meetings held during the year ended 31 December 2017 and, where appropriate, the number of such meetings attended by each Director. R Hingley R Prosser M Northover Q Spicer A Weaver Scheduled Board Audit & Risk Property Valuation Management Engagement Nomination & Remuneration Held Attend Held Attend Held Attend Held Attend Held Attend 4 4 4 4 4 4 4 3 4 3 4 4 4 4 – 4 4 4 3* – – 2 – 2 – – 2 – 2 – 1 1 – 1 – 1 1 – 1 – 2 – – 2 2 2 – – 2 1 * Quentin Spicer was appointed to the Audit and Risk Committee on 25 April 2017. 36 Phoenix Spree Deutschland Annual Report and Accounts 2017 Financial StatementsDirectors’ ReportStrategic Report Ad hoc meetings are held as required by the Board members to instruct on, and be kept informed of, material matters relating to the running of the Group. Information and support for Directors New Directors receive a full, formal and tailored induction on joining the Board in order to further inform them of the Group’s activities and structure. Upon appointment new Directors are briefed about their responsibilities and duties, together with relevant background information on the Company and assistance and information from representatives of the Investment Advisers and the Administrators. New Directors are also provided with an opportunity to observe the Board before their appointment and meet representatives of the Property Advisors and Administrators to the Company. All the Directors comply with mandatory continued professional development requirement and are encouraged to attend industry and other seminars covering issues and developments relevant to investment companies, and Board meetings regularly include agenda items on recent developments in governance and industry issues. The Chair regularly reviews and agrees with each Director their training and development needs. All Directors are able to take independent professional advice at the Group’s expense in the furtherance of their duties, if necessary. The Group purchases appropriate insurance in respect of legal action against its Directors and Officers. Company Secretary The Company Secretary is responsible for ensuring that Board procedures are followed. Under the guidance of the Chairman, the Secretary ensures that appropriate and timely information flows between the Board, the Committees and to/from the Directors. It facilitates inductions to new Directors and the provision of additional information where required and appropriate. The Secretary is responsible for advising the Board on governance matters and is available to all Directors for advice and support as required. Non-executive Directors The Board considers its current Non-executive Directors to be of sufficient calibre and number (particularly following the appointment of its new Non-executive Directors, subsequent to the year end) for their views to be of sufficient weight and that no individual or small group can dominate the Board’s decision-making process. Their qualifications and experience are relevant to their directorships and in their appointments to the Committees where applicable. The Non-executive Directors’ terms and conditions of appointment are available for inspection at the Company’s registered office on request and will be available at the forthcoming AGM. Independence of Non-executive Directors The Code states that it is for the Board to determine whether a Director is independent in character and judgement and to consider whether there are any relationships or circumstances that are likely to affect a Director’s judgement. In applying the Code, the Board has considered a number or factors in determining the independence of each Non-executive Director. Following such assessment, the Board considers each of the Non-executive Directors to be independent in both character and judgement and that there are no circumstances that give rise to question their respective judgements when considering matters put before the Board in 2017 or in the future, except as disclosed in relation to Matthew Northover or Richard Prosser, and in the case of Andrew Weaver, his connection with the Company’s Jersey legal advisors. Phoenix Spree Deutschland Annual Report and Accounts 2017 37 Financial StatementsDirectors’ ReportStrategic Report Corporate Governance Statement continued Non-executive Directors’ shareholdings The Board has assessed that the holdings of the Directors are not significant and believes such levels of investment should not raise questions regarding their independence. The Board considers that Directors owning shares in the Company directly aligns them with the interests of the Shareholders. Board assessment In the past, annual appraisals by external investor research analysts have recommended that Shareholders vote against, or abstain from, any proposed re-election of Non-executive Directors due to a perceived non-compliance with the Code regarding the criteria quoted above. The Code requires companies to ‘Comply or Explain’. We have continually and consistently met this requirement. The structure of the Board and the membership of the standing Committees takes into account the views expressed by our Shareholders together with issues of independence, diversity and the requisite skills to deliver our strategy. Performance evaluation The Board has a process of formal evaluation for individual Directors, the Committees and the processes utilised by the Board itself. This is undertaken by the Chair and the Audit Committee. The Board areas evaluated include: • Board composition and quality; • overall strategy, performance and risk; • Shareholders value; • governance; • Board meetings; • • personal evaluation; and • Chair’s evaluation support and relations with suppliers; The process of performance evaluation is designed to consider all elements of performance including any perceived shortcomings, training or development needs and unforeseen tasks and responsibilities that have arisen during the year. While no KPIs are set for individual Non-executive Directors, the time, effort and application applied in the performance of their duties for the Board and, where applicable, Committees is taken into account. The Board, the Committees and the management process – performance evaluation In line with the requirements of the Code, the Company has carried out annual performance evaluations of the Board, the Committees and the processes utilised by each forum. The aim of the evaluation is to recognise the strengths and address any weaknesses and consider improvements to the management process. The evaluation is designed to ensure that the Board meets its objectives and effectiveness is maximised. The Chair led the evaluation which focused on the following issues: • • • • • the frequency of meetings and the business transacted; the workload of each forum; the timing, level of detail and appropriateness of information put before meetings; the reporting process from Committees to the Board and delegation process itself; the levels of expertise available within the membership of the Committees and the need for, selection of and the use of external consultants; and the effectiveness of internal controls following the review and report of the Audit Committee. • The Chair is satisfied with the outcome of the evaluation. Following the changes to the Board, and if any potential future changes are made, due consideration to the evaluation process will be made. 38 Phoenix Spree Deutschland Annual Report and Accounts 2017 Financial StatementsDirectors’ ReportStrategic Report Accountability The Board has overall responsibility for maximising the Group’s success by directing and supervising the affairs of the business and meeting the appropriate interests of Shareholders and relevant stakeholders, while enhancing the value of the Group and also ensuring protection of investors. The Board has determined that its role is to consider and determine the following principal matters which it considers are of strategic importance to the Group: • the overall objectives of the Company as described under the paragraph headed ‘Strategy & Business Model’ in the Strategic Report, and the strategy for fulfilling those objectives within an appropriate risk framework in light of market conditions prevailing from time to time; the appointment of the Property Advisor, administrator and other appropriately skilled service providers and to monitor their effectiveness through regular reports and meetings; and the key elements of the Group’s performance including NAV and EPRA NAV growth and the payment of dividends. • • The Board is responsible to Shareholders for the overall management of the Group and for preparing the Annual Report and Financial Statements. The Board is satisfied that the Annual Report and Financial Statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Group’s position and performance, business model and strategy. In seeking to achieve this, the Directors have set out the Group’s investment objective and policy and have explained how the Board and its delegated Committees operate and how the Directors review the risk environment within which the Group operates and set appropriate risk controls. Furthermore, throughout the Annual Report and Financial Statements the Board has sought to provide further information to enable Shareholders to understand the Group’s business and financial performance better. The Board also maintain a formal schedule of matters specifically reserved solely for their decision. Remuneration In accordance with the Code, the Board has established a Nomination and Remuneration Committee which was chaired during the calendar year by Quentin Spicer (the Senior Independent Director), with Robert Hingley and Andrew Weaver as members. With effect from 24 January 2018, Charlotte Valeur and Jonathan Thompson joined the Nomination and Remuneration Committee as members. Andrew Weaver ceased to be a member of the Nomination and Remuneration Committee following his resignation from the Board on 17 April 2018 and was replaced by Monique O’Keefe. The Nomination and Remuneration Committee met twice during the year. As at the year-end there were five Directors, all of whom were male. The Directors have agreed that appointments to the Board should be made on the basis of the Group’s specific needs based on merit, without reference to age, gender or religious belief. Charlotte Valeur and Jonathan Thompson were appointed to the Board on 24 January 2018 (with Matthew Northover stepping down) and Monique O’Keefe was appointed on 17 April 2018 (with Richard Prosser and Andrew Weaver stepping down). Relations with Shareholders The Board believes that the maintenance of good relations with both institutional and retail Shareholders is important for the long-term prospects of the Group. The Board receives feedback on the views of Shareholders from its corporate broker. Through this process the Board seeks to monitor the views of shareholders and to ensure an effective communication programme. The Chair discusses governance and strategy with major Shareholders and Non-executive Directors are also provided the opportunity to attend meetings with major Shareholders. The Board believes that the Annual General Meeting provides an appropriate forum for investors to communicate with the Board and encourages participation. The Group regularly reviews the Shareholder profile of the Group. Shareholders may contact the Company directly through the Investor section of the Company’s website www.phoenixspree.com. Phoenix Spree Deutschland Annual Report and Accounts 2017 39 Financial StatementsDirectors’ ReportStrategic Report Audit Committee Report This report provides details of the role of the Committee and the duties it has undertaken during the year under review. Summary of the role of the Audit Committee The Audit Committee is responsible for reviewing the half-year and annual financial statements and recommends them to the Board for approval. The role of the Audit Committee includes: • Monitoring the integrity of the Annual Report and Financial Statements of the Group, covering: – formal announcements relating to the Group’s financial performance; – significant financial reporting issues and judgements; – matters raised by the external auditors; and – the appropriateness of accounting policies and practices. • Reviewing and considering the Code and FRC Guidance on Audit Committees. • Monitoring the quality and effectiveness of the independent external auditors, which includes: – meeting regularly to discuss the audit plan and the subsequent Audit Report; – considering the level of fees for both audit and non-audit work; – reviewing independence, objectivity, expertise, resources and qualification; and – making recommendations to the Board on the appointment, reappointment, replacement and remuneration of the external auditors. • Reviewing the Group’s procedures for prevention, detection and reporting of fraud, bribery and corruption. • Monitoring and reviewing the internal control and risk management systems of the service providers together with the need for an Internal Audit function. The Audit Committee’s full terms of reference can be obtained from the Company’s website www.phoenixspree.com. Financial reporting The Audit Committee is responsible for reviewing the half-year and annual financial statements before their submission to the Board. In addition, the Audit Committee is specifically charged under its terms of reference with advising the Board on the terms and scope of the appointment of the auditors, including their remuneration, independence, objectivity and reviewing with the auditors the results and effectiveness of the audit. Composition of the Audit Committee The Audit Committee is chaired by Jonathan Thompson with Quentin Spicer, Charlotte Valeur and Monique O’Keefe as members. The Audit Committee meets no less than three times a year and, if required, meetings can also be attended by the Property Advisor and the external auditor. The qualifications and experience of the members of the Audit and Risk Committee during the financial year are set out in their biographical details on pages 28 and 29. Meetings The Audit Committee is scheduled to meet no less than three times a year and, if required, meetings can also be attended by the Property Advisor, the administrator and the external auditor. Significant issues related to the financial statements Valuation of investment property Mitigation A significant focus for the Audit Committee is the valuation of the Group’s property Portfolio carried out at half year in June and at the financial year end in December each year, as this is a key determinant of the Group’s NAV, its profit or loss and the Property Advisor’s remuneration. The Group has appointed Jones Lang LaSalle (‘JLL’) to act as the Independent Property Valuer. The Audit and Risk Committee is satisfied that the valuer is independent and that it conducted its work in accordance with the Royal Institution of Chartered Surveyors Valuation Standards (‘RICS’). The Property Valuation Committee reviews the valuer’s report, the methodology followed and the assumptions incorporated to assess the adequacy of the valuation. 40 Phoenix Spree Deutschland Annual Report and Accounts 2017 Financial StatementsDirectors’ ReportStrategic Report Settlement of Property Advisor Performance Fee Mitigation A significant focus for the Audit Committee is the settlement of the Performance Fee to the Property Advisor, which is due for settlement after the completion of its three year cycle at the end of 2017. The Group has appointed RSM as external auditors who will validate that the Performance Fee calculation agrees with the mechanisms in the Property Advisor Agreement. It is material by nature of being due to a related party, and from its size, and its effect on the Financial Statements. It was agreed by the Property Advisor and the Board, in April 2018, that the Performance Fee be settled by the issuance of new shares in the Company. This ensures the liquidity of fund, while remaining in agreement with the terms of the Property Advisor Agreement. External audit Assessing the effectiveness of the external audit process The Committee satisfied itself as to the effectiveness of the external audit process as follows: The audit partner As a new audit firm and audit partner was appointed in 2014, no additional rotation considerations were taken into account for the current year. Following completion of the audit the Committee assessed the partner’s performance against expectations and found this to be satisfactory. The audit team Continuity of personnel was reviewed and found to be satisfactory. To supplement the Committee’s necessarily limited exposure to junior members of the audit team, feedback was sought on the performance of the external audit team, in particular as regards their understanding of the business, technical competence and attitude. The audit plan The scope of the audit was reviewed and debated by the Committee with the auditors prior to work being commenced. This was done in light of both the auditors’ and the Committee’s assessment of the key risks. The auditors explained materiality thresholds used in determining their audit scope and the Committee confirmed that these were in accordance with normal audit practice. The generality of the audit plan document was assessed and found to be satisfactory. Arrangements to identify, report and manage conflicts of interest were satisfactory. The Committee also considered whether it wished to commission further audit work to be conducted beyond which the auditor considered necessary for the expression of their opinions on the Group accounts and concluded that it did not. Matters arising from the audit These were promptly and effectively communicated and addressed as appropriate. The robustness and perceptiveness of the auditors in their handling of the key accounting and audit judgements were seen as appropriate. The detailed report received from the auditors following completion of their work gave comfort as to the diligence of execution of that work. Added value In appraising the overall performance of the auditors, the Committee considered whether they had provided useful feedback arising from their work additional to their statutory responsibilities and concluded that they had. Independence In addition to receiving the auditors’ formal confirmation of their independence, the Committee considered whether this was demonstrated through their general approach and attitude and were satisfied that this was the case. Audit fees The level of audit fees was reviewed to ensure that it was sufficient for the work necessary but not excessive. In particular, changes in fees from the previous year were considered in relation to changes in the Group and in risk assessments. Phoenix Spree Deutschland Annual Report and Accounts 2017 41 Financial StatementsDirectors’ ReportStrategic Report Audit Committee Report continued Audit tendering The Committee considered whether the audit appointment should be put out to tender. In doing so, it considered both the performance of the current auditors and the likely costs and potential benefits of change. Following the above, the Audit Committee has recommended to the Board that RSM UK Audit LLP is reappointed. Going forward, the Committee will continue to keep the audit appointment under review, having regard for the new EU requirements for audit tendering. Group policy on the provision of non-audit services by the auditor The Committee has an established policy for the commission of non-audit work from the Group’s auditor. The external auditor is excluded from providing non-audit services to the Group where the objectives of such assignments are inconsistent with the objectives of the audit. Additionally, no work is awarded to the auditor which would result in an element of self-review, either during the work or via the audit itself. The Committee will continue to approve all non-audit fees prior to the work commencing and review the non-audit fees in aggregate for the year. Risk management and internal control The Committee reviews the adequacy and effectiveness of the Groups’ (and its service providers’) internal financial controls and internal control and risk management systems and review and approves the statements to be included in the Annual Report concerning internal controls and risk management. The Committee is also responsible for oversight and advice to the Board on the current risk exposures and future risk strategy of the Group. The Directors have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity. The result of this review, the potential impact of each type of risk identified and the mitigation reasons put in place are set out in the ‘Principal Risks’ section of the Annual Report on pages 26 to 27. The Directors do not consider that there are any significant problems facing the business in the coming year. Internal audit The Group does not currently have an internal audit function, as the Board believes that it can ensure that the Group’s risk management, governance and internal control processes are operating effectively without this. This is because the Group’s business is conducted by relatively few individuals (through the outsourced service providers) who report to the Board, and its operations are not complex at present. However, if the Group increases in size, the appointment of an appropriately qualified and resourced internal audit department will be considered. 42 Phoenix Spree Deutschland Annual Report and Accounts 2017 Financial StatementsDirectors’ ReportStrategic Report Director’s Remuneration Report This report is on the activities of the Nomination and Remuneration Committee. The information provided in this part of the Directors’ Report is not subject to audit. Remuneration policy During 2017, the Nomination and Remuneration Committee comprised three Non-executive Directors and is chaired by Quentin Spicer, with Robert Hingley and Andrew Weaver as members. During 2018, Charlotte Valeur, Jonathan Thompson and Monique O’Keefe joined the Nomination and Remuneration Committee as members. Andrew Weaver ceased to be a member of the Nomination and Remuneration Committee following his resignation from the Board on 17 April 2018. The Group’s policy is that the remuneration of the Directors should reflect the experience of the Board as a whole, the time commitment required, and be fair and comparable with that of other similar companies. Furthermore, the level of remuneration should be sufficient to attract and retain the Directors needed to oversee the Group properly and to reflect its specific circumstances. There were no changes to the policy during the year and it is intended that this policy will continue to apply for the year ending 31 December 2018. Duties The Committee was responsible for setting the Directors’ remuneration levels, in conjunction with the Chairman and with consideration of the following: • • Non-executive Directors’ remuneration should not include share options or other performance-related elements; • careful consideration should be given to what compensation commitments entail in the event of early termination levels of Directors’ remuneration should reflect the time commitment and responsibilities of the role; of a Director’s appointment; • notice of contract periods should be set at one year or less; and • no Director should be involved in deciding his or her own remuneration. The Committee is also responsible for judging where to position the Group relative to other companies in relation to the level of Directors’ remuneration, but using such comparisons with caution in view of the risk of increased remuneration with no corresponding improvement in performance; and considering and making the appropriate recommendations to the Board with regard to the need to appoint external remuneration consultants. The terms of reference of the Nomination and Remuneration Committee can be obtained from the Company’s website www.phoenixspree.com. For the years ended 31 December 2017 and 31 December 2016 Directors’ fees were as follows: R Hingley R Prosser M Northover Q Spicer A Weaver 2017 £ 45,000 25,000 Nil 35,000 25,000 2016 £ 42,708 25,000 Nil 32,500 25,000 Throughout 2017, Richard Prosser was a Director of Estera Fund Administrators (Jersey) Limited, the Group’s Administrator. The remuneration of Estera is disclosed in note 32. Throughout 2017, Andrew Weaver was a Partner in Appleby’s, the Group’s Jersey Legal Advisor. The remuneration of Appleby’s is disclosed in note 32. Phoenix Spree Deutschland Annual Report and Accounts 2017 43 Financial StatementsDirectors’ ReportStrategic Report Director’s Remuneration Report continued The Directors are responsible for preparing the Annual Report and the consolidated financial statements in accordance with applicable law and regulations. Jersey company law requires the Directors to prepare financial statements for each financial year, in accordance with generally accepted accounting principles. The Directors are required under the Listing Rules of the Financial Conduct Authority to prepare the financial statements in accordance with International Financial Reporting Standards (‘IFRS’), as adopted by the European Union (‘EU’). The financial statements are required by law and IFRS as adopted by EU to present fairly the financial position of the Group. Under Jersey company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and of the profit or loss of the Group for that period. select suitable accounting policies and then apply them consistently; In preparing the financial statements, the Directors are required to: • • make judgements and estimates that are reasonable and prudent; • • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and state whether they have been prepared in accordance with IFRS as adopted by the EU; and the Company will continue in business. 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 (Jersey) Law 1991. They are also responsible for safeguarding the assets of the Group and the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors confirm that these financial statements comply with these requirements. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in Jersey governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Directors’ Responsibility Statement The Directors confirm that to the best of their knowledge: • the consolidated financial statements, prepared in accordance with the applicable set of accounting standards (as detailed above) and Company Law, give a true and fair view of the assets, liabilities, financial position and profit and loss of the issuer and the undertakings included in the consolidation taken as a whole; the management report includes a fair review of the development and performance of the business and the position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties they face, as well as the business model and strategy of the Group; and the Annual Report and consolidated financial statements, as a whole, are fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s position, performance, business model and strategy. • • For and on behalf of the Board Monique O’Keefe Director 26 April 2018 44 Phoenix Spree Deutschland Annual Report and Accounts 2017 Financial StatementsDirectors’ ReportStrategic Report Independent Auditor’s Report to the Members of Phoenix Spree Deutschland Limited Opinion We have audited the Group Financial Statements of Phoenix Spree Deutschland Limited for the year ended 31 December 2017 which comprise the Consolidated Statement of Comprehensive Income, the Consolidated Statement of Financial Position, the Consolidated Statement of Changes in Equity, the Consolidated Statement of Cash Flows and notes to the Financial Statements, including a summary of significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (‘IFRSs’) as adopted by the European Union. In our opinion: • The Group Financial Statements give a true and fair view of the state of the Group’s affairs as at 31 December 2017 • • and of the Group’s profit for the year then ended; the Group Financial Statements have been properly prepared in accordance with IFRSs as adopted by the European Union; and the Group Financial Statements have been prepared in accordance with the requirements of the Companies (Jersey) Law 1991 and Article 4 of the IAS Regulation. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the Financial Statements section of our report. We are independent of the Group and Parent Company in accordance with the ethical requirements that are relevant to our audit of the Financial Statements in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Conclusions relating to principal risks, going concern and viability statement We have nothing to report in respect of the following information in the annual report, in relation to which the ISAs (UK) require us to report to you whether we have anything material to add or draw attention to: • the disclosures in the annual report set out on pages 26 to 27 that describe the principal risks and explain how they are being managed or mitigated; the Directors’ confirmation set out on pages 26 to 27 in the annual report that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity; the Directors’ statement set out on page 32 in the Financial Statements about whether the Directors considered it appropriate to adopt the going concern basis of accounting in preparing the Financial Statements and the Directors’ identification of any material uncertainties to the Group ability to continue to do so over a period of at least twelve months from the date of approval of the Financial Statements; • • • whether the Directors’ statement relating to going concern required under the Listing Rules in accordance with Listing • Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit; or the Directors’ explanation set out on page 32 in the annual report as to how they have assessed the prospects of the Group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the Financial Statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the Financial Statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Phoenix Spree Deutschland Annual Report and Accounts 2017 45 Financial StatementsDirectors’ ReportStrategic Report Independent Auditor’s Report to the Members of Phoenix Spree Deutschland Limited continued Valuation of investment properties held by the Group Risk of material misstatement This is detailed in the Audit Committee report on pages 40 to 42; the significant accounting judgements and estimates on page 62; significant accounting policies on pages 57 and 58 and notes 16 and 17 to the Financial Statements on pages 68 to 72. The Group owns or controls through a portfolio of Special Purpose Vehicles (SPV’s) a portfolio of investment properties which include residential and commercial. The total value of the portfolio at 31 December 2017 was €609.3 million (2016: €423.8 million), including properties designated as held for sale. These properties are all in Germany and predominately in Berlin. The accounting policy in respect of investment properties is to hold them at fair value in the Financial Statements, and to recognise the movement in the value in the accounting period in the Income Statement. The Directors’ assessment of the value of investment properties at the year end date is considered a significant audit risk due to the magnitude of the total amount, the potential impact of the movement in value on the reported results, and the subjectivity of the valuation process. Audit approach adopted We audited the independent valuation of investment properties to ensure they had been prepared on a consistent basis for all properties and are considered to be appropriate and correctly recorded in the Financial Statements in line with Accounting Standards. We assessed the external valuer’s qualifications and expertise and considered their terms of engagement. We also considered their objectivity and any other existing relationships with the Group and concluded that there was no evidence that their objectivity had been compromised. We carried out audit tests on the inputs provided by the Property Advisor to the valuer and ensured these reflected the correct inputs for each property. We obtained market data for a sample of properties and ensured this was consistent with the valuation report. We reviewed the top 20 properties by value, and other properties where there were unusual movements in value compared to the average, or compared to the previous year, and discussed and challenged the valuation of the top 20 properties, and significant movements with the Property Advisor and the valuer, and obtained evidence to support the explanations received. We tested ownership of the properties by reference to land registry records. Performance fee payable to the Property Advisor This is detailed in the Audit Committee report on pages 40 to 42; the significant accounting policies on page 57 and note 26 to the Financial Statements on pages 75 and 76. Risk of material mis-statement The performance fee payable to the Property Advisor, PMM Partners, warranted additional focus because the amount due under the agreement dated 9 February 2015 crystallised as at 31 December 2017. At €34 million the fee is material to the Financial Statements and was subject to contract terms which had to be amended during the course of the audit and involved judgement as to the interpretation of the calculations and the accounting treatment of the obligation. Details of the Property Advisors fee are set out in note 26 to the Financial Statements. Audit approach adopted We examined the original agreement, and the amended terms, and audited the calculation of the amount due. We have further reviewed the impact of the settlement of the fee on the financial position of the Group and the accounting treatment adopted, being to present the obligation as a component of equity as at the balance sheet date the Directors consider that it was probable that the liability would be settled in shares. Our application of materiality When establishing our overall audit strategy, we set certain thresholds which help us to determine the nature, timing and extent of our audit procedures and to evaluate the effects of misstatements, both individually and on the Financial Statements as a whole. During planning we determined a magnitude of uncorrected misstatements that we judge would be material for the Financial Statements as a whole (FSM). During planning FSM was calculated as €9 million which was not changed during the course of our audit. We agreed with the Audit Committee that we would report to them all unadjusted 46 Phoenix Spree Deutschland Annual Report and Accounts 2017 Financial StatementsDirectors’ ReportStrategic Report differences in excess of €225,000 as well as differences below those thresholds that, in our view, warranted reporting on qualitative grounds. An overview of the scope of our audit Our audit scope covered 100% of Group revenue, Group profit and total Group assets and was performed to the materiality levels set out above. Other information The other information comprises the information included in the annual report set out on pages 2 to 44 other than the Financial Statements and our auditor’s report thereon. The Directors are responsible for the other information. Our opinion on the Financial Statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. In connection with our audit of the Financial Statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the Financial Statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the Financial Statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of the other information, we are required to report that fact. We have nothing to report in this regard. In this context, we also have nothing to report in regard to our responsibility to specifically address the following items in the other information and to report as uncorrected material misstatements of the other information where we conclude that those items meet the following conditions: • Fair, balanced and understandable set out on page 44 – the statement by the Directors that they consider the annual report and Financial Statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s performance, business model and strategy, is materially inconsistent with our knowledge obtained in the audit; or • Audit committee reporting set out on pages 40 to 42 – the section describing the work of the audit committee does not appropriately address matters communicated by us to the audit committee; or • Directors’ statement of compliance with the UK Corporate Governance Code set out on pages 33 to 39 – the parts of the Directors’ statement required under the Listing Rules relating to the Company’s compliance with the UK Corporate Governance Code containing provisions specified for review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a relevant provision of the UK Corporate Governance Code. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies (Jersey) Law 1991 requires us to report to you if, in our opinion: • proper accounting records have not been kept by the Parent Company, or • proper returns adequate for our audit have not been received from branches not visited by us; or • the Parent Company Financial Statements are not in agreement with the accounting records; or • we have failed to receive all the information and explanations which, to the best of our knowledge and belief, was necessary for our audit. Responsibilities of Directors As explained more fully in the Directors’ responsibilities statement set out on page 44, the Directors are responsible for the preparation of the Financial Statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors determine is necessary to enable the preparation of Financial Statements that are free from material misstatement, whether due to fraud or error. In preparing the Financial Statements, the Directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Phoenix Spree Deutschland Annual Report and Accounts 2017 47 Financial StatementsDirectors’ ReportStrategic Report Independent Auditor’s Report to the Members of Phoenix Spree Deutschland Limited continued Auditor’s responsibilities for the audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the Financial Statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these Financial Statements. As part of our audit, we will consider the susceptibility of the Group and Parent Company to fraud and other irregularities, taking account of the business and control environment established and maintained by the Directors, as well as the nature of transactions, assets and liabilities recorded in the accounting records. Owing to the inherent limitations of an audit, there is an unavoidable risk that some material misstatements of the Financial Statements may not be detected, even though the audit is properly planned and performed in accordance with the ISAs. However, the principal responsibility for ensuring that the Financial Statements are free from material misstatement, whether caused by fraud or error, rests with management who should not rely on the audit to discharge those functions. A further description of our responsibilities for the audit of the Financial Statements is included in appendix 1 of this auditor’s report. This description, which is located on page 49 forms part of our auditor’s report. Other matters which we are required to address Following the recommendation of the audit committee, we were appointed by the Directors on 16 December 2014 to audit the Financial Statements for the year ending 31 December 2014 and subsequent financial periods. The period of total uninterrupted engagement is 4 years, covering the years ending 31 December 2014 to 31 December 2017. The non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Group or the Parent Company and we remain independent of the Group and the Parent Company in conducting our audit. Our audit opinion is consistent with the additional report to the audit committee. This report is made solely to the Company’s members, as a body, in accordance with Article 113A of the Companies (Jersey) Law 1991. 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. Euan Banks for and on behalf of RSM UK Audit LLP Auditor Chartered Accountants 25 Farringdon Street London EC4A 4AB 26 April 2018 48 Phoenix Spree Deutschland Annual Report and Accounts 2017 Financial StatementsDirectors’ ReportStrategic Report Appendix 1: Auditor’s responsibilities for the audit of the Financial Statements As part of an audit in accordance with ISAs (UK), we exercise professional judgement and maintain professional scepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the Financial Statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Directors. • Conclude on the appropriateness of the Directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the Financial Statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the Financial Statements, including the disclosures, and whether the Financial Statements represent the underlying transactions and events in a manner that achieves fair presentation. • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated Financial Statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. Phoenix Spree Deutschland Annual Report and Accounts 2017 49 Financial StatementsDirectors’ ReportStrategic Report Consolidated Statement of Comprehensive Income For the year ended 31 December 2017 Continuing operations Revenue Property expenses Gross profit Administrative expenses Gain on disposal of investment property (including investment property held for sale) Investment property fair value gain Performance fee due to property advisor Operating profit Net finance charge Profit before taxation Income tax expense Profit after taxation Other comprehensive income Total comprehensive income for the year Total comprehensive income attributable to: Owners of the parent Non-controlling interests Earnings per share attributable to the owners of the parent: From continuing operations Basic (€) Diluted (€) Notes 6 7 8 10 11 26 12 13 Year ended 31 December 2017 €’000 Year ended 31 December 2016 (restated – note 2.2) €’000 18,080 (7,000) 11,080 (2,967) 5,319 157,374 (26,339) 144,467 (5,995) 138,472 (26,150) 112,322 – 112,322 111,538 784 112,322 15,934 (7,001) 8,933 (2,977) 799 55,226 (6,350) 55,631 (6,756) 48,875 (10,913) 37,962 – 37,962 36,998 964 37,962 29 29 1.21 1.11 0.42 0.40 50 Phoenix Spree Deutschland Annual Report and Accounts 2017 Financial StatementsDirectors’ ReportStrategic Report Consolidated Statement of Financial Position At 31 December 2017 ASSETS Non-current assets Investment properties Property, plant and equipment Deferred tax asset Loans and receivables Current Assets Investment properties – held for sale Trade and other receivables Cash and cash equivalents Total assets EQUITY AND LIABILITIES Current liabilities Borrowings Trade and other payables Derivative financial instruments Current tax Non-current liabilities Borrowings Derivative financial instruments Other financial liabilities Deferred tax liability Total liabilities Equity Stated capital Share-based payment reserve Retained earnings Equity attributable to owners of the parent Non-controlling interest Total equity Total equity and liabilities As at 31 December 2017 €’000 As at 31 December 2016 €’000 Notes 16 18 13 19 17 20 21 22 23 24 13 22 24 25 13 27 26 28 502,360 92 527 2,323 505,302 106,897 10,001 27,182 144,080 649,382 2,646 2,119 – 2,914 7,679 219,648 3,333 5,663 45,117 273,761 281,440 162,630 33,953 169,634 366,217 1,725 367,942 649,382 395,829 40 770 2,253 398,892 27,970 7,503 18,450 53,923 452,815 9,169 1,331 392 24 10,916 176,423 4,477 3,590 22,150 206,640 217,556 162,630 7,614 64,074 234,318 941 235,259 452,815 The financial statements on pages 50 to 81 were approved by the Board of Directors and were signed on its behalf by: Charlotte Valeur Director 26 April 2018 Monique O’Keefe Director 26 April 2018 Phoenix Spree Deutschland Annual Report and Accounts 2017 51 Financial StatementsDirectors’ ReportStrategic Report Consolidated Statement of Changes in Equity For the year ended 31 December 2017 Non- controlling interest €’000 Total €’000 Total equity €’000 148,539 2,626 151,165 Balance at 1 January 2016 Comprehensive income: Profit for the year Other comprehensive income Total comprehensive income for the year Transactions with owners – recognised directly in equity: Issue of share capital Dividends paid Performance fee Recognition of redemption liability Acquisition of subsidiaries Cost related to share placing Balance at 31 December 2016 Comprehensive income: Profit for the year Other comprehensive income Total comprehensive income for the year Transactions with owners – recognised directly in equity: Dividends paid Performance fee Attributable to the owners of the parent Stated capital €’000 Share-based payment reserve €’000 115,150 1,264 – – – 49,080 – – – – (1,600) – – – – – 6,350 – – – Retained earnings €’000 32,125 36,998 – 36,998 – (5,049) – – – – 36,998 – 36,998 49,080 (5,049) 6,350 – – (1,600) 162,630 7,614 64,074 234,318 – – – – – – – – 111,538 – 111,538 111,538 – 111,538 – 26,339 33,953 (5,978) – (5,978) 26,339 964 – 964 – – – (3,590) 941 – 941 784 – 784 – – 37,962 – 37,962 49,080 (5,049) 6,350 (3,590) 941 (1,600) 235,259 112,322 – 112,322 (5,978) 26,339 Balance at 31 December 2017 162,630 169,634 366,217 1,725 367,942 The share-based payment reserve has been established in relation to the issue of shares for the payment of the performance fee of the property advisor. Settlement to be made in May 2018. Retained earnings are the undistributed reserves to be either reinvested within the Group or distributed to Shareholders as dividends. 52 Phoenix Spree Deutschland Annual Report and Accounts 2017 Financial StatementsDirectors’ ReportStrategic Report Consolidated Statement of Cash Flows For the year ended 31 December 2017 Profit before taxation Adjustments for: Net finance charge Gain on disposal of investment property Investment property revaluation gain Depreciation Performance fee charge Operating cash flows before movements in working capital Increase in receivables Increase/(Decrease) in payables Cash generated from operating activities Income tax (paid) Net cash generated from operating activities Cash flow from investing activities Proceeds on disposal of investment property Interest received Capital expenditure on investment property Property additions Additions to property, plant and equipment Loans issued to minority shareholders Net cash used in investing activities Cash flow from financing activities Interest paid on bank loans Repayment of bank loans Drawdown on bank loan facilities Share issue Dividends paid Net cash generated from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year Exchange gains/(losses) on cash and cash equivalents Cash and cash equivalents at end of year Year ended 31 December 2017 €’000 Year ended 31 December 2016 €’000 138,472 48,875 5,995 (5,319) (157,374) 23 26,339 8,136 (3,048) 788 5,876 (50) 5,826 60,436 103 (6,715) (76,486) (75) – (22,737) (5,080) (117,712) 154,414 – (5,978) 25,644 8,733 18,450 (1) 27,182 6,756 (799) (55,226) 12 6,350 5,968 (3,808) (1,353) 807 – 807 4,250 168 (4,189) (72,808) (22) (806) (73,407) (3,173) (6,040) 45,394 47,480 (5,049) 78,612 6,012 12,757 (319) 18,450 Phoenix Spree Deutschland Annual Report and Accounts 2017 53 Financial StatementsDirectors’ ReportStrategic Report Reconciliation of Net Cash Flow to Movement in Debt For the year ended 31 December 2017 Cash flow from increase in debt financing Change in net debt resulting from cash flows Movement in debt in the year Debt at the start of the year Debt at the end of the year Year ended 31 December 2017 €’000 Year ended 31 December 2016 €’000 36,702 36,702 36,702 185,592 222,294 39,354 39,354 39,354 146,238 185,592 54 Phoenix Spree Deutschland Annual Report and Accounts 2017 Financial StatementsDirectors’ ReportStrategic Report Notes to the Financial Statements For the year ended 31 December 2017 1. General information The Group consists of a Parent Company, Phoenix Spree Deutschland Limited (‘the Company’), incorporated in Jersey, Channel Islands and all its subsidiaries (‘the Group’) which are incorporated and domiciled in and operate out of Jersey, Guernsey and Germany. Phoenix Spree Deutschland Limited is listed on the premium segment of the Main Market of the London Stock Exchange. The Group invests in residential and commercial property in Germany. The registered office is at 13-14 Esplanade, St Helier, Jersey, JE1 1EE, Channel Islands. 2. Summary of significant accounting policies The principal accounting policies adopted are set out below. 2.1 Basis of preparation The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards, International Accounting Standards and International and Financial Reporting Interpretation Committee (‘IFRIC’) interpretations (collectively ‘IFRS’) as adopted by the European Union (‘IFRS as adopted by the EU’). The financial statements are presented to the nearest €1,000. The Group has adopted all of the new and revised standards and interpretations issued by the International Accounting Standards Board (‘IASB’) and the International Financial Reporting Interpretations Committee (‘IFRIC’) of the IASB, as they have been adopted by the European Union, that are relevant to its operations and effective for accounting periods beginning on 1 January 2017. The consolidated financial statements have been prepared on a going concern basis under the historical cost convention as modified by the revaluation of investment property, and financial assets and liabilities at fair value through profit or loss. The preparation of the consolidated financial statements requires management to exercise its judgement in the process of applying accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions or estimates are significant to the consolidated financial statements are disclosed in note 4. 2.2 Change of accounting policy The performance fee payable to the property manager had previously been disclosed in property expenses. Due to this fee being linked to the fair value increase, it is now presented separately in the consolidated statement of comprehensive income with a restatement of the prior year figures. This has resulted in a reduction of Property Expenses in 2016 by €6.35 million. The change of policy has no effect on reported profit. 2.3 Going concern The Directors have prepared projections for the period to 31 December 2020. These projections have been prepared using assumptions which the Directors consider to be appropriate to the current financial position of the Group as regards to current expected revenues and its cost base and the Group’s investments, borrowing and debt repayment plans and show that the Group should be able to operate within the level of its current resources and expects to comply with all covenants for the foreseeable future. The Group’s business activities together with the factors likely to affect its future development and the Group’s objectives, policies and processes from managing its capital and its risks are set out in the Strategic Report. After making enquiries the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. The Group therefore continues to adopt the going concern basis in preparing its consolidated financial statements. 2.4 Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries). The Company controls an entity when the Group is exposed to, or has rights to, variable returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. Phoenix Spree Deutschland Annual Report and Accounts 2017 55 Financial StatementsDirectors’ ReportStrategic Report 2. Summary of significant accounting policies continued Profit or loss and each component of other comprehensive income are attributable to the owners of the Company and to the non-controlling interests. Total comprehensive income of the subsidiaries is attributable to the owners of the Company and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. Accounting policies of subsidiaries which differ from Group accounting policies are adjusted on consolidation. All intra-Group transactions, balances, income and expenses are eliminated on consolidation. Non-controlling interests in subsidiaries are identified separately from the Group’s equity therein. Those interests of non-controlling Shareholders that present ownership interests entitling their holders to a proportionate share of net assets upon liquidation may initially be measured at fair value or at the non-controlling interests’ proportionate share of the fair value of the acquiree’s identifiable net assets. The choice of measurement is made on an acquisition-by-acquisition basis. Other non-controlling interests are initially measured at fair value. Subsequent to acquisition, the carrying amount of non-controlling interests is the amount of those interests at initial recognition plus the non-controlling interests’ share of subsequent changes in equity. Changes in the Group’s interests in subsidiaries that do not result in a loss of control are accounted for as equity transactions. The carrying amount of the Group’s interests and the non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognised directly in equity and attributed to the owners of the Company. 2.5 Business combinations The Group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair value of the assets transferred to the Group, the liabilities incurred by the Group to the former owners of the acquiree and the equity interests issued by the Group in exchange for control of the acquiree. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The Group recognises any non-controlling interest in the acquiree on an acquisition-by-acquisition basis, either at fair value or at the non-controlling interest’s proportionate share of the recognised amounts of the acquiree’s identifiable net assets. Acquisition-related costs are expensed in the profit or loss as incurred. If the business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date; any gains or losses arising from such remeasurement are recognised in profit or loss. Goodwill is measured as the excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets acquired. If the total of consideration transferred, non-controlling interest recognised and previously held interest measured is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in profit or loss as a bargain purchase gain. 2.6 Asset acquisition The Group applies the acquisition method to account for asset acquisitions. The consideration transferred for the acquisition of a subsidiary is the fair value of the assets transferred to the Group, the liabilities incurred by the Group to the former owners of the acquiree and the equity interests issued by the Group in exchange for control of the acquiree. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired and liabilities and contingent liabilities assumed in an asset acquisition are measured initially at their fair values at the acquisition date. The Group recognises any non-controlling interest in the acquiree on an acquisition-by-acquisition basis, either at fair value or at the non-controlling interest’s proportionate share of the recognised amounts of the acquiree’s identifiable net assets. Acquisition-related costs are expensed in profit or loss as incurred. 56 Phoenix Spree Deutschland Annual Report and Accounts 2017 Financial StatementsDirectors’ ReportStrategic ReportNotes to the Financial Statements continuedFor the year ended 31 December 2017 2. Summary of significant accounting policies continued No goodwill is recognised on asset acquisitions where the nature of the acquisition on the subsidiary is to acquire the property held in the entity. The consideration for the asset acquisition is attributed to the property as fair value at the acquisition date. 2.7 Revenue recognition Revenue includes rental income and excludes service charges and other amounts directly recoverable from tenants. Rental income from operating leases is recognised in income on a straight-line basis over the lease term. When the Group provides incentives to its tenants, the cost of incentives are recognised over the lease term, on a straight-line basis, as a reduction of rental income. 2.8 Foreign currencies (a) Functional and presentation currency The currency of the primary economic environment in which the Company operates (‘the functional currency’) is the Euro (€). The presentational currency of the consolidated financial statements is also the Euro (€). (b) Transactions and balances. Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. At each reporting date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing at that date. Foreign exchange gains and losses resulting from such transactions are recognised in the consolidated statement of comprehensive income. Non-monetary items carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. 2.9 Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Board of Directors. 2.10 Operating profit Operating profit is stated before the Group’s gain or loss on its financial assets and after the revaluation gains or losses for the year in respect of investment properties and after gains or losses on the disposal of investment properties. 2.11 Administrative and property expenses All expenses are accounted for on an accruals basis and are charged to the consolidated statement of comprehensive income in the period in which they are incurred. Service charge costs, to the extent that they are not recoverable from tenants, are accounted for on an accruals basis and included in property expenses. 2.12 Exceptional items Exceptional items are disclosed separately in the consolidated financial statements where this provides further understanding of the financial performance of the Group, due to their significance in terms of nature or amount. 2.13 Property Advisor fees The element of Property Advisor fees for management services provided are accounted for on an accruals basis and are charged to the consolidated statement of comprehensive income within property expenses in the period in which they are incurred. These fees are detailed in note 7 and classified under ‘Property advisors’ fees and expenses’. The settlement of the Property Advisor performance fees is detailed in note 26. The Performance Fee is presented on the face of the Consolidated Statement of Comprehensive Income as a separate line item following restatement from 2016 as detailed in note 2.2. Due to the nature of the settlement of the Performance Fee, any movement in the amount payable at the year end is reflected within the share-based payment reserve on the Consolidated Statement of Financial Position. 2.14 Investment property Property that is held for long-term rental yields or for capital appreciation, or both, and that is not occupied by the Group, is classified as investment property. Phoenix Spree Deutschland Annual Report and Accounts 2017 57 Financial StatementsDirectors’ ReportStrategic Report 2. Summary of significant accounting policies continued Investment property is measured initially at cost, including related transaction costs. After initial recognition, investment property is carried at fair value, based on market value. The change in fair values is recognised in profit or loss for the year. A valuation exercise is undertaken by the Group’s independent valuer, Jones Lang LaSalle GmbH (‘JLL’), at each reporting date in accordance with the methodology described in note 16 on a building-by-building basis. Such estimates are inherently subjective and actual values can only be determined in a sales transaction. The valuations have been prepared by JLL on a consistent basis at each reporting date. Subsequent expenditure is added to the asset’s carrying amount only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. Repairs and maintenance costs are charged to the consolidated statement of comprehensive income during the financial period in which they are incurred. Changes in fair values are recorded in profit or loss for the year. Purchases and sales of investment properties are recognised on legal completion. An investment property is derecognised upon disposal or when the investment property is permanently withdrawn from use and no future economic benefits are expected from the disposal. Any gain or loss arising on derecognition of the property (calculated as the difference between the net disposal proceeds and the carrying amount of the asset, where the carrying amount is the higher of cost or fair value) is included in profit or loss in the period in which the property is derecognised. 2.15 Current assets held for sale – Investment property Non-current assets (and disposal groups) classified as held for sale are measured at the most recent valuation. Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset (or disposal group) is available for immediate sale in its present condition. Management must be committed to the sale which should be expected to qualify for recognition as a completed sale within one year from the date of classification. The Group will recognise an asset in this category once the Board has committed the sale of an asset and marketing has commenced. When the Group is committed to a sale plan involving loss of control of a subsidiary, all of the assets and liabilities of that subsidiary are classified as held for sale when the criteria described above are met, regardless of whether the Group will retain a non-controlling interest in its former subsidiary after the sale. 2.16 Property, plant and equipment Property, plant and equipment is stated at cost less accumulated depreciation. Cost includes the original purchase price of the asset and the costs attributable to bringing the asset to its working condition for its intended use. Depreciation is charged so as to write off the costs of assets to their residual values over their estimated useful lives, on the following basis: Equipment, fixtures and vehicles – 4.50% – 25% per annum, straight line. The gain or loss arising on the disposal of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in profit or loss. 2.17 Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. All other borrowing costs are recognised in profit or loss in the period in which they are incurred. 58 Phoenix Spree Deutschland Annual Report and Accounts 2017 Financial StatementsDirectors’ ReportStrategic ReportNotes to the Financial Statements continuedFor the year ended 31 December 2017 2. Summary of significant accounting policies continued 2.18 Tenants deposits Tenants deposits are held off balance sheet in a separate bank account in accordance with German legal requirements, and the funds are not accessible to the Group. Accordingly, neither an asset nor a liability is recognised. 2.19 Financial instruments Financial assets and financial liabilities are recognised in the Group’s consolidated statement of financial position when the Group becomes party to the contractual provisions of the instrument. Financial assets are derecognised when the contractual rights to the cash flows from the financial asset expire or when the contractual rights to those assets are transferred. Financial liabilities are derecognised when the obligation specified in the contract is discharged, cancelled or expired. The Group classifies its financial assets as held at fair value through profit or loss, or loans and receivables. The classification depends on the purpose for which the financial assets were acquired, and is determined at initial recognition. (a) Financial assets at fair value through profit or loss (‘FVTPL’) Financial assets are classified as FVTPL when the financial asset is designated as FVTPL. A financial asset may be designated as FVTPL upon initial recognition if: • such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or the financial asset forms part of a group of financial assets or financial liabilities, or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group’s documented risk management strategy, and information about the grouping is provided internally on that basis. • Financial assets at FVTPL are stated at fair value, with any gains or losses arising on re-measurement recognised in profit or loss. Fair value is determined in the manner described in note 31. (b) Loans and receivables The Group’s loans and receivables comprise trade and other receivables and cash and cash equivalents. Loans and receivables are recognised initially at fair value and subsequently at amortised cost using the effective interest method. (i) Trade and other receivables Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method less provision for impairment. Appropriate provisions for estimated irrecoverable amounts are recognised in the consolidated statement of comprehensive income when there is objective evidence that the assets are impaired. Interest income is recognised by applying the effective interest rate, except for short-term trade and other receivables when the recognition of interest would be immaterial. Service charges receivable from tenants are presented net of amounts paid on account by tenants. Impairment provisions are recognised when there is objective evidence (such as significant financial difficulties on the part of the counterparty or default or significant delay in payment) that the Group will be unable to collect all of the amounts due. For trade and other receivables, which are reported net, such provisions are recorded in a separate allowance account with the loss being recognised within property expenses in the consolidated statement of comprehensive income. On confirmation that the trade and other receivables will not be collectable, the gross carrying value of the asset is written off against the associated provision. (ii) Cash and cash equivalents Cash and cash equivalents comprise cash in-hand, cash at agents, demand deposits and other short-term highly-liquid investments that have maturities of three months or less from inception, are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. (c) Equity instruments An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Group are recorded at the proceeds received, net of direct issue costs. Phoenix Spree Deutschland Annual Report and Accounts 2017 59 Financial StatementsDirectors’ ReportStrategic Report 2. Summary of significant accounting policies continued (d) Trade and other payables Trade payables are initially measured at their fair value and are subsequently measured at their amortised cost using the effective interest method; this method allocates interest expense over the relevant period by applying the ‘effective interest rate’ to the carrying amount of the liability. (e) Borrowings Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the consolidated statement of comprehensive income over the period of the borrowings using the effective interest method. (f) Leases Rental income from operating leases is recognised on a straight-line basis over the term of the relevant lease. 2.20 Current and deferred income tax The tax expense for the period comprises current and deferred tax. Tax is recognised in the Consolidated Statement of Comprehensive Income, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In that case, the tax is also recognised in other comprehensive income or directly in equity, respectively. (a) Current tax The current tax charge is based on taxable profit for the year. Taxable profit differs from net profit reported in the Consolidated Statement of Comprehensive Income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the accounting date. (b) Deferred tax Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Deferred tax is charged or credited in the Consolidated Statement of Comprehensive Income except when it relates to items credited or charged directly in equity, in which case the deferred tax is also dealt with in equity. Deferred tax is calculated at the tax rates and laws that are expected to apply to the period when the asset is realised or the liability is settled based upon tax rates that have been enacted or substantively enacted by the accounting date. The carrying amount of deferred tax assets is reviewed at each accounting date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. 2.21 New standards and interpretations No new standards, amendments or interpretations effective for annual periods beginning on or after 1 January 2017 had an impact on the Group. The following relevant new standards, amendments to standards and interpretations have been issued, but are not effective for the financial year beginning on 1 January 2017, as adopted by the European Union, and have not been early adopted: Title As issued by the IASB, mandatory for accounting periods starting on or after IFRS 9 – Financial Instruments IFRS 15 Revenue from Contracts with Customers IFRS 16 Leases IFRIC 22 – Foreign currency transactions and advance consideration Accounting periods beginning on or after 1 January 2018 Accounting periods beginning on or after 1 January 2018 Accounting periods beginning on or after 1 January 2019 Accounting periods beginning on or after 1 January 2018 The Directors have considered that the adoption of these standards and interpretations in future periods will have no material impact on the financial statements of the Group. The Group has no income that is covered under IFRS 15 because its income deriving from rentals is covered under IAS 17. Furthermore, the impact of IFRS 16 removes the differentiation between financial and operational leases with regard to the Lessee party. As the Group is the lessor in their contractual arrangements IFRS 16’s approach is substantially unchanged from its predecessor, IAS 17. 60 Phoenix Spree Deutschland Annual Report and Accounts 2017 Financial StatementsDirectors’ ReportStrategic ReportNotes to the Financial Statements continuedFor the year ended 31 December 2017 2. Summary of significant accounting policies continued The following standards have been issued by the IASB but have not yet been adopted by the EU: Title As issued by the IASB, mandatory for accounting periods starting on or after Classification and Measurement of Share-based Payment Transactions Accounting periods beginning on or after 1 January 2018 (Amendments to IFRS 2) Transfer of Investment Property (Amendments to IAS 40) IFRIC 23 – Uncertainty over Income Tax Treatments Accounting periods beginning on or after 1 January 2018 Accounting periods beginning on or after 1 January 2019 While the above standards have not yet been adopted by the EU, the Group is currently assessing their impact. 3. Financial risk management 3.1 Financial risk factors The Group’s activities expose it to a variety of financial risks: market risk, credit risk and liquidity risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial performance. Risk management is carried out by the Risk Committee (previously the Audit and Risk Committee up to 17 April 2018) under policies approved by the Board of Directors. The Board provides principles for overall risk management, as well as policies covering specific areas, such as interest rate risk, credit risk and investment of excess liquidity. 3.2 Market risk Market risk is the risk of loss that may arise from changes in market factors such as foreign exchange rates, interest rates and general property market risk. (a) Foreign exchange risk The Group operates in Germany and is exposed to foreign exchange risk arising from currency exposures, primarily with respect to Sterling against the Euro arising from the costs which are incurred in Sterling. Foreign exchange risk arises from future commercial transactions, and recognised monetary assets and liabilities denominated in currencies other than the Euro. The Group’s policy is not to enter into any currency hedging transactions. (b) Interest rate risk The Group has exposure to interest rate risk. It has external borrowings at a number of different variable interest rates. The Group is also exposed to interest rate risk on some of its financial assets, being its cash at bank balances. Details of actual interest rates paid or accrued during each period can be found in note 24 to the consolidated financial statements. The Group’s policy is to manage its interest rate risk by entering into interest rate swaps in order to limit exposure to borrowings at variable rates. (c) General property market risk Through its investment in property, the Group is subject to other risks which can affect the value of property. The Group seeks to minimise the impact of these risks by review of economic trends and property markets in order to anticipate major changes affecting property values. 3.3 Credit risk The risk of financial loss due to counterparty’s failure to honour their obligations arises principally in connection with property leases and the investment of surplus cash. The Group has policies in place to ensure that rental contracts are made with customers with an appropriate credit history. Tenant rent payments are monitored regularly and appropriate action taken to recover monies owed, or if necessary, to terminate the lease. Cash transactions are limited to financial institutions with a high credit rating. Phoenix Spree Deutschland Annual Report and Accounts 2017 61 Financial StatementsDirectors’ ReportStrategic Report 3. Financial risk management continued 3.4 Liquidity risk The Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of bank loans secured on the Group’s properties. The terms of the borrowings entitle the lender to require early repayment should the Group be in default with significant payments for more than one month. 3.5 Capital management The prime objective of the Group’s capital management is to ensure that it maintains the financial flexibility needed to allow for value-creating investments as well as healthy balance sheet ratios. The capital structure of the Group consists of net debt (borrowings disclosed in note 22 after deducting cash and cash equivalents) and equity of the Group (comprising stated capital, reserves and retained earnings). When reviewing the capital structure the Group considers the cost of capital and the risks associated with each class of capital. The Group reviews the gearing ratio which is determined as the proportion of net debt to equity. In comparison with comparable companies operating within the property sector the Board considers the gearing ratios to be reasonable. The gearing ratios for the reporting periods are as follows: Borrowings Cash and cash equivalents Net debt Equity Net debt to equity ratio As at 31 December 2017 €’000 (222,294) 27,182 (195,112) 367,942 53% As at 31 December 2016 €’000 (185,592) 18,450 (167,142) 235,259 71% 4. Critical accounting estimates and judgements The preparation of consolidated financial statements in conformity with IFRS requires the Group to make certain critical accounting estimates and judgements. In the process of applying the Group’s accounting policies, management has decided the following estimates and assumptions have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the financial year; i) Estimate of fair value of investment properties The best evidence of fair value is current prices in an active market of investment properties with similar leases and other contracts. In the absence of such information, the Group determines the amount within a range of reasonable fair value estimates. In making its judgement, the Group considers information from a variety of sources, including: a) Current prices in an active market, and its third party independent experts, for properties of different nature, condition or location (or subject to different lease or other contracts), adjusted to reflect those differences. b) Recent prices of similar properties in less active markets, with adjustments to reflect any changes in economic conditions since the date of the transactions that occurred at those prices. c) Discounted cash flow projections based on reliable estimates of future cash flows, derived from the terms of any existing lease and other contracts, and (where possible) from external evidence such as current market rents for similar properties in the same location and condition, and using discount rates that reflect current market assessments of the uncertainty in the amount and timing of the cash flows. The Directors remain ultimately responsible for ensuring that the valuers are adequately qualified, competent and base their results on reasonable and realistic assumptions. The Directors have appointed JLL as the real estate valuation experts who determine the fair value of investment properties using recognised valuation techniques and the principles of IFRS 13. Further information on the valuation process can be found in note 16. 62 Phoenix Spree Deutschland Annual Report and Accounts 2017 Financial StatementsDirectors’ ReportStrategic ReportNotes to the Financial Statements continuedFor the year ended 31 December 2017 4. Critical accounting estimates and judgements continued ii) Judgement in relation to the recognition of assets held for sale Management has assumed the likelihood of investment properties – held for sale, being sold within 12 months, in accordance with the requirement of IFRS 5. Management considers that based on historical and current experience that the properties can be reasonably expected to sell within 12 months. 5. Segmental information Information reported to the Board of Directors, which is the chief operating decision-maker, for the purposes of resource allocation and assessment of segment performance is focussed on the different revenue streams that exist within the Group. The Group’s principal reportable segments under IFRS 8 are therefore as follows: • • commercial. residential; and All revenues are earned in Germany with property and administrative expenses incurred in Jersey and Germany. 31 December 2016 Investment property Loans and receivables Investment properties – held for sale Other assets Liabilities Net assets Revenue Property expenses (restated – see note 2.2) Administrative expenses Gain on disposal of investment property Investment property fair value gain Performance fee Operating profit Net finance charge Income tax expense Profit for the year Residential €’000 332,496 – 23,495 22,447 (179,711) 198,727 Commercial €’000 Unallocated €’000 63,333 – 4,475 4,276 (34,231) 37,853 – 2,253 – 40 (3,614) (1,321) Residential €’000 Commercial €’000 Unallocated €’000 13,385 (11,215) – 799 46,390 – 49,359 2,549 (2,136) – – 8,836 – 9,249 – – (2,977) – – (6,350) (9,327) Total €’000 395,829 2,253 27,970 26,763 (217,556) 235,259 Total €’000 15,934 (7,001) (2,977) 799 55,226 (6,350) 55,631 (6,756) (10,913) 37,962 Phoenix Spree Deutschland Annual Report and Accounts 2017 63 Financial StatementsDirectors’ ReportStrategic Report 5. Segmental information continued 31 December 2017 Investment properties Loans and receivables Investment properties – held for sale Other assets Liabilities Net assets Revenue Property expenses Administrative expenses Gain on disposal of investment property Investment property fair value gain Performance fee Operating profit Net finance charge Income tax expense Profit for the year 6. Revenue Rental income Commercial €’000 Unallocated €’000 57,872 – 12,315 4,344 (7,843) – 2,323 – 92 (8,577) (6,162) 307,416 66,688 Residential €’000 Commercial €’000 Unallocated €’000 Residential €’000 444,488 – 94,582 33,366 (265,020) 15,997 (6,194) – 5,319 139,245 – 154,367 Total €’000 502,360 2,323 106,897 37,802 (281,440) 367,942 Total €’000 18,080 (7,000) (2,967) 5,319 157,374 (26,339) 2,083 (806) – – 18,129 – – – (2,967) – – (26,339) 19,406 (29,306) 144,467 (5,995) (26,150) 112,322 31 December 2017 €’000 18,080 31 December 2016 €’000 15,934 The total future aggregated minimum rentals receivable under non-cancellable operating leases are as follows: Not later than one year Later than one year but not later than five years Later than five years 31 December 2017 €’000 904 3,364 1,398 5,666 31 December 2016 €’000 309 3,171 2,605 6,085 Revenue comprises rental income earned from residential and commercial property in Germany. There are no individual tenants that account for greater than 10% of revenue during any of the reporting periods. The leasing arrangements for residential property are with individual tenants, with one month notice for cancellation of the lease in most cases. The commercial leases are non-cancellable, with an average lease period of three years. 64 Phoenix Spree Deutschland Annual Report and Accounts 2017 Financial StatementsDirectors’ ReportStrategic ReportNotes to the Financial Statements continuedFor the year ended 31 December 2017 7. Property expenses Property management expenses Repairs and maintenance Impairment charge – trade receivables Other property expenses Property advisors’ fees and expenses 8. Administrative expenses Secretarial & administration fees Legal & professional fees Directors’ fees Audit and accountancy fees Bank charges Loss on foreign exchange Depreciation Other income 31 December 2017 €’000 31 December 2016 €’000 1,079 1,433 41 238 4,209 7,000 1,100 1,102 88 1,324 3,387 7,001 31 December 2017 €’000 31 December 2016 €’000 901 1,045 148 894 56 20 23 (120) 2,967 658 1,494 150 586 32 319 12 (274) 2,977 Key management compensation – the functions of management are undertaken by external providers of professional services, as set out in note 32. Further details of the Directors’ fees are set out in the Directors’ Remuneration Report on page 43. 9. Auditor’s remuneration An analysis of the fees charged by the auditor and its associates is as follows: Fees payable to the Group’s auditor and its associates for the audit of the consolidated financial statements: Fees payable to the Group’s auditor and its associates for other services: – Corporate finance – Audit-related assurance services 10. Gains on disposal of investment property (including investment property held for sale) Net proceeds Book value of disposals Disposal costs 31 December 2017 €’000 176 26 24 226 31 December 2016 €’000 141 150 25 316 31 December 2017 €’000 61,652 (55,117) (1,216) 5,319 31 December 2016 €’000 4,250 (3,405) (46) 799 Where there has been a partial disposal of a property, the net book value of the asset sold is calculated on a per sqm rate, based on the prior period or interim valuation. Phoenix Spree Deutschland Annual Report and Accounts 2017 65 Financial StatementsDirectors’ ReportStrategic Report 11. Investment property fair value gain Investment property fair value gain Further information on investment properties is shown in note 16. 12. Net finance charge Interest income Interest from partners’ loans (Gain)/Loss on interest rate swap Interest payable on bank borrowings Finance arrangement fee amortisation Finance charge on redemption liability 13. Income tax expense The tax charge for the period is as follows: Current tax charge Adjustment in respect of prior year Deferred tax charge – origination and reversal of temporary differences 31 December 2017 €’000 157,374 31 December 2016 €’000 55,226 31 December 2017 €’000 (116) (57) (1,535) 5,080 550 2,073 5,995 31 December 2016 €’000 (113) (55) 3,000 2,753 217 954 6,756 31 December 2017 €’000 2,940 – 23,210 26,150 31 December 2016 €’000 24 (1) 10,890 10,913 The tax charge for the year can be reconciled to the theoretical tax charge on the profit in the income statement as follows: Profit before tax on continuing operations Tax at German income tax rate of 15.8% (2016: 15.8%) Income not taxable Recognition of timing differences on acquisition Tax effect of expenses that are not deductible in determining taxable profit Total tax charge for the year Reconciliation of current tax liabilities Balance at beginning of year Tax paid during the year Current tax charge Balance at end of year 66 Phoenix Spree Deutschland Annual Report and Accounts 2017 31 December 2017 €’000 138,472 31 December 2016 €’000 48,875 21,879 (840) – 5,111 26,150 7,722 (126) 1,686 1,631 10,913 31 December 2017 €’000 31 December 2016 €’000 24 (50) 2,940 2,914 – – 24 24 Financial StatementsDirectors’ ReportStrategic ReportNotes to the Financial Statements continuedFor the year ended 31 December 2017 13. Income tax expense continued Reconciliation of deferred tax Balance at 1 January 2016 Charged to the statement of comprehensive income Deferred tax (liability)/asset at 31 December 2016 Charged to the statement of comprehensive income Deferred tax (liability)/asset at 31 December 2017 Jersey income tax The Group is liable to Jersey income tax at 0%. Guernsey income tax The Group is liable to Guernsey income tax at 0%. Capital gains on properties €’000 (Liabilities) Interest rate swaps €’000 Asset (10,786) (11,364) (22,150) (22,967) (45,117) 296 474 770 (243) 527 Total €’000 (Net liabilities) (10,490) (10,890) (21,380) (23,210) (44,590) German tax As a result of the Group’s operations in Germany, the Group is subject to German Corporate Income Tax (‘CIT’) – the effective rate for Phoenix Spree Deutschland Limited for 2017 was 15.8% (2016: 15.8%). Factors affecting future tax charges The Group has accumulated tax losses of approximately €18.1 million (2016: €23.6 million) in Germany, which will be available to set against suitable future profits should they arise, subject to the criteria for relief. No deferred tax asset is recognised in respect of losses of €0.3 million (2016: €2.2 million) as there is insufficient certainty the losses can be utilised by Group entities. 14. Dividends Amounts recognised as distributions to equity holders in the period: Interim dividend for the year ended 31 December 2017 of €1.9 cents (1.6p) (2016: €1.9 cents (1.6p)) per share Proposed final dividend for the year ended 31 December 2017 of €5.0 cents (4.4p) (2016: €4.3 cents (3.7p)) per share 31 December 2017 €’000 2,079 5,038 31 December 2016 €’000 1,635 3,977 The proposed final dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these consolidated financial statements. The proposed dividend is payable to all Shareholders on the Register of Members on 8 June 2018. The total estimated dividend to be paid is 4.4p per share. The payment of this dividend will not have any tax consequences for the Group. Phoenix Spree Deutschland Annual Report and Accounts 2017 67 Financial StatementsDirectors’ ReportStrategic Report 15. Subsidiaries The Group consists of a Parent Company, Phoenix Spree Deutschland Limited, incorporated in Jersey, Channel Islands and a number of subsidiaries held directly by Phoenix Spree Deutschland Limited, which are incorporated in and operated out of Jersey, Guernsey and Germany. Further details are given below: Phoenix Spree Deutschland I Limited Phoenix Spree Deutschland II Limited Phoenix Spree Deutschland III Limited Phoenix Spree Deutschland IV Limited Phoenix Spree Deutschland V Limited Phoenix Spree Deutschland VII Limited Phoenix Spree Deutschland IX Limited Phoenix Spree Deutschland X Limited Phoenix Spree Deutschland XI Limited Phoenix Spree Deutschland XII Limited Phoenix Property Holding GmbH & Co. KG Laxpan Mueller GmbH Invador Grundbesitz GmbH PSPF Holdings GmbH PSPF General Manager GmbH (in liquidation) PSPF Acquisition Vehicle GmbH (in liquidation) PSPF Property GmbH & Co. KG (in liquidation) Phoenix Spree Property Fund Ltd & Co. KG PSPF General Partner (Guernsey) Limited Country of incorporation % holding Nature of business Jersey Jersey Jersey Jersey Jersey Jersey Jersey Jersey Jersey Jersey Germany Germany Germany Germany Germany Germany Germany Germany Guernsey 100 100 100 100 100 100 100 100 100 100 100 94.9 94.9 100 100 99.64 94 94.8 100 Investment property Investment property Investment property Investment property Investment property Investment property Investment property Finance vehicle Investment property Investment property Holding Company Investment property Investment property Holding Company Management of PSPF Acquisition vehicle Investment property Investment property Management of PSPF The investments in PSPF General Manager GmbH and PSPF Acquisition Vehicle GmbH & Co. KG are all held via the investment is PSPF Holdings GmbH, which was acquired on 7 September 2007. The other subsidiaries are held directly. 16. Investment properties Fair value At 1 January Capital expenditure Property additions Disposals Fair value gain Investment properties at fair value – as set out in the report by JLL Assets considered as ‘Held for Sale’ (note 17) At 31 December 2017 €’000 2016 €’000 423,799 6,715 76,486 (55,117) 157,374 609,257 (106,897) 283,554 4,189 84,235 (3,405) 55,226 423,799 (27,970) 502,360 395,829 The property portfolio was valued at 31 December 2017 by the Group‘s independent valuers, Jones Lang LaSalle GmbH (‘JLL’), in accordance with the methodology described below. The valuations were performed in accordance with the current Appraisal and Valuation Standards, 8th edition (the ‘Red Book’) published by the Royal Institution of Chartered Surveyors (‘RICS’). The valuation is performed on a building-by-building basis and the source information on the properties including current rent levels, void rates and non-recoverable costs was provided to JLL by the Property Advisors PMM Partners (UK) Limited. Assumptions with respect to rental growth, adjustments to non-recoverable costs and the future valuation of these are those of JLL. Such estimates are inherently subjective and actual values can only be determined in a sales transaction. Having reviewed the JLL report, the Directors are of the opinion that this represents a fair and reasonable valuation of the properties and have consequently adopted this valuation in the preparation of the consolidated financial statements. 68 Phoenix Spree Deutschland Annual Report and Accounts 2017 Financial StatementsDirectors’ ReportStrategic ReportNotes to the Financial Statements continuedFor the year ended 31 December 2017 16. Investment properties continued The valuations have been prepared by JLL on a consistent basis at each reporting date and the methodology is consistent and in accordance with IFRS which requires that the ‘highest and best use’ value is taken into account where that use is physically possible, legally permissible and financially feasible for the property concerned, and irrespective of the current or intended use. All properties are valued as Level 3 measurements under the fair value hierarchy (see note 31) as the inputs to the discounted cash flow methodology which have a significant effect on the recorded fair value are not observable. The unrealised fair value gain in respect of investment property is disclosed in the Consolidated Statement of Comprehensive Income as ‘Investment property fair value gain’. Valuations are undertaken using the discounted cash flow valuation technique as described below and with the inputs set out below. Discounted cash flow methodology (‘DCF’) The fair value of investment properties is determined using discounted cash flows. Under the DCF method, a property’s fair value is estimated using explicit assumptions regarding the benefits and liabilities of ownership over the asset’s life including an exit or terminal value. As an accepted method within the income approach to valuation the DCF method involves the projection of a series of cash flows on a real property interest. To this projected cash flow series, an appropriate, market-derived discount rate is applied to establish the present value of the income stream associated with the real property. The duration of the cash flow and the specific timing of inflows and outflows are determined by events such as rent reviews, lease renewal and related lease up periods, re-letting, redevelopment or refurbishment. The appropriate duration is typically driven by market behaviour that is a characteristic of the class of real property. Periodic cash flow is typically estimated as gross income less vacancy, non-recoverable expenses, collection losses, lease incentives, maintenance cost, agent and commission costs and other operating and management expenses. The series of periodic net operating incomes, along with an estimate of the terminal value anticipated at the end of the projection period, is then discounted. Phoenix Spree Deutschland Annual Report and Accounts 2017 69 Financial StatementsDirectors’ ReportStrategic Report 16. Investment properties continued The principal inputs to the valuation are as follows: Residential Properties Market Rent Rental Value (€ per sq. p.m.) Stabilised residency vacancy (% per year) Tenancy vacancy fluctuation (% per year) Commercial Properties Market Rent Rental Value (€ per sq. p.m.) Stabilised commercial vacancy (% per year) Tenancy vacancy fluctuation (% per year) Estimated Rental Value (‘ERV’) ERV per year (€’000) ERV (€ per sq.) Financial Rates Discount rate (%) Portfolio yield (%) Year ended 31 December 2017 Range Year ended 31 December 2016 Range 5-13 2 8-10 2-28 0-26 10 5-13 2 10 1-29 0-4 10 48-1,200 5-14 25-1,014 5-13 3-9 2-8 4-8 3-8 Sensitivity Changes in the key assumptions and inputs to the valuation models used would impact the valuations as follows: Vacancy: A change in vacancy by 1% would not materially affect the investment property fair value assessment. Rental value: All other factors remaining equal an increase in rental income would increase valuations. Correspondingly, a decrease in rental values would decrease valuations. Discount rate: An increase of 0.5% in the discount rate would reduce the investment property fair value by €85.9 million, and a decrease in the discount rate would increase the investment property fair value by €129.9 million. There are, however, inter-relationships between unobservable inputs as they are determined by market conditions. The existence of an increase of more than one unobservable input could amplify the impact on the valuation. Conversely, changes on unobservable inputs moving in opposite directions could cancel each other out, or lessen the overall effect. 70 Phoenix Spree Deutschland Annual Report and Accounts 2017 Financial StatementsDirectors’ ReportStrategic ReportNotes to the Financial Statements continuedFor the year ended 31 December 2017 16. Investment properties continued The Group categorises all investment properties in the following three ways; Rental scenario Where properties have been valued under the ‘Discounted Cashflow Methodology’ and are intended to be held by the Group for the foreseeable future, they are considered valued under the ‘Rental Scenario’. This will equal the ‘Investment Properties line in the Non-Current Assets section of the Consolidated Statement of Financial Position. Condominium scenario Where properties have the potential or the benefit of all relevant permissions required to sell apartments individually (condominiums) then we refer to this as a ‘condominium scenario’. These assets are considered held for sale under IFRS 5 and can be seen in note 17. The additional value is reflected by using a lower discount rate under the DCF Methodology. Properties’ which do not have the benefit of all relevant permissions are described as valued using a standard ‘rental scenario’. Disposal scenario Where properties have been notarised for sale prior to the balance sheet date, but have not completed; they are held at their notarised disposals value. These assets are considered held for sale under IFRS 5 and can be seen in note 17. The table below sets out the assets valued using these three scenarios: Rental scenario Condominium scenario Disposal scenario Total 31 December 2017 €’000 31 December 2016 €’000 502,360 29,847 77,050 609,257 388,509 35,290 – 423,799 The 2016 condominium scenario does not equal the 2016 assets held for sale due to an asset being valued under a condominium scenario methodology but did not meet the requirement of IFRS 5 to be treated as an asset held for sale. The movement in the fair value of investment properties is included in the Consolidated Statement of Comprehensive Income as ‘gain on disposal of investment property’ and comprises: Investment properties Properties held for sale (see note 17) 17. Investment properties – Held for sale Fair value – held for sale investment properties At 1 January Transferred from investment properties Apartments sold Valuation gain on apartments held for sale At 31 December 31 December 2017 €’000 31 December 2016 €’000 155,787 1,587 157,374 2017 €’000 27,970 88,990 (11,650) 1,587 106,897 55,226 – 55,226 2016 €’000 – 27,970 – – 27,970 Investment properties are re-classified as current assets and described as ‘held for sale’ in three different situations: properties notarised for sale at the reporting date; properties where at the reporting date the Group has obtained and implemented all relevant permissions required to sell individual apartment units, and efforts are being made to dispose of the assets (condominium); and properties which are being marketed for sale but have currently not been notarised. Phoenix Spree Deutschland Annual Report and Accounts 2017 71 Financial StatementsDirectors’ ReportStrategic Report 17. Investment properties – Held for sale continued Properties notarised for sale by the reporting date are valued at their disposal price (disposal scenario), and other properties are valued using the condominium or rental scenarios (see note 16) as appropriate. The table below sets out the respective categories: Condominium scenario Disposal scenario 2017 €’000 29,847 77,050 106,897 2016 €’000 – – 27,970 Investment properties held for sale are all expected to be sold within 12 months of the reporting date based on management knowledge of current and historic market conditions. There were liabilities secured on the investment properties held for sale of €56.9 million (2016: €11.7 million). 18. Property, plant and equipment Cost or valuation As at 1 January 2016 Additions As at 31 December 2016 Additions As at 31 December 2017 Accumulated depreciation and impairment As at 1 January 2016 Charge for the year As at 31 December 2016 Charge for the year As at 31 December 2017 Carrying amount As at 31 December 2016 As at 31 December 2017 19. Loans and receivables At 1 January Loans issued to minority interest – initial recognition at fair value Accrued interest At 31 December Equipment €’000 36 22 58 75 133 6 12 18 23 41 40 92 31 December 2017 €’000 31 December 2016 €’000 2,253 – 70 2,323 1,382 806 65 2,253 The Group entered into loan agreements with Mike Hilton and Paul Ruddle in connection with the acquisition of PSPF. The loans bear interest at 4% per annum, and have a maturity of less than five years. The Group also entered into a loan agreement with the minority interest of Accentero Real Estate AG (formerly Blitz B16 – 210 GmbH) in relation to the acquisition of the assets as share deals. This loan bears interest at 3% per annum. 72 Phoenix Spree Deutschland Annual Report and Accounts 2017 Financial StatementsDirectors’ ReportStrategic ReportNotes to the Financial Statements continuedFor the year ended 31 December 2017 20. Trade and other receivables Current Trade receivables Less: impairment provision Net receivables Prepayments and accrued income Investment property disposal proceeds receivable Sundry receivables Aging analysis of trade receivables Up to 12 months Between 1 year and 2 years Over 3 years Movements in the impairment provision against trade receivables are as follows: Balance at the beginning of the year Impairment losses recognised Amounts written off as uncollectable Balance at the end of the year 21. Cash and cash equivalents Cash at bank Cash at agents Cash and cash equivalents 31 December 2017 €’000 31 December 2016 €’000 691 (342) 349 6,521 2,232 899 10,001 1,344 (383) 961 6,050 21 471 7,503 31 December 2017 €’000 31 December 2016 €’000 344 5 – 349 902 40 19 961 31 December 2017 €’000 31 December 2016 €’000 383 180 (221) 342 295 319 (231) 383 31 December 2017 €’000 31 December 2016 €’000 25,518 1,664 27,182 17,107 1,343 18,450 Phoenix Spree Deutschland Annual Report and Accounts 2017 73 Financial StatementsDirectors’ ReportStrategic Report 22. Borrowings Current liabilities Bank loans – Kreissparkasse Boblingen District Savings Bank Bank loans – Deutsche Genossenschafts-Hypothekenbank AG Bank loans – Berliner Sparkasse Bank loans – Sparkasse Langenfeld Non-current liabilities Bank loans – Deutsche Genossenschafts-Hypothekenbank AG Bank loans – Berliner Sparkasse Bank loans – HypoVereinsbank 31 December 2017 €’000 31 December 2016 €’000 – 2,020 626 – 2,646 167,656 51,992 – 219,648 222,294 2,869 – – 6,300 9,169 171,418 – 5,005 176,423 185,592 All borrowings are secured against the investment properties of the Group. As at 31 December 2017, the Company had €0.6 million of undrawn debt facilities (2016: €13.6 million was available to be drawn down, from three separate loan facilities. €2.0 million from a €81.5 million facility with interest rate 1.4%, €1 million from a €9.3 million facility with interest rate 1.34%, and €10.6 million undrawn, from a €10.6 million facility with interest rate 1.75%). 23. Trade and other payables Trade payables Accrued liabilities Deferred income 24. Derivative financial instruments Interest rate swaps – carried at fair value through profit or loss Balance at 1 January Additions on acquisition (Gain)/Loss in movement in fair value through profit or loss. Balance at 31 December 31 December 2017 €’000 31 December 2016 €’000 1,489 622 8 2,119 791 533 7 1,331 31 December 2017 €’000 31 December 2016 €’000 4,869 – (1,536) 3,333 1,869 392 2,608 4,869 The notional principal amounts of the outstanding interest rate swap contracts at 31 December 2017 were €188,165,000 (2016: €175,932,000). At 31 December 2017 the fixed interest rates vary from 0.402% to 0.775% (2016: 0.040% to 0.705%) above the main factoring Euribor rate. Maturity analysis of interest rate swaps Less than 1 year Between 1 and 2 years Between 2 and 5 years More than 5 years 74 Phoenix Spree Deutschland Annual Report and Accounts 2017 31 December 2017 €’000 31 December 2016 €’000 – – – 3,333 3,333 392 – – 4,477 4,869 Financial StatementsDirectors’ ReportStrategic ReportNotes to the Financial Statements continuedFor the year ended 31 December 2017 25. Other financial liabilities Balance at 1 January Recognition of redemption liability Profit share attributable to NCI in PSPF Balance at 31 December 31 December 2017 €’000 31 December 2016 €’000 3,590 – 2,073 5,663 – 2,626 964 3,590 The redemption liability relates to the put option held by the minority shareholders of PSPF for the purchase of the minority interest in PSPF. The option period starts on 6 June 2020. The amount of the purchase price will be based on the EPRA NAV on the balance sheet date as well as the movement in the EPRA NAV during the year and the proportion of EPRA NAV attributable to the non-controlling interest in PSPF. A portion of the liability (€795 thousand, 2016: (€378 thousand)) is recognised to cover the tax charge of the minority in PSPF on the proceeds received if they choose to exercise their put option. The recognition of the redemption liability has been accounted for as a reduction in the non-controlling interest with the remainder of the recognition against the Group’s retained earnings. Also see the Consolidated Statement of Changes in Equity for the recognition accounting. 26. Share-based payment reserve Balance at 1 January 2016 Fee charge for the period Balance at 31 December 2016 Fee charge for the period Balance at 31 December 2017 Performance Fee €’000 1,264 6,350 7,614 26,339 33,953 Property Advisor fees The Property Advisor is entitled to an asset and estate management Performance Fee, measured over consecutive three-year periods, equal to 20% of the excess by which the annual EPRA NAV total return of the Group exceeds 8% per annum, compounding (the ‘Performance Fee’). The Performance Fee is subject to a high watermark, being the higher of: (i) the most recently published EPRA NAV on 4 March 2015; and (ii) the highest previously recorded EPRA NAV total return at the end of a performance period The Company’s EPRA NAV performance for the three years ending 31 December 2017 has resulted in a performance fee liability under the Property Advisory Agreement to the Property Advisor of circa €34 million. The parties have agreed that this performance fee (but not any further performance fees that may become due) shall be settled through the issuance by the Company to the Property Advisor of 8,260,065 new shares in the Company at EPRA NAV per share. 50% of the shares issued in settlement of this fee are subject to a 12-month restriction on disposal. Application will be made for the new shares, once issued, to be admitted to trading on the premium segment of the Official List and to trading on the Main Market of the London Stock Exchange. Under the Property Advisory Agreement for providing property advisory services, the Property Advisor is also entitled to a Portfolio and Asset Management Fee as follows: (i) 1.50% of the EPRA NAV of the Group where the EPRA NAV of the Group is equal to or less than €250 million; (ii) 1.25% of the EPRA NAV of the Group between €250 million and €500 million; and (iii) 1% of the EPRA NAV of the Group greater than €500 million. Phoenix Spree Deutschland Annual Report and Accounts 2017 75 Financial StatementsDirectors’ ReportStrategic Report 26. Share-based payment reserve continued The Property Advisor is entitled to a capex monitoring fee equal to 7% of any capital expenditure incurred by any subsidiary which the Property Advisor is responsible for managing (the ‘Capex Monitoring Fee’). The Property Advisor is entitled to receive a finance fee equal to: (i) 0.1% of the value of any borrowing arrangement which the Property Advisor has negotiated and/or supervised; and (ii) a fixed fee of £1,000 in respect of any borrowing arrangement which the Property Advisor has renegotiated or varied. The Property Advisor is entitled to receive a transaction fee fixed at £1,000 in respect of any acquisition or disposal of property by any subsidiary. Details of the fees paid to the Property Advisor are set out in note 32. 27. Stated capital Issued and fully paid: 40,522,364 participating shares of no par value, issued at a consideration of GBP1 each 5,896,369 participating shares of no par value, issued at a consideration of GBP1.11 each 19,237,484 participating shares of no par value, issued at a consideration of GBP1.46 each 4,216,080 participating shares of no par value, issued at a consideration of GBP1.44 each 22,619,047 participating shares of no par value, issued at a consideration of GBP1.68 each on 4 March 2016, less costs of €1.6 million associated with placing. 31 December 2017 €’000 31 December 2016 €’000 60,027 7,681 39,052 8,390 60,027 7,681 39,052 8,390 47,480 47,480 162,630 162,630 The number of shares in issue at 31 December 2017 was 92,491,344 (31 December 2016: 92,491,344). 28. Non-controlling interests Invador Grundbesitz GmbH Laxpan Mueller GmbH Non-controlling interest % 31 December 2017 €’000 31 December 2016 €’000 5.1 5.1 915 810 1,725 467 474 941 The non-controlling interest relates to the subsidiaries Invador Grundbesitz GmbH and Laxpan Mueller GmbH. 29. Earnings per share Earnings for the purposes of basic earnings per share being net profit attributable to owners of the parent (€’000) Weighted average number of Ordinary Shares for the purposes of basic earnings per share (Number) Effect of dilutive potential Ordinary Shares (Number) 111,538 92,491,344 7,677,250 36,998 88,587,235 2,829,885 Weighted average number of Ordinary Shares for the purposes of diluted earnings per share (Number) 100,168,594 91,417,120 Earnings per share (€) Diluted earnings per share (€) 1.21 1.11 0.42 0.40 31 December 2017 31 December 2016 76 Phoenix Spree Deutschland Annual Report and Accounts 2017 Financial StatementsDirectors’ ReportStrategic ReportNotes to the Financial Statements continuedFor the year ended 31 December 2017 30. Net asset value per share and EPRA net asset value Net assets (€’000) Number of participating Ordinary Shares Net asset value per share (€) EPRA net asset value Net assets (€’000) Add back deferred tax assets and liabilities, derivative financial instruments, goodwill and share-based payment reserves (€’000) EPRA net asset value (€’000) EPRA net asset value per share (€) 31 December 2017 31 December 2016 366,217 92,491,344 3.96 234,318 92,491,344 2.53 31 December 2017 31 December 2016 366,217 234,318 13,970 18,635 380,187 4.11 252,953 2.73 31. Financial instruments The Group is exposed to the risks that arise from its use of financial instruments. This note describes the objectives, policies and processes of the Group for managing those risks and the methods used to measure them. Further quantitative information in respect of these risks is presented throughout the financial statements. financial assets; Principal financial instruments The principal financial instruments used by the Group, from which financial instrument risk arises, are as follows: • • cash and cash equivalents; trade and other receivables; • • trade and other payables; • borrowings; and • derivative financial instruments. The Group held the following financial assets at each reporting date: Loans and receivables Trade and other receivables – current Cash and cash equivalents Loans and receivables The Group held the following financial liabilities at each reporting date: Held at amortised cost Borrowings payable: current Borrowings payable: non-current Other financial liabilities Trade and other payables Fair value through profit or loss Derivative financial liability – interest rate swaps 31 December 2017 €’000 31 December 2016 €’000 3,480 27,182 2,323 32,985 1,453 18,450 2,253 22,156 31 December 2017 €’000 31 December 2016 €’000 2,646 219,648 5,663 2,119 230,076 3,333 3,333 9,169 176,423 3,590 1,331 190,513 4,869 4,869 233,409 195,382 Phoenix Spree Deutschland Annual Report and Accounts 2017 77 Financial StatementsDirectors’ ReportStrategic Report 31. Financial instruments continued Fair value of financial instruments With the exception of the variable rate borrowings, the fair values of the financial assets and liabilities are not materially different to their carrying values due to the short-term nature of the current assets and liabilities or due to the commercial variable rates applied to the long-term liabilities. The interest rate swap was valued externally by the respective counterparty banks by comparison with the market price for the relevant date. The interest rate swaps are expected to mature between January 2022 and February 2027. The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique: Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities; Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly; and Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data. During each of the reporting periods, there were no transfers between valuation levels. Group fair values Financial liabilities Interest rate swaps – Level 2 The valuation basis for the investment properties is disclosed in note 16. Financial risk management The Group is exposed through its operations to the following financial risks: • • • credit risk; and liquidity risk. • interest rate risk; foreign exchange risk; The Group’s policies for financial risk management are outlined below. 31 December 2017 €’000 31 December 2016 €’000 (3,333) (4,869) Interest rate risk The Group’s interest rate risk arises from certain of its borrowings. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk. The Group is also exposed to interest rate risk on cash and cash equivalents. Under interest rate swap contracts, the Group agrees to exchange the difference between fixed and floating rate interest amounts calculated on agreed notional principal amounts. Such contracts enable the Group to mitigate the risk of changing interest rates on the cash flow exposures on the issued variable rate debt held. Sensitivity analysis has not been performed as all variable rate borrowings have been swapped to fixed interest rates, and potential movements on cash at bank balances are immaterial. The Group gives careful consideration to interest rates when considering its borrowing requirements and where to hold its excess cash. The Directors believe that the interest rate risk is at an acceptable level. 78 Phoenix Spree Deutschland Annual Report and Accounts 2017 Financial StatementsDirectors’ ReportStrategic ReportNotes to the Financial Statements continuedFor the year ended 31 December 2017 31. Financial instruments continued Foreign exchange risk The Group is exposed to foreign exchange risk on sales, purchases, and translation of assets and liabilities that are in a currency other than the functional currency (Euros). The Group does not enter into any currency hedging transactions and the Directors believe that the foreign exchange rate risk is at an acceptable level. The carrying amount of the Group’s foreign currency (non-Euro) denominated monetary assets and liabilities are shown below, all the amounts are for Sterling balance only: Financial assets Cash and cash equivalents Financial liabilities Trade and other payables Net position 31 December 2017 €’000 31 December 2016 €’000 598 (216) 382 553 (204) 349 At each reporting date, if the Euro had strengthened or weakened by 10% against GBP with all other variables held constant, post-tax loss for the year would have increased/(decreased) by: 31 December 2017 31 December 2016 Weakened by 10% Increase/ (Decrease) in post-tax loss and impact on equity €’000 Strengthened by 10% Increase/ (Decrease) in post-tax loss and impact on equity €’000 38 35 (38) (35) Credit risk management Credit risk refers to the risk that the counterparty will default on its contractual obligations resulting in financial loss to the Group. Credit risk arises principally from the Group’s trade and other receivables and its cash balances. The Group gives careful consideration to which organisations it uses for its banking services in order to minimise credit risk. The Group has an established credit policy under which each new tenant is analysed for creditworthiness and each tenant is required to pay a two-month deposit. At each reporting date the Group had no tenants with outstanding balances over 10% of the total trade receivables balance. The Group uses the following banks: Barclays Private Clients International Jersey Ltd, Barclays Bank Plc Frankfurt and Deutsche Bank. The split of cash held at each of the banks respectively at 31 December 2017 was 61%/30%/9% (31 December 2016: 19%/63%/16%). Barclays and Deutsche Bank have credit ratings of A and A- respectively. The Group holds no collateral as security against any financial asset. The carrying amount of financial assets recorded in the financial information, net of any allowances for losses, represents the Group’s maximum exposure to credit risk. Details of receivables from tenants in arrears at each reporting date can be found in note 20 as can details of the receivables that were impaired during each period. An allowance for impairment is made where there is an identified loss event which, based on previous experience, is evidence of a reduction in the recoverability of the cash flows. Management considers the above measures to be sufficient to control the credit risk exposure. The credit risk on liquid funds and derivative financial instruments is limited because the counterparties are banks with high credit-ratings assigned by international credit-rating agencies. Phoenix Spree Deutschland Annual Report and Accounts 2017 79 Financial StatementsDirectors’ ReportStrategic Report 31. Financial instruments continued The carrying amount of financial assets recorded in the financial statements, which is net of impairment losses, represents the Group’s maximum exposure to credit risk as no collateral or other credit enhancements are held. Liquidity risk management Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group’s approach to managing liquidity risk is to ensure that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or damage to the Group’s reputation. The Directors manage liquidity risk by regularly reviewing cash requirements by reference to short-term cash flow forecasts and medium-term working capital projections prepared by management. The Group maintains good relationships with its banks, which have high credit ratings. The following table details the Group’s remaining contractual maturity for its non-derivative financial liabilities with agreed maturity periods. The table has been drawn based on the undiscounted cash flows of the financial liabilities based on the earliest date on which the Group can be required to pay. The tables include both interest payable and principal cash flows. Maturity analysis for financial liabilities At 31 December 2017 Borrowings payable: current Borrowings payable: non-current Other financial liabilities Trade and other payables At 31 December 2016 Borrowings payable: current Borrowings payable: non-current Other financial liabilities Trade and other payables Less than 1 year €’000 2,646 – – 2,119 4,765 Less than 1 year €’000 9,169 – – 1,331 10,500 Between 1-2 years €’000 Between 2-5 years €’000 – – – – – Between 1-2 years €’000 – – – – – – – 5,663 – 5,663 Between 2-5 years €’000 – – 3,590 – 3,590 More than 5 years €’000 – 219,648 – – 219,648 More than 5 years €’000 – 176,423 – – 176,423 Total €’000 2,646 219,648 5,663 2,119 230,076 Total €’000 9,169 176,423 3,590 1,331 190,513 The analysis of the market risk review and sensitivity analysis is detailed in note 16. 32. Related party transactions Related party transactions not disclosed elsewhere are as follows: R Prosser is a director of Estera Fund Administrators (Jersey) Limited and Estera Trust (Guernsey) Limited, both of which provide administration services to the Group. A Weaver is a partner of the Jersey law firm, Appleby which provides legal services to the Group and a member of Appleby group. During the year ended 31 December 2017, an amount of €690,165 (2016: €657,751) was payable to Estera Fund Administrators (Jersey) Limited and Estera Trust (Guernsey) Limited for accounting, administration and secretarial services. At 31 December 2017, €215,625 (2016: €187,515 Estera Fund Administrators (Jersey) Limited only) was outstanding. During the year ended 31 December 2017, an amount of €40,044 (2016: €60,337) was payable to Appleby, law firm for legal and professional services. At 31 December 2017 €Nil (2016: €9,495) was outstanding. 80 Phoenix Spree Deutschland Annual Report and Accounts 2017 Financial StatementsDirectors’ ReportStrategic ReportNotes to the Financial Statements continuedFor the year ended 31 December 2017 32. Related party transactions continued M Northover was a Director during 2017 and shareholder of PMM Partners (UK) Limited, the Group’s appointed Property Advisor. During the year ended 31 December 2017, an amount of €4,209,000 (€4,110,000 Management Fees and €99,000 Other expenses and fees) (2016: €3,387,000 (€3,331,000 Management fees and €56,000 Other expenses and fees)) was payable to PMM Partners (UK) Limited. At 31 December 2017 €Nil (2016: €Nil) was outstanding. The Property Advisor is also entitled to an asset and estate management Performance Fee. The charge for the period in respect of the Performance Fee was €26,339,000 (2016: €6,350,000). Please refer to note 26 for more details. The Property Advisor has a controlling stake in IWA Real Estate Gmbh & Co. KG who are contracted to dispose of condominiums in Berlin on behalf of the Company. IWA does not receive a fee from the Company in providing this service. In March 2015 the Group also entered into an option agreement to acquire the remaining 5.2% interest in Phoenix Spree Property Fund GmbH & Co. KG from the remaining partners being M Hilton and P Ruddle both Directors of PMM Partners (UK) Limited. The options are to be exercised on the fifth anniversary of the majority interest acquisition for a period of three months thereafter at the fair value of the remaining interest. The Group entered into an unsecured loan agreement with M Hilton and P Ruddle in connection with the acquisition of PSPF. At the period end an amount of €747,120 (2016: €704,500) each was owed to the Group. The loans bear interest of 4% per annum. Dividends paid to Quentin Spicer in his capacity as a shareholder amounted to €1,527. 33. Events after the reporting date In January 2018, the Company exchanged contracts for the acquisition of one individual property and a portfolio of four properties in Berlin with an aggregate consideration of €17.7 million. The Company also exchanged contracts to acquire two individual properties, one in February and the other in April, with an aggregate consideration of €7.1 million. These properties are still awaiting completion. The Company had exchanged contracts for the acquisition of two properties in Berlin with an aggregate purchase price of €7.5 million prior to the balance sheet date, which as at the balance sheet date had not yet completed. Both properties completed in Q1 2018. The Company exchanged contracts for the sale of nine condominiums in Berlin with an aggregate consideration of €3.5 million. Three of these condominium sales have subsequently completed at a value of €1.1 million. The remainder are expected to complete in Q2 2018. The Company had exchanged contracts for the sale of five condominiums in Berlin with an aggregate sales price of €1.8 million prior to the balance sheet date, which as at the balance sheet date had not yet completed. These condominium sales have subsequently completed. In March 2018, the Company refinanced the debt held against a portfolio of buildings in Berlin. The new facility released equity of €7.8 million which was drawn in March 2018. The Company has signed for a €12 million loan secured against seven properties notarised for acquisition in Q4 2017 and Q1 2018. The Company and the Property Advisor agreed to settle the Performance Fee through the issuance of 8,260,065 new shares in the Company at EPRA NAV. The settlement is expected to take place in May 2018. Phoenix Spree Deutschland Annual Report and Accounts 2017 81 Financial StatementsDirectors’ ReportStrategic Report Professional Advisors PMM Partners (UK) Limited 54-56 Jermyn Street London SW1Y 6LX Estera Fund Administrators (Jersey) Limited Estera Secretaries (Jersey) Limited 13-14 Esplanade St. Helier Jersey JE1 1EE Link Asset Services (Jersey) Limited 12 Castle Street St. Helier Jersey JE2 3RT Barclays Private Clients International Limited 13 Library Place St. Helier Jersey JE4 8NE Stephenson Harwood LLP 1 Finsbury Circus London EC2M 7SH Appleby 13-14 Esplanade St. Helier Jersey JE1 1BD Mittelstein Rechtsanwälte Alsterarkaden 20 Hamburg 20354 Germany Taylor Wessing Partnerschaftsgesellschaft mbB Thurn-und-Taxis-Platz 6 60313 Frankfurt a.M. Germany Liberum Capital Limited Ropemaker Place 25 Ropemaker Street London EC2Y 9LY Jones Lang LaSalle Rahel-Hirsch-Strasse 10 10557 Berlin Germany RSM UK Audit LLP 25 Farringdon Street London EC4A 4AB Property Advisor Administrator Company Secretary and Registered Office Registrar Principal Banker English Legal Advisor Jersey Legal Advisor German Legal Advisor as to property law German Legal Advisor as to German partnership law Sponsor and Broker Independent Property Valuer Auditor 82 Phoenix Spree Deutschland Annual Report and Accounts 2017 Financial StatementsDirectors’ ReportStrategic Report Notes Phoenix Spree Deutschland Annual Report and Accounts 2017 83 Financial StatementsDirectors’ ReportStrategic Report Notes 84 Phoenix Spree Deutschland Annual Report and Accounts 2017 Financial StatementsDirectors’ ReportStrategic Report P h o e n i x S p r e e D e u t s c h l a n d A n n u a l R e p o r t a n d A c c o u n t s 2 0 1 7 Phoenix Spree Deutschland Ltd 13-14 Esplanade St. Helier Jersey JE1 1BD www.phoenixspree.com